HOW IS IT RELATED TO

CASES FACTS ISSUE RULING DOCTRINE OUR TOPIC OR WHY IS IT

IMPORTANT?

CONTRACTS: GENERAL PRINCIPLES

PL Uy Realty - On September 3, 1980, petitioner PLU, as vendor, and respondent ALS, as Issue: Whether or - The parties should still be bound by their agreements in the Doctrine: When the provisions of Article 1306. The contracting
v. ALS vendee, executed a Deed of Absolute Sale with Mortgage covering a registered parcel of not the parties contract being a valid one. The stipulated terms of their contract a contract are valid, the parties parties may establish such
Management, land located at F. Blumentritt Street, Mandaluyong, Metro Manila. should still be are valid provided that they are not contrary to law, morals, are bound by such terms under stipulations, clauses, terms
- The purchase price for the land was set at PhP 8,166,705 payable, as follows: bound by their good customs, public order, or public policy the principle that a contract is the and conditions as they may
GR 166642,
a. Upon execution of the Contract - P 500,000.00 agreements in - Art. 1306 of the Civil Code guarantees the freedom of parties law between the parties. deem convenient, provided
Oct. 24, 2012 b. Within 100 days thereafter, a down payment equivalent to 24% (P1,960,000.00) the contract being to stipulate the terms of their contract provided that they are not they are not contrary to law,
of the principal amount less the advance of P500,000.00 - 1,460,009.20 a valid one. contrary to law, morals, good customs, public order, or public morals, good customs, public
c. The balance of P6,206,695.80 together with interest of 12% per annum policy. order, or public policy.
(estimated interest included) on the diminishing balance shall be payable over a - Here, both parties knew for a fact that the property subject of
period of four (4) years on or before the month and day of the first down payment their contract was occupied by informal settlers, whose eviction
- The parties also stipulated on the eviction of informal settlers/ existing would entail court actions that in turn, would require some Topic: Principle of Autonomy – Art. 1306

occupants/squatters, the removal of which shall be for the sole expenses & responsibilities amount of time.
of the VENDOR & that the VENDEE is authorized to withhold payment of the 1st 24% - They also knew that the length of time that would take to
installment unless the above-undertaking is done and completed to the satisfaction of the conclude such court actions was not within their power to
VENDEE; determine.
- Thereafter, the parties entered into an Agreement dated December 23, 1980 that all - Despite such knowledge, both parties still agreed to the
accruals of interest as provided for in paragraph 2-c of the Deed of Sale with Mortgage will stipulation that the payment of the balance of the purchase price
be deferred and the subsequent payments of installments will correspondingly be would be deferred until the informal settlers are ejected.
extended to the date the occupants/squatters will vacate the subject property. - There was never any allegation that PLU was coerced into
- In the event the informal settlers do not leave the property, PLU would reimburse ALS signing the Deed of Sale with Mortgage or that its consent was
the following amounts: in any way vitiated.
a. All payments made, including the down payment - PLU was free to accept or decline such contracted provision.
b. All costs of temporary/permanent improvements introduced by the SECOND - Thus, PLU should not be allowed to renege on its agreement.
PARTY in the subject property
c. All damages suffered by the SECOND PARTY due to the refusal of the
occupants/squatters to vacate the premises.
On January 26, 1981, TCT No. 16721 was canceled and a new one, TCT No.
26048, issued in the name of ALS. Subsequently, the parties executed a Partial Release of
Mortgage dated April 3, 1981 attesting to the payment by ALS of the first installment
indicated in the underlying deed. The relevant portion of the Partial Release of Mortgage
reads:
1. Upon the execution of this document, the SECOND PARTY shall pay the net sum of
THREE HUNDRED NINETY FIVE THOUSAND PESOS (P395,000.00) after deducting
expenses, to complete the full payment of the first 24% installment.
2. The FIRST PARTY hereby executes a partial release of the mortgage to the extent of
TWENTY THOUSAND SQUARE METERS (20,000 sq.m.) in consideration of the advance
payment which would now amount to a total of P1,960,009.20, of a portion of the said
property indicated in the attached subdivision plan herewith x x x.
- ALS, however, failed to pay the 2nd payment despite demands.
- Thus, on August 25, 1982, PLU filed a Complaint against ALS for Foreclosure of
Mortgage and Annulment of Documents.
- In the complaint, PLU alleged having had entered into an oral agreement with ALS
whereby the latter "agreed to take over the task of ejecting the squatters/occupants from
the property covered by TCT No. 26048 issued in its name," adding that, through the
efforts of ALS, the property was already 90% clear of informal settlers.
Procedural:
- On May 9, 1986, the Makati RTC rendered a Decision ruling that the obligation of PLU to
clear the property of informal settlers was superseded by an oral agreement between the
parties whereby ALS assumed the responsibility of ejecting said informal settlers.
- The Makati RTC, however, declared that the removal of the informal settlers on the
property is still a subsisting and valid condition.
- The trial court further ruled that because informal settlers still occupied 28% of the
property, the condition, as to their eviction, had not yet been complied with. For this
reason, the Makati RTC found the obligation of ALS to pay the balance of the purchase
price has not yet fallen due and demandable; thus, it dismissed the case for being
 premature.
- ALS appealed the case to this Court primarily questioning the finding of the Makati RTC
that it had assumed the responsibility of ejecting the informal settlers on the property.
- The Court issued a Resolution affirming the rulings of the CA and the Makati RTC. The
resolution became final and executory on February 7, 1990.
- Sometime thereafter, PLU again filed a Complaint dated November 12, 1990 against
ALS for Judicial Foreclosure of Real Estate Mortgage under Rule 68, before the RTC.
- In the complaint, PLU claimed that ALS had not yet completed the agreed 1st payment
obligation despite numerous demands.
- In defense, ALS claims that the installment payments for the balance of the purchase
price of the property are not yet due and demandable, as the removal of the informal
settlers, a condition precedent for such payments to be demandable, is still to be
completed.
- ALS further avers that respondent Antonio Litonjua (Litonjua) cannot be made personally
liable under the Deed of Absolute Sale with Mortgage, not being a party thereto and as no
ground exists for piercing the veil of corporate fiction to make Litonjua, a corporate officer
of ALS, liable.
- By way of counterclaim, ALS alleged that because there were still informal settlers on the
property, PLU should be directed to reimburse ALS the payments that it already made, the
cost of improvements introduced by ALS on the property and for other damages.
- In a Decision dated November 17, 1993, the Pasig RTC dismissed the case for being
premature. Furthermore, the trial court, citing Art. 1167 of the Civil Code, ruled that the
foreclosure of the mortgage is not the proper remedy, and that PLU should have caused
the ejectment of the informal settlers. Also, the court found no reason to render Litonjua
personally liable for the transaction of ALS as there was no ground to pierce the veil of
corporate fiction.

GSIS v. CA,
228 SCRA
183 (1993)

Phil. Savings Respondent spouses Alfredo M. Castillo and Elizabeth Capati-Castillo were the registered No, the modifications in the interest rates are not valid. The unilateral determination and
Bank v. owners of a lot located in Tondo, Manila while respondent spouses Romeo B. Capati and Whether or not imposition of the increased rates
Castillo, GR Aquilina M. Lobo were the registered owners of another lot, also located in Tondo, Manila. the modifications Basic is the rule that there can be no contract in its true sense is violative of the principle of
in the interest without the mutual assent of the parties. If this consent is absent mutuality of contracts under
193178, May
On May 7, 1997, respondents obtained a loan, with real estate mortgage over the said rates are valid. on the part of one who contracts, the act has no more efficacy Article 1308 of the Civil Code,
30, 2011 properties, from petitioner as evidenced by a Promissory Note with a face value of than if it had been done under duress or by a person of which provides that "[t]he
P2,500,000.00. unsound mind. contract must bind both
contracting parties; its validity or
The rate of interest and/or bank charges herein stipulated, during the terms of this Similarly, contract changes must be made with the consent of compliance cannot be left to the
promissory note, its extensions, renewals or other modifications, may be increased, the contracting parties. The minds of all the parties must meet will of one of them."
decreased or otherwise changed from time to time within the rate of interest and charges as to the proposed modification, especially when it affects an
allowed under present or future law(s) and/or government regulation(s) as the PHILIPPINE important aspect of the agreement. A perusal of the Promissory
SAVINGS BANK may prescribe for its debtors. Note will readily show that the
In the case of loan contracts, the interest rate is undeniably increase or decrease of interest
From the release of the loan in May 1997 until December 1999, petitioner had increased always a vital component, for it can make or break a capital rates hinges solely on the
and decreased the rate of interest, the highest of which was 29% and the lowest was venture. Thus, any change must be mutually agreed upon, discretion of petitioner. It does
15.5% per annum, per the Promissory Note. otherwise, it produces no binding effect. not require the conformity of the
maker before a new interest rate
Respondents were notified in writing of these changes in the interest rate. Respondents’ assent to the modifications in the interest rates could be enforced. Any contract
cannot be implied from their lack of response to the memos sent which appears to be heavily
They neither gave their confirmation thereto nor did they formally question the changes. by petitioner, informing them of the amendments. weighed in favor of one of the
parties so as to lead to an
However, respondent Alfredo Castillo sent several letters to petitioner requesting for the The said memos were in the nature of a proposal to change the unconscionable result, thus
reduction of the interest rates. Petitioner denied these requests. contract with respect to one of its significant components, i.e., partaking of the nature of a
the interest rates. contract of adhesion, is void. Any
stipulation regarding the validity
As we have held, no one receiving a proposal to change a or compliance of the contract left
contract is obliged to answer the proposal. Therefore, solely to the will of one of the
respondents could neither be faulted, nor could they be deemed parties is likewise invalid.
to have assented to the modified interest rates, for not replying
to the said memos from petitioner.
 We likewise disagree with petitioner’s assertion that
respondents recognized the legality of the imposed interest
rates through the letters requesting for the reduction of the
rates.

The request for reduction of the interest does not translate to

consent thereto. To be sure, a cursory reading of the said letters
would clearly show that Alfredo Castillo was, in fact, questioning
the propriety of the interest rates imposed on their loan.

DISPOSITIVE:

WHEREFORE, the petition is PARTIALLY GRANTED. The

assailed Decision dated August 27, 2009 and the Resolution
dated August 4, 2010 of the Court of Appeals in CA-G.R. CV
No. 86445 are AFFIRMED WITH MODIFICATIONS, such that
the award for moral damages, exemplary damages, attorney’s
fees, and litigation expenses is DELETED, and the order of
refund in favor of respondents of interest payments made in
excess of 17% per annum shall bear interest of 12% per annum
from the time of the filing of the complaint until its full
satisfaction.

SO ORDERED.

Juico v. China ● Spouses Ignacio F. Juico and Alice P. Juico (petitioners) obtained a loan from Whether the The escalation clause does not necessarily violate the mutuality Article 1308. The contract must
Banking China Banking Corporation (respondent), through Promissory Notes. interest rates of contracts, but it is void in this instance. The principle of bind both contracting parties; its
Corporation, ● The loan was secured by a Real Estate Mortgage (REM) over petitioners’ property were unilaterally mutuality of contracts is expressed in Article 1308 of the Civil validity or compliance cannot be
● Petitioners failed to pay the monthly amortizations, respondent demanded the full imposed by the Code, which provides: left to the will of one of them.
GR 187678,
payment of the outstanding balance bank, and thus Article 1956 of the Civil Code
April 10, 2013 ● The amount due on the two promissory notes totaled ₱19,201,776.63 violate the Article 1308. The contract must bind both contracting parties; its likewise ordains that "no interest
● The mortgaged property was sold at public auction, with respondent as highest principle of validity or compliance cannot be left to the will of one of them. shall be due unless it has been
bidder mutuality of Article 1956 of the Civil Code likewise ordains that "no interest expressly stipulated in writing."
● Petitioners received a demand letter from respondent for the payment of contracts. shall be due unless it has been expressly stipulated in writing."
₱8,901,776.63, the deficit amount after applying the proceeds of the foreclosure The binding effect of any
sale to the mortgage debt. The binding effect of any agreement between parties to a agreement between parties to a
● Petitioners did not give the amount so Respondent filed a collection suit contract is premised on two settled principles: (1) that any contract is premised on two
● Ms. Yu, loan assistant, was the one who handled the account of petitioners, and obligation arising from contract has the force of law between the settled principles: (1) that any
she claims that parties; and (2) that there must be mutuality between the obligation arising from contract
○ Petitioner was charged with interest rates which changes every month parties based on their essential equality. Any contract which has the force of law between the
based on the prevailing market rate appears to be heavily weighed in favor of one of the parties so parties; and (2) that there must
○ She would notify them of the prevailing rate by calling monthly before their as to lead to an unconscionable result is void. Any stipulation be mutuality between the parties
account becomes past due. regarding the validity or compliance of the contract which is left based on their essential equality.
○ petitioners signed a promissory note indicating that they agreed to pay solely to the will of one of the parties, is likewise, invalid. Any contract which appears to be
interest at the prevailing rate, thus the increase of the interest rate heavily weighed in favor of one of
● Petitioner Ignacio F. Juico testified that he was required to sign a blank promissory Escalation clauses refer to stipulations allowing an the parties so as to lead to an
note and was informed that the interest rate on the loan will be based on increase in the interest rate agreed upon by the contracting unconscionable result is void.
prevailing market rates. parties. There is nothing inherently wrong with escalation Any stipulation regarding the
○ Respondent informs him by telephone of the prevailing interest rate. clauses which are valid stipulations in commercial contracts to validity or compliance of the
● Respondent incurred delay in the pay of the amortizations due to the financial maintain fiscal stability and to retain the value of money in long contract which is left solely to the
crisis. Eventually, his property was foreclosed and sold at public auction. term contracts. Hence, such stipulations are not void per se. will of one of the parties, is
● Petitioner have read the promissory notes and that he is aware of his obligation likewise, invalid.
under them before he signed the same. But an escalation clause "which grants the creditor an
● RTC ruled in favor of respondent. unbridled right to adjust the interest independently and
● The CA affirmed the trial court’s decision upwardly, completely depriving the debtor of the right to
● Hence, the petitioner before the SC assent to an important modification in the agreement" is
● Petitioner now alleges that the escalation clause in the promissory notes void. A stipulation of such nature violates the principle of
does not give respondent the unbridled authority to increase the interest mutuality of contracts. Thus, this Court has previously nullified
rate unilaterally. Any change must be mutually agreed upon. the unilateral determination and imposition by creditor banks of
increases in the rate of interest provided in loan contracts.
 In Solidbank Corporation v. Permanent Homes, Incorporated,
there was a valid escalation clause which required a written
notice to and conformity by the borrower to the increased
interest rate.

Still, 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
advising petitioners of the prevailing interest rates is
insufficient. A detailed billing statement based on the new
imposed interest with corresponding computation of the
total debt should have been provided by the respondent to
enable petitioners to make an informed decision. An
appropriate form must also be signed by the petitioners to
indicate their conformity to the new rates. Compliance with
these requisites is essential to preserve the mutuality of
contracts. For indeed, one-sided impositions do not have
the force of law between the parties, because such
impositions are not based on the parties’ essential equality.

Modifications in the rate of interest for loans pursuant to an

escalation clause must be the result of an agreement
between the parties. Unless such important change in the
contract terms is mutually agreed upon, it has no binding effect.
In the absence of consent on the part of the petitioners to
the modifications in the interest rates, the adjusted rates
cannot bind them. Hence, we consider as invalid the interest
rates in excess of 15%, the rate charged for the first year.

Sps. Silos v. - Spouses Eduardo and Lydia Silos have been in the business for about two decades of Issue: May the No. Doctrine: Any modification in the Article 1308. The contract
PNB GR contract must be made with the
operating a department store and buying and selling of ready-to-wear apparel. bank, on its own, - Any modification in the contract, such as the interest rates, must bind both contracting
181045 July 2, consent of the contracting
- Respondent PNB is a banking corporation organized and existing under Philippine laws. modify the must be made with the consent of the contracting parties. parties. parties; its validity or
2014
- Spouses Silos secured a revolving credit line with Philippine National Bank (PNB) interest rate in a - The minds of all the parties must meet as to the proposed compliance cannot be left to
through a real estate mortgage as a security. - After two years, their credit line increased. loan agreement modification, especially when it affects an important aspect of the will of one of them.
Spouses Silos then signed a Credit Agreement which was also amended two years later, without violating the agreement.
and several Promissory Notes (PN) as regards their Credit Agreements with PNB. the mutuality of - In the case of loan agreements, the rate of interest is a
- The said loan was initially subjected to a19.5% interest rate per annum. contracts? principal condition, if not the most important component.
- In the Credit Agreements, Spouses Silos bound themselves to the power of PNB to - Loan and credit arrangements may be made enticing by, or
modify the interest rate depending on whatever policy that PNB may adopt in the future, “sweetened” with, offers of low initial interest rates, but actually
without the need of notice upon them. Topic: Mutuality – Arts. accompanied by provisions written in fine print that allow
1308-1310
- Thus, the said interest rates played from 16% to as high as 32% per annum. lenders to later on increase or decrease interest rates
- Spouses Silos acceded to the policy by pre-signing a total of twenty-six (26) Promissory unilaterally, without the consent of the borrower, and depending
Notes (PNs) leaving the individual applicable interest rates at hand blank since it would be on complex and subjective factors.
subject to modification by PNB. - Because they have been lured into these contracts by initially
- Spouses Silos regularly renewed and made good on their promissory notes, religiously low interest rates, borrowers get caught and struck in the web of
paid the interests without objection or fail. subsequent steep rates and penalties, surcharges and the like.
- However, during the 1997 Asian Financial Crisis, Spouses Silos faltered when the - Being ordinary individuals or entities, they naturally dread legal
interest rates soared. complications and cannot afford court litigation; they succumb to
th
- Spouses Silos’ 26 Promissory Note became past due, and despite repeated demands whatever charges the lenders impose.
 by PNB, they failed to make good on the note. - At the very least, borrowers should be charged rightly; but then
- Thus, PNB foreclosed and auctioned the involved security for the mortgage. again this is not possible in a one-sided credit system where the
- Spouses Silos instituted an action to annul the foreclosure sale on the ground that the temptation to abuse is strong and the willingness to rectify is
succeeding interest rates used in their loan agreements was left to the sole will of PNB, made weak by the eternal desire for profit.
the same fixed by the latter without their prior consent and thus, void.
- The Regional Trial Court (RTC) ruled that such stipulation authorizing both the increase
and decrease of interest rates as may be applicable is valid.
- The Court of Appeals (CA) affirmed the RTC decision.

UCPB v. UCPB granted the spouses Beluso a Promissory Notes Line under Credit Agreement Whether the No. As stated in Art. 1308 of the Civil Code. The promissory notes, the copies SUMMARY:
Beluso, 530 whereby the latter could avail from the formercredit of up to a maximum amount of P1.2 contract between of which were presented to the In April 1997, spouses Beluso
SCRA 567 Million pesos for a term ending on 30 April 1997. The spouses Beluso constituted, other the spouses Art. 1308. The contract must bind both contracting parties; its spouses Beluso after execution, constituted other than
than their promissory notes, a real estate mortgage over parcels of land in Roxas City, Beluso and validity or compliance cannot be left to the will of one of them. are not sufficient notification from promissory notes, a real
covered by Transfer Certificates of Title No. T-31539 and T-27828, as additional security UPCB is valid. UCPB. Asearlier discussed, estate mortgage over parcels
for the obligation. TheCredit Agreement was subsequently amended to increase The provision stating that the interest shall be at the “rate the interest rate provision of land. 3 of their promissory
the amount of the Promissory Notes Line to a maximum of P2.35. Whether UCPB is indicative of DBD retail rate or as determined by the Branch therein does not sufficiently notes were renewed several
authorized to Head” is indeed dependent solely on the will of petitioner UCPB. indicated with particularity the times. Subsequently, spouses
On 30 April 1997, the payment of the principal and interest of the latter two promissory unilaterally fix the interest rate to be applied to the failed to deliver payment upon
notes were debited from the spouses Beluso Account with UCPB; yet, a consolidated loan interest rates Under such provision, petitioner UCPB has two choices on what loan covered by said promissory UPCB’s demand. As a result,
for P1.3 Million wasagain released to the spouses Beluso under one promissory note with the interest rate shall be: notes which is required in TRuth their mortgage was
a due date of 28 February 1998. To completely avail themselves of the P2.35 (1) a rate indicative of the DBD retail rate; or in Lending Act foreclosed. Spouses filed a
Million credit line extended to them byUCPB, the spouses Beluso executed two more (2) a rate as determined by the Branch Head. Petition for Annulment,
promissory notes for a total of P350,000.00. However, the spouses Beluso alleged that the TRUTH LENDING ACT Accounting and Damages
amounts covered by these last two promissory notes were never released or credited to As UCPB is given this choice, the rate should be categorically - Section 2. Declaration of against UCPB. Trial court
their account and, thus, claimed that the principal indebtedness was only P2 Million determinable in both choices. If either of these two choices Policy. – It is hereby ruled in favor of the spouses.
presents an opportunity for UCPB to fix the rate at will, the bank declared to be the policy CA affirmed the same
The spouses Beluso, however, failed to make any payment of the foregoing amounts can easily choose such an option, thus making the entire of the State to protect its decision.
interest rate provision violative of the principle of mutuality of citizens from lack of
On 2 September 1998, UCPB demanded that the spouses Beluso Pay their total obligation contracts. awareness of the true
of P2,932,543.00 plus 25% attorney’s fees,but the spouses Beluso failed to comply cost of credit to the user
therewith. In addition, the Separability Clause cannot save either of the by assuring a full
two options of UCPB as to the interest to be imposed, as both disclosure of such cost
On 28December 1998, UCPB foreclosed the properties mortgaged by the spouses Beluso options violate the principle of mutuality of contracts.While the with a view of preventing
to secure their credit line, which, by that time,already ballooned to P3,784,603.00. spouses agreed to renew the credit line, the offending the uninformed use of
provisions are found in the promissory notes themselves and credit to the detriment of
On 9 February 1999, the spouses Beluso filed a Petition for Annulment, not in the credit line. the national economy
Accounting and Damages against UCPB with the RTCof Makati City.

RTC declared in its judgment that:

a. the interest rate used by UCPB void
b. the foreclosure and Sheriff’s Certificate of Sale void
c. UCPB is ordered to return to [the spouses Beluso] the properties
subject to the foreclosured.
d. UCPB to pay [the spouses Beluso] the amount of P50,000.00 byway of attorney’s
fees.
e. UCPB to pay the costs of the suit.
f. Spouses Beluso are hereby ordered to pay UCPB the sum of P1,560,308.00

CA affirmed Trial court's decision subject to the modification that defendant-appellant

UCPB is not liable for attorney's fees or the costs of suit.

SHORTER VERSION:
The UCPB granted the spouses Beluso a Promissory Note Line under a Credit
Agreement. The spouses Beluso constituted other than their promissory notes, a real
estate mortgage over parcels of land as additional security for the obligation. UCPB
unilaterally applied interest rates on the different promissory notes ranging from 18% to
34%:
 FOR VALUE RECEIVED, I, and/or We, on or before due date, SPS.
SAMUEL AND ODETTE BELUSO (BORROWER), jointly and severally
promise to pay to UNITED COCONUT PLANTERS BANK (LENDER) or
order at UCPB Bldg., Makati Avenue, Makati City, Philippines, the sum of
______________ PESOS, (P_____), Philippine Currency, with interest
thereon at the rate indicative of DBD retail rate or as determined by the
Branch Head.

The spouses, however, failed to pay their obligations with the bank. Due to this, the bank
foreclosed the property which was under mortgage. Spouses Beluso filed a petition for the
annulment, accounting and damages against UCPB.

On July 30, 1914, Attorney Leocadio Joaquin,on his own behalf, filed a written complaint in Whether or not The Court held that Leocadio Joaquin is liable for the two An alleged defect in a contract
the Court of First Instance of Manila against the defendant, O. Mitsumine, alleging that on Leocadio Joaquin promissory notes and a mortgage deed executed in favor of O. perfectly valid and binding on its
July 1,1914, the plaintiff executed an instrument whereby he gave a chattel mortgage on is liable for the Mitsumine as the record shows it to have been duly proven that face, must be conclusively
certain apparatus for the manufacture of aerated water as security for the payment in two two promissory on April 15, 1914, he signed and forwarded to the commercial proved. The validity and
installments of the sum of P525; that the said mortgage deed was entirely null and void for notes and a establishment of the defendant,Mitsumine, named the Nippon fulfillment of contracts can not be
the reason that it had been executed by the plaintiff by mistake, inasmuch as in May, mortgage deed Bazar, which was an order to procure a complete machine for left to the will of one of the
1914, he had instructed the defendant to acquire the said machine at the request of the executed in favor the manufacture of aerated waters parties.
plaintiff's client,Macario Vito, and that the latter was responsible for the payment of the of O. Mitsumine
said P525. for the purchase The foregoing facts lead to the inevitable conclusion that the
of a machine for only person obliged to pay to the defendant the price of the
On August 20, 1914, the defendant answered the above complaint, denying all the the manufacture machine imported from Japan is the plaintiff, for the reason that
allegations therein contained except those that were expressly admitted in his answer and of Aerated Water. it was he who ordered and contracted for it.
that after the defendant had ordered the machine from Japan and delivered it to the
plaintiff to his entire satisfaction, plaintiff paid defendant P200 on account and agreed to If, after a perfect and binding contract has been executed
pay the balance of P525 in two installments by signing two promissory notes and a between the parties it occurs to one of them to allege some
mortgage deed. defect therein as a reason for annulling it, the alleged defect
must be conclusively proven, since the validity and fulfillment of
The court rendered the judgment absolving the defendant O. Mitsumine from the contracts can not be left to the will of one of the contracting
Joaquin v. complaint,decreeing that the mortgage executed by the plaintiff Leocadio Joaquin to the parties.
Mitsumine, 34 defendant was valid, and ordering the plaintiff to pay to the defendant the sum of P525,
Phil. 858 plus P105 for the expenses of collection.

Garcia v. - Petitioners (spouses Maria A. Garcia and Marcelino A. Timbang) instituted the WON paragraph 1. NO. SC upholds the validity of contracts with resolutory C. Characteristics
Legarda, 21 present petition against the respondent corporation (Rita Legarda, Inc) to have certain 6 of the subject conditions 2. Mutuality – Arts. 1308-1310
SCRA 555 (3) contracts numbered 322, 324, and 965 declared as existing and subsisting; and contracts violate (see also Art. 1473)
to compel the respondent to accept payment tendered by them; and to recover moral A. 1308 NCC PAR. 6 OF THE SUBJECT CONTRACT:
and exemplary damages and attorney's fees in the amounts of P6,000.00 and P1,500.00 - NO Par. 6 of the contract in question merely gives the vendor ART. 1308 NEW CIVIL CODE
respectively. "the right to declare this contract cancelled and of no CONSTRUED. — Art. 1308 is a
- The three causes of action alleged in their complaint involved the three parcels of WON by having effect" upon fulfillment of the conditions herein set forth. It virtual reproduction of Art. 1256
land subject matter of the contracts aforesaid. Each had an area of about 150 square previously does not leave the validity or compliance of the contract of the old Civil Code, so phrased
meters, and formed part of the Rita Legarda Estate situated in Manila, and subdivided accepted entirely "to the will of one of the contracting parties'' as to emphasize that the contract
into lots sold on installment basis. payments of must bind both parties, based on
- Respondent averred that initially the petitioners paid the monthly installments, the 53rd, overdue The stipulation or agreement simply says that in case of the principles
43rd and 53rd installments, respectively, corresponding to the installments for the month installments the default in the payment of installments by the vendee, he xxx
of July, 1951; BUT as of June 11, 1952, the petitioners had failed to pay the stipulated respondent had shall have (1) "a month of grace," and that (1) that obligations arising from
monthly installments for Contracts Nos. 322 and 324 corresponding to the period from waived its right to (2) should said month of grace expire without the vendee contracts have the force of law
August, 1951 through June, 1952, and in the case of Contract No. 965, from August, 1951 declare the paying his arrears, he shall have another "period of 90 between the contracting
through May, 1952; that despite several demands for payment of arrears made contracts days" to pay "all the amounts he should have paid" etc., parties;
between December, 1951 and June, 1952 by the respondent, the petitioners had failed cancelled and of then the vendor "has the right to declare this contract (2) that there must be mutuality
to pay the amounts due; and that upon the expiration of the 90- day grace period on no effect. cancelled and of no effect." between the parties based on
June 11, 1952 stipulated in the sixth paragraph of the contracts, the respondent had - NO their essential equality, to
cancelled them (contracts). The answer also prayed for an award of damages and Obviously, all that said party had to do to prevent the other which it is repugnant (offensive)
attorney's fees in the sum of P2,000.00. from exercising the power to cancel the contract was for to have one party bound by the
- Petitioners filed a reply denying that they were in arrears as to their obligations him to comply with his part of the contract. And in this case, contract leaving the other free
under the three contracts and, further averred as an affirmative defense that the after the maturity of any particular installment and its non- therefrom. Its ultimate purpose
cancellation by respondent thereof was unlawful and arbitrary. payment, the contract gave him not only a month grace period, is to render void a contract
- Trial court ruled that the 3 contracts (nos. 322, 324 and 965) as existing and but also an additional period of 90 days. containing a condition which
subsisting: ordering the respondent to accept the payments tendered by the petitioners makes its fulfillment
and to pay attorney's fees in the sum of P1,500.00, but denied the award of moral and JURISPRUDENCE: dependent exclusively upon
exemplary damages. In Taylor vs. Ky Tieng Piao, SC upheld that a contract the uncontrolled will of one of
- The respondent appealed to the Court of Appeals from whose decision - reversing expressly giving to one part, the right to cancel the same if a the contracting parties.
that of the lower court - the instant appeal was taken by the petitioners resolutory condition therein agreed upon — similar to the one
under consideration — is not fulfilled, is valid, the reason being xxx
that when the contract is thus cancelled, the agreement of VALID CONTRACTS TO SELL
the parties is in reality being fulfilled. Indeed, the power thus OF RESIDENTIAL LOTS WITH
granted can not be said to be immoral, much less unlawful, for it RESOLUTORY CONDITION. —
could be exercised - not arbitrarily - but only upon the other Where in a contract to sell
contracting party committing the breach of contract of non- subdivided lots in monthly
payment of the installments agreed upon. installments there has been a
stipulation that in case of
Article 1308 of the New Civil Code reads as follows: vendee's default in the payment
"The contract must bind both contracting parties; its validity or of installments he should have a
compliance cannot be left to the will of one of them" month of grace and an additional
period of ninety days to pay all
xxx the amounts due otherwise the
vendor should have the right
2. NO. The contracts under consideration are not of absolute to declare the contract
sale but mere contracts to sell on installment. They give the cancelled and of no effect,
respondent (vendor) the right to declare the contracts such stipulation is valid and
cancelled and of no effect — as in fact it did in the present not violative of Art. 1308 of the
case— upon fulfillment of certain conditions in the new Civil Code, considering that
contract. All said conditions so the record shows have been the validity or compliance thereof
fulfilled. Consequently, the respondent's (vendor) right to is not entirely left to the will of
cancel the contracts can not be doubted. one of the contracting parties, but
it merely gives the vendor the
Prior to the cancellation it had in fact accepted payment of right to declare such contract
installments in arrears, but another act of forbearance on its cancelled and of no effect.
part to give the petitioners an additional opportunity to Indeed, the power thus granted
keep the contracts alive. Rather than give rise to the cannot be said to be immoral,
presumption that by such an act of humanity it waived its right to much less unlawful, for it could
do so, considering that even after such an act of not be arbitrarily exercised
accommodation beneficial to the petitioners, the latter without the other party
subsequently defaulted again and again in the fulfillment of committing the breach of
their obligation. contract for nonpayment of the
installments agreed upon.
Painful for the petitioners to lose not only the right they had Obviously, all that said party had
acquired under the contracts but also whatever amounts they to do to prevent the other from
had already paid thereunder, but such consequences had exercising the power to cancel
been foreseen by the contracting parties. To avoid them, all was for him to comply with his
that petitioners had to do as already said heretofore - was part of the contract.
to comply with their part of the bargain. Having failed to do xxx
so, they really have no valid reason to complain. That one
contracting party appears to have made a poor bargain is PAYMENT; ACCEPTANCE OF
no reason for setting aside the agreement. (Fernandez vs. PAYMENT IN ARREARS
Manila Railroad) CREATES NO PRESUMPTION.
— Where prior to the cancellation
DISPOSITION: of the contract to sell the vendor
Wherefore, the appealed judgment being in accordance with had accepted payment of
law and the facts of the case, the same is hereby affirmed. installments in arrears as an act
of forbearance so as to give the
vendee an additional opportunity
to keep the contract alive, such
acceptance did not give rise to
the presumption that by such
act of humanity the vendor had
waived his right to cancel the
contract; on the contrary, it
strengthened his right to do
so, considering that even after
such beneficial act of
accommodation still the vendee
 subsequently defaulted again
and again in the payment of
the installments.

- In March, 1914, the steamship Alicante, belonging to the Compañia Trasatlantica de Issues: Can the No. Doctrine: Article 1311. Contracts take
Barcelona, arrived at Manila with two locomotive boilers aboard, the property of The Atlantic Company General rule: an implied contract effect only between the
Manila Railroad Company. be held directly - The Compañia Trasatlantica de Barcelona is liable to pay the never arises where an express parties, their assigns and
liable to the Manila Railroad Company. contract has been made. The two heirs, except in case where
- The equipment of the ship for discharging heavy cargo was not sufficiently strong to Railroad liabilities cannot coexist. the rights and obligations
handle these boilers, and it was therefore necessary for the Steamship Company to - The Compañia Trasatlantica de Barcelona is entitled to
Company? recover from the Atlantic Gulf & Pacific Company. arising from the contract are
procure assistance in the port of Manila. not transmissible by their
- The Atlantic Company was accordingly employed by the Steamship Company, as having - The conclusion of the Supreme Court is there is lack of privity nature, or by stipulation or by
Topic: Contracts take of contract between the Atlantic Company and the Railroad provision of law. The heir is
probably the best equipment for this purpose of any contracting company in the city. effect only between
Company. not liable beyond the value of
the parties. Art. 1311
- Upon the arrival of the Alicante, the Atlantic Company sent out its crane in charge of one the property he received from
Leyden. - The Railroad Company does not have a right of action to the decedent.
recover damages from the Atlantic Company for the wrongful
- The boiler fell. act which constituted the violation of said contract. If a contract should contain
some stipulation in favor of a
- It was found to be so badly damaged that it had to be reshipped to England where it was - The rights of the plaintiff the Railroad Company can only be third person, he may demand
rebuilt, and afterwards vas returned to Manila. made effective through the Compañia Transatlantica de its fulfillment provided he
Barcelona with whom the contract of affreightment was made. communicated his acceptance
- The Railroad Company's damage by reason of the cost of repairs, expenses, and loss of
to the obligor before its
the use of the boiler proved to be P22,343.29 - Such damages would have been demandable under article
revocation. A mere incidental
1103 of the Civil Code and the action would not have been
- To recover these damages the present action was instituted by the Railroad Company benefit or interest of a person
subject to the qualification expressed in the last paragraph of
against the Steamship Company. is not sufficient. The
article 1903.
contracting parties must have
- The Steamship Company caused the Atlantic Company to be brought in as a - The two liabilities cannot in our opinion coexist. clearly and deliberately
codefendant, and insisted that whatever liability existed should be fixed upon the Atlantic conferred a favor upon a third
Company as an independent contractor who had underaken to discharge the boilers and - It is a general rule that an implied contract never arises where person.
had become responsible or such damage as had been done. an express contract has been made.
Procedural: - The judgment entered in the Court of First Instance is reversed
not only with respect to the judgment entered in favor of the
- Court of First Instance: Ruled in favor of the plaintiff the Manila Railroad Co. against the plaintiff directly against the Atlantic Company but also with
Atlantic Company, but absolved the Steamship Company from the complaint. respect to the absolution of the Steamship Company and the
- The lower court found the mishap was undoubtedly due as to the negligence of one further failure of the court to enter judgment in favor of the latter
Leyden, the foreman in charge; and we may add that the evidence tends to show that his against the Atlantic Company.
negligence was of a type which may without exaggeration be denominated gross. Article 1311. Contracts take effect only between the parties,
- The foreman was therefore guilty of negligence in attempting to hoist the boiler the their assigns and heirs, except in case where the rights and
second time under the conditions that had thus developed. obligations arising from the contract are not transmissible by
their nature, or by stipulation or by provision of law. The heir is
- It should be noted that the operation was at all its stages entirely under Leyden's control; not liable beyond the value of the property he received from the
and, although in the first lift he utilized the ship's tackle to aid in hoisting the boiler, decedent.
everything was done under his immediate supervision.
If a contract should contain some stipulation in favor of a third
Manila person, he may demand its fulfillment provided he
Railroad Co. v. communicated his acceptance to the obligor before its
La Compañia revocation. A mere incidental benefit or interest of a person is
Transatlantica, not sufficient. The contracting parties must have clearly and
deliberately conferred a favor upon a third person.
83 Phil. 875
(1918)

DKC Holdings ARTICLE 1311:

Corp. v. CA, The subject of the controversy is a 14,021 square meter parcel of land located in WON the No, Victor is still bound by the Contract of lease and is required
329 SCRA Valenzuela, which was originally owned by private respondent Victor U. Bartolome’s Contract of Lease to fulfill the obligation of the said contract. Contracts take effect only
deceased mother, Encarnacion Bartolome, under TCT No. B-37615 of the Register of with Option to between the parties, their
666 (2000)
Deeds of Metro Manila, District III. This lot was in front of one of the textile plants o f Buy entered into The SC argued that under both Article 1311 of the Civil Code assigns and heirs, except in
petitioner and, as such, was seen by the latter as a potential warehouse site. On March by Encarnacion and jurisprudence, the legal heir, Victor, is bound by the subject case where the rights and
16, 1988, petitioner entered into a Contract of Lease with Option to Buy with Encarnacion Bartoleme with Contract of Lease with Option to Buy executed by his obligations arising from the
Bartolome, whereby petitioner was given the option to lease or lease with purchase the DKC Holdings predecessor-in-interest, Encarnacion. It is futile for Victor to contract are not transmissible
subject land, which option must be exercised within a period of two years counted from the was terminated insist that he is not a party to the contract because of the clear by their nature, or by
 upon her Death stipulation or by provision of
signing of the Contract. and DOES NOT provision of Article1311 of the Civil Code. Indeed, being an heir law. The heir is not liable
bind her sole heir, of Encarnacion, there is privity of interest between him and his beyond the value of the
In turn, petitioner undertook to pay P3,000 a month as consideration for the reservation of VICTOR, even deceased mother. property he received from the
its option. Within the two-year period, petitioner shall serve formal written notice upon the after her demise? decedent.
lessor Encarnacion Bartolome of its desire to exercise its option. (WON the He only succeeds to what rights his mother had and what
Contract of is valid and binding against her is also valid and binding as EXCEPTION:
The contract also provided that in case petitioner chose to lease the property, it may take Lease bind against him.
actual possession of the premises. In such an event, the lease shall be for a period of six Victor to DKC When the rights and
years, renewable for another six years, and the monthly rental fee shall be P15,000 for the Holdings even if The general rule is that heirs are bound by contracts obligations arising therefrom
first six years and P18,000 for the next six years, in case of renewal. his Mother entered into by their predecessors-in-interest except when are not transmissible by
Died?) the rights and obligations arising therefrom are not
Petitioner regularly paid the monthly P3,000 provided for by the Contract to Encarnacion transmissible by (1) their nature, (2) stipulation or (3) provision (1) their nature,
until her death in January 1990. Thereafter, petitioner coursed its payment to private of law. (2) stipulation or (3) provision
respondent Victor Bartolome, being the sole heir of Encarnacion. Victor, however, refused of law.
to accept these payments. Meanwhile, on January10, 1990,

Victor executed an Affidavit of Self-Adjudication over all the properties of

Encarnacion, Including the subject lot.

Accordingly, respondent Register of Deeds cancelled TCT No. B-37615 and issued
Transfer Certificate of Title No. V-14249 in the name of Victor Bartolome.

On March 14, 1990, petitioner served upon Victor, via registered mail, notice that it was
exercising its option to lease the property, tendering the amount of P15,000 as rent for the
month of March.

Again, Victor refused to accept the tendered rental fee and to surrender possession
of the property to petitioner.

On April 23, 1990, petitioner filed a complaint for specific performance and damages
against Victor and the Register of Deeds.

Petitioner prayed for the surrender and delivery of possession of the subject land in
accordance with the Contract terms; the surrender of title for registration and annotation
thereon of the Contract. RTC dismissed the complaint.

Ureta v. Ureta - In his lifetime, Alfonso Ureta begot 14 children, namely, Policronio, Liberato, Narciso, Yes. SC further explains: NOT applicable in this case:
GR 165748 Prudencia, Vicente, Francisco, Inocensio, Roque, Adela, Wenefreda, Merlinda, Benedicto, Topic: Relativity. -The Heirs of Alfonso are parties, heirs, or successors-in- - The heirs of Policronio are
Contracts take effect
and 165930 Jorge, and Andres.
only between the
interest under the contemplation of law and are clothed with the wrong in arguing that under Article 1311. Contracts take
- Petitioners, the children of Policronio (Heirs of Policronio), are opposed to the rest of parties, their assigns personality to question the Deed of Sale. Article 1311 of the Civil Code, effect only between the
Sept. 14, 2011
Alfonso’s children and their descendants. and heirs. Art. 1311. - The right to set up the nullity of a void or non-existent contract contracts take effect only parties, their assigns and
- Alfonso was financially well-off during his lifetime. He owned several fishpens, a is not limited to the parties, as in the case of annullable or between the parties, their heirs, except in case where
fishpond, a sari-sari store, a passenger jeep, and was engaged in the buying and selling of voidable contracts; it is extended to third persons who are assigns and heirs. Thus, the
copra.
Issue: directly affected by the contract. genuine character of a contract
the rights and obligations
arising from the contract are
- Francisco, who was then a municipal judge, suggested that in order to reduce the Whether or - The SC also held that where a contract is absolutely which personally binds the not transmissible by their
inheritance taxes, their father should make it appear that he had sold some of his lands to simulated, even third persons who may be prejudiced thereby parties cannot be put in issue by
not the heirs nature, or by stipulation or
his children. (simulated contract) may set up its inexistence. a person who is not a party
by provision of law. The heir
- Accordingly, Alfonso executed four (4) Deeds of Sale covering several parcels of land in of Alfonso - The Heirs of Alfonso are the children of Alfonso, with his thereto.
is not liable beyond the
favor of Policronio, Liberato, Prudencia, and his common-law wife, Valeriana Dela Cruz. have deceased children represented by their children (Alfonso's - They (heirs of Policronio)
- The Deed of Sale executed on October 25, 1969, in favor of Policronio, covered six grandchildren). posited that the Heirs of Alfonso
value of the property he
parcels of land, which are the properties in dispute in this case. personalities - The Heirs of Alfonso are clearly his heirs and successors-in- were not parties to the contract; received from the decedent.
- Since the sales were only made for taxation purposes and no monetary consideration to question interest and, as such, their interests are directly affected, neither did they appear to be
was given, Alfonso continued to own, possess and enjoy the lands and their produce. thereby giving them the right to question the legality of the Deed beneficiaries by way of If a contract should contain
- Policronio died on November 22, 1974. Except for the said portion of parcel 5, neither the sale? of Sale. assignment or inheritance. Unlike some stipulation in favor of a
Policronio nor his heirs ever took possession of the subject lands. themselves who are direct heirs third person, he may
 - On April 19, 1989, Alfonso’s heirs executed a Deed of Extra-Judicial Partition, which of Policronio, the Heirs of Alfonso demand its fulfillment
included all the lands that were covered by the four (4) deeds of sale that were previously are not Alfonso's direct heirs. For provided he communicated
executed by Alfonso for taxation purposes. the Heirs of Alfonso to qualify as his acceptance to the obligor
- Conrado, Policronio’s eldest son, representing the Heirs of Policronio, signed the Deed of parties, under Article 1311 of the before its revocation. A mere
Extra-Judicial Partition in behalf of his co-heirs. Civil Code, they must first prove incidental benefit or interest
- After their father’s death, the Heirs of Policronio found tax declarations in his name Heirs of Alfonso is
that they are either heirs or of a person is not sufficient.
covering the six parcels of land. questioning the sale assignees. Being neither, they The contracting parties must
- On June 15, 1995, they obtained a copy of the Deed of Sale executed on October 25, because they know it's have no legal standing to have clearly and deliberately
1969 by Alfonso in favor of Policronio. simulated question the Deed of Sale. They
conferred a favor upon a
- Not long after, on July 30, 1995, the Heirs of Policronio allegedly learned about the Deed (heirs of Policronio) further
third person.
of Extra-Judicial Partition involving Alfonso’s estate when it was published in the July 19, argued that the sale cannot be
1995 issue of the Aklan Reporter. assailed for being barred under
Article 1421 of the Civil Code Article 1421. The defense of
Procedural: which provides that the defense illegality of contract is not
-Heirs of Policronio filed a Complaint for Declaration of Ownership, Recovery of of illegality of a contract is not available to third persons
Possession, Annulment of Documents, Partition, and Damages against the Heirs of available to third persons whose whose interests are not
Alfonso before the RTC. interests are not directly affected. directly affected.
-RTC: Dismissed the Complaint of the Heirs of Policronio and ruled in favor of the Heirs of -- SC said heirs of Policronio are
Alfonso. wrong for saying that.
-CA: Partially granted the appeal of the Heirs of Policronio The Deed of Sale in favor of
Policronio Ureta, Sr. was declared VOID for being ABSOLUTELY SIMULATED, and the
Deed of Extra-Judicial Partition is ANNULLED.

Doña Adela ● Petitioner Doña Adela Export International, Inc., (petitioner, for brevity) filed a Whether the No, the petitioner is not bound by the compromise agreement. DOCTRINE OF RELATIVITY OF
Export v. Petition for Voluntary Insolvency. petitioner is Law on Secrecy of Bank Deposits requires a written permission. CONTRACTS:
TIDCOR GR ● RTC issued an order declaring the petitioner as insolvent. bound by the The provision on the waiver of the confidentiality of petitioner’s
● Petitioner and Technology Resource Center (TRC) entered into a Dacion En waiver of bank deposits was merely inserted in the agreement. There was Article 1311 (1) of the Civil Code
201931 Feb.
Pago by Compromise Agreement where petitioner agreed to transfer a parcel of confidentiality no express consent of petitioner. Thus, petitioner is not a party which provides that “contracts
11, 2015 land covered by TCT with existing improvements in favor of TRC in full payment of provision in the and signatory to the said agreement. take effect only between the
petitioner’s obligation. Agreement parties, their assigns and heirs x
○ The agreement bears the conformity of Atty. Gonzales as receiver. between Petitioner’s failure to interpose his objection should not be taken x x.”
● TRC filed a Motion to Approve Dacion En Pago by Compromise Agreement. TIDCORP and against him. There must be a positive act of a waiver, not an
● TIDCORP and BPI also filed a Joint Motion to Approve Agreement BPI despite not implied one. A waiver must not only be voluntary, but must
○ settlement shall constitute payment of petitioner’s obligation pursuant to being a party and have been made knowingly, intelligently, and with sufficient
Act No. 1956 (Insolvency Act). signatory to the awareness of the relevant circumstances and likely
○ NO. 5 - WAIVER OF CONFIDENTIALITY - the agreement states that same. consequences. There must be actual intent to relinquish the
petitioner waives all its right to confidentiality right. Mere silence is not an acquiescence.
● RTC approved the Dacion En Pago by Compromise Agreement and the Joint
Motion to Approve Agreement It is basic in law that a compromise agreement, as a contract,
● Petitioner filed a motion for partial reconsideration and claimed that TIDCORP and is binding only upon the parties to the compromise, and
BPI’s agreement imposes on it several obligations such as payment of not upon non-parties. This is the doctrine of relativity of
expenses and taxes and waiver of confidentiality of its bank deposits but it contracts. The rule is based on Article 1311 (1) of the Civil
is not a party and signatory to the said agreement. Code which provides that “contracts take effect only between
● RTC denied the motion and held that petitioner’s silence and acquiescence to the the parties, their assigns and heirs x x x.” The ratio for the
joint motion to approve compromise agreement while it was set for hearing by exclusion of non-parties to an agreement is because the
creditors BPI and TIDCORP is tantamount to admission and acquiescence vinculum/ juridical tie is absent.
thereto.
○ No objection filed by petitioner to the joint motion to approve compromise Consistent with this principle, a judgment based entirely on a
agreement prior to its approval compromise agreement is binding only on the parties to the
● Hence, this petition. compromise the court approved, and not upon the parties who
● PETITIONER CONTENDS: did not take part in the compromise agreement and in the
○ express and written waiver from the depositor concerned is required proceedings leading to its submission and approval by the
by law before any third person or entity is allowed to examine bank court. Otherwise stated, a court judgment made solely on
deposits or bank records. the basis of a compromise agreement binds only the
■ it is not a party to the compromise agreement between BPI parties to the compromise, and cannot bind a party litigant
and TIDCORP and its silence or acquiescence is not who did not take part in the compromise agreement.
tantamount to an admission that binds it to the compromise
agreement of the creditors especially the waiver of
confidentiality of bank deposits.
○ Rule on relativity of contracts: states that contracts can only bind the
parties who entered into it, and it cannot favor or prejudice a third
 person, even if he is aware of such contract and has knowledge thereof.
● RESPONDENT COUNTERS:
○ petitioner is estopped from questioning the compromise agreement
because petitioner and its counsel participated in all the proceedings
involving the subject compromise agreement and did not object when
the compromise agreement was considered by the RTC.
○ [can exclude during recit: the waiver of confidentiality under Republic Act
(R.A.) Nos. 1405 and 8791 does not require the express or written
consent of the depositor.
○ Insolvency court obtains complete jurisdiction over the insolvent’s property
which includes the authority to issue orders to look into the insolvent’s
bank deposits.]
○ The compromise agreement is not an ordinary contract. Since it was
approved by the insolvency court, the compromise agreement has the
force and effect of judgment.

● Petitioner and private respondent executed an order agreement whereby private Whether Private No. Private respondent cannot be held liable under the
respondent bound itself to deliver to petitioner a total of 3,450 reams of printing respondent is contracts entered into by petitioner with Philacor. Private
paper worth P1,040,060.00 within the period of May, 1978 to October 1979 to be liable for respondent is not a party to said agreements. It is also not
paid within a minimum of thirty days and maximum of ninety days from delivery. petitioner’s a contract pour autrui. Aforesaid contracts could not affect
● As of July 30, 1979, private respondent had delivered only 1,097 reams of printing breach of third persons like private respondent because of the basic civil
paper to petitioner. contract with law principle of relativity of contracts [art. 1311] which provides
● Petitioner demanded for the immediate delivery of the balance of the printing Philacor that a contract can only bind the parties who entered into it, and
paper. it cannot favor or prejudice a third person, even if he is aware of
● From June 5, 1980 to July 23, 1981 private respondents delivered various such contract and had acted with knowledge thereof.
quantities of printing paper amounting to P766,101.70.
● Subsequently, petitioner encountered difficulties paying private respondent said The order agreement entered into by petitioner and private
amount. respondent has not been shown as having a direct bearing on
● Private respondent made a formal demand upon petitioner to settle its account. the contracts of petitioner with Philacor. As pointed out by
● Petitioner made partial payments totalling to P97,200.00 only which was applied to private respondent and not refuted by petitioner, the paper
its back accounts. specified in the order agreement between petitioner and private
● Petitioner failed to comply with its additional printing contract with respondent are markedly different from the paper involved in the
Philippine Appliance Corporation (Philacor), hence, Philacor demanded contracts of petitioner with Philacor. Furthermore, the demand
compensation from petitioner for the delay and damages it suffered on made by Philacor upon petitioner for the latter to comply with its
account thereof. printing contract is dated February 15, 1984, which is clearly
● Private respondent filed with the RTC a collection suit against petitioner. made long after private respondent had filed its
● Petitioner alleges that private respondent delivered only 1,097 reams in total complaint on August 14, 1981. This demand relates to contracts
disregard of their agreement and that by reason thereof, it suffered actual with Philacor dated April 12, 1983 and May 13, 1983, which
damages and failed to realize expected profits. were entered into by petitioner after private respondent filed the
● Trial court rendered judgment declaring that petitioner should pay private instant case. To recapitulate, private respondent did not violate
respondent the sum of P763,101.70 representing the value of the printing paper the order agreement it had with petitioner. Likewise, private
delivered from June 5, 1980 to July 23, 1981. respondent could not be held liable for petitioner's breach of
● Trial court also ordered the private respondent to pay the compensatory damages, contract with Philacor. It follows that there is no basis to hold
as well as it also awarded moral damages and attorney's fees. petitioner's private respondent liable for damages.
counterclaim meritorious since the failure or delay of private respondent to deliver
printing paper, petitioner lost profit.
● On appeal, the Court of Appeals upheld the award in favor of private respondent
but deleted the award of damages in favor of petitioner for lack of factual and legal
Integrated
basis.
Packing v. CA, ● Hence, this petition.
333 SCRA
170

Gutierrez - The defendant Orense had been the owner of a parcel of land, with the buildings and WON the sale YES. The sworn statement made by the defendant, Orense, C. Characteristics
Hermanos v. improvements thereon, situated in the pueblo of Guinobatan, Albay. under right of while testifying as a witness at the trial of Duran for estafa, 3. Relativity
Orense, 28 - Jose Duran, a nephew of the defendant, with the latter's knowledge and consent, redemption of a virtually confirms and ratifies the sale of his property b. No one may contract in the
executed before a notary a public instrument whereby he sold and conveyed to the plaintiff parcel of land effected by his nephew, Duran, and, pursuant to article 1313 name of another – Art. 1317
Phil. 571
company, for P1,500, the aforementioned property, the vendor Duran reserving to himself effected by Jose of the Civil Code, remedies all defects which the contract may
(1914) the right to repurchase it for the same price within a period of four years from the date of Duran, nephew of have contained from the moment of its execution. PRINCIPAL AND AGENT;
the said instrument the owner of the RATIFICATION OF AGENT'S
- Plaintiff company had not entered into possession of the purchased property, property, The record in this case shows that defendant Orense gave ACTS; RETRACTION. — When
because Orense and Duran continued to occupy the land by virtue of a contract of lease Engracio Orense his consent in order that his nephew, Jose Duran, might a person who sold a parcel of
executed by the plaintiff to Duran, which contract was in force up to February 14, 1911. was valid sell the property in question to Gutierrez Hermanos, and real estate for P1,500 appears
- After the lapse of the four years stipulated for the redemption, the defendant that he did thereafter confirm and ratify the sale by means of later not to be its owner and
Orense refused to deliver the property to the plaintiff Gutierrez Hermanos, and to a public instrument executed before a notary. when the real owner thereof,
pay the rental thereof at the rate of P30 per month for its use and occupation since upon being questioned in a
February 14, 1911, when the period for its repurchase terminated. Such confirmation and ratification has been proven at the criminal case instituted against
- Defendant’s refusal was based on the allegations that he had been and was then trial that he gave his consent to the said sale, it follows that the vendor, states that he
the owner of the said property, which was registered in his name in the property the defendant conferred verbal, or at least implied, power of consented to such sale, so that
registry; that he had not executed any written power of attorney to Jose Duran, nor agency upon his nephew Duran, who accepted it in the same the vendor was acquitted of
had he given the latter any verbal authorization to sell the said property to the way by selling the said property. The principal (defendant the charge against him, it is
plaintiff firm in his name; and that, prior to the execution of the deed of sale, the orense) must therefore fulfill all the obligations contracted neither lawful nor permissible
defendant performed no act such as might have induced the plaintiff to believe that Jose by the agent, who acted within the scope of his authority. for said owner later to retract
Duran was empowered and authorized by the defendant to effect the said sale. (Civil Code, arts. 1709, 1710 and 1727) and deny his former sworn
- The plaintiff firm, therefore, charged Jose Duran with estafa, for having represented ● Even should it be held that the said consent was statement that he had
himself in the said deed of sale to be the absolute owner of the aforesaid land and granted subsequently to the sale, it is consented to said sale by a third
improvements, whereas in reality they did not belong to him, but to the defendant Orense. unquestionable that the defendant, the owner of the person who was a relative of his
- During the trial of the estafa case, defendant Orense was presented as a witness, property, approved the action of his nephew, who in (Civil Code, arts. 1709, 1710,
being interrogated by the fiscal as to whether he had consented to Duran's selling this case acted as the manager of his uncle's business, 1727.)
the said property under right of redemption to the 􏰀rm of Gutierrez Hermanos, and Orense's ratification produced the effect of an
replied that he had. In view of this statement by the defendant, the court acquitted Jose express authorization to make the said sale. (Civil xxx
Duran of the charge of estafa. Code, arts. 1888 and 1892.)
EFFECT IN ACTION FOR
PROCEDURAL: Article 1259 of the Civil Code prescribes: "No one can ESTAFA. — The sworn
- Based on the explicit testimony of Engracio Orense, the owner of the property, to contract in the name of another without being authorized by him statement of the owner of the
the effect that he had consented to his nephew Duran's selling the property under or without having his legal representation according to law. real estate in the action for
right of repurchase to Gutierrez Hermanos, counsel for this firm filed a complaint estafa secured the acquittal of
praying that the defendant Orense be compelled to execute a deed for the transfer "A contract executed in the name of another by one who has the accused by destroying the
and conveyance to the plaintiff company of all the right, title and interest which Orense neither his authorization nor legal representation shall be void, fraud which at first appeared to
had in the property sold, and to pay to the same the rental of the property due from unless it should be ratified by the person in whose name it was have been perpetrated to the
February 14, 1911. executed before being revoked by the other contracting party." owner's prejudice and became a
- Trial court ruled in favor of plaintiff and ordered the defendant to make immediate confirmation and ratification of
delivery of the property in question through a public instrument, by transferring and The sale of the said property made by Duran to Gutierrez the sale; therefore, the owner
conveying to the plaintiff all his rights in the property described in the complaint and to Hermanos was indeed null and void in the beginning, but must fulfill the obligations
pay it the sum of P780, as damages, and the costs of the suit. afterwards became perfectly valid and cured of the defect of contracted by his agent, who
nullity it bore at its execution by the confirmation solemnly made the sale as though he
made by the said owner upon his stating under oath to the had had prior authorization
judge that he himself consented to his nephew Jose and express instructions in
Duran's making the said sale. writing.
● Moreover, pursuant to article 1309 of the Code, the
right of action for nullification that could have been xxx
brought became legally extinguished from the
moment the contract was validly confirmed and RATIFICATION AS EXPRESS
ratified, and, in the present case, it is unquestionable AGENCY. — Even though the
that the defendant did con􏰀rm the said contract of sale owner of the real estate had not
and consent to its execution. previously authorized the sale
and his consent was given
Defendant Orense cannot deny the validity of the subsequent to the act, yet when
admission after having acknowledged and admitted under the fact is established that he
oath that he had consented to Jose Duran's selling the approved the action of his
property in litigation to Gutierrez Hermanos. Therefore the relative in selling it as his
principal is bound to abide by the consequences of his agency agent, this subsequent
as though it had actually been given in writing. ratification by the owner in
giving his approval and
consent to the sale produced
the effect of an express agency
and so purified the contract of
the flaws it contained at the time
it was executed. (Civil Code, arts.
1259, 1313.)

xxx

The action for nullity that could

 have at first been instituted
was legally extinguished at the
moment when said contract of
sale was validly ratified and
confirmed. (Civil Code, art.
1309.)

Gabriel v.
Monte de
Piedad, 71
Phil. 497
(1941)

Pakistan International Airlines Corporation (“PIA”), a foreign corporation licensed to do Whether or not No. The principle of freedom to contract is not absolute. Art. Art. 1306 provides that
business in the Philippines, executed in Manila two (2) separate contracts of employment, the provisions of 1306 provides that stipulations by the parties may be allowed stipulations by the parties may be
one with private respondent Ethelynne B. Farrales and the other with private respondent the contract provided they are not contrary to law, morals, good customs, allowed provided they are not
Ma. M.C. Mamasig. superseded the public order & policy. Thus, the principle of autonomy of contrary to law, morals, good
general contracting parties must be counterbalanced with the general customs, public order & policy
The contracts provided that (1) the Duration of Employment is for a period of 3 years, (2) provisions of the rule that provisions of the applicable law are deemed written
PIA reserves the right to terminate this agreement at any time by giving the EMPLOYEE Labor Code into the contract.
notice in writing in advance one month before the intended termination or in lieu thereof,
by paying the EMPLOYEE wages equivalent to one month’s salary; and (3) the agreement In this case, the law relating to labor and employment is an area
shall be construed and governed under and by the laws of Pakistan, and only the Courts in which the parties are not at liberty to insulate themselves and
of Karachi, Pakistan shall have the jurisdiction to consider any matter arising out of or their relationship by simply contracting with each other.
under this agreement.

Farrales and Mamasig then commenced training in Pakistan and after such, they began
discharging their job functions as flight attendants with the base station in Manila and
flying assignments to different parts of the Middle East and Europe.

Roughly one (1) year and four (4) months prior to the expiration of the contracts of
employment, PIA sent separate letters to private respondents advising both that their
services as flight stewardesses would be terminated. PIA claimed that both were habitual
absentees, were in the habit of bringing in from abroad sizeable quantities of “personal
effects”.

Prior Proceedings: Regional Director of MOLE ordered the reinstatement of private

respondents with full back wages or, in the alternative, the payment to them of the
amounts equivalent to their salaries for the remainder of the fixed three-year period of their
employment contracts having attained the status of regular employees.

On appeal, the Deputy Minister of MOLE adopted the findings of fact and conclusions of
the Regional Director and affirmed the latter’s award save for the portion thereof giving
Pakistan PIA the option, in lieu of reinstatement, “to pay each of the complainants [private
International respondents] their salaries corresponding to the unexpired portion of the contract[s] [of
Airlines v. employment] . . .”
Ople, 190
SCRA 90 Hence, this instant Petition for Certiorari by PIA.
(1990)

Azcuna, Jr. v. - Azcuna had a one year lease contract with the Barcelona’s for three units of a building Whether or not YES. Article 1306. The contracting
CA, 255 renewable upon agreement. Azcuna is liable - In Azcuna’s case, in the lease agreement he had with the parties may establish such
SCRA 215 - After a year, the lease expired without renewing the contract. to pay the Php3, Barcelona’s, there was a stipulation about the awarded stipulations, clauses, terms
- So, the Barcelona’s demanded Azcuna to vacate the units, but the latter refused to do 000 per day damages. and conditions as they may
so. damages. - The lower courts in awarding the said damages was merely deem convenient, provided
enforcing what was stipulated upon in black and white by they are not contrary to law,
Procedural: Topic: Freedom to
private respondent-lessor and petitioner-lessee appearing in morals, good customs, public
- The Barcelona’s then filed an ejectment case at the MTC. contract – Art. 1306
order, or public policy.
paragraph 10 of the lease contract which reads:
- MTC ruled in favor of Barcelonas. RTC and CA affirmed MTC decision. “That after the termination of the lease, the LESSEE shall
- The subject of this appeal is not because Azcuna was compelled to vacate the premises, peaceably deliver to the LESSOR the leased premises vacant
 but because of the CA decision holding him liable to pay the Barcelona’s Php3, 000 per and unencumbered and in good tenantable conditions minus
day by way of damages for his continued occupation of the subject premises from the the ordinary wear and tear. In case the LESSEEs failure or
expiration of the contract until such time he vacates the properties. inability to do so, LESSOR has the right to charge the LESSEE
- His petition is based on the doctrine enunciated in the case of Villanueva vs. CA that the P1,000.00 per day as damages without prejudice to other
only damages that can be recovered in an ejectment suit are the fair rental value or the remedies which LESSOR is entitled in the premise.”
- This is clearly an agreement for liquidated damages - entitling
reasonable compensation for the use and occupation of the real property.
private respondent to claim a stipulated amount by way of
damages (correctly totaling P3,000.00 per day as there were
three [3] units being leased by petitioner) over and above other
damages still legally due him, i.e., the fair rental value for the
use and occupation of the property as provided for in Section 8,
Rule 70 of the Rules of Court.
- The freedom of the contracting parties to make stipulations in
their contract provided they are not contrary to law, morals,
good customs, public order or public policy is so settled, and the
Court finds nothing immoral or illegal with the indemnity/ penalty
clause of the lease contract which does not appear to have
been forced upon or fraudulently foisted on petitioner.
- Petitioner cannot now evade further liability for liquidated
damages, for after entering into such an agreement, petitioner
cannot thereafter turn his back on his word with a plea that on
him was inflicted a penalty shocking to the conscience and
impressed with iniquity as to call for the relief sought on the part
of a judicial tribunal.

A ten-year lease contract, commencing on March 4, 1988 and set to expire on March 4, Whether or not Yes, the Supreme Court finds petitioner's failure to comply with Freedom to contract – Art. 1306
1998, over the subject building, was executed by and between the private respondents the strict the mandatory requirement of insuring the building shall result
Sabenianos as owners-lessors,and petitioner Manila Bay Club Corporation as lessee. The compliance with in the automatic termination and cancellation of the lease as Art. 1306 – The contracting
lease agreement, however, was short-lived because private respondents, unilaterally the "insurance stipulated in their contract. parties may establish such
terminated the lease on the following grounds: clause" is stipulations, clauses, terms and
1. Failure on the part of the LESSEE to insure the building mandatory to Article 1306 of the New Civil Code provides that the contracting conditions NOT contrary to law,
2. For unpaid accumulated rentals in arrears and to issue all the postdated checks result in the parties may establish such stipulations, clauses, terms and morals, good customs, public
agreed upon automatic conditions as they may deem convenient, provided they are not order or public policy.
3. For failure on the part of the LESSEE to pay the fees, taxes and other termination and contrary to law, morals, good customs, public order or public
assessments on the improvements cancellation of policy. In the case at bar, it can be fairly judged from the tenor
the lease in case of the contract that the parties intended mandatory compliance
Feeling aggrieved by the premature termination of the lease, petitioner filed a complaint of non- with all the provisions of the contract. Certainly, there is nothing
with the Makat iRTC for "Specific Performance with Prayer for Preliminary Injunction and observance. wrong if the parties to the lease contract agreed on certain
Damages" against private respondents on the ground that the cancellation of the lease mandatory provisions concerning their respective rights and
contract was arbitrary and capricious, for petitioner did not violate any of its provisions.The obligations, such as the procurement of the insurance and the
RTC held that petitioner was not in default nor in arrears in payment of rentals. However, it rescission clause.
found that the petitioner violated the "insurance clause" of the contract. Consequently,
RTC dismissed the complaint, declared the lease contract terminated and ordered the Thus, the petition is DENIED for lack of merit.
Manila Bay
petitioner to immediately return possession of the leased premises to private respondents.
Club v. CA, Petitioner appealed to respondent Court of Appeals which affirmed with modification
245 SCRA RTC’s decision
715

De Leon v.
CA, 186
SCRA 345

Batarra v.
Marcos, 7 Phil.
156

Cui v. Arellano Emeterio Cui enrolled in the defendant university where plaintiff finished his law studies in Whether or not The contract of waiver between the plaintiff and respondent on Before defendant awarded to
University, 2 the up to and including the first semester of the fourth year. the contract September 10, 1951, is a direct violation of Memorandum plaintiff the scholarship grants as
SCRA 205 between Cui and No. 38 and hence null and void. above stated, he was made to
During all the school years in which plaintiff was studying law in defendant Law College, the respondent sign the following contract
he was awarded scholarship grants and his semestral tuition fees were returned to him university, The contract was contrary to sound policy and civic honesty. covenant and agreement:
after ends of the semester. whereby the The policy enunciated in Memorandum No.38, s. 1949 is sound “In consideration of the
 former waives his policy. When students are given full or partial scholarships, it is scholarship granted to me by the
Plaintiff left the defendant's law college and enrolled for the last semester of his fourth year right to transfer to understood that such scholarships are merited and earned. University, I hereby waive my
law in the college of law of the Abad Santos University graduating from the college of law another school right to transfer to another school
of the latter university. He applied to take the bar examination in without having The amount in tuition and other fees corresponding to these without having refunded to the
which he needed the transcripts of his records in defendant Arellano University. refunded to the scholarships should not be subsequently charged to the University (defendant) the
defendant the recipient students when they decide to quit school or to transfer equivalent of my scholarship
The defendant refused until after he had paid back the P1,033.87, noting the contract that equivalent of the to another institution. cash.
he signed which stated that in consideration of the scholarship granted to scholarship cash (Sgd.) Emeterio Cui”.
him by the University, he waives his right to transfer to another school without having valid or not? Scholarships should not be offered merely to attract and keep
refunded to the defendant the equivalent of the scholarship cash and followed by students in a school.
Memorandum No. 38 that the Director of Private Schools issued.
IMPORTANT DEETS:
The high court opined that the stipulation in question is contrary
to public policy, hence, null and void.

It correctly sited the case of Zeigel vs. Illinois Trust and Savings
Bank, 245 Ill. 180, 19 Ann. Case 127 in which the court said: ‘In
determining a public policy of the state, courts are limited to a
consideration of the Constitution, the judicial decisions, the
statutes, and the practice of government officers.‘

If Arellano University understood clearly the real essence of

scholarships and the motives which prompted this office to
issue Memorandum No. 38, s. 1949, it should have not entered
into a contract of waiver with Cui on September 10, 1951, which
is a direct violation of our Memorandum and an open challenge
to the authority of the Director of Private Schools because the
contract was repugnant to sound morality and civic honesty.

Also cited was the case of Gabriel vs. Monte de Piedad, Off.
Gazette Supp. Dec. 6, 1941, p. 67 which provided that: ‘In order
to declare a contract void as against public policy, a court must
find that the contract as to consideration or the thing to be done,
contravenes some established interest of society, or is
inconsistent with sound policy and good morals or tends clearly
to undermine the security of individual rights.

The policy enunciated in Memorandum No. 38, s. 1949 is sound

policy. Scholarship are awarded in recognition of merit not to
keep outstanding students in school to bolster its prestige.

In the understanding of that university scholarships award is a

business scheme designed to increase the business potential of
an education institution. Thus conceived it is not only
inconsistent with sound policy but also good morals.

But what is morals? Manresa has this definition. It is good

customs; those generally accepted principles of morality which
have received some kind of social and practical confirmation.

The practice of awarding scholarships to attract students and

keep them in school is not good customs nor has it received
some kind of social and practical confirmation except in some
private institutions as in Arellano University.

DISPOSITIVE:
WHEREFORE, the decision appealed from is hereby reversed
and another one shall be entered sentencing the defendant to
pay to the plaintiff the sum of P1,033.87, with interest thereon at
the legal rate from September 1, 1954, date of the institution of
this case, as well as the costs, and dismissing defendant's
counterclaim. It is so ordered.
Ferrazzini v.
GSell, 34 Phil.
697

Omico Mining
and Industrial
Corp v.
Vallejos, 63
SCRA 301

- Berwin is the counsel for Marcela Juareza in the court of Iloilo who is facing prosecution Issue: Whether or Yes Article 1306. The contracting
for theft by Petitioner Ignacio Arroyo. not the - The Supreme Court dismissed this complaint on the ground of parties may establish such
- Berwin requested Arroyo to dismiss the criminal proceeding because Marcela Juaneza consideration is the illegality of the consideration of the alleged contract. stipulations, clauses, terms
would recognized the ownership of Arroyo in the land in Calle San Juan, Molo, Iloilo. illegal? - An agreement by the owner of stolen goods to stifle the and conditions as they may
- Berwin agreed that Arroyo must obtain a torrens title in the next term of the court for the prosecution of the person charged with the theft, for a pecuniary deem convenient, provided
trial of cadastral cases and Marcela Juaneza would not object to the application for or other valuable consideration, is manifestly contrary to public they are not contrary to law,
registration of the said land by the applicant PROVIDED that Arroyo will ask the Topic: What they may not policy and the due administration of justice. morals, good customs, public
stipulate. Contrary to law,
prosecutor to dismiss the criminal charges against Marcela Juaneza. Article 1306 - In the interest of the public, it is of the utmost importance that order, or public policy.
- Arroyo complied and requested the prosecutor to cease from pursuing the criminal case. criminals should be prosecuted and that all criminal
- The prosecutor the petitioned and court dismissed. proceedings should be instituted and maintained in the form
-Arroyo then made a written agreement stating the agreed terms and sent it to Berwin to and manner prescribed by law.
be signed by Marcela. - To permit an offender to escape the penalties prescribed by
- Berwin, as her legal counsel, did not return the said written agreement. law by the purchase of immunity from private individuals would
result in a manifest perversion of justice.
Arroyo v. - The order entered in the court below should, therefore, be
Berwin, 36 affirmed, with the cost of this instance against the appellant.
Phil. 386
(1917)

The Philippine Rating Bureau is a formation of non life insurance companies in the The test as to whether a given agreement constitutes an Contrary to public policy
country. It was created as a mechanism for members to jointly fix rates, determine risks, unlawful machination or a combination in restraint of trade is
Filipinas gather information, etc. In Art. 22 of their constitution states that: “Members of the Bureau whether, under the particular circumstances of the case and the
Compañia de agree not to represent nor to effect reinsurance with, nor to accept reinsurance from any nature of the particular contract involved in it, the contract is, or
company, body, or underwriter, licensed to do business in the Philippines not a member in is not, unreasonable. There is nothing unlawful or contrary to
Seguros v.
good standing of the Bureau.” Defendant Mandanas seeks to have this stricken down as public policy either in the objectives thus sought to be attained
Mandanas, 17 an illegal restraint on trade. by the Bureau, or the means to their ends. It is very clear that
SCRA 391 the purpose of the assailed article is to promote ethical
(1966) practices, not to prevent or eliminate competition

Bustamante v. Petitioner entered into a loan agreement with the respondent wherein the former as the Whether or not No.Contracts have the force of law between the contracting The contracting parties may
Rosel, 319 borrower and the latter as the lender. The loan was secured by a parcel of land of the the stipulation in parties and must be complied with in good faith. However, establish such stipulations,
SCRA 413 petitioner as a collateral. In their agreement, it was stated that in the event that if the the loan contract certain exceptions to the rule, specifically Article 1306 of the clauses, terms and conditions as
petitioner herein fails to pay, the respondent has the option to buy or purchase the was valid and Civil Code, which provides that “The contracting parties may they may deem convenient,
(1999)
collateral. When the loan was about to mature, respondents proposed to buy the collateral enforceable. establish such stipulations, clauses, terms and conditions as provided they are not contrary to
land on the amount stated in the loan agreement. Petitioners herein refuse to sell and to they may deem convenient, provided they are not contrary to law, morals, good customs,
execute a Deed of Absolute sale. When the petitioner tendered payment on the loan, law, morals, good customs, public order, or public policy.” public order, or public policy.
respondent refused to receive and demand the sale of the land. Rosel filed a complaint in
the RTC which rendered a decision denying the prayer for the issuance of the deed sale. A scrutiny of the stipulation of the parties reveals a subtle
However, upon appeal to the Court of Appeals, the said decision was reversed. Hence, intention of the creditor to acquire the property given as security
this petition. for the loan. This is embraced in the concept of pactum
commissorium, which is proscribed by law. The elements of
pactum commissorium are as follows: (1) there should be a
property mortgaged by way of security for the payment of the
principal obligation, and (2) there should be a stipulation for
automatic appropriation by the creditor of the thing mortgaged in
case of non-payment of the principal obligation within the
stipulated period.

In this case, the intent to appropriate the property given as

collateral in favor of the creditor appears to be evident, for the
debtor is obliged to dispose of the collateral at the pre-agreed
 consideration amounting to practically the same amount as the
loan. In effect, the creditor acquires the collateral in the event of
non-payment of the loan. This is within the concept of pactum
commissorium. Such stipulation is void.

Petitioner Jose P. Dizon was the owner of the three (3) parcels of land. He constituted a Whether or not No. The court held that the true agreement between the plaintiff We find that the agreement
first mortgage lien in favor of the Develop. ment Bank of the Philippines in order to secure the contract and defendant is that the defendant would assume and pay the between petitioner Dizon and
a loan in the sum of P38,000.00 trial a second mortgage lien in favor of the Philippine showed the true indebtedness of the plaintiff to DBP and PNB, and in respondent Gaborro is one of
National Bank to cure his indebtedness to said bank in the amount of P93,831.91. agreement consideration therefore, the defendant was given the those innominate contracts under
between the possession and enjoyment of the properties in question until the Art. 1307 of the New Civil Code
Petitioner Dizon having defaulted in the payment of his debt, the Development Bank of the parties. plaintiff shall have reimbursed to defendant fully the amount of whereby petitioner and
Philippines foreclosed the mortgage extrajudicially.Sometime prior to October 6, 1959 P131,831.91 plus 8% interest per annum from October 6, 1959 respondent agreed “to give and
Alfredo G. Gaborro trial Jose P. Dizon met. Gaborro became interested in the lands of until full payment, said right to be exercised within one year to do” certain rights and
Dizon. Dizon originally intended to lease to Gaborro the property which had been lying idle from the date the judgment becomes final, if he fails to do so obligations respecting the lands
for some time. within the said period, then he is deemed to have lost his right and the mortgage debts of
over the lands forever. petitioner which would be
But as the mortgage was already foreclosed by the DPB trial the bank in fact purchased acceptable to the bank, but
the lands at the foreclosure sale on May 26, 1959, they abandoned the projected lease. partaking of the nature of
antichresis insofar as the
Dizon and Alfredo Gaborro. on the same day, October 6, 1959, constitute in truth and in principal parties, petitioner Dizon
fact an absolute sale of the three parcels of land therein described or merely an equitable and respondent Gaborro, are
mortgage or conveyance thereof by way of security for reimbursement or repayment by concerned.
petitioner Jose P. Dizon of any and all sums which may have been paid to the
Development Bank of the Philippines and the Philippine National Bank by Alfredo G.
Gaborro Said documents were executed by the parties and the payments were made by
Gaborro for the debt of Dizon to said banks after the Development Bank of the Philippines
had foreclosed the mortgage executed by Dizon and during the period of redemption after
the foreclosure sale of the mortgaged property to said creditor bank.

Gaborros contention; Deed of Sale with Assumption of Mortgage trial Option to

Dizon v.
Purchase Real Estate
Gaborro, 83
SCRA 688 Dizon’s contention: merely an equitable mortgage or conveyance thereof by way of
(1978) security for reimbursement, refund or repayment by petitioner Jose P. Dizon

Perez v.
Pomar, 2 Phil.
682

Asian - Petitioner Asian Construction and Development Corp. (Asian) purchased from ISSUE: YES. Article 1306. The
Construction Respondent Cathay Pacific Steel Corp. (Cathay) various reinforcing steel bars worth Are the parties - Article 1306 of the Civil Code provides that the "contracting Parties would do well to always contracting parties may
v. Cathay P2.6M covered by a total of 12 invoices. bound by express parties may establish such stipulations, clauses, terms and be conscious of their freedom to establish such stipulations,
- Asian made partial payments leaving a balance of P200,000. stipulations in the conditions as they may deem convenient, provided they are not accept or reject printed clauses, terms and
Pacific Steel,
- Cathay sent demand letters but no payment was made by Asian; prompting it to file a sales invoice? contrary to law, morals, good customs, public order, or public stipulations supplied by only one conditions as they may
June 29, 2010 complaint for a sum of money and damages with the RTC. policy." party that form part of the deem convenient, provided
- In its answer, Asian contended among others that it had not agreed to pay interest and - In the present case, the sales invoices expressly stipulated the (adhesive) contract they enter they are not contrary to law,
attorney's fees. payment of interest and attorney's fees in case of overdue into. Failure to object to such morals, good customs,
Procedural: Topic: What they may accounts and collection suits, to wit: "Interest at 24% per annum stipulations, which are not
stipulate – Art. 1306 public order, or public policy.
The RTC ordered Asian to pay the amount due. is to be charged to all accounts overdue plus 25% additional on excessive or unconscionable, will
On appeal, the CA found that based on the invoices, there is a specific amount of interest unpaid invoice for attorney's fees aside from court cost, the bind them to its performance.
agreed upon, which is 24% per annum, and modified the RTC decision. parties expressly submit themselves to the venue of the courts
in Rizal, in case of legal proceeding."
- The sales invoices are in the nature of contracts of adhesion.
- "The court has repeatedly held that contracts of adhesion are
as binding as ordinary contracts.
- Those who adhere to the contract are in reality free to reject it
entirely and if they adhere, they give their consent. It is true that
in some occasions the Court struck down such contracts as void
when the weaker party is imposed upon in dealing with the
dominant party and is reduced to the alternative of accepting
the contract or leaving it, completely deprived of the opportunity
to bargain on equal footing."
- Considering that Asian is not a small time construction
company, having such construction projects as the MRT III and
the Mauban Power Plant, "it is presumed to have full knowledge
and to have acted with due care or, at the very least, to have
been aware of the terms and conditions of the contract. Asian
was free to contract the services of another supplier if
respondent's terms were not acceptable".
- By contracting with Cathay for the supply of the reinforcing
steel bars and not interposing any objection to the stipulations in
the sales invoice, petitioner did not only bind itself to pay the
stated selling price, it also bound itself to pay (1) interest of 24%
per annum on overdue accounts and (2) 25% of the unpaid
invoice for attorney's fees. Thus, the lower courts did not err in
using the invoices as basis for the award of interest.