Obligations and Contracts Case Updates (2005-2014) (2).doc

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OBLIGATIONS AND CONTRACTS

OBLIGATIONS GENERAL PROVISIONS Ernesto Uypitching, et al. v. Ernesto Quiamco..........................................................10 Lourdes Dela Cruz v. Court of Appeals......................................................................10 Department of Health v. HTMC Engineers Co...........................................................10 International Finance Corporation v. Imperial Textile Mills, Inc.................................11 Sebastian Siga-An v. Alicia Villanueva......................................................................11 Makati Stock Exchange, Inc., et al. v. Miguel V. Campos, substituted By Julia Ortigas Vda. De Campos....................................................................................................... 12 Spouses Patricio and Myrna Bernales v. Heirs Of Julian Sambaan............................12 Vitarich Corporation v. Chona Losin..........................................................................13 CBK Power Company Limited vs. Commissioner of Internal Revenue.......................13

NATURE AND EFFECT OF OBLIGATIONS Cortes v. Court of Appeals........................................................................................ 13 Winifreda Ursal v. Court of Appeals, The Rural Bank of Larena (Siquijor), Inc. and Spouses Jesus Moneset and Cristita Moneset...........................................................14 Prudential Bank v. Chonney Lim............................................................................... 14 YHT Realty Corporation, Erlinda Lainez and Anicia Payam v. Court of Appeals and Maurice Mcloughlin................................................................................................... 14 Schimtz Transport and Brokerage Corporation v. Transport Venture Inc...................15 Lapreciosisima Cagungun, et. al. v. Planters Development Bank.............................15 Radio Communication of the Philippines vs. Alfonso Verchez, et al..........................15 Crisostomo Alcaraz v. Court of Appeals....................................................................16 Metropolitan Bank and Trust Company vs. Renato D. Cabilzo..................................16 Ma. Elizabeth Kind and Mary Ann King v. Megaworld Properties and Holdings, Inc.. 16 Autocorp Group v. Intra Strata Assurance Corporation.............................................16 J Plus Asia Development Corporation v. Utility Assurance Corporation.....................17 Polo S. Pantaleon v. American Express International, Inc.........................................18 Sps. Guanio v. Makati Shangri-La Hotel....................................................................18 Marques v. Far East Bank.......................................................................................... 18 Philippine Realty and Holding Corp. v. Ley Const. and Dev. Corp.............................19

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Gilat Satellite Networks, Ltd. v. United Coconut Planters Bank General Insurance Co., Inc............................................................................................................................ 19 Carlo F. Sunga v.Virjen Shipping Corporation, Nissho Odyssey Ship Management Pte. Ltd., And/Or Capt. Angel Zambrano..........................................................................20

DIFFERENT KINDS OF OBLIGATIONS PURE AND CONDITIONAL OBLIGATIONS Sacobia Hills Development Corporation vs. Allan Ty.................................................20 Carrascoso v. Court of Appeals................................................................................. 21 Spouses William And Jeanette Yao v. Carlomagno B. Matela....................................21 Spouses Jaime Benos And Marina Benos v. Spouses Gregorio Lawilao And Janice Gail Lawilao..................................................................................................................... 21 Darrel Cordero, et al. vs. F.S. Management and Development Corporation..............22 Yamamoto v. Nishino Leather Industries, Inc............................................................22 Spouses Jose T. Valenzuela and Gloria Valenzuela v. Kalayaan Development & Industrial Corporation............................................................................................... 22 Solar Harvest, Inc. v. Davao Corrugated Carton Corporation....................................23 Republic v. Holy Trinity Realty Development Corporation.........................................24 Subic Bay Metropolitan Authority v. Court of Appeals..............................................24 Sps. Fernando and Lourdes Viloria vs. Continental Airlines, Inc................................24

JOINT AND SOLIDARY OBLIGATIONS Stronghold Insurance Company, Inc. v. Republic-Asahi Glass Corporation...............25 Petron Corporation vs. Sps. Cesar Jovero and Erma F. Cudilla, et al.........................25 Philippine Commercial International Bank v. CA.......................................................25 Crystal v. Bank of the Philippine Islands...................................................................26 The Heirs of George Y. Poe vs. Malayan Insurance Company, Inc.,...........................26 Alba v. Yupangco...................................................................................................... 26 Sps. Rodolfo Berot v. Felipe Siapno...........................................................................27 Trade and Investment Development Corp. of the Philippines v. Asia Paces Corp... . .27 Olongapo City, V. Subic Water And Sewerage Co., Inc.,............................................27

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OBLIGATIONS WITH A PENAL CLAUSE First Fil-Sin Lending Corporation v. Gloria D. Padillo..................................................28 Filinvest Land, Inc. vs. Hon. Court of Appeals, Philippine American General Insurance Company and Pacific Equipment Corporation...........................................................28 Development Bank of the Philippines v. Family Foods Manufacturing Co. Ltd., and Spouses Julianco and Catalina Centeno....................................................................28 Ileana Dr. Macalinao v. Bank of the Philippine Islands..............................................29

EXTINGUISHMENT OF OBLIGATIONS PAYMENT OR PERFORMANCE Jaime Biana v. George Gimenez................................................................................ 29 G & M (Phil.), Inc. vs. Willie Batomalaque.................................................................29 Abacus Securities Corporation v. Ruben U. Ampil.....................................................30 Almeda v. Bathala Marketing Industries, Inc.............................................................30 ASJ Corporation v. Evangelista.................................................................................. 30 Insular Life Assurance Company, Ltd. v. Toyota Bel-Air, Inc......................................31 Dao Heng Bank, Inc. (Now Banco De Oro Universal Bank) v. Laigo..........................31 Royal Cargo Corporation v. DFS Sports Unlimited, Inc..............................................32 Allandale Sportsline, Inc. v. The Good Development Corporation.............................32 Annabelle Dela Peña and Adrian Villareal v. The Court of Appeals and Rural Bank of Bolinao, Inc............................................................................................................... 32 D.B.T. Mar-Bay Construction, Incorporated v. Ricaredo Panes et al..........................33 Rockville Excel International Exim Corporation v. Spouses Oligario Culla and Bernardita Miranda................................................................................................... 33 Premiere Development Bank v. Central Surety & Insurance Company, Inc..............33 Cecilleville Realty and Service Corporation v. Acuña................................................34 DBT Mar-Bay Construction, Inc. vs. Panes................................................................34 Manuel Go Cinco and Araceli S. Go Cinco v. Court Of Appeals, Ester Servacio and Maasin Traders Lending Corporation........................................................................35 Land Bank of the Philippines vs. Alfredo Ong...........................................................35 Republic v. Thi Thu Thuy T. De Guzman....................................................................35 Dalton vs. FGR Realty and Development Corp.........................................................36 Elizabeth Del Carmen v. Sps. Sabordo......................................................................36 Erlinda Gajudo, Fernando Gajudo, Jr., Estelita Gajudo, Baltazar Gajudo And Danilo Arahan Chua v. Traders Royal Bank..........................................................................36 Luzon Development Bank v. Enriquez......................................................................37

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Telengtan Brothers & Sons, Inc. v. United States Lines, Inc. and the Court of Appeals ................................................................................................................................. 37 Simplicio A. Palanca v. Ulyssis Guides......................................................................37

LOSS OF THE THING DUE Ayala Construction and Development Corporation v. Philippine Commercial International Bank.................................................................................................... 38 Raymundo S. De Leon vs. Benita T. Ong...................................................................38 CONDONATION OR REMISSION OF THE DEBT Ruben Reyna V. COA................................................................................................. 38 CONFUSION OR MERGER OF RIGHTS Cecilleville Realty and Service Corporation vs. Spouses Tito Acuña and Ofelia B. Acuña....................................................................................................................... 39 Sps. Dominador R. Narvaez and Lilia W. Narvaez vs. Sps. Rose Ogas Alciso and Antonio Alciso........................................................................................................... 39 COMPENSATION Mavest (USA) Inc. and Mavest Manila Liaison Office vs. Sampaguita Garment Corporation............................................................................................................... 39 Manuel B. Aloria v. Estrellita B. Clemente.................................................................40 Premiere Development Bank v. Flores......................................................................40 Soriano v. People...................................................................................................... 40 United Planters Sugar Milling Co., Inc., (UPSUMCO) vs. Court of Appeals, et al........41 Lao v. Special Plans, Inc............................................................................................ 41 Traders Royal Bank vs. Norberto Castañares and Milagros Castañares....................42 Cesar V. Areza and Lolita B. Areza v. Express Savings Bank, Inc..............................42 Mondragon Personal Sales, Inc. v. Victoriano S. Sola, Jr............................................42 NOVATION Philippine Savings Bank v. Sps. Rodelfo Malanac Jr...................................................43 Isaisas F. Fabrigas and Marcelina R. Fabrigas v. San Francisco del Monte, Inc..........43 Sps. Francisco and Ruby Reyes v. BPI Family Savings Bank, Inc., And Magdalena L. Lometillo, in her capacity as Ex-Officio Provincial Sheriff for Iloilo............................44 Gammon Philippines, Inc. v. Metro Rail Transit Development Corporation................44

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Ek Lee Steel Works Corporation v. Manila Castor Oil Corporation.............................45 Sueno v. Land Bank of the Philippines......................................................................45 S.C. Megaworld Construction And Development Corporation v. Parado...................45 Foundation Specialists, Inc., vs. Betonval Ready Concrete, Inc. and Stronghold Insurance Co., Inc..................................................................................................... 46 Carolina Hernandez-Nievera v. Wilfredo Hernandez.................................................47 Sime Darby Pilipinas, Inc. v. Goodyear Philippines, Inc.............................................47 Heirs of Servando Franco v. Sps. Gonzales...............................................................47 Roberto R. David vs. Eduardo C. David.....................................................................48 First United Constructors Corporation vs. Bayanihan Automotiv..............................48

CONTRACTS GENERAL PROVISIONS Asian Construction and Development Corporation v. Tulabut..................................48 Tanay Recreation Center and Development Corp. v. Catalina Matienzo Fausto and Anunciacion Fausto Pacunayen................................................................................. 49 Litonjua v. Litonjua................................................................................................... 49 Bortikey v. AFP Retirement and Separation Benefits System....................................49 GF Equity, Inc. vs. Arturo Valenzona.........................................................................50 Tanay Recreation Center and Development Corp. v. Catalina Matienzo Fausto and Anunciacion Fausto Pacunayen................................................................................. 50 Tanay Recreation Center and Development Corp. v. Catalina Matienzo Fausto and Anunciacion Fausto Pacunayen................................................................................. 51 Sunace International vs. NLRC.................................................................................. 51 Greater Metropolitan Manila Solid Waste Management Committee v. Jancom Environmental Corporation....................................................................................... 51 Roxas v. Zuzuarregui, Jr............................................................................................ 51 Bonifacio Nakpil v. Manila Towers Development Corp...............................................52 Xavierville III Homeowners Association, Inc., v. Xavierville Ii Homeowners Association, Inc.,....................................................................................................... 52 William Golangco Construction Corporation v. Philippine Commercial International Bank......................................................................................................................... 53 Spouses Anthony and Percita Oco v. Victor Limbaring..............................................53 Rolando Limpo v. Court of Appeals...........................................................................53 Caltex (Philippines), Inc., v. PNOC Shipping and Transport Corporation....................54 Mr. & Mrs. George R. Tan v. G.V.T Engineering Services, Acting through its Owner/Manager Gerino V. Tactaquin.........................................................................54

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William Ong Genato vs. Benjamin Bayhon et al........................................................54 Vicenta Cantemprate et al. vs. CRS Realty Development Corporation et al.............54 National Power Corporation vs. Premier Shipping Lines, Inc.....................................55 Patricia Halagueña et al. vs. Philippine Airlines Incorporated...................................55 Sta. Lucia Realty & Development, Inc. vs. SPOUSES Francisco & Emelia Buenaventura........................................................................................................... 55 Sps. Isagani Castro and Diosdada Castro v. Angelina De Leon Tan, et. al.,..............56 Narvaez vs. Alciso.................................................................................................... 56 Herald Black Dacasin vs.Sharon Del Mundo Dacasin................................................56 PNCC Skyway Traffic Management and Security Division Workers Organization (PSTMSDWO) vs. PNCC Skyway Corporation............................................................57 Heirs of Mario Pacres, vs. Heirs of Cecilia Ygoña......................................................57 Heirs of Fausto C. Ignacio v. Home Bankers Savings and Trust Company.................57 Spouses Ignacio F. Juico and Alice P. Juico v. China Banking Corporation..................58 Sps. Benjamin Mamaril v. The Boy Scout of the Philippines......................................58 Star Two (SPV-AMC), Inc. v. Paper City Corporation of the Philippines......................58 Land Bank of the Philippines vs. Heirs of Spouses Jorja Rigor-Soriano and Magin Soriano..................................................................................................................... 59 Rodolfo G. Cruz and Esperanza Ibias v. Atty. Delfin Gruspe......................................59 Philippine National Bank vs. Spouses Enrique Manalo and Rosalinda Jacinto, et al.. 59

ESSENTIAL REQUISITES OF CONTRACTS Spouses Azaro M. Zulueta and Perla Sucayan-Zulueta v. Jose Wong, et al...............59 Paulo Ballesteros v. Rolando Abion...........................................................................60 Estate of Orlando Llenado et al. vs. Eduardo Llenado et al......................................60

CONSENT Dandoy v. Tongson................................................................................................... 60 Navotas Industrial Corporation V. Cruz, et al............................................................61 Epifania Dela Cruz, substituted by Laureana V. Alberto v. Sps. Eduardo C. Sison and Eufemia S. Sison....................................................................................................... 61 Perpetua vda. de Ape v. Court of Appeals and Genorosa Cawit Vda. De Lumayno...62 Reynaldo Villanueva vs. Philippine National Bank....................................................62 Gaudencio Valerio et. al v. Vicenta Refresca et. al....................................................62 Heirs of Cayetano Pangan vs. Spouses Rogelio Perreras and Priscilla Perreras........62

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Cornelia Baladad vs. Sergio A. Rublico and Spouses Laureano F. Yupano.................63 Francisco Landicho et al. vs. Felix Sia.......................................................................63 XYST Corp. v. DMC Urban Properties Development Inc.............................................63 Gloria Ocampo and Teresita Tan v. Land Bank of the Philippines et al......................64 Government Service Insurance System vs. Abraham Lopez.....................................64 Sps. Ramon Lequin and Virginia Lequin vs. Sps. Raymundo Vizconde and Salome Lequin Vizconde....................................................................................................... 65 Spouses Exequiel Lopez and Eusebia Lopez v. Spouses Eduardo Lopez and Marcelina Lopez........................................................................................................................ 65 Heirs Of Dr. Mario S. Intac v. Court of Appeals..........................................................65 Korean Air Co., Ltd. V. Yuson..................................................................................... 66 Doña Rosana Realty and Development Corporation vs. Molave Development Corporation............................................................................................................... 66 Jocelyn M. Toledo vs. Marilou M. Hyden....................................................................66 ECE Realty and Development Inc. v. Rachel G. Mandap...........................................67

OBJECT OF CONTRACTS Atty. Pedro M. Ferrer vs. Spouses Alfredo Diaz and Imelda Diaz...............................67

CAUSE OF CONTRACTS J.L.T. Agro Inc. v. Balansag........................................................................................ 68 Alvarez v. PICOP Resources...................................................................................... 68

FORM OF CONTRACTS Manuel Mallari and Millie Mallari v. Rebecca Alsol....................................................69 Serafin Naranja et al. vs. Court of Appeals..............................................................69

REFORMATION OF INSTRUMENTS Benny Go v. Eliodoro Bacaron................................................................................... 69

INTERPRETATION OF CONTRACTS Holy Cross of Davao College, Inc. vs. Holy Cross of Davao Faculty Union – Kampi.. .70 Agas vs. Sabico........................................................................................................ 70

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Berman Memorial Park, Inc. and Luisa Chong v. Francisco Cheng............................70 Rosalina Tagle v. Court of Appeals, Fast International Corporation and/or Kuo Tung Yu Huang....................................................................................................................... 71 Martha R. Horrigan v. Troika Commercial, Inc...........................................................71 Aurelio P. Alonzo and Teresita A. Sison v. Jaime and Perlita San Juan........................71 Vicente Go v. Pura Kalaw, Inc................................................................................... 72 Sps. Alvaro v. Sps. Returban..................................................................................... 72 Ayala Inc. v. Ray Burton Corp................................................................................... 72 Laureano T. Angeles v. Philippine National Railways (PNR) And Rodolfo Flores........73 Elenita Ishida and Continent Japan Co., Inc. v. Antusa de Mesa-Magno, Firmo de Mesa et.al................................................................................................................. 73 Heirs of the Deceased Carmen Cruz-Zamora v. Multiwood International, Inc...........73 Antipolo Properties v. Nuyda................................................................................... 74 Adriatico Consortium, Inc., et al. vs. Land Bank of the Philippines...........................74 Manila International Airport Authority v. Avia Filipinas International, Inc.,................74

RESCISSIBLE CONTRACTS Oliverio Laperal and Filipinas Golf & Country Club, Inc. v. Solid Homes, Inc.............75 C-J Yulo & Sons, Inc. v. Roman Catholic Bishop of San Pablo, Inc..............................75 Spouses Felipe and Leticia Cannu v. Spouses Gil And Fernandina Galang and National Home Mortgage Finance Corporation.........................................................75 Bienvenido M. Casino Jr. v. Court of Appeals.............................................................76 Pryce Corporation (Formerly Pryce Properties Corporation), v. Philippine Amusement And Gaming Corporation.......................................................................................... 76 Coastal Pacific Trading Inc., v. Southern Rolling Mills, Co., Inc. et al.........................77 Pan Pacific Industrial Sales Co., v. Court of Appeals.................................................77 Laurencio Ramel, et.al. v. Daniel Aquino and Guadaluper Abalahin.........................77 Union Bank of the Philippines v. Sps. Ong................................................................77 Philippine Leisure and Retirement Authority v. Court of Appeals..............................78 Uniwide Holdings, Inc. v. Jandecs Transportation Co., Inc.........................................78 Bonrostro v. Luna...................................................................................................... 79 Armand O. Raquel-Santos and Annalissa Mallari v. Court of Appeals and Finvest Securities Co., Inc..................................................................................................... 79 Heirs of Sofia Quirong v. Development Bank of the Philippines................................79 “G” Holdings, Inc., v. National Mines and Allied Workers Union Local 103 (NAMAWU) ................................................................................................................................. 80

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VOIDABLE CONTRACTS Jorge Gonzales v. Climax Mining Ltd.........................................................................80 Felicitas Asycong and Teresa Polan v. Court of Appeals and Moller Lending Investor ................................................................................................................................. 80 Development Bank of the Philippines and Privatization and Management Office v. CA ................................................................................................................................. 80 Barceliza P. Capistrano vs. Darryl Limcuando and Fe S. Sumiran.............................81 Hernania “Lani” Lopez vs. Gloria Umale-Cosme.......................................................81 First Philippine Holdings Corporation vs. Trans Middle East (Phils.) Equities, Inc......82 ECE Realty And Development Inc. v. Rachel G. Mandap...........................................82

UNENFORCEABLE CONTRACTS Spouses Mario and Elizabeth Torcuator v. Spouses Remigio and Gloria Bernabe and Spouses Diosdado and Lourdes Salvador.................................................................82 Banco Filipino Savings v. Diaz................................................................................... 83 Lina Peñalber vs. Quirino Ramos et al......................................................................83 Orduña, et al. v. Fuentebella, et al............................................................................83 Municipality of Hagonoy, Bulacan vs. Dumdum, Jr....................................................84 Rogelio Dantis, v. Julio Maghinang, Jr........................................................................84

VOID OR INEXISTENT Menchavez vs. Teves................................................................................................ 84 Department of Health v. C.V. Canchela & Associates, Architects (CVCAA), in Association With MCS Engineers Co., and A.O. Mansueto IV – Electrical Engineering Services, and Luis Alina, Sheriff IV, RTC, Manila.......................................................85 The Manila Banking Corporation v. Edmundo S. Silverio and The Court of Appeals, 85 La’o v. Republic of the Philippines and the Government Service Insurance System. 86 Potenciano Ramirez v. Ma. Cecilia Ramirez...............................................................86 Joaquin Villegas and Emma M. Villegas v. Rural Bank of Tanjay Inc.........................86 Land Bank of the Philippines v. Eduardo M. Cacayuran...........................................87 Queensland-Tokyo Commodities, Inc. vs. George.....................................................87 Anuel O. Fuentes and Leticia L. Fuentes vs. Conrado G. Roca..................................87 Domingo Gonzalo vs. John Tarnate, Jr.......................................................................87

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS

OBLIGATIONS CHAPTER 1. GENERAL PROVISIONS Ernesto Uypitching, et al. v. Ernesto Quiamco GR No. 146322, December 6, 2006 Corona, J. ISSUE: Can an obligation to pay damages arise from an abuse of a right which is exercised to the prejudice or injury of another person as when a corporation seized a motorcycle with the assistance of policemen without a search warrant or order? DOCTRINE: A blatant disregard for the lawful procedure for the enforcement of its right, to the prejudice of respondent violated the law as well as public morals, and transgressed the proper norms of human relations. Article 19, also known as the “principle of abuse of right,” prescribes that a person should not use his right unjustly or contrary to honesty and good faith, otherwise he opens himself to liability. There is an abuse of right when it is exercised solely to prejudice or injure another. The exercise of a right must be in accordance with the purpose for which it was established and must not be excessive or unduly harsh; there must be no intention to harm another. Otherwise, liability for damages to the injured party will attach. Lourdes Dela Cruz v. Court of Appeals G.R No. 139442, December 6, 2006 Velasco, Jr. J.: ISSUE: Can a person under a contract of lease possess such land by tolerance even after the expiration of the contract of lease and after a demand to vacate. DOCTRINE: Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. Thus, initially petitioner as lessee is the legal possessor of the subject lot by virtue of a contract of lease. When fire destroyed her house, the Reyeses considered the lease terminated. It has been held that a person who occupies the land of another at the latter’s tolerance or permission, without any contract between them, is necessarily bound by an implied promise that he will vacate upon demand, failing which a summary action for ejectment is the proper remedy against them. Department of Health v. HTMC Engineers Co. G.R. No. 146120. January 27, 2006 Chico-Nazario, J. ISSUE: Can a perfected contract be renounced unilaterally? DOCTRINE: No. A contract properly executed between parties continues to be the law between said parties and should be complied with in good faith. There being a perfected contract, DOH cannot revoke or renounce the same

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS without the consent of the other party. Just as nobody can be forced to enter into a contract, in the same manner, once a contract is entered into, no party can renounce it unilaterally or without the consent of the other. It is a general principle of law that no one may be permitted to change his mind or disavow and go back upon his own acts, or to proceed contrary thereto, to the prejudice of the other party. As no revision to the original agreement was ever arrived at, the terms of the original contract shall continue to govern over both the HTMC and the DOH with respect to the infrastructure projects as if no amendments were ever initiated. In the absence of a new perfected contract between HTMC and DOH, both parties shall continue to be bound by the stipulations of the original contract and all its natural effects. International Finance Corporation v. Imperial Textile Mills, Inc. G.R. No. 160324; November 15, 2005 Panganiban, J.: ISSUES: (1) What is the nature of the contract entered into between the parties denominated as Guarantee Agreement? (2) Under Suretyship, what are the obligations of the parties under the contract? DOCTRINES: (1) The terms of a contract govern the rights and obligations of the contracting parties. When the obligor undertakes to be "jointly and severally" liable, it means that the obligation is solidary. If solidary liability was instituted to "guarantee" a principal obligation, the law deems the contract to be one of suretyship. The creditor in the present Petition was able to show convincingly that, although denominated as a "Guarantee Agreement," the Contract was actually a surety. Notwithstanding the use of the words "guarantee" and "guarantor," the subject Contract was indeed a surety, because its terms were clear and left no doubt as to the intention of the parties. The obligations of the guarantors are meticulously expressed in the following provision: "Section 2.01. The Guarantors jointly and severally, irrevocably, absolutely and unconditionally guarantee, as primary obligors and not as sureties merely, the due and punctual payment of the principal of, and interest and commitment charge on, the Loan, and the principal of, and interest on, the Notes, whether at stated maturity or upon prematuring, all as set forth in the Loan Agreement and in the Notes." The Agreement uses "guarantee" and "guarantors," prompting ITM to base its argument on those words. This Court is not convinced that the use of the two words limits the Contract to a mere guaranty. The specific stipulations in the Contract show otherwise. (2) While referring to ITM as a guarantor, the Agreement specifically stated that the corporation was "jointly and severally" liable. To put emphasis on the nature of that liability, the Contract further stated that ITM was a primary obligor, not a mere surety. Those stipulations meant only one thing: that at bottom, and to all legal intents and purposes, it was a surety.

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS Indubitably therefore, ITM bound itself to be solidarily liable with PPIC for the latter’s obligations under the Loan Agreement with IFC. ITM thereby brought itself to the level of PPIC and could not be deemed merely secondarily liable. Sebastian Siga-An v. Alicia Villanueva G.R. No. 173227, January 20, 2009 Chico-Nazario J.: ISSUE: Whether solutio indebiti applies to situations wherein there was a wrongful payment of interest? DOCTRINE: Yes. Under Article 1960 of the Civil Code, if the borrower of loan pays interest when there has been no stipulation therefor, the provisions of the Civil Code concerning solutio indebiti shall be applied. Article 2154 of the Civil Code explains the principle of solutio indebiti. Said provision provides that if something is received when there is no right to demand it, and it was unduly delivered through mistake, the obligation to return it arises. In such a case, a creditor-debtor relationship is created under a quasi-contract whereby the payor becomes the creditor who then has the right to demand the return of payment made by mistake, and the person who has no right to receive such payment becomes obligated to return the same. The quasi-contract of solutio indebiti harks back to the ancient principle that no one shall enrich himself unjustly at the expense of another. The principle of solutio indebiti applies where (1) a payment is made when there exists no binding relation between the payor, who has no duty to pay, and the person who received the payment; and (2) the payment is made through mistake, and not through liberality or some other cause. We have held that the principle of solutio indebiti applies in case of erroneous payment of undue interest. Makati Stock Exchange, Inc., et al. v. Miguel V. Campos, substituted By Julia Ortigas Vda. De Campos G.R. No. 138814, April 16, 2009 Chico-Nazario, J.: ISSUE: Whether the claim of a right or an obligation may be made even without identifying its source. DOCTRINE: No. Right and obligation are legal terms with specific legal meaning. A right is a claim or title to an interest in anything whatsoever that is enforceable by law. An obligation is defined in the Civil Code as a juridical necessity to give, to do or not to do. For every right enjoyed by any person, there is a corresponding obligation on the part of another person to respect such right. Thus, Justice J.B.L. Reyes offers the definition given by Arias Ramos as a more complete definition: An obligation is a juridical relation whereby a person (called the creditor) may demand from another (called the debtor) the observance of a determinative conduct (the giving, doing or not doing), and in case of breach, may demand satisfaction from the assets of the latter. Therefore, an obligation imposed on a person, and the corresponding right granted to another, must be rooted in at least one of these five sources. The mere assertion of a right and claim of an obligation in an initiatory pleading, whether a Complaint or Petition, without identifying the basis or source

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS thereof, is merely a conclusion of fact and law. A pleading should state the ultimate facts essential to the rights of action or defense asserted, as distinguished from mere conclusions of fact or conclusions of law. Thus, a Complaint or Petition filed by a person claiming a right to the Office of the President of this Republic, but without stating the source of his purported right, cannot be said to have sufficiently stated a cause of action. Also, a person claiming to be the owner of a parcel of land cannot merely state that he has a right to the ownership thereof, but must likewise assert in the Complaint either a mode of acquisition of ownership or at least a certificate of title in his name. Spouses Patricio and Myrna Bernales v. Heirs Of Julian Sambaan G.R. No. 163271, January 15, 2010 Del Castillo, J.: ISSUE: Whether title to the subject parcel of land was transferred by virtue of a forged deed of absolute sale allegedly executed by the late Julian and Guillerma Sambaan in favor of Myrna Bernales and her husband. DOCTRINE: No. With the presentation of the forged deed, even if accompanied by the owner’s duplicate certificate of title, the registered owner did not thereby lose his title, and neither does the assignee in the forged deed acquire any right or title to the said property. The valid execution of the Deed of Absolute Sale will convey and transfer ownership in favor of appellants title based on the rule that by the contract of sale one of the contracting parties obligates himself to transfer ownership of and to deliver a determinate thing, and the other to pay therefor a sum certain in money or its equivalent. The fact that the assailed Deed was not signed by Julian and the signatures of Julian and Guillerma were forged per findings of the NBI Senior Document Examiner, it can therefore be inferred that the subsequent issuance of Transfer Certificate of Title No. T-14204 has no basis at all since ownership was not conveyed to appellants by reason of the forged Deed.

Vitarich Corporation v. Chona Losin G.R. No. 181560, November 15, 2010 Mendoza, J.: ISSUE: Whether Vitarich should be held liable for the conduct of its employee, Dericto, in taking out dressed chickens from the bodega of Vitarich and receiving the same but charging it as Charge Sales Invoice against its client, Losin. DOCTRINE: No. Pursuant to Article 2180 of the Civil Code, that vicarious liability attaches only to an employer when the tortuous conduct of the employee relates to, or is in the course of, his employment. The question to ask should be whether at the time of the damage or injury, the employee is engaged in the affairs or concerns of the employer or, independently, in that of his own? Vitarich incurred no liability when Directo’s conduct, act or omission went beyond the range of his employment. CBK Power Company Limited vs. Commissioner of Internal Revenue

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS G.R. Nos. 198729-30 January 15, 2014 Sereno, C.J.: ISSUE: Whether the principle of solutio indebiti applies in a claim for the issuance of a tax credit certificate representing the latter's alleged unutilized input taxes on local purchases of goods and services attributable to effectively zero-rated sales to National Power Corporation (NPC) for the second and third quarters of 2005. DOCTRINE: No. Devoid of merit is the applicability of the principle of solutio indebiti to the present case. According to this principle, if something is received when there is no right to demand it, and it was unduly delivered through mistake, the obligation to return it arises. In that situation, a creditor-debtor relationship is created under a quasi-contract, whereby the payor becomes the creditor who then has the right to demand the return of payment made by mistake, and the person who has no right to receive the payment becomes obligated to return it. The quasi-contract of solutio indebiti is based on the ancient principle that no one shall enrich oneself unjustly at the expense of another .There is solutio indebiti when: (1) Payment is made when there exists no binding relation between the payor, who has no duty to pay, and the person who received the payment; and (2) Payment is made through mistake, and not through liberality or some other cause. Though the principle of solutio indebiti may be applicable to some instances of claims for a refund, the elements thereof are wanting in this case. First, there exists a binding relation between petitioner and the CIR, the former being a taxpayer obligated to pay VAT. Second, the payment of input tax was not made through mistake, since petitioner was legally obligated to pay for that liability. The entitlement to a refund or credit of excess input tax is solely based on the distinctive nature of the VAT system. At the time of payment of the input VAT, the amount paid was correct and proper.

CHAPTER 2. NATURE AND EFFECT OF OBLIGATIONS Cortes v. Court of Appeals GR No. 126083. July 12, 2006 Ynares-Santiago, J. ISSUES: What is the effect if both parties incur in delay in a reciprocal obligation? DOCTRINE: Considering that both parties were in delay and that their obligation was reciprocal, performance thereof must be simultaneous. The mutual inaction of Cortes and the Corporation therefore gave rise to a compensatio morae or default on the part of both parties because neither has completed their part in their reciprocal obligation. This mutual delay of the parties cancels out the effects of default such that it is as if no one is guilty of delay. Winifreda Ursal v. Court of Appeals, The Rural Bank of Larena (Siquijor), Inc. and Spouses Jesus Moneset and Cristita Moneset GR No. 142411. October 14, 2005 Austria-Martinez, J.:

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS ISSUE: Is the vendor liable for damages in reciprocal obligations? DOCTRINE: Where the vendee in the contract to sell also took possession of the property, the subsequent mortgage constituted by the owner over said property in favor of another person was valid since the vendee retained absolute ownership over the property. At most, the vendee in the contract to sell was entitled only to damages pursuant to Art. 1169 of the Civil Code on reciprocal obligations. Prudential Bank v. Chonney Lim G.R. No. 136371 November 11, 2005 Tinga, J.: ISSUE: Whether the failure of the bank’s employees to credit the deposit to respondent’s savings account constitutes actionable negligence in law. DOCTRINE: Article 1172 of the Civil Code ordains that responsibility arising from negligence in the performance of an obligation is demandable. The failure of the bank’s employees to credit the amount of P34,000.00 to respondent’s savings account, resulting as it did in the dishonor of respondent’s checks, constitutes actionable negligence in law. From another perspective, the negligence of the bank constitutes a breach of duty to its client. It is worthy of note that the banking industry is impressed with public interest. As such, it must observe a high degree of diligence and observe lofty standards of integrity and performance. By the nature of its functions, a bank is under obligation to treat the accounts of its depositors with meticulous care and always to have in mind the fiduciary nature of its relationship with them. YHT Realty Corporation, Erlinda Lainez and Anicia Payam v. Court of Appeals and Maurice Mcloughlin G.R. No. 126780. February 17, 2005 Tinga, J.: ISSUE: When will the hotelkeepers/innkeepers liable for the effects of their guests? DOCTRINE: Article 2003 is controlling, thus: Art. 2003. The hotel-keeper cannot free himself from responsibility by posting notices to the effect that he is not liable for the articles brought by the guest. Any stipulation between the hotel-keeper and the guest whereby the responsibility of the former as set forth in Articles 1998 to 2001 is suppressed or diminished shall be void. Article 2003 was incorporated in the New Civil Code as an expression of public policy precisely to apply to situations such as that presented in this case. The hotel business like the common carrier's business is imbued with public interest. Catering to the public, hotelkeepers are bound to provide not only lodging for hotel guests and security to their persons and belongings. The twin duty constitutes the essence of the business. The law in turn does not allow such duty to the public to be negated or diluted by any contrary stipulation in so-called "undertakings" that ordinarily appear in prepared forms imposed by hotel keepers on guests for their signature.

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS In an early case it was ruled that to hold hotelkeepers or innkeeper liable for the effects of their guests, it is not necessary that they be actually delivered to the innkeepers or their employees. It is enough that such effects are within the hotel or inn. With greater reason should the liability of the hotelkeeper be enforced when the missing items are taken without the guest's knowledge and consent from a safety deposit box provided by the hotel itself, as in this case. Schimtz Transport and Brokerage Corporation v. Transport Venture Inc. G.R. No. 150255, April 22, 2005 Carpio-Morales J: ISSUE: How must the liability of the common carrier, on one hand, and an independent contractor, on the other hand, be described? DOCTRINE: It would be solidary. A contractual obligation can be breached by tort and when the same act or omission causes the injury, one resulting in culpa contractual and the other in culpa aquiliana, Article 2194 of the Civil Code can well apply. In fine, a liability for tort may arise even under a contract, where tort is that which breaches the contract. Stated differently, when an act which constitutes a breach of contract would have itself constituted the source of a quasi-delictual liability had no contract existed between the parties, the contract can be said to have been breached by tort, thereby allowing the rules on tort to apply. As for Black Sea, its duty as a common carrier extended only from the time the goods were surrendered or unconditionally placed in its possession and received for transportation until they were delivered actually or constructively to consignee Little Giant. Parties to a contract of carriage may, however, agree upon a definition of delivery that extends the services rendered by the carrier. In the case at bar, Bill of Lading No. 2 covering the shipment provides that delivery be made “to the port of discharge or so near thereto as she may safely get, always afloat.” The delivery of the goods to the consignee was not from “pier to pier” but from the shipside of “M/V Alexander Saveliev” and into barges, for which reason the consignee contracted the services of petitioner. Since Black Sea had constructively delivered the cargoes to Little Giant, through petitioner, it had discharged its duty. In fine, no liability may thus attach to Black Sea. Lapreciosisima Cagungun, et. al. v. Planters Development Bank GR No. 158674. October 17, 2005 Chico-Nazario, J.: ISSUE: What is the degree of diligence required in the performance of an obligation? DOCTRINE: The fiduciary nature of banking requires banks to assume a degree of diligence higher than that of a good father of a family. Article 1172 of the New Civil Code states that the degree of diligence required of an obligor is that prescribed by law or contract, and absent such stipulation then the diligence of a family. In every case, the depositor expects the bank

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS to treat his account with utmost fidelity, whether such accounts consists only of a few hundred pesos or of millions of pesos. Radio Communication of the Philippines vs. Alfonso Verchez, et al. G.R. No. 164349. January 31, 2006 Carpio Morales, J.: ISSUE: Must a causal connection between the delay of the respondent in the performance of its duty and the injury suffered by the plaintiffs be proved in culpa contractual? DOCTRINE: No. In culpa contractual, the mere proof of the existence of the contract and the failure of its compliance justify, prima facie, a corresponding right of relief. The law, recognizing the obligatory force of contracts, will not permit a party to be set free from liability for any kind of misperformance of the contractual undertaking or a contravention of the tenor thereof. A breach upon the contract confers upon the injured party a valid cause for recovering that which may have been lost or suffered.

Crisostomo Alcaraz v. Court of Appeals G.R. No. 152202. July 28, 2006 Puno, J.: ISSUE: Is a credit card holder liable to pay the interests and surcharges imposed by the bank for non-payment of his obligations absent any stipulation for such payment? DOCTRINE: No. Absence of any proof that the terms and conditions of the credit card use has been shown to its client, and failure to by respondent to show that an application form or document prior to the issuance of the credit card has been submitted or signed by the same, the client should not be condemned to pay the interest and charges provided under its terms and conditions. Metropolitan Bank and Trust Company vs. Renato D. Cabilzo GR No. 154469. December 6, 2006 Chico-Nazario, J: ISSUE: Can a Banking Institution Who Relied To Another Bank’s indorsement of a check evade liability by failing to detect alterations made in a check. DOCTRINE: No. The point is that as a business affected with public interest and because of the nature of its functions, the bank is under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship. The appropriate degree of diligence required of a bank must be a high degree of diligence, if not the utmost diligence. In every case, the depositor expects the bank to treat his account with the utmost fidelity, whether such account consists only of a few hundred pesos or of millions. Ma. Elizabeth Kind and Mary Ann King v. Megaworld Properties and Holdings, Inc.

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS G.R. No. 162895. August 16, 2006 Quisumbing, J.: ISSUE: Is refund a remedy in case there is a defect in the object of the obligation? DOCTRINE: There is nothing on record to show that the original structure was unstable. One who alleges a fact has the burden of proving it. Aside from the pictures and videos of the cracked perimeter fence, petitioners did not present any other evidence. These pictures and videos are insufficient to show that the townhouse’s foundation was structurally defective. The cracks could be merely superficial. Other than that, the presumption is that there was no irregularity regarding the approval of the building plan. Moreover, respondent presented an affidavit of a structural engineer attesting that the cracks and leaks on the perimeter fence do not affect the structural integrity of the townhouse. Absent any showing that the townhouse structure was unstable and unsafe for habitation, petitioners are not entitled to a refund. Autocorp Group v. Intra Strata Assurance Corporation G.R. No. 166662, 556 SCRA 250 ISSUES: (1) Is demand necessary to make an obligation become due and demandable? (2) Are defenses against the Bureau of Customs completely available against ISAC, since the right of the latter to seek indemnity from petitioner depends on the right of the BOC to proceed against the bonds? DOCTRINE: (1) Demand, whether judicial or extrajudicial, is not required before an obligation becomes due and demandable-a demand is only necessary in order to put an obligor in a due and demandable obligation in delay, which in turn is for the purpose of making the obligor liable for interests or damages for the period of delay. (2) ISAC’s right to seek indemnity from petitioners does not constitute subrogation under the Civil Code, considering that there has been no payment yet by ISAC to the BOC. There are indeed cases in the aforementioned Article 2071 of the Civil Code wherein the guarantor or surety, even before having paid, may proceed against the principal debtor, but in all these cases, Article 2071 of the Civil Code merely grants the guarantor or surety an action “to obtain release from the guaranty, or to demand a security that shall protect him from any proceedings by the creditor and from the danger of insolvency of the debtor.” The benefit of subrogation, an extinctive subjective novation by a change of creditor, which “transfers to the person subrogated, the credit and all the rights thereto appertaining, either against the debtor or against third persons,” is granted by the Article 2067 of the Civil Code only to the “guarantor (or surety) who pays.” ISAC cannot be said to have stepped into the shoes of the BOC, because the BOC still retains said rights until it is paid. ISAC’s right to file Civil Case No. 95-1584 is based on the express provision of the Indemnity Agreements making petitioners liable to ISAC at the very moment ISAC’s bonds become due and demandable for the liability of Autocorp Group to the BOC, without

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS need for actual payment by ISAC to the BOC. But it is still correct to say that all the defenses available to petitioners against the BOC can likewise be invoked against ISAC because the latter’s contractual right to proceed against petitioners only arises when the Autocorp Group becomes liable to the BOC for non-compliance with its undertakings. Indeed, the arguments and evidence petitioners can present against the BOC to prove that Autocorp Group’s liability to the BOC is not yet due and demandable would also establish that petitioners’ liability to ISAC under the Indemnity Agreements has not yet arisen. J

Plus Asia Development Corporation G.R. No. 199650, 700 SCRA 134

Corporation

v.

Utility

Assurance

ISSUE: Can delay take place even if the obligation to perform or complete the project was not yet demandable because the agreed completion date is yet to come? DOCTRINE: Default or mora on the part of the debtor is the delay in the fulfillment of the prestation by reason of a cause imputable to the former. It is the non-fulfillment of an obligation with respect to time. In this jurisdiction, the following requisites must be present in order that the debtor may be in default: (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. Since the parties contemplated delay in the completion of the entire project as can be seen in the Construction Agreement, the CA concluded that the failure of the contractor to catch up with schedule of work activities did not constitute delay giving rise to the contractor’s liability for damages. Article 1374 of the Civil Code requires that the various stipulations of a contract shall be interpreted together, attributing to the doubtful ones that sense which may result from all of them taken jointly. Here, the work schedule approved by petitioner was intended, not only to serve as its basis for the payment of monthly progress billings, but also for evaluation of the progress of work by the contractor. Article 13.01 (g) (iii) of the Construction Agreement provides that the contractor shall be deemed in default if, among others, it had delayed without justifiable cause the completion of the project "by more than thirty (30) calendar days based on official work schedule duly approved by the OWNER." Where a party to a building construction contract fails to comply with the duty imposed by the terms of the contract, a breach results for which an action may be maintained to recover the damages sustained thereby, and of course, a breach occurs where the contractor inexcusably fails to perform substantially in accordance with the terms of the contract.

Polo S. Pantaleon v. American Express International, Inc. G.R. No. 174269, May 8, 2009 Tinga, J.: ISSUE: Whether delay by itself gives rise to moral damages.

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS DOCTRINE: No. It should be emphasized that the reason why petitioner is entitled to damages is not simply because respondent incurred delay, but because the delay, for which culpability lies under Article 1170, led to the particular injuries under Article 2217 of the Civil Code for which moral damages are remunerative. Moral damages do not avail to soothe the plaints of the simply impatient, so this decision should not be cause for relief for those who time the length of their credit card transactions with a stopwatch. The somewhat unusual attending circumstances to the purchase at Coster – that there was a deadline for the completion of that purchase by petitioner before any delay would redound to the injury of his several traveling companions – gave rise to the moral shock, mental anguish, serious anxiety, wounded feelings and social humiliation sustained by the petitioner, as concluded by the RTC. Those circumstances are fairly unusual, and should not give rise to a general entitlement for damages under a more mundane set of facts. Sps. Guanio v. Makati Shangri-La Hotel GR No. 190601, February 7, 2011 ISSUE: Whether the doctrine of proximate cause is applicable to a breach of contract. DOCTRINE: No. The Court finds that since petitioners’ complaint arose from a contract, the doctrine of proximate cause finds no application to it, the latter applicable only to actions for quasi-delicts, not in actions involving breach of contract. Breach of contract is defined as the failure without legal reason to comply with the terms of a contract. The appellate court, and even the trial court, observed that petitioners were remiss in their obligation to inform respondent of the change in the expected number of guests. Petitioners’ failure to discharge such obligation thus excused respondent from liability for “any damage or inconvenience” occasioned thereby. What applies in the present case is Article 1170 of the Civil Code which reads: 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. In culpa contractual the mere proof of the existence of the contract and the failure of its compliance justify, prima facie, a corresponding right of relief. The law, recognizing the obligatory force of contracts, will not permit a party to be set free from liability for any kind of misperformance of the contractual undertaking or a contravention of the tenor thereof. A breach upon the contract confers upon the injured party a valid cause for recovering that which may have been lost or suffered. The remedy serves to preserve the interests of the promissee that may include his “expectation interest,” which is his interest in having the benefit of his bargain by being put in as good a position as he would have been in had the contract been performed, or his “reliance interest,” which is his interest in being reimbursed for loss caused by reliance on the contract by being put in as good a position as he would have been in had the contract not been made; or his “restitution interest,” which is his interest in having restored to him any benefit that he has conferred on the other party. Marques v. Far East Bank

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS G.R. No. 171379; January 10, 2011 ISSUE: Whether FEBTC is estopped from claiming that the insurance premium in the contract has been paid, making it liable for damages. DOCTRINE: Yes. In estoppel, a party creating an appearance of fact, which is false, is bound by that appearance as against another person who acted in good faith on it. In Santiago Syjuco, Inc. v. Castro, the Court stated that “estoppel may arise from silence as well as from words.” ‘Estoppel by silence’ arises where a person, who by force of circumstances is obliged to another to speak, refrains from doing so and thereby induces the other to believe in the existence of a state of facts in reliance on which he acts to his prejudice. As a consequence of its negligence, FEBTC must be held liable for damages pursuant to Article 1172 in relation to Article 2176 of the Civil Code which states “whoever by act or omission causes damage to another, there being fault or negligence, is obliged to pay for the damage done.” Indisputably, had the insurance premium been paid, through the automatic debit arrangement with FEBTC, Maxilite’s fire loss claim would have been approved. Mondragon Leisure and Resorts Corporation v. Court of Appeals et al. G.R. No. 154188, June 15, 2005 Quisumbing, J.: ISSUE: In 1997, the Asian Financial crisis occurred. Is this a fortuitous event contemplated under Article 1174 such that a debtor cannot be held in default under a loan agreement? DOCTRINE: No. To exempt the obligor from liability for a breach of an obligation by reason of a fortuitous event, the following requisites must concur: (a) the cause of the breach of the obligation must be independent of the will of the debtor; (b) the event must be either unforeseeable or unavoidable; (c) the event must be such as to render it impossible for the debtor to fulfill his obligation in a normal manner; and (d) the debtor must be free from any participation in, or aggravation of the injury to the creditor. The following are excepted from the rule: (1) when the law expressly so specifies; (2) when it is otherwise declared by the parties; and (3) when the nature of the obligation requires the assumption of risks. Every business venture involves risks. Risks are not unforeseeable; they are inherent in business. Hence, a corporation that enters into a loan agreement, being aware of the economic environment at the time it entered into such agreement, can be declared in default despite events such as the Asian financial crisis. It is not a fortuitous event so as to exonerate a party from its obligation. Philippine Realty and Holding Corp. v. Ley Const. and Dev. Corp. G. R. No. 165548, June 13, 2011 ISSUE: Whether there is a fortuitous event that will exempt the obligor from liability for the breach of an obligation. DOCTRINE: Yes. Under Article 1174 of the Civil Code, to exempt the obligor from liability for a breach of an obligation due to an "act of God" or

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS force majeure, the following 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. The shortage in supplies and cement may be characterized as force majeure. In the present case, hardware stores did not have enough cement available in their supplies or stocks at the time of the construction in the 1990s. Likewise, typhoons, power failures and interruptions of water supply all clearly fall under force majeure. Since LCDC could not possibly continue constructing the building under the circumstances prevailing, it cannot be held liable for any delay that resulted from the causes aforementioned. Gilat Satellite Networks, Ltd. v. United Coconut Planters Bank General Insurance Co., Inc. G.R. No. 189563; April 7, 2014 Sereno, CJ: ISSUE: Whether the delay started to run from the time it demanded the fulfillment of respondent’s obligation under the suretyship contract. DOCTRINE: Yes. As to the issue of when interest must accrue, the Civil Code is explicit in stating that it accrues from the time judicial or extrajudicial demand is made on the surety. This ruling is in accordance with the provisions of Article 1169 of the Civil Code and of the settled rule that where there has been an extra-judicial demand before an action for performance was filed, interest on the amount due begins to run, not from the date of the filing of the complaint, but from the date of that extrajudicial demand.60 Considering that respondent failed to pay its obligation on 30 May 2000 in accordance with the Purchase Agreement, and that the extrajudicial demand of petitioner was sent on 5 June 2000,61 we agree with the latter that interest must start to run from the time petitioner sent its first demand letter (5 June 2000), because the obligation was already due and demandable at that time. Carlo F. Sunga v.Virjen Shipping Corporation, Nissho Odyssey Ship Management Pte. Ltd., And/Or Capt. Angel Zambrano Gr no. 198640; April 23, 2014 Brion, J.: ISSUE: Whether Sunga’s injury was a result of an accident. DOCTRINE: Yes. In Jarco Marketing Corporation, et al., v. Court of Appeals, SC ruled that an accident pertains to an unforeseen event in which no fault or negligence attaches to the defendant. It is "a fortuitous circumstance, event or happening; an event happening without any human agency, or if happening wholly or partly through human agency, an event which under the circumstances is unusual or unexpected by the person to whom it happens." In the present case, Sunga did not incur the injury while solely performing his regular duties; an intervening event transpired which brought upon the injury. To repeat, the two other oilers who were supposed to help carry the weight of the 200-kilogram globe valve lost their grasp of the globe valve. As a result, Sunga’s back snapped when the entire weight of the item fell upon him. The sheer weight of the item is designed not to be

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS carried by just one person, but as was observed, meant to be undertaken by several men and expectedly greatly overwhelmed the physical limits of an average person. Notably, this incident cannot be considered as foreseeable, nor can it be reasonably anticipated. Sunga’s duty as a fitter involved changing the valve, not to routinely carry a 200-kilogram globe valve singlehandedly. The loss of his fellow workers’ group was also unforeseen in so far as Sunga was concerned.

CHAPTER 3. DIFFERENT KINDS OF OBLIGATIONS SECTION 1. PURE AND CONDITIONAL OBLIGATIONS Sacobia Hills Development Corporation vs. Allan Ty G.R. No. 165889. September 20, 2005 Ynares-Santiago, J.: ISSUE: Can a non-existent obligation be the subject of rescission? DOCTRINE: No. Ty did not pay the full purchase price which is his obligation under the contract to sell, therefore, it cannot be said that Sacobia breached its obligation. No obligations arose on its part because respondent’s non-fulfillment of the suspensive condition rendered the contract to sell ineffective and unperfected. Indeed, there can be no rescission under Article 1191 of the Civil Code because until the happening of the condition, i.e. full payment of the contract price, Sacobia’s obligation to deliver the title and object of the sale is not yet extant. A non-existent obligation cannot be subject of rescission. Article 1191 speaks of obligations already existing, which may be rescinded in case one of the obligors fails to comply with what is incumbent upon him.

Carrascoso v. Court of Appeals G.R. No. 123672. December 14, 2005 Carpio Morales, J.: ISSUE: May the partially unpaid seller rescind the sale for failure of the buyer to pay the balance of the purchase price of the property in the manner and within the period agreed upon? DOCTRINE: Yes. Reciprocal obligations are those which arise from the same cause, and in which each party is a debtor and a creditor of the other, such that the obligation of one is dependent upon the obligation of the other. They are to be performed simultaneously such that the performance of one is conditioned upon the simultaneous fulfillment of the other. The right of rescission of a party to an obligation under Article 1191 of the New Civil Code is predicated on a breach of faith by the other party who violates the reciprocity between them. A contract of sale is a reciprocal obligation. The seller obligates itself to transfer the ownership of and deliver a determinate thing, and the buyer

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS obligates itself to pay therefor a price certain in money or its equivalent The non-payment of the price by the buyer is a resolutory condition which extinguishes the transaction that for a time existed, and discharges the obligations created thereunder. Such failure to pay the price in the manner prescribed by the contract of sale entitles the unpaid seller to sue for collection or to rescind the contract. Spouses William And Jeanette Yao v. Carlomagno B. Matela G.R. No. 167767. August 29, 2006 Ynares-Santiago, J.: ISSUE: May a court annul a contract on the ground that its object is a disastrous deal or an unwise investment? What is the role of the court in determining the liability of the contracting parties who are both guilty of violating the terms therein? DOCTRINE: The well-entrenched doctrine is that the law does not relieve a party from the effects of an unwise, foolish or disastrous contract, entered into with full awareness of what he was doing and entered into and carried out in good faith. Such a contract will not be discarded even if there was a mistake of law or fact. Courts have no jurisdiction to look into the wisdom of the contract entered into by and between the parties or to render a decision different therefrom. They have no power to relieve parties from obligation voluntarily assumed, simply because their contracts turned out to be disastrous deals or unwise investments. However, in situations such as the one discussed above, where it cannot be conclusively determined which of the parties first violated the contract, equity calls and justice demands that we apply the solution provided in Article 1192 of the Civil Code. Spouses Jaime Benos And Marina Benos v. Spouses Gregorio Lawilao And Janice Gail Lawilao G.R. No. 172259, December 5, 2006 Ynares-Santiago, J.: ISSUE: In reciprocal obligations in a pacto de retro sale, is the vendee precluded to pay even after the date agreed upon due to a cross-claim found in the answer? DOCTRINE: Yes. While the vendors did not rescind the Pacto de Retro Sale through a notarial act, they nevertheless rescinded the same in their Answer with Counterclaim. Even a cross-claim found in the Answer could constitute a judicial demand for rescission that satisfies the requirement of the law. The counterclaim of the vendors in their answer satisfied the requisites for the judicial rescission of the subject Pacto de Retro Sale

Darrel Cordero, et al. vs. F.S. Management and Development Corporation G.R. No. 167213. October 31, 2006 Carpio Morales, J.:

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS ISSUE: May the contract be rescinded in case of failure of a party to comply with its obligations under a contract, such as the obligation to pay the down payment of the purchase price in a contract to sell? DOCTRINE: No. A contract to sell is not a contract of sale. Article 1191 applies only in reciprocal contracts. A contract to sell is not a reciprocal contract. Under a contract to sell, the seller retains title to the thing to be sold until the purchaser fully pays the agreed purchase price. The full payment is a positive suspensive condition, the non-fulfillment of which is not a breach of contract but merely an event that prevents the seller from conveying title to the purchaser. The non-payment of the purchase price renders the contract to sell ineffective and without force and effect. Nevertheless, while rescission does not apply in this case, petitioners may cancel the contract to sell, their obligation not having arisen. Yamamoto v. Nishino Leather Industries, Inc. G.R. No. 150283, 551 SCRA 447 ISSUE: Will an offer to a stockholder to that he could take out the Machinery in the corporation if he wanted to so, provided that the value of said machines would be deducted from his capital contribution, give rise to an obligation to the corporation to deliver said properties to the prior? DOCTRINE: Without acceptance, a mere offer produces no obligation. Thus, under Article 1181 of the Civil Code, "in conditional obligations, the acquisition of rights, as well as the extinguishment or loss of those already acquired, shall depend upon the happening of the event which constitutes the condition." In the case at bar, there is no showing of compliance with the condition for allowing Yamamoto to take the machineries and equipment, namely, his agreement to the deduction of their value from his capital contribution due him in the buy-out of his interests in the corporation. Yamamoto’s allegation that he agreed to the condition remained just that, no proof thereof having been presented. The machineries and equipment, which comprised Yamamoto’s investment in NLII, thus remained part of the capital property of the corporation. Spouses Jose T. Valenzuela and Gloria Valenzuela v. Kalayaan Development & Industrial Corporation G.R. No. 163244, June 22, 2009 Peralta, J.: ISSUE: Whether there can be a rescission of contract if a positive suspensive condition under a contract to sell has not been complied with. DOCTRINE: No. Under a contract to sell, the seller retains title to the thing to be sold until the purchaser fully pays the agreed purchase price. The full payment is a positive suspensive condition, the non-fulfillment of which is not a breach of contract, but merely an event that prevents the seller from conveying title to the purchaser. The non-payment of the purchase price renders the contract to sell ineffective and without force and effect. Since the obligation of respondent did not arise because of the failure of petitioners to fully pay the purchase price, Article 1191 of the Civil Code would have no application.

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS The non-fulfillment by the respondent of his obligation to pay, which is a suspensive condition to the obligation of the petitioners to sell and deliver the title to the property, rendered the contract to sell ineffective and without force and effect. The parties stand as if the conditional obligation had never existed. Article 1191 of the New Civil Code will not apply because it presupposes an obligation already extant. There can be no rescission of an obligation that is still non-existing, the suspensive condition not having happened. Solar Harvest, Inc. v. Davao Corrugated Carton Corporation G.R. No. 176868 July 26, 2010 Nachura, J.: ISSUE: Whether petitioner failed to establish a cause of action for rescission it being shown that respondent did not commit any breach of its contractual obligation. DOCTRINE: Yes, in reciprocal obligations, as in a contract of sale, the general rule is that no demand is generally necessary because, once a party fulfills his obligation and the other party does not fulfill his, the latter automatically incurs in delay. But when different dates for performance of the obligations are fixed the other party would incur in delay only from the moment the other party demands fulfillment of the former’s obligation. Evident from the records and even from the allegations in the complaint was the lack of demand by petitioner upon respondent to fulfill its obligation to manufacture and deliver the boxes. The Complaint only alleged that petitioner made a “follow-up” upon respondent, which, however, would not qualify as a demand for the fulfillment of the obligation. Petitioner’s witness also testified that they made a follow-up of the boxes, but not a demand. Without a previous demand for the fulfillment of the obligation, petitioner would not have a cause of action for rescission against respondent as the latter would not yet be considered in breach of its contractual obligation. International Hotel Corporation, v. Francisco Joaquin, Jr. and Rafael Suarez G.R. No. 158361. April 10, 2013 Bersamin, J.: ISSUES: (1) Will the absence of intent on the part of the obligor to pre-empt the fulfillment of the condition warrant the application of Art. 1186? (2) Will substantial compliance warrant the application of Art. 1234? DOCTRINE: (1) No. This provision refers to the constructive fulfillment of a suspensive condition, whose application calls for two requisites, namely: (a) the intent of the obligor to prevent the fulfillment of the condition, and (b) the actual prevention of the fulfillment. Since the debtor had no intent to prevent the fulfillment of the condition, Art. 1186 cannot be applied. (2) Generally, yes. Art. 1234 applies only when an obligor admits breaching the contract after honestly and faithfully performing all the material elements thereof except for some technical aspects that cause no serious harm to the obligee. However, if incomplete performance amounts to a material breach of the contract, the same shall no longer be applicable.

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS In order that there may be substantial performance of an obligation, there must have been an attempt in good faith to perform, without any willful or intentional departure therefrom. The deviation from the obligation must be slight, and the omission or defect must be technical and unimportant, and must not pervade the whole or be so material that the object which the parties intended to accomplish in a particular manner is not attained. The non-performance of a material part of a contract will prevent the performance from amounting to a substantial compliance. Conversely, the principle of substantial performance is inappropriate when the incomplete performance constitutes a material breach of the contract. A contractual breach is material if it will adversely affect the nature of the obligation that the obligor promised to deliver, the benefits that the obligee expects to receive after full compliance, and the extent that the nonperformance defeated the purposes of the contract.

Republic v. Holy Trinity Realty Development Corporation G.R. No. 172410, 551 SCRA 303 ISSUE: Will the effects of the fulfillment of a condition retroact to the date of the constitution of the obligation? DOCTRINE: The effects of a conditional obligation to give, once the condition has been fulfilled, shall retroact to the day of the constitution of the obligation. Hence, when HTRDC complied with the given conditions, as determined by the RTC in its Order dated April 21, 2003, the effects of the constructive delivery retroacted to the actual date of the deposit of the amount in the expropriation account of DPWH. Subic Bay Metropolitan Authority v. Court of Appeals G.R. No. 192885, July 4, 2012. ISSUE: Whether SBMA is entitled to receive service fees pursuant to the contract despite failing to render the services required from them? . DOCTRINE: No. Reciprocal obligations are those which arise from the same cause, and in which each party is a debtor and a creditor of the other, such that the obligation of one is dependent upon the obligation of the other. They are to be performed simultaneously such that the performance of one is conditioned upon the simultaneous fulfillment of the other. For one party to demand the performance of the obligation of the other party, the former must also perform its own obligation. Accordingly, petitioner, not having provided the services that would require the payment of service fees as stipulated in the Lease Development Agreement, is not entitled to collect the same. The records show that petitioner did not actually provide most of the services enumerated in the Lease and Development Agreement and that the obligation involved in the agreement was reciprocal in nature; therefore, private respondent's obligation to pay was dependent upon petitioner's performance of its reciprocal duty to provide the agreed service, and since petitioner failed to perform its part of the deal, it cannot exact compliance from private respondent of its duty to pay.

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS Sps. Fernando and Lourdes Viloria vs. Continental Airlines, Inc. G.R. No. 188288. January 16, 2012. ISSUE: Whether annulment in Art 1390 is the same as rescission under Art. 1191. DOCTRINE: No. Annulment and rescission are two inconsistent remedies. In resolution, all the elements to make the contract valid are present; in annulment, one of the essential elements to a formation of a contract, which is consent, is absent. In resolution, the defect is in the consummation stage of the contract when the parties are in the process of performing their respective obligations; in annulment, the defect is already present at the time of the negotiation and perfection stages of the contract. Accordingly, by pursuing the remedy of rescission under Article 1191, there was implied admission of the validity of the subject contracts, forfeiting their right to demand their annulment. A party cannot rely on the contract and claim rights or obligations under it and at the same time impugn its existence or validity. Indeed, litigants are enjoined from taking inconsistent positions. The right to rescind a contract for non-performance of its stipulations is not absolute. 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 violations as would defeat the very object of the parties in making the agreement. Whether a breach is substantial is largely determined by the attendant circumstances. Under Article 1192, in case both parties have committed a breach of the obligation, the liability of the first infractor shall be equitably tempered by the courts. If it cannot be determined which of the parties first violated the contract, the same shall be deemed extinguished, and each shall bear his own damages. SECTION 4. JOINT AND SOLIDARY OBLIGATIONS Stronghold Insurance Company, Corporation G.R. No. 147561. June 22, 2006 Panganiban, C.J.

Inc.

v.

Republic-Asahi

Glass

ISSUE: Is a surety’s liability under a performance bond automatically extinguished by the death of the principal? DOCTRINE: No. A surety company’s liability under the performance bond it issues is solidary. The death of the principal obligor does not, as a rule, extinguish the obligation and the solidary nature of that liability. As a general rule, the death of either the creditor or the debtor does not extinguish the obligation. Obligations are transmissible to the heirs, except when the transmission is prevented by the law, the stipulations of the parties, or the nature of the obligation. Only obligations that are personal or are identified with the persons themselves are extinguished by death. Section 5 of Rule 86 of the Rules of Court expressly allows the prosecution of money claims arising from a contract against the estate of a deceased debtor. Evidently, those claims are not actually extinguished. What is

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS extinguished is only the obligee’s action or suit filed before the court, which is not then acting as a probate court. The death of the principal debtor will not work to convert, decrease or nullify the substantive right of the solidary creditor. Evidently, despite the death of the principal debtor, [the obligee] may still sue petitioner alone, in accordance with the solidary nature of the latter’s liability under the performance bond. Petron Corporation vs. Sps. Cesar Jovero and Erma F. Cudilla, et al. G.R. No. 151038. January 18, 2012 ISSUE: Whether payment made by one of the solidary debtor is enough to extinguish the liability of all the co-debtors. DOCTRINE: According to Article 1217 of the Civil Code, payment made by one of the solidary debtors extinguishes the obligation. If two or more solidary debtors offer to pay, the creditor may choose which offer to accept. The debtor who made the payment may claim from his co-debtors only the share which corresponds to each, with the interest for the payment already made. If the payment is made before the debt is due however, no interest for the intervening period may be demanded. Article 1208 provides for the share of solidary debtors which states that if from the law, or the nature of the wording of the obligations to which the preceding article refers the contrary does not appear, the credit of debt shall be presumed to be divided into as many equal shares as there are creditors or debtors, the credits or debts being considered distinct from one another, subject to the Rules of Court governing the multiplicity of suits. Philippine Commercial International Bank v. CA G.R. No. 121989. January 31, 2006 Tinga, J.: ISSUE: In the absence of stipulation, how should the debtor (Atlas) satisfy his obligation with two solidary creditors (PCIB and MCB)? DOCTRINE: Article 1208 of the Civil Code mandates the equal sharing of creditors in the payment of debt in the absence of any law or stipulation to the contrary. Thus, Atlas may satisfy his obligation by giving the payment to the two solidary creditors, as joint payees. Whatever share a solidary debtor failed to receive is an internal matter to be resolved by the solidary debtors themselves. Crystal v. Bank of the Philippine Islands G.R. No. 172428, 572 SCRA 697 ISSUE: Does a party who bind himself solidarily as ‘guarantor’ only become secondarily liable to the creditor? DOCTRINE: A solidary obligation is one in which each of the debtors is liable for the entire obligation, and each of the creditors is entitled to demand the satisfaction of the whole obligation from any or all of the debtors. A liability is solidary “only when the obligation expressly so states, when the law so provides or when the nature of the obligation so

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS requires.” Thus, when the obligor undertakes to be “jointly and severally” liable, it means that the obligation is solidary, such as in this case. If solidary liabilities were instituted to “guarantee” a principal obligation, the law deems the contract to be one of suretyship; the surety is directly and equally bound with the principal. The Heirs of George Y. Poe vs. Malayan Insurance Company, Inc., G.R. No. 156302, April 7, 2009 Chico-Nazario, J.: ISSUE: Whether a solidary obligation must be expressly stated to hold a party liable for the obligation. DOCTRINE: 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. In a joint obligation, each obligor answers only for a part of the whole liability and to each obligee belongs only a part of the correlative rights. Well-entrenched is the rule that solidary obligation cannot lightly be inferred. There is solidary liability only when the obligation expressly so states, when the law so provides or when the nature of the obligation so requires. Alba v. Yupangco G.R. No. 188233 Carpio Morales, J: ISSUE: Whether the respondent has solidary liability with obligorcorporation despite the decision of the Labor Arbiter being silent as to the matter. DOCTRINE: No, there is solidary liability only when the obligation expressly so states, when the law so provides, or when the nature of the obligation so requires. MAM Realty Development Corporation v. NLRC on solidary liability of corporate officers in labor disputes, enlightens: A corporation being a juridical entity, may act only through its directors, officers and employees. Obligations incurred by them, acting as such corporate agents are not theirs but the direct accountabilities of the corporation they represent. True solidary liabilities may at times be incurred but only when exceptional circumstances warrant such as, generally, in the following cases: 1.When directors and trustees or, in appropriate cases, the officers of a corporation:(a) vote for or assent to patently unlawful acts of the corporation;(b)act in bad faith or with gross negligence in directing the corporate affairs. Asset Builders Corporation v. Stronghold Insurance Company, Incorporated G.R. No. 187116, October 18, 2010 Mendoza, J.: ISSUE: Whether a guarantor who binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so is a solidary debtor? DOCTRINE: Yes, if a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this Book shall be

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS observed. In such case the contract is called a suretyship. As provided in Article 2047, the surety undertakes to be bound solidarily with the principal obligor. That undertaking makes a surety agreement an ancillary contract as it presupposes the existence of a principal contract. Although the contract of a surety is in essence secondary only to a valid principal obligation, the surety becomes liable for the debt or duty of another although it possesses no direct or personal interest over the obligations nor does it receive any benefit therefrom. Sps. Rodolfo Berot v. Felipe Siapno G. R. No. 188944; July 9, 2014 ISSUE: Whether the mortgage may be considered solidary despite the absence of express terms making the obligation solidary. DOCTRINE: No. Under Article 1207 of the Civil Code of the Philippines, the general rule is that when there is a concurrence of two or more debtors under a single obligation, the obligation is presumed to be joint. The law further provides that to consider the obligation as solidary in nature, it must expressly be stated as such, or the law or the nature of the obligation itself must require solidarity. Upon examination of the contents of the real estate mortgage, the Court found no indication in the plain wordings of the instrument that the debtors had expressly intended to make their obligation to respondent solidary in nature. Absent from the mortgage are the express and indubitable terms characterizing the obligation as solidary. Respondent was not able to prove by a preponderance of evidence that petitioners' obligation to him was solidary. Hence, applicable to this case is the presumption under the law that the nature of the obligation herein can only be considered as joint. It is incumbent upon the party alleging otherwise to prove with a preponderance of evidence that petitioners' obligation under the loan contract is indeed solidary in character. Trade and Investment Development Corp. of the Philippines v. Asia Paces Corp. G.R. No. 187403, February 12, 2014 Perlas-Bernabe, J. ISSUE: Will an extension of payment granted to a third party extinguish the suretyship in which one the parties is also a principal debtor to said third party? DOCTRINE: No. The theory behind Article 2079 is that an extension of time given to the principal debtor by the creditor without the surety’s consent would deprive the surety of his right to pay the creditor and to be immediately subrogated to the creditor’s remedies against the principal debtor upon the maturity date. The surety is said to be entitled to protect himself against the contingency of the principal debtor or the indemnitors becoming insolvent during the extended period. Article 2079 of the Civil Code refers to a payment extension granted by the creditor to the principal debtor without the consent of the guarantor or surety. It will not apply in cases where the suretyship was entered to insure a debt transaction distinct and separate from the transaction upon which the extension for payment was made. The two sets of transactions should be treated separately and distinctly from one another following the civil law principle of relativity of contracts "which provides that contracts can only

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS 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. Olongapo City, V. Subic Water And Sewerage Co., Inc., G.R. No. 171626, August 06, 2014 ISSUE: Can the Subic Water, who was not a party in the case, still be subjected to a writ of execution, since it was identified as OCWD’s co-maker and successor-in-interest in the compromise agreement? DOCTRINE: No. Solidary liability must be expressly stated; it is not presumed. Art. 1207 of the Civil Code provides, “There is a solidary liability only when the obligation expressly so states, or when the law or the nature of the obligation requires solidarity.” In Palmares v. Court of Appeals, the Court did not hesitate to rule that although a party to a promissory note was only labeled as a co-maker, his liability was that of a surety, since the instrument expressly provided for his joint and several liability with the principal. The law explicitly states that solidary liability is not presumed and must be expressly provided for. Not being a surety, Subic Water is not an insurer of OCWD’s obligations under the compromise agreement. At best, Subic Water was merely a guarantor against whom petitioner can claim, provided it was first shown that: a) petitioner had already proceeded after the properties of OCWD, the principal debtor; b) and despite this, the obligation under the compromise agreement, remains to be not fully satisfied. SECTION 6. OBLIGATIONS WITH A PENAL CLAUSE First Fil-Sin Lending Corporation v. Gloria D. Padillo G.R. No. 160533. January 12, 2005 Ynares-Santiago, J.: ISSUE: Whether the penalty charges of 1% per day of delay is unconscionable. DOCTRINE: As regards the penalty charges, the Court agrees with the Court of Appeals in ruling that the 1% penalty per day of delay is highly unconscionable. Applying Article 1229 of the Civil Code, courts shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with, or if it is iniquitous or unconscionable. Filinvest Land, Inc. vs. Hon. Court of Appeals, Philippine American General Insurance Company and Pacific Equipment Corporation G.R. No. 138980. September 20, 2005 Chico-Nazario, J.: ISSUE: Is there a difference between penalty and liquidated damages in cases where there has been partial or irregular compliance? DOCTRINE: None. Courts may equitably reduce a stipulated penalty in the contract in two instances: (1) if the principal obligation has been partly or

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS irregularly complied; and (2) even if there has been no compliance if the penalty is iniquitous or unconscionable in accordance with Article 1229 of the Civil Code. In cases where there has been partial or irregular compliance, as in this case, there will be no substantial difference between a penalty and liquidated damages insofar as legal results are concerned and that either may be recovered without the necessity of proving actual damages and both may be reduced when proper. Development Bank of the Philippines v. Family Foods Manufacturing Co. Ltd., and Spouses Julianco and Catalina Centeno G.R. No. 180458; July 30, 2009 Nachura, J.: ISSUE: Whether the stipulated penalty charge of 8% per annum and interest rates of 18% and 22% per annum are unreasonable, iniquitous and unconscionable. DOCTRINE: No. Respondents’ own evidence shows that they agreed on the stipulated interest rates of 18% and 22%, and on the penalty charge of 8%, in each promissory note. It is a basic principle in civil law that parties are bound by the stipulations in the contracts voluntarily entered into by them. Parties are free to stipulate terms and conditions that they deem convenient, provided these are not contrary to law, morals, good customs, public order, or public policy. There is nothing in the records, and in fact, there is no allegation, showing that respondents were victims of fraud when they signed the promissory notes. Neither is there a showing that in their contractual relations with DBP, respondents were at a disadvantage on account of their moral dependence, mental weakness, tender age or other handicap, which would entitle them to the vigilant protection of the courts as mandated by Article 24 of the Civil Code. Ileana Dr. Macalinao v. Bank of the Philippine Islands G.R. No. 175490, September 17, 2009 Velasco, Jr., J.: ISSUE: Whether the reduction of interest rate should be upheld since the stipulated rate of interest was unconscionable and iniquitous, and thus illegal. DOCTRINE: Yes. The interest rate and penalty charge of 3% per month should be equitably reduced to 2% per month or 24% per annum. Indeed, in the Terms and Conditions Governing the Issuance and Use of the BPI Credit Card, there was a stipulation on the 3% interest rate. Nevertheless, it should be noted that this is not the first time that this Court has considered the interest rate of 36% per annum as excessive and unconscionable. It was held in Chua vs. Timan: The stipulated interest rates of 7% and 5% per month imposed on respondents’ loans must be equitably reduced to 1% per month or 12% per annum. We need not unsettle the principle we had affirmed in a plethora of cases that stipulated interest rates of 3% per month and higher are excessive, iniquitous, unconscionable and exorbitant. Such stipulations are void for being contrary to morals, if not against the law. Since the stipulation on the interest rate is void, it is as if there was no express contract thereon. Hence, courts may reduce the interest rate as reason and equity demand. Thus, under the circumstances, the Court finds it equitable to reduce the interest rate pegged by the CA at 1.5% monthly to 1% monthly and penalty charge fixed by the CA at 1.5% monthly to 1%

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS monthly or a total of 2% per month or 24% per annum in line with the prevailing jurisprudence and in accordance with Art. 1229 of the Civil Code.

CHAPTER 4. EXTINGUISHMENT OF OBLIGATIONS SECTION 1. PAYMENT OR PERFORMANCE A. APPLICATION OF PAYMENTS B. PAYMENT BY CESSION C. TENDER OF PAYMENT AND CONSIGNATION Jaime Biana v. George Gimenez G.R. No. 132768. September 9, 2005 Garcia, J.: ISSUE: May redemption be made through tender of postdated checks? DOCTRINE: Yes. A check may be used for the exercise of the right of redemption, the same being a right and not an obligation. The tender of a check is sufficient to compel redemption but it is not in itself a payment that relieves the redemptioner from his liability to pay the redemption price. Art. 1249 may not be applied. G & M (Phil.), Inc. vs. Willie Batomalaque G.R. No. 151849 June 23, 2005 Carpio Morales, J. ISSUE: Who has the burden of showing with legal certainty that the obligation has been discharged by payment? DOCTRINE: Debtor. It is settled that as a general rule, a party who alleges payment as a defense has the burden of proving it. On repeated occasions, this Court ruled that the debtor has the burden of showing with legal certainty that the obligation has been discharged by payment. To discharge means to extinguish an obligation, and in contract law discharge occurs either when the parties have performed their obligations in the contract, or when an event the conduct of the parties, or the operation of law releases the parties from performing. Thus, a party who alleges that an obligation has been extinguished must prove facts or acts giving rise to the extinction. The fact of underpayment does not shift the burden of evidence to the plaintiff-herein respondent because partial payment does not extinguish the obligation. Only when the debtor introduces evidence that the obligation has been extinguished does the burden of evidence shift to the creditor who is then under a duty of producing evidence to show why payment does not extinguish the obligation. Abacus Securities Corporation v. Ruben U. Ampil Gr. No. 160016. February 27, 2006 Panganiban, CJ.: ISSUE: What is the duty of the principal for the advance payments made by the broker in accordance with the former’s instructions?

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS DOCTRINE: Under Article 1236 of the Civil Code, he can demand from the principal what he has paid, except that if he paid without the knowledge or against the will of the debtor, he can recover only insofar as the payment has been beneficial to the debtor. Almeda v. Bathala Marketing Industries, Inc. G.R. No. 150806, 542 SCRA 470 ISSUE: Can the continuous erosion of the value of the Philippines peso for three to four years amount to extra-ordinary inflation as contemplated by Article 1250 of the Civil Code? DOCTRINE: The erosion of the value of the Philippine peso in the past three or four decades, starting in the mid-sixties, is characteristic of most currencies-while the Supreme Court may take judicial notice of the decline in the purchasing power of the Philippine currency in the span of time, such downward trend of the peso cannot be considered as the extraordinary phenomenon contemplated by Article 1250 of the Civil Code; Absent an official pronouncement or declaration by competent authorities of the existence of extraordinary inflation during a given period, the effects of extraordinary inflation are not to be applied. ASJ Corporation v. Evangelista G.R. No. 158086, 545 SCRA 300 ISSUE: Was ASJ’s retention of the goods to be delivered on account of Evangelista’s failure to pay the full amount plus service fees unjustified? DOCTRINE: To begin with, ASJ’s obligation to deliver the chicks and byproducts corresponds to three dates: the date of hatching, the delivery/pickup date and the date of respondents’ payment. On several setting reports, respondents made delays on their payments, but petitioners tolerated such delay. When Evangelista’s accounts accumulated because of their successive failure to pay on several setting reports, petitioners opted to demand the full settlement of respondents’ accounts as a condition precedent to the delivery. However, Evangelista was unable to fully settle their accounts. Evangelista’s offer to partially satisfy their accounts is not enough to extinguish their obligation. Under Article 1248 of the Civil Code, the creditor cannot be compelled to accept partial payments from the debtor, unless there is an express stipulation to that effect. More so, respondents cannot substitute or apply as their payment the value of the chicks and byproducts they expect to derive because it is necessary that all the debts be for the same kind, generally of a monetary character. Needless to say, there was no valid application of payment in this case. Furthermore, it was Evangelista who violated the very essence of reciprocity in contracts, consequently giving rise to ASJ’s right of retention. This case is clearly one among the species of non-performance of a reciprocal obligation. Reciprocal obligations are those which arise from the same cause, wherein each party is a debtor and a creditor of the other, such that the performance of one is conditioned upon the simultaneous fulfillment of the other-from the moment one of the parties fulfills his obligation, delay by the other party begins.

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS Insular Life Assurance Company, Ltd. v. Toyota Bel-Air, Inc. G.R. No. 137884, 550 SCRA 70 ISSUES: (1) Is possession of the property a sufficient justification to grant the motion to consign the rents due? (2) Will a party’s non-compliance to some of the suspensive conditions in an agreement result to extinguishment of the obligation of the other party? DOCTRINES: (1) 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 show that: (1) there was a debt due; (2) the consignation of the obligation was made because the creditor to whom tender of payment had been made refused to accept it or was absent or incapacitated, or because several persons claimed to be entitled to receive the amount due, or because the title to the obligation was lost; (3) previous notice of the consignation was 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. Failure in any of these requirements is enough ground to render a consignation ineffective. In the present case, Toyota failed to allege (2) and (3) above, much less prove that any of the requirements was present. The mere fact that Toyota had been in possession of the property since July 3, 1998, is not a sufficient justification to grant the motion to consign the rents due. (2) When a contract is subject to a suspensive condition, its birth or effectivity can take place only if and when the event which constitutes the condition happens or is fulfilled, and if the suspensive condition does not take place, the parties would stand as if the conditional obligation has never existed. Since Toyota was unable to comply with the last two conditions of the agreement, which were suspensive conditions, Insular Life cannot be compelled to comply with its obligation to end the present litigation. No right in favor of Toyota arose and no obligation on the part of Insular Life was created. Dao Heng Bank, Inc. (Now Banco De Oro Universal Bank) v. Laigo G.R. No. 173856, 571 SCRA 434 ISSUE: Is a separate written contract necessary to make a dacion en pago binding upon the parties? DOCTRINE: Dacion en pago as a mode of extinguishing an existing obligation and partakes of the nature of sale whereby property is alienated to the creditor in satisfaction of a debt in money. Dacion en pago is an objective novation of the obligation, hence, common consent of the parties is required in order to extinguish the obligation. Being likened to that of a contract of sale, dacion en pago is governed by the law on sales. The partial execution of a contract of sale takes the transaction out of the provisions of the Statute of Frauds so long as the

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS essential requisites of consent of the contracting parties, object and cause of the obligation concur and are clearly established to be present.

Royal Cargo Corporation v. DFS Sports Unlimited, Inc. G.R. No. 158621, 573 SCRA 414 ISSUE: To whom does the burden of evidence lie in order to prove that payment has been made? DOCTRINE: As to the first issue raised, the settled rule is that one who pleads payment has the burden of proving it. Even where the creditor alleges non-payment, the general rule is that the onus rests on the debtor to prove payment, rather than on the creditor to prove non-payment. The debtor has the burden of showing with legal certainty that the obligation has been discharged by payment. Where the debtor introduces some evidence of payment, the burden of going forward with the evidence – as distinct from the general burden of proof – shifts to the creditor, who is then under a duty of producing some evidence to show non-payment. Since respondent claims that it had already paid petitioner for the services rendered by the latter, it follows that the former carries the burden of proving such payment. Allandale Sportsline, Inc. v. The Good Development Corporation G.R. No. 164521, 574 SCRA 625 ISSUE: Is tender of payment alone and the other party’s refusal to accept the same sufficient to discharge the other from their obligation? DOCTRINE: Tender of payment, without more, produces no effect-it must be followed by a valid consignation in order to produce the effect of payment and extinguish an obligation. Consignation has the following mandatory requirements: (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 claim 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. Petitioners did not allege or prove that after their tender of payment was refused by respondents, they attempted or pursued consignation of the payment with the proper court. Their tender of payment not having been followed by a valid consignation, it produced no effect whatsoever, least of all the extinguishment of the loan obligation. Therefore, the first issue of the validity or invalidity of their tender of payment is completely moot and academic, for either way the discussion will go, it will lead to no other conclusion but that, without an accompanying valid consignation, the tender of payment did not result in the payment and extinguishment of the loan

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS obligation. The Court cannot take cognizance of such a purely hypothetical issue. Annabelle Dela Peña and Adrian Villareal v. The Court of Appeals and Rural Bank of Bolinao, Inc. G.R. No. 177828, February 13, 2009 Nachura, J.: ISSUE: Whether the burden of proving the fact of payment lies on the person alleging it. DOCTRINE: Yes. Jurisprudence is replete with rulings that in civil cases, the party who alleges a fact has the burden of proving it. Burden of proof is the duty of a party to present evidence of the facts in issue necessary to prove the truth of his claim or defense by the amount of evidence required by law. Thus, a party who pleads payment as a defense has the burden of proving that such payment has, in fact, been made. When the plaintiff alleges nonpayment, still, the general rule is that the burden rests on the defendant to prove payment, rather than on the plaintiff to prove nonpayment. D.B.T. Mar-Bay Construction, Incorporated v. Ricaredo Panes et al. G.R. No. 167232, July 31, 2009 Nachura, J. ISSUE: Whether an innocent purchaser for value and good faith which, through a dacion en pago, acquire ownership over the property. DOCTRINE: Yes. DBT is an innocent purchaser for value and good faith which, through a dacion en pago duly entered into with B.C. Regalado, acquired ownership over the subject property, and whose rights must be protected under Section 32 of P.D. No. 1529. Dacion en pago is the delivery and transmission of ownership of a thing by the debtor to the creditor as an accepted equivalent of the performance of the obligation. It is a special mode of payment where the debtor offers another thing to the creditor, who accepts it as an equivalent of the payment of an outstanding debt. 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. It must also be noted that portions of the subject property had already been sold to third persons who, like DBT, are innocent purchasers in good faith and for value, relying on the certificates of title shown to them, and who had no knowledge of any defect in the title of the vendor, or of facts sufficient to induce a reasonably prudent man to inquire into the status of the subject property. Rockville Excel International Exim Corporation v. Spouses Oligario Culla and Bernardita Miranda G.R. No. 155716, October 2, 2009 Brion, J.

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS ISSUE: Whether the grant of extensions of the time to pay the loan belied the contention that they had intended a dacion en pago. DOCTRINE: Yes. Dacion en pago is the delivery and transmission of ownership of a thing by the debtor to the creditor as an accepted equivalent of the performance of an existing obligation. It is a special mode of payment where the debtor offers another thing to the creditor who accepts it as equivalent to the payment of an outstanding debt. For dacion en pago to exist, the following elements must concur: (a) existence of a money obligation; (b) the alienation to the creditor of a property by the debtor with the consent of the former; and (c) satisfaction of the money obligation of the debtor. If the parties had truly intended a dacion en pago transaction to extinguish the Sps. Culla’s P2,000,000.00 loan and Oligario had sold the property in payment for this debt, it made no sense for him to continue to ask for extensions of the time to pay the loan. More importantly, Rockville would not have granted the requested extensions to Oligario if payment through a dacion en pago had taken place. That Rockville granted the extensions simply belied its contention that they had intended a dacion en pago. Thus, we agree with the factual findings of the RTC and the CA that no agreement of sale was perfected between Rockville and the Sps. Culla. On the contrary, what they denominated as a Deed of Absolute Sale was in fact an equitable mortgage. Premiere Development Bank v. Central Surety & Insurance Company, Inc. G.R. No. 176246, February 13, 2009 Nachura, J.: ISSUE: Whether the debtor may choose among his obligations in which he may apply his payment and whether such right may be waived in favor of the creditor. DOCTRINE: Yes. The debtor’s right to apply payment is not mandatory. This is clear from the use of the word "may" rather than the word "shall" in the provision which reads: "He who has various debts of the same kind in favor of one and the same creditor, may declare at the time of making the payment, to which of the same must be applied." Indeed, the debtor’s right to apply payment has been considered merely directory, and not mandatory, following this Court’s earlier pronouncement that "the ordinary acceptation of the terms ‘may’ and ‘shall’ may be resorted to as guides in ascertaining the mandatory or directory character of statutory provisions." Article 1252 gives the right to the debtor to choose to which of several obligations to apply a particular payment that he tenders to the creditor. But likewise granted in the same provision is the right of the creditor to apply such payment in case the debtor fails to direct its application. This is obvious in Art. 1252, par. 2, viz.: "If the debtor accepts from the creditor a receipt in which an application of payment is made, the former cannot complain of the same." It is the directory nature of this right and the subsidiary right of the creditor to apply payments when the debtor does not elect to do so that make this right, like any other right, waivable.

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS A debtor, in making a voluntary payment, may at the time of payment direct an application of it to whatever account he chooses, unless he has assigned or waived that right. If the debtor does not do so, the right passes to the creditor, who may make such application as he chooses. But if neither party has exercised its option, the court will apply the payment according to the justice and equity of the case, taking into consideration all its circumstances. Verily, the debtor’s right to apply payment can be waived and even granted to the creditor if the debtor so agrees. Cecilleville Realty and Service Corporation v. Acuña G.R. No. 162074; July 13, 2009 Carpio, J. ISSUE: Whether Cecilleville Realty and Service Corporation is entitled to reimbursement from the Acuña spouses DOCTRINE: Yes Cecilleville paid the debt of the Acuña spouses to Prudential as an interested third party. The second paragraph of Article 1236 of the Civil Code reads: Whoever pays for another may demand from the debtor what he has paid, except that if he paid without the knowledge or against the will of the debtor, he can recover only insofar as the payment has been beneficial to the debtor. Even if the Acuña spouses insist that Cecilleville’s payment to Prudential was without their knowledge or against their will, Article 1302(3) of the Civil Code states that Cecilleville still has a right to reimbursement, thus: When, even without the knowledge of the debtor, a person interested in the fulfillment of the obligation pays, without prejudice to the effects of confusion as to the latter’s share. DBT Mar-Bay Construction, Inc. vs. Panes G.R. No. 167232; July 31, 2009 Nachura, J. ISSUE: Whether DBT, as an innocent purchaser for value and good faith which, through a dacion en pago duly entered into with B.C. Regalado, acquired ownership over the subject property. DOCTRINE: Yes. Dacion en pago is the delivery and transmission of ownership of a thing by the debtor to the creditor as an accepted equivalent of the performance of the obligation. It is a special mode of payment where the debtor offers another thing to the creditor, who accepts it as an equivalent of the payment of an outstanding debt. 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. It must also be noted that portions of the subject property had already been sold to third persons who, like DBT, are innocent purchasers in good faith and for value, relying on the certificates of title shown to them, and who had no knowledge of any defect in the title of the vendor, or of facts sufficient to induce a reasonably prudent man to inquire into the status of the subject property. To disregard these circumstances simply on the basis of alleged continuous and adverse possession of respondents would not only be inimical to the rights of the aforementioned titleholders, but would ultimately wreak havoc on the stability of the Torrens system of registration.

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS Manuel Go Cinco and Araceli S. Go Cinco v. Court Of Appeals, Ester Servacio and Maasin Traders Lending Corporation G.R. No. 151903, October 9, 2009 Brion, J.: ISSE: Whether unjust refusal of creditor to accept payment is equivalent to payment. DOCTRINE: No. Refusal without just cause is not equivalent to payment; to have the effect of payment and the consequent extinguishment of the obligation to pay, the law requires the companion acts of tender of payment and consignation. Tender of payment, as defined in Far East Bank and Trust Company v. Diaz Realty, Inc., is the definitive act of offering the creditor what is due him or her, together with the demand that the creditor accept the same. When a creditor refuses the debtor’s tender of payment, the law allows the consignation of the thing or the sum due. Tender and consignation have the effect of payment, as by consignation, the thing due is deposited and placed at the disposal of the judicial authorities for the creditor to collect. Land Bank of the Philippines vs. Alfredo Ong G.R. No. 190755November 24, 2010 Velasco, Jr., J.: ISSUE: Whether Art. 1236 makes a creditor (Land Bank) bound to accept payment from a third person having no interest in the fulfillment of the obligation and Whether a third person (Alfredo) may demand from the debtor (Spouses Sy) what he has paid. DOCTRINE: No. Land Bank was not bound to accept Alfredo’s payment, since as far as the former was concerned, he did not have an interest in the payment of the loan of the Spouses Sy. No. Alfredo was not making payment to fulfill the obligation of the Spouses Sy. Alfredo, as a third person, did not, therefore, have an interest in the fulfillment of the obligation of the Spouses Sy, since his interest hinged on Land Bank’s approval of his application, which was denied. As Alfredo made the payment for his own interest and not on behalf of the Spouses Sy, recourse is not against the latter. He, thus, made payment not as a debtor but as a prospective mortgagor. And as Alfredo was not paying for another, he cannot demand from the debtors, the Spouses Sy, what he has paid. Republic v. Thi Thu Thuy T. De Guzman G.R. No. 175021; June 15, 2011 ISSUE: Is the payment made to a person other than the creditor extinguishes the obligation? DOCTRINE: No. In general, a payment in order to be effective to discharge an obligation, must be made to the proper person. Thus, payment must be made to the obligee himself or to an agent having authority, express or implied, to receive the particular payment. Payment made to one having apparent authority to receive the money will, as a rule, be treated as though actual authority had been given for its receipt. Likewise, if payment is made to one who by law is authorized to act for the creditor, it will work a

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS discharge. The receipt of money due on a judgment by an officer authorized by law to accept it will, therefore, satisfy the debt. The respondent was able to establish that the LBP check was not received by her or by her authorized personnel. Dalton vs. FGR Realty and Development Corp G.R. No. 172577; January 19, 2011 ISSUE: Whether the consignation made by the plaintiff-appellant was void for failure to give notice to the defendants-appellees of her intention to so consign her rental payments. DOCTRINE: NO. Compliance with the requisites of a valid consignation is mandatory. Failure to comply strictly with any of the requisites will render the consignation void. Substantial compliance is not enough. The requisites of a valid consignation: (1) a debt due; (2) the creditor to whom tender of payment was made refused without just cause to accept the payment, or the creditor was absent, unknown or incapacitated, or several persons claimed the same right to collect, or the title of the obligation was lost; (3) the person interested in the performance of the obligation was given notice before consignation was made; (4) the amount was placed at the disposal of the court; and (5) the person interested in the performance of the obligation was given notice after the consignation was made. The consignation having been made, the interested parties shall also be notified thereof. The giving of notice to the persons interested in the performance of the obligation is mandatory. Failure to notify the persons interested in the performance of the obligation will render the consignation void. In Ramos v. Sarao, the Court held that, "All interested parties are to be notified of the consignation. Compliance with [this requisite] is mandatory. Elizabeth Del Carmen v. Sps. Sabordo G.R. No. 181723, August 11, 2014 ISSUE: Whether the judicial deposit or consignation of the money was valid and binding to the parties and produced the effect of payment of the purchase price of the subject lots. DOCTRINE: NO. Consignation is the act of depositing the thing due with the court or judicial authorities whenever the creditor cannot accept or refuses to accept payment, and it generally requires a prior tender of payment. It should be distinguished from tender of payment which is the manifestation by the debtor to the creditor of his desire to comply with his obligation, with the offer of immediate performance. Tender is the antecedent of consignation, that is, an act preparatory to the consignation, which is the principal, and from which are derived the immediate consequences which the debtor desires or seeks to obtain. Tender of payment may be extrajudicial, while consignation is necessarily judicial, and the priority of the first is the attempt to make a private settlement before proceeding to the solemnities of consignation. Tender and consignation, where validly made, produces the effect of payment and extinguishes the obligation. It is settled that compliance with the requisites of a valid consignation is mandatory. Failure to comply strictly with any of the requisites will render

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS the consignation void. One of these requisites is a valid prior tender of payment. Erlinda Gajudo, Fernando Gajudo, Jr., Estelita Gajudo, Baltazar Gajudo And Danilo Arahan Chua v. Traders Royal Bank G.R. No. 151098. March 21, 2006 Panganiban, C.J.: ISSUE: What is a means of proving a firm commitment to pay the redemption price on a fixed period, which is essential in conventional redemption? DOCTRINE: Other than the Interbank check marked "for deposit" by respondent bank, no other evidence was presented to establish that petitioners had offered to pay the alleged redemption price of P40,135.53 on a fixed date. For that matter, petitioners have not shown that they tendered payment of the balance and/or consigned the payment to the court, in order to fulfill their part of the purported agreement. These remedies are available to an aggrieved debtor under Article 1256 of the Civil Code, when the creditor unjustly refuses to accept the payment of an obligation. Luzon Development Bank v. Enriquez G.R. No. 168646; January 12, 2011 ISSUE: Whether the dacion en pago extinguished the loan obligation, such that DELTA has no more obligations to the BANK. DOCTRINE: The contractual intention determines whether the property subject of the dation will be considered as the full equivalent of the debt and will therefore serve as full satisfaction for the debt. "The dation in payment extinguishes the obligation to the extent of the value of the thing delivered, either as agreed upon by the parties or as may be proved, unless the parties by agreement, express or implied, or by their silence, consider the thing as equivalent to the obligation, in which case the obligation is totally extinguished." Telengtan Brothers & Sons, Inc. v. United States Lines, Inc. and the Court of Appeals Gr. No. 132284. February 28, 2006 Garcia, J.: ISSUE: When can there be extraordinary inflation or deflation of the currency stipulated so as to justify the application of payment under Article 1250? DOCTRINE: Extraordinary inflation or deflation, as the case may be, exists when there is an unusual increase or decrease in the purchasing power of the Philippine peso which is beyond the common fluctuation in the value of said currency, and such increase or decrease could not have been reasonably foreseen or was manifestly beyond the contemplation of the parties at the time of the establishment of the obligation. Even if the price index of goods and services may have risen during the intervening period, this increase, without more, cannot be considered as

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS resulting to "extraordinary inflation" as to justify the application of Article 1250. The erosion of the value of the Philippine peso in the past three or four decades, starting in the mid-sixties, is, as the Court observed in Singson vs. Caltex (Phil), Inc., characteristics of most currencies. And while the Court may take judicial notice of the decline in the purchasing power of the Philippine currency in that span of time, such downward trend of the peso cannot be considered as the extraordinary phenomenon contemplated by Article 1250 of the Civil Code. Furthermore, absent an official pronouncement or declaration by competent authorities of the existence of extraordinary inflation during a given period, as here, the effects of extraordinary inflation, if that be the case, are not to be applied. Extraordinary inflation can never be assumed; he who alleges the existence of such phenomenon must prove the same. Simplicio A. Palanca v. Ulyssis Guides G.R. No. 146365. February 28, 2005 Tinga, J.: ISSUE: What is the effect of acceptance of payment without qualification on the part of the creditor? DOCTRINE: Art. 1235 of the Civil Code provides that “When the obligee accepts the performance, knowing its incompleteness or irregularity, and without expressing any protest or objection, the obligation is deemed fully complied with.” Thus, when petitioner accepted respondent’s installment payments despite the alleged charges incurred by the latter, and without any showing that he protested the irregularity of such payment, nor demanded the payment of the alleged charges, respondent’s liability, if any for said charges, is deemed fully satisfied.

SECTION 2. LOSS OF THE THING DUE Ayala Construction and Development Corporation v. Philippine Commercial International Bank G.R. No. 153827. April 25, 2006. Garcia, J.: ISSUE: In an obligation to give will a party be released from its obligation when the prestation becomes legally of physically impossible? DOCTRINE: No. It is a 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 complied with in good faith. But the law recognizes exceptions to the principle of the obligatory force of contracts. 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.

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS Petitioner cannot, however, successfully take refuge in the said article, since it is applicable only to obligations “to do,” and not obligations “to give.” An obligation “to do” includes all kinds of work or service; while an obligation “to give” is a prestation which consists in the delivery of a movable or an immovable thing in order to create a real right, or for the use of the recipient, or for its simple possession, or in order to return it to its owner. Raymundo S. De Leon vs. Benita T. Ong G.R. No. 170405, February 2, 2010 Corona, J.: ISSUE: Whether the respondent a purchaser in good faith. DOCTRINE: YES. Article 1266 of the Civil Code provides: Article 1266. The debtor in obligations to do shall be released when the prestation become legally or physically impossible without the fault of the obligor. Since respondent’s obligation to assume petitioner’s outstanding balance with RSLAI became impossible without her fault, she was released from the said obligation. Moreover, because petitioner himself willfully prevented the condition vis-à-vis the payment of the remainder of the purchase price, the said condition is considered fulfilled pursuant to Article 1186 of the Civil Code. For purposes, therefore, of determining whether respondent was a purchaser in good faith, she is deemed to have fully complied with the condition of the payment of the remainder of the purchase price.

SECTION 3. CONDONATION OR REMISSION OF THE DEBT Ruben Reyna V. COA G.R. No. 167219; February 8, 2011 ISSUE: Whether the writing off of a loan is considered as condonation which releases a debt by the creditor. DOCTRINE: NO. This Court rules that writing-off a loan does not equate to a condonation or release of a debt by the creditor. Write-off is not one of the legal grounds for extinguishing an obligation under the Civil Code. It is not a compromise of liability. Neither is it a condonation, since in condonation gratuity on the part of the obligee and acceptance by the obligor are required. In making the write-off, only the creditor takes action by removing the uncollectible account from its books even without the approval or participation of the debtor.

SECTION 4. CONFUSION OR MERGER OF RIGHTS

Cecilleville Realty and Service Corporation vs. Spouses Tito Acuña and Ofelia B. Acuña G.R. No. 162074, July 13, 2009 Carpio, J. ISSUE: Whether a third-party accommodation mortgagor in a real estate mortgage who paid the mortgaged debt in favor of the principal mortgagor without his knowledge has the right to reimburse from the latter.

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS DOCTRINE: Yes. When, even without the knowledge of the debtor, a person interested in the fulfillment of the obligation pays, without prejudice to the effects of confusion as to the latter’s share. Cecilleville clearly has an interest in the fulfillment of the obligation because it owns the properties mortgaged to secure the Acuña spouses’ loan. When an interested party pays the obligation, he is subrogated in the rights of the creditor. Because of its payment of the Acuña spouses’ loan, Cecilleville actually steps into the shoes of Prudential and becomes entitled, not only to recover what it has paid, but also to exercise all the rights which Prudential could have exercised. There is, in such cases, not a real extinguishment of the obligation, but a change in the active subject. Sps. Dominador R. Narvaez and Lilia W. Narvaez vs. Sps. Rose Ogas Alciso and Antonio Alciso G.R. No. 165907, July 27, 2009 Carpio, J. ISSUE: Whether there could be a stipulation in favor of a third person. DOCTRINE: Yes. In Limitless Potentials, Inc. v. Quilala, the Court laid down the requisites of a stipulation pour autrui: (1) there is a stipulation in favor of a third person; (2) the stipulation is a part, not the whole, of the contract; (3) the contracting parties clearly and deliberately conferred a favor to the third person — the favor is not an incidental benefit; (4) the favor is unconditional and uncompensated; (5) the third person communicated his or her acceptance of the favor before its revocation; and (6) the contracting parties do not represent, or are not authorized by, the third party. All the requisites are present in the instant case: (1) there is a stipulation in favor of Alciso; (2) the stipulation is a part, not the whole, of the contract; (3) Bate and the Spouses Narvaez clearly and deliberately conferred a favor to Alciso; (4) the favor is unconditional and uncompensated; (5) Alciso communicated her acceptance of the favor before its revocation — she demanded that a stipulation be included in the 14 August 1981 Deed of Sale of Realty allowing her to repurchase the property from the Spouses Narvaez, and she informed the Spouses Narvaez that she wanted to repurchase the property; and (6) Bate and the Spouses Narvaez did not represent, and were not authorized by, Alciso.

SECTION 5. COMPENSATION Mavest (USA) Inc. and Mavest Manila Liaison Office vs. Sampaguita Garment Corporation G.R. No. 127454. September 21, 2005 Garcia, J.: ISSUE: In compensation, do the rights of creditors or obligations of debtors need to spring from one and the same contract? DOCTRINE: No. For compensation to validly take place, the governing Civil Code provisions require the concurrence of well-defined conditions. At its minimum, compensation presupposes two persons who, in their own right and as principals, are mutually indebted to each other respecting equally

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS demandable and liquidated obligations over any of which no retention or controversy commenced and communicated in due time to the debtor exists. But while compensation, be it legal or conventional, requires the confluence in the parties of the characters of mutual debtors and creditors, their rights as such creditors, or their obligations as such debtors, need not spring from one and the same contract or transaction. Manuel B. Aloria v. Estrellita B. Clemente G.R. No. 165644 . February 28, 2006 Carpio Morales, J.: ISSUE: Can there be compensation for the amount of expenses due to a possessor in bad faith as against the rentals due from him to the lawful possessor? DOCTRINE: Yes. The amount of reimbursable or refundable expenses due to a possessor in bad faith under Articles 443 and 546 can be compensated under Article 1278 which reads: Compensation shall take place when two persons, in their own right, are creditors and debtors of each other. Premiere Development Bank v. Flores G.R. No. 175339, 574 SCRA 66 ISSUE: Must the principles of compensation or set-off be applied in a case where there is foreclosure of mortgaged property since foreclosure does not preclude the creditor from filing an action to recover any deficiency from respondent corporations’ loan? DOCTRINE: The Court cannot give due course to Premiere Development Bank’s claim of compensation or set-off on account of the pending Civil Case No. MC03-2202 before the RTC of Mandaluyong City. For compensation to apply, among other requisites, the two debts must be liquidated and demandable already. A distinction must be made between a debt and a mere claim. A debt is an amount actually ascertained. It is a claim which has been formally passed upon by the courts or quasi-judicial bodies to which it can in law be submitted and has been declared to be a debt. A claim, on the other hand, is a debt in embryo. It is mere evidence of a debt and must pass thru the process prescribed by law before it develops into what is properly called a debt. Absent, however, any such categorical admission by an obligor or final adjudication, no legal compensation or off-set can take place. Unless admitted by a debtor himself, the conclusion that he is in truth indebted to another cannot be definitely and finally pronounced, no matter how convinced he may be from the examination of the pertinent records of the validity of that conclusion the indebtedness must be one that is admitted by the alleged debtor or pronounced by final judgment of a competent court. At best, what Premiere Development Bank has against respondent corporations is just a claim, not a debt. At worst, it is a speculative claim. Soriano v. People G.R. No. 181692, 703 SCRA 536 ISSUE: Can there be compensation for debt comprising of the debtor’s harvest?

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS DOCTRINE: Compensation is a mode of extinguishing to the concurrent amount, the debts of persons who in their own right are creditors and debtors of each other. Article 1279 of the Civil Code provides for the requisites for compensation to take effect: (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. Harvest due to petitioner as provided in the contract of loan, the same cannot be considered in the legal compensation of the debts of the parties since it does not consist in a sum of money, said share being in the form of harvests. United Planters Sugar Milling Co., Inc., (UPSUMCO) vs. Court of Appeals, et al. G.R. No. 126890, April 2, 2009 Tinga, J.: ISSUE: Whether the absence of a mutual creditor-debtor relation between the parties prevents them from extinguishing their obligations through compensation. DOCTRINE: No. It might seem that APT has no right to set-off payments with UPSUMCO for under Article 1279 (1), it is necessary for compensation that the obligors "be bound principally, and that he be at the same time a principal creditor of the other." There is, concededly, no mutual creditordebtor relation between APT and UPSUMCO. However, we recognize the concept of conventional compensation, defined as occurring "when the parties agree to compensate their mutual obligations even if some requisite is lacking, such as that provided in Article 1282." It is intended to eliminate or overcome obstacles which prevent ipso jure extinguishment of their obligations. Legal compensation takes place by operation of law when all the requisites are present, as opposed to conventional compensation which takes place when the parties agree to compensate their mutual obligations even in the absence of some requisites. The only requisites of conventional compensation are (1) that each of the parties can dispose of the credit he seeks to compensate, and (2) that they agree to the mutual extinguishment of their credits. The right of PNB to set-off payments from UPSUMCO arose out of conventional compensation rather than legal compensation, even though all of the requisites for legal compensation were present as between those two parties. The determinative factor is the mutual agreement between PNB and UPSUMCO to set-off payments. Even without an express agreement stipulating compensation, PNB and UPSUMCO would have been entitled to set-off of payments, as the legal requisites for compensation under Article 1279 were present.

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS As soon as PNB assigned its credit to APT, the mutual creditor-debtor relation between PNB and UPSUMCO ceased to exist. However, PNB and UPSUMCO had agreed to a conventional compensation, a relationship which does not require the presence of all the requisites under Article 1279. And PNB too had assigned all its rights as creditor to APT, including its rights under conventional compensation. The absence of the mutual creditor-debtor relation between the new creditor APT and UPSUMCO cannot negate the conventional compensation. Accordingly, APT, as the assignee of credit of PNB, had the right to set-off the outstanding obligations of UPSUMCO on the basis of conventional compensation before the condonation took effect on 3 September 1987. Lao v. Special Plans, Inc. G.R. No. 164791 Del Castillo, J. ISSUE: Whether legal compensation shall take place where the parties are mutual creditors and debtors of each other? DOCTRINE: No, Article 1279 of the New Civil Code provides that compensation shall take place when two persons, in their own right, are creditors and debtors of each other. In order for compensation to be proper, it is necessary that: 1. Each one of the obligors be bound principally and that he be at the same time a principal creditor of the other; 2. 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. The two debts are due: 4. The debts are liquidated and demandable; 5. Over neither of them be any retention or controversy, commenced by third parties and communicated in due time to the debtor. Petitioners failed to properly discharge their burden to show that the debts are liquidated and demandable. Consequently, legal compensation is inapplicable. Traders Royal Bank vs. Norberto Castañares G.R. No. 172020 December 6, 2010 Villarama, Jr., J.:

Castañares

and

Milagros

ISSUE: Whether petitioner has a right by way of set-off the telegraphic transfer in the sum of $4,220.00 against the unpaid loan account of private respondents, both being bound as principals and debtors of each other, the debts consisting of a sum of money and due, liquidated and demandable, and are not claimed by a third person. DOCTRINE: Yes. Agreements for compensation of debts or any obligations when the parties are mutually creditors and debtors are allowed under Art. 1282 of the Civil Code even though not all the legal requisites for legal compensation are present. Voluntary or conventional compensation is not limited to obligations which are not yet due. The only requirements for conventional compensation are (1) that each of the parties can fully dispose of the credit he seeks to compensate, and (2) that they agree to the extinguishment of their mutual credits. Consequently, no error was

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS committed by the trial court in holding that petitioner validly applied, by way of compensation, the $4,220.00 telegraphic transfer remitted by respondents’ foreign client through the petitioner. Cesar V. Areza and Lolita B. Areza v. Express Savings Bank, Inc. G.R. No. 176697, September 10, 2014 ISSUE: Whether the Bank can set-off the amount it paid to Equitable-PCI Bank with petitioner’s savings account. DOCTRINE: No. Under Art. 1278 of the New Civil Code, compensation shall take place when two persons, in their own right, are creditors and debtors of each other. And the requisites for legal compensation are: Art. 1279. In order that compensation may be proper, it is necessary: (1)That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other; (2)That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated; (3)That the two debts be due; (4)That they be liquidated and demandable; (5)That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor. It is well-settled that the relationship of the depositors and the Bank or similar institution is that of creditor-debtor. Article 1980 of the New Civil Code provides that fixed, savings and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loans. The bank is the debtor and the depositor is the creditor. The depositor lends the bank money and the bank agrees to pay the depositor on demand. The savings deposit agreement between the bank and the depositor is the contract that determines the rights and obligations of the parties.33cralawred Mondragon Personal Sales, Inc. v. Victoriano S. Sola, Jr. G.R. No. 174882. January 21, 2013 Peralta, J.: ISSUE: Is petitioner's act of withholding respondent's service fees and thereafter applying them as partial payment to the obligation of respondent's wife with petitioner unlawful? DOCTRINE: No. Petitioner’s act of withholding respondent's service fees/commissions and applying them to the latter's outstanding obligation with the former is merely an acknowledgment of the legal compensation that occurred by operation of law between the parties. Compensation is a mode of extinguishing to the concurrent amount the obligations of persons who in their own right and as principals are reciprocally debtors and creditors of each other. Legal compensation takes place by operation of law when all the requisites are present, as opposed to conventional compensation which takes place when the parties agree to compensate their mutual obligations even in the absence of some requisites. Legal compensation requires the concurrence of the following conditions: (1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other;

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS (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.

SECTION 6. NOVATION Philippine Savings Bank v. Sps. Rodelfo Malanac Jr. G.R. No. 145441, April 26, 2005 Ynares-Santiago J: ISSUE: Is moral damages proper in case a bank misrepresents that they would accept a request of a party and then does an act that is legal under the circumstances? DOCTRINE: Yes. While the bank had the legal basis to withhold the release of the mortgaged properties, nevertheless, it was not forthright and was lacking in candor in dealing with Mañalac. In accepting the PCIB Check, the bank knew fully well that the payment was conditioned on its commitment to release the specified properties. At the first instance, the bank should not have accepted the check or returned the same had it intended beforehand not to honor the request of Mañalac. In accepting the check and applying the proceeds thereof to the loan accounts of Mañalac and Galicia, the former were led to believe that the bank was favorably acting on their request. In justifying the award of moral damages, the Court of Appeals correctly observed that “there is the unjustified refusal of the appellant bank to make a definite commitment while profiting from the proceeds of the check by applying it to the principal and the interest of the Galicias and plaintiff-appellants.” Isaisas F. Fabrigas and Marcelina R. Fabrigas v. San Francisco del Monte, Inc. G.R. No. 152346. November 25, 2005 Tinga, J.: ISSUE: Is there a novation when at first, there is a contract to sell which was rescinded but subsequently a second contract to sell was created to replace the first contract? DOCTRINE: Novation, in its broad concept, may either be extinctive or modificatory. It is extinctive when an old obligation is terminated by the creation of a new obligation that takes the place of the former; it is merely modificatory when the old obligation subsists to the extent it remains compatible with the amendatory agreement. An extinctive novation results either by changing the object or principal conditions (objective or real), or by substituting the person of the debtor or subrogating a third person in the rights of the creditor (subjective or personal). Under this mode, novation would have dual functions—one to extinguish an existing obligation, the other to substitute a new one in its place—requiring a conflux of four essential requisites: (1) a previous valid obligation; (2) an agreement of all

58

CASE DOCTRINES OBLIGATIONS AND CONTRACTS parties concerned to a new contract; (3) the extinguishment of the old obligation; and (4) the birth of a valid new obligation. Notwithstanding the improper rescission, the facts of the case show that Contract to Sell No. 2482-V was subsequently novated by Contract to Sell No. 2491-V. The execution of Contract to Sell No. 2491-V accompanied an upward change in the contract price, which constitutes a change in the object or principal conditions of the contract. In entering into Contract to Sell No. 2491-V, the parties were impelled by causes different from those obtaining under Contract to Sell No. 2482-V. On the part of petitioners, they agreed to the terms and conditions of Contract to Sell No. 2491-Vnot only to acquire ownership over the subject property but also to avoid the consequences of their default under Contract No. 2482-V. On Del Monte’s end, the upward change in price was the consideration for entering into Contract to Sell No. 2491-V. In order that an obligation may be extinguished by another which substitutes the same, it is imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible with each other. The test of incompatibility is Whether 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. The execution of Contract to Sell No. 2491-V created new obligations in lieu of those under Contract to Sell No. 2482-V, which are already considered extinguished upon the execution of the second contract. The two contracts do not have independent existence for to hold otherwise would present an absurd situation where the parties would be liable under each contract having only one subject matter. Sps. Francisco and Ruby Reyes v. BPI Family Savings Bank, Inc., And Magdalena L. Lometillo, in her capacity as Ex-Officio Provincial Sheriff for Iloilo G.R. Nos. 149840-41. March 31, 2006 Corona, J.: ISSUE: Does novation result when the creditor reconstructs the loan and changes it terms and the debtor issues a promissory note for the same? DOCTRINE: No there is no novation. 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. The cancellation of the old obligation by the new one is a necessary element of novation which may be effected either expressly or impliedly. While there is really no hard and fast rule to determine what might constitute sufficient change resulting in novation, the touchstone, however, is irreconcilable incompatibility between the old and the new obligations. The novation of a contract cannot be presumed. In the absence of an express agreement, novation takes place only when the old and the new obligations are incompatible on every point. Gammon Philippines, Inc. v. Corporation G.R. No. 144792. January 31, 2006

Metro

Rail

Transit

Development

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS Tinga, J. ISSUE: Is there a novation when a subsequent agreement is entered into by the parties changing the agreed price in the previous contract? DOCTRINE: No. Novation cannot be presumed. The animus novandi, whether partial or total, must appear by the express agreement of the parties, or by their acts that are too clear and unequivocal to be mistaken. Thus, in order than an obligation may be extinguished by another which substitutes the same, it is imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible with each other.

Ek Lee Steel Works Corporation v. Manila Castor Oil Corporation G.R. No. 119033, 557 SCRA 339 ISSUES: (1) Does an agreement setting forth a new period for the completion of an already delayed obligation amount to novation of the previous obligation? (2) Does failure of one party to comply with his part in a reciprocal obligation amount to delay? DOCTRINE: (1) The Court finds no novation of the previous agreements between the parties. On the contrary, it expressly recognized the parties’ reciprocal obligations. Thus, while the 16 May 1988 letter did not extinguish the parties’ obligations under their previous contracts, it however modified the manner of payment from the system of progress billings to a specific schedule of payments (2) Petitioner failed to comply with its undertaking to complete the whole project on 15 June 1988. Consequently, respondent’s obligation to pay the P200,000 did not arise. Respondent could not be considered in delay when it failed to pay petitioner at that time. According to the last paragraph of Article 1169 of the Civil Code, “[i]n reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him. From the moment one of the parties fulfills his obligation, delay by the other begins. Sueno v. Land Bank of the Philippines G.R. No. 174711, 565 SCRA 611 ISSUE: Is there a valid novation entered by parties for the extension of the redemption period? DOCTRINE: The elements of novation clearly do not exist in the instant case. While it is true that there is a previous valid obligation (i.e., the obligation of LBP to honor Sueno’s right to redeem the subject property within a period of one year), such obligation expired at the same time as the redemption period on 6 March 2001. There is, however, no clear agreement between the parties to a new contract, again imposing upon LBP the obligation of honoring Sueno’s right to redeem the subject properties within an extended period of six months. Without a new contract, the old contract cannot be considered extinguished.

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS The condition of LBP for the extension of the redemption period for the subject properties was plain and simple, that Sueno pay an initial amount of P115,000.00 for the extension of the redemption period. Sueno tendered a check for P50,000.00 in partial payment of the amount demanded by LBP. By accepting the check payment, LBP merely accepted partial compliance of Sueno with its demand, but it does not mean that LBP had conceded to the extension of the redemption period for such reduced amount. In fact, LBP promptly sent Sueno a letter dated 6 March 2001, which was duly received by the latter, explicitly and consistently requiring payment of the full amount of P115,000.00 for the extension of the redemption period. It is without doubt that LBP was still expecting Sueno to pay the balance of P65,000.00. Hence, not until full payment of the amount it demanded, for LBP had not yet agreed to extend the period for redemption of the subject properties. The consent of LBP to an extension of the period to redeem is subject to the suspensive condition that Sueno shall pay the initial amount of P115,000.00 in full. With Sueno’s failure to remit the balance of P65,000.00 to LBP, then there is non-perfection of a new contract. 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 unmistakable. S.C. Megaworld Construction Parado G.R. No. 183804, 705 SCRA 584

And

Development

Corporation

v.

ISSUE: Can there be a valid novation even without the consent of the creditor? DOCTRINE: Novation is a mode of extinguishing an obligation by changing its objects or principal obligations, by substituting a new debtor in place of the old one, or by subrogating a third person to the rights of the creditor. It is "the substitution of a new contract, debt, or obligation for an existing one between the same or different parties." Article 1293 of the Civil Code defines novation as which consists in substituting a new debtor in the place of the original one, may be made even without the knowledge or against the will of the latter, but not without the consent of the creditor. Payment by the new debtor gives him rights mentioned in Articles 1236 and 1237. Thus, in order to change the person of the debtor, the former debtor must be expressly released from the obligation, and the third person or new debtor must assume the former’s place in the contractual relation. Article 1293 speaks of substitution of the debtor, which may either be in the form of expromision or delegacion, as seems to be the case here. In both cases, the old debtor must be released from the obligation, otherwise, there is no valid novation. In general, there are two modes of substituting the person of the debtor: (1) expromision and (2) delegacion. In expromision, the initiative for the change does not come from—and may even be made without the knowledge of—the debtor, since it consists of a third person’s assumption of the obligation. As such, it logically requires the consent of the third person and the creditor. In delegacion, the debtor offers, and the creditor accepts, a third person who consents to the substitution and assumes the obligation; thus, the

58

CASE DOCTRINES OBLIGATIONS AND CONTRACTS consent of these three persons are necessary. Both modes of substitution by the debtor require the consent of the creditor. Foundation Specialists, Inc., vs. Betonval Ready Concrete, Inc. and Stronghold Insurance Co., Inc. G.R. No. 170674 August 24, 2009 Corona, J. ISSUE: Whether extinctive novation can be presumed. DOCTRINE: No. Novation is one of the modes of extinguishing an obligation.21 It is done by the substitution or change of the obligation by a subsequent one which extinguishes the first, either by changing the object or principal conditions, or by substituting the person of the debtor, or by subrogating a third person in the rights of the creditor. Novation may: Either be extinctive or modificatory, much being dependent on the nature of the change and the intention of the parties. Extinctive novation is never presumed; there must be an express intention to novate; in cases where it is implied, the acts of the parties must clearly demonstrate their intent to dissolve the old obligation as the moving consideration for the emergence of the new one. Implied novation necessitates that the incompatibility between the old and new obligation be total on every point such that the old obligation is completely superseded by the new one. The test of incompatibility is whether they can stand together, each one having an independent existence; if they cannot and are irreconcilable, the subsequent obligation would also extinguish the first. There can be no other conclusion but that Betonval had reduced the imposable interest rate from 30% to 24% p.a. and this reduced interest rate was accepted, albeit impliedly, by FSI when it proposed a new schedule of payments and, in fact, actually made payments to Betonval with 24% p.a. interest. By its own actions, therefore, FSI is estopped from questioning the imposable rate of interest. Salazar v. J.Y. Brothers Marketing Corporation G.R. No. 171998, October 20, 2010 Peralta, J.: ISSUE: Whether acceptance of a new check in replacement of the previous one is a novation? DOCTRINE: No, the obligation to pay a sum of money is not novated by an instrument that expressly recognizes the old, changes only the terms of payment, adds other obligations not incompatible with the old ones or the new contract merely supplements the old one. In the instant case, there was no express agreement that BA Finance's acceptance of the SBTC check will discharge Nyco from liability. Neither is there incompatibility because both checks were given precisely to terminate a single obligation arising from Nyco's sale of credit to BA Finance. As novation speaks of two distinct obligations, such is inapplicable to this case. Lourdes Azarcon vs. People of the Philippines and Marcos Gonzales G.R. No. 185906. June 29, 2010 Carpio Morales, J.:

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS ISSUE: Whether petitioner’s obligations under the various checks had been released, superseded and novated by her husband’s assumption of her liabilities? DOCTRINE: No. The novation which petitioner suggests as having taken place, whereby Manuel was supposed to assume her obligations as debtor, is neither express nor implied. There is no showing of Marcosa explicitly agreeing to such a substitution, nor of any act of her from which an inference may be drawn that she had agreed to absolve petitioner from her financial obligations and to instead hold Manuel fully accountable. Carolina Hernandez-Nievera v. Wilfredo Hernandez GR No. 171165; February 14, 2011 ISSUE: Whether the Memorandum of Agreement to deliver option money and agree to a more flexible term by agreeing instead to receive shares of stock resulted to novation of PMRDC’s integral obligations. DOCTRINE: Yes. There are two ways which could indicate, in fine, 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 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. Sime Darby Pilipinas, Inc. v. Goodyear Philippines, Inc. GR No. 182148; June 8, 2011 ISSUE: Whether the lessee can assign the lease without the consent of the lessor. DOCTRINE: NO. In an assignment of a lease, there is a novation by the substitution of the person of one of the parties – the lessee. The personality of the lessee, who dissociates from the lease, disappears. Thereafter, a new juridical relation arises between the two persons who remain – the lessor and the assignee who is converted into the new lessee. The objective of the law in prohibiting the assignment of the lease without the lessor’s consent is to protect the owner or lessor of the leased property. Broadly, a novation may either be extinctive or modificatory. It is extinctive when an old obligation is terminated by the creation of a new obligation that takes the place of the former; it is merely modificatory when the old obligation subsists to the extent it remains compatible with the amendatory agreement. An extinctive novation results either by changing the object or principal conditions (objective or real), or by substituting the person of the debtor or subrogating a third person in the rights of the creditor (subjective or personal). Heirs of Servando Franco v. Sps. Gonzales G.R. 159709; June 27, 2012 ISSUE: Whether irreconcilable incompatibility between the old and the new obligation is essential for a valid novation to be effected.

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS DOCTRINE: YES. For a valid novation to take place, there must be, therefore: (a) a previous valid obligation; (b) an agreement of the parties to make a new contract; (c) an extinguishment of the old contract; and (d) a valid new contract. In short, the new obligation extinguishes the prior agreement only when the substitution is unequivocally declared, or the old and the new obligations are incompatible on every point. A compromise of a final judgment operates as a novation of the judgment obligation upon compliance with either of these two conditions.A novation arises when there is a substitution of an obligation by a subsequent one that extinguishes the first, either by changing the object or the principal conditions, or by substituting the person of the debtor, or by subrogating a third person in the rights of the creditor. Roberto R. David vs. Eduardo C. David G.R. No. 162365 January 15, 2014 Bersamin, J. ISSUE: Whether there was novation of the Deed of Sale with assumption of mortgage when the parties executed a memorandum of Agreement for the sale of the subject house and lot and, thereafter sold the said property to third persons. DOCTRINE: No. The issue of novation involves a question of fact, as it necessarily requires the factual determination of the existence of the various requisites of novation, namely: (a) there must be a previous valid obligation; (b) the parties concerned must agree to a new contract; (c) the old contract must be extinguished; and (d) there must be a valid new contract. With both the RTC and the CA concluding that the MOA was consistent with the deed of sale, novation whereby the deed of sale was extinguished did not occur. First United Constructors Corporation vs. Bayanihan Automotiv G.R. No. 164985 January 15, 2014 Bersamin, J. ISSUE: Whether legal compensation was proper in the case when the petitioners’ expenses for the repair of the dump truck being already established and determined with certainty by the lower courts. DOCTRINE: Yes. A debt is liquidated when its existence and amount are determined. Accordingly, an unliquidated claim set up as a counterclaim by a defendant can be set off against the plaintiff’s claim from the moment it is liquidated by judgment. Article 1290 of the Civil Code provides that when all the requisites mentioned in Article 1279 of the Civil Code are present, compensation takes effect by operation of law, and extinguishes both debts to the concurrent amount. With petitioners’ expenses for the repair of the dump truck being already established and determined with certainty by the lower courts, it follows that legal compensation could take place because all the requirements were present.

CONTRACTS

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS

CHAPTER 1. GENERAL PROVISIONS Asian Construction and Development Corporation v. Tulabut G.R. No. 161904. April 26, 2005 Callejo, Sr., J. ISSUE: May the principle of estoppel be applied in determining whether the obligation contemplated in the contract had already been completed? DOCTRINE: Yes. The application of the principle of estoppel is proper and timely in heading off plaintiff’s shrewd efforts at renouncing his previous acts to the prejudice of parties who had dealt with him honestly and in good faith t is provided, as one of the conclusive presumptions under Rule 131, Section 3(a), of the Rules of Court that, “Whenever a party has, by his own declaration, act or omission, intentionally and deliberately led another to believe a particular thing to be true, and to act upon such belief, he cannot, in any litigation arising out of such declaration, act or omission, be permitted to falsify it.” Hence, when the appellant corporation manifested its approval in the purchase orders and progress billings it cannot, thereafter, refute such act or renege on the effects of the same to the prejudice of the appellee who merely relied on it. The terms and conditions of the contract between the petitioner and the respondent unequivocally expressed in the purchase orders and progress billings must govern the contractual relation of the parties, for these serve as the terms of the agreement, which are binding and conclusive between them. When the words of the contract are clear and readily understandable, there is no room for construction. The contract is the law between the parties. Tanay Recreation Center and Development Corp. Matienzo Fausto and Anunciacion Fausto Pacunayen GR No. 140182. April 12, 2005 Austria-Martinez, J.:

v.

Catalina

ISSUE: Is the rule of transmissibility of rights and obligations applicable in a lease contract entered into by the decedent? DOCTRINE: A lease contract is not essentially personal in character. Applying Article 1311 of the New Civil Code, the rights and obligations are transmissible to the heirs. The general rule is that heirs are bound by contracts entered into by their predecessors-in-interest except when the rights and obligations arising therefrom are not transmissible by: (1) their nature; (2) stipulation; or (3) provision of law. Whatever rights and obligations the decedent had over the property, including his obligation under the lease contract, were transmitted to his heirs by way of succession, a mode of acquiring the property, rights and obligation of the decedent to the extent of the value of the inheritance of the heirs. Litonjua v. Litonjua G.R. Nos. 166299-300. December 13, 2005 Garcia, J.:

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS ISSUE: Can an actionable document create a demandable right in favor of a person who filed a suit for specific performance and accounting in a joint venture/partnership arrangement (innominate contract)? DOCTRINE: No. A complaint for delivery and accounting of partnership property based on such void or legally non-existent actionable document is dismissible for failure to state of action. Whether the actionable document creates a partnership, joint venture, or whatever, is a legal matter. What us determinative for purposes of sufficiency of one’s allegations, is whether the actionable document bears out an actionable contract – be it a partnership a joint venture or whatever or some innominate contract (Article 1307, New Civil Code). It may be noted that one kind of innominate contract is what is known as du utfacias (I give that you may do). Bortikey v. AFP Retirement and Separation Benefits System G.R. No. 146708. December 13, 2005 Corona, J.: ISSUE: Given a statement in a contract to sell that, “In case of failure on the part of the BUYER to pay the amortization due on the specified maturity date, the Buyer shall be given a seven-day grace period xxx. However, in the event that the BUYER fails to pay within the seven-day grace period, he shall be charged a penalty of 24% per annum to be reckoned from the first day of default”, may the buyer say that the 24% annual interest stipulated in the contract was contrary to law and public morals? DOCTRINE: No. Basic is the principle that contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided these are not contrary to law, morals, good customs, public order or public policy (Article 1306, New Civil Code). Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith (Article 1159, New Civil Code).Petitioner was free to decide on the manner of payment, either in cash or installment. Since he opted to purchase the land on installment basis, he consented to the imposition of interest on the contract price. He cannot now unilaterally withdraw from it by disavowing the obligation created by the stipulation in the contract. Therefore, the stipulated 24% annual interest on the price of the parcel of land purchased by petitioner from respondent on installment basis is hereby declared valid and binding. GF Equity, Inc. vs. Arturo Valenzona G.R. No. 156841 June 30, 2005 Carpio-Morales, J. ISSUE: What is the principle of mutuality of contracts? DOCTRINE: Mutuality is one of the characteristics of a contract, its validity or performance or compliance of which cannot be left to the will of only one of the parties. This is enshrined in Article 1308 of the New Civil Code, which states “The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them.” The stated legal provision is a virtual reproduction of Article 1256 of the old Civil Code but it was so phrased as to emphasize the principle that the contract must bind both parties. This, of course is based firstly, on the principle that obligations arising from contracts have the force of law between the contracting parties and secondly, that there must be mutuality between the

58

CASE DOCTRINES OBLIGATIONS AND CONTRACTS parties based on their essential equality to which is repugnant to have one party bound by the contract leaving the other free therefrom. Its ultimate purpose is to render void a contract containing a condition, which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties. The ultimate purpose of the mutuality principle is thus to nullify a contract containing a condition which makes its fulfillment or pre-termination dependent exclusively upon the uncontrolled will of one of the contracting parties. Not all contracts though which vest to one party their determination of validity or compliance or the right to terminate the same are void for being violative of the mutuality principle. Jurisprudence is replete with instances of cases where this Court upheld the legality of contracts, which left their fulfillment or implementation to the will of either of the parties. In these cases, however, there was a finding of the presence of essential equality of the parties to the contracts, thus preventing the perpetration of injustice on the weaker party. Tanay Recreation Center and Development Corp. Matienzo Fausto and Anunciacion Fausto Pacunayen G.R. No. 140182. April 12, 2005 Austria-Martinez, J.:

v.

Catalina

ISSUE: Is the rule of transmissibility of rights and obligations applicable in a lease contract entered into by the decedent? DOCTRINE: A lease contract is not essentially personal in character. Applying Article 1311 of the New Civil Code, the rights and obligations are transmissible to the heirs. The general rule is that heirs are bound by contracts entered into by their predecessors-in-interest except when the rights and obligations arising therefrom are not transmissible by: (1) their nature; (2) stipulation; or (3) provision of law. Whatever rights and obligations the decedent had over the property, including his obligation under the lease contract, were transmitted to his heirs by way of succession, a mode of acquiring the property, rights and obligation of the decedent to the extent of the value of the inheritance of the heirs. Tanay Recreation Center and Development Corp. Matienzo Fausto and Anunciacion Fausto Pacunayen GR No. 140182. April 12, 2005 Austria-Martinez, J.:

v.

Catalina

ISSUE: Is the rule of transmissibility of rights and obligations applicable in a lease contract entered into by the decedent? DOCTRINE: A lease contract is not essentially personal in character. Applying Article 1311 of the New Civil Code, the rights and obligations are transmissible to the heirs. The general rule is that heirs are bound by contracts entered into by their predecessors-in-interest except when the rights and obligations arising therefrom are not transmissible by: (1) their nature; (2) stipulation; or (3) provision of law. Whatever rights and obligations the decedent had over the property, including his obligation under the lease contract, were transmitted to his heirs by way of succession, a mode of acquiring the property, rights and obligation of the decedent to the extent of the value of the inheritance of the heirs.

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS Sunace International vs. NLRC G.R. No. 161757. January 25, 2006 Carpio Morales, J. ISSUE: Can an employment contract extension bind a company who has not consented thereto? DOCTRINE: No. There being no substantial proof that Sunace knew of and consented to be bound under the 2-year employment contract extension, it cannot be said to be privy thereto. As such, it and its “owner” cannot be held solidarily liable for any of Divina’s claims arising from the 2-year employment extension. Art. 1311 provides that 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. Greater Metropolitan Manila Solid Waste Management Committee v. Jancom Environmental Corporation GR No. 163663. June 30, 2006 Carpio Morales, J.: ISSUE: Can a party revoke a perfected contract without the consent of the other? DOCTRINE: No. From the moment of perfection, 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. The contract has the force of law between the parties and they are expected to abide in good faith by their respective contractual commitments, not weasel out of them. Just as nobody can be forced to enter into a contract, in the same manner, once a contract is entered into, no party can renounce it unilaterally or without the consent of the other. Roxas v. Zuzuarregui, Jr. G.R. No. 152072, January 31, 2006 Chico-Nazario, J.: ISSUE: In the contract, the petitioners offered to be the legal representatives of the petitioner in the expropriation proceeding. In return, contingency fees shall be paid. Is there a valid and binding contract between the parties? DOCTRINE: Under Article 1318 of the Civil Code, there are three essential requisites which must concur in order to give rise to a binding contract: (1) consent of the contracting parties; (2) object certain which is the subject matter of the contract; and (3) cause of the obligation which is established. All these requisites were present in the execution of the Letter-Agreement. Consent is manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract. The Zuzuarreguis, in entering into the Letter-Agreement, fully gave their consent thereto. In fact, it was them (the Zuzuarreguis) who sent the said letter to Attys. Roxas and Pastor, for the purpose of confirming all the matters which they had agreed upon previously. There is absolutely no

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS evidence to show that anybody was forced into entering into the LetterAgreement. Verily, its existence, due execution and contents were admitted by the Zuzuarreguis themselves. The second requisite is the object certain. The objects in this case are twofold. One is the money that will go to the Zuzuarreguis (P17.00 per square meter), and two, the money that will go to Attys. Roxas and Pastor (any and all amount in excess of P17.00 per square meter). There was certainty as to the amount that will go to the Zuzuarreguis, and there was likewise certainty as to what amount will go to Attys. Roxas and Pastor. The cause is the legal service that was provided by Attys. Roxas and Pastor. In general, cause is the why of the contract or the essential reason which moves the contracting parties to enter into the contract. Bonifacio Nakpil v. Manila Towers Development Corp. GR No. 160867. September 20, 2006 Callejo, Sr., J.: ISSUE: What is a breach of contract? What is the extent of liability of an obligor who performed a breach of contract? DOCTRINE: Breach of contract is the failure without legal reason to comply with the terms of a contract. It is also defined as the failure, without legal excuse, to perform any promise which forms the whole or part of the contract. There is no factual and legal basis for any award for damages to respondent. In contracts, the obligor who acted in good faith is liable for damages that are the material and probable consequence of the breach of the obligation and which the parties have foreseen or could have reasonably foreseen at the time the obligation was contracted. In case of fraud, bad faith, malice or wanton attitude, he shall be responsible for all damages which may be reasonably attributed to the non-performance of the obligation. Xavierville III Homeowners Association, Homeowners Association, Inc., G.R. No. 170092. December 6, 2006 Carpio Morales, J.:

Inc.,

v.

Xavierville

Ii

ISSUE: What is the legal effect of entering into a compromise agreement? DOCTRINE: Under Article 1306 of the Civil Code, 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. Thus, a compromise agreement whereby the parties make reciprocal concessions to resolve their differences to thereby put an end to litigation is binding on the contracting parties and is expressly acknowledged as a juridical agreement between them. To have the force of res judicata, however, the compromise agreement must be approved by final order of the court.

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS William Golangco Construction Commercial International Bank G.R. No. 142830. March 24, 2006 Corona, J.:

Corporation

v.

Philippine

ISSUE: Is the construction company liable for defects that occurred after the lapse of the one-year defects liability period stipulated in the contract? DOCTRINE: No, the construction company is not liable for defects that occurred after the lapse of the one-year defects liability period stipulated in the contract. The autonomous nature of contracts is enunciated in Article 1306 of the Civil Code. Obligations arising from contracts have the force of law between the parties and should be complied with in good faith. In characterizing the contract as having the force of law between the parties, the law stresses the obligatory nature of a binding and valid agreement. The provision in the construction contract providing for a defects liability period was not shown as contrary to law, morals, good customs, pubic order or public policy. By the nature of the obligation in such contract, the provision limiting liability for defects and fixing specific guaranty periods was not only fair and equitable; it was also necessary. The Court cannot countenance an interpretation that undermines a contractual stipulation freely and validly agreed upon. The courts will not relieve a party from the effects of an unwise or unfavorable contract freely entered into. Spouses Anthony and Percita Oco v. Victor Limbaring G.R. No. 161298. January 31, 2006 Panganiban, C.J.: ISSUE: Can a person who did not take part in a contract show that he has a real interest affected by its performance or annulment? DOCTRINE: Yes. As a rule, the parties to a contract are the real parties in interest in an action upon it. Only the contracting parties are bound by the stipulations in the contract; they are the ones who would benefit from and could violate it. Thus, one who is not a party to a contract, and for whose benefit it was not expressly made, cannot maintain an action on it. One cannot do so, even if the contract performed by the contracting parties would incidentally inure to one’s benefit. As an exception, parties who have not taken part in a contract may show that they have a real interest affected by its performance or annulment. In other words, those who are not principally or subsidiarily obligated in a contract, in which they had no intervention, may show their detriment that could result from it. Contracts pour autrui are covered by this exception. In this latter instance, the law requires that the “contracting parties must have clearly and deliberately conferred a favor upon a third person.” A “mere incidental benefit is not enough.” Rolando Limpo v. Court of Appeals G.R. No. 144732, February 13, 2006 Azcuna, J.: ISSUE: Whether a Compromise Agreement binds a person who did not take part in its execution.

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS DOCTRINE: No. It is settled that a compromise agreement cannot bind persons who are not parties to it.3This rule is based on Article 1311(1) of the Civil Code which provides that "contracts take effect only between the parties, their assigns and heirs x x x." The sound reason for the exclusion of non-parties to an agreement is the absence of a vinculum or juridical tie which is the efficient cause for the establishment of an obligation. In the Compromise Agreement that was presented to the trial court, there is no question that only the spouses Uy and the Bank were parties. Limpo did not participate in its execution and there was no reference to him in any of its provisions. He cannot be bound by the Compromise Agreement.

Caltex (Philippines), Inc., v. Corporation G.R. No. 150711. August 10, 2006 Carpio, J.:

PNOC

Shipping

and

Transport

ISSUE: May a creditor file a case for rescission or execution against a third party who has assumed the obligations of the debtor? DOCTRINE: Article 1313 of the Civil Code provides that “[c]reditors are protected in cases of contracts intended to defraud them.” Further, Article 1381 of the Civil Code provides that contracts entered into in fraud of creditors may be rescinded when the creditors cannot in any manner collect the claims due them. Article 1381 applies to contracts where the creditors are not parties, for such contracts are usually made without their knowledge. Thus, a creditor who is not a party to a contract can sue to rescind the contract to prevent fraud upon him. Or, the same creditor can instead choose to enforce the contract if a specific provision in the contract allows him to collect his claim, and thus protect him from fraud. Mr. & Mrs. George R. Tan v. G.V.T Engineering Services, Acting through its Owner/Manager Gerino V. Tactaquin G.R. No. 153057. August 7, 2006 Austria-Martinez, J.: ISSUE: May an obligor be held liable for damages in case of breach of contract? DOCTRINE: Article 1313 of the Civil Code provides that “creditors are protected in cases of contracts intended to defraud them.” Further, Article 1381 of the Civil Code provides that contracts entered into in fraud of creditors may be rescinded when the creditors cannot in any manner collect the claims due them. Article 1381 applies to contracts where the creditors are not parties, for such contracts are usually made without their knowledge. Thus, a creditor who is not a party to a contract can sue to rescind the contract to prevent fraud upon him. Or, the same creditor can instead choose to enforce the contract if a specific provision in the contract allows him to collect his claim, and thus protect him from fraud. William Ong Genato vs. Benjamin Bayhon et al. G.R. No. 171035 August 24, 2009 Puno, C.J.:

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS ISSUE: Whether a party’s contractual transmissible to the successors.

rights

and

obligation

are

DOCTRINE: Yes. The rule is a consequence of the progressive "depersonalization" of patrimonial rights and duties that, as observed by Victorio Polacco, has characterized the history of these institutions. From the Roman concept of a relation from person to person, the obligation has evolved into a relation from patrimony to patrimony, with the persons occupying only a representative position, barring those rare cases where the obligation is strictly personal, i.e., is contracted intuitu personae, in consideration of its performance by a specific person and by no other. The transition is marked by the disappearance of the imprisonment for debt. The loan in this case was contracted by respondent. He died while the case was pending before the Court of Appeals. While he may no longer be compelled to pay the loan, the debt subsists against his estate. No property or portion of the inheritance may be transmitted to his heirs unless the debt has first been satisfied. Vicenta Cantemprate et al. vs. CRS Realty Development Corporation et al. G.R. No. 171399, May 8, 2009 Tinga, J.: ISSUE: Whether rescission of a contract gives rise to mutual restitution. DOCTRINE: Rescission creates the 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. Rescission abrogates the contract from its inception and requires a mutual restitution of the benefits received. National Power Corporation vs. Premier Shipping Lines, Inc. G.R No. 179103; September 17, 2009 ISSUE: Whether the terms contained in the contract are the law between the parties. DOCTRINE: Yes. It is basic that a contract is the law between the parties, and the stipulations therein -- provided that they are not contrary to law, morals, good customs, public order or public policy -- shall be binding as between the parties. In contractual relations, the law allows the parties much leeway and considers their agreement to be the law between them. This is because "courts cannot follow one every step of his life and extricate him from bad bargains x xx relieve him from one-sided contracts, or annul the effects of foolish acts. The Courts are obliged to give effect to the agreement and enforce the contract to the letter. In the case at bar, the parties entered into a contract for the hauling and delivery of wood poles. By reason of a change in one of the delivery points, they executed a supplemental contract that embodied said change. The terms and conditions were clear. In both contracts, the parties voluntarily and freely affixed their signatures thereto without objection. Thus, the terms contained therein are the law between them. Patricia Halagueña et al. vs. Philippine Airlines Incorporated

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS G.R. No. 172013. October 2, 2009 Ynares-Santiago, J., ISSUE: Whether the principle of autonomy of contracts is absolute. DOCTRINE: No. 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 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. Sta. Lucia Realty & Development, Inc. vs. SPOUSES Francisco & Emelia Buenaventura G.R. No. 177113. October 2, 2009 Ynares-Santiago, J. ISSUE: Whether rights and obligations arising from a contract may be transmitted. DOCTRINE: Yes. Article 1311 of the New Civil Code states that, “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.” In this case, the rights and obligations between petitioner and Alfonso are transmissible. There was no mention of a contractual stipulation or provision of law that makes the rights and obligations under the original sales contract for Lot 3, Block 4, Phase II intransmissible. Hence, Alfonso can transfer her ownership over the said lot to respondents and petitioner is bound to honor its corresponding obligations to the transferee or new lot owner in its subdivision project. Having transferred all rights and obligations over Lot 3, Block 4, and Phase II to respondents, Alfonso could no longer be considered as an indispensable party. Contrary to petitioner’s claim, Alfonso no longer has an interest on the subject matter or the present controversy, having already sold her rights and interests on Lot 3, Block 4, Phase II to herein respondents. Sps. Isagani Castro and Diosdada Castro v. et. al., G.R. No. 168940; November 24, 2009 Del Castillo, J.

Angelina De Leon Tan,

ISSUE: Whether freedom of contract is absolute. DOCTRINE: No. Freedom of contract is not absolute. The same is understood to be subject to reasonable legislative regulation aimed at the

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS promotion of public health, morals, safety and welfare. One such legislative regulation is found in Article 1306 of the Civil Code which allows the contracting parties to "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." To reiterate, we fully agree with the Court of Appeals in holding that the compounded interest rate of 5% per month, is iniquitous and unconscionable. Being a void stipulation, it is deemed inexistent from the beginning. The debt is to be considered without the stipulation of the iniquitous and unconscionable interest rate. Narvaez vs. Alciso G.R. No. 165907; July 27, 2009 Carpio, J. ISSUE: Whether the spouses Narvaez were right in claiming that Alciso did not communicate her acceptance of the favor contained in the stipulation pour autrui, thus, she could not repurchase the property. DOCTRINE: No. Article 1311, paragraph 2, of the Civil Code states the rule on stipulations pour autrui: If a contract should contain some stipulation in favor of a third person, he may demand its fulfillment provided he communicated his acceptance to the obligor before its revocation. A mere incidental benefit or interest of a person is not sufficient. The contracting parties must have clearly and deliberately conferred a favor upon a third person. All the requisites are present in the instant case: (1) there is a stipulation in favor of Alciso; (2) the stipulation is a part, not the whole, of the contract; (3) Bate and the Spouses Narvaez clearly and deliberately conferred a favor to Alciso; (4) the favor is unconditional and uncompensated; (5) Alciso communicated her acceptance of the favor before its revocation — she demanded that a stipulation be included in the 14 August 1981 Deed of Sale of Realty allowing her to repurchase the property from the Spouses Narvaez, and she informed the Spouses Narvaez that she wanted to repurchase the property; and (6) Bate and the Spouses Narvaez did not represent, and were not authorized by, Alciso. The RTC stated that: Rose Alciso communicated her acceptance of such favorable stipulation when she went to see defendant Lillia [sic] Narvaez in their house. Herald Black Dacasin vs.Sharon Del Mundo Dacasin G.R. No. 168785, February 05, 2010 Carpio, J.: ISSUE: Whether the Agreement, the object of which was to establish a post-divorce joint custody regime between respondent and petitioner over their child under seven years old contravenes Philippine law. DOCTRINE: YES. In this jurisdiction, parties to a contract are free to stipulate the terms of agreement subject to the minimum ban on stipulations contrary to law, morals, good customs, public order, or public policy. Otherwise, the contract is denied legal existence, deemed “inexistent and void from the beginning.” PNCC Skyway Traffic Management and Security Division Workers Organization (PSTMSDWO) vs. PNCC Skyway Corporation

58

CASE DOCTRINES OBLIGATIONS AND CONTRACTS G.R. No. 171231, February 17, 2010 Peralta, J. ISSUE: Whether the rule that a contract freely entered into between the parties should be respected since a contract is the law between the parties is absolute. DOCTRINE: No. There are certain exceptions to the rule, specifically Article 1306 of the Civil Code, which provides: “The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.” Moreover, the relations between capital and labor are not merely contractual. "They are so impressed with public interest that labor contracts must yield to the common good." The supremacy of the law over contracts is explained by the fact that labor contracts are not ordinary contracts; they are imbued with public interest and therefore are subject to the police power of the state. However, it should not be taken to mean that provisions agreed upon in the CBA are absolutely beyond the ambit of judicial review and nullification. If the provisions in the CBA run contrary to law, public morals, or public policy, such provisions may very well be voided. Heirs of Mario Pacres, vs. Heirs of Cecilia Ygoña G.R. No. 174719.  May 5, 2010. Del Castillo, J.: ISSUE: Whether third parties may sue for the enforcement of the supposed obligations arising from said contracts pursuant to stipulation pour autri. DOCTRINE: NO. Under Article 1311 of the Civil Code, contracts take effect only between the parties, their assigns and heirs (subject to exceptions not applicable here). Thus, only a party to the contract can maintain an action to enforce the obligations arising under said contract. It is true that third parties may seek enforcement of a contract under the second paragraph of Article 1311, which provides that “if a contract should contain some stipulation in favor of a third person, he may demand its fulfillment.” This refers to stipulations pour autrui, or stipulations for the benefit of third parties. However, the written contracts of sale in this case contain no such stipulation in favor of the petitioners. Heirs of Fausto C. Ignacio v. Home Bankers Savings and Trust Company G.R. No. 177783. January 23, 2013 Villarama Jr., J. ISSUE: When is a contract deemed perfected? DOCTRINE: Contracts that are consensual in nature, like a contract of sale, are perfected upon mere meeting of the minds. Once there is concurrence between the offer and the acceptance upon the subject matter, consideration, and terms of payment, a contract is produced. The offer must be certain. To convert the offer into a contract, the acceptance must be absolute and must not qualify the terms of the offer; it must be plain, unequivocal, unconditional, and without variance of any sort from the proposal. A qualified acceptance, or one that involves a new proposal,

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS constitutes a counter-offer and is a rejection of the original offer. Consequently, when something is desired which is not exactly what is proposed in the offer, such acceptance is not sufficient to generate consent because any modification or variation from the terms of the offer annuls the offer.

Spouses Ignacio F. Juico and Alice P. Juico v. China Banking Corporation G.R. No. 187678. April 10, 2013 Villarama, Jr., J.: ISSUE: Whether the interest rates imposed by virtue of escalation clause in the promissory notes upon them by respondent violate the principle of mutuality of contracts? DIOCTRINE: Escalation clauses refer to stipulations allowing an increase in the interest rate agreed upon by the contracting parties. This Court has long recognized that there is nothing inherently wrong with escalation clauses which are valid stipulations in commercial contracts to maintain fiscal stability and to retain the value of money in long term contracts. Hence, such stipulations are not void per se. Nevertheless, an escalation clause "which grants the creditor an unbridled right to adjust the interest independently and upwardly, completely depriving the debtor of the right to assent to an important modification in the agreement" is void. A stipulation of such nature violates the principle of mutuality of contracts. Thus, this Court has previously nullified the unilateral determination and imposition by creditor banks of increases in the rate of interest provided in loan contracts. There is no indication that petitioners were coerced into agreeing with the foregoing provisions of the promissory notes. In fact, petitioner Ignacio, a physician engaged in the medical supply business, admitted having understood his obligations before signing them. At no time did petitioners protest the new rates imposed on their loan even when their property was foreclosed by respondent. This notwithstanding, we hold that the escalation clause is still void because it grants respondent the power to impose an increased rate of interest without a written notice to petitioners and their written consent. Respondent’s monthly telephone calls to petitioners advising them of the prevailing interest rates would not suffice. A detailed billing statement based on the new imposed interest with corresponding computation of the total debt should have been provided by the respondent to enable petitioners to make an informed decision. An appropriate form must also be signed by the petitioners to indicate their conformity to the new rates. Compliance with these requisites is essential to preserve the mutuality of contracts. For indeed, one-sided impositions do not have the force of law between the parties, because such impositions are not based on the parties’ essential equality. Sps. Benjamin Mamaril v. The Boy Scout of the Philippines

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS G.R. No. 179382. January 14, 2013 Perlas-Bernabe, J. ISSUE: When can a third person benefit from a stipulation pour autrui? DOCTRINE: The following requisites must concur: (1) There is a stipulation in favor of a third person; (2) The stipulation is a part, not the whole, of the contract; (3) The contracting parties clearly and deliberately conferred a favor to the third person - the favor is not merely incidental; (4) The favor is unconditional and uncompensated; (5) The third person communicated his or her acceptance of the favor before its revocation; and (6) The contracting parties do not represent, or are not authorized, by the third party.22 However, none of the foregoing elements obtains in this case. Star Two (SPV-AMC), Inc. Philippines GR No. 169211. March 6, 2013 Perez, J.

v.

Paper

City

Corporation

of

the

ISSUE: Whether the machineries should be included in the foreclosure of the real estate mortgage? DOCTRINE: Yes. Repeatedly, the parties stipulated that the properties mortgaged by Paper City to RCBC are various parcels of land including the buildings and existing improvements thereon as well as the machineries and equipment, which as stated in the granting clause of the original mortgage, are "more particularly described and listed that is to say, the real and personal properties listed in Annexes 'A' and 'B' . . . of which the [Paper City] is the lawful and registered owner." Significantly, Annexes "A" and "B" are itemized listings of the buildings, machineries and equipment typed single spaced in twenty-seven pages of the document made part of the records. As held in Gateway Electronics Corp. v. Land Bank of the Philippines, the rule in this jurisdiction is that the contracting parties may establish any agreement, term, and condition they may deem advisable, provided they are not contrary to law, morals or public policy. The right to enter into lawful contracts constitutes one of the liberties guaranteed by the Constitution. Land Bank of the Philippines vs. Heirs of Spouses Jorja RigorSoriano and Magin Soriano G.R. No. 178312. January 30, 2013 Bersamin, J: ISSUE: When is a compromise valid? DOCTRINE: The validity of a compromise is dependent upon its compliance with the requisites and principles of contracts dictated by law. Also, the terms and conditions of a compromise must not be contrary to law, morals, good customs, public policy and public order. Rodolfo G. Cruz and Esperanza Ibias v. Atty. Delfin Gruspe GR No. 191431. March 13, 2013 Brion, J. ISSUE: Is a joint affidavit considered a contract and binding upon the parties?

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS DOCTRINE: Yes. Contracts are obligatory no matter what their forms may be, whenever the essential requisites for their validity are present. In determining whether a document is an affidavit or a contract, the Court looks beyond the title of the document, since the denomination or title given by the parties in their document is not conclusive of the nature of its contents. In the construction or interpretation of an instrument, the intention of the parties is primordial and is to be pursued. If the terms of the document are clear and leave no doubt on the intention of the contracting parties, the literal meaning of its stipulations shall control. If the words appear to be contrary to the parties' evident intention, the latter shall prevail over the former. A simple reading of the terms of the Joint Affidavit of Undertaking readily discloses that it contains stipulations characteristic of a contract. Philippine National Bank vs. Spouses Enrique Manalo and Rosalinda Jacinto, et al. G.R. No. 174433; February 24, 2014 Bersamin, J. ISSUE: Whether the credit agreement which stipulated that the loan would be subjected to interest at a rate "determined by the Bank to be its prime rate plus applicable spread, prevailing at the current month" contravened the principle of mutuality of contracts. DOCTRINE: Yes. The unilateral determination and imposition of the increased rates is violative of the principle of mutuality of contracts under Article 1308 of the Civil Code, which provides that ‘[t]he contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them.’ A perusal of the Promissory Note will readily show that the increase or decrease of interest rates hinges solely on the discretion of petitioner. It does not require the conformity of the maker before a new interest rate could be enforced. Any contract which appears to be heavily weighed in favor of one of the parties so as to lead to an unconscionable result, thus partaking of the nature of a contract of adhesion, is void. Any stipulation regarding the validity or compliance of the contract left solely to the will of one of the parties is likewise invalid.

CHAPTER 2. ESSENTIAL REQUISITES OF CONTRACTS Spouses Azaro M. Zulueta and Perla Sucayan-Zulueta v. Jose Wong, et al. G.R. No. 153514, June 8, 2005 Callejo, Sr., J.: ISSUE: What is the distinction between failure to pay the consideration and lack of consideration? What is the status of a deed of sale where the purchase price has been paid but in fact has never been paid? DOCTRINE: Failure to pay the consideration results in a right to demand the fulfillment or cancellation of the obligation under an existing contract, while lack of consideration prevents the existence of a valid contract. Where there was no price or consideration for the sale and in fact

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS had not received any consideration for the said sale, it is null and void ab initio for lack of consideration. Paulo Ballesteros v. Rolando Abion G.R. No. 143361. February 9, 2006 Corona, J.: ISSUE: May a contract, the object of which was already transferred to a third person at the time it was entered, be validated and remain enforceable if one of the party thereto has no knowledge of the fact of its transfer? DOCTRINE: No. Under Arts. 1318 and 1409 (3) of the Civil Code, contracts the cause or object of which did not exist at the time of the transaction are inexistent and void ab initio. The good faith of a party in entering into a contract is immaterial in determining whether it is valid or not. Good faith, not being an essential element of a contract, has no bearing on its validity. No amount of good faith can validate an agreement which is otherwise void. A contract which the law denounces as void is necessarily no contract at all and no effort or act of the parties to create one can bring about a change in its legal status. Estate of Orlando Llenado et al. vs. Eduardo Llenado et al. G.R. No. 145736. March 4, 2009. Ynares-Santiago, J. ISSUE: Whether the heirs are bound by the contracts entered into by their predecessors in interest. DOCTRINE: Yes. Under Article 1311 of the Civil Code, the heirs are bound by the contracts entered into by their predecessors-in-interest except when the rights and obligations therein are not transmissible by their nature, by stipulation or by provision of law. A contract of lease is, therefore, generally transmissible to the heirs of the lessor or lessee. It involves a property right and, as such, the death of a party does not excuse non-performance of the contract. The rights and obligations pass to the heirs of the deceased and the heir of the deceased lessor is bound to respect the period of the lease. The same principle applies to the option to renew the lease. As a general rule, covenants to renew a lease are not personal but will run with the land. Consequently, the successors-in-interest of the lessee are entitled to the benefits, while that of the lessor are burdened with the duties and obligations, which said covenants conferred and imposed on the original parties.

SECTION 1. CONSENT Dandoy v. Tongson G.R. No. 144652 December 16, 2005 Austria-Martinez, J. ISSUE: May a contract to transfer rights be null and void for failure to obtain the consent of the government? DOCTRINE: Yes. Section 29 of the Commonwealth Act 141 or the Public Land Act provides in part: “After the cultivation of the land has been begun,

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS the purchaser, with the approval of the Secretary of Agriculture and Commerce, may convey or encumber his rights to any person, corporation, or association legally qualified under this Act to purchase agricultural public lands, provided such conveyance or encumbrance does not affect any right or interest of the Government in the land: And provided, further, That the transferor is not delinquent in the payment of any installment due and payable. Any sale and encumbrance made without the previous approval of the Secretary of Agriculture and Commerce shall be null and void and shall produce the effect of annulling the acquisition and reverting the property and all rights thereto to the State, and all payments on the purchase price theretofore made to the Government shall be forfeited. Said provision contemplates a sale and encumbrance that a purchaser may desire to make during the pendency of his application and before his compliance with the requirements of the law. The reason for the prior approval is obvious. Since the application is still pending consideration and the rights of the applicant have not yet been determined, he cannot make any transfer that may affect the land without the approval of the Government. Such approval is necessary to protect the interest of the Government. Thus, the law allows an applicant after the cultivation of the land has been begun to convey or encumber his rights to any person provided such conveyance or encumbrance does not affect any right or interest of the Government on the land. And to safeguard such right or interest previous approval of the Secretary is required. Given that the "Transfer of Sales Rights" from which respondents base their capacity to enter into the contracts is null and void, respondents have no legal justification whatsoever to enter into these agricultural leasehold contracts, thus rendering the contracts invalid. Navotas Industrial Corporation V. Cruz, et al. G.R. No. 159212. September 12, 2005 Callejo, Sr., J.: ISSUE: Is there a valid option contract in a lease agreement providing for an option to buy property but without stating the period for its exercise? DOCTRINE: No. An option contract is a preparatory contract in which one party grants to the other, for a fixed period and under specified conditions, the power to decide Whether to enter into a principal contract. Epifania Dela Cruz, substituted by Laureana V. Alberto v. Sps. Eduardo C. Sison and Eufemia S. Sison G.R. No. 163770. February 17, 2005 Ynares-Santiago, J.: ISSUE: Whether the person assailing that either he is unable to read, or the contract is in a language not understood by him or that there has been fraud or mistake in the contract executed must prove the facts claimed by him in determining whether Article 1332 applies – the person asserting the contract has fulfilled his duty to explain the terms of the contract to the other party? DOCTRINE: ART. 1332. 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

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS alleged, the person enforcing the contract must show that the terms thereof have been fully explained to the former. The contradictory statements do not establish the fact that Epifania was unable to read and understand the English language. There being no evidence adduced to support her bare allegations, thus, Epifania failed to satisfactorily establish her inability to read and understand the English language. It is well settled that a party who alleges a fact has the burden of proving it. Consequently, the provisions of Article 1332 does not apply.

Perpetua vda. de Ape v. Court of Appeals and Genorosa Cawit Vda. De Lumayno GR No. 133638. April 15, 2005 Chico-Nazario, J.: ISSUE: Whether a person enforcing a contract of sale has the burden of proving that the terms of the agreement were fully explained to the other party, who was an illiterate? DOCTRINE: As a general rule, he who alleges fraud or mistake in a transaction must substantiate his allegation as the presumption is that a person takes ordinary care for his concerns and that private dealings have been entered into fairly and regularly. The exception to this rule is provided for under Article 1332 of the Civil Code which provides that “[w]hen 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. Reynaldo Villanueva vs. Philippine National Bank G.R. No. 154493. December 6, 2006 Austria-Martinez, J.: ISSUE: What is the effect of making a qualified acceptance of an offer? DOCTRINE: A qualified acceptance, or one that involves a new proposal, constitutes a counter-offer and a rejection of the original offer (Art. 1319, id.). Consequently, when something is desired which is not exactly what is proposed in the offer, such acceptance is not sufficient to generate consent because any modification or variation from the terms of the offer annuls the offer. Gaudencio Valerio et. al v. Vicenta Refresca et. al. G.R. No. 163687. March 28, 2006 Puno, J.: ISSUE: Whether a Deed of Sale with no monetary consideration involved may be considered as an absolutely simulated or fictitious contract which produces no legal effect. DOCTRINE: Article 1345 of the Civil Code provides that the simulation of a contract may either be absolute or relative. In absolute simulation, there is

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS a colorable contract but it has no substance as the parties have no intention to be bound by it. The main characteristic of an absolute simulation is that the apparent contract is not really desired or intended to produce legal effect or in any way alter the juridical situation of the parties. As a result, an absolutely simulated or fictitious contract is void, and the parties may recover from each other what they may have given under the contract. However, if the parties state a false cause in the contract to conceal their real agreement, the contract is relatively simulated and the parties are still bound by their real agreement. Hence, where the essential requisites of a contract are present and the simulation refers only to the content or terms of the contract, the agreement is absolutely binding and enforceable between the parties and their successors in interest. Heirs of Cayetano Pangan vs. Spouses Rogelio Perreras and Priscilla Perreras G.R. No. 157374 August 27, 2009 Brion, J. ISSUE: Whether there was a perfected contract of sale of one of the coowners of his share despite the no consent of the other owners to such sale. DOCTRINE: Yes. There was a perfected contract between the parties since all the essential requisites of a contract were present. Article 1318 of the Civil Code declares that no contract exists unless the following requisites concur: (1) consent of the contracting parties; (2) object certain which is the subject matter of the contract; and (3) cause of the obligation established. Since the object of the parties’ agreement involves properties co-owned by Consuelo and her children, the petitioners-heirs insist that their approval of the sale initiated by their mother, Consuelo, was essential to its perfection. Accordingly, their refusal amounted to the absence of the required element of consent. That a thing is sold without the consent of all the co-owners does not invalidate the sale or render it void. Article 493 of the Civil Code8 recognizes the absolute right of a co-owner to freely dispose of his pro indiviso share as well as the fruits and other benefits arising from that share, independently of the other co-owners. Thus, when Consuelo agreed to sell to the respondents the subject properties, what she in fact sold was her undivided interest that, as quantified by the RTC, consisted of one-half interest, representing her conjugal share, and one-sixth interest, representing her hereditary share. Cornelia Baladad vs. Sergio A. Rublico and Spouses Laureano F. Yupano G.R. No. 160743 August 4, 2009 Nachura, J. ISSUE: Whether a contract of absolute sale in an Extrajudicial Settlement of Estate with Absolute Sale executed by parties through their attorney-infact was valid. DOCTRINE: Yes. While contained in one document, the two are severable and each can stand on its own. Hence, for its validity, each must comply with the requisites prescribed in Article 1318 of the Civil Code, namely (1)

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS consent of the contracting parties; (2) object certain, which is the subject matter of the contract; and (3) cause of the obligation which is established. And, most important of all is the fact that the subject deed is, on its face, unambiguous. When the terms of a contract are lawful, clear and unambiguous, facial challenge cannot be allowed. We should not go beyond the provisions of a clear and unambiguous contract to determine the intent of the parties thereto, because we will run the risk of substituting our own interpretation for the true intent of the parties. It is immaterial that Cornelia’s signature does not appear on the Extrajudicial Settlement of Estate with Absolute Sale. A contract of sale is perfected the moment there is a meeting of the minds upon the thing which is the object of the contract and upon the price. 29 The fact that it was Cornelia herself who brought Atty. Francisco to Corazon’s house to notarize the deed shows that she had previously given her consent to the sale of the two lots in her favor. Her subsequent act of exercising dominion over the subject properties further strengthens this assumption. Francisco Landicho et al. vs. Felix Sia G.R. No. 169472. January 20, 2009. Puno C.J.: ISSUE: Whether old age and illiteracy incapacitates a person to execute a contract. DOCTRINE: No. The petitioners also failed to support their claim that the Aragons took advantage of Francisco’s old age and illiteracy and employed fraudulent schemes in order to deceive him into signing the Kasulatan. It has been held that “[a] person is not incapacitated to contract merely because of advanced years or by reason of physical infirmities. It is only when such age or infirmities impair the mental faculties to such extent as to prevent one from properly, intelligently, and fairly protecting her property rights, is she considered incapacitated.” XYST Corp. v. DMC Urban Properties Development Inc. G.R. No. 171968; July 31, 2009 Quisumbing, J. ISSUE: Whether there exists a perfected contract of sale between the parties despite the terms, conditions and amendments which the offeror tried to impose upon the other. DOCTRINE: No. By introducing amendments to the contract, XYST presented a counter-offer to which DMC did not agree. Clearly, there was only an offer and a counter-offer that did not sum up to any final arrangement containing the elements of a contract. No meeting of the minds was established. The rule on the concurrence of the offer and its acceptance did not apply because other matters or details–in addition to the subject matter and the consideration–would still be stipulated and agreed upon by the parties. Therefore, since the element of consent is absent, there is no contract to speak of. Where the parties merely exchanged offers and counter-offers, no agreement or contract is perfected. Gloria Ocampo and Teresita Tan v. Land Bank of the Philippines et al.

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS G.R. No. 164968; July 3, 2009 Peralta, J. ISSUE: Whether the deceit employed must be serious. DOCTRINE: Yes. Verily, fraud refers to all kinds of deception -- whether through insidious machination, manipulation, concealment or misrepresentation -- that would lead an ordinarily prudent person into error after taking the circumstances into account. The deceit employed must be serious. It must be sufficient to impress or lead an ordinarily prudent person into error, taking into account the circumstances of each case. Unfortunately, Ocampo was unable to establish clearly and precisely how the Land Bank committed the alleged fraud. She failed to convince Us that she was deceived, through misrepresentations and/or insidious actions, into signing a blank form for use as security to her previous loan. Granting, for the sake of argument, that appellant bank did not apprise the appellees of the real nature of the real estate mortgage, such stratagem, deceit or misrepresentations employed by defendant bank are facts constitutive of fraud which is defined in Article 1338 of the Civil Code as that insidious words or machinations of one of the contracting parties, by which the other is induced to enter into a contract which without them, he would not have agreed to. When fraud is employed to obtain the consent of the other party to enter into a contract, the resulting contract is merely a voidable contract that is a valid and subsisting contract until annulled or set aside by a competent court. It must be remembered that an action to declare a contract null and void on the ground of fraud must be instituted within four years from the date of discovery of fraud. In this case, it is presumed that the appellees must have discovered the alleged fraud since 1991 at the time when the real estate mortgage was registered with the Register of Deeds of Lingayen, Pangasinan. The appellees cannot now feign ignorance about the execution of the real estate mortgage. Government Service Insurance System vs. Abraham Lopez G.R. No. 165568; July 13, 2009 Carpio, J.: ISSUE: Whether when there is merely an offer by one party without acceptance by the other, there is no contract of sale. DOCTRINE: Yes. In the present case, the parties never got past the negotiation stage. Nothing shows that the parties had agreed on any final arrangement containing the essential elements of a contract of sale, namely, (1) consent or the meeting of the minds of the parties; (2) object or subject matter of the contract ; and (3) price or consideration of the sale. The 2 August 1988 letter of the GSIS cannot be classified as a perfected contract of sale which binds the parties. The letter was in reply to Lopez’s offer to repurchase the property. Both the trial and appellate courts found that Lopez’s offer to repurchase the property was subject to the approval of the Board of Trustees of the GSIS, as explicitly stated in the 2 August 1988 GSIS’ letter. No such approval appears in the records. When there is merely an offer by one party without acceptance by the other, there is no contract of sale. Since there was no acceptance by GSIS, which can validly act only through its Board of Trustees, of Lopez’s offer to repurchase the property, there was no perfected contract of sale.

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Sps. Ramon Lequin and Virginia Lequin vs. Sps. Raymundo Vizconde and Salome Lequin Vizconde G.R. No. 177710. October 12, 2009 Velasco, Jr., J.: ISSUE: Whether when consent is given through fraud would make the contract voidable. DOCTRINE: Yes. Article (Art.) 1330 of the Civil Code provides that when consent is given through fraud, the contract is voidable. Tolentino defines fraud as “every kind of deception whether in the form of insidious machinations, manipulations, concealments or misrepresentations, for the purpose of leading another party into error and thus execute a particular act.” Fraud has a “determining influence” on the consent of the prejudiced party, as he is misled by a false appearance of facts, thereby producing error on his part in deciding Whether to agree to the offer. One form of fraud is misrepresentation through insidious words or machinations. Under Art. 1338 of the Civil Code, there is fraud when, through insidious words or machinations of one of the contracting parties, the other is induced to enter into a contract which without them he would not have agreed to. Insidious words or machinations constituting deceit are those that ensnare, entrap, trick, or mislead the other party who was induced to give consent which he or she would not otherwise have given. Deceit is also present when one party, by means of concealing or omitting to state material facts, with intent to deceive, obtains consent of the other party without which, consent could not have been given. Art. 1339 of the Civil Code is explicit that failure to disclose facts when there is a duty to reveal them, as when the parties are bound by confidential relations, constitutes fraud. Spouses Exequiel Lopez and Eusebia Lopez v. Spouses Eduardo Lopez and Marcelina Lopez G.R. No. 161925; November 25, 2009 Nachura, J. ISSUE: Whether where the essential requisites of a contract are present and the simulation refers only to the content or terms of the contract, the agreement is absolutely binding and enforceable between the parties and their successors in interest. DOCTRINE: Yes. Simulation takes place when the parties do not really want the contract they have executed to produce the legal effects expressed by its wordings. Article 1345 of the Civil Code provides that the simulation of a contract may either be absolute or relative. In absolute simulation, there is a colorable contract but it has no substance as the parties have no intention to be bound by it. The main characteristic of an absolute simulation is that the apparent contract is not really desired or intended to produce legal effect or in any way alter the juridical situation of the parties. As a result, an absolutely simulated or fictitious contract is void, and the parties may recover from each other what they may have given under the contract. However, if the parties state a false cause in the contract to

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS conceal their real agreement, the contract is relatively simulated and the parties are still bound by their real agreement. Hence, where the essential requisites of a contract are present and the simulation refers only to the content or terms of the contract, the agreement is absolutely binding and enforceable between the parties and their successors in interest. Heirs Of Dr. Mario S. Intac v. Court of Appeals G.R. No. 173211; October 11, 2012 ISSUE: Whether the deed of sale executed by Ireneo and Salvacion was absolutely simulated for lack of consideration and cause and, therefore, void. DOCTRINE: NO. Article 1345 provides that simulation of a contract may be absolute or relative. The former takes place when the parties do not intend to be bound at all; the latter, when the parties conceal their true agreement. While Article 1346 states that 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. If the parties state a false cause in the contract to conceal their real agreement, the contract is only relatively simulated and the parties are still bound by their real agreement. Hence, where the essential requisites of a contract are present and the simulation refers only to the content or terms of the contract, the agreement is absolutely binding and enforceable between the parties and their successors in interest. In absolute simulation, there is a colorable contract but it has no substance as the parties have no intention to be bound by it. The main characteristic of an absolute simulation is that the apparent contract is not really desired or intended to produce legal effect or in any way alter the juridical situation of the parties. As a result, an absolutely simulated or fictitious contract is void, and the parties may recover from each other what they may have given under the contract." Korean Air Co., Ltd. V. Yuson G.R. No. 170369 Carpio, J. ISSUE: Whether the offer of MNLSM Management is equivalent to an offering of said early retirement program to its staff was certain. DOCTRINE: No, the offer must be definite, complete and intentional. There is an ‘offer’ in the context of Article 1319 only if the contract can come into existence by the mere acceptance of the offeree, without any further act on the part of the offeror. Hence, the ‘offer’ must be definite, complete and intentional. In the present case, the offer is not certain since (1) the 21 August 2001 memorandum clearly states that, “MNLSM Management, on its discretion, is hereby offering the said early retirement program to its staff. Doña Rosana Realty and Development Corporation vs. Molave Development Corporation G.R. No. 180523; March 26, 2010 Abad, J.

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS ISSUE: Whether consent of the buyer is vitiated when the President of buyer-corporation executed a document acknowledging the receipt of PhP 1.3 million as consideration for the cancellation of its contract to sell by reason of the actuation of the seller’s lawyer that the check would not be released without such document. DOCTRINE: No, the President of buyer-corporation asserted that she signed the above receipt because seller’s lawyer would not have released the check to her. But this is not a valid ground for claiming that consent is vitiated. If she did not want to agree to the cancellation, she had no business signing the receipt and accepting the check. She could very well have stood her ground and pressed for complete performance of the contract to sell. Having received the P1.3 million, the buyer-corporation’s remaining remedy was to pursue a claim for the balance of P1 million that it paid the seller upon the execution of the contract to sell. Jocelyn M. Toledo vs. Marilou M. Hyden G.R. No. 172139 December 8, 2010 Del Castillo, J.: ISSUE: Whether the "Acknowledgment of Debt" is an inexistent contract rendering it void from the very beginning pursuant to Article 1409 of the New Civil Code. DOCTRINE: No, the "Acknowledgment of Debt" is valid and binding contract. Even if there was indeed such threat made by Marilou, the same is not considered as that kind of threat that would vitiate consent. Article 1335 of the New Civil Code is very specific on this matter. It provides: " Art. 1335. There is violence when in order to wrest consent, serious or irresistible force is employed. x xxx A threat to enforce one’s claim through competent authority, if the claim is just or legal, does not vitiate consent. Here, it is uncontested that petitioner had in fact signed the "Acknowledgment of Debt" in April 1998 and two of her subordinates served as witnesses to its execution, knowing fully well the nature of the contract she was entering into. Next, petitioner issued five checks in favor of respondent representing renewal payment of her loans amounting to P290,000.00. In June 1998, she asked to recall Check No. 0010761 in the amount of P30,000.00 and replaced the same with six checks, in staggered amounts. All these are indicia that Jocelyn treated the "Acknowledgment of Debt" as a valid and binding contract. ECE Realty and Development Inc. v. Rachel G. Mandap G.R. No. 196182, September 01, 2014 ISSUE: Whether fraud attended the perfection of the contract which should be a ground to invalidate the contract. DOCTRINE: YES. Article 1338 of the Civil Code provides that “[t]here is fraud when through insidious words or machinations of one of the contracting parties, the other is induced to enter into a contract which, without them, he would not have agreed to.” In addition, under Article 1390 of the same Code, a contract is voidable or annullable “where the consent is vitiated by mistake, violence, intimidation, undue influence or fraud.”

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS Jurisprudence has shown that in order to constitute fraud that provides basis to annul contracts, it must fulfill two conditions. First, the fraud must be dolo causante or it must be fraud in obtaining the consent of the party. This is referred to as causal fraud. The deceit must be serious. Second, the fraud must be proven by clear and convincing evidence and not merely by a preponderance thereof. insofar as the present case is concerned, the Court agrees that the misrepresentation made by petitioner in its advertisements does not constitute causal fraud which would have been a valid basis in annulling the Contract to Sell between petitioner and respondent.

SECTION 2. OBJECT OF CONTRACTS Atty. Pedro M. Ferrer vs. Spouses Alfredo Diaz and Imelda Diaz G.R. No. 165300.  April 23, 2010 Del Castillo, J.: ISSUE: Whether a waiver of hereditary rights in favor of another executed by a future heir while the parents are still living valid. DOCTRINE: No. Pursuant to the second paragraph of Article 1347 of the Civil Code, no contract may be entered into upon a future inheritance except in cases expressly authorized by law. For the inheritance to be considered “future,” the succession must not have been opened at the time of the contract. A contract may be classified as a contract upon future inheritance, prohibited under the second paragraph of Article 1347, where the following requisites concur: (1) That the succession has not yet been opened; (2) That the object of the contract forms part of the inheritance; and, (3) That the promissor has, with respect to the object, an expectancy of a right which is purely hereditary in nature.

SECTION 3. CAUSE OF CONTRACTS J.L.T. Agro Inc. v. Balansag G.R. No. 141882. March 11, 2005 Tinga, J.: ISSUE: What will be the effect on the contract if it was entered into without cause or with unlawful cause? DOCTRINE: Article 1318 of the New Civil Code enumerates the requisites of a valid contract, namely: (1) consent of the contracting parties; (2) object certain which is the subject matter of the contract; and (3) Cause of the obligation which is established. Thus, Article 1352 declares that contracts without cause, or with unlawful cause produce no effect whatsoever. Those contracts lack an essential element and they are not only voidable but void or inexistent pursuant to

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS Article 1409, paragraph (2). The absence of the usual recital of consideration in a transaction which normally should be supported by a consideration such as the assignment made by Don Julian of all nineteen (19) lots he still had at the time, coupled with the fact that the assignee is a corporation of which Don Julian himself was also the President and Director, forecloses the application of the presumption of existence of consideration established by law. Alvarez v. PICOP Resources G.R. No. 162243 December 3, 2009 ISSUE: Whether in onerous contracts the cause is understood to be, for each contracting party, the prestation or promise of a thing or service by the other. DOCTRINE: Yes. According to Article 1350 of the Civil Code, "(i)n onerous contracts the cause is understood to be, for each contracting party, the prestation or promise of a thing or service by the other." Private investments for one’s businesses, while indeed eventually beneficial to the country and deserving to be given incentives, are still principally and predominantly for the benefit of the investors. Thus, the "mutual" contract considerations by both parties to this alleged contract would be both for the benefit of one of the parties thereto, BBLCI, which is not obligated by the 1969 Document to surrender a share in its proceeds any more than it is already required by its TLA and by the tax laws. PICOP’s argument that its investments can be considered as contract consideration derogates the rule that "a license or a permit is not a contract between the sovereignty and the licensee or permittee, and is not a property in the constitutional sense, as to which the constitutional proscription against the impairment of contracts may extend." All licensees obviously put up investments, whether they are as small as a tricycle unit or as big as those put up by multi-billion-peso corporations. To construe these investments as contract considerations would be to abandon the foregoing rule, which would mean that the State would be bound to all licensees, and lose its power to revoke or amend these licenses when public interest so dictates. The power to issue licenses springs from the State’s police power, known as "the most essential, insistent and least limitable of powers, extending as it does to all the great public needs." Businesses affecting the public interest, such as the operation of public utilities and those involving the exploitation of natural resources, are mandated by law to acquire licenses. This is so in order that the State can regulate their operations and thereby protect the public interest. Thus, while these licenses come in the form of "agreements," e.g., "Timber License Agreements," they cannot be considered contracts under the non-impairment clause.

CHAPTER 3. FORM OF CONTRACTS Manuel Mallari and Millie Mallari v. Rebecca Alsol

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS G.R. No. 150866. March 6, 2006 Carpio, J.: ISSUE: Will a defect in the notarization of a private document nullify the transaction of the parties indicated therein? DOCTRINE: Notarization converts a private document into a public document. However, the non-appearance of the parties before the notary public who notarized the document does not necessarily nullify nor render the parties’ transaction void ab initio. Serafin Naranja et al. vs. Court of Appeals G.R. No. 160132. April 17, 2009. Nachura J.: ISSUE: Whether a contract of sale should follow a particular form. DOCTRINE: No. The Court does not agree with petitioners’ contention that a deed of sale must contain a technical description of the subject property in order to be valid. Petitioners anchor their theory on Section 127 of Act No. 496, which provides a sample form of a deed of sale that includes, in particular, a technical description of the subject property. To be valid, a contract of sale need not contain a technical description of the subject property. Contracts of sale of real property have no prescribed form for their validity; they follow the general rule on contracts that they may be entered into in whatever form, provided all the essential requisites for their validity are present. The requisites of a valid contract of sale under Article 1458 of the Civil Code are: (1) consent or meeting of the minds; (2) determinate subject matter; and (3) price certain in money or its equivalent.

CHAPTER 4. REFORMATION OF INSTRUMENTS Benny Go v. Eliodoro Bacaron GR No. 159048. October 11, 2005 Panganiban, J.: ISSUE: What is the proper remedy of the parties when they failed to express their true intentions in the contract? DOCTRINE: Ultimately, it is the intention of the parties that determines whether a contract is one of sale or of mortgage. In the present case, one of the parties to the contract raises as an issue the fact that their true intention or agreement is not reflected in the instrument. Under Article 1605 of the New Civil Code, the supposed vendor may ask for the reformation of the instrument, should the case be among those mentioned in Articles 1602 and 1604. Because respondent has more than sufficiently established that the assailed Contract is in fact an equitable mortgage rather than an absolute sale, he is allowed to avail himself of the remedy of reformation of contracts as provided in Article 1359 of the New Civil Code.

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CHAPTER 5. INTERPRETATION OF CONTRACTS Holy Cross of Davao College, Inc. vs. Holy Cross of Davao Faculty Union – Kampi G.R. No. 156098 June 27, 2005 Sandoval-Gutierrez, J. ISSUE: How are non-ambiguous contracts to be interpreted? DOCTRINE: Contracts, which are not ambiguous are to be interpreted according to their literal meaning and not beyond their obvious intendment. When the provisions of a CBA state that academic teaching personnel as recipient of a scholarship grant are entitled to a leave of absence with a grant-in-aid equivalent to their monthly salary and allowance, provided such grant is to promote their professional growth or to enhance their studies in institutions of higher learning. Such provisions need no interpretation for they are clear. In Mactan Workers Union vs. Aboitiz, the court held that "the terms and conditions of a collective bargaining contract constitute the law between the parties. Those who are entitled to its benefits can invoke its provisions. In the event that an obligation therein imposed is not fulfilled, the aggrieved party has the right to go to court for redress." Agas vs. Sabico G.R. No. 156447. April 26, 2005 Callejo, Sr., J. ISSUE: May the Court declare a deed of sale to be a deed of absolute mortgage, taking into consideration the circumstances attendant in a certain case? DOCTRINE: Yes. In determining the nature of a contract, courts are not bound by the title or name given by the parties. The decisive factor in evaluating such agreement is the intention of the parties, as shown not necessarily by the terminology used in the contract but by their conduct, words, actions and deeds prior to, during and immediately after executing the agreement. As such, therefore, documentary and parol evidence may be submitted and admitted to prove such intention. If both parties offer a conflicting interpretation of a contract or several contracts, then judicial determination of the intention of the parties’ intention is inevitable. A contract may be embodied in two or more separate writings, in which event the writings should be read and interpreted together in such a way as to eliminate seeming inconsistencies and render the parties’ intention effectual. In construing a written contract, the reason behind and the circumstances surrounding its execution are of paramount importance to place the interpreter in the situation occupied by the parties concerned at the time the writing was executed. Construction of the terms of a contract, which would amount to impairment or loss of right, is not favored. Conservation and preservation, not waiver, abandonment or forfeiture of a 58

CASE DOCTRINES OBLIGATIONS AND CONTRACTS right, is the rule. In case of doubts in contracts, the same should be settled in favor of the greatest reciprocity of interests. Moreover, such doubts must be resolved against the person who drafted the deed and who is responsible for the ambiguities in the deed. Further, the notary public who notarized the said deed merely asked the respondent if the latter knew the contents of the deed of absolute sale, and the respondent purportedly replied in the affirmative. The notary public never even bothered to explain to the respondent the nature and the rights and obligations of the parties under the deed, as mandated by Article 1332 of the New Civil Code Berman Memorial Park, Inc. and Luisa Chong v. Francisco Cheng G.R. No. 154630. May 6, 2005 Callejo, Sr., J.: ISSUE: Do the stipulations embodied in an agreement reflect the true agreement of the parties? DOCTRINE: Yes. Article 1370 of the New Civil Code provides that if the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulation shall control. No amount of extrinsic aids are required and no further extraneous sources are necessary in order to ascertain the parties’ intent, determinable as it is, from the contract itself. The records are clear that the respondent understood the nature of the contract he entered into. If, indeed, the agreement were not the true intention of the parties, the party should file a corresponding action for reformation of the contract. The hornbook rule on interpretation of contracts gives primacy to the intention of the parties, which is the law among them. Ultimately, their intention is to be deciphered not from the unilateral post facto assertions of one of the parties, but from the language used in the contract. And when the terms of the agreement, as expressed in such language, are clear, they are to be understood literally, just as they appear on the face of the contract. Rosalina Tagle v. Court of Appeals, Fast International Corporation and/or Kuo Tung Yu Huang G. R. No. 148235. August 11, 2005 Carpio Morales, J.: ISSUE: Can a widow who filed a claim for death benefits be entitled to the additional labor insurance she is entitled to as provided for in her deceased husband’s employment contract on compensation and benefits which explicitly states that “Benefits . . . include compensation for . . . death in accordance with social insurance laws and other pertinent provisions of the Taiwan Labor Law. . . Additional Labor Insurance shall be provided to the Fisherman with a limit of NT$300,000.00 per person (or its equivalent) for accident insurance covering fisherman regardless of whether accident occurs within and/or beyond work hours”? DOCTRINE: No. Death is defined as “loss of life resulting from injury or sickness. Death could be a result of accident, but accident does not necessarily result to death. Compensation benefits

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS for illness, death, accident which does not result to death, and partial or total disability are treated separately and differently in the 3-paragraph provision of Article II, Section 10 of the employment contract. The said provision in the employment contract being clear and unambiguous, its literal meaning controls (Article 1370, New Civil Code). To uphold petitioner’s claim for additional insurance for accident, assuming that one for the purpose was secured, after receiving insurance benefits for death arising from accident, would violate the clear provision of Article II, Section 10 of the employment contract, the law between the parties. And it would trifle with the Release, Waiver and Quitclaim, another contract between the parties, barring petitioner from claiming other or additional benefits arising from petitioner’s husband’s death-basis of the release of the insurance proceeds to her. Martha R. Horrigan v. Troika Commercial, Inc. G.R. No. 148411. November 29, 2005 Sandoval-Gutierrez, J.: ISSUE: Who bears the responsibility for causing obscurities in a contract? DOCTRINE: The party who draws up the contract, in which obscure words or phrases appear, bears the responsibility for causing the ambiguity or obscurity, and hence, these must be construed against him. In this case, it was petitioner’s spouse who prepared the sub-lease contract in question. Consequently, the ambiguity must be construed against herein petitioner as she is presumed to have Aurelio P. Alonzo and Teresita A. Sison v. Jaime and Perlita San Juan G.R. No. 137549. February 11, 2005 Chico-Nazario, J.: ISSUE: How conflicting stipulations in a compromise agreement must be interpreted? DOCTRINE: Article 1374 of the Civil Code requires that the various stipulations of a contract shall be interpreted together, attributing to the doubtful ones that sense which may result from all of them taken jointly. In this case, we find it was error on the part of the trial court to have interpreted the compromise agreement in the manner it has done so. Applying the rule that the various stipulations of a contract should be taken together, the trial court should have interpreted paragraph 10, in relation to paragraphs 11 and 12. If we were to follow the interpretation of the trial court, the respondents would only have to default in the payment of their obligation and the contract would be rendered null and void to their benefit and advantage leaving the petitioners without any recourse at all. This surely was not what was envisioned when the parties entered into the compromise. The Court itself would not have approved the same for being contrary to law, morals and public policy. Certainly, to sustain the interpretation of the trial court would be to sanction an absurdity as it would go against the very rationale of entering into a Compromise Agreement, i.e., to put an end to litigation. If we were to follow the argument of the trial court to its logical conclusion, then it would mean that the parties would have to go back to square one and re-litigate what they

58

CASE DOCTRINES OBLIGATIONS AND CONTRACTS had already put to rest when they entered into the subject Compromise Agreement Vicente Go v. Pura Kalaw, Inc. G.R. No. 131408. July 31, 2006 Sandoval-Gutierrez, J. ISSUE: How should agreements in a contract be interpreted? DOCTRINE: Article 1370 of the Civil Code governs the interpretation of the terms of agreement in a written contract. Simply put, the literal meaning of the stipulations shall control the intention of the parties, to be deciphered not from the unilateral post facto assertions of one of the parties, but from the language used in the contract. The language is to be understood literally, just as it so appears in the contract. Sps. Alvaro v. Sps. Returban G.R. No. 166183. January 20, 2006 Ynares-Santiago, J.: ISSUE: Is the nomenclature interpretation of a contract?

used

by

the

parties

decisive

in

the

DOCTRINE: No. The nomenclature used by the contracting parties to describe a contract does not determine its nature. The decisive factor is the intention of the parties to the contract – as shown by their conduct, words, actions and deeds – prior to, during and after executing the agreement. Ayala Inc. v. Ray Burton Corp GR No. 163075. January 23, 2006. Sandoval-Gutierrez, J.: ISSUE: Is the name given by the parties to a contract conclusive? DOCTRINE: No. The real nature of a contract may be determined from the express terms of the written agreement and from the contemporaneous and subsequent acts of the contracting parties. In the construction or interpretation of an instrument, the intention of the parties is primordial and is to be pursued. If the terms of the contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control. If the words appear to be contrary to the evident intention of the parties, the latter shall prevail over the former. The denomination or title given by the parties in their contract is not conclusive of the nature of its contents. San Diego v. Evangelista G.R. No. 163680. January 24, 2006 Carpio Morales, J. ISSUE: What is the effect if the terms of the contract are clear? DOCTRINE: Paragraph No. 1 of the contract relied upon by petitioner is clearly worded. It provides that “an agricultural leasehold relation iscreatedon a farm lot which is a portion of a parcel of land” covered by a transfer certificate of title consisting of three hectares, clearly referring to respondent’s father’s TCT No. 98.728 (M) containing three hectares. Art.

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS 1370 of the New Civil Code which provides that if the terms of the contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control. Laureano T. Angeles v. Philippine National Railways (PNR) And Rodolfo Flores G.R. No. 150128. August 31, 2006 Garcia, J.: ISSUE: What is the probative value of the acts of a contracting party if there is doubt as to the language used in the contract or as to the intention of such party in entering into the said contract? DOCTRINE: Article 1374 of the Civil Code provides that the various stipulations of a contract shall be read and interpreted together, attributing to the doubtful ones that sense which may result from all of them taken jointly. In fine, the real intention of the parties is primarily to be determined from the language used and gathered from the whole instrument. Article 1371 of the Civil Code provides that to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally considered. In other words, in case of doubt, resort may be made to the situation, surroundings, and relations of the parties. Elenita Ishida and Continent Japan Co., Inc. v. Antusa de MesaMagno, Firmo de Mesa et.al. G. R. No. 136260. July 28, 2006 Garcia, J.: ISSUE: Is a declaration of nullity of a contract warranted where the parties executed an addendum to a Deed of Sale with Mortgage excluding certain properties within the area of the real properties subject of the sale? DOCTRINE: To warrant a declaration of nullity of the contract, the doubts or obscurities must be cast upon the principal object of the contract (which in this case are three parcels of land) in such a way that the true intention of the parties cannot be known. (Par. 2, Art. 1378 of the Civil Code) Such confusion merely led to the failure of the parties to express in the contract the true intention of their agreement, the proper remedy of which is reformation of the contact under Chapter 4, Title 2, Book IV (Obligations and Contracts) of the Civil Code. Heirs of the Deceased Carmen International, Inc. G.R. No. 146428. January 19, 2009. Leonardo-De Castro, J.:

Cruz-Zamora

v.

Multiwood

ISSUE: Whether clear and explicit terms in contracts warrant court interpretation. DOCTRINE: No. When the terms of the agreement are clear and explicit, such that they do not justify an attempt to read into them any alleged intention of the parties, the terms are to be understood literally just as they appear on the face of the contract. It is only in instances when the language of a contract is ambiguous or obscure that courts ought to apply certain

58

CASE DOCTRINES OBLIGATIONS AND CONTRACTS established rules of construction in order to ascertain the supposed intent of the parties. However, these rules will not be used to make a new contract for the parties or to rewrite the old one, even if the contract is inequitable or harsh. They are applied by the court merely to resolve doubts and ambiguities within the framework of the agreement. Antipolo Properties v. Nuyda G.R. No. 171832; October 12, 2009 ISSUE: Whether contemporaneous and subsequent acts shall be principally considered in knowing the intention of the contracting parties. DOCTRINE: Yes. Petitioner moreover unequivocally obligated itself to extend the said benefits to respondent. Rudimentary is the principle that a contract is the law between the contracting parties. Further, when the language of the contract is clear and plain or readily understandable by any ordinary reader, there is absolutely no room for interpretation or construction and the literal meaning of its stipulations shall control. The Court then fully agrees with the CA’s declaration that the contract "leaves no other recourse for the courts than to enforce the contractual stipulations therein, in the exact manner agreed upon and written. Adriatico Consortium, Inc., et al. vs. Land Bank of the Philippines G.R. No. 187838; December 23, 2009 Velasco, Jr., J. ISSUE: Whether the literal meaning of a contract’s stipulations shall control if the terms are clear and leave no doubt upon the intention of the contracting parties. DOCTRINE: Yes. The cardinal rule in the interpretation of contracts is embodied in the first paragraph of Article 1370 of the Civil Code: “[i]f the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control.” In the case at bar, the word “action” should be defined according to its plain and ordinary meaning, i.e., as the process of doing something; conduct or behavior; a thing done. It is not limited to actions before a court or a judicial proceeding. Therefore, the only logical conclusion that can be derived from the use of the word “action” in Sec. 5 of the agreement is that the parties intentionally used it in its plain and ordinary sense and did not limit it to mean any specific legal term. Moreover, a compromise agreement compromises not only those objects definitely stated in it, but also those, which by necessary implication, should be deemed to have been included in it. Ergo, the term “action” includes the sale of the receivables as a necessary implication. Furthermore, Sec. 5 of the Partial Compromise Agreement speaks of cooperation between the parties to determine the person or persons ultimately liable. It states, “x x x until it is finally adjudged and determined who are the parties liable thereto; toward this end, the parties herein agree to cooperate with each other in order for respondent Land Bank of the Philippines to recover the same as against the person/s liable thereon.” In other words, the parties agreed to cooperate and collaborate with each other in order to determine the person or persons who are ultimately liable. By selling the receivables, Land Bank did not cooperate with petitioners.

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS Manila International Airport Authority v. Avia Filipinas International, Inc., G.R. No. 180168; February 27 2012 ISSUE: Whether the stipulations of the contract, in case of doubt, should be read in its entirety? DOCTRINE: Yes. Article 1374 of the Civil Code clearly provides that “the various stipulations of a contract shall be interpreted together, attributing to the doubtful ones that sense which may result from all of them taken jointly.” Indeed, in construing a contract, the provisions thereof should not be read in isolation, but in relation to each other and in their entirety so as to render them effective, having in mind the intention of the parties and the purpose to be achieved.7 In other words, the stipulations in a contract and other contract documents should be interpreted together with the end in view of giving effect to all.

CHAPTER 6. RESCISSIBLE CONTRACTS Oliverio Laperal and Filipinas Golf & Country Club, Inc. v. Solid Homes, Inc. G.R. No. 130913. June 21, 2005 Garcia, J.: ISSUE: Is mutual restitution under Article 1385 proper where one party successfully rescinds a contract under Article 1191? DOCTRINE: Yes. The right to rescind under Article 1191 of the Civil Code carries with it the corresponding obligation for restitution. It is not correct to say that mutual restitution under Article 1385 applies only if the rescission is made under the instances enumerated in Article 1381. Mutual restitution is required in cases involving rescission under Article 1191. Rescission creates the obligation to return the object of the contract. It is so required to bring back the parties to their original situation prior to the inception of the contract. C-J Yulo & Sons, Inc. v. Roman Catholic Bishop of San Pablo, Inc. G.R. No. 133705. March 31, 2005 Garcia, J.: ISSUE: What should be the nature of the breach of contract before a rescission may be allowed? DOCTRINE: The violations of the conditions of the donation committed by the donee were merely casual breaches of the conditions of the donation and did not detract from the purpose by which the donation was made, i.e., for the establishment of a home for the aged and the infirm. In order for a contract which imposes a reciprocal obligation, which is the onerous donation in this case wherein the donor is obligated to donate a 41,117 square meter property in Canlubang, Calamba, Laguna on which property the donee is obligated to establish a home for the aged and the infirm (Exhibit C), may be rescinded per Article 1191 of the New Civil Code, the

58

CASE DOCTRINES OBLIGATIONS AND CONTRACTS breach of the conditions thereof must be substantial as to defeat the purpose for which the contract was perfected The right to rescind the contract for non-performance of one of its stipulations is not absolute. 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 question of whether a breach of a contract is substantial depends upon the attendant circumstances. Spouses Felipe and Leticia Cannu v. Spouses Gil And Fernandina Galang and National Home Mortgage Finance Corporation G.R. No. 139523. May 26, 2005 Chico-Nazario, J.: ISSUE: Does failure to pay the balance of the purchase price constitute a substantial breach of the obligation? DOCTRINE: Yes. Settled is the rule that rescission or, more accurately, resolution, of a party to an obligation under Article 1191 is predicated on a breach of faith by the other party that violates the reciprocity between them. Rescission will not be permitted for a slight or casual breach of the contract. Rescission may be had only for such breaches that are substantial and fundamental as to defeat the object of the parties in making the agreement. The question of whether a breach of contract is substantial depends upon the attending circumstances and not merely on the percentage of the amount not paid. Bienvenido M. Casino Jr. v. Court of Appeals G.R. No. 133803. September 16, 2005 Garcia, J.: ISSUE: May a party who deems the contract violated consider it resolved or rescinded, and act accordingly, without previous court action? HELD: Yes but he proceeds at his own risk. It is only the final judgment of the corresponding court that will conclusively and finally settle whether the action taken was or was not correct in law. But the law definitely does not require that the contracting party who believes itself injured must first file suit and wait for a judgment before taking extrajudicial steps to protect its interest. Otherwise, the party injured by the other’s breach will have to passively sit and watch its damages accumulate during the pendency of the suit until the final judgment of rescission is rendered when the law itself requires that he should exercise due diligence to minimize its own damages. Pryce Corporation (Formerly Pryce Properties Corporation), v. Philippine Amusement And Gaming Corporation G.R. No. 157480. May 6, 2005 Panganiban, J.: ISSUE: Is there a “termination” and “rescission”?

difference

between

the

terms

DOCTRINE: Yes. The term “rescission” is found in 1) Article 1191 of the Civil Code, the general provision on rescission of reciprocal obligations; 2) Article 1659, which authorizes rescission as an alternative remedy, insofar

58

CASE DOCTRINES OBLIGATIONS AND CONTRACTS as the rights and obligations of the lessor and the lessee in contracts of lease are concerned; and 3) Article 1380 with regard to the rescission of contracts. There is a distinction in law between cancellation of a contract and its rescission. To rescind is to declare a contract void in its inception and to put an end to it as though it never were. It is not merely to terminate it and release parties from further obligations to each other but to abrogate it from the beginning and restore the parties to relative positions which they would have occupied had no contract ever been made. Rescission has likewise been defined as the “unmaking of a contract, or its undoing from the beginning, and not merely its termination.” Rescission may be effected by both parties by mutual agreement; or unilaterally by one of them declaring a rescission of contract without the consent of the other, if a legally sufficient ground exists or if a decree of rescission is applied for before the courts. On the other hand, termination refers to an “end in time or existence; a close, cessation or conclusion.” With respect to a lease or contract, it means an ending, usually before the end of the anticipated term of such lease or contract, that may be effected by mutual agreement or by one party exercising one of its remedies as a consequence of the default of the other. Thus, mutual restitution is required in a rescission (or resolution), in order to bring back the parties to their original situation prior to the inception of the contract. In contrast, the parties in a case of termination are not restored to their original situation; neither is the contract treated as if it never existed. Prior to its termination, the parties are obliged to comply with their contractual obligations. Only after the contract has been cancelled will they be released from their obligations.

Coastal Pacific Trading Inc., v. Southern Rolling Mills, Co., Inc. et al. G.R. No. 118692. July 28, 2006 Panganiban, CJ: ISSUE: Whether respondent consortium banks disposed of VISCO’s assets in fraud of the creditors? DOCTRINE: Yes. Director owe loyalty and fidelity to the corporation they serve and to its creditors. When these directors sit on the board as representatives of shareholders who are also major creditors, they cannot be allowed to use their offices to secure undue advantage for those shareholders, in fraud of other creditors who do not have similar representation in the board of directors. Pan Pacific Industrial Sales Co., v. Court of Appeals G.R. No. 125283. February 10, 2006 Tinga, J:

58

CASE DOCTRINES OBLIGATIONS AND CONTRACTS ISSUE: Whether rescission can be availed of when one party denies the existence of a contract. DOCTRINE: A non-existent contract need not be cancelled. In asking for "rescission," under Article 1191 of the Civil Code provides that the "power to rescind," really means to resolve or cancel, is implied in reciprocal obligations "in case one of the obligors should not comply with what is incumbent upon him." When a party asks for the resolution or cancellation of a contract it is implied that he recognizes its existence. Laurencio Ramel, et.al. v. Daniel Aquino and Guadaluper Abalahin G.R. No. 133208. July 31, 2006 Puno, J.: ISSUE: When a party fails to pay the mortgage obligation, is the other party entitled to a rescission of the contract? DOCTRINE: Violation of an agreement gives entitles the other party to rescind the contract under Art. 1191 of the Civil Code. Non-payment of the mortgage obligation assumed by petitioners in this case constitute substantial, not merely casual and slight breach, that entitles the respondents to rescind the contract. Union Bank of the Philippines v. Sps. Ong G.R. No. 152347. June 21, 2006 Garcia, J.: ISSUE: Does mere fact of injury to the creditor mean that a contract is rescissible for having been entered into to defraud the creditor? DOCTRINE: No. Contracts in fraud of creditors are those executed with the intention to prejudice the rights of creditors. They should not be confused with those entered into without such mal-intent, even if, as a direct consequence thereof, the creditor may suffer some damage. In determining whether a certain conveying contract is fraudulent, what comes to mind first is the question of whether the conveyance was a bona fide transaction or a trick and contrivance to defeat creditors. To creditors seeking contract rescission on the ground of fraudulent conveyance rest the onus of proving by competent evidence the existence of such fraudulent intent on the part of the debtor, albeit they may fall back on the disputable presumptions, if proper, established under Article 1387 of the Code. The existence of fraud or the intent to defraud creditors cannot plausibly be presumed from the fact that the price paid for a piece of real estate is perceived to be slightly lower, if that really be the case, than its market value. To be sure, it is logical, even expected, for contracting minds, each having an interest to protect, to negotiate on the price and other conditions before closing a sale of a valuable piece of land. The negotiating areas could cover various items. The purchase price, while undeniably an important consideration, is doubtless only one of them. It may be stressed that, when the validity of sales contract is in issue, two veritable presumptions are relevant: first, that there was sufficient consideration of the contract; and, second, that it was the result of a fair and regular private transaction. If shown to hold, these presumptions infer prima facie the transaction's validity, except that it must yield to the

58

CASE DOCTRINES OBLIGATIONS AND CONTRACTS evidence adduced which the party disputing such presumptive validity has the burden of overcoming. Parenthetically, the rescissory action to set aside contracts in fraud of creditors is accion pauliana, essentially a subsidiary remedy accorded under Article 1383 of the Civil Code which the party suffering damage can avail of only when he has no other legal means to obtain reparation for the same. In net effect, the provision applies only when the creditor cannot recover in any other manner what is due him. For a contract to be rescinded for being in fraud of creditors, both contracting parties must be shown to have acted maliciously so as to prejudice the creditors who were prevented from collecting their claims. Philippine Leisure and Retirement Authority v. Court of Appeals G.R. No. 156303, 541 SCRA 85 ISSUE: May a party be allowed to unilaterally rescind a contract absent any provision in the contract providing for a right to rescind? DOCTRINE: 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 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. Therefore, even if a provision providing for a right to rescind is not in agreement, a party may still rescind a contract should one obligor fail to comply with its obligations. Uniwide Holdings, Inc. v. Jandecs Transportation Co., Inc. G.R. No. 168522, 541 SCRA 158 ISSUE: Does mere failure of a party in a reciprocal obligation to deliver his end of the contract warrant the other party to rescind the contract even if the latter has already delivered his part of said obligation? DOCTRINE: The right of rescission is implied in every reciprocal obligation where one party fails to perform what is incumbent upon him while the other is willing and ready to comply. Certainly, petitioner's failure to deliver the units on the commencement date of the lease on October 1, 1997 gave respondent the right to rescind the contract after the latter had already paid the contract price in full. Furthermore, respondent's right to rescind the contract cannot be prevented by the fact that petitioner had the option to substitute the stalls. Even if petitioner had that option, it did not, however, mean that it could insist on the continuance of the contract by forcing respondent to accept the substitution. Neither did it mean that its previous default had been obliterated completely by the exercise of that option.

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS

Bonrostro v. Luna G.R. No. 172346, 702 SCRA 1 ISSUE: Whether the failure of spouses Bonrostro to pay the installments of P300,000.00 on April 30, 1993 and P330,000.00 on July 31, 1993 is a substantial breach of their obligation under the contract as to warrant the rescission of the same. DOCTRINE: The defendants’ delay in the payment of the two installments is not so substantial as to warrant rescission of contract. Although, the defendant failed to pay the two installments in due time, she was able to communicate with the plaintiffs through letters requesting for an extension of two months within which to pay the installments. In fact, on November 24, 1993 defendant informed Atty. Arlene Carbon that she was ready to pay the installments and the money is ready for pick-up. However, plaintiff did not bother to get or pick-up the money without any valid reason. It would be very prejudicial on the part of the defendant if the contract to sell be rescinded considering that she made a downpayment of P200,000.00 and made partial amortization to the Bliss Development Corporation. In fact, the defendant testified that she is willing and ready to pay the balance including the interest on November 24, 1993. The Court is of the opinion that the delay in the payment of the balance of the purchase price of the house and lot is not so substantial as to warrant the rescission of the contract to sell. The question of whether a breach of contract is substantial depends upon the attendant circumstance. Armand O. Raquel-Santos and Annalissa Mallari v. Court of Appeals and Finvest Securities Co., Inc. G.R. No. 174986 July 7, 2009 Nachura, J.: ISSUE: Whether rescission of a contract gives rise to mutual restitution. DOCTRINE: Yes. Rescission creates the obligation to return the object of the contract. To rescind is to declare a contract void at its inception and to put an end to it as though it never was. Rescission does not merely terminate the contract and release the parties from further obligations to each other, but abrogates it from the beginning and restores the parties to their relative positions as if no contract has been made. Heirs of Sofia Quirong v. Development Bank of the Philippines G.R. No. 173441 December 3, 2009 Abad, J. ISSUE: Whether the action to claim rescission must be commenced within four years. DOCTRINE: Yes. The next question that needs to be resolved is the applicable period of prescription. The DBP claims that it should be four years as provided under Article 1389 of the Civil Code. 16 Article 1389 provides that "the action to claim rescission must be commenced within four years." The Quirong heirs, on the other hand, claim that it should be 10 years as provided under Article 1144 which states that actions "upon a

58

CASE DOCTRINES OBLIGATIONS AND CONTRACTS written contract" must be brought "within 10 years from the date the right of action accrues." Now, was the action of the Quirong heirs "for rescission" or "upon a written contract"? There is no question that their action was for rescission, since their complaint in Civil Case CV-98-02399-D asked for the rescission of the contract of sale between Sofia Quirong, their predecessor, and the DBP and the reimbursement of the price of P78,000.00 that Sofia Quirong paid the bank plus damages. The prescriptive period for rescission is four years. Here, the Quirong heirs alleged in their complaint that they were entitled to the rescission of the contract of sale of the lot between the DBP and Sofia Quirong because the decision in Civil Case D-7159 deprived her heirs of nearly the whole of that lot. But what was the status of that contract at the time of the filing of the action for rescission? Apparently, that contract of sale had already been fully performed when Sofia Quirong paid the full price for the lot and when, in exchange, the DBP executed the deed of absolute sale in her favor. There was a turnover of control of the property from DBP to Sofia Quirong since she assumed under their contract, "the ejectment of squatters and/or occupants" on the lot, at her own expense. “G” Holdings, Inc., v. National Mines and Allied Workers Union Local 103 (NAMAWU) G.R. No. 160236; October 16, 2009 Nachura, J.: ISSUE: Whether there is presumption of fraud in an involuntary alienation DOCTRINE: No. We also cannot agree that the presumption of fraud in Article 1387 of the Civil Code relative to property conveyances, when there was already a judgment rendered or a writ of attachment issued, authorizes piercing the veil of corporate identity in this case. We find that Article 1387 finds less application to an involuntary alienation such as the foreclosure of mortgage made before any final judgment of a court. We thus hold that when the alienation is involuntary, and the foreclosure is not fraudulent because the mortgage deed has been previously executed in accordance with formalities of law, and the foreclosure is resorted to in order to liquidate a bona fide debt, it is not the alienation by onerous title contemplated in Article 1387 of the Civil Code wherein fraud is presumed.

CHAPTER 7. VOIDABLE CONTRACTS Jorge Gonzales v. Climax Mining Ltd. G.R. No. 161957. February 28, 2005 Tinga, J.: ISSUE: Who determines the validity of contracts? DOCTRINE: The question if whether a contract is void or voidable contracts is a judicial question. It may, in some instances, involve questions of fact especially with regard to the determination of the circumstances of the execution of the contracts. But the resolution of the validity or voidness of the contracts remains a legal or judicial question as it requires the

58

CASE DOCTRINES OBLIGATIONS AND CONTRACTS exercise of judicial function. It requires the ascertainment of what laws are applicable to the dispute, the interpretation and application of those laws, and the rendering of a judgment based thereon. It is essentially judicial. Felicitas Asycong and Teresa Polan v. Court of Appeals and Moller Lending Investor GR No. 153758. February 22, 2006 Carpio, J.: ISSUE: What is the effect of a voidable contract where the consent is vitiated by intimidation? DOCTRINE: Contracts where the consent is vitiated by mistake, violence, intimidation, undue influence or fraud are voidable. These contracts are binding, unless they are annulled by a proper action in court. They are susceptible of ratification. Development Bank of the Management Office v. CA G.R. No. 138703. June 30, 2006 Azcuna, J.:

Philippines

and

Privatization

and

ISSUE: What is “undue influence”? When may it be considered to exist? Can the fact that a party had no “choice” but to sign a contract may be interpreted that the other party exerted undue influence. DOCTRINE: There is undue influence when a person takes improper advantage of his power over the will of another, depriving the latter f reasonable freedom of choice. The following circumstances shall be considered: the 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. For undue influence to be present, the influence exerted must have so overpowered or subjugated the mind of a contracting party as to destroy the latter’s free agency, making such party express the will of another rather than its own. The alleged lingering financial woes of a debtor per se cannot be equated with the presence of undue influence. Yes. The law grants an aggrieved party the right to obtain the annulment of a contract on account of factors such as mistake, violence, intimidation, undue influence and fraud which vitiate consent. However, the fact that respondents were “forced” to sign the promissory notes and mortgage contracts in order to have respondents’ original loans restructured and to prevent the foreclosure of their properties does not amount to vitiated consent. The financial condition of respondents may have motivated them to contract with DBP, but undue influence cannot be attributed to DBP simply because the latter had lent money. While respondents were purportedly financially distressed, there is no clear showing that those acting on their behalf had been deprived of their free agency when they executed the promissory notes representing respondents’ refinanced obligations to DBP. Barceliza P. Capistrano vs. Darryl Limcuando and Fe S. Sumiran G.R. No. 152413 February 13, 2009

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS Leonardo-De Castro, J. ISSUE: Whether the person who caused fraud can annul the contract. DOCTRINE: No. We simply cannot uphold petitioner’s contention that the deed of sale she executed in favor of respondents should be declared null and void on the basis of the previous deed of sale with right of repurchase petitioner executed in favor the spouses Zuasola and Subida. Ostensibly, when petitioner sold the subject property to herein respondents, she no longer had any right to do so for having previously sold the same property to other vendees. However, it is elementary that he who comes to court must do so with clean hands. Being the vendor in both sales, petitioner knew perfectly well that when she offered the subject property for sale to respondents she had already previously sold it to the spouses Zuasola and Subida. It is undeniable then that petitioner fraudulently obtained the consent of respondents in the execution of the assailed deed of sale. She even admits her conviction of the crime of estafa for the deception she perpetrated on respondents by virtue of the double sale. Certainly, petitioner’s action for annulment of the subject deed should be dismissed based on Article 1397 of the Civil Code which provides that the person who employed fraud cannot base his action for the annulment of contracts upon such flaw of the contract, thus: Art. 1397. The action for the annulment of contracts may be instituted by all who are thereby obliged principally or subsidiarily. However, persons who are capable cannot allege the incapacity of those with whom they contracted; nor can those who exerted intimidation, violence, or undue influence, or employed fraud, or caused mistake base their action upon these flaws of the contract. One who has caused the ground to annul a contract such as fraud is precluded from seeking the annulment of the said contract. Hernania “Lani” Lopez vs. Gloria Umale-Cosme G.R. No. 171891. February 24, 2009. Puno, C.J.: ISSUE: Whether the oral agreement has force and effect of law between the parties as in the case of a contract. DOCTRINE: It is well-settled that where a contract of lease is verbal and on a monthly basis, the lease is one with a definite period which expires after the last day of any given thirty-day period. In the recent case of Wee v. De Castro, 562 SCRA 695 (2008), where the lease contract between the parties did not stipulate a fixed period. First Philippine Holdings Corporation vs. Trans Middle East (Phils.) Equities, Inc. G.R. No. 179505; December 4, 2009 ISSUE: Whether contracts where consent is given through fraud are void. DOCTRINE: No. These circumstances surrounding the questioned transaction fit in with what Article 1390 of the Civil Code contemplates as voidable contracts, viz: Art. 1390. The following contracts are voidable or

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS annullable, even though there may have been no damage to the contracting parties: xxxx (2) Those where the consent is vitiated by mistake, violence, intimidation, undue influence, or fraud. Thus, contracts where consent is given through fraud, are voidable or annullable. These are not void ab initio since voidable or annullable contracts are existent, valid, and binding, although they can be annulled because of want of capacity or the vitiated consent of one of the parties. However, before such annulment, they are considered effective and obligatory between parties. ECE Realty And Development Inc. v. Rachel G. Mandap G.R. No. 196182, September 01, 2014 ISSUE: Whether the false representations made were ratified by the signature of the respondent. DOCTRINE: Yes. Respondent's act of affixing her signature to the said Contract, after having acquired knowledge of the property's actual location, can be construed as an implied ratification thereof. Ratification of a voidable contract under Article 1393 of the Civil Code may be effected expressly or tacitly. It is understood that there is a tacit ratification if, with knowledge of the reason which renders the contract voidable and such reason having ceased, the person who has a right to invoke it should execute an act which necessarily implies an intention to waive his right.

CHAPTER 8. UNENFORCEABLE CONTRACTS Spouses Mario and Elizabeth Torcuator v. Spouses Remigio and Gloria Bernabe and Spouses Diosdado and Lourdes Salvador G.R. No. 134219. June 08, 2005 Tinga, J.: ISSUE: What is the purpose of the Statute of Frauds? Doctrine: The term "Statute of Frauds" is descriptive of statutes which require certain classes of contracts, such as agreements for the sale of real property, to be in writing. It does not deprive the parties the right to contract with respect to the matters therein involved, but merely regulates the formalities of the contract necessary to render it enforceable. 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. The written note or memorandum, as contemplated by Article 1403 of the Civil Code, should embody the essentials of the contract.

Banco Filipino Savings v. Diaz G.R. No. 153134. June 27, 2006 Callejo, Sr., J.:

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS ISSUE: Can the obligor(s) withdraw the amount previously consigned with the regional trial court after a higher court (court of appeals) has declared the consignment as invalid? DOCTRINE: Yes. Before the consignation has been accepted by the creditor or judicially declared as properly made, the debtor is still the owner of the thing or amount deposited, and, therefore, the other parties liable for the obligation have no right to oppose his withdrawal of such thing or amount. The debtor merely uses his right, and unless the law expressly limits that use of his right, it cannot be prevented by the objections of anyone. Our law grants to the debtor the right to withdraw, without any limitation, and we should not read a non-existing limitation into the law. Although the other parties liable for the obligation would have been benefited if the consignation had been allowed to become effective, before that moment they have not acquired such an interest as would give them a right to oppose the exercise of the right of the debtor to withdraw the consignation. Thus, under Article 1260 of the Civil Code, the debtor may withdraw, as a matter of right, the thing or amount deposited on consignation in the following instances: (1) Before the creditor has accepted the consignation; or (2) Before a judicial declaration that the consignation has been properly made. Lina Peñalber vs. Quirino Ramos et al. G.R. No. 178645. January 30, 2009. Chico-Nazario J.: ISSUE: Whether statute of frauds deprive the parties of the right to contract with respect to the matters therein involved. DOCTRINE: We subscribe to the ruling of the RTC in its Order dated 17 July 2000 that said spouses were deemed to have waived their objection to the parol evidence as they failed to timely object when petitioner testified on the said verbal agreement. The requirement in Article 1443 that the express trust concerning an immovable or an interest therein be in writing is merely for purposes of proof, not for the validity of the trust agreement. Therefore, the said article is in the nature of a statute of frauds. 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. The effect of non-compliance is simply that no action can be proved unless the requirement is complied with. Oral evidence of the contract will be excluded upon timely objection. But if the parties to the action, during the trial, make no objection to the admissibility of the oral evidence to support the contract covered by the statute, and thereby permit such contract to be proved orally, it will be just as binding upon the parties as if it had been reduced to writing. Orduña, et al. v. Fuentebella, et al. G.R. No. 176841 June 29, 2010 Velasco, Jr., J.

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS ISSUE: Whether the Statute of Frauds is inapplicable to partially executed contracts. DOCTRINE: Yes. Statute of Frauds expressed in Article 1403, par. (2),of the Civil Code applies only to executory contracts, i.e., those where no performance has yet been made. Stated a bit differently, the legal consequence of non-compliance with the Statute does not come into play where the contract in question is completed, executed, or partially consummated. The Statute of Frauds, in context, provides that a contract for the sale of real property or of an interest therein shall be unenforceable unless the sale or some note or memorandum thereof is in writing and subscribed by the party or his agent. However, where the verbal contract of sale has been partially executed through the partial payments made by one party duly received by the vendor, as in the present case, the contract is taken out of the scope of the Statute. Municipality of Hagonoy, Bulacan vs. Dumdum, Jr. G.R. No. 168289; March 22, 2010 Peralta, J. ISSUE: Whether the court can declare a reciprocal contract unenforceable under the Statute of Frauds if there is an allegation where one of the parties performed his obligation? DOCTRINE: No, it has been obligee's consistent stand, since the inception of the instant case that she has entered into a contract with the obligors. As far as she is concerned, she has already performed her part of the obligation under the agreement by undertaking the delivery of the 21 motor vehicles contracted for by the obligor in the name of petitioner municipality. This claim is well substantiated — at least for the initial purpose of setting out a valid cause of action against the obligors — by copies of the bills of lading attached to the complaint, naming petitioner municipality as consignee of the shipment. Obligors have not at any time expressly denied this allegation and, hence, the same is binding on the trial court for the purpose of ruling on the motion to dismiss. In other words, since there exists an indication by way of allegation that there has been performance of the obligation on the part of the obligee, the case is excluded from the coverage of the rule on dismissals based on unenforceability under the statute of frauds, and either party may then enforce its claims against the other. Rogelio Dantis, v. Julio Maghinang, Jr. G.R. No. 191696. April 10, 2013 Mendoza, J.: ISSUE: Is the Statute of Frauds applicable in the absence of a perfected contract? DOCTRINE: No. The application of the Statute of Frauds presupposes the existence of a perfected contract. In the absence thereof, there is no basis for the application of the Statute of Frauds.

CHAPTER 9. VOID OR INEXISTENT CONTRACTS

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS Menchavez vs. Teves G.R. No. 153201. January 26, 2005 Panganiban, J. ISSUES: (1) May parties to a void contract be declared to be in pari delicto by the Court? (2) May parties to a void contract be entitled to damages? DOCTRINE: (1) Yes. Void are all contracts in which the cause, object or purpose is contrary to law, public order or public policy. It is deemed legally nonexistent and produces no legal effect. As a general rule, courts leave parties to such a contract as they are, because they are in pari delicto or equally at fault. Neither party is entitled to legal protection. To this rule, however, there are exceptions that permit the return of that which may have been given under a void contract. One of the exceptions is found in Article 1412 of the Civil Code. In this case, the defendants ought to have known that they cannot lease what does not belong to them for as a matter of fact, they themselves are still applying for a lease of the subject fishpond (which, under the 1987 Constitution, belongs to the State) under litigation from the government. On the other hand, Teves, being fully aware that defendants were not yet the owners, had assumed the risks and under the principle of “VOLENTI NON FIT INJURIA NEQUES DOLUS” - He who voluntarily assumes a risk, does not suffer damages thereby. As a consequence, when plaintiff leased the fishpond area from defendants- who were mere holders or possessors thereof, he took the risk that it may turn out later that his application for lease may not be approved. “IN PARI DELICTO NON ORITOR ACTIO” (Where both are at fault, no one can found a claim). (2) No. Article 1412 of the Civil Code merely allows innocent parties to recover what they have given without any obligation to comply with their prestation. No damages may be recovered on the basis of a void contract; being nonexistent, the agreement produces no juridical tie between the parties involved. Since there is no contract, the injured party may only recover through other sources of obligations such as a law or a quasicontract. Department of Health v. C.V. Canchela & Associates, Architects (CVCAA), in Association With MCS Engineers Co., and A.O. Mansueto IV – Electrical Engineering Services, and Luis Alina, Sheriff IV, RTC, Manila G.R. Nos. 151373-74. November 17, 2005 Carpio-Morales, J.: ISSUE: Is the Sole Arbitrator’s Decision may nullified on the light that it did not comply with requirements of the law? DOCTRINE: An inquiry into the fundamental issue of nullity of the Agreements is then warranted to determine if petitioner duly observed the constitutional prescription for the prevention and disallowance of irregular, unnecessary, excessive, extravagant, or unconscionable expenditures, or uses of public funds and properties.

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS The Agreements, it bears noting, expressly stated that payments arising therefrom shall be "subject to the usual accounting and auditing rules and regulations. Being government contracts, they are governed and regulated by special laws, failure to comply with which renders them void. The illegality of the subject Agreements proceeds, it bears emphasis, from an express declaration or prohibition by law, not from any intrinsic illegality. As such, the Agreements are not illegal per se and the party claiming thereunder may recover what had been paid or delivered. The Manila Banking Corporation v. Edmundo S. Silverio and The Court of Appeals, G.R. No. 132887. August 11, 2005 Chico-Nazario, J.: ISSUE: Is the contract void if badges of fraud and simulation permeate the whole transaction? DOCTRINE: Yes. An absolutely simulated contract, under Article 1346 of the Civil Code, is void. It takes place when the parties do not intend to be bound at all. 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. Thus, where a person, in order to place his property beyond the reach of his creditors, simulates a transfer of it to another, he does not really intend to divest himself of his title and control of the property; hence, the deed of transfer is but a sham. Lacking, therefore, in a fictitious and simulated contract is consent which is essential to a valid and enforceable contract. Such failure is a clear badge of simulation that renders the whole transaction void pursuant to Article 1409 of the Civil Code. When a contract is void, the right to set-up its nullity or non-existence is available to third persons whose interests are directly affected thereby. The remedy of accion pauliana is available when the subject matter is a conveyance, otherwise valid¸ undertaken in fraud of creditors. Such a contract is governed by the rules on rescission which prescribe, under Art. 1383 of the Civil Code, that such action can be instituted only when the party suffering damage has no other legal means to obtain reparation for the same. A void or inexistent contract is one which has no force and effect from the very beginning, as if it had never been entered into; it produces no effect whatsoever either against or in favor of anyone. Rescissible contracts, on the other hand, are not void ab initio, and the principle, “quod nullum est nullum producit effectum,” in void and inexistent contracts is inapplicable. Until set aside in an appropriate action, rescissible contracts are respected as being legally valid, binding and in force. Absolute simulation implies that there is no existing contract, no real act executed; while fraudulent alienation means that there is a true and existing transfer or contract. The former can be attacked by any creditor, including one subsequent to the contract; while the latter can be assailed only by the creditors before the alienation. In absolute simulation, the insolvency of the debtor making the simulated transfer is not a prerequisite to the nullity of the contract; while in fraudulent alienation, the action to rescind, or accion

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS pauliana, requires that the creditor cannot recover in any other manner what is due him. Finally, the action to declare a contract absolutely simulated does not prescribe (Articles 1409 and 1410); while the accion pauliana to rescind a fraudulent alienation prescribes in four years (Article 1389). La’o v. Republic of the Philippines and the Government Service Insurance System GR No. 166183. January 23, 2006 Corona, J.: ISSUE: Is a contract entered into in violation of the Anti-Graft and Corrupt Practices act void? DOCTRINE: Yes. Art. 1409 of the Civil Code provides, among others, that those expressly prohibited or declared void by law are inexistent and void from the beginning. The foregoing clearly shows that the second contract caused undue injury to the government, gave petitioner unwarranted benefits and was grossly disadvantageous to the government. The act of entering into the contract was a corrupt practice and was therefore unlawful. It was a contract expressly prohibited by RA 3019. As a result, it was null and void from the beginning under Art. 1409(7) of the Civil Code. Potenciano Ramirez v. Ma. Cecilia Ramirez G.R. No. 165088. March 17, 2006 Azcuna, J.: ISSUE: What is the difference between Article 1411 and Article 1412 with respect to the in pari delicto rule? DOCTRINE: Article 1412 of the Civil Code refers to a situation where the cause of the contract is unlawful or forbidden but does not constitute a violation of the criminal laws. Under Article 1411, it must be shown that the nullity of the contract proceeds from an illegal cause or object, and the act of executing said contract constitutes a criminal offense. Object and cause are two separate elements of a donation and the illegality of either element gives rise to the application of the doctrine of pari delicto. Object is the subject matter of the donation, while cause is the essential reason which moves the parties to enter into the transaction. Joaquin Villegas and Emma M. Villegas v. Rural Bank of Tanjay Inc. G.R. No. 161407; June 5, 2009 Nachura, J. ISSUE: Whether parties who are in pari delicto can obtain relief from the court. DOCTRINE: Even assuming both parties were guilty of the violation, it does not always follow that both parties, being in pari delicto, should be left where they are. We recognized as an exception a situation when courts must interfere and grant relief to one of the parties because public policy requires their intervention, even if it will result in a benefit derived by a plaintiff who is in equal guilt with defendant.

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS Land Bank of the Philippines v. Eduardo M. Cacayuran G.R. No. 191667. April 17, 2013 Perlas-Bernabe J. ISSUE: May a public plaza be the subject of a private redevelopment plan? DOCTRINE: Article 1409(1) of the Civil Code provides that a contract whose purpose is contrary to law, morals, good customs, public order or public policy is considered void and as such, creates no rights or obligations or any juridical relations. Consequently, given the unlawful purpose behind the Subject Loans which is to fund the commercialization of the Agoo Plaza pursuant to the Redevelopment Plan, they are considered as ultra vires in the primary sense thus, rendering them void and in effect, non-binding on the Municipality. Queensland-Tokyo Commodities, Inc. vs. George G.R. No. 172727; September 8, 2010 Nachura, J. ISSUE: Whether respondent may recover in a void contract. DOCTRINE: Yes, it is settled that a void contract is equivalent to nothing; it produces no civil effect. It does not create, modify, or extinguish a juridical relation. Parties to a void agreement cannot expect the aid of the law; the courts leave them as they are, because they are deemed in pari delicto or in equal fault. This rule, however, is not absolute. Article 1412 of the Civil Code provides an exception, and permits the return of that which may have been given under a void contract. The evidence on record established that petitioners indeed permitted an unlicensed trader and salesman, like Mendoza, to handle respondent’s account. On the other hand, the record is bereft of proof that respondent had knowledge that the person handling his account was not a licensed trader. Respondent can, therefore, recover the amount he had given under the contract. Anuel O. Fuentes and Leticia L. Fuentes vs. Conrado G. Roca G.R. No. 178902. April 21, 2010 Abad J. ISSUE: Whether the action for the declaration of nullity of the sale to the spouses already prescribed. DOCTRINE: NO. Under the provisions of the Civil Code governing contracts, a void or inexistent contract has no force and effect from the very beginning. And this rule applies to contracts that are declared void by positive provision of law, as in the case of a sale of conjugal property without the other spouse’s written consent. A void contract is equivalent to nothing and is absolutely wanting in civil effects. It cannot be validated either by ratification or prescription. But, although a void contract has no legal effects even if no action is taken to set it aside, when any of its terms have been performed, an action to declare its inexistence is necessary to allow restitution of what has been given under it. This action, according to Article 1410 of the Civil Code does not prescribe. Domingo Gonzalo vs. John Tarnate, Jr. G.R. No. 160600; January 15, 2014 Bersamin, J.

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CASE DOCTRINES OBLIGATIONS AND CONTRACTS ISSUE: Whether the respondent may recover even though both parties are in pari delicto. DOCTRINE: Yes. According to Article 1412 (1) of the Civil Code, the guilty parties to an illegal contract cannot recover from one another and are not entitled to an affirmative relief because they are in pari delicto or in equal fault. The doctrine of in pari delicto is a universal doctrine that holds that no action arises, in equity or at law, from an illegal contract; no suit can be maintained for its specific performance, or to recover the property agreed to be sold or delivered, or the money agreed to be paid, or damages for its violation; and where the parties are in pari delicto, no affirmative relief of any kind will be given to one against the other. Nonetheless, the application of the doctrine of in pari delicto is not always rigid. An accepted exception arises when its application contravenes wellestablished public policy. In this jurisdiction, public policy has been defined as "that principle of the law which holds that no subject or citizen can lawfully do that which has a tendency to be injurious to the public or against the public good."

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