FERNANDO A. GAITE vs.

ISABELO FONACIER
REYES, J.B.L., J.:

What characterizes a conditional obligation is the fact that its efficacy or obligatory force
(as distinguished from its demandability) is subordinated to the happening of a future and
uncertain event; so that if the suspensive condition does not take place, the parties would
stand as if the conditional obligation had never existed.

Facts:
Isabelo Fonacier was the owner and/or holder of iron lode mineral claims, known as the
Dawahan Group. By a "Deed of Assignment" he constituted and appointed Fernando
Gaite as his attorney-in-fact to enter into a contract with any individual or juridical person
for the exploration and development of the mining claims. Gaite in turn executed a general
assignment conveying the development and exploitation of said mining claims into the
Larap Iron Mines, a single proprietorship owned solely by him. He started making
improvements and installing facilities therein for use in the development of the mines, and
in time extracted therefrom approximately 24,000 metric tons of iron ore.

Fonacier decided to revoke the authority granted by him to Gaite to exploit and develop
the mining claims in a Revocation of Power of Attorney and Contract. Gaite assented
thereto subject to certain conditions.

Gaite transferred to Fonacier, among other rights and interests, all his rights and interests
over the 24,000 tons of iron in consideration of the sum of P75,000 where P10,000 of
which was paid upon the signing of the agreement.

The balance of P65,000.00 will be paid from and out of the first letter of credit covering
the first shipment of iron ores and of the first amount derived from the local sale of iron
ore made by the Larap Mines. Fonacier executed in favor of Gaite a surety bond, to secure
the payment of the balance, with himself (Fonacier) as principal and the Larap Mines and
Smelting Co. and its stockholders. But Gaite asked for another bond under written by a
bonding company, to which Fonacier complied with. The liability of said surety company
would automatically expire on December 8, 1955.

Up to December 8, 1955, the second bond expired and no sale of the approximately
24,000 tons of iron ore had been made by the Larap Mines nor had the P65,000 balance
of the price of said ore been paid to Gaite by Fonacier and his sureties on the theory that
they had lost right to make use of the period given them when their bond.

Fonacier and his sureties failed to pay as demanded by Gaite, the latter filed the present
complaint for the payment of the P65,000.00 balance.

The defendants argued that the obligation was subject to a condition that the amount of
P65,000.00 would be payable out of the first letter of credit covering the first shipment of
iron ore and/or the first amount derived from the local sale of the iron ore by the Larap
Mines & Smelting Co.
Issue:
Whether or not the obligation of Fonacier to pay Gaite the P65,000 balance is one with a
period or term and not one with a suspensive condition.

Held:
Yes. The shipment or local sale of the iron ore is not a condition precedent (or suspensive)
to the payment of the balance of P65,000.00, but was only a suspensive period or
term. What characterizes a conditional obligation is the fact that its efficacy or obligatory
force (as distinguished from its demandability) is subordinated to the happening of a
future and uncertain event; so that if the suspensive condition does not take place, the
parties would stand as if the conditional obligation had never existed.

The words of the contract express no contingency in the buyer's obligation to pay: "The
balance of Sixty-Five Thousand Pesos (P65,000.00) will be paid out of the first letter of
credit covering the first shipment of iron ores . . ." etc. By the very terms of the contract,
therefore, the existence of the obligation to pay is recognized; only its maturity or
demandability is deferred.

Nothing was found that Gaite desired or assumed to run the risk of losing his right over
the ore without getting paid for it, or that Fonacier understood that Gaite assumed any
such risk. This is proved by the fact that Gaite insisted on a bond a to guarantee payment
of the P65,000.00, an not only upon a bond by Fonacier, the Larap Mines and the
company's stockholders, but also on one by a surety company; and the fact that appellants
did put up such bonds indicates that they admitted the definite existence of their obligation
to pay the balance of P65,000.00.

To subordinate the obligation to pay the remaining P65,000.00 to the sale or shipment of
the ore as a condition precedent, would be tantamount to leaving the payment at the
discretion of the debtor, for the sale or shipment could not be made unless Fonacier took
steps to sell the ore.

Assuming that there could be doubt whether by the wording of the contract the parties
indented a suspensive condition or a suspensive period for the payment of the P65,000.00,
the rules of interpretation would incline the scales in favor of "the greater reciprocity
of interests", since sale is essentially onerous and there can be no question that greater
reciprocity obtains if the buyer's obligation is deemed to be actually existing. There can
be no question that greater reciprocity obtains if the buyer's obligation is deemed to be
actually existing, with only its maturity (due date) postponed or deferred

The previous sale or shipment of the ore was not a suspensive condition for the payment
of the balance of the agreed price, but was intended merely to fix the future date of the
payment.

FELIX L. GONZALES vs. THE HEIRS OF THOMAS and PAULA CRUZ

G.R. No. 131784. September 16, 1999
PANGANIBAN, J.:

FACTS:
In 1983, Cruz together with the plaintiffs heirs of Thomas entered into a Contract of
Lease/Purchase with the defendant Gonzales, the sole proprietor and manager of Felgon
Farms, of a half-portion of a parcel of land in Province of Rizal.

CONTRACT OF LEASE/PURCHASE TERMS AND CONDITIONS:

* The Contract is for a period of one year with 15k annual rental and after such period
the LESSEE shall purchase the property on the agreeable price of 1M payable within 2
years with an interest of 12% per annum subject to the devalued amount of the Philippine
Peso, according to the following schedule of payment.

* Upon the execution of the Deed of Sale 50% - and thereafter 25% every 6 months
thereafter, payable within the first 10 days of the beginning of each period of 6 months.

PARAGRAPH 9 ( the issue in this case)

* The LESSORS hereby commit themselves and shall undertake to obtain a separate and
distinct T.C.T. over the herein leased portion to the LESSEE within a reasonable period of
time which shall not in any case exceed 4 years, after which a new Contract shall be
executed by the herein parties which shall be the same in all respects with this Contract
of Lease/Purchase insofar as the terms and conditions are concerned.

Gonzales did not, however, exercise his option to purchase the property immediately after
the expiration of the lease but he remained in possession of the property without paying
the purchase price provided for in the Contract of Lease/Purchase and without paying any
further rentals. (September 14, 1989 to November 7, 1989)

One of the plaintiffs-heirs to informed Gonzales of the lessors decision to rescind the
Contract of Lease/Purchase due to a breach thereof committed by the defendant and
demanded to vacate the premises within 10 days from receipt but Gonzales refused to
vacate.

The matter was therefore brought before the barangay captain but Gonzales refused to
appear before the barangay. Thereafter, Cruz died.

A final demand letter to vacate the premises was sent by the heirs of the deceased Cruz
but remain unheeded.

The property became subject of an Extra-Judicial Partition. Title to the property remained
in the name of the plaintiffs predecessors-in-interest, Bernardina Calixto and Severo Cruz.

Alleging breach of the Contract of Lease/Purchase, the heirs filed a complaint for recovery
of possession of the property - subject of the contract with damages, both moral and
compensatory and attorneys fees and litigation expenses.
The heirs anchored their allegation in the payment of only 50k of the 500k agreed down
payment on the purchase price of 1M, Gonzales prayed for a dismissal of the complaint
filed against him and an award of moral, exemplary and actual damages, as well as
litigation expenses.

TRIAL COURT DECISION: favored Gonzales

The failure of the heirs to secure the Transfer Certificate of Title, as provided for in the
contract, does not entitle them to rescind the contract. That is a condition. Although the
contract stated that the same be done within 4 years from execution, still, Gonzales has
to be assured that the land subject of the case will be transferred in his name without any
encumbrances, as the Extra-Judicial Partition was being processed, and continues to be
in process. The failure to secure the Transfer Certificate of Title in favor of Gonzales
entitles not the heirs but, rather, Gonzales to either rescind or to ask for specific
performances.

CA: REVERSED
The transfer of title cannot be interpreted as a condition precedent to the payment of the
agreed purchase price, the terms of the contract [are] explicit and require no
interpretation. Upon the expiration of the lease, the lessee shall purchase the property.
Besides, the normal course of things anent the sale of real properties dictates that there
must first be payment of the agreed purchase price before transfer of title to the vendees
name can be made.

ISSUE:
1. WHETHER THE TRANSFER OF TITLE IS A CONDITION PRECEDENT

HELD: YES
The Petition is meritorious.

The disputed agreement provides that Gonzales shall lease the property for one year,
after which he shall purchase it. Paragraph 9, on the other hand, requires herein
respondents to obtain a separate and distinct TCT over the property.

Basic is the rule in the interpretation of contracts that if some stipulation therein should
admit of several meanings, it shall be understood as bearing that import most adequate
to render it effectual. Considering the antecedents of the ownership of the disputed lot, it
appears that petitioners interpretation renders clause nine most effectual.

The clear intent of the ninth paragraph was for heirs to obtain a separate and distinct TCT
in their names. This was necessary to enable them to show their ownership of the
stipulated portion of the land and their concomitant right to dispose of it. Absent any title
in their names, they could not have sold the disputed parcel of land.

It is a well-settled principle in law that no one can give what one does not have -- nemo
dat quod non habet.
Because the property remained registered in the names of their predecessors-in-interest,
heirs could validly sell only their undivided interest in the estate, the extent of which was
however not shown in the records. There being no partition of the estate thus far, there
was no guarantee as to how much and which portion would be adjudicated to
respondents.

In a contract of sale, the title to the property passes to the vendee upon the delivery of
the thing sold. In this case, the heirs could not deliver ownership or title to a specific
portion of the yet undivided property. True, they could have intended to sell their
hereditary interest, but in the context of the Contract of Lease/Purchase, the parties under
paragraph nine wanted the specific portion of the land to be segregated, identified and
specifically titled. Hence, by the said Contract, the respondents as sellers were given a
maximum of four years within which to acquire a separate TCT in their names, preparatory
to the execution of the deed of sale and the payment of the agreed price in the manner
described in paragraph nine.

This interpretation is bolstered by the 50k petitioner advanced to heirs in order to help
them expedite the transfer of the TCT to their names. Ineluctably, the intention of the
parties was to have the title transferred first to respondents names as a condition for the
completion of the purchase.

Condition has been defined as every future and uncertain event upon which an obligation
or provision is made to depend. It is a future and uncertain event upon which the
acquisition or resolution of rights is made to depend by those who execute the juridical
act. Without it, the sale of the property under the Contract cannot be perfected, and
petitioner cannot be obliged to purchase the property. When the consent of a party to a
contract is given subject to the fulfillment of a suspensive condition, the contract is not
perfected unless that condition is first complied with.

In this case, the obligation of the petitioner to buy the land cannot be enforced unless
respondents comply with the suspensive condition that they acquire first a separate and
distinct TCT in their names. The suspensive condition not having been fulfilled, then the
obligation of the petitioner to purchase the land has not arisen.

2. WHETHER THE HEIRS CAN RESCIND THE CONTRACT

HELD: NO

Because they have not caused the transfer of the TCT to their names, which is a condition
precedent to petitioners obligation. This Court has held that there can be no rescission (or
more properly, resolution) of an obligation as yet non-existent, because the suspensive
condition has not happened.

However, the court find no sufficient factual or legal justifications for the award of moral
damages and attorneys fees.
Coronel vs CA
253 SCRA 15 G.R. No. 103577; October 7, 1996
MELO, J.

A contract to sell may thus be defined as a bilateral contract whereby the prospective
seller, while expressly reserving the ownership of the subject property despite delivery
thereof to the prospective buyer, binds himself to sell the said property exclusively to the
prospective buyer upon fulfillment of the condition agreed upon, that is, full payment of
the purchase price. In a conditional contract of sale, however, upon the fulfillment of the
suspensive condition, the sale becomes absolute and this will definitely affect the seller's
title thereto.

FACTS:
This case is about a sale of land in Roosevelt Avenue, Quezon City by the vendor Romulo
Coronel to the vendees Conception Alcaraz and her daughter Ramona Patricia Alcaraz with
the following conditions: (a)The Coronel’s will immediately transfer the certificate of title
in their name upon receipt of the downpayment which is ₱50,000. (b) Upon the transfer
in their names of the subject property, the Coronel’s will execute the deed of absolute
sale in favor of Ramona and then Ramona shall immediately pay the Coronel’s the whole
balance of ₱1,190,000.

On January 15, 1985, Conception paid the downpayment of ₱50,000 and then on February
6, 1985, the property was now registered under the name of Coronel’s. By Feb. 18, 1985,
the Coronel’s sold the property to Catalina B. Mabanag for ₱1,580,000 after she made a
₱300,000 downpayment. This is the reason why the Coronels cancelled and rescinded the
contract with the Alcaraz by depositing back the ₱50,000 to Ramona’s bank account.

Alcaraz filed acomplaint for specific performance, which the trial and the appellate court
ruled in her favor.

ISSUE:
Whether or not the contract between the parties is a contract of conditional sale or merely
a contract to sell

RULING:
The agreement is a contract of sale as there was no express reservation of ownership
or title to the subject parcel of land. Petitioners did not merely promise to sell the property
to private respondent upon the fulfillment of the suspensive condition but on the contrary,
havingalready agreed to sell the subject property, they undertook to have the certificate
of title changedto their names and immediately thereafter, to execute the written deed of
absolute sale. Thesuspensive condition was fulfilled on 6 February 1985 and thus, the
conditional contract of sale between the parties became obligatory, the only act required
for the consummation thereof beingthe delivery of the property by means of the execution
of the deed of absolute sale in a publicinstrument, which petitioners unequivocally
committed themselves to do as evidenced by the³Receipt of Down Payment.´

George Parks v. Province of Tarlac

C.J. AVANCEÑA
The characteristic of a condition precedent is that the acquisition of the right is not
effected while said condition is not complied with or is not deemed complied with.
Meanwhile nothing is acquired and there is only an expectancy of right. In the present
case, the condition imposed is not a condition precedent because the donee could not do
any work on the donated land if the donation had not really been effected.

FACTS:
On October 18, 1910, Concepcion Cirer and James Hill, the owners of parcel of land No.
2 referred to in the complaint, donated it perpetually to the municipality of Tarlac, Province
of Tarlac, under certain conditions specified in the public document in which they made
this donation. The donation was accepted by Mr. Santiago de Jesus in the same document
on behalf of the municipal council of Tarlac of which he was the municipal president. Said
donated parcel of land was later on registered in the name of the donee, the municipality
of Tarlac.

On January 15, 1921, Concepcion Cirer and James Hill sold this parcel to herein plaintiff
George L. Parks. On August 24, 1923, the municipality of Tarlac transferred the parcel to
the Province of Tarlac which, by reason of this transfer, applied for and obtained the
registration thereof in its name, the corresponding certificate of title having been issued
to it.

Plaintiff alleged that the conditions of the donation had not been complied with, and
invoked the sale of this parcel of land made in his favor. Thus, he brought the instant
action and prayed that he be declared the absolute owner entitled to the possession of
this parcel, that the transfer of the same by the municipality of Tarlac to the Province of
Tarlac be annulled, and the transfer certificate issued to the Province of Tarlac cancelled.

The lower court dismissed the complaint.

ISSUE: Whether the sale of the parcel of land in favor of plaintiff should be given effect
despite the donation of subject property in favor of the Municipality of Tarlac?

RULING: No, the sale should not be given effect and plaintiff has no right of action over
the same.

Said parcel of land having been donated by Concepcion Cirer and James Hill to the
municipality of Tarlac, which donation was accepted by the latter, the title to the property
was transferred to the municipality of Tarlac.

It is true that the donation might have been revoked for causes, if any, provided by the
law, but the fact remains - it was not revoked when Concepcion Cirer and James Hill made
the sale of this parcel to the plaintiff. Even supposing that causes existed for the revocation
of this donation, still, it was necessary, in order to consider it revoked, either that the
revocation had been consented to by the donee, the municipality of Tarlac, or that it had
been judicially decreed. None of these circumstances existed when Concepcion and James
sold this parcel to the plaintiff. Consequently, when the sale was made Concepcion and
James were no longer the owners of this parcel and could not have sold it to the plaintiff,
nor could the latter have acquired it from them.
More so, plaintiff contends that a condition precedent having been imposed in the
donation and the same not having been complied with, the donation never became
effective. However, the Court finds no merit on plaintiff’s contention. Plaintiff refers to the
condition imposed that one of the parcels donated was to be used absolutely and
exclusively for the erection of a central school and the other for a public park, the work
to commence in both cases within the period of six months from the date of the ratification
by the parties of the document evidencing the donation. It is true that this condition has
not been complied with. The allegation, however, that it is a condition precedent is
erroneous.

The characteristic of a condition precedent is that the acquisition of the right is not
effected while said condition is not complied with or is not deemed complied with.
Meanwhile nothing is acquired and there is only an expectancy of right. Consequently,
when a condition is imposed, the compliance of which cannot be effected except when
the right is deemed acquired, such condition cannot be a condition precedent. In the
present case the condition that a public school be erected and a public park made of the
donated land, work on the same to commence within six months from the date of the
ratification of the donation by the parties, could not be complied with except after giving
effect to the donation. The donee could not do any work on the donated land if the
donation had not really been effected, because it would be an invasion of another's title,
for the land would have continued to belong to the donor so long as the condition imposed
was not complied with.

Finally, plaintiff contends that, in any event, the condition not having been complied with,
even supposing that it was not a condition precedent but subsequent, the non-compliance
thereof is sufficient cause for the revocation of the donation. This is correct. But the period
for bringing an action for the revocation of the donation has already prescribed. That the
instant action is prescriptible, there is no doubt. There is no legal provision which excludes
this class of action from the statute of limitations. Under the law in force (sec. 43, Code
of Civ. Proc.) the period of prescription of this class of action is ten years. The action for
the revocation of the donation for this cause arose on April 19, 1911, that is six months
after the ratification of the instrument of donation of October 18, 1910. The complaint in
this action was presented July 5, 1924, more than ten years after this cause accrued.

Hence, the judgment appealed from is affirmed, with the costs against the appellant.

CENTRAL PHILIPPINE UNIVERSITY vs. COURT OF APPEALS, REMEDIOS

FRANCO, FRANCISCO N. LOPEZ, CECILIA P. VDA. DE LOPEZ, REDAN LOPEZ AND
REMARENE LOPEZ

G.R. No. 112127 July 17, 1995

BELLOSILLO, J.:
When the obligation does not fix a period but from its nature and circumstances it can be
inferred that a period was intended, the general rule provided in Art. 1197 of the Civil
Code applies (the courts may fix the duration because the fulfillment of the obligation
itself cannot be demanded until after the court has fixed the period for compliance
therewith and such period has arrived). But, if after reasonable period and opportunity
has already been given for the donee to fulfill what has been charged upon him by the
donor and still he failed to comply, the court need not fix a period and rescission of the
donation can be warranted (Art. 1191).

Facts: In 1939, the late Don Ramon Lopez, Sr., then a member of the Board of Trustees
of the Central Philippine College (now University), executed a deed of donation in favor
of the latter of a parcel of land with the following annotations from the deed of donation
—

1. The land described shall be utilized by the CPU exclusively for the
establishment and use of a medical college with all its buildings as part
of the curriculum;

2. The said college shall not sell, transfer or convey to any third party nor in any
way encumber said land;

xxx

In 1989, the heirs of Don Ramon Lopez, Sr., filed an action for annulment of donation,
reconveyance and damages against CPU alleging that since 1939 up to the time the action
was filed the latter had not complied with the conditions of the donation. They also argued
that CPU had in fact negotiated with the National Housing Authority (NHA) to exchange
the donated property with another land owned by NHA.

CPU alleged that the right of private respondents to file the action had prescribed; that it
did not violate any of the conditions in the deed of donation because it never used the
donated property for any other purpose than that for which it was intended; and, that it
did not sell, transfer or convey it to any third party.

TC: CPU failed to comply with the conditions of the donation and declared it null and void
and directed CPU to execute a deed of the reconveyance of the property in favor of the
heirs of the donor.

CA: Reversed TC’s ruling and remanded the case to the court a quo for the determination
of the time within which petitioner should comply with the first condition annotated in the
certificate of title.

Reason: While the first condition mandated petitioner to utilize the donated
property for the establishment of a medical school, the donor did not fix a period
within which the condition must be fulfilled, hence, until a period was fixed for the
fulfillment of the condition, petitioner could not be considered as having failed to
comply with its part of the bargain.
Issues:

1. Whether or not the donation is an onerous donation – (YES)

2. Whether or not the conditions imposed upon the donation are resolutory conditions
– (YES)
3. Whether or not the action has prescribed – (NO)

Ruling: RTC Decision REINSTATED and AFFIRMED. CPU directed to reconvey the parcel
of land to the heirs.

1. The donation was onerous, one executed for a valuable consideration which is
considered the equivalent of the donation itself, e.g., when a donation imposes a
burden equivalent to the value of the donation. A gift of land to the City of Manila
requiring the latter to erect schools, construct a children's playground and open
streets on the land was considered an onerous donation. Similarly, where Don
Ramon Lopez donated the subject parcel of land to petitioner but imposed an
obligation upon the latter to establish a medical college thereon, the donation must
be for an onerous consideration.
2. Under Art. 1181 of the Civil Code, the acquisition of rights, as well as the
extinguishment or loss of those already acquired, shall depend upon the happening
of the event which constitutes the condition. Thus, when a person donates land to
another on the condition that the latter would build upon the land a school, the
condition imposed was not a suspensive condition but a resolutory one. It is not
correct to say that the schoolhouse had to be constructed before the donation
became effective, that is, before the donee could become the owner of the land.
The donation had to be valid before the fulfillment of the condition. If there was
no fulfillment or compliance with the condition, such as what obtains in the instant
case, the donation may now be revoked and all rights which the donee may have
acquired under it shall be deemed lost and extinguished.
3. The action has not prescribed.

The condition imposed by the donor depended upon the exclusive will of the donee
as to when this condition shall be fulfilled, therefore, its absolute acceptance and
the acknowledgment of its obligation provided in the deed of donation were
sufficient to prevent the statute of limitations from barring the action.

Although, in the instant case, the period of time for the establishment of a medical
college and the necessary buildings and improvements on the property cannot be
quantified in a specific number of years because of the presence of several factors
and circumstances involved in the erection of an educational institution, such as
government laws and regulations pertaining to education, building requirements
and property restrictions which are beyond the control of the donee.

Here, the rule is: when the time from which the cause of action accrued for the
revocation of the donation and recovery of the property donated cannot be
specifically determined, the starting point begins from the expiration of a
reasonable period and opportunity for the donee to fulfill what has been
charged upon it by the donor.
 Thus, when the obligation does not fix a period but from its nature and
circumstances it can be inferred that a period was intended, the general
rule provided in Art. 1197 of the Civil Code applies, which provides that
the courts may fix the duration thereof because the fulfillment of the
obligation itself cannot be demanded until after the court has fixed the
period for compliance therewith and such period has arrived.

This general rule however cannot be applied considering the different set of
circumstances existing in the instant case. More than a reasonable period of 50
years has already been given to CPU for it to comply with the condition. But,
unfortunately, it failed to do so. Hence, there is no more need to fix the duration
of a term of the obligation and rescission is warranted. Under Art. 1191 of the
Civil Code, when one of the obligors cannot comply with what is incumbent upon
him, the obligee may seek rescission and the court shall decree the same unless
there is just cause authorizing the fixing of a period. In the absence of any just
cause for the court to determine the period of the compliance, there is no more
obstacle for the court to decree the rescission claimed.

ALFONSO QUIJADA, CRESENTE QUIJADA, REYNELDA QUIJADA, DEMETRIO

QUIJADA, ELIUTERIA QUIJADA, EULALIO QUIJADA, and WARLITO QUIJADA vs
COURT OF APPEALS, REGALADO MONDEJAR, RODULFO GOLORAN, ALBERTO
ASIS, SEGUNDINO RAS, ERNESTO GOLORAN, CELSO ABISO, FERNANDO
BAUTISTA, ANTONIO MACASERO, and NESTOR MAGUINSAY, G.R. No. 126444
December 4, 1998, MARTINEZ, J.

It has been ruled that when a person donates land to another on the condition that the
latter would build upon the land a school, the condition imposed is not a condition
precedent or a suspensive condition but a resolutory one.

Facts:

Plaintiffs-appellees (petitioners) are the children of the late Trinidad Corvera Vda, de
Quijada. Trinidad was one of the heirs of the late Pedro Corvera and inherited from the
latter the two-hectare parcel of land subject of the case, situated in the barrio of San
Agustin, Talacogon, Agusan del Sur. On April 5, 1956, Trinidad Quijada together with her
sisters Leonila Corvera Vda. de Sequeña and Paz Corvera Cabiltes and brother Epapiadito
Corvera executed a conditional deed of donation of the two-hectare parcel of land subject
of the case in favor of the Municipality of Talacogon, the condition being that the parcel
of land shall be used solely and exclusively as part of the campus of the proposed
provincial high school in Talacogon. Apparently, Trinidad remained in possession of the
parcel of land despite the donation. On July 29, 1962, Trinidad sold one (1) hectare of the
subject parcel of land to defendant-appellant Regalado Mondejar. Subsequently, Trinidad
verbally sold the remaining one (1) hectare to defendant-appellant (respondent) Regalado
Mondejar without the benefit of a written deed of sale and evidenced solely by receipts of
payment.

On July 5, 1988, plaintiffs-appellees (petitioners) filed this action against defendants-

appellants (respondents). In the complaint, plaintiffs-appellees (petitioners) alleged that
their deceased mother never sold, conveyed, transferred or disposed of the property in
question to any person or entity much less to Regalado Mondejar save the donation made
to the Municipality of Talacogon in 1956; that at the time of the alleged sale to Regalado
Mondejar by Trinidad Quijada, the land still belongs to the Municipality of Talacogon,
hence, the supposed sale is null and void.

Defendants-appellants (respondents), on the other hand, in their answer claimed that the
land in dispute was sold to Regalado Mondejar, the one (1) hectare on July 29, 1962, and
the remaining one (1) hectare on installment basis until fully paid. As affirmative and/or
special defense, defendants-appellants (respondents) alleged that plaintiffs action is
barred by laches or has prescribed.

Issue:

Is the donation subject to a resolutory condition?

Ruling:

Yes. The donation made on April 5, 1956 by Trinidad Quijada and her brother and sisters
was subject to the condition that the donated property shall be "used solely and
exclusively as a part of the campus of the proposed Provincial High School in Talacogon."
The donation further provides that should "the proposed Provincial High School be
discontinued or if the same shall be opened but for some reason or another, the same
may in the future be closed" the donated property shall automatically revert to the
donor. Such condition, not being contrary to law, morals, good customs, public order or
public policy was validly imposed in the donation.

When the Municipality's acceptance of the donation was made known to the donor, the
former became the new owner of the donated property — donation being a mode of
acquiring and transmitting ownership — notwithstanding the condition imposed by the
donee. The donation is perfected once the acceptance by the donee is made known to
the donor. According, ownership is immediately transferred to the latter and that
ownership will only revert to the donor if the resolutory condition is not fulfilled.

In this case, that resolutory condition is the construction of the school. It has been ruled
that when a person donates land to another on the condition that the latter would build
upon the land a school, the condition imposed is not a condition precedent or a suspensive
condition but a resolutory one. Thus, at the time of the sales made in 1962 towards 1968,
the alleged seller (Trinidad) could not have sold the lots since she had earlier transferred
ownership thereof by virtue of the deed of donation. So long as the resolutory condition
subsists and is capable of fulfillment, the donation remains effective and the donee
continues to be the owner subject only to the rights of the donor or his successors-in-
interest under the deed of donation. Since no period was imposed by the donor on when
must the donee comply with the condition, the latter remains the owner so long as he has
tried to comply with the condition within a reasonable period. Such period, however,
became irrelevant herein when the donee-Municipality manifested through a resolution
that it cannot comply with the condition of building a school and the same was made
known to the donor. Only then — when the non-fulfillment of the resolutory condition was
brought to the donor's knowledge — that ownership of the donated property reverted to
the donor as provided in the automatic reversion clause of the deed of donation.

The donor may have an inchoate interest in the donated property during the time that
ownership of the land has not reverted to her. Such inchoate interest may be the subject
of contracts including a contract of sale. In this case, however, what the donor sold was
the land itself which she no longer owns. It would have been different if the donor-seller
sold her interests over the property under the deed of donation which is subject to the
possibility of reversion of ownership arising from the non-fulfillment of the resolutory
condition.

FRANCISCO LAO LIM vs. CA and BENITO VILLAVICENCIO DY

The disputed stipulation "for as long as the defendant needed the premises and can meet
and pay said increases" is a purely potestative condition because it leaves the
effectivity and enjoyment of leasehold rights to the sole and exclusive will of the lessee.

FACTS:
The records show that Villavicencio entered into a contract of lease with petitioner for a
period of three (3) years, that is, from 1976 to 1979. After the stipulated term expired,
Villavicencio refused to vacate the premises, hence, petitioner filed an ejectment suit
against the former in the City Court of Manila, docketed therein as Civil Case No. 051063-
CV.

The case was terminated by a judicially approved compromise agreement of the parties
providing in part:

“3. That the term of the lease shall be renewed every 3years retroacting from October
1979 to October 1982; after which the abovenamed rental shall be raised automatically
by 20% every three years for as long as defendant needed the premises and can meet
and pay the said increases, the defendant to give notice of his intent to renew sixty (60)
days before the expiration of the term;”

By reason of said compromise agreement the lease continued from 1979 to 1982, then
from 1982 to 1985. On April 17, 1985, petitioner advised Villavicencio that he would no
longer renew the contract effective October, 1985.

However, on August 5, 1985, Villavicencio informed petitioner in writing of his intention

to renew the contract of lease for another term, commencing November, 1985 to October,
1988. In reply to said letter, petitioner advised Villavicencio that he did not agree to a
renewal of the lease contract upon its expiration in October, 1985.

On January 15, 1986, because of Villavicencio's refusal to vacate the premises, petitioner
filed another ejectment suit, this time with the Metropolitan Trial Court of Manila. In its
decision of September 24, 1987, said court dismissed the complaint on the grounds that:
(1) the lease contract has not expired, being a continuous one the period whereof
depended upon the lessee's need for the premises and his ability to pay the rents;
and

(2) the compromise agreement entered into in the aforesaid Civil Case No. 051063-CV
constitutes res judicata to the case before it.

Petitioner appealed to the RTC of Manila which, in its decision of January 28, 1988,
affirmed the decision of the lower court.

CA affirmed RTC and held that:

(1) the stipulation in the compromise agreement which, in its formulation, allows the
lessee to stay on the premises as long as he needs it and can pay rents is valid, being
a resolutory condition and, therefore, beyond the ambit of Article 1308 of the Civil
Code; and

(2) that a compromise has the effect of res judicata.

ISSUE:
Was the stipulation in the compromise agreement which allows the lessee to stay on the
premises as long as he needs it and can pay rents is valid?

RULING:
No. The decision of respondent CA is REVERSED and SET ASIDE.

It is likewise a suspensive condition because the renewal of the lease, which gives rise
to a new lease, depends upon said condition. It should be noted that a renewal constitutes
a new contract of lease although with the same terms and conditions as those in the
expired lease.
It should also not be overlooked that said condition is not resolutory in nature because
it is not a condition that terminates the lease contract. The lease contract is for a definite
period of three (3) years upon the expiration of which the lease automatically terminates.

The invalidity of a condition in a lease contract similar to the one at bar has been resolved
in Encarnacion vs. Baldomar, et al. where we ruled that in an action for ejectment, the
defense interposed by the lessees that the contract of lease authorized them to continue
occupying the premises as long as they paid the rents is untenable, because it would leave
to the lessees the sole power to determine whether the lease should continue or not.

As stated therein, "(i)f this defense were to be allowed, so long as defendants elected to
continue the lease by continuing the payment of the rentals, the owner would never be
able to discontinue it; conversely, although the owner should desire the lease to continue,
the lessees could effectively thwart his purpose if they should prefer to terminate the
contract by the simple expedient of stopping payment of the rentals. This, of course, is
prohibited by the aforesaid article of the Civil Code.
The continuance, effectivity and fulfillment of a contract of lease cannot be made to
depend exclusively upon the free and uncontrolled choice of the lessee between
continuing the payment of the rentals or not, completely depriving the owner of any say
in the matter. Mutuality does not obtain in such a contract of lease and no equality exists
between the lessor and the lessee since the life of the contract is dictated solely by the
lessee.

The interpretation made by respondent court cannot, therefore, be upheld. The

compromise agreement, read and interpreted in its entirety, is actually to the effect that
the last portion thereof, which gives the Villavicencio sixty (60) days before the expiration
of the term the right to give notice of his intent to renew, is subject to the first portion of
said paragraph that "the term of the lease shall be renewed every three (3) years," thereby
requiring the mutual agreement of the parties.

The use of the word "renew" and the designation of the period of three (3) years clearly
confirm that the contract of lease is limited to a specific period and that it is not a
continuing lease. The stipulation provides for a renewal of the lease every three (3) years;
there could not be a renewal if said lease did not expire, otherwise there is nothing to
renew.

The contract of lease should be and is hereby construed as providing for a definite period
of three (3) years and that the automatic increase of the rentals by twenty percent (20%)
will take effect only if the parties decide to renew the lease. A contrary interpretation will
result in a situation where the continuation and effectivity of the contract will depend only
upon the will of the lessee, in violation of Article 1308 of the Civil Code and the aforesaid
doctrine in Encarnacion.

Moreover, perpetual leases are not favored in law, nor are covenants for continued
renewals tending to create a perpetuity, and the rule of construction is well settled that a
covenant for renewal or for an additional term should not be held to create a right to
repeated grants in perpetuity, unless by plain and unambiguous terms the parties have
expressed such intention.

A lease will not be construed to create a right to perpetual renewals unless the language
employed indicates dearly and unambiguously that it was the intention and purpose of
the parties to do so. A portion in a lease giving the lessee and his assignee the right to
perpetual renewals is not favored by the courts, and a lease will be construed as not
making such a provision unless it does so clearly.

As we have further emphasized:

It is also important to bear in mind that in a reciprocal contract like a lease, the period of
the lease must be deemed to have been agreed upon for the benefit of both parties,
absent language showing that the term was deliberately set for the benefit of the lessee
or lessor alone. We are not aware of any presumption in law that the term of a lease is
designed for the benefit of the lessee alone. . .
In addition, even assuming that the clause "for as long as the defendant needed the
premises and can meet and pay, said increases" gives Villavicencio an option to renew the
lease, the same will be construed as providing for but one renewal or extension and,
therefore, was satisfied when the lease was renewed in 1982 for another three (3) years.

A general covenant to renew is satisfied by one renewal and will not be construed to
confer the right to more than one renewal unless provision is clearly and expressly made
for further renewals. 16Leases which may have been intended to be renewable in
perpetuity will nevertheless be construed as importing but one renewal if there is any
uncertainty in that regard.

The case of Buccat vs. Dispo et al., relied upon by respondent court, to support its holding
that respondent lessee can legally stay on the premises for as long as he needs it and can
pay the rents, is not in point. In said case, the lease contract provides for an indefinite
period since it merely stipulates "(t)hat the lease contract shall remain in full force and
effect as long as the land will serve the purpose for which it is intended as a school site
of the National Business Institute, but the rentals now stipulated shall be subject to review
every after ten (10) years by mutual agreement of the parties." This is in clear contrast
to the case at bar wherein, to repeat, the lease is fixed at a period of three (3) years
although subject to renewal upon agreement of the parties, and the clause "for as long
as defendant needs the premises and can meet and pay the rents" is not an independent
stipulation but is controlled by said fixed term and the option for renewal upon agreement
of both parties.

SILOS v. PNB
Del Castillo, J.

In loan agreements, it cannot be denied that the rate of interest is a principal condition,
if not the most important component. Thus, any modification thereof must be mutually
agreed upon; otherwise, it has no binding effect.

Facts
Spouses Eduardo and Lydia Silos (petitioners) have been in business for about two
decades of operating a department store and buying and selling of ready-to-wear apparel.
To secure a one-year revolving credit line of ₱150,000.00 obtained from PNB, petitioners
constituted in 1987 a Real Estate Mortgage over a 370-square meter lot in Kalibo, Aklan.
After two years, their credit line increased, and additional security was given in the form
of a 134-square meter lot. Petitioners issued a total of 26 Promissory Notes and signed a
Credit Agreement, which was amended two years later. The Loan was initially subjected
to interest at the rate of 19.5% per annum. The Agreement granted PNB the right to
increase or reduce interest rates at any time without notice depending on whatever policy
PNB may adopt in the future and within the limits allowed by law or by the Monetary
Board. Thus, the interest rates played from 16% to as high as 32% per annum.
Respondent regularly renewed the line from 1990 up to 1997, and petitioners made good
on the promissory notes, religiously paying the interests without objection or fail. But in
1997, petitioners faltered when the interest rates soared due to the Asian financial crisis.
Despite repeated demands, petitioners failed to make good on the 26th Promissory Note.
Thus, PNB foreclosed on the mortgage, and the lots were sold to it at auction. Petitioners
sought the annulment of the foreclosure sale on the ground that the succeeding
stipulations for the payment of interest in their loan agreements with PNB – which
allegedly left to the latter the sole will to determine the interest rate – became null and
void.

Issue
Whether the stipulation authorizing PNB to unilaterally increase or de interest rates is valid

Ruling
NO. Contract changes must be made with the consent of the contracting parties. The
minds of all the parties must meet as to the proposed modification, especially when it
affects an important aspect of the agreement. In the case of loan contracts, it cannot be
gainsaid that the rate of interest is always a vital component, for it can make or break a
capital venture. Thus, any change must be mutually agreed upon, otherwise, it is bereft
of any binding effect.
The unilateral action of the PNB in increasing the interest rate on the private respondent’s
loan violated the mutuality of contracts ordained in Article 1308 of the Civil Code:
Art. 1308. The contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them.
In order that obligations arising from contracts may have the force of law between the
parties, there must be mutuality between the parties based on their essential equality. A
contract containing a condition which makes its fulfillment dependent exclusively upon the
uncontrolled will of one of the contracting parties, is void . . . . Hence, even assuming that
the . . . loan agreement between the PNB and the private respondent gave the PNB a
license (although in fact there was none) to increase the interest rate at will during the
term of the loan, that license would have been null and void for being violative of the
principle of mutuality essential in contracts. It would have invested the loan agreement
with the character of a contract of adhesion, where the parties do not bargain on equal
footing, the weaker party’s (the debtor) participation being reduced to the alternative "to
take it or leave it" . . . . Such a contract is a veritable trap for the weaker party whom the
courts of justice must protect against abuse and imposition.
Escalation clauses are not basically wrong or legally objectionable so long as they are not
solely potestative but based on reasonable and valid grounds. Here, not only are the
increases of the interest rates on the basis of the escalation clause patently unreasonable
and unconscionable, but also there are no valid and reasonable standards upon which the
increases are anchored.

Naga Telephone Co (NATELCO) ., Inc. vs. Court of Appeals,230 SCRA 351, G.R.
No. 107112 February 24, 1994
Article 1267 states in our law the doctrine of unforeseen events. This is said to be based
on the discredited theory of rebus sic stantibus in public international law; under this
theory, the parties stipulate in the light of certain prevailing conditions, and once these
conditions cease to exist the contract also ceases to exist. Considering practical needs and
the demands of equity and good faith, the disappearance of the basis of a contract gives
rise to a right to relief in favor of the party prejudiced.

Facts:
NATELCO is a telephone company rendering local and long distance services in Naga. It
entered into a contract with Camarines Sur II Electric Cooperative (electric power service
provider) for for the use by NATELCO in the operation of its telephone service the electric
light posts of private respondent in Naga City. In consideration therefor, petitioners agreed
to install, free of charge, ten (10) telephone connections for the use by private respondent.

Said contract also provided:

(a) That the term or period of this contract shall be as long as the party of the
first part has need for the electric light posts of the party of the second part it
being understood that this contract shall terminate when for any reason
whatsoever, the party of the second part is forced to stop, abandoned [sic] its
operation as a public service and it becomes necessary to remove the electric
lightpost;

After over 10 years Camarines Sur Electric filed against petitioners for reformation of the
contract with damages, on the ground that it is too one-sided in favor of petitioners; that
it is not in conformity with the guidelines of the National Electrification Administration
(NEA) which direct that the reasonable compensation for the use of the posts is P10.00
per post, per month; that after eleven (11) years of petitioners' use of the posts, the
telephone cables strung by them thereon have become much heavier with the increase in
the volume of their subscribers, worsened by the fact that their linemen bore holes
through the posts at which points those posts were broken during typhoons; that a post
now costs as much as P2,630.00; so that justice and equity demand that the contract be
reformed to abolish the inequities thereon.

RTC:

While the contract appeared to be fair to both parties when it was entered into by them
during the first year of private respondent's operation and when its Board of Directors did
not yet have any experience in that business, it had become disadvantageous and unfair
to private respondent because of subsequent events and conditions, particularly the
increase in the volume of the subscribers of petitioners for more than ten (10) years
without the corresponding increase in the number of telephone connections to private
respondent free of charge. The trial court concluded that while in an action for reformation
of contract, it cannot make another contract for the parties, it can, however, for reasons
of justice and equity, order that the contract be reformed to abolish the inequities therein.
Thus, said court ruled that the contract should be reformed by ordering petitioners to pay
private respondent compensation for the use of their posts in Naga City,

NAGA:
Appealed and interpose the following arguments:
Petitioners assert earnestly that Article 1267 of the New Civil Code is not applicable
primarily because the contract does not involve the rendition of service or a personal
prestation and it is not for future service with future unusual change and that the contract
was subject to a potestative condition which rendered said condition void.

ISSUES:

A. Whether or not Article 1267 is applicable in this case.

B. Whether or not period of contract, “as long as the party of the first part has need for
electrive light posts…” potestative?

RULING:
A. Yes.

·ARTICLE 1267, EVEN THOUGH NEVER RAISED BEFORE, IS APPLICABLE.

ARTICLE 1267: Art. 1267. When the service has become so difficult as to be manifestly
beyond the contemplation of the parties, the obligor may also be released therefrom, in
whole or in part.

The contract between the parties has, through the years (since 1977), become too
inequitous or disadvantageous to the plaintiff and too one-sided in favor of defendant-
appellant, so that a solution must be found to relieve plaintiff from the continued operation
of said agreement and to prevent defendant-appellant from further unjustly enriching
itself at plaintiff's expense. It is indeed unfortunate that defendant had turned deaf ears
to plaintiffs requests for renegotiation, constraining the latter to go to court. But although
plaintiff cannot, as we have held, correctly invoke reformation of contract as a proper
remedy (there having been no showing of a mistake or error in said contract on the part
of any of the parties so as to result in its failure to express their true intent), this does not
mean that plaintiff is absolutely without a remedy in order to relieve itself from a contract
that has gone far beyond its contemplation and has become so highly inequitous and
disadvantageous to it through the years because of the expansion of defendant-
appellant's business and the increase in the volume of its subscribers. And as it is the duty
of the Court to administer justice, it must do so in this case in the best way and manner
it can in the light of the proven facts and the law or laws applicable thereto.

B.
No.
That the term or period of this contract shall be as long as the party of the first part
(petitioner) has need for the electric light posts of the party of the second part (private
respondent) . . ..
is a potestative condition, is correct.

However, it must have overlooked the other conditions in the same provision, to wit:
. . . it being understood that this contract shall terminate when for any reason whatsoever,
the party of the second part (private respondent) is forced to stop, abandoned (sic) its
operation as a public service and it becomes necessary to remove the electric light post
(sic); which are casual conditions since they depend on chance, hazard, or the will of a
third person. In sum, the contract is subject to mixed conditions, that is, they depend
partly on the will of the debtor and partly on chance, hazard or the will of a third person,
which do not invalidate the aforementioned provision.

OSMENA VS RAMA
14 PHIL 99; G.R. # 4437; SEPTEMBER 9, 1909
J. Johnson

A condition imposed upon a contract by the promisor, the performance of which depends
upon his exclusive will, is void, in accordance with the provisions of Article 1115 of the
Civil Code.

FACTS:
On November 15, 1890, Don Victoriano Osmena loaned P200 to Dona Cenona Rama with
an interest of half a cuartillo (quarter) per month on each peso with the promise that if
Dona Rama does not comply, she will sell all the sugar she has harvested, and pledge as
security all her present and future properties, and as special security, her house in which
she lives in in Pagina.

On October 27, 1891, Don Victoriano Osmena loaned P70 to Dona Cenona Rama, P50 of
which she has loaned to Don Evaristo Penares which they will pay in sugar. There was no
date supplied in the case. Don Victoriano Osmena died between the execution and delivery
of the contracts and they are passed down to one of his heirs, Agustina Rafols.

On March 15, 1902, Osmena presented the contracts to Rama who acknowledged her
responsibility by issuing an endorsement which provided that if the house where she
resides has already been sold, she will pay her indebtedness to Osmena. However, Rama
still failed to comply with her obligation.

On June 26, 1906, the plaintiff commenced the present action in the Court of First Instance
of the Province of Cebu alleging the aforementioned incidents with prayer for a judgment
for the amount due on said contracts. The defendant filed a general denial and has set
up the special defense of prescription. CFI decided in favor of the plaintiff and ordered
Rama to pay.

ISSUES:
WON the condition imposed by Rama in her endorsement is valid

HELD:
No. A condition imposed upon a contract by the promisor, the performance of which
depends upon his exclusive will, is void, in accordance with the provisions of Article 1115
of the Civil Code.
In the acknowledgment of the indebtedness made by the defendant, she imposed the
condition that she would pay the obligation if she sold her house. If that statement found
in her acknowledgment of the indebtedness should be regarded as a condition, it was a
condition which depended upon her exclusive will, and is, therefore, void. (Art. 1115, Civil
Code.) The acknowledgment, therefore, was an absolute acknowledgment of the
obligation and was sufficient to prevent the statute of limitation from barring the action
upon the original contract.

Smith Bell Vs Sotelo Matti

G.R. No. 16570, March 9,1922, Romualdez, J.

Mixed- when the fulfillment of the condition depends partly upon the will of a party to the
obligation and partly upon chance and / or will of a third person. (the chance stated herein
in this case is World War II.)

Facts:
Smith Bell and Co. entered into contract with Mr. Vicente Sotelo in August 1918.Two steel
tanks, two expellers two electric motors to be sold to Sotelo . The steel tanks are to be
delivered within 3 or 4 months; the expellers to be delivered in September 1918 or as
soon as possible; electric motors approximate delivery within 90 days and is not
guaranteed. The tanks arrived at Manila on the 27th of April, 1919: the expellers on the
26th of October, 1918; and the motors on the 27th of February, 1919. The plaintiff
corporation notified the defendant, Mr. Sotelo, of the arrival of these goods, but Mr. Sotelo
refused to receive them and to pay the prices stipulated.
The plaintiff brought suit against the defendant, based on four separate causes
of action, 1.) alleging, among other facts, that it 2.) immediately notified the defendant
of the arrival of the goods, and 3.) asked instructions from him as to the delivery thereof,
and that the defendant 4.) refused to receive any of them and to pay their price. The
plaintiff, further, alleged that the expellers and the motors were in good condition.

Issue:
Whether Smith Bell incurred delay in the delivery of goods to Sotelo

Held:
No, it did not incur delay.
From the record it appears that these contracts were executed at the time of the world
war when there existed connection with the tanks and "Priority Certificate, subject to the
United -States Government requirements," with respect to the motors. At the time of the
execution of the contracts, the parties were not unmindful of the contingency of the United
States Government not allowing the export of the goods, nor of the fact that the other
foreseen circumstances therein stated might prevent it.
Considering these contracts in the light of the civil law, we cannot but conclude that the
term which the parties attempted to fix is so uncertain that one cannot tell just whether,
as a matter of fact, those articles could be brought to Manila or not. If that is the case, as
we think it is, the obligation must be regarded as conditional.

When the delivery was subject to a condition the fulfillment of which depended not only
upon the effort of the herein plaintiff, but upon the will of third persons who could in no
way be compelled to fulfill .the condition. In cases like this, which are not expressly
provided for, but impliedly covered, by the Civil Code, the obligor will be deemed to have
sufficiently performed his part of the obligation, if he has done all that was in his power,
even if the condition has not been fulfilled in reality.
In connection with this obligation to deliver, occurring in a contract of sale like those in
question, the rule in North America is that when the time of delivery is not fixed in the
contract, time is regarded unessential.
When the contract provides for delivery 'as soon as possible' the seller is entitled to a
reasonable time, in view of all the circumstances, such as the necessities of manufacture,
or of putting the goods in condition for delivery. The term does not mean immediately or
that the seller must stop all his other work and devote himself to that particular order. But
the seller must nevertheless act with all reasonable diligence or without unreasonable
delay. It has been held that a requirement that the shipment of goods should be the
'earliest possible' must be construed as meaning that the goods should be sent as soon
as the seller could possibly send them, and that it signified rather more than that the
goods should be sent within a reasonable time.

"The question as to what is a reasonable time for the delivery of the goods by the seller
is to be determined by the circumstances attending the particular transaction, such as the
character of the goods, and the purpose for which they are intended, the ability of the
seller to produce the goods if they are to be manufactured, the facilities available for
transportation, and the distance the goods must be carried, and the usual course of
business in the particular trade."
The record shows, as we have stated, that the plaintiff did all within its power to have the
machinery arrive at Manila as soon as possible, and immediately upon its arrival it notified
the purchaser of the fact and offered to deliver it to him. Taking these circumstances into
account, we hold that the said machinery was brought to Manila by the plaintiff within a
reasonable time.
Therefore, the plaintiff has not been guilty of any delay in the fulfillment of its obligation,
and, consequently, it could not have incurred any of the liabilities mentioned by the
intervenor in its counterclaim or set-off.

RUSTAN PULP & PAPER MILLS, INC., vs. IAC, ILIGAN DIVERSIFIED PROJECT
MILLS, INC, LLUCH
G.R. No. 70789 | October 19, 1992 | MELO, J.:

A condition both potestative (or facultative) and resolutory may be valid, even though left
to the will of the obligor if the facts relate to the birth of the undertaking and not to the
fulfillment of an existing obligation.

FACTS:
Rustan Pulp established a pulp and paper mill. Respondent Lluch, a holder of a forest
products license. The parties executed a contract of sale, wherein respondent Lluch of the
Iligan Diversified Products agreed to sell, and Rustan Pulp and Paper Mill, Inc. undertook
to pay the price of P30.00 per cubic meter of pulp wood raw materials. The contract stated
among others that Rustan Pulp shall have the option to buy pulp wood from other equally
qualified sellers and holders of license to sell or dispose, and that Rustan Pulp shall
have the right to stop delivery of the said raw materials with sufficient notice
to respondent, when supply shall become sufficient until such time when need
for said raw materials shall have become necessarily provided. In installing plant
facilities, the technical staff of Rustan Pulp recommended the acceptance of deliveries
from other suppliers of the pulp wood material. Thus, corresponding deliveries from other
suppliers were made. During the test run of the pulp mill, the machinery line had major
defects while deliveries of the raw materials piled up, prompting the Japanese supplier of
the machinery to recommend the stoppage of the deliveries. Rustan Pulp sent a letter to
Mr. Lluch informing him that the supply of raw materials was sufficient, and requesting
him to stop delivery thirty days from when it was sent (September 30, 1968). Lluch sought
to clarify the tenor of the letter, whether stoppage of delivery or termination of the
contract of sale was intended. However, such query was left unanswered by petitioners.
Notwithstanding this ambiguity, Lluch and the other suppliers resumed deliveries after the
series of talks between Rustan Pulp’s Manager Vergara and Lluch. This prompted Mr. Lluch
to file a Complaint for contractual breach.

ISSUE: Whether or not the suspension of deliveries by Rustan is a proper exercise of its
rights under the contract of sale.

RULING:

NO. The provision that “petitioners can stop delivery of pulp wood from private
respondents if the supply at the plant is sufficient as ascertained by petitioners, subject
to re-delivery when the need arises as determined likewise by petitioners” has a purely
potestative character, which must be obliterated from the face of the contract without
affecting the rest of the stipulations, considering that the condition relates to the
fulfillment of an already existing obligation.

A condition, which is both potestative (or facultative) and resolutory may be valid, even
though the clause is left to the will of the obligor as ruled in Taylor vs. Uy Tieng Piao. But
the Taylor case, which allowed a condition for unilateral cancellation dependent on the
arrival of factory machinery, cannot be applied because the facts relate to the birth of the
undertaking and not to the fulfillment of an existing obligation.

There is no doubt that the contract speaks loudly about petitioners' prerogative but what
diminishes the legal efficacy of such right is the condition attached to it which is dependent
exclusively on their will. It was incongruous for petitioners to send letters calling for
suspension and yet disregarded their own advice by accepting the deliveries from the
suppliers knowing fully well that they will encounter difficulty in producing output because
of the defective machinery line, opting to open the plant to greater loss, and compounding
the costs by accepting additional supply to the stockpile.

Romero vs. Court of Appeals

We share the opinion of the appellate court that the undertaking required of private
respondent does not constitute a "potestative condition dependent solely on his will" that
might, otherwise, be void in accordance with Article 1182 of the Civil Code17 but a "mixed"
condition "dependent not on the will of the vendor alone but also of third persons like the
squatters and government agencies and personnel concerned.”

FACTS:
-Petitioner Virgilio R. Romero, a civil engineer, was engaged in the business of production,
manufacture and exportation of perlite filter aids, permalite insulation and processed
perlite ore. In 1988, petitioner and his foreign partners decided to put up a central
warehouse in Metro Manila on a land area of approximately 2,000 square meters. A day
or so after the announcement, Alfonso Flores and his wife, accompanied by a broker,
offered a parcel of land measuring 1,952 square meters. Petitioner visited the property,
except for the presence of squatters in the area, he found the place suitable for a central
warehouse.
-Later, the Flores spouses called on petitioner with a proposal that should he advance the
amount of P50,000.00 which could be used in taking up an ejectment case against the
squatters, private respondent would agree to sell the property for only P800.00 per square
meter. Petitioner expressed his concurrence. On 09 June 1988, a contract, denominated
"Deed of Conditional Sale," was executed between petitioner and private respondent. The
simply-drawn contract read:
“It is hereby agreed, covenanted and stipulated by and between the parties hereto
that if after 60 days from the date of the signing of this contract the VENDOR shall not be
able to remove the squatters from the property being purchased, the downpayment made
by the buyer shall be returned/reimbursed by the VENDOR to the VENDEE.”
-Pursuant to this agreement, Private Respondent filed a case of ejectment against the
squatters. A few months later, judgment was rendered but it was beyond the 60-day
period agreed upon by the parties. Atty. Apostol (counsel for petitioner) reminded the
private responded of his client’s willingness to underwrite the expenses to execute the
judgment. However, Atty. Yuseco (counsel of private respondent) advised that the Deed
of Conditional Sale has been rendered null and void due to the failure of his client to eject
the squatters within the agrred 60-day period. Private respondent decided to retain the
property.
-Private Respondent then filed with the RTC of Makati, rescission of the deed of conditional
sale, damages and for consignation of the 50,000.00. RTC ruled in favour of the petitioner,
stating that the private respondent had no right to rescind since he was the one who
violated the contract. On appeal, the CA reversed the decision stating that the conditional
sale was subject to a reslolutory condition and that private respondent substantially
performed his obligation . Hence, this appeal.

ISSUE:
1. Whether or not the deed of conditional sale was subject to a resolutory condition?

RULING:
-NO. it is a mixed condition. From the moment the contract is perfected, the parties are
bound not only to the fulfillment of what has been expressly stipulated but also to all the
consequences which, according to their nature, may be in keeping with good faith, usage
and law. Under the agreement, private respondent is obligated to evict the squatters on
the property. The ejectment of the squatters is a condition the operative act of which sets
into motion the period of compliance by petitioner of his own obligation, i.e., to pay the
balance of the purchase price. Private respondent's failure "to remove the squatters from
the property" within the stipulated period gives petitioner the right to either refuse to
proceed with the agreement or waive that condition in consonance with Article 1545 of
the Civil Code. This option clearly belongs to petitioner and not to private respondent.

We share the opinion of the appellate court that the undertaking required of private
respondent does not constitute a "potestative condition dependent solely on his will" that
might, otherwise, be void in accordance with Article 1182 of the Civil Code but a "mixed"
condition "dependent not on the will of the vendor alone but also of third persons like the
squatters and government agencies and personnel concerned." We must hasten to add,
however, that where the so-called "potestative condition" is imposed not on the birth of
the obligation but on its fulfillment, only the obligation is avoided, leaving unaffected the
obligation itself.

ROMAN CATHOLIC ARCHBISHOP OF MANILA v CA
G.R. No. 77425/77450 June 19, 1991

There is no need for prescription to be applied in cases where there is stipulation

for automatic reversion. Nonetheless, the stipulation is against public policy and thus, is
void.

FACTS
The administrators of the estate of deceased spouses Eusebio and Martina De
Castro filed a complaint to nullify the deed of donation, rescission of contract, and
reconveyance of the property against spouses Florencio and Soledad Ignao, Roman
Catholic Bishop of Imus, and Roman Catholic Archbishop of Manila.

The administrators alleged that in 1930 the De Castros executed the deed of
donation over their Cavite property to the Archbishop, said deed allegedly providing that
the latter cannot dispose or sell the property within 100 years from execution. The
administration of the said properties was transferred to the Bishop of Imus in 1962. And
in 1980, the Bishop of Imus sold the property to the spouses Ignao. The Ignaos were then
able to transfer the TCT under their names.

The lower court ruled that the action had already prescribed and dismissed the
complaint. This was reversed by the CA.

The Ignaos and the Bishops contend that the cause of action had already
prescribed, relying on Art. 764 which provides that "(t)he donation shall be revoked at the
instance of the donor, when the donee fails to comply with any of the conditions which
the former imposed upon the latter," and that "(t)his action shall prescribe after four years
from the non-compliance with the condition, may be transmitted to the heirs of the donor,
and may be exercised against the donee's heirs.

ISSUE
WON the action has already prescribed

HELD / RATIO
 ACTION HAS ALREADY PRESCRIBED. Art. 764 is not applicable in this case.
The deed of donation involved expressly provided for automatic reversion of the property
donated in case of violation of the, as was correctly recognized by the CA.

A judicial action for rescission of a contract is not necessary where the contract
provides that it may be revoked and cancelled for violation of any of its terms and
conditions. This cancellation can be applied in the case at bar. Art. 732 of the Civil Code
provides that donations inter vivos shall be governed by the general provisions on
contracts and obligations in all that is not determined by the law on donations.

In contracts providing for automatic revocation, judicial intervention is necessary

not for purposes of obtaining a judicial declaration rescinding a contract already deemed
rescinded, but in order to determine whether or not the rescission was proper.
Thus, the cause of action has not yet prescribed since an action to enforce a
written contract prescribes in ten (10) years. Article 764 was intended to provide a judicial
remedy in case of non-fulfillment or contravention of conditions specified in the deed of
donation if and when the parties have not agreed on the automatic revocation of such
donation upon the occurrence of the contingency contemplated therein. That is not the
situation in the case at bar.

NONETHELESS, while the action may not be dismissed by reason of prescription,

the same should be dismissed on the ground that the estates of the De Castros have NO
CAUSE OF ACTION against the Ignaos and other petitioners.

The cause of action of the De Castros is based on the alleged breach of the
resolutory condition that the property donated should not be sold within the prohibited
period. Said condition, however, constitutes an undue restriction on the rights arising from
ownership and is, therefore, contrary to public policy and should be declared as an illegal
or impossible condition.

The Ignaos won. The CA decision is reversed.

Araneta v Phil Sugar Estates Development

GR No. L-22558 – May 31, 1967
Ponente: Reyes, JBL.,J.

It must be recalled that Article 1197 of the Civil Code involves a two-step process. The
Court must first determine that "the obligation does not fix a period" (or that the period
is made to depend upon the will of the debtor)," but from the nature and the
circumstances it can be inferred that a period was intended". And second, to determine
and decide what period “was properly contemplated by the parties”.
The Court can not fix a period merely because in its opinion it is or should be reasonable,
but must set the time that the parties are shown to have intended.

Facts:
J. M. Tuason & Co., Inc. is the owner of a big tract land situated in Quezon City. On July
28, 1950, through Gregorio Araneta, Inc., it (Tuason & Co.) sold a portion thereof for the
sum of P430,514.00, to Philippine Sugar Estates Development Co., Ltd.
The parties stipulated that the buyer will build on the said parcel land the Sto. Domingo
Church and Convent while the seller for its part will Construct streets on the NE and NW
and SW sides of the land.

The buyer, Philippine Sugar Estates Development Co., Ltd., finished the construction of
Sto. Domingo Church and Convent, but the seller, Gregorio Araneta, Inc., which began
constructing the streets, is unable to finish the construction of the street in the Northeast
side named because a certain third-party, by the name of Manuel Abundo, who has been
physically occupying a middle part thereof, refused to vacate the same; hence, on May 7,
1958, Philippine Sugar Estates Development Co., Lt. filed its complaint against J. M.
Tuason & Co., Inc. seeking to compel the latter to comply with their obligation, as
stipulated in the deed of sale, and/or to pay damages in the event they failed or refused
to perform said obligation.

Araneta’s contention:
That the action was premature since its obligation to construct the streets in question was
without a definite period which needs to he fixed first by the court in a proper suit for that
purpose before a complaint for specific performance will prosper and that the plaintiff's
complaint did not expressly or impliedly allege and pray for the fixing of a period to comply
with its obligation and that the evidence presented at the trial was insufficient to warrant
the fixing of such a period.

Trial Court:
Judgment is rendered against defendant Gregorio Araneta, Inc., a period of two (2) years
is given within which to comply with its obligation under the contract

CA:
Affirmed

Issues:
a. w/n the court erred in fixing the time of performance
b. w/n it was within the powers of the lower court to set the performance of the
obligation in 2 years
c. Does “reasonable time” mean that the date of performance would be indefinite?

Ruling:
a. Yes. The Court should not have fixed a period for the time of performance since
in the contract, Philippine Sugar Estates gave Araneta “reasonable time within
which to comply with its obligation to construct and complete the streets”. All that
the Court should have done was to determine if that reasonable time had already
elapsed when the suit was filed. If it had passed, then the court should have
declared that Araneta has breached the contract. If it had not passed, then the
filing of the suit was premature.

b. No. The complaint did not seek to have the period fixed. Thus, the Court should
not have set the period. Granting that it did, the decision setting the period to 2
years is without any basis. The last paragraph of Art 1197 is clear that the period
cannot be set arbitrarily. The Court shall determine such period as may under the
 circumstances been probably contemplated by the parties. It must set the time
that the parties are shown to have intended. It must be recalled that Art 1197
involves a two-step process. The Court must first determine that “the obligation
does not fix a period” (or that the period is made to depend upon the will of the
debtor), but from the nature and circumstances it can be inferred that a period
was intended. And second, to determine and decide what period was “probably
contemplated by the parties”.

c. Yes. The circumstances admit no other reasonable view. This indefiniteness is what
explains why the agreement did not specify any exact periods or dates of
performance. The contract shows that the parties were fully aware that the land
was occupied by squatters. As the parties must have known that they could not
take the law into their own hands and must resort to legal processes to evict the
squatters. They must have known that the duration of the suits would not be under
their control nor determined in advance. Thus, it can be concluded that the parties
intended to defer the performance of the obligations until the squatters were duly
evicted.

CENTRAL PHILIPPINE UNIVERSITY v. COURT OF APPEALS, et al.

G.R. No. 112127, 17 July 1995, FIRST DIVISION (Bellosillo, J.)

When the obligation does not fix a period but from its nature and circumstances it
can be inferred that a period was intended, the general rule provided in Art. 1197 of the
Civil Code applies.

FACTS:
In 1939, the late Don Ramon Lopez, Sr., who was then a member of the Board of Trustees
of the Central Philippine College (now Central Philippine University [CPU]), donated a
parcel of land in favor of the said school. The Deed of Donation imposed conditions: that
the land shall be utilized by the CPU exclusively for the establishment and use of a medical
college and that the CPU shall erect a building named “Ramon Lopez Campus”. These
conditions were annotated in the TCT issued in the name of the donee CPU. In 1989, the
heirs of Lopez, Sr. (private respondents), filed an action for annulment of donation,
reconveyance and damages against CPU alleging that since 1939 up to the time the action
was filed, the latter had not complied with the conditions of the donation.

The trial court held that CPU failed to comply with the conditions of the donation
and declared it null and void. However, the CA reversed and found that while the first
condition mandated CPU to utilize the donated property for the establishment of a medical
school, the donor did not fix a period within which the condition must be fulfilled, hence,
until a period was fixed for the fulfillment of the condition, CPU could not be considered
as having failed to comply with its part of the bargain. Thus, the CA remanded the case
to the trial court for the determination of the time within which CPU should comply with
the obligation to establish a medical college.

ISSUE: WON the court should fix the period within which CPU would establish a medical
college.
RULING:
NO. The period of time for the establishment of a medical college and the
necessary buildings and improvements on the property cannot be quantified in a specific
number of years because of the presence of several factors and circumstances involved
in the erection of an educational institution, such as government laws and regulations
pertaining to education, building requirements and property restrictions which are beyond
the control of the donee.

Thus, when the obligation does not fix a period but from its nature and
circumstances it can be inferred that a period was intended, the general rule provided in
Art. 1197 of the Civil Code applies, which provides that the courts may fix the duration
thereof because the fulfillment of the obligation itself cannot be demanded until after the
court has fixed the period for compliance therewith and such period has arrived.

This general rule however cannot be applied considering the different set of
circumstances existing in the instant case. More than a reasonable period of fifty (50)
years has already been allowed CPU to avail of the opportunity to comply with the
condition even if it be burdensome, to make the donation in its favor forever valid. But,
unfortunately, it failed to do so. Hence, there is no more need to fix the duration of a term
of the obligation when such procedure would be a mere technicality and formality and
would serve no purpose than to delay or lead to an unnecessary and expensive
multiplication of suits. Moreover, under Art. 1191 of the Civil Code, when one of the
obligors cannot comply with what is incumbent upon him, the obligee may seek rescission
and the court shall decree the same unless there is just cause authorizing the fixing of a
period. In the absence of any just cause for the court to determine the period of the
compliance, there is no more obstacle for the court to decree the rescission claimed.

Finally, since the questioned deed of donation herein is basically a gratuitous one,
doubts referring to incidental circumstances of a gratuitous contract should be resolved in
favor of the least transmission of rights and interests. Records are clear and facts are
undisputed that since the execution of the deed of donation up to the time of filing of the
instant action, CPU has failed to comply with its obligation as donee. CPU has slept on its
obligation for an unreasonable length of time. Hence, it is only just and equitable now to
declare the subject donation already ineffective and, for all purposes, revoked so that CPU
as donee should now return the donated property to the heirs of the donor, private
respondents herein, by means of reconveyance.

LAFARGE CEMENT vs. CONTINENTAL CEMENT CORPORATION

Joint tort feasors are not liable pro rata. The damages can not be apportioned among
them, except among themselves. They cannot insist upon an apportionment, for the
purpose of each paying an aliquot part. They are jointly and severally liable for the whole
amount.

FACTS:
A Letter of Intent (LOI) was executed by both parties on August 11, 1998, whereby
Petitioner Lafarge Cement Philippines, Inc. (Lafarge) -- on behalf of its affiliates and other
qualified entities, including Petitioner Luzon Continental Land Corporation (LCLC) -- agreed
to purchase the cement business of Respondent Continental Cement Corporation (CCC).
The parties entered into a Sale and Purchase Agreement (SPA). At the time of the
foregoing transactions, petitioners were well aware that CCC had a case pending with the
Supreme Court. The case was docketed as GR No. 119712, entitled Asset Privatization
Trust (APT) v. Court of Appeals and Continental Cement Corporation.
In anticipation of the liability that the High Tribunal might adjudge against CCC, the
parties, under Clause 2 (c) of the SPA, allegedly agreed to retain from the purchase price
a portion of the contract price in the amount of P117,020,846.84 -- the equivalent of
US$2,799,140. This amount was to be deposited in an interest-bearing account in the First
National City Bank of New York (Citibank) for payment to APT, the petitioner in GR No.
119712.
However, Lafarge allegedly refused to apply the sum to the payment to APT, despite
the subsequent finality of the Decision in GR No. 119712 in favor of the latter and the
repeated instructions of Respondent CCC. Fearful that nonpayment to APT would result in
the foreclosure, not just of its properties covered by the SPA with Lafarge but of several
other properties as well, CCC filed a Complaint with Application for Preliminary Attachment
against Lafarge and prayed, among others, that petitioners be directed to pay the APT
Retained Amount referred to in Clause 2 (c) of the SPA.
Petitioners moved to dismiss the Complaint on the ground that it violated the
prohibition on forum-shopping. Respondent CCC had allegedly made the same claim it
was raising in Civil Case No. Q-00-41103 in another action, which involved the same
parties and which was filed earlier before the International Chamber of Commerce. After
the trial court denied the Motion to Dismiss in its November 14, 2000 Order, petitioners
elevated the matter before the Court of Appeals in CA-GR SP No. 68688.
In the meantime, to avoid being in default and without prejudice to the outcome of
their appeal, Lafarge filed their Answer and Compulsory Counterclaims ad Cautelam. In
their (Lafarge) Answer, they denied the allegations in the Complaint. They
prayed -- by way of compulsory counterclaims against Respondent CCC, its
majority stockholder and president Gregory T. Lim, and its corporate secretary
Anthony A. Mariano -- for the sums of (a) P2,700,000 each as actual damages,
(b) P100,000,000 each as exemplary damages, (c) P100,000,000 each as
moral damages, and (d) P5,000,000 each as attorneys fees plus costs of suit.
Petitioners alleged that CCC, through Lim and Mariano, had filed the baseless
Complaint in Civil Case No. Q-00-41103 and procured the Writ of Attachment in bad faith.
Relying on this Courts pronouncement in Sapugay v. CA, Lafarge prayed that both Lim
and Mariano be held jointly and solidarily liable with Respondent CCC.

The RTC dismissed LAFARGE’s counterclaims. On MR, the RTC clarified that it was
dismissing the counterclaim as it impleaded Respondents Lim and Mariano, even if it
included CONTINENTAL.
ISSUE: Whether or not the RTC gravely erred in refusing to rule that CONTINENTAL has
no personality to move to dismiss petitioners’ compulsory counterclaims on Respondents
Lim and Mariano’s behalf.
RULING: YES
Lafarge’s counterclaim for damages against Respondents CCC, Lim and Mariano is
characterized as joint and solidary.
Obligations may be classified as either joint or solidary. Joint or jointly or conjoint
means mancum or mancomunada or pro rata obligation; on the other hand, solidary
obligations may be used interchangeably with joint and several or several. Thus,
petitioners’ usage of the term joint and solidary is confusing and ambiguous.
The ambiguity in petitioners counterclaims notwithstanding, respondents liability, if
proven, is solidary. This characterization finds basis in Article 1207 of the Civil Code, which
provides that obligations are generally considered joint, except when otherwise expressly
stated or when the law or the nature of the obligation requires solidarity. However,
obligations arising from tort are, by their nature, always solidary. Joint tort feasors are
jointly and severally liable for the tort which they commit. The persons injured may sue
all of them or any number less than all. Each is liable for the whole damages caused by
all, and all together are jointly liable for the whole damage. It is no defense for one sued
alone, that the others who participated in the wrongful act are not joined with him as
defendants; nor is it any excuse for him that his participation in the tort was insignificant
as compared to that of the others.
Joint tort feasors are not liable pro rata. The damages can not be apportioned among
them, except among themselves. They cannot insist upon an apportionment, for the
purpose of each paying an aliquot part. They are jointly and severally liable for the whole
amount.

Allegations show that LAFARGE’s counterclaims for damages were the result of LIM AND
MARIANO’s act of filing the Complaint and securing the Writ of Attachment in bad faith.
The Liability Sought Against Continental Is For Specific Performance/Tort; Lim And
Mariano’s Tort Does Not Negate The Solidary Nature For The Tortuous Acts Alleged In
Counterclaims. Due to SOLIDARY CHARACTER of obligation, LIM and MARIANO may avail
themselves as regards to part of the debt for which they are responsible. THEREFORE,
the act of CONTINENTAL in filing a motion to dismiss the counterclaim on grounds that
pertain only to its individual co-debtors -- is allowed.

PHILEX vs. AMALGAMATED

Bersamin, J.

In a solidary obligation, each debtor was liable for the entire obligation. The
petitioner could compel any of the solidary obligors to perform the entire obligation.

FACTS:

The petitioner, Trade and Investment Development Corporation of the Philippines,

is a GOCC, engaged to guarantee the foreign loans, granted to domestic corporations,
majority of the capital of which is owned by Filipino citizens. While the respondent
Amalgamated Management and Development Corporation (AMDC), is a domestic
corporation, engaged in the business of hauling different commodities within the Middle
East countries. Its co-respondents Cuevas and Saddul, were, its President and Vice-
President, respectively.

In early 1982, AMDC obtained from the National Commercial Bank of Saudi Arabia
(NCBSA) a loan amounting to SR3.3 million (equivalent to ₱9,000,000.00). Petitioner
issued a letter of guaranty in favor of NCBSA as the lending bank upon the request of
AMDC. As the security for the guaranty, Amalgamated Motors Philippines Incorporated
(AMPI), a sister company of AMDC, acted as an accommodation mortgagor, and executed
in favor of the petitioner a real estate mortgage over two parcels of land in Cavite and a
deed of undertaking, with Cuevas and Saddul as its co-obligors. In the deed of
undertaking, AMDC, Cuevas, and Saddul jointly and severally bound themselves to pay to
the petitioner, as obligee, whatever damages or liabilities that the petitioner would incur
by reason of the guaranty.

AMDC defaulted on the obligation. Upon demand, the petitioner paid the obligation
to NCBSA. By subrogation and pursuant to the Deed of Undertaking, the petitioner then
demanded AMDC, Cuevas and Saddul to pay the obligation, but its demand was not
complied with. Hence, it extra-judicially foreclosed the real estate mortgage. The
Provincial Sheriff of Cavite conducted a public auction, in which the petitioner acquired
the mortgaged properties as the highest bidder.

On the premise that the proceeds of the foreclosure sale were not sufficient to
cover the guaranty because a balance of ₱45,839,219.95 plus interest and other charges
remained unpaid, the petitioner sued AMDC, Cuevas and Saddul in the RTC to collect the
deficiency.

In a consolidated answer, AMDC and Cuevas admitted the existence of the real
estate mortgage and deed of undertaking, but raised as defenses that they did not receive
from the petitioner any demand for the payment of the loan. Saddul submitted a separate
answer, averring that he was not liable to the petitioner for any amount because he did
not benefit from the guaranty; that the deed of undertaking was unenforceable for being
executed without any consideration; and that the petitioner did not notify him that AMDC
had incurred in delay in the payment of the obligation.

After trial, the RTC rendered its decision in favor of the plaintiff and against
defendant AMDC. The RTC, however, absolved from the obligation Cuevas and Saddul.
The petitioner appealed to the CA, asserting that Cuevas and Saddul should be held jointly
and severally liable with AMDC on its deficiency claim. The CA affirmed in toto the decision
of the RTC. Hence this petition.

Issue:

Whether or not Cuevas and Saddul were liable on the petitioner’s deficiency claim;

Ruling:
 Cuevas and Saddul were liable on the deficiency claim despite the lack of notice
to them about the extension of the guaranty. The court ruled that, Cuevas and Saddul,
were the ones who wrote to the petitioner to request the extension of the guaranty period
since AMDC could not pay the obligation on its due date. These requests for extension
were granted by the petitioner. Having thus admitted their letters on the extension of the
guaranty period, Cuevas and Saddul could not anymore feign ignorance of the guaranty
extension.

Moreover, the deed of undertaking itself specifically stated that the grant of the
extension of the guaranty period will not extinguish or diminish the obligation of Cuevas
and Saddul under the guaranty. Hence, whether or not the guaranty period was extended,
and whether or not they were notified of the extension, Cuevas and Saddul remained
liable under the guaranty. The stipulation, which was not illegal or immoral, necessarily
bound Cuevas and Saddul.

It is worth noting, too, that a solidary obligation existed among AMDC, Cuevas and
Saddul because they had assented to be jointly and severally liable to the petitioner for
whatever damages or liabilities that it might incur by virtue of the guaranty. In a solidary
obligation, each debtor was liable for the entire obligation. The petitioner could compel
any of the solidary obligors to perform the entire obligation.

In the deed of undertaking, Cuevas and Saddul bound themselves to reimburse or

to pay to the petitioner their obligation under the guaranty upon the latter’s demand. The
Civil Code provides that the obligor incurs in delay from the time the obligee judicially or
extrajudicially demands the fulfillment of the obligation. It is noted that the petitioner’s
complaint to recover its deficiency claim from obligors AMDC, Cuevas and Saddul, being
a judicial demand, sufficed to render Cuevas and Saddul in delay in the payment of the
deficiency claim.

Estanislao and Africa Sinamban v. China Banking Corporation

A co-maker of a PN who binds himself with the maker "jointly and severally" renders
himself directly and primarily liable with the maker on the debt, without reference to his
solvency.

Facts: The spouses Danilo and Magdalena Manalastas (spouses Manalastas) executed a
Real Estate Mortgage (REM)4 in favor of respondent China Banking Corporation
(Chinabank) over two real estate properties to secure a loan from Chinabank of
₱700,000.00 intended as working capital in their rice milling business.

During the next few years, they executed several amendments to the mortgage contract
progressively increasing their credit line secured by the aforesaid mortgage. Thus, from
₱700,000.00, their loan limit was increased to 2,450,000.00. The spouses Manalastas
executed several promissory notes (PNs) in favor of Chinabank. In two of the PNs,
petitioners Estanislao and Africa Sinamban (spouses Sinamban) signed as co-makers.
Chinabank filed a Complaint for sum of money against the spouses Manalastas and the
spouses Sinamban (collectively called the which the spouses Manalastas executed in favor
of Chinabank on different dates.

Pursuant to the promissory notes, Chinabank instituted extrajudicial foreclosure

proceedings against the mortgage security. However there is a deficiency, thus, in the
complaint before the RTC, Chinabank prayed to direct the defendants to jointly and
severally settle the said deficiency.

RTC held that the spouses Sinamban must, solidarily with the spouses Manalastas,
proportionately answer for the loan deficiency pertaining to the two PNs they co-signed,
since the mortgage security provided by the spouses Manalastas secured all three PNs
and thus also benefited them as co-makers. But since they did not co-sign PN No. OACL
634-95, the deficiency judgment pertaining thereto will be the sole liability of the spouses
Manalastas. On appeal, CA affirmed with modification the ruling of the RTC.

Issue: Whether or not the Court of Appeals erred in not considering the facts indubitably
showing that it is the Sps. Sinamban, as the debtors, and not the respondent bank, who
are given the choice under Article 1252 of the Civil Code to have the proceeds of the
auction sale applied as payments to their obligations?

Held: No.

A co-maker of a PN who binds himself with the maker "jointly and severally"
renders himself directly and primarily liable with the maker on the debt,
without reference to his solvency.

Employing words of common commercial usage and well-accepted legal significance, the
three subject PNs uniformly describe the solidary nature and extent of the obligation
assumed by each of the defendants in Civil Case, to wit:

"FOR VALUE RECEIVED, I/We jointly and severally promise to pay to the CHINA BANKING
CORPORATION or its order the sum of PESOS x x x[.]" (Emphasis ours)

According to Article 2047 of the Civil Code, if a person binds himself solidarily with the
principal debtor, the provisions of Articles 1207 to 1222 of the Civil Code (Section 4,
Chapter 3,Title I, Book IV) on joint and solidary obligations shall be observed. Thus, where
there is a concurrence of two or more creditors or of two or more debtors in one and the
same obligation, Article 1207 provides that among them, "[t]here is a solidary liability only
when the obligation expressly so states, or when the law or the nature of the obligation
requires solidarity." It is settled that when the obligor or obligors undertake to be "jointly
and severally" liable, it means that the obligation is solidary. In this case, the spouses
Sinamban expressly bound themselves to be jointly and severally, or solidarily, liable with
the principal makers of the PNs, the spouses Manalastas.

Pursuant to Article 1216 of the Civil Code, as well as Paragraph 5 of the PNs,
Chinabank opted to proceed against the co debtors simultaneously, as implied
in its May 18, 1998 statement of account when it applied the entire amount of
its auction bid to the aggregate amount of the loan obligations.

xxx Article 1216 of the Civil Code provides that "[t]he creditor may proceed against any
one of the solidary debtors or some or all of them simultaneously. The demand made
against one of them shall not be an obstacle to those which may subsequently be directed
against the others, so long as the debt has not been fully collected." Article 1252of the
Civil Code does not apply, as urged by the petitioners, because in the said article the
situation contemplated is that of a debtor with several debts due, whereas the reverse is
true, with each solidary debt imputable to several debtors.

LANDBANK OF THE PHILIPPINES vs BELLE CORPORATION

A person who deliberately ignores a significant fact that could create suspicion in an
otherwise reasonable person is not a mortgagee in good faith and for value. A mortgagee
cannot close his eyes to facts which should put a reasonable man on his guard and claim
that he acted in good faith under the belief that there was no defect in the title of the
mortgagor.

FACTS:

Belle Corporation is engaged in the development and operation of several leisure and
recreational projects in Tagaytay city. Belle Corp claims to be the registered owner in
possession of four parcels of land known as lots 1-4 located in Tagaytay city. A certain
Bautista claims that she owns the subject property held by Belle Corporation. Bautista put
up a sign that the subject property’s ownership is being contested. Belle Corporation
subsequently filed a suit for quieting of title.

Belle Corporation was informed that the subject property was not under the name of
Bautista anymore. Apparently, the subject property was mortgaged by Bautista in favor
of Landbank and such property was foreclosed because Bautista failed to pay the loan
covered by the mortgage property.

Landbank claims to be an innocent mortagee for value as it exercised the due diligence
required by law.

ISSUE:
Whether or NOT Landbank is an innocent mortgagee for value

HELD:
The Supreme Court held in the negative.
An institution which deliberately ignores a significant fact that could create suspicion in an
otherwise reasonable person is NOT a mortgagee in good faith. A Mortgagee can not close
his eyes to facts which should put a reasonable man on his guard and claim that he acted
in good faith under the belief that there was no defect in the title of the mortgagor. His
mere refusal to believe that such defect exists or the willful closing of his eyes to the
possibility of the existence of a defect in the mortgagor’s title will not make him an
innocent mortgagee for value if it afterwards develops that the title was in fact defective,
and it appears that he had such notice of such defect as would have led to the discovery
had he acted with a certain level of precaution which may be required of a prudent man.
A mortgagee in good faith is defined as one who buys a property without notice that some
other person has a right to or interest in the property and pays full and fair price at the
time of purchase or before he has notice of the claim or interest of other persons over the
property.

RIVELISA REALTY, INC. VS. FIRST STA. CRUZ BUILDERS CORPORATION | GR

NO. 189618 | January 15, 2014
PERLAS-BERNABE, J.

Under the principle of quantum meruit, a contractor is allowed to recover the

reasonable value of the thing or services rendered despite the lack of a written contract,
in order to avoid unjust enrichment. Quantum meruit means that, in an action for work
and labor, payment shall be made in such amount as the plaintiff reasonably deserves.

FACTS:
Petitioner and respondent entered into a JVA for the construction and development
of residential subdivision in Cabanatuan City. The JVA provides that the respondent will
complete the undeveloped horizontal development works within 12 months from the date
of signing. Upon its completion, 60% of the said project will be transferred in the name
of the respondent. A portion of the said project was already completed by the petitioner.
The agreement provides that the resources needed for the total completion of the said
project will be initially shouldered by the respondent before it can claim for additional
funds from the petitioner.
Respondent hired the services of a subcontract for the completion of the project.
However, only 2 months from the date of signing, respondent already ran out of funds.
With this, the petitioner was forced to provide for funds needed. When the petitioner
refused to finance the project, the respondent decided to release itself from the JVA which
the petitioner readily accepted. Respondent had the condition that the petitioner should
reimburse the former for the expenses which it incurred. Due to failure of the petitioner
to pay the respondent despite demands, the latter filed a complaint1 for rescission of the
JVA against petitioner before the RTC, claiming the payment of damages for breach of
contract and delay in the performance of an obligation. As a defense, petitioner asserted
that it has no obligation to reimburse the respondent because the latter failed to perform
its obligation to initially finance the project with the same amount which the petitioner
incurred for its partial completion.

ISSUE: WON the respondent is entitled to be compensated for the development works it
had accomplished on the project.

RULING:
YES. Respondent is entitled to be compensated for the development works it had
accomplished on the project based on the principle of quantum meruit. Case law instructs
that under this principle, a contractor is allowed to recover the reasonable value of the
thing or services rendered despite the lack of a written contract, in order to avoid unjust
enrichment. Quantum meruit means that, in an action for work and labor, payment shall
be made in such amount as the plaintiff reasonably deserves. The measure of recovery
should relate to the reasonable value of the services performed because the principle aims
to prevent undue enrichment based on the equitable postulate that it is unjust for a person
to retain any benefit without paying for it.
In this case, the respondent had already performed certain works for the said
project. To deny it payment would result to the unjust enrichment of the petitioner. Also,
the petitioner obligated itself to unconditionally reimburse the respondent for the
equivalent valuation of the works which the latter had performed. With this, the petitioner
cannot unilaterally renege on its promise on the ground of respondent’s non-fulfilment of
its obligation based on the JVA.

Leon J. Lambert v. T.J. Fox

In this jurisdiction penalties provided in contracts of this character are enforced . It is the
rule that parties who are competent to contract may make such agreements within the
limitations of the law and public policy as they desire, and that the courts will enforce
them according to their terms. (Civil Code, articles 1152, 1153, 1154, and 1155; Fornow
vs. Hoffmeister, 6 Phil. Rep., 33; Palacios vs. Municipality of Cavite, 12 Phil. Rep., 140;
Gsell vs. Koch, 16 Phil. Rep., 1.) The only case recognized by the Civil Code in which the
court is authorized to intervene for the purpose of reducing a penalty stipulated in the
contract is when the principal obligation has been partly or irregularly fulfilled and the
court can see that the person demanding the penalty has received the benefit of such or
irregular performance. In such case the court is authorized to reduce the penalty to the
extent of the benefits received by the party enforcing the penalty.

This is an action brought to recover a penalty prescribed on a contract as punishment for

the breach thereof.

FACTS:
Early in 1911 John R. Edgar & Co., engaged in the retail book and stationery business was
taken over by its creditors including Lambert and Fox.
Lambert and Fox became the largest stockholders in the new corporation called John R.
Edgar & Co., Incorporated. Subsequently, Lambert and Fox entered into an agreement
wherein they mutually and reciprocally agree not to sell, transfer, or otherwise dispose of
any part of the stock until after 1 year from the agreement date unless consented in
writing. A liquidated damages of 1,000 will be compelled the party who will breach the
said contract.
On October 19, 1911 Fox sold his stock E. C. McCullough & Co. of Manila, a strong
competitor sale was made by the defendant against the protest .Fox offered to sell his
shares of stock to Lambert for the same sum that McCullough was paying them less
P1,000, the penalty specified in the contract. Trial Court dismissed the case.

ISSUE:
Whether or not Fox is liable for damages.

HELD:
YES. Parties expressly stipulated that the contract should last one year regardless of the
objective it should be applied.
Parties who are competent to contract may make such agreements within the limitations
of the law and public policy as they desire, and that the courts will enforce them according
to their terms
The suspension of the power to sell has a beneficial purpose, results in the protection of
the corporation as well as of the individual parties to the contract, and is reasonable as to
the length of time of the suspension.
The judgment is reversed, the case remanded with instructions to enter a judgment in
favor of the plaintiff and against the defendant for P1,000, with interest; without costs in
this instance.

Social Security System vs. Moonwalk. G.R. No. 73345. April 7, 1993

An accessory obligation cannot exist without the principal obligation from which
the former arises. A penalty clause in a contract, which is an accessory obligation, can no
longer be demanded when the principal obligation from which it arises has been
extinguished by full performance of the principal obligation.

Facts: Social Security System (SSS) sued Moonwalk Development & Housing
Corporation (Moonwalk) alleging that the former had committed an error in computing
the correct indebtedness of Moonwalk and that as a result SSS erroneously cancelled the
debt of Moonwalk and released the real estate mortgages executed to secure the
obligation thereby extinguishing the latter’s obligation.

In this case, SSS likewise claims that Moonwalk is liable for the penalty stipulated
considering that the latter has incurred in delay.

Issue: Whether or not Moonwalk is liable for the penalty.

Ruling: No. A penalty clause, being an accessory obligation, cannot exist without
a principal obligation, which in this case is the loan obtained by Moonwalk. The principal
obligation in this case has been extinguished when Moonwalk made a full payment upon
issuance of the Statement of Account dated October 1, 1979 stating that the total
obligation of Moonwalk at that time was P15,004,905.74. Until such time, no demand was
ever made by SSS to Moonwalk to comply with the latter’s obligation.

Such being the case, there can be no more basis for the payment of the penalty
the reasons being first, the principal obligation from which it arises has been extinguished,
and second, Moonwalk has never incurred in delay in the performance of its obligation
since no demand for payment was made by SSS until October 1, 1979.

SSS further contended that being a trustee of the funds entrusted to it by the
public, it cannot be considered as having waived the penalty citing the case of United
Christian Missionary Society vs. Social Security Commission. However, the Supreme Court
said that the case cited cannot be applied in this case, because the penalty involved
therein is the penalty imposed by law for belated remittance of premiums to the SSS which
can never be waived by SSS, because said penalty is imposed by law. On the other hand,
the penalty involved in the case at bar is a penalty stipulated in the loan contract of the
parties. It is settled that when a government created corporation enters into a contract
with a private party concerning a loan, it descends to the level of a private person. Hence,
the rules on contract applicable to private parties are applicable to it. This being the case,
a waiver of said stipulated penalty may be validly made by SSS.

ROBES-FRANCISCO REALTY DEVELOPMENT v. CFI

Under Art. 2209 of the NCC, even without a penal clause, the vendee will still be entitled
to recover the amount paid by her with legal rate of interest which is even more than the
4% provided for in the clause.

FACTS: Petitioner, Robes-Francisco Realty & Development Corporation, agreed to sell to

private respondent, Lolita Millan, for and in consideration of the sum of P 3, 864, payable
in installments, a parcel of land containing an area of approximately 276 square meters,
situated in Caloocan City.

Millan complied with her obligation under the contract and paid the installments stipulated
therein, she also paid the final payment. Millan paid a total amount of P 5, 193.63 including
interests and expenses for registration of title.

Thereafter, Millan made repeated demands upon the corporation for the execution of the
final deed of sale and issuance to her of the transfer certificate of title. They have agreed
that within the period of 6 months from the date of full payment, the vendor shall issue
the transfer certificate of title. Moreover, it was agreed upon that failure of the corporation
to issue such transfer certificate of title, the vendor shall be obliged to refund to the
vendee the total amount already paid for, plus an interest at the rate of 4% per annum.

Notwithstanding the lapse of the stipulated period, the corporation failed to cause the
issuance of the transfer certificate of title over the lot sold to Millan. Hence, Millan filed a
complaint for specific performance and damages against the petitioner.

The corporation alleged that the deed of absolute sale was voluntarily executed between
the parties and the interest of the plaintiff was amply protected by the provision in the
contract for payment of the 4% interest per annum of the total amount paid, for the delay
in the issuance of the title.

However, the corporation admitted that it failed to cause the issuance of the
corresponding transfer certificate of title because the parcel of land conveyed to Millan
was included among the properties of the corporation mortgaged to GSIS, the owner’s
duplicate certificate of title was in the possession of the GSIS.

Petitioner contends that the vendee is bound by the terms of their agreement and cannot
recover more than what was agreed upon. It further invoked Art. 1226 of the NCC which
provides that in obligations with a penal clause, the penalty shall substitute the indemnity
for damages and the payment of interests in case of noncompliance, if there is no
stipulation to the contrary.

ISSUE: Whether the petitioner is liable under the stipulation in the contract
RULING: Yes, while the provision in the agreement obliging the vendor to reimburse the
vendee the total amount paid by the vendee plus interest should the vendor fail to perform
its obligation, is not considered a penal clause, the vendor will still be liable to the vendee
pursuant to Art. 2209 of the civil code. The vendee will still be entitled to recover the
amount paid by her with legal rate of interest which is even more than the 4% provided
for in the clause. It is therefore inconceivable that the aforecited provision in the deed of
sale is a penal clause which will preclude an award of damages to the vendee, Millan. To
conclude, the vendee shall be entitled to nominal damages plus the full amount she has
paid.

RODRIGO RIVERA VS. SPOUSES CHUA

G.R. No. 184458 / January 14, 2015
PEREZ, J.:

The penal clause is generally undertaken to insure performance and works as either, or
both, punishment and reparation. It is an exception to the general rules on recovery of
losses and damages. As an exception to the general rule, a penal clause must be
specifically set forth in the obligation.

FACTS:
On 24 February 1995, Rivera obtained a loan of ₱120,000.00 from the Spouses
Chua evidenced by a promissory note (PN) wherein he acknowledged that failure to pay
the amount loaned on December 31, 1995 would subject him to 5% monthly interest from
the date of default until the entire obligation is fully paid for, as well as the further sum
of 20% of the total amount due and payable as and for attorney’s fees should the case
be referred to a lawyer.
Almost three years from the date of payment stipulated in the PN, Rivera made
partial payments for the loan via 2 checks which he delivered to the Spouses. However,
upon presentment for payment, the two checks were dishonored for the account being
closed.
The amount due the Spouses Chua was pegged at ₱366,000.00 covering the
principal of ₱120,000.00 plus 5% interest per month from 1 January 1996 (from default)
to 31 May 1999.
Rivera’s unjustified refusal to pay prompted the Spouses Chua to file a suit.
In the main, Rivera claimed forgery of the subject PN and denied his indebtedness
under it, alleging that given his friendship with the Spouses Chua who were money
lenders, he has been able to maintain a loan account with them. He points out that the
Spouses Chua never demanded payment for almost four years from the time of the alleged
default in payment. Not being in default, he should therefore not be made liable for the
5% interest.

ISSUE:
Whether Rivera is in default and is therefore liable for the stipulated 5% interest.

RULING:
 Yes.

On the date of default under the PN, Rivera became liable for the stipulated interest
of 5% per month. Since the date is expressly provided for, the Spouses need not make a
demand. Under the law, demand by the creditor is no longer necessary in order that delay
may exist since the PN itself already expressly so declares.
The liability for damages of those who default, including those who are guilty of delay,
in the performance of their obligations is laid down on Article 1170 of the Civil Code.
Corollary, Article 2209 solidifies the consequence of payment of interest as an indemnity
for damages when the obligor incurs in delay:
Art. 2209. If the obligation consists in the payment of a sum of money,
and the debtor incurs in delay, the indemnity for damages, there
being no stipulation to the contrary, shall be the payment of the
interest agreed upon, and in the absence of stipulation, the legal
interest, which is six percent per annum.
Article 2209 is specifically applicable in this instance where: (1) the obligation is
for a sum of money; (2) the debtor, Rivera, incurred in delay when he failed to pay on or
before 31 December 1995; and (3) the PN provides for an indemnity for damages upon
default of Rivera which is the payment of a 5% monthly interest from the date of default.
However, the stipulation on payment of interest in this case is not a penal
clause.
Article 1226 of the Civil Code provides:
Art. 1226. In obligations with a penal clause, the penalty shall
substitute the indemnity for damages and the payment of
interests in case of noncompliance, if there is no stipulation to the
contrary. Nevertheless, damages shall be paid if the obligor refuses to pay
the penalty or is guilty of fraud in the fulfillment of the obligation.
The penalty may be enforced only when it is demandable in accordance with the
provisions of this Code.
Under the given facts, the stipulation in the PN is designated merely as payment
of interest, not as a penal clause, and is simply an indemnity for damages incurred by the
Spouses Chua because Rivera defaulted in the payment of the amount of ₱120,000.00.
The stipulation of interest is simply for the limiting of damages that may be recovered
from Rivera as a result of his delay in payment.
Additional note: The SC found that the stipulated interest of 5% per month or 60% per
annum in addition to legal interests and attorney’s fees was highly iniquitous and
unreasonable. Stipulated interest rates are illegal if they are unconscionable and the Court
is allowed to temper interest rates when necessary. Since the interest rate agreed upon
is void, the parties are considered to have no stipulation regarding the interest rate, and
thus the computation should be based on the rate of legal interest.

New World Developers and Management, Inc. Petitioner, vs. Ama Computer
Learning Center, Inc., Respondent. (Gr. Nos. 187930/188250, February 23,
2015)

The law does not relieve a party from the consequences of a contract it entered into with
all the required formalities. Courts have no power to ease the burden of obligations
voluntarily assumed by parties, just because things did not turn out as expected at the
inception of the contract.
Facts:
Petitioner New World (lessor) and respondent AMA (lessee) entered into a Contract
of Lease in 1998 for a period of eight years. It was stipulated that AMA may pre-terminate
the contract by sending notice in writing to New World at least six months before the
intended date. In such case, AMA shall be liable for liquidated damages in an amount
equivalent to six months of the prevailing rent. AMA paid New World the amount of
P450,000.00 as advance rental and another P450,000.00 as security deposit.

On three separate occasions starting 2002, AMA had requested for the deferment and
adjustment of the annual increase in the monthly rent on the ground of financial
constraints due to decrease of enrolment to which, New World acceded. However, on the
evening of July 6, 2004, AMA removed all its office equipment and furniture from the
leased premises. On the following day, New World received a letter from AMA informing
the former that the latter is pre-terminating the lease effective immediately. New World
replied with a letter to which a Statement of Account was attached. Despite the meetings
conducted, the parties failed to arrive at a settlement thus prompting New World to file a
suit for a sum of money and damages against AMA.

Issue: Whether the stipulation on the Contract of Lease stating that “in case of pre-
termination, AMA shall notify New World in writing at least six months before the intended
date,” makes AMA liable for liquidated damages and if so, what is the basis thereof?

Ruling: AMA is liable for six months’ worth of rent as liquidated damages.
Item No. 14 of the Contract of Lease states:
That [AMA] may pre-terminate this Contract of Lease by notice in writing to [New World]
at least six (6) months before the intended date of pretermination, provided, however,
that in such case, [AMA] shall be liable to [New World] for an amount equivalent to six
(6) months current rental as liquidated damages;

Quite notable is the fact that AMA never denied its liability for the payment of liquidated
damages in view of its pretermination of the lease contract with New World. What it
claims, however, is that it is entitled to the reduction of the amount due to the serious
business losses it suffered as a result of a drastic decrease in its enrollment.

This Court is, first and foremost, one of law. While we are also a court of equity, we do
not employ equitable principles when well-established doctrines and positive provisions of
the law clearly apply.

The law does not relieve a party from the consequences of a contract it entered into with
all the required formalities. Courts have no power to ease the burden of obligations
voluntarily assumed by parties, just because things did not turn out as expected at the
inception of the contract. It must also be emphasized that AMA is an entity that has had
significant business experience, and is not a mere babe in the woods.

Articles 1159 and 1306 of the Civil Code state:

Art. 1159. Obligations arising from contracts have the force of law between the contracting
parties and should be complied with in good faith.
xxxx

Art. 1306. The contracting parties may establish such stipulations, clauses, terms and
conditions as they may deem convenient, provided they are not contrary to law, morals,
good customs, public order, or public policy.

The fundamental rule is that a contract is the law between the parties. Unless it has been
shown that its provisions are wholly or in part contrary to law, morals, good customs,
public order, or public policy, the contract will be strictly enforced by the courts.
METRO CONCAST STEEL CORPORATION, SPOUSES JOSE S. DYCHIAO AND
TIUOH YAN, SPOUSES GUILLERMO AND MERCEDES DYCHIAO, AND SPOUSES
VICENTE AND FILOMENA DYCHIAO , vs. ALLIED BANK CORPORATION

Article 1231 of the Civil Code states that obligations are extinguished either by payment
or performance, the loss of the thing due, the condonation or remission of the debt, the
confusion or merger of the rights of creditor and debtor, compensation or novation.

FACTS:
Metro Concast obtained several loans from Allied Bank. These loan transactions
were covered by a promissory note and twelve (12) separate letters of credit/trust
receipts.
Petitioners failed to settle their obligations under the aforementioned promissory
note and trust receipts, hence, Allied Bank sent them demand letters, but to no avail.
Thus, Allied Bank was prompted to file a complaint for collection of sum of money.
Petitioners admitted their indebtedness to Allied Bank but denied liability for the
interests and penalties charged. In order to settle their debts with Allied Bank, petitioners
offered the sale of Metro Concast’s remaining assets, consisting of machineries and
equipment, to Allied Bank, which the latter, however, refused. The equipments were not
sold and was reduced into ferro scrap or scrap metal over the years.
In 2002, Peakstar Oil Corporation (Peakstar), represented by one Crisanta Camiling
(Camiling), expressed interest in buying the scrap metal. During the negotiations with
Peakstar, petitioners claimed that Atty. Peter Saw (Atty. Saw), a member of Allied Bank’s
legal department, acted as the latter’s agent. Eventually, with the alleged conformity of
Allied Bank, through Atty. Saw, a Memorandum of Agreement (MoA) was drawn between
Metro Concast, which Peakstar obligated itself to purchase the scrap metal.
Unfortunately, Peakstar reneged on all its obligations under the MoA. In this regard,
petitioners asseverated that:
(a) their failure to pay their outstanding loan obligations to Allied Bank
must be considered as force majeure ; and
(b) since Allied Bank was the party that accepted the terms and conditions
of payment proposed by Peakstar, petitioners must therefore be deemed to have
settled their obligations to Allied Bank. Peakstar also contended that Atty. Saw
himself drafted the MoA and subsequently received the P2,000,000.00 cash and
the two (2) Bankwise post-dated checks worth P1,000,000.00 each from Camiling.

ISSUE:
Whether the loan obligations incurred by the petitioners under the subject
promissory note and various trust receipts have already been extinguished?
HELD: NO.
Article 1231 of the Civil Code states that obligations are extinguished either by
payment or performance, the loss of the thing due, the condonation or remission of the
debt, the confusion or merger of the rights of creditor and debtor, compensation or
novation.
In the present case, petitioners essentially argue that their loan obligations to
Allied Bank had already been extinguished due to Peakstar’s failure to perform its own
obligations to Metro Concast pursuant to the MoA. Petitioners classify Peakstar’s
default as a form of force majeure in the sense that they have, beyond their control,
lost the funds they expected to have received from the Peakstar (due to the MoA) which
they would, in turn, use to pay their own loan obligations to Allied Bank. They further
state that Allied Bank was equally bound by Metro Concast’s MoA with Peakstar
since its agent, Atty. Saw, actively represented it during the negotiations and
execution of the said agreement. Petitioners’ arguments are untenable. The MoA have
no relevance to the performance of petitioners’ obligations to Allied Bank. The MoA is a
sale of assets contract, while petitioners’ obligations to Allied Bank arose from various loan
transactions. Absent any showing that the terms and conditions of the latter transactions
have been, in any way, modified or novated by the terms and conditions in the MoA, said
contracts should be treated separately and distinctly from each other. In the foregoing
respect, the issue on whether Allied Bank expressed its conformity to the assets sale
transaction between Metro Concast and Peakstar (as evidenced by the MoA) is actually
irrelevant to the issues related to petitioners’ loan obligations to the bank. Besides, the
fact of Allied Bank’s representation has not been proven in this case and hence, cannot
be deemed as a sustainable defense to exculpate petitioners from their loan obligations
to Allied Bank.

Now, anent petitioners’ reliance on force majeure, suffice it to state that

Peakstar’s breach of its obligations to Metro Concast arising from the MoA cannot be
classified as a fortuitous event. While it may be argued that Peakstar’s breach of the MoA
was unforeseen by petitioners, the same us clearly not "impossible" to foresee or even an
event which is independent of human will." Neither has it been shown that said occurrence
rendered it impossible for petitioners to pay their loan obligations to Allied Bank and thus,
negates the former’s force majeure theory altogether.

ARCO PULP AND PAPER CO., INC. AND CANDIDA A. SANTOS v. DAN T. LIM,
DOING BUSINESS UNDER THE NAME AND STYLE OF QUALITY PAPERS &
PLASTIC PRODUCTS ENTERPRISES
G.R. No. 206806, June 25, 2014, Leonen, J.

Novation must be stated in clear and unequivocal terms to extinguish an obligation.

It cannot be presumed and may be implied only if the old and new contracts are
incompatible on every point.

Facts:
The original contract between the parties was for Lim to deliver scrap papers Arco
Pulp and Paper. The payment for this delivery became Arco Pulp and Paper’s obligation;
which is an alternative obligation. By agreement, Arco Pulp and Paper, as the debtor, had
the option to either (1) pay the price or (2) deliver the finished products of equivalent
value to Lim.

Arco Pulp and Paper and Eric Sy executed a memorandum of agreement where
Arco Pulp and Paper bound themselves to deliver their finished products to Megapack
Container Corporation, owned by Eric Sy, for his account. According to the memorandum,
the raw materials would be supplied by Dan T. Lim, through his company, Quality Paper
and Plastic Products.

Lim demanded payment from Arco Pulp and Paper but no payment was made to
him. Lim filed a complaint for collection of sum of money with prayer for attachment with
the RTC. The RTC held that when Arco Pulp and Paper and Eric Sy entered into the
memorandum of agreement, novation took place, which extinguished Arco Pulp and
Paper’s obligation to Lim. Lim appealed the judgment, the CA reversed and set aside the
RTC decision.

Issue:
Whether the obligation between the parties was extinguished by novation

Ruling:

NO. There is nothing in the memorandum of agreement that states that with its
execution, the obligation of Arco Pulp and Paper to Lim would be extinguished. It also
does not state that Eric Sy somehow substituted Arco Pulp and Paper as Lim’s debtor. It
merely shows that Arco Pulp and Paper opted to deliver the finished products to a third
person instead. If the memorandum of agreement was intended to novate the original
agreement between the parties, Lim must have first agreed to the substitution of Eric Sy
as his new debtor. The memorandum of agreement must also state in clear and
unequivocal terms that it has replaced the original obligation of Arco Pulp and Paper to
Lim. Neither of these circumstances is present in this case. Since there was no novation,
Arco Pulp and Paper’s obligation to Lim remains valid. Arco Pulp and Paper, therefore,
must still pay Lim the full amount.

Heirs of Leonardo Natividad and Juliana Natividad v. Junana Mauricio-

Natividad

Article 1236 par. 2 of the NCC provides that “Whoever pays for another may demand from
the debtor what he has paid, except that if he paid without the knowledge or against the
will of the debtor, he can recover only insofar as the payment has been beneficial to the
debtor”

Facts : Sergio, husband of Juana and father of Jean, obtained a loan from
Development Bank of the Phils.(DBP). As a security, he mortgaged 2 lands, one of which
is co-owned and registered in his name and that of his siblings – Leonardo, Domingo and
Adoracion and the other land is in the name of Sergio and Juana. Sergio died without
being able to pay his loan. Since the loan was nearing its maturity and the mortgaged
lands were in danger of being foreclosed, Leonardo paid Sergio’s loan with DBP.
 According to Leonardo, since respondents were unable to reimburse him, the latter
agreed that Sergio’s share in the lot which he co-owned with his sibling and the other land
in the name of Sergio and Juana shall be assigned in favor of the spouses Leonardo and
Juliana. Despite demands made by Leonardo, respondents failed to honor their
undertaking to cause transfer of title.

Respondents averred that there is neither verbal nor written agreement between
Leonardo and them to reimburse whatever payment was made by Leonardo to DBP in
Sergio’s favor. Leonardo insist that there was a verbal agreement relying on the
Extrajudicial Settlement among heirs, which was executed by respondents to prove that
there was indeed such an agreement and that such a settlement is evidence of the partial
execution of the said agreement.

Leonardo filed an action against respondents for specific performance and/or

recovery of sum of money.

RTC ordered to effect transfer of title. CA modified RTC ruling and ordered instead
to reimburse Leonardo of the amount of loan obligation.
Issue : Whether or not the respondents are liable to reimburse Leonardo for the
payment of Sergio’s loan to DBP

Ruling : There is nothing in the Extrajudicial Settlement among heirs which would
indicate that respondents agreed to effect transfer of title in Leonardo’s name for his
payment of Sergio’s obligation. The document only shows that respondents acknowledge
Sergio’s obligation with DBP and that respondents have divided the properties by Sergio
among themselves.

There is also no partial execution of any contract because Leonardo failed to prove
that there was a verbal agreement that was entered into. Even granting that such an
agreement existed, the obligation to transfer title cannot be enforced if there is no written
contract to such effect. Under the Statute of Frauds, an agreement to convey real
property shall be unenforceable by action in the absence of a written note or
memorandum thereof and subscribed by the party charged or by his agent.

In any case, since respondents had already acknowledged that Sergio had, in fact,
incurred loan with the DBP, they are liable to reimburse the amount paid by Leonardo for
the payment of the obligation even if such payment was made without their knowledge
or consent.

Art 1236 of the NCC provides that whoever pays for another may demand from
the debtor what he has paid, except that if he paid without the knowledge or against the
will of the debtor, he can recover only insofar as the payment has been beneficial to the
debtor.

Being Sergio’s heirs, they succeed not only to the rights of Sergio but also to his
obligations.

PNB vs. Dee

Dacion en pago or dation in payment is the delivery and transmission of ownership of a
thing by the debtor to the creditor as an accepted equivalent of the performance of the
obligation.40 It is a mode of extinguishing an existing obligation41 and partakes the nature
of sale as the creditor is really buying the thing or property of the debtor, the payment
for which is to be charged against the debtor’s debt. Consequently, the execution of the
dation in payment effectively extinguished respondent PEPI’s loan obligation to the
petitioner insofar as it covers the value of the property purchased by Dee. This negates
the petitioner’s claim that PEPI must first redeem the property before it can cancel or
release the mortgage.

Facts: respondent Teresita Tan Dee (Dee) bought from respondent Prime East Properties
Inc. (PEPI) on an installment basis a residential lot. Subsequently, PEPI assigned its rights
the said property to respondent Armed Forces of the Philippines–Retirement and
Separation Benefits System, Inc. (AFP–RSBS). Thereafter, PEPI obtained a loan from
petitioner Philippine National Bank (petitioner), secured by a mortgage over several
properties, including Dee’s property. After Dee’s full payment of the purchase price, a
deed of sale was executed by respondents PEPI and AFP–RSBS in Dee’s favor.
Consequently, Dee sought from the petitioner the delivery of the owner’s duplicate title
over the property, to no avail. Thus, she filed with the HLURB a complaint for specific
performance to compel delivery of TCT No. 619608 by the petitioner, PEPI and AFP–RSBS,
among others. The lower courts ruled in favour of Dee.

The petitioner also argues that it is not privy to the transactions between the subdivision
project buyers and PEPI, and has no obligation to perform any of their respective
undertakings under their contract.

Respondent PEPI, on the other hand, claims that the title over the subject property is one
of the properties due for release by the petitioner as it has already been the subject of a
Memorandum of Agreement and dacion en pago entered into between them. The
agreement was reached after PEPI filed a petition for rehabilitation, and contained the
stipulation that the petitioner agreed to release the mortgage lien on fully paid mortgaged
properties upon the issuance of the certificates of title over the dacioned properties.

Issue: WON PNB is bound to cancel the mortgage/release the title in favour of Dee despite
the lack of payment or settlement by the mortgagor API/PEPI and AFP –RSBS of its loan
obligation?

Ruling: YES.
First, there is nothing in the decision of the HLURB, as affirmed by the OP and the CA,
which shows that the petitioner is being ordered to assume the obligation of any of the
respondents. There is also nothing in the HLURB decision, which validates the petitioner’s
claim that the mortgage has been nullified. The order of cancellation/release of the
mortgage is simply a consequence of Dee’s full payment of the purchase price.
PEPI brought to the attention of the Court the subsequent execution of a Memorandum
of Agreement dated November 22, 2006 by PEPI and the petitioner. Said agreement was
executed pursuant to an Order dated February 23, 2004 by the Regional Trial Court (RTC)
of Makati City, Branch 142, in SP No. 02–1219, a petition for Rehabilitation under the
Interim Rules of Procedure on Corporate Rehabilitation filed by PEPI. The RTC order
approved PEPI’s modified Rehabilitation Plan, which included the settlement of the latter’s
unpaid obligations to its creditors by way of dacion of real properties. In said order, the
RTC also incorporated certain measures that were not included in PEPI’s plan, one of
which is that “[t]itles to the lots which have been fully paid shall be released to the
purchasers within 90 days after the dacion to the secured creditors has been completed.”
Consequently, the agreement stipulated that as partial settlement of PEPI’s obligation with
the petitioner, the former absolutely and irrevocably conveys by way of “dacion en pago”
the properties listed therein, which included the lot purchased by Dee.

The petitioner also committed to –

[R]elease its mortgage lien on fully paid Mortgaged Properties upon issuance of
the certificates of title over the Dacioned Properties in the name of the [petitioner].
The request for release of a Mortgaged Property shall be accompanied with: (i)
proof of full payment by the buyer, together with a certificate of full payment
issued by the Borrower x x x. The [petitioner] hereby undertakes to cause the
transfer of the certificates of title over the Dacioned Properties and the release of
the Mortgaged Properties with reasonable dispatch.

Dacion en pago or dation in payment is the delivery and transmission of ownership of a

thing by the debtor to the creditor as an accepted equivalent of the performance of the
obligation. It is a mode of extinguishing an existing obligation and partakes the nature of
sale as the creditor is really buying the thing or property of the debtor, the payment for
which is to be charged against the debtor’s debt.Dation in payment extinguishes the
obligation to the extent of the value of the thing delivered, either as agreed upon by the
parties or as may be proved, unless the parties by agreement – express or implied, or by
their silence – consider the thing as equivalent to the obligation, in which case the
obligation is totally extinguished.

There is nothing on record showing that the Memorandum of Agreement has been nullified
or is the subject of pending litigation; hence, it carries with it the presumption of validity.
Consequently, the execution of the dation in payment effectively extinguished respondent
PEPI’s loan obligation to the petitioner insofar as it covers the value of the property
purchased by Dee. This negates the petitioner’s claim that PEPI must first redeem the
property before it can cancel or release the mortgage. As it now stands, the petitioner
already stepped into the shoes of PEPI and there is no more reason for the petitioner to
refuse the cancellation or release of the mortgage, for, as stated by the Court in Luzon
Development Bank, in accepting the assigned properties as payment of the obligation,
“[the bank] has assumed the risk that some of the assigned properties are covered by
contracts to sell which must be honored under PD 957.” Whatever claims the petitioner
has against PEPI and AFP–RSBS, monetary or otherwise, should not prejudice the rights
and interests of Dee over the property, which she has already fully paid for.

Magbanua et. Al vs. Uy

A compromise of a final judgment operates as a novation of the judgment obligation,

upon compliance with either requisite: 1) substitution is unequivocally declared, or 2) the
old and the new obligations are incompatible on every point.
Facts:
As a consequence of a final and executory decision of the SC in a labor case, hearings
were conducted in NLRC to determine the amount of wages to be paid to the 8 erring
employees (petitioners in this case), which found out to be amounting to 1.4 M pesos.

Uy paid them, so he filed a Manifestation that the case be terminated because the
judgment award had been complied with and the employees had been fully satisfied. The
Manifestation was signed by the petitioners with their Joint Affidavit waiving all other
benefits related to the complaint. However, thereafter, 2 of them filed a motion for an
issuance of a writ of execution.

NLRC: Directed the issuance of the writ holding that a final and executory judgment can
no longer be altered, and quitclaims are normally frowned upon for being contrary to
public policy.

CA: Compromise Agreements may be entered into even after final judgment which could
validly release Uy from the obligation.

Issue:
WON a Compromise Agreement may be validly entered into even after the judgment has
been rendered final and executory?

Held:
Yes

Compromise Agreement may be entered into even after the finality of judgment. Its
validity is determined by the compliance with the requisites and principles of contracts,
not by when it was entered into. Here, the petitioners voluntarily entered in the
compromise agreement.

The principle of novation supports the validity of a compromise after final judgment.

Novation, a mode of extinguishing an obligation, is done by changing the object or

principal condition of an obligation, substituting the person of the debtor, or surrogating
a third person in the exercise of the rights of the creditor.

For an obligation to be extinguished by another, the law requires either of these two
conditions:
1. the substitution is unequivocally declared, or
2. the old and the new obligations are incompatible on every point.

A compromise of a final judgment operates as a novation of the judgment obligation, upon

compliance with either requisite. In the present case, the incompatibility of the final
judgment with the compromise agreement is evident, because the latter was precisely
entered into to supersede the former.

Heirs of Servando Franco, petitioner vs. Spouses Veronica and Danilo Gonzales,
respondents, G.R. No. 159709, June 27, 2012, Bersamin, J.

There is novation when there is an irreconcilable incompatibility between the old and the
new obligations. There is no novation in case of only slight modifications; hence, the old
obligation prevails.

Facts:
Defendants Servando and Leticia Medel obtained loans from Veronica Gonzales,
the latter being engaged in the business of financing under the company Gonzales Credit
Enterprises. There were three loans which the defendants secured with the respondent,
which was not paid on maturity. The third loan was secured by a property owned by one
Leticia Makalintal Yaptinchay, who issued a special power of attorney in favor of Leticia
Medel authorizing her to execute the mortgage. Servando and Leticia with the latter’s
husband, Dr. Rafael Medel, consolidated all their previous unpaid loans totalling P440, 000
and sought from Veronica another loan in the amount of P60, 000, bringing their
indebtedness to a total of P500.000, payable on August 23, 1986.

Upon maturity of the new promissory note, the defendants failed to pay their
obligation. So, the plaintiffs filed a complaint for the collection of the full amount of the
loan, plus interests and other charges. Servando contended that he did not obtain any
loan from the respondents and that he was not able to benefit from its proceeds and that
he signed the promissory note as a witness only.

With the various appeals and motion for reconsideration with the Regional Trial
Court and Court of Appeals, it was decided that the parties should be liable for the loans.
Servando opposed that he and the respondents had agreed to fix the entire obligation at
P775, 000. According to Servando, their agreement which was allegedly embodied in a
receipt dated February 5, 1992, whereby he made an initial payment of P400, 000 and
promised to pay the balance of P375, 000 on February 29, 1992, effectively superseded
the promissory note dated July 23, 1986. RTC ruled over Servando’s opposition and moved
for the execution of the judgment. Then, Servando’s heirs, on account of his intervening
death, appealed that there was already novation.

Issue:
Whether or not there was already novation of the August 23, 1986 promissory note when
respondent Veronica Gonzales issued the February 5, 1992 receipt.

Ruling:
No.
The court ruled that there is novation when there is an irreconcilable
incompatibility between the old and the new obligations. There is no novation in case of
only slight modifications; hence, the old obligation prevails. Extinguishment of the old
obligation is a necessary element for novation and the new one will arise from such.
 Novation arises when there is a substitution of an obligation by a subsequent one
that extinguishes the first, either by changing the object of the principal conditions, or by
substituting the person of the debtor, or by subrogating a third person in the rights of the
creditor. For valid novation to take place, there must be: (a) a previous valid obligation;
(b) an agreement of the parties to make a new contract; (c) an extinguishment of the old
contract; and (d) a valid new contract. In short, the new obligation extinguishes the prior
agreement only when the substitution is unequivocally declared, or the old and new
obligations are incompatible on every point.

In the present case, novation did not transpire because no irreconcilable

incompatibility existed between the promissory note and the receipt. The receipt of
February 5, 1992 did not create a new obligation which is incompatible with the old one
under the promissory note that was issued. It was only a payment of the obligation of
Servando and did not established a new obligation. The court ruled that the payment of
the obligation does not novate the instrument that only expressly recognize the old
obligation, or changes only the terms of the payment, or adds other obligation that is not
incompatible with the old ones, or the new contract merely supplements the old one. The
new contract that is mere reiteration, acknowledgement or ratification of the old contract
with slight modifications or alterations as to the cause or object or principal conditions can
stand together with the former one, and there can be no incompatibility between them.

Novation is not presumed by the parties, there should be an express agreement

that would abrogate the old one in favour of the new one. In the absence of express
agreement, the old one and the new obligation should be incompatible on every pint. The
incompatibility of the obligation is that the two obligations cannot stand together, each
one having independence from each other.

ACE FOODS, INC vs. MICRO PACIFIC TECHNOLOGIES CO., LTD.

G.R. No. 200602 December 11, 2013

Novation, in its broad concept, may either be extinctive or modificatory. It is extinctive

when an old obligation is terminated by the creation of a new obligation that takes the
place of the former; it is merely modificatory when the old obligation subsists to the extent
it remains compatible with the amendatory agreement. In either case, however, novation
is never presumed, and the animus novandi, whether totally or partially, must appear by
express agreement of the parties, or by their acts that are too clear and unequivocal to
be mistaken.

FACTS:

ACE Foods and MTCL entered into an agreement whereby the latter shall sell and deliver
computer hardware and equipment which will be installed at various offices of ACE Foods
amounting to ₱646,464.00. MTCL delivered the said products to ACE Foods where the fine
print of the invoice states, inter alia, that "[t]itle to sold property is reserved in
MICROPACIFIC TECHNOLOGIES CO., LTD. until full compliance of the terms and
conditions of above and payment of the price (title reservation stipulation). The subject
products were then installed and configured in ACE Foods’s premises. MTCL’s demands
for payment of the purchase price, however, remained unheeded. Instead of paying, ACE
Foods sent a letter stating that it "ha[s] been returning the [subject products] to [MTCL]
thru [its] sales representative Mr. Mark Anteola who has agreed to pull out the said
[products] but had failed to do so up to now."

Eventually, ACE Foods lodged a Complaint against MTCL praying that the latter pull out
from its premises the subject products since MTCL breached its "after delivery services"
obligations to it, particularly, to: (a) install and configure the subject products; (b) submit
a cost benefit study to justify the purchase of the subject products; and (c) train ACE
Foods’s technicians on how to use and maintain the subject products. It also claimed that
the products delivered by MTCL are defective and not working.

MTCL maintained that it had duly complied with its obligations and that the subject
products were in good working condition when they were delivered, installed and
configured in ACE Foods’s premises. That it even conducted a training course for ACE
Foods’s representatives/employees; and that there was no agreement as to the purported
"after delivery services." That ACE Foods refused and failed to pay the purchase price
despite its use of the products for nine (9) months. As such, it prayed that ACE Foods pay
the purchase price, as well as damages related to the transaction.

ISSUES:

1. Whether ACE Foods should pay MTCL the purchase price for the subject
products.(Already discussed during the Topic on General Provisions)

2. Whether or not there is novation on the ground that the reservation stipulation changed
the complexion of the transaction from a contract of sale into a contract to sell. (Relevant
Issue)

RULING:

2. NO. MTCL’s reservation of ownership of the subject products as reflected in the Invoice
Receipt did not change the complexion of the transaction from a contract of sale into a
contract to sell. Records are bereft of any showing that the said stipulation novated the
contract of sale between the parties which, to repeat, already existed at the precise
moment ACE Foods accepted MTCL’s proposal. To be sure, novation, in its broad concept,
may either be extinctive or modificatory. It is extinctive when an old obligation is
terminated by the creation of a new obligation that takes the place of the former; it is
merely modificatory when the old obligation subsists to the extent it remains compatible
with the amendatory agreement. In either case, however, novation is never presumed,
and the animus novandi, whether totally or partially, must appear by express agreement
of the parties, or by their acts that are too clear and unequivocal to be mistaken.

Here, it has not been shown that the title reservation stipulation appearing in the Invoice
Receipt had been included or had subsequently modified or superseded the original
agreement of the parties. The fact that the Invoice Receipt was signed by a representative
of ACE Foods does not, by and of itself, prove animus novandi since: (a) it was not shown
that the signatory was authorized by ACE Foods (the actual party to the transaction) to
novate the original agreement; (b) the signature only proves that the Invoice Receipt was
received by a representative of ACE Foods to show the fact of delivery; and (c) as matter
of judicial notice, invoices are generally issued at the consummation stage of the contract
and not its perfection, and have been even treated as documents which are not
actionable per se, although they may prove sufficient delivery.

Thus, absent any clear indication that the title reservation stipulation was actually agreed
upon, the Court must deem the same to be a mere unilateral imposition on the part of
MTCL which has no effect on the nature of the parties’ original agreement as a contract
of sale. Perforce, the obligations arising thereto, among others, ACE Foods’s obligation to
pay the purchase price as well as to accept the delivery of the goods, remain
enforceable and subsisting.

The Wellex Group, Inc. v. U-land Airlines, Co., Ltd.

Rescission or resolution under Article 1191 is a principal action that is immediately

available to the party at the time that the reciprocal prestation was breached. Mutual
restitution is required in cases involving rescission under Article 1191. This means bringing
the parties back to their original status prior to the inception of the contract. Determining
the existence of fraud is not necessary in an action for rescission or resolution under
Article 1191. The existence of fraud must be established if the rescission prayed for is the
rescission under Article 1381.

Facts:
Wellex and U-Land agreed to develop a long-term business relationship through
the creation of joint interest in airline operations and property development projects in
the Philippines. The agreement includes: I. Acquisition of APIC and PEC shares; II.
Operation and management of APIC/PEC/APC; III. Entering into and funding a joint
development agreement; and IV. The option to acquire from WELLEX shares of stock of
EXPRESS SAVINGS BANK ("ESB") up to 40% of the outstanding capital stock of ESB of U-
Land. The provisions of the memorandum were agreed to be executed within 40 days
from its execution date.

The 40-day period lapsed but Wellex and U-Land were not able to enter into any
share purchase agreement although drafts were exchanged between the two. However,
Despite the absence of a share purchase agreement, U-Land remitted to Wellex a total of
US$7,499,945.00. Wellex acknowledged the receipt of these remittances in a confirmation
letter addressed to U-Land and allegedly delivered stock certificates and TCTs of subject
properties. Despite these transactions, Wellex and U-Land still failed to enter into the
share purchase agreement and the joint development agreement. Thus, U-Land filed a
Complaint72 praying for rescission of the First Memorandum of Agreement and damages
against Wellex and for the issuance of a Writ of Preliminary Attachment. Note: After
verification with the Securities and Exchange Commission, U-Land discovered that "APIC
did not own a single share of stock in APC.

RTC: Ruled In favor of Uland and ordered rescission of contract under Art. 1911 of the
civil code. Basis of rescission: Wellex’s misrepresentation that APIC was a majority
shareholder of APC that compelled it to enter into the agreement..
“Notwithstanding the said remittances, APIC does not own a single share of APC. On the
other hand, defendant could not even satisfactorily substantiate its claim that at least it
had the intention to cause the transfer of APC shares to APIC. Defendant obviously did
not enter into the stipulated SPA because it did not have the shares of APC transferred to
APIC despite its representations. Under the circumstances, it is clear that defendant
fraudulently violated the provisions of the MOA.”

On appeal, the Court of Appeals affirmed the ruling of the Regional Trial Court.
Hence this petition.

Petitioners invokes Suria v. Intermediate Appellate Court, which held that an

"action for rescission is not a principal action that is retaliatory in character under Article
1191 of the Civil Code, but a subsidiary one which is available only in the absence of any
other legal remedy under Article 1384 of the Civil Code Respondent U-land avers that this
case was inapplicable because the pertinent provision in Suria was not Article 1191 but
rescission under Article 1383 of the Civil Code. The "rescission" referred to in Article 1191
referred to "resolution" of a contract due to a breach of a mutual obligation, while Article
1384 spoke of "rescission" because of lesion and damage. Thus, the rescission that is
relevant to the present case is that of Article 1191, which involves breach in a reciprocal
obligation. It is, in fact, resolution, and not rescission as a result of fraud or lesion, as
found in Articles 1381, 1383, and 1384 of the Civil Code.

Issue: Whether or not respondent U-Land correctly sought the principal relief of rescission
or resolution under Article 1191.

Held: Yes.
Respondent U-Land is praying for rescission or resolution under Article 1191, and
not rescission under Article 1381. The failure of one of the parties to comply with its
reciprocal prestation allows the wronged party to seek the remedy of Article 1191. The
wronged party is entitled to rescission or resolution under Article 1191, and even the
payment of damages. It is a principal action precisely because it is a violation of the
original reciprocal prestation. Article 1381 and Article 1383, on the other hand, pertain to
rescission where creditors or even third persons not privy to the contract can file an action
due to lesion or damage as a result of the contract. Rescission or resolution under Article
1191, therefore, is a principal action that is immediately available to the party at the time
that the reciprocal prestation was breached. Article 1383 mandating that rescission be
deemed a subsidiary action cannot be applicable to rescission or resolution under Article
1191. Thus, respondent U-Land correctly sought the principal relief of rescission or
resolution under Article 1191.

The order is valid. Enforcement of Section 9 of the First Memorandum of

Agreement has the same effect as rescission or resolution under Article 1191 of the Civil
Code. The parties are obligated to return to each other all that they may have received
as a result of the breach by petitioner Wellex of the reciprocal obligation. Therefore, the
Court of Appeals did not err in affirming the rescission granted by the trial court.

Contrary to petitioner Wellex’s argument, this is not rescission under Article 1381
of the Civil Code. This case does not involve prejudicial transactions affecting guardians,
absentees, or fraud of creditors. Article 1381(3) pertains in particular to a series of
fraudulent actions on the part of the debtor who is in the process of transferring or
alienating property that can be used to satisfy the obligation of the debtor to the creditor.
There is no allegation of fraud for purposes of evading obligations to other creditors. The
actions of the parties involving the terms of the First Memorandum of Agreement do not
fall under any of the enumerated contracts that may be subject of rescission.

Further, respondent U-Land is pursuing rescission or resolution under Article 1191,

which is a principal action. Justice J.B.L. Reyes’ concurring opinion in the landmark case
of Universal Food Corporation v. Court of Appeals184 gave a definitive explanation on the
principal character of resolution under Article 1191 and the subsidiary nature of actions
under Article 1381:
The rescission on account of breach of stipulations is not predicated on injury to economic
interests of the party plaintiff but on the breach of faith by the defendant, that violates
the reciprocity between the parties. It is not a subsidiary action, and Article 1191 may be
scanned without disclosing anywhere that the action for rescission thereunder is
subordinated to anything other than the culpable breach of his obligations by the
defendant. This rescission is a principal action retaliatory in character, it being unjust that
a party be held bound to fulfill his promises when the other violates his. As expressed in
the old Latin aphorism: "Non servanti fidem, non est fides servanda." Hence, the
reparation of damages for the breach is purely secondary.

On the contrary, in the rescission by reason of lesion or economic prejudice, the

cause of action is subordinated to the existence of that prejudice, because it is the raison
detre as well as the measure of the right to rescind. Hence, where the defendant makes
good the damages caused, the action cannot be maintained or continued, as expressly
provided in Articles 1383 and 1384. But the operation of these two articles is limited to
the cases of rescission for lesión enumerated in Article 1381 of the Civil Code of the
Philippines, and does not apply to cases under Article 1191.

Rescission or resolution under Article 1191, therefore, is a principal action that is

immediately available to the party at the time that the reciprocal prestation was breached.
Article 1383 mandating that rescission be deemed a subsidiary action cannot be applicable
to rescission or resolution under Article 1191. Thus, respondent U-Land correctly sought
the principal relief of rescission or resolution under Article 1191.

The obligations of the parties gave rise to reciprocal prestations, which arose from
the same cause: the desire of both parties to enter into a share purchase agreement that
would allow both parties to expand their respective airline operations in the Philippines
and other neighboring countries.

BANK OF THE PHILIPPINE ISLANDS vs. AMADOR DOMINGO

G.R. No. 169407 | March 25, 2015 | Leonardo-De Castro, J.

As a general rule, since novation implies a waiver of the right the creditor had
before the novation, such waiver must be express. However, the existence of the creditor's
consent may also be inferred from the creditor's acts, provided that such acts still need to
be "a clear and unmistakable expression of [the creditor's] consent. " Further,
jurisprudence requires presentation of proof of consent, not mere absence of objection

FACTS:

Spouses Domingo executed a Promissory Note in favor of Makati Auto Center, Inc. in the
sum of ₱629,856.00, payable in 48 successive monthly installments in the amount of
₱13,122.00 each. They simultaneously executed a Deed of Chattel Mortgage over a 1993
Mazda 323 (subject vehicle) to secure the payment of their Promissory Note. Makati Auto
Center, Inc. then assigned, ceded, and transferred all its rights and interests over the said
Promissory Note and chattel mortgage to Far East Bank and Trust Company (FEBTC).

On April 7, 2000, the Securities and Exchange Commission (SEC) approved and issued the
Certificate of Filing of the Articles of Merger and Plan-· of Merger executed on January 20,
2000 by and between BPI, the surviving corporation, and FEBTC, the absorbed
corporation. By virtue of said merger, all the assets and liabilities of FEBTC were
transferred to and absorbed by BPI.

The spouses Domingo defaulted when they failed to pay 21 monthly installments that had
fallen due consecutively from January 15, 1996 to September 15, 1997. BPI, being the
surviving corporation after the merger, demanded that the spouses Domingo pay the
balance of the Promissory Note including accrued late payment charges/interests or to
return the possession of the subject vehicle for the purpose of foreclosure in accordance
with the undertaking stated in the chattel mortgage. When the spouses Domingo still
failed to comply with its demands, BPI filed on November 14, 2000 a Complaint for
Replevin and Damages (or in the alternative, for the collection of sum of money, interest
and other charges, and attorney's fees). BPI included a John Doe as defendant because
at the time of filing of the Complaint, BPI was already aware that the subject vehicle was
in the possession of a third person but did not yet know the identity of said person. The
said person was later on identified as Carmelita Gonzales.

Spouses Domingo contends that BPI has no cause of action against them as their
obligation with the bank has been extinguished by virtue of the sale of the subject vehicle
to Carmelita who assumed payment of the balance of the mortgaged loan. BPI, on the
other hand, argues that Spouses Domingo are not released from their obligation because
its consent to the substitution of debtor was never obtained.

ISSUE:

Whether or not there had been a novation of the loan obligation with chattel mortgage of
the spouses Domingo to BPI so that the spouses Domingo were released from said
obligation and Carmelita was substituted as debtor.

RULING:

NO.
 According to Manresa, novation is the extinguishment of an obligation by the
substitution or change of the obligation by a subsequent one which extinguishes or
modifies the first, either by changing the object or principal conditions, or by substituting
the person of the debtor, or by subrogating a third person to the rights of the creditor.
Unlike other modes of extinction of obligations, novation is a juridical act with a dual
function - it extinguishes an obligation and creates a new one in lieu of the old.

Article 1293 of the New Civil Code provides:

"Novation which consists in substituting a new debtor in the place of the original
one, may be made even without the knowledge or against the will of the latter,
but not without the consent of the creditor." (emphasis supplied)

Under this provision, there are two forms of novation by substituting the person
of the debtor, and they are: (1) expromision and (2) delegacion. In the former, the
initiative for the change does not come from the debtor and may even be made without
his knowledge, since it consists in a third person assuming the obligation. As such, it
logically requires the consent of the third person and the creditor. In the latter, the debtor
offers and the creditor accepts a third person who consents to the substitution and
assumes the obligation, so that the intervention and the consent of these three persons
are necessary. In these two modes of substitution, the consent of the creditor is an
indispensable requirement.

As a general rule, since novation implies a waiver of the right the creditor had
before the novation, such waiver must be express. However, the existence of the creditor's
consent may also be inferred from the creditor's acts, provided that such acts still need to
be "a clear and unmistakable expression of [the creditor's] consent. "

In this case, there is no express consent of BPI to the substitution of debtors. That
BPI (or FEB TC) had a copy of the Deed of Sale and Assumption of Mortgage executed
between Mercy and Carmelita in its file does not mean that it had consented to the
same. The documents of BPI concerning the car loan and chattel mortgage are still in the
name of the spouses Domingo. No new promissory note or chattel mortgage had been
executed between BPI (or FEBTC) and Carmelita. Even the account itself is still in the
names of the spouses Domingo.

The absence of objection on the part of BPI (or FEB TC) cannot be presumed as consent.
Jurisprudence requires presentation of proof of consent, not mere absence of
objection. The consent of BPI to the substitution of debtors cannot be deduced from its
acceptance of payments from Carmelita, absent proof of its clear and unmistakable
consent to release the spouses Domingo from their obligation. Since the spouses Domingo
remained as debtors of BPI, together with Carmelita, the fact that BPI demanded payment
from the spouses Domingo 30 months after accepting payment from Carmelita is
insignificant.

Absent proof that BPI gave its clear and unmistakable consent to release the
spouses Domingo from the obligation to pay the car loan, Carmelita is simply considered
an additional debtor. Consequently, BPI can still enforce the obligation against the spouses
Domingo even 30 months after it had started accepting payments from Carmelita.

PCIB v. Franco

…the general rule is that the burden rests on the defendant to prove payment, rather than
on the plaintiff to prove non-payment. When the creditor is in possession of the document
of credit, he need not prove non-payment for it is presumed.
Facts:
This is an action for damages filed by Arturo P. Franco, on September 5, 2000, against
PCIB, now known as Equitable-PCI Bank, and Equitable Banking Corporation. The
complaint essentially alleges, among others that herein respondent secured from herein

Number Issued Maturity Amount Interest

094846 Dec 8 1986 Jan 7 1987 P100,000.00 8.75% p.a.
135928 Jan 19 1987 Feb 18 1987 P850,594.54 7.75% p.a.
205007 May 13 1987 June 15 1987 P500,000.00 8.50% p.a.
205146 July 15 1987 Aug 14 1987 P502,958.90 9.25% p.a.
petitioner PCIB the following Trust Indenture Certificates (TIC/s):

Respondent, according to his testimony, is the proprietor of Fair Marketing Freight

Services, which is the investor named in TIC 094846. In 1986, he decided to save up for
his retirement and to invest his hard earned money. He was 51 years old when he decided
to deposit his funds with PCIB which later on merged with Equitable Banking Corporation,
and is now known as Equitable PCI Bank. He chose PCIB for the latter’s representation
that by making such investment, he was actually providing for his future since his
investment would be commingled, pooled and automatically rolled-over for better
investment return and which will provide for his needs upon retirement, without need for
him to take any further action. He was a loyal client to PCIB from 1986 to 1997. He entered
into a trust agreement with PCIB for which the latter issued TICs. In 1995, his son Arthur
was diagnosed to be afflicted with leukemia and eventually died on October 24,1997. Due
to his son’s illness, he was forced to go to defendants and try to encash his TICs but was
denied by the bank. Arturo, who was then 62 years old, was given a run around by the
bank. In a letter dated June 22, 2000, defendants, through their counsel, informed plaintiff
that the subject TICs are null and void. When he received the letter, he and his wife began
to experience sleepless nights, became anxious because their hope to secure their life in
their old age had fallen apart. And

Arturo was constrained to file a case against herein petitioner bank.

PCIB admitted in the answer the issuance of the TICs subject matter of the complaint,
but deny the allegation that the investments subject of the TICs are automatically rolled
over as such certificates have their own fixed term and maturity date. PCIB presented the
operations officer of Equitable PCI Bank, who testified that she came to know plaintiff in
1987 when she was assigned at PCIB Gil Puyat branch and herein respondent was one of
the bank’s valued clients. The said officer, Ms. Soriano, admitted that she had no direct
dealing with Arturo regarding the TICs and she had no idea what happened to the said
TICs after their respective maturity dates. PCIB also presented another operations officer,
Mr. Fortuno, who was familiar with the TIC issued to Arturo.

He stated that when a client would like to secure a TIC, they would require the client
among others, to sign a roll over agreement/rules and regulations. In 1992, all existing
TICs were converted to Common Trust funds and that he is not aware of any TIC
belonging to Arturo which were converted into Common Trust funds. Mr. Fortuno also
admitted that the change is only in name because they have the same features and the
only difference is that Common Trust funds are classified into several product types
depending on the limit of the amount of investment.
RTC rendered a decision in favor of Arturo ordering the PCIB to pay: all the TICs plus the
legal interest until fully paid, moral damages, exemplary damages, attorneys fees and
reimbursement for filing fees. On appeal, CA affirmed the RTC. CA denied the MR. Hence
this petition.

Issue: WON herein respondent is entitled to the relief sought

Held: YES. Considering that the four TICs have not been replaced or cancelled, the
relationship of express trust between herein petitioner bank and respondent Arturo still
subsists at the time the latter demanded the withdrawal of his funds under them. While
the TICs contain a maturity date, the trial court correctly opined that the same refers only
to the gross income expectation or the applicable interest rate because the funds are
automatically rolled over with varying interest rates depending on the prevailing interest
rates as determined by the petitioner bank’s Trust Department. With respect however to
the interest rate applicable after the stipulated maturity dates, the court deemed it fair
and reasonable to impose the legal rate of interest for want of evidence on the prevailing
rate at the time of roll over. Finally, the court found that petitioner bank is in bad faith in
its dealings with respondent Arturo when it unilaterally declared – despite claiming that
respondent was a valued client – the TICs as null and void by reason of their conversion
to Common Trust Funds in 1991.

Jurisprudence abounds that, in civil cases, one who pleads payment has the burden of
proving it. Even where the plaintiff must allege non-payment, the general rule is that the
burden rests on the defendant to prove payment, rather than on the plaintiff to prove
non-payment. When the creditor is in possession of the document of credit, he need not
prove non-payment for it is presumed. The creditor’s possession of the evidence of debt
is proof that the debt has not been discharged by payment. In this case, respondent’s
possession of the original copies of TICs strongly supports his claim that petitioner bank’s
obligation to return the principal plus interest of the money placement has not been
extinguished. The TICs in the hands of respondent is a proof of indebtedness and a prima
facie evidence that they have not been paid. Petitioner bank could have easily presented
documentary evidence to dispute the claim but it did not. In its omission, it may be
reasonably deduced that no evidence to that effect really exists.
FILINVEST CREDIT CORPORATION v. PHILIPPINE ACETYLENE, CO., INC.
G.R. No. L-50449 January 30, 1982 (DE CASTRO, J.)

The mere return of the mortgaged motor vehicle by the mortgagor to the mortgagee does
not constitute dation in payment or dacion en pago in the absence, express or implied of
the true intention of the parties. Dacion en pago, according to Manresa, is the
transmission of the ownership of a thing by the debtor to the creditor as an accepted
equivalent of the performance of obligation. In dacion en pago, as a special mode of
payment, the debtor offers another thing to the creditor who accepts it as equivalent of
payment of an outstanding debt.

Facts:
Philippine Acetylene, purchased from Alexander Lim, a motor vehicle (Chevorlet) for
P55,247.80 with a down payment of P20,000.00 and the balance of P35,247.80 payable,
under the promissory note at a monthly installment of P1,036.70 for 34 months, due and
payable on the first day of each month starting December 1971 through September 1974
with 12 % interest per annum on each unpaid installment, and attorney's fees equivalent
to 25% of the total of the outstanding unpaid amount.

As security for the payment of said promissory note, the appellant executed a chattel
mortgage over the same motor vehicle in favor of said Alexander Lim. Subsequently, Lim
assigned to the Filinvest Finance Corporation (now Filinvest Credit Corporation) all his
rights, title, and interests in the promissory note and chattel mortgage by virtue of a Deed
of Assignment.

Filinvest Credit defaulted in the payment of nine successive installments prompting

Philippine Acetylene to send a demand letter whereby its counsel demanded "to remit the
aforesaid amount in full in addition to stipulated interest and charges or return the
mortgaged property to my client at its office xxx within five (5) days from date of this
letter xxx. " Replying thereto, appellant wrote back advising appellee of its decision to
"return the mortgaged property, which return shall be in full satisfaction of its
indebtedness pursuant to Article 1484 of the New Civil Code." Accordingly, the mortgaged
vehicle was returned to the appellee together with the document "Voluntary Surrender
with Special Power of Attorney To Sell" confirmed to by appellee's vice-president.

Philippine Acetylene informed the latter that appellee cannot sell the motor vehicle as
there were unpaid taxes on the said vehicle and requested the appellant to update its
account by paying the installments in arrears and accruing interest in the amount of
P4,232.21 on or before April 9, 1973. Philippine Acetylene offered to deliver back the
motor vehicle to the appellant but the latter refused to accept it, so appellee instituted an
action for collection of a sum of money with damages in the Court of First Instance
of Manila.

Appellant avers that appellee has no cause of action against it since its obligation towards
the appellee was extinguished when it returned the mortgaged property to the appellee,
and that assuming arguendo that the return of the property did not extinguish its
obligation, it was nonetheless justified in refusing payment since the appellee is not
entitled to recover the same due to the breach of warranty committed by the original
vendor-assignor Alexander Lim.

The CFI of Manila renders judgment directing defendant to pay plaintiff the outstanding
unpaid obligation of the defendant under the assigned credit with interest and for
attorney's fees; and directing plaintiff to deliver to, and defendant to accept, the motor
vehicle, subject of the chattel.

Issues
(a) Whether or not the return of the mortgaged motor vehicle to the appellee by virtue of
its voluntary surrender by the appellant totally extinguished and/or cancelled its obligation
to the appellee.
(b) Whether or not the warranty for the unpaid taxes on the mortgaged motor vehicle
may be properly raised and imputed to or passed over to the appellee.
Held
(a) NO.
The mere return of the mortgaged motor vehicle by the mortgagor, the herein appellant,
to the mortgagee, the herein appellee, does not constitute dation in payment
or dacion en pago in the absence, express or implied of the true intention of the
parties. Dacion en pago, according to Manresa, is the transmission of the ownership of
a thing by the debtor to the creditor as an accepted equivalent of the performance of
obligation. In dacion en pago, as a special mode of payment, the debtor offers another
thing to the creditor who accepts it as equivalent of payment of an outstanding debt. The
undertaking really partakes in one sense of the nature of sale, that is, the creditor is really
buying the thing or property of the debtor, payment for which is to be charged against
the debtor's debt. As such, the essential elements of a contract of sale, namely, consent,
object certain, and cause or consideration must be present. In its modern concept, what
actually takes place in dacion en pago is an objective novation of the obligation where
the thing offered as an accepted equivalent of the performance of an obligation is
considered as the object of the contract of sale, while the debt is considered as the
purchase price. In any case, common consent is an essential prerequisite, be it sale or in
novation to have the effect of totally extinguishing the debt or obligation.

The evidence on the record fails to show that the mortgagee, the herein appellee,
consented, or at least intended, that the mere delivery to, and acceptance by him, of the
mortgaged motor vehicle be construed as actual payment, more specifically dation in
payment or dacion en pago. The fact that the mortgaged motor vehicle was delivered to
him does not necessarily mean that ownership thereof, as juridically contemplated by
dacion en pago, was transferred from appellant to appellee. In the absence of clear
consent of appellee to the proferred special mode of payment, there can be no transfer
of ownership of the mortgaged motor vehicle from appellant to appellee.

A more solid basis of the true intention of the parties is furnished by the document
executed by appellant captioned "Voluntary Surrender with Special Power of Attorney To
Sell" of the appellant's answer to the complaint. An examination of the language of the
document reveals that the possession of the mortgaged motor vehicle was voluntarily
surrendered by the appellant to the appellee authorizing the latter to look for a buyer and
sell the vehicle in behalf of the appellant who retains ownership thereof, and to apply the
proceeds of the sale to the mortgage indebtedness, with the undertaking of the appellant
to pay the difference, if any, between the selling price and the mortgage obligation.

Appellant would also argue that by accepting the delivery of the mortgaged motor vehicle,
appellee is estopped from demanding payment of the unpaid obligation. Estoppel would
not lie since appellee never accepted the mortgaged motor vehicle in full satisfaction of
the mortgaged debt. Under the law, the delivery of possession of the mortgaged property
to the mortgagee can only operate to extinguish appellant's liability if the appellee had
actually caused the foreclosure sale of the mortgaged property when it recovered
possession thereof. It is worth noting that it is the fact of foreclosure and actual
sale of the mortgaged chattel that bar the recovery by the vendor of any
balance of the purchaser's outstanding obligation not satisfied by the sale.

(b) NO.
There is no dispute that there is an unpaid taxes due on the mortgaged motor vehicle
which, according to appellant, liability for the breach of warranty under the Deed of Sale
is shifted to the appellee who merely stepped into the shoes of the assignor Alexander
Lim by virtue of the Deed of Assignment in favor of appellee. The Deed of Sale between
Alexander Lim and appellant and the Deed of Assignment between Alexander Lim and
appellee are very clear on this point. There is a specific provision in the Deed of Sale that
the seller Alexander Lim warrants the sale of the motor vehicle to the buyer, the herein
appellant, to be free from liens and encumbrances. When appellee accepted the
assignment of credit from the seller Alexander Lim, there is a specific agreement that Lim
continued to be bound by the warranties he had given to the buyer.

Note: It must be noted that the unpaid taxes on the motor vehicle is a burden on the
property. Since as earlier shown, the ownership of the mortgaged property never left the
mortgagor, the herein appellant, the burden of the unpaid taxes should be borne by him,
who, in any case, may not be said to be without remedy under the law, but definitely not
against appellee to whom were transferred only rights, title and interest, as such is the
essence of assignment of credit.

TAN SHUY vs. Spouses GUILLERMO MAULAWIN and PARING CARIÑO-

MAULAWIN

Facts:
Petitioner Tan Shuy is engaged in the business of buying copra and corn in the Fourth
District of Quezon Province. According to Vicente Tan (Vicente), son of petitioner,
whenever they would buy copra or corn from crop sellers, they would prepare and issue
a pesada in their favor. A pesada is a document containing details of the transaction,
including the date of sale, the weight of the crop delivered, the trucking cost, and the net
price of the crop. He then explained that when a pesada contained the annotation "pd"
on the total amount of the purchase price, it meant that the crop delivered had already
been paid for by petitioner.

Guillermo Maulawin (Maulawin), respondent, is a farmer-businessman engaged in the

buying and selling of copra and corn. On 10 July 1997, Tan Shuy extended a loan to
Maulawin in the amount of ₱ 420,000. In consideration thereof, Guillermo obligated
himself to pay the loan and to sell lucad or copra to petitioner. According to Vicente, part
of their agreement with Maulawin was that they would put the annotation "sulong" on the
pesada when partial payment for the loan was made.
Petitioner alleged that despite repeated demands, Guillermo remitted only a total of ₱
28,500.4 He claimed that respondent had an outstanding balance of ₱391,500. Thus,
petitioner brought the controversy to the Lupon Tagapamayapa. When no settlement was
reached, petitioner filed a Complaint before the Regional Trial Court (RTC).

On 27 July 2007, the trial court issued a Decision, ruling that the net proceeds from
Guillermo’s copra deliveries – represented in the pesadas, which did not bear the notation
"pd" – should be applied as installment payments for the loan. On 31 July 2009, the CA
issued its assailed Decision, which affirmed the finding of the trial court.

Issue: Whether the delivery of copra amounted to installment payments for the loan
obtained by respondents from petitioner.

Ruling:
We hereby uphold the factual findings of the RTC, as affirmed by the CA, in that the
pesadas served as proof that the net proceeds from the copra deliveries were used
as installment payments for the debts of respondents.
Article 1232 of the Civil Code provides that an obligation is extinguished by payment or
performance. There is payment when there is delivery of money or performance of an
obligation. Article 1245 of the Civil Code provides for a special mode of payment called
dation in payment (dación en pago).

There is dation in payment when property is alienated to the creditor in satisfaction of

a debt in money. Here, the debtor delivers and transmits to the creditor the former’s
ownership over a thing as an accepted equivalent of the payment or performance of an
outstanding debt. In such cases, Article 1245 provides that the law on sales shall apply,
since the undertaking really partakes – in one sense – of the nature of sale; that is, the
creditor is really buying the thing or property of the debtor, the payment for which is to
be charged against the debtor’s obligation. Dation in payment extinguishes the
obligation to the extent of the value of the thing delivered, either as agreed upon by the
parties or as may be proved, unless the parties by agreement – express or implied, or by
their silence – consider the thing as equivalent to the obligation, in which case the
obligation is totally extinguished.

Be that it may, this Court cannot however subscribe to the averments of Maulawin that
he has fully paid the amount of his loan to Tan Shuy from the proceeds of the copras he
delivered to Tan Shuy as shown in the "pesadas". Maulawin claimed that based on the
said "pesadas" he has paid the total amount of P420,537.68 to the plaintiff. However, this
Court keenly noted that some of the "pesadas" offered in evidence by the Maulawin were
not for copras that he delivered to the plaintiff but for "mais" (corn).

To the mind of this Court, the amount P41,585.25 which the pesadas show as payment
for mais delivered by Maulawin cannot be claimed by him to have been applied also as
payment to his loan with the plaintiff because he does not testify on such fact. Thus,
equity dictates that the total amount of P41,585.25 which corresponds to the payment for
"mais" (corn) delivered by the plaintiff shall be deducted from the total amount of
P420,537.68 which according to the defendant based on the pesadas that he presented
as evidence, is the total amount of the payment that he made for his loan to the plaintiff.

Clearly from the foregoing, since the total amount of Maulawin’s loan to the plaintiff is
P420,000.00 and the evidence on record shows that the actual amount of payment made
by the defendant from the proceeds of the copras he delivered to the plaintiff is
P378,952.43, the defendant is still indebted to the plaintiff in the amount of
P41,047.53 (P420,000.00-P378,952.43).
The subsequent arrangement between Tan Shuy and Guillermo can thus be considered
as one in the nature of dation in payment. There was partial payment every time
Guillermo delivered copra to petitioner, chose not to collect the net proceeds of his copra
deliveries, and instead applied the collectible as installment payments for his loan from
Tan Shuy.

REPARATIONS COMMISSION v. UNIVERSAL DEEP-SEA FISHING

CORPORATION and MANILA SURETY AND FIDELITY CO., INC.,
A.M. No. 21901-96, June 27, 1978

FACTS:

The Universal Deep-Sea Fishing Corporation (UNIVERSAL) was awarded six (6)
trawl boats by the Reparations Commission as end-user of reparations goods. These
fishing boats were delivered to UNIVERSAL two at a time, each delivery being covered by
a Contract of Conditional Purchase and Sale providing for identical schedules of payments.
The first installment representing 10% of the total cost was to be paid 24 months after
delivery and the balance of the total cost to be paid in ten (10) equal installments, which,
in the schedule were numbered as 1, 2, 3, etc., the first of which was due one (1) year
after the 1st installment.

When the Reparations Commission sued UNIVERSAL and its surety to recover
various amounts of money due under the contracts, they claimed that the amounts of
money sought to be collected are not yet due and demandable. UNIVERSAL alleged that
there was an obscurity in the terms of the contracts in question caused by the plaintiff as
to the AMOUNTS and DUE DATES of the FIRST INSTALLMENTS which should have first
been fixed before the creditor could demand its payment from the debtor, specifically
referring to the schedule of payments which allegedly indicated two (2) due dates for the
payment of the 1st installment.

The Schedule of Payment of the M/S UNIFISH 1 and M/S UNIFISH 2 states that
the amount of first installment is P53,642.84 and the due date of its payment is May 8,
1961. However, the amount of the first of succeeding itemized installments is P56,597.20
and the due date is May 8, 1962. In the case of the M/S UNIFISH 3 and M/S UNIFISH 4,
the first installments are P68,777.77 and due in July, 1961 and P72,565.68 and due in
July 1962, respectively. In the contract for the purchase and sale of the M/S UNIFISH 5
and M/S UNIFISH 6, the amounts indicated as first installments are P54,500.00 and
P57,501.57, and the due dates of payment are October 17, 1961 and October 17, 1962,
respectively.
ISSUE: WON the first installments under the three (3) contracts of conditional purchase
and sale of reparations goods were already due and demandable when the complaint was
filed.

RULING: Yes

The terms of the contracts for the purchase and sale of the reparations
vessels are very clear and leave no doubt as to the intent of the contracting
parties. Thus, in the contract concerning the M/S UNIFISH 1 and M/S UNIFISH 2, the
parties expressly agreed that the first installment representing 10% of the purchase price
or P53,642.84 shall be paid within 24 months from the date of complete delivery of the
vessel or on May 8, 1961, and the balance to be paid in ten (10) equal yearly installments.
The amount of P56,597.20 due on May 8, 1962, which is also claimed to be a "first
installment," is but the first of the ten (10) equal yearly installments of balance of
judgment, purchase price.

The first installment on M/S UNIFISH 1 and M/S UNIFISH 2 in the amount of
P53,642.84 was due on May 8, 1961, while the first installments on M/S UNIFISH 3 and
M/S UNIFISH 4, and M/S UNIFISH 5 and M/S UNIFISH 6 amounting to P68,777.77 and
P54,500.00 were due on July 31, 1961 and October 17, 1961, respectively. Accordingly,
the obligation of UNIVERSAL to pay the first installments on the purchase price of the six
(6) reparations vessels was already due and demandable when the present action was
commenced on August 10, 1962. Also due and demanded from UNIVERSAL were the first
of the ten (10) equal yearly installments on the balance of the purchase price of the M/S
UNIFISH I and M/S UNIFISH 2 in the amount of P56,597.20 and P72,565.68 on M/S
UNIFISH 3 and M/S UNIFISH 4. The first accrued on May 8, 1962, while judgment, second
fell due on July 31, 1962.

Paculdo v Regalado
345 SCRA 134 (2000)

Application of payments, NCC 1252-1254; The right to specify which among his various
obligations to the same creditor is to be satisfied first rests with the debtor. Under the
law, if the debtor did not declare at the time he made the payment which of his debts
with the creditor the payment is to be applied, the law provided the guideline—no payment
is to be made to a debt that is not yet due and the payment has to be applied first to the
debt most onerous to the debtor.

FACTS: Petitioner Nereo Paculdo (Paculdo) and respondent Bonifacio Regalado

(Regalado) entered into a contract of lease over a parcel of land with a wet market
building, located at Fairview Park, Quezon City. The contract was for twenty five (25)
years. For the first five (5) years of the contract beginning December 27, 1990, Paculdo
would pay a monthly rental of P450,000, payable within the first five (5) days of each
month with a 2% penalty for every month of late payment. Aside from the above lease,
Paculdo leased eleven (11) other properties from Regalado, ten (10) of which were located
within the Fairview compound, while the eleventh was located along Quirino Highway
Quezon City. Paculdo also purchased from Regalado eight (8) units of heavy equipment
and vehicles.

On account of Paculdo’s failure to pay the corresponding monthly rentals, Regalado sent
two demand letters demanding payment of the back rentals, and if no payment was made
within fifteen (15) days from the receipt of the letter, it would cause the cancellation of
the lease contract.

Without the knowledge of Paculdo, Regalado mortgaged the land subject of the lease
contract, including the improvements which Paculdo introduced into the land. Subsequent
dates thereafter, Regalado refused to accept Paculdo’s daily rental payments.

Consequently, Paculdo filed an action for injunction and damages seeking to enjoin
respondents from disturbing his possession of the property subject of the lease contract.
On the same day, Regalado also filed a complaint for ejectment against Paculdo.

The lower court rendered a decision in favor of the Regalado, which was affirmed in toto
by the Court of Appeals. Hence, this petition.

ISSUE: Whether or not the Paculdo was in arrears in the payment of rentals on the subject
property at the time of the filing of the complaint for ejectment.

RULING: NO. Paculdo was not in arrears in the payment of rentals on the subject property
at the time of the filing of the complaint for ejectment.

As found by the lower court there was a letter sent by Regalado to Paculdo, which states
that Paculdo’s security deposit for the Quirino lot, be applied as partial payment for his
account under the subject lot as well as to the real estate taxes on the Quirino lot. However
later on Regalado also informed Paculdo that the payment was to be applied not only to
Paculdo’s accounts under the subject land and the Quirino lot but also to heavy equipment
bought by the latter from Regalado. Paculdo submits that his silence is not consent but is
in fact a rejection.

As provided in Article 1252 of the Civil Code, the right to specify which among his various
obligations to the same creditor is to be satisfied first rest with the debtor.

In the case at bar, at the time Paculdo made the payment, he made it clear to Regalado
that they were to be applied to his rental obligations on the Fairview wet market property.
However, Regalado applied a big portion of the amount paid by Paculdo to the satisfaction
of an obligation which was not yet due and demandable- the payment of the eight heavy
equipment.
The lease over the Fairview wet market is the most onerous to the petitioner in the case
at bar.

Consequently, the petition is granted.

ESTANISLAO and AFRICA SINAMBAN, Petitioners,

vs.
CHINA BANKING CORPORATION, Respondent.

On February 19, 1990, the spouses Danilo and Magdalena Manalastas (spouses
Manalastas) executed a Real Estate Mortgage (REM) in favor of respondent China Banking
Corporation (Chinabank) over two real estate properties to secure a loan from Chinabank
of ₱700,000.00. During the next few years, they executed several amendments to the
mortgage contract progressively increasing their credit line secured by the aforesaid
mortgage. The spouses Manalastas executed several promissory notes (PNs) in favor of
Chinabank. In two of the PNs, petitioners Estanislao and Africa Sinamban (spouses
Sinamban) signed as co-makers.

On November 18, 1998, Chinabank filed a Complaint for sum of money against the
spouses Manalastas and the spouses Sinamban (collectively called the defendants). The
complaint alleged that they reneged on their loan obligations under the PNs which the
spouses Manalastas executed in favor of Chinabank on different dates.

All of the three promissory notes carried an acceleration clause stating that if the
borrowers failed to pay any stipulated interest, installment or loan amortization as they
accrued, the notes shall, at the option of Chinabank and without need of notice,
immediately become due and demandable. A penalty clause also provides that an
additional amount shall be paid equivalent to 1/10 of 1% per day of the total amount due
from date of default until fully paid, and the further sum of 10% of the total amount due,
inclusive of interests, charges and penalties, as and for attorney’s fees and costs.

Pursuant to the promissory notes, Chinabank instituted extrajudicial foreclosure

proceedings against the mortgage security. The foreclosure sale was held on May 18,
1998, with Chinabank offering the highest bid of ₱4,600,000.00, but by then the
defendants’ total obligations on the three promissory notes had risen to ₱5,401,975.00,
before attorney’s fees of 10% and auction expenses, leaving a loan deficiency of
₱1,758,427.87.

The spouses Sinamban, in their Answer dated February 26, 1999, averred that they do
not recall having executed PNs dated May 23, 1995 and February 26, 1991, and had no
participation in the one dated April 24, 1995. They however admitted that they signed
some PN forms as co-makers upon the request of the spouses Manalastas who are their
relatives; although they insisted that they derived no money or other benefits from the
loans.

The RTC held that the spouses Sinamban must, solidarily with the spouses Manalastas,
proportionately answer for the loan deficiency pertaining to the two PNs they co-signed,
since the mortgage security provided by the spouses Manalastas secured all three PNs
and thus also benefited them as co-makers. But since they did not co-sign PN No. OACL
634-95, the deficiency judgment pertaining thereto will be the sole liability of the spouses
Manalastas.

The CA affirmed the RTC’s ruling, with modification. The CA noted that the choice is given
to the solidary creditor to determine against whom he wishes to enforce payment, and
Chinabank chose to apply the net proceeds of the extrajudicial foreclosure sale first to the
PN solely signed by spouses Manalastas. Thus, the net proceeds were applied first to PN
No. OACL 634-95 in the principal amount of ₱1,800,000.00, instead of pro rata to all three
PNs due.

Issues:

1. Whether or not the proceeds of the auction sale of the properties securing all the three
(3) promissory notes should first be applied to satisfy the promissory notes signed by the
Sps. Sinamban; and

2. Whether or not the debtors, and not the creditor, are given the choice under Article
1252 of the Civil Code to have the proceeds of the auction sale applied as payments to
their obligations.

The Court modifies the CA decision.

A co-maker of a PN who binds himself with the maker "jointly and severally"
renders himself directly and primarily liable with the maker on the debt,
without reference to his solvency.

"A promissory note is a solemn acknowledgment of a debt and a formal commitment to

repay it on the date and under the conditions agreed upon by the borrower and the lender.
A person who signs such an instrument is bound to honor it as a legitimate obligation duly
assumed by him through the signature he affixes thereto as a token of his good faith. If
he reneges on his promise without cause, he forfeits the sympathy and assistance of this
Court and deserves instead its sharp repudiation."
According to Article 2047 of the Civil Code, if a person binds himself solidarily with the
principal debtor, the provisions of Articles 1207 to 1222 of the Civil Code (Section 4,
Chapter 3,Title I, Book IV) on joint and solidary obligations shall be observed. Thus, where
there is a concurrence of two or more creditors or of two or more debtors in one and the
same obligation, Article 1207 provides that among them, "[t]here is a solidary liability only
when the obligation expressly so states, or when the law or the nature of the obligation
requires solidarity." It is settled that when the obligor or obligors undertake to be "jointly
and severally" liable, it means that the obligation is solidary. In this case, the spouses
Sinamban expressly bound themselves to be jointly and severally, or solidarily, liable with
the principal makers of the PNs, the spouses Manalastas.

Moreover, as the CA pointed out, in Paragraph 5 of the PNs, the borrowers and their co-
makers expressly authorized Chinabank, as follows:

[T]o apply to the payment of this note and/or any other particular obligation or obligations
of all or any one of us to the CHINA BANKING CORPORATION as the said Corporation
may select, irrespective of the dates of maturity, whether or not said obligations are then
due, any or all moneys, securities and things of value which are now or which may
hereafter be in its hands on deposit or otherwise to the credit of, or belonging to, all or
any one of us, and the CHINA BANKING CORPORATION is hereby authorized to sell at
public or private sale such securities or things of value for the purpose of applying their
proceeds to such payments.40

Pursuant to Article 1216 of the Civil Code, as well as Paragraph 5 of the PNs,
Chinabank opted to proceed against the co-debtors simultaneously, as implied
in its May 18, 1998 statement of account when it applied the entire amount of
its auction bid to the aggregate amount of the loan obligations.

Article 1216 of the Civil Code provides that "[t]he creditor may proceed against any one
of the solidary debtors or some or all of them simultaneously. The demand made against
one of them shall not be an obstacle to those which may subsequently be directed against
the others, so long as the debt has not been fully collected." Article 1252 of the Civil Code
does not apply, as urged by the petitioners, because in the said article the situation
contemplated is that of a debtor with several debts due, whereas the reverse is true, with
each solidary debt imputable to several debtors.

RTC - Liable both spouses on remaining debts, pero di naman lahat ng PN pinirmahan ng
mga Sinamban, percentage lang nung utang liability nila, based dun sa PN
CA - In-apply nung Chinabank sa 1st PN na hindi pinirmahan ng Sinamban lahat ng
pinagbentahan sa auction; option nila yun as creditors; so buo pa din yung utang ng mga
Sinamban dun sa PN 2 and PN3.

SC - Mali CA, walang ganun option ang Chinabank; pro rata dapat ang application ng
proceeds; proportionate decrease.

NUNELON R. MARQUEZ, Petitioner, v. ELISAN CREDIT CORPORATION,

Respondents.
G.R. No. 194642, April 06, 2015, BRION, J.

Under Article 1253, payments shall first be applied to the interest and not to the principal,
shall govern if two facts exist: (1) the debt produces interest (e.g., the payment of interest
is expressly stipulated) and (2) the principal remains unpaid.

Facts:

Nunelon R. Marquez (petitioner) obtained a (first loan) from Elisan Credit Corporation
(respondent) for fifty-three thousand pesos (Php 53,000.00) payable in one-hundred
eighty (180) days.The petitioner signed a promissory note which provided that it is payable
in weekly installments and subject to twenty-six percent (26%) annual interest. In case
of non-payment, the petitioner agreed to pay ten percent (10%) monthly penalty based
on the total amount unpaid and another twenty-five percent (25%) of such amount for
attorney's fees exclusive of costs, and judicial and extrajudicial expenses. To further
secure payment of the loan, the petitioner executed a chattel mortgage over a motor
vehicle.

Subsequently, the petitioner obtained another loan (second loan) from the respondent for
fifty-five thousand pesos (P55,000.00) evidenced by a promissory note and a cash voucher
both dated June 15, 1992.The promissory note covering the second loan contained exactly
the same terms and conditions as the first promissory note.

When the second loan matured on December 15, 1992, the petitioner had only paid
twenty-nine thousand nine hundred sixty pesos (P29,960.00), leaving an unpaid balance
of twenty five thousand forty pesos (P25,040.00).

Due to liquidity problems, the petitioner asked the respondent if he could pay in daily
installments (daily payments) until the second loan is paid. The respondent granted the
petitioner's request. Thus, as of September 1994 or twenty-one (21) months after the
second loan's maturity, the petitioner had already paid a total of fifty-six thousand four-
hundred forty pesos (P56,440.00), an amount greater than the principal.

Despite the receipt of more than the amount of the principal, the respondent filed a
complaint for judicial foreclosure of the chattel mortgage because the petitioner allegedly
failed to settle the balance of the second loan despite demand. The respondent further
alleged that pursuant to the terms of the promissory note, the petitioner's failure to fully
pay upon maturity triggered the imposition of the ten percent (10%) monthly penalty and
twenty-five percent (25%) attorney's fees.

Issue:
Whether the respondent act lawfully when it credited the daily payments against the
interest instead of the principal?

Ruling:

Yes.

Article 1176 provides that the receipt of the principal by the creditor, without reservation
with respect to the interest, shall give rise to the presumption that said interest has been
paid. On the other hand, Article 1253 states that, if the debt produces interest, payment
of the principal shall not be deemed to have been made until the interests have been
covered.

Both provisions are also presumptions and, as such, lose their legal efficacy in the face of
proof or evidence to the contrary. Thus, the settlement of the first issue depends on which
of these presumptions prevails under the given facts of the case.

Correlating the two provisions, the rule under Article 1253 that payments shall first be
applied to the interest and not to the principal shall govern if two facts exist: (1) the debt
produces interest (e.g., the payment of interest is expressly stipulated) and (2) the
principal remains unpaid. The exception is a situation covered under Article 1176, i.e.,
when the creditor waives payment of the interest despite the presence of (1) and (2)
above. In such case, the payments shall obviously be credited to the principal.

Since the doubt in the present case pertains to the application of the daily payments,
Article 1253 shall apply. Only when there is a waiver of interest shall Article 1176 become
relevant.

Under this analysis, we rule that the respondent properly credited the daily payments to
the interest and not to the principal because: (1) the debt produces interest, i.e., the
promissory note securing the second loan provided for payment of interest; (2) a portion
of the second loan remained unpaid upon maturity; and (3) the respondent did not waive
the payment of interest.

MEAT PACKING CORPORATION OF THE PHILIPPINES, petitioner, vs. THE

HONORABLE SANDIGANBAYAN, THE PRESIDENTIAL COMMISSION ON GOOD
GOVERNMENT and PHILIPPINE INTEGRATED MEAT CORPORATION,
respondents.
G.R. No. 103068. June 22, 2001.
YNARES-SANTIAGO, J.:
 Tender and consignation, where validly made, produces the effect of payment and
extinguishes the obligation.

Facts: Meat Packing Corporation of the Philippines (MPCP) is a corporation wholly owned
by GSIS. It is the owner of 3 parcels of land in Pasig as well as the meat processing and
packing plant thereon. On November 3, 1975, the MPCP and Philippine Integrated Meat
Corporation (PIMECO) entered into an Agreement whereby MPCP leased to PIMECO,
under a lease-purchase arrangement. The said contract was subsequently modified in
consideration of the additional expenditures incurred by MPCP for plant rehabilitation,
increasing the total contract price to P93,695,552.59, payable in 28 years, at the annual
rental rate of P3,346,269.70.

The Agreement contains a rescission clause which states that if the lessee-vendee
(PIMECO) should fail or default in the payment of rentals equivalent to the cumulative
sum total of 3 annual installments, the Agreement shall be deemed automatically cancelled
and forfeited without need of judicial intervention.

On March 17, 1986, the PCGG sequestered all the assets, properties, and records
of PIMECO, including the meat packing plant and the lease-purchase agreement. GSIS
asked the PCGG to exclude the meat packing plant from the sequestered assets of PIMECO
because it is owned by MPCP. However, the PCGG denied the request. Meanwhile, MPCP
wrote a letter to PIMECO, giving notice of the rescission of the lease-purchase agreement
on the ground, among others, of non-payment of rentals of more than P2M.

PIMECO alleged that from 1981 to 1985, PIMECO has been regularly paying the
annual rentals and that prior to its sequestration, PIMECO was able to pay MPCP the
amount of P846,269.70. However, after its sequestration, the PCGG Management Team
that took over the plant became erratic and irregular in its payments of the annual rentals
to MPCP. In 1991, the PCGG tendered to MPCP amounting to P5M representing partial
payment of accrued rentals on the meat packing plant, which MPCP refused to accept on
the theory that the lease-purchase agreement has been rescinded. Thus, the PCGG filed
an Urgent Motion praying that the Sandiganbayan order MPCP to accept the tendered
amount of P5M.

For its part, the MPCP alleged that its lease-purchase agreement with PIMECO has
been rescinded as early as November 19, 1986 and that PIMECO was in arrears in the
payment of rentals in the amount of P12,378,171.06, which is more than the equivalent
of three cumulative rentals at the annual rate of P3,346,269.70. On July 1991, the
Sandiganbayan approved the consignation by PCGG of the amount of P5M and ordered
the MPCP to accept the payment and issue the corresponding receipt.

ISSUE: Was there a rescission or a valid consignation? (Rescission was avoided by the
proper tender and consignation.)
HELD: Consignation is the act of depositing the thing due with the court or judicial
authorities whenever the creditor cannot accept or refuses to accept payment, and it
generally requires a prior tender of payment. Tender is the antecedent of consignation.
Tender of payment may be extrajudicial, while consignation is necessarily judicial, and the
priority of the first is the attempt to make a private settlement before proceeding to the
solemnities of consignation. Tender and consignation, where validly made, produces the
effect of payment and extinguishes the obligation. Article 1256 states that: “If the creditor
to whom tender of payment has been made refuses without just cause to accept it, the
debtor shall be released from responsibility by the consignation of the thing or sum due.”

The court held that there was valid prior tender by PCGG of the amount of P5M
for payment of the rentals in arrears. MPCP’s refusal to accept the same, on the ground
merely that its lease-purchase agreement with PIMECO had been rescinded, was
unjustified. It found that from January 29, 1986 to January 30, 1990, PIMECO paid, and
GSIS/MPCP received several amounts due under the lease-purchase agreement, in total
sum of P15,921,205.83. Such acceptance by MPCP and GSIS of such payments negates
any rescission.

Under the terms of the lease-purchase agreement, the amount of arrears in rentals
or amortizations must be equivalent to the cumulative sum of three annual installments,
in order to warrant the rescission of the contract. Therefore, it must be shown that
PIMECO failed to pay the aggregate amount of at least P10,038,809.10 before the lease-
purchase agreement can be deemed automatically cancelled. Assuming in the extreme
that, as alleged by MPCP, the arrears at the time of tender on January 30, 1991 amounted
to P12,578,171.00, the tender and consignation of the sum of P5,000,000.00, which had
the effect of payment, reduced the back rentals to only P7,578,171.00, an amount less
than the equivalent of three annual installments. Thus, with the Sandiganbayan’s approval
of the consignation and directive for MPCP to accept the tendered payment, the lease-
purchase agreement could not be said to have been rescinded.

G.R. No. 171298 April 15, 2013

SPOUSES OSCAR and THELMA CACAYORIN vs ARMED FORCES AND

POLICE MUTUAL BENEFIT ASSOCIATION, INC.

Under Article 1256 of the Civil Code,the debtor shall be released from
responsibility by the consignation of the thing or sum due, without need of prior
tender of payment, when the creditor is absent or unknown, or when he is
incapacitated to receive the payment at the time it is due, or when two or more
persons claim the same right to collect, or when the title to the obligation has
been los
 Consignation is necessarily judicial. Article 1258 of the Civil Code specifically
provides that consignation shall be made by depositing the thing or things due at
the disposal of judicial authority. The said provision clearly precludes
consignation in venues other than the courts.

FACTS

Oscar Cacayorin (Oscar) is a member of respondent Armed Forces and Police

Mutual Benefit Association, Inc. (AFPMBAI). He filed an application with AFPMBAI
to purchase a piece of property which the latter owned, located in San Pedro,
Puerto Princesa City (the property), through a loan facility.

Oscar and his wife Thelma, and a Rural Bank executed a Loan and Mortgage
Agreementunder the auspices of Pag-IBIG or Home Development Mutual Fund’s
Home Financing Program. The proceeds are to be released to AFPMBAI after title
to the property is transferred in petitioners’ name and after the registration and
annotation of the parties’ mortgage agreement.AFPMBAI executed in petitioners’
favor a Deed of Absolute Sale,and a new title was issued in their name.

Unfortunately, the Pag-IBIG loan facility did not push through and the Rural Bank
closed and was placed under receivership. Meanwhile, AFPMBAI somehow was
able to take possession of petitioners’ loan documents and the cerrtificate, while
petitioners were unable to pay the loan/consideration for the property. AFPMBAI
made oral and written demands for petitioners to pay the loan/ consideration for
the property.

The spouses filed a Complaintfor consignation of loan payment, recovery of title

and cancellation of mortgage annotation against AFPMBAI, PDIC and the Register
of Deeds of Puerto Princesa City, alleging that as a result of the Rural Bank’s
closure and PDIC’s claim that their loan papers could not be located, they were
left in a quandary as to where they should tender full payment of the loan. They
prayed that the court order the AFPMBAI to turn over to the custody of the court
the loan records and title of the plaintiffs if the same are in their possession; to
declare the full payment of the principal loan and interest and ordering the full
discharge from mortgage of the property.

AFPMBAI’s defense is that the Complaint falls within the jurisdiction of the Housing
and Land Use Regulatory Board (HLURB) and not the Puerto Princesa RTC, as it
was filed by petitioners in their capacity as buyers of a subdivision lot and it added
that since no prior valid tender of payment was made by petitioners, the
consignation case was fatally defective and susceptible to dismissal.

Issue
W/N there is a valid consignation in this case despite lack of tender of payment
and that it was made to RTC Puerto Princessa.

RULING

YES.

It appears that the petitioners’ debt is outstanding; that the Rural Bank’s receiver,
PDIC, informed petitioners that it has no record of their loan even as it took over
the affairs of the Rural Bank, which on record is the petitioners’ creditor. AFPMBAI
came into possession of the loan documents as well as TCT ; that petitioners are
ready to pay the loan in full; however, under the circumstances, they do not know
which of the two – the Rural Bank or AFPMBAI – should receive full payment of
the purchase price, or to whom tender of payment must validly be made.

Under Article 1256 of the Civil Code,the debtor shall be released from responsibility
by the consignation of the thing or sum due, without need of prior tender of
payment, when the creditor is absent or unknown, or when he is incapacitated to
receive the payment at the time it is due, or when two or more persons claim the
same right to collect, or when the title to the obligation has been lost.

Applying Article 1256 to the petitioners’ case as shaped by the allegations in their
Complaint, the Court finds that a case for consignation has been made out, as it
now appears that there are two entities which petitioners must deal with in order
to fully secure their title to the property: 1) the Rural Bank (through PDIC), which
is the apparent creditor under the Loan and Mortgage Agreement; and 2)
AFPMBAI, which is currently in possession of the loan documents and the
certificate of title, and the one making demands upon petitioners to pay. Clearly,
the allegations in the Complaint present a situation where the creditor is unknown,
or that two or more entities appear to possess the same right to collect from
petitioners. Whatever transpired between the Rural Bank or PDIC and AFPMBAI in
respect of petitioners’ loan account, if any, such that AFPMBAI came into
possession of the loan documents and TCT No. 37017, it appears that petitioners
were not informed thereof, nor made privy thereto.

Finally, the lack of prior tender of payment by the petitioners is not fatal to their
consignation case. They filed the case for the exact reason that they were at a
loss as to which between the two – the Rural Bank or AFPMBAI – was entitled to
such a tender of payment. Besides, as earlier stated, Article 1256 authorizes
consignation alone, without need of prior tender of payment, where the ground
for consignation is that the creditor is unknown, or does not appear at the place
of payment; or is incapacitated to receive the payment at the time it is due; or
when, without just cause, he refuses to give a receipt; or when two or more
persons claim the same right to collect; or when the title of the obligation has been
lost.

Consignation is necessarily judicial; hence, jurisdiction lies with the RTC, not with
the HLURB.On the question of jurisdiction, petitioners’ case should be tried in the
Puerto Princesa RTC, and not the HLURB. Consignation is necessarily judicial,as
the Civil Code itself provides that consignation shall be made by depositing the
thing or things due at the disposal of judicial authority, thus:

Art. 1258. Consignation shall be made by depositing the things due at the disposal
of judicial authority x x x

The above provision clearly precludes consignation in venues other than the
courts.1âwphi1

Tender of payment must be distinguished from consignation. Tender is the

antecedent of consignation, that is, an act preparatory to the consignation, which
is the principal, and from which are derived the immediate consequences which
the debtor desires or seeks to obtain. Tender of payment may be extrajudicial,
while consignation is necessarily judicial, and the priority of the first is the attempt
to make a private settlement before proceeding to the solemnities of consignation.

SPS BONROSTRO vs. SPS JUAN and CONSTANCIA LUNA

DEL CASTILLO, J.:

FACTS:

Respondent Constancia luna, as buyer, entered into a Contract to Sell with Bliss
Corporation (Bliss) involving a house and lot in QC.

Constancia, this time as the seller, entered into another Contract to Sell with
Bonrostro concerning the same property under the following terms and conditions:

1. The stipulated price of ₱1,250,000.00 shall be paid by the VENDEE to the

VENDOR in the following manner:
(a) ₱200,000.00 upon signing x x x the Contract To Sell,
(b) ₱300,000.00 payable on or before April 30, 1993,
(c) ₱330,000.00 payable on or before July 31, 1993,
(d) ₱417,000.00 payable to the New Capitol Estate, for 15 years at ₱6,867.12 a
month,

2. In the event the VENDEE fails to pay the second installment on time, the
VENDEE will pay starting May 1, 1993 a 2% interest on the ₱300,000.00 monthly.
Likewise, in the event the VENDEE fails to pay the amount of ₱630,000.00 on the
stipulated time, this CONTRACT TO SELL shall likewise be deemed cancelled and
rescinded and 5% of the total contract price of ₱1,250,000.00 shall be deemed
forfeited in favor of the VENDOR. Unpaid monthly amortization shall likewise be
deducted from the initial down payment in favor of the VENDOR.

Bonrostro took possession of the property after execution. However, except for the
₱200,000.00 down payment, Bonrostro failed to pay the subsequent amortization
payments.

RTC DECISION

Ordered the spouses Bonrostro to pay the spouses Luna the sums of ₱300,000.00
plus interest of 2% per month from April 1993 to November 1993 and ₱330,000.00
plus interest of 2% per month from July 1993 to November 1993, respectively.

CA AFFIRMED

BONROSTRO CONTENTION
The spouses Bonrostro harp on the factual finding of the RTC, as affirmed by the
CA, that Lourdes was willing and ready to pay her obligation as evidenced by her
letter to Atty. Carbon. They also assert that the sending of the said letter constitutes
a valid tender of payment on their part. Hence, they argue that they should not be
assessed any interest subsequent to the date of the said letter. Neither should they
be ordered to pay interest on the amount of ₱214,492.62 which covers the
amortizations paid by the spouses Luna to Bliss. They point out that it was
Constancia who prevented them from fulfilling their obligation to pay the
amortizations when she instructed Bliss not to accept payment from them.

LUNA CONTENTION:
Aver that the etter of Lourdes is not equivalent to tender of payment since the mere
sending of a letter expressing the intention to pay, without the accompanying
payment, cannot be considered a valid tender of payment. Also, if the spouses
Bonrostro were really willing and ready to pay at that time and assuming that the
spouses Luna indeed refused to accept payment, the former should have resorted
to consignation.

ISSUE: whether there was valid tender of payment made

HELD: NONE.

The spouses Bonrostro’s reliance on the RTC’s factual finding that Lourdes was
willing and ready to pay on November 24, 1993 is misplaced.

They cannot invoke their readiness and willingness to pay their obligation on
November 24, 1993 as an excuse from being made liable for interest beyond the
said date.

The spouses Bonrostro are liable for interest on the installments due from the date
of default until fully paid.
The spouses Bonrostro assert that Lourdes’ letter of November 24, 1993 amounts
to tender of payment of the remaining balance amounting to ₱630,000.00.
Accordingly, thenceforth, accrual of interest should be suspended.

Tender of payment "is the manifestation by the debtor of a desire to comply with
or pay an obligation. If refused without just cause, the tender of payment will
discharge the debtor of the obligation to pay but only after a valid consignation of
the sum due shall have been made with the proper court."

"Consignation is the deposit of the proper amount with a judicial authority in

accordance with rules prescribed by law, after the tender of payment has been
refused or because of circumstances which render direct payment to the creditor
impossible or inadvisable.

"Tender of payment, without more, produces no effect.""To have the effect of

payment and the consequent extinguishment of the obligation to pay, the law
requires the companion acts of tender of payment and consignation."

As to the effect of tender of payment on interest, noted civilist Arturo M. Tolentino

explained as follows:
When a tender of payment is made in such a form that the creditor could have
immediately realized payment if he had accepted the tender, followed by a prompt
attempt of the debtor to deposit the means of payment in court by way of
consignation, the accrual of interest on the obligation will be suspended from the
date of such tender. But when the tender of payment is not accompanied by the
means of payment, and the debtor did not take any immediate step to make a
consignation, then interest is not suspended from the time of such tender.

Here, the subject letter merely states Lourdes’ willingness and readiness to pay
but it was not accompanied by payment. She claimed that she made numerous
telephone calls to Atty. Carbon reminding the latter to collect her payment, but,
neither said lawyer nor Constancia came to collect the payment. After that, the
spouses Bonrostro took no further steps to effect payment. They did not resort to
consignation of the payment with the proper court despite knowledge that under
the contract, non-payment of the installments on the agreed date would make them
liable for interest thereon.

The spouses Bonrostro want to be relieved from paying interest which the spouses
Luna paid to Bliss as amortizations by asserting that they were prevented by the
latter from fulfilling such obligation.

They invoke Art. 1186 of the Civil Code which provides that "the condition shall be
deemed fulfilled when the obligor voluntarily prevents its fulfillment."
However, the Court finds Art. 1186 inapplicable to this case. The said provision
explicitly speaks of a situation where it is the obligor who voluntarily prevents
fulfillment of the condition. Here, Constancia is not the obligor but the obligee.
Moreover, even if this significant detail is to be ignored, the mere intention to
prevent the happening of the condition or the mere placing of ineffective obstacles
to its compliance, without actually preventing fulfillment is not sufficient for the
application of Art. 1186.37 Two requisites must concur for its application, to wit:

(1) intent to prevent fulfillment of the condition; and,

(2) actual prevention of compliance.

In this case, while it is undisputed that Constancia indeed instructed Bliss not to
accept payment from anyone but her, there is nothing on record to show that Bliss
heeded the instruction of Constancia as to actually prevent the spouses Bonrostro
from making payments to Bliss. There is no showing that subsequent to the said
letter, the spouses Bonrostro attempted to make payment to and was refused by
Bliss. Neither was there a witness presented to prove that Bliss indeed gave effect
to the instruction contained in Constancia’s letter.

WHEREFORE, the Petition for Review on Certiorari is DENIED and the assailed
Decision AFFIRMED.
ELIZABETH DEL CARMEN vs. SPOUSES RESTITUTO SABORDO and MIMA
MAHILUM-SABORDO

G.R. No. 181723 August 11, 2014

Compliance with the requisites of a valid consignation is mandatory. Failure to

comply strictly with any of the requisites will render the consignation void. One
of these requisites is a valid prior tender of payment.

Facts:

The spouses Toribio and EufrocinaSuico (Suico spouses), along with several
business partners, entered into a business venture by establishing a rice and corn
mill at Mandaue City, Cebu. As part of their capital, they obtained a loan from the
Development Bank of the Philippines (DBP), and to secure the said loan, four
parcels of land owned by the Suico spouses, denominated as Lots 506, 512, 513
and 514, and another lot owned by their business partner, Juliana Del Rosario,
were mortgaged.
Subsequently, the Suico spouses and their business partners failed to pay their
loan obligations forcing DBP to foreclose the mortgage. After the Suico spouses
and their partners failed to redeem the foreclosed properties, DBP consolidated its
ownership over the same. Nonetheless, DBP later allowed the Suico spouses and
Reginald and Beatriz Flores (Flores spouses), as substitutes for Juliana Del Rosario,
to repurchase the subject lots by way of a conditional sale for the sum of
₱240,571.00. The Suico and Flores spouses were able to pay the downpayment
and the first monthly amortization, but no monthly installments were made
thereafter. Threatened with the cancellation of the conditional sale, the
Suico and Flores spouses sold their rights over the said properties to
herein respondents Restituto and MimaSabordo, subject to the condition
that the latter shall pay the balance of the sale price.

Respondents and the Suico and Flores spouses executed a supplemental

agreement whereby they affirmed that what was actually sold to respondents were
Lots 512 and 513, while Lots 506 and 514 were given to them as usufructuaries.
DBP approved the sale of rights of the Suico and Flores spouses in favor of herein
respondents. Subsequently, respondents were able to repurchase the
foreclosed properties of the Suico and Flores spouses.

Respondent Restituto filed an action with the CFI raising the issue of whether or
not the Suico spouses have the right to recover from respondents Lots 506 and
514.RTC of San Carlos City, Negros Occidental, ruled in favor of the Suico spouses
gave them time within which to redeem or buy back from respondents Lots 506
and 514.On appeal, the CAmodified the RTC decision by giving the Suico spouses
extended time within which to exercise their option to purchase or redeem the
subject lots from respondents by paying the sum of ₱127,500.00.

In the meantime, Toribio died leaving his widow, Eufrocina, and petitioner, as legal
heirs. Later, they discovered that respondents mortgaged Lots 506 and 514 with
Republic Planters Bank (RPB) as security for a loan which, subsequently, became
delinquent.

Thereafter, claiming that theyare ready with the payment of ₱127,500.00, but
alleging that they cannot determine as to whom such payment shall be made,
petitioner and her co-heirs filed a Complaint with the RTC of San Carlos City,
Negros Occidental seeking to compel herein respondents and RPB to interplead
and litigate between themselves their respective interests on the abovementioned
sum of money.Upon filing of their complaint, the heirs of Toribio deposited the
amount of ₱127,500.00 with the RTC of San Carlos City, Branch 59.

RTC dismissed the Complaint for lack of merit.Petitioner and her co-heirs
appealed with the CA contending that the judicial deposit or
consignation of the amount of ₱127,500.00 was valid and binding and
produced the effect of payment of the purchase price of the subject
lots.CA denied the above appeal for lack of merit and affirmed the disputed RTC
Decision.

Issue: Whether or not there is a valid consignation

Ruling:

No. Consignation is the act of depositing the thing due with the court or judicial
authorities whenever the creditor cannot accept or refuses to accept payment, and
it generally requires a prior tender of payment. It should be distinguished from
tender of payment which is the manifestation by the debtor to the creditor of his
desire to comply with his obligation, with the offer of immediate
performance.Tender is the antecedent of consignation, thatis, an act preparatory
to the consignation, which is the principal, and from which are derived the
immediate consequences which the debtor desires or seeks to obtain. Tender of
payment may be extrajudicial, while consignation is necessarily judicial, and the
priority of the first is the attempt to make a private settlement before proceeding
to the solemnities of consignation. Tender and consignation, where validly made,
produces the effect of payment and extinguishes the obligation.

In the instant case, petitioner and her co-heirs, upon making the deposit with the
RTC, did not ask the trial court that respondents be notified to receive the amount
that they have deposited. In fact, there was no tender of payment. Instead,
what petitioner and her co-heirs prayed for is thatrespondents and RPB be directed
to interplead with one another to determine their alleged respective rights over
the consigned amount.

The court further held that for a consignation or deposit with the court of an
amount due on a judgment to be considered as payment, there must beprior
tender to the judgment creditor who refuses to accept it.Tender of payment
involves a positive and unconditional act by the obligor of offering legal tender
currency as payment to the obligee for the former’s obligation and demanding that
the latter accept the same.In the instant case, the Court finds no cogent
reason to depart from the findings of the CA and the RTC that petitioner
and her co-heirs failed to make a prior valid tender of payment to
respondents.

It is settled that compliance with the requisites of a valid consignation is

mandatory.Failure to comply strictly with any of the requisites will render the
consignation void. One of these requisites is a valid prior tender of payment.

Under Article 1256, the only instances where prior tender of payment is
excused are: (1) when the creditor is absent or unknown, or does not appear at
the place of payment; (2) when the creditor is incapacitated to receive the
payment at the time it is due; (3) when, without just cause, the creditor refuses
to give a receipt; (4) when two or more persons claim the same right to collect;
and (5) when the title of the obligation has been lost. None of these instances
are present in the instant case. Hence, the fact that the subject lots are
in danger of being foreclosed does not excuse petitioner and her co-heirs
from tendering payment to respondents, as directed by the court.

VICTOR YAM & YEK SUN LENT, doing business under the name and style
of Philippine Printing Works, petitioners, vs. THE COURT OF APPEALS
and MANPHIL INVESTMENT CORPORATION, respondents.
Ponente: J. Mendoza

It is undisputed that the alleged agreement to condone P266,146.88 of the second

IGLF loan was not reduced in writing. The notation in full payment of IGLF loan
merely states petitioners intention in making the payment, but in no way does it
bind private respondent.
FACTS:
On May 10, 1979, parties in this case entered into a Loan Agreement with
Assumption of Solidary Liability whereby petitioners were given a loan
of P500,000.00 by private respondent Manphil Investment Corp. The contract
provided for the payment of 12% annual interest, 2% monthly penalty, 1 1/2%
monthly service charge, and 10% attorneys fees. Denominated the first Industrial
Guarantee and Loan Fund (IGLF), the loan was secured by a chattel mortgage on
the printing machinery in petitioners’ establishment.
Subsequently, petitioners obtained a second IGLF loan of P300,000.00 evidenced
by two promissory notes, dated July 3, 1981 and September 30, 1981. For this
purpose, a new loan agreement was entered into by the parties containing
identical provisions as the first one, except as to the annual interest which was
increased to 14%, and the service charge was reduced to 1% per annum. The
deed of chattel mortgage was amended correspondingly.
By April 2, 1985, petitioners had paid their first loan of P500,000.00. However, on
November 4, 1985, private respondent was placed under receivership by the
Central Bank and Ricardo Lirio and Cristina Destajo were appointed as receiver
and in-house examiner, respectively. As to the second loan, petitioners made a
partial payment of P50,000.00 on May 17, 1986.
As of July 31, 1986, petitioners total liability to private respondent
was P727,001.35. On this date, petitioners paid P410,854.47 by means of a
Pilipinas Bank check, receipt of which was acknowledged by Destajo. The
corresponding voucher for the check bears the following notation: full
payment of IGLF LOAN.
Consequently, private respondent sent two demand letters to petitioners, dated
September 4, 1986 and September 25, 1986, seeking payment of the balance
of P266,146.88. As petitioners did not respond, private respondent filed this case
in the Regional Trial Court of Metro Manila for the collection of P266,146.88 plus
interests, penalties, and service charges or, in the alternative, for the foreclosure
of the mortgaged machineries.
Petitioners claimed that they had fully paid their obligation to private respondent.
They contended that petitioner Victor and Elena Yam met with Carlos Sobrepeas,
president of respondent corporation, during which the latter agreed to waive the
penalties and service charges. This is the reason why according to them they only
paid P410,854.47. Petitioners added that this fact of full payment is reflected in
the voucher accompanying the Pilipinas Bank check they issued, which bore the
notation full payment of IGLF loan. RTC ruled against petitioner which was
affirmed in totoby CA.
ISSUE: Whether petitioners are liable for the payment of the penalties and service
charges on their loan which, as of July 31, 1986, amounted to P266,146.88.
RULING:
Yes, petitioners are liable since there is neither expressed nor implied condonation
to speak of.
Art. 1270, par. 2 of the Civil Code provides that express condonation must comply
with the forms of donation. Art. 748, par. 3 provides that the donation and
acceptance of a movable, the value of which exceeds P5,000.00, must be made in
writing, otherwise the same shall be void. In this connection, under Art. 417, par.
1, obligations, actually referring to credits, are considered movable property. In
the case at bar, it is undisputed that the alleged agreement to
condone P266,146.88 of the second IGLF loan was not reduced in writing.
Nonetheless, petitioners insist that the voucher covering the Pilipinas Bank check
for P410,854.47, containing the notation that the amount is in full payment of IGLF
loan, constitutes documentary evidence of such oral agreement. This contention
is without merit. The notation in full payment of IGLF loan merely states petitioners
intention in making the payment, but in no way does it bind private respondent.
It would have been a different matter if the notation appeared in a receipt issued
by respondent corporation, through its receiver, because then it would be an
admission against interest. Indeed, if private respondent really condoned the
amount in question, petitioners should have asked for a certificate of full payment
from respondent corporation, as they did in the case of their first IGLF loan
of P500,000.00.
The Central Bank examiner assigned to respondent corporation, Cristina Destajo,
when she signed the voucher in question failed to notice the statement that the
amount of P410,854.47 was being given in full payment of IGLF Loan. She said
she merely took note of the amount and the check number indicated therein. In
any event, Destajo, by countersigning the voucher, did no more than acknowledge
receipt of the payment. She cannot be held to have ascented thereby to the
payment in full of petitioners’ indebtedness to private respondent. It was obvious
she had no authority to condone any indebtedness, her duties being limited to
issuing official receipts, preparing check vouchers and documentation.
Moreover, the alleged agreement to condone the amount in question was
supposedly entered into by the parties sometime in July 1986, that is, after
respondent corporation had been placed under receivership on November 4,
1985. As held in Villanueva v. Court of Appeals the appointment of a receiver
operates to suspend the authority of a [corporation] and of its directors and
officers over its property and effects, such authority being reposed in the
receiver. Thus, Sobrepeas had no authority to condone the debt.
SPOUSES RICARDO and ELENA C. GOLEZ vs.MELITON NEMENO

G.R. No. 178317/ VILLARAMA, JR., J.:

Petitioners used the property for several years for their own benefit having
operated a restaurant thereon. The fact that the parties agreed to a different
mode of payment – in this case, a building – does not in any way exempt
petitioners from paying compensation due to respondent for the use of the
latter’s property because the building was destroyed. They are legally obliged to
pay the rentals for their use and enjoyment of the leased premises to prevent
unjust enrichment at the expense of the respondent.

Facts:

Nemeno is the registered owner of a commercial lot in Molave, Zamboangadel Sur

which he leased to Spouses Golez in 1989. The pertinent portion of the contract is
quoted verbatim hereunder:

x xx

That, the Party of the Second Part shall construct a Commercial

Building thereon amounting to ONE HUNDRED FORTY THREE
THOUSAND EIGHT HUNDRED TWENTY THREE (P143,823.00)
PESOS;

That, the Party of the Second Part shall pay a monthly rental of the
space occupied by the building in the amount of TWO THOUSAND
 (P2,000) PESOS, of which amount, the Party of the First Part shall
not collect, instead, said amount shall be used/paid to the herein
Lessee as payment of the cost of building built on the aforesaid lot;

x xx

That, as soon as the above amount shall be fully paid, the building
shall be deemed owned by the herein Party of the First Part;
however, the Party of the Second Part is hereby obligated to cause
the repair of the building before it shall be turned over to the Party
of the First Part

On May 23, 1992, the building subject of the lease contract was burned down.

Because of the destruction of the building, Nemeno sent a letter to Spouses Golez
demanding the accumulated rentals. As the demand was left unheeded,
respondent filed a complaint for collection of rentals plus damages before the
Molave RTC.

He prayed that petitioners be ordered to pay him P96,000.00 representing the

unpaid rentals from March 17, 1989 until the expiration of the lease.

Spouses’ contentions:

• Admitted the execution of the contract of lease but dispute their liability to
pay rentals.
• Under the contract of lease, the rental payment is amortized over the cost
of the subject building, thus, respondent had already become its co-owner
who must suffer the loss of his property. They also denied liability for the
burning of the building contending that it has been destroyed by a fortuitous
event.
• They are not liable to pay back rentals insisting the applicability of Article
1262 to the case at bar. They contend that the "rentals" are supposed to
be "refund" to petitioners for the cost of the subject building and thus, no
"rental" is due. Petitioners also submit that based on the contract, they had
an obligation to deliver a determinate thing, i.e., the subject building, but
applying Article 1262, the total loss thereof extinguished their obligation.
They likewise point out that there was no stipulation in the contract making
them liable even for fortuitous events or that the nature of the obligation
requires the assumption of risk.
TC: ordered the spouses jointly and severally to pay Nemeno the contract amount
of P143,823.00
The trial court likewise noted that petitioners have never paid respondent rent for
the leased premises. Since they can no longer deliver the building which the
contract obliged them to deliver, the trial court ruled that they are legally obliged
to pay the rentals for their use and enjoyment of the leased premises to prevent
unjust enrichment on the part of petitioners.

CA: affirmed the decision of the trial court in all other respects. It held that the
ownership of the subject building still pertains to petitioners and therefore, they
must solely bear the loss. The CA also ruled that the fact that the building was
destroyed before it was delivered to respondent does not free petitioners from
paying back rentals. It held that petitioners cannot use respondent’s land and
deprive him of rents due him, otherwise, it would be a case of unjust enrichment
at the expense of respondent.

Issue:

1. Whether or not Spouses Golez are liable for back rentals (YES)

Ruling: Yes. Petitioners should pay respondent for back rentals. There is no
dispute that the contract entered into by the parties is one of lease. True, it had
some modifications such that instead of paying the rent in the form of money,
petitioners will withhold such payment and will apply the accumulated rent to the
cost of the building they built on the leased property. Thereafter, at the end of the
lease period or until such time the cost of the building has been fully covered by
the rent accumulated, petitioners, as lessees will transfer the ownership of said
building to respondent. Unfortunately, the subject building was gutted down by
fire. However, the destruction of the building should not in any way be made a
basis to exempt petitioners from paying rent for the period they made use of the
leased property. Otherwise, this will be a clear case of unjust enrichment. As held
in P.C. Javier & Sons, Inc. v. Court of Appeals:

x xxThe fundamental doctrine of unjust enrichment is the transfer of

value without just cause or consideration. The elements of this
doctrine are: enrichment on the part of the defendant;
impoverishment on the part of the plaintiff; and lack of cause. The
main objective is to prevent one to enrich himself at the expense of
another. It is commonly accepted that this doctrine simply means that
a person shall not be allowed to profit or enrich himself inequitably at
another’s expense.

In the instant case, there is no dispute that petitioners used the property for
several years for their own benefit having operated a restaurant thereon.
Therefore, it would be the height of injustice to deprive respondent of
compensation due him on the use of his property by petitioners. The fact that the
parties agreed to a different mode of payment – in this case, a building – does not
in any way exempt petitioners from paying compensation due to respondent for
the use of the latter’s property because the building was destroyed.

While the court sustains the award of back rentals in favor of respondent, it did
not agree with the amount imposed by the courts a quo. Petitioners should only
be liable for rent during the period within which they were in possession of the
leased property. There was no evidence submitted to prove that petitioners were
in possession of the leased property after the fire. Therefore, petitioners should
be made to pay rent until that time only. To order petitioners to pay for back
rentals equivalent to the cost of the building is in the same way, unjust enrichment
this time on the part of respondent considering that the rent due for the period
petitioners occupied the leased premises is way below the cost of the building.

GAN TION v.HON. COURT OF APPEALS, et al.

G.R. No. L-22490, 21 May 1969, EN BANC (Makalintal, J.)

An award for attorney’s fees is a proper subject of legal compensation. An

award for attorney’s fees is made in favor of the litigant, not of his counsel, and
that the litigant, not his counsel, is the judgment creditor who may enforce the
judgment by execution.

FACTS:

Ong Wan Sieng was a tenant in certain premises owned by GanTion. In

1961, the latter filed an ejectment case against the former, alleging non-payment
of rents for August and September of that year, at P180 a month, or P360
altogether. The defendant denied the allegation and said that the agreed monthly
rental was only P160, which he had offered to but was refused by the plaintiff.
The plaintiff obtained a favorable judgment in the municipal court (of Manila), but
upon appeal, the CFI reversed the judgment and dismissed the complaint, and
ordered the plaintiff to pay the defendant the sum of P500 as attorney’s fees. That
judgment became final.

On October 10, 1963, GanTion served notice on Ong Wan Sieng that he
was increasing the rent to P180 a month, effective November 1st, and at the same
time demanded the rents in arrears at the old rate in the aggregate amount of
P4,320.00, corresponding to a period from August 1961 to October 1963.

In the meantime, over GanTion’s opposition, Ong Wan Sieng was able to
obtain a writ of execution of the judgment for attorney’s fees in his favor. GanTion
went on certiorari to the Court of Appeals, where he pleaded legal compensation,
claiming that Ong Wan Sieng was indebted to him in the sum of P4,320 for unpaid
rents. The appellate court accepted the petition but eventually decided for the
respondent, holding that although “respondent Ong is indebted to the petitioner
for unpaid rentals in an amount of more than P4,000.00,” the sum of P500 could
not be the subject of legal compensation, it being a “trust fund for the benefit of
the lawyer, which would have to be turned over by the client to his counsel.” In
the opinion of said court, the requisites of legal compensation, namely, that the
parties must be creditors and debtors of each other in their own right (Art. 1278,
Civil Code) and that each one of them must be bound principally and at the same
time be a principal creditor of the other (Art. 1279), are not present in the instant
case, since the real creditor with respect to the sum of P500 was the defendant’s
counsel.

ISSUE:

Whether or not there has been legal compensation between GanTion and
Ong Wan Sieng.

RULING:

YES. The CA Decision is not an accurate statement of the nature of an

award for attorney’s fees. The award is made in favor of the litigant, not of his
counsel, and is justified by way of indemnity for damages recoverable by the
former in the cases enumerated in Article 2208 of the Civil Code. It is the litigant,
not his counsel, who is the judgment creditor and who may enforce the judgment
by execution. Such credit, therefore, may properly be the subject of legal
compensation. Quite obviously it would be unjust to compel petitioner to pay his
debt for P500 when admittedly his creditor is indebted to him for more than
P4,000.
Mirasolvs CA GR No. 128448 February 1, 2001

Facts:

The Mirasols are sugarland owners and planters. Philippine National Bank (PNB)
financed the Mirasols' sugar production venture FROM 1973-1975 under a crop
loan financing scheme. The Mirasols signed Credit Agreements, a Chattel Mortgage
on Standing Crops, and a Real Estate Mortgage in favor of PNB. The Chattel
Mortgage empowered PNB to negotiate and sell the latter's sugar and to apply the
proceeds to the payment of their obligations to it.

President Marcos issued PD 579 in November, 1974 authorizing Philippine

Exchange Co., Inc. (PHILEX) to purchase sugar allocated for export and authorized
PNB to finance PHILEX's purchases. The decree directed that whatever profit
PHILEX might realize was to be remitted to the government. Believing that the
proceeds were more than enough to pay their obligations, petitioners asked PNB
for an accounting of the proceeds which it ignored. Petitioners continued to avail
of other loans from PNB and to make unfunded withdrawals from their accounts
with said bank. PNB asked petitioners to settle their due and demandable accounts.
As a result, petitioners, conveyed to PNB real properties by way of dacion en pago
still leaving an unpaid amount. PNB proceeded to extrajudicially foreclose the
mortgaged properties. PNB still had a deficiency claim.

Petitioners continued to ask PNB to account for the proceeds, insisting that said
proceeds, if properly liquidated, could offset their outstanding obligations. PNB
remained adamant in its stance that under P.D. No. 579, there was nothing to
account since under said law, all earnings from the export sales of sugar pertained
to the National Government.
On August 9, 1979, the Mirasols filed a suit for accounting, specific performance,
and damages against PNB.

Issues:

(1) Whether or not the Trial Court has jurisdiction to declare a statute
unconstitutional without notice to the Solicitor General where the parties have
agreed to submit such issue for the resolution of the Trial Court.

(2) Whether PD 579 and subsequent issuances thereof are unconstitutional.

(3) Whether or not said PD is subject to judicial review

Held:

It is settled that Regional Trial Courts have the authority and jurisdiction to
consider the constitutionality of a statute, presidential decree, or executive order.
The Constitution vests the power of judicial review or the power to declare a law,
treaty, international or executive agreement, presidential decree, order,
instruction, ordinance, or regulation not only in this Court, but in all Regional Trial
Courts.

The purpose of the mandatory notice in Rule 64, Section 3 is to enable the Solicitor
General to decide whether or not his intervention in the action assailing the validity
of a law or treaty is necessary. To deny the Solicitor General such notice would be
tantamount to depriving him of his day in court. We must stress that, contrary to
petitioners' stand, the mandatory notice requirement is not limited to actions
involving declaratory relief and similar remedies. The rule itself provides that such
notice is required in "any action" and not just actions involving declaratory relief.
Where there is no ambiguity in the words used in the rule, there is no room for
construction. 15 In all actions assailing the validity of a statute, treaty, presidential
decree, order, or proclamation, notice to the Solicitor General is mandatory.

Petitioners contend that P.D. No. 579 and its implementing issuances are void for
violating the due process clause and the prohibition against the taking of private
property without just compensation. Petitioners now ask this Court to exercise its
power of judicial review.

Jurisprudence has laid down the following requisites for the exercise of this power:
First, there must be before the Court an actual case calling for the exercise of
judicial review. Second, the question before the Court must be ripe for
adjudication. Third, the person challenging the validity of the act must have
standing to challenge. Fourth, the question of constitutionality must have been
raised at the earliest opportunity, and lastly, the issue of constitutionality must be
the very lismota of the case.

MONTEMAYOR v. MILLORA
Del Castillo, J. (2011)

A debt is liquidated when its existence and amount are determined. It is not necessary
that it be admitted by the debtor. Nor is it necessary that the credit appear in a final
judgment in order that it can be considered as liquidated; it is enough that its exact
amount is known. And a debt is considered liquidated, not only when it is expressed
already in definite figures which do not require verification, but also when the
determination of the exact amount depends only on a simple arithmetical operation.

FACTS

Respondent Atty. Vicente Milloraobtained aloan of P400,000 from petitioner Dr. Jesus
Montemayoras evidenced by a promissory note executed by Vicente. The parties
executed a loan contract wherein it was provided that the loan has a stipulated monthly
interest of 2% and that Vicente had already paid the amount of P100,000 as well as
the P8,000 representing the interest for the period July 24 to August 23,
1990.Subsequently and with Vicente’s consent, the interest rate was increased to 3.5%
or P10,500 a month. For a period of four months, Vicente was supposed to
pay P42,000as interest but was able to pay only P24,000. This was the last payment
Vicente made. Jesus made several demands for Vicente to settle his obligation but to no
avail.

Thus, Jesus filed before the RTC of Quezon City a Complaint for Sum of Money against
Vicente. Vicente filed his Answer interposing a counterclaim for attorneys fees of not less
than P500,000. Vicente claimed that he handled several cases for Jesus but he was
summarily dismissed from handling them when the instant complaint for sum of money
was filed.

In its Decision, the RTC ordered Vicente to pay Jesus his monetary obligation amounting
to P300,000 plus interest of 12% from the time of the filing of the complaint until fully
paid. At the same time, the trial court found merit in Vicente’s counterclaim and thus
ordered Jesus to pay Vicente his attorney’s fees which is equivalent to the amount of
Vicente’s monetary liability, and which shall be set-off with the amount Vicente is
adjudged to pay Jesus, viz:

WHEREFORE, premises above-considered [sic], JUDGMENT is hereby rendered

ordering defendant Vicente D. Millora to pay plaintiff Jesus M. Montemayor the
sum of P300,000.00 with interest at the rate of 12% per annum counted from
the filing of the instant complaint on August 17, 1993 until fully paid and whatever
amount recoverable from defendant shall be set off by an equivalent amount
awarded by the court on the counterclaim representing attorney’s fees of
defendant on the basis of quantum meruit for legal services previously rendered
to plaintiff.
No pronouncement as to attorney’s fees and costs of suit.SO ORDERED.

ISSUE
Whether, despite the absence of a specific amount in the decision representing
respondent’s counterclaim, the same could be validly offset against the specific
amount of award mentioned in the decision in favorof the petitioner

RULING

YES. The amount of attorney’s fees is ascertainable from the RTC Decision. Thus,
compensation is possible.

For legal compensation to take place, the requirements set forth in Articles 1278 and
1279 of the Civil Code, quoted below, must be present.

Art. 1278. Compensation shall take place when two persons, in their own
right, are creditors and debtors of each other.

Art. 1279. In order that compensation may be proper, it is necessary:

(1) That each one of the obligors be bound principally, and that he
be at the same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due
are consumable, they be of the same kind, and also of the same
quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or
controversy, commenced by third persons and communicated in due time
to the debtor.
A debt is liquidated when its existence and amount are determined. It is not necessary
that it be admitted by the debtor. Nor is it necessary that the credit appear in a final
judgment in order that it can be considered as liquidated; it is enough that its exact
amount is known. And a debt is considered liquidated, not only when it is expressed
already in definite figures which do not require verification, but also when the
determination of the exact amount depends only on a simple arithmetical operation.

When the defendant, who has an unliquidated claim, sets it up by way of counterclaim,
and a judgment is rendered liquidating such claim, it can be compensated against the
plaintiff’s claim from the moment it is liquidated by judgment.
In the execution of the RTC Decision, there are two parts to be executed. The first part
is the computation of the amount due to Jesus. This is achieved by doing a simple
arithmetical operation at the time of execution. The principal amount of P300,000 is to
be multiplied by the interest rate of 12%. The product is then multiplied by the number
of years that had lapsed from the filing of the complaint up to the date when the
judgment is to be executed. The result thereof plus the principal of P300,000 is the total
amount that Vicente must pay Jesus.

The second part is the payment of attorney’s fees to Vicente. This is achieved by following
the clear wordings of the above fallo of the RTC Decision which provides that Vicente is
entitled to attorney’s fees which is equivalent to whatever amount recoverable from him
by Jesus. Therefore, whatever amount due to Jesus as payment of Vicente’s debt is
equivalent to the amount awarded to the latter as his attorney’s fees. Legal compensation
or set-off then takes place between Jesus and Vicente and both parties are on even terms
such that there is actually nothing left to execute and satisfy in favor of either party.
UNION BANK OF THE PHILIPPINES, Petitioner,
vs.
DEVELOPMENT BANK OF THE PHILIPPINES, Respondent.
G.R. No. 191555 January 20, 2014

Facts:

Foodmasters, Inc. (FI) had outstanding loan obligations to both Union Bank’s
predecessor-in-interest, Bancom Development Corporation (Bancom), and to
Development Bank of the Philippines (DBP).

FI and DBP entered into a Deed of Cession of Property In Payment of Debt(dacion

en pago) whereby the former ceded in favor of the latter certain properties
(including a processing plant) in consideration of the following:
(a) The full and complete satisfaction of FI’s loan obligations to DBP; and
(b) The direct assumption by DBP of FI’s obligations to Bancom in the amount of
P17,000,000.00 (Assumed Obligations).

DBP, as the new owner of the processing plant, leased back for 20 years the said
property to FI (Lease Agreement) which was, in turn, obliged to pay monthly
rentals to be shared by DBP and Bancom. DBP also entered into a separate
agreement with Bancom (Assumption Agreement) whereby the former: (a)
Confirmed its assumption of FI’s obligations to Bancom; and
(b) Undertook to remit up to 30% of any and all rentals due from FI to
Bancom which would serve as payment of the assumed obligations, to
be paid in monthly installments.

On May 23, 1979, FI assigned its leasehold rights under the Lease Agreement to
Foodmasters Worldwide, Inc. (FW). On May 9, 1984, Bancom conveyed all
its receivables, including DBP’s assumed obligations, to Union Bank.
Claiming that the subject rentals have not been duly remitted despite its
repeated demands, Union Bank filed a collection case against DBP before
the RTC.
DBP countered that the obligations it assumed were payable only out of
the rental payments made by FI. Since, FI had yet to pay the same, DBP’s
obligation to Union Bank had not arisen.

RTC: Finding the complaint to be meritorious, RTC ordered:

(a) DBP to pay Union Bank the sum of P4,019,033.59, representing the amount of
the subject rentals (which constitutes 30% of FI’s [now FW’s] total rental debt),
including interest until fully paid; and
(b) FW, as third-party defendant, to indemnify DBP, as third- party plaintiff, for its
payments of the subject rentals to Union Bank.

RTC ruled that when DBP failed to remit the subject rentals to Union
Bank, it defaulted on its assumed obligations.

CA: On May 27, 1994, CA Set aside the RTC’s ruling, and consequently
ordered:

(a) Foodmasters Worldwide to pay DBP the amount of P32,441,401.85

representing the total rental debt incurred under the Lease Agreement, and
(b) DBP, after having been paid by FW its unpaid rentals, to remit 30% thereof to
Union Bank.
CA ruled that DBP did not default in its obligations to remit the subject rentals to
Union Bank precisely because it had yet to receive the rental payments of FW.

Union Bank and DBP filed separate petitions for review on certiorari before the
Supreme Court.

SC:

Denied both petitions in a Resolution. SC upheld the CA’s finding that

while DBP directly assumed FI’s obligations to Union Bank, DBP was only
obliged to remit to the latter 30% of the lease rentals collected from FW,
from which any deficiency was to be settled by DBP not later than
December 29, 1998.

On May 16, 2001, Union Bank filed a motion for execution before the RTC, praying
that DBP be directed to pay the amount of P9,732,420.555 which represents the
amount of the subject rentals

On September 12, 2001, DBP filed its own motion for execution against FW.
The RTC granted both motions for execution of Union Bank and DBP on
October 15, 2001. As a result, a notice of garnishment against DBP were
issued. DBP filed a motion for reconsideration averring that the RTC prematurely
ordered DBP to pay the assumed obligations to Union Bank before FW’s payment.
The motion was denied. Thus, DBP’s deposits were eventually garnished. DBP then
filed a petition for certiorari before the CA which was later on denied.

SC: On January 13, 2004, SC granted DBP’s appeal, and thereby reversed
and set aside the CA’s ruling. SC acknowledged that DBP’s obligation to
Union Bank for remittance of the lease payments is contingent on FW’s
prior payment to DBP, and that any deficiency DBP had to pay by
December 29, 1998 as per the Assumption Agreement cannot be
determined until after the satisfaction of FW’s own rental obligations to
DBP.

Accordingly, the SC:

(a) nullified the October 15, 2001 Writ of Execution and all related
issuances thereto; and;
(b) ordered Union Bank to return to DBP the amounts it received
pursuant to the said writ.
Union Bank moved for reconsideration which was denied by the SC.

DBP moved for the execution of the said decision before the RTC. The
RTC then issued a writ of execution ordering Union Bank to return to
DBP all funds it received pursuant to the October 15, 2001 Writ of
Execution.

On September 13, 2005, Union Bank filed a Manifestation and Motion to

Affirm Legal Compensation to the RTC, praying that the RTC apply legal
compensation between itself and DBP in order to offset the return of the
funds it previously received from DBP.
Union Bank anchored its motion on two grounds, namely:
(a) on December 29, 1998, DBP’s assumed obligations became due and
demandable; and
(b) considering that FW became non-operational and non-existent, DBP became
primarily liable to the balance of its assumed obligation, which as of Union Bank’s
computation after its claimed set-off, amounted to P1,849,391.87.
Both the RTC and CA denied the claim for legal compensation.

Issue: Whether or not the CA correctly upheld the denial of Union Bank’s motion
to affirm legal compensation.

HELD:

Yes. The petition is bereft of merit. Compensation is defined as a mode of

extinguishing obligations whereby two persons in their capacity as principals are
mutual debtors and creditors of each other with respect to equally liquidated and
demandable obligations to which no retention or controversy has been timely
commenced and communicated by third parties. The requisites therefor are
provided under Article 1279 of the Civil Code which reads as follows:
Art. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same
time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable,
they be of the same kind, and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced
by third persons and communicated in due time to the debtor.

The rule on legal compensation is stated in Article 1290 of the Civil Code which
provides that "when all the requisites mentioned in Article 1279 are present,
compensation takes effect by operation of law, and extinguishes both debts to the
concurrent amount, even though the creditors and debtors are not aware of the
compensation."

Therefore, compensation could not have taken place between these debts for the
apparent reason that requisites 3 and 4 under Article 1279 of the Civil Code are
not present. Since DBP’s assumed obligations to Union Bank for
remittance of the lease payments are – in the Court’s words –
"contingent on the prior payment thereof by FW to DBP," it cannot be
said that both debts are due . Also, the Court observed that any
deficiency that DBP had to make up for the full satisfaction of the
assumed obligations "cannot be determined until after the satisfaction
of FW’s obligation to DBP." In this regard, it cannot be concluded that
the same debt had already been liquidated, and thereby became
demandable . Thus, CA correctly upheld the denial of Union Bank’s
motion to affirm legal compensation
FIRST UNITED CONSTRUCTORS CORPORATION and BLUE STAR
CONSTRUCTION CORPORATION vs. BAYANIHAN AUTOMOTIVE
CORPORATION

G.R. No. 164985 | January 15, 2014

Bersamin, J. | Topic: Compensation

Article 1290 of the Civil Code provides that when all the requisites mentioned in
Article 1279 of the Civil Code are present, compensation takes effect by
operation of law, and extinguishes both debts to the concurrent amount.

FACTS:
Petitioner FUCC and petitioner Blue Star were associate construction
firms sharing financial resources, equipment and technical personnel on a case-to-
case basis. From May 27, 1992 to July 8, 1992, they ordered six units of dump
trucks from respondent Bayanihan.

On September 19, 1992, FUCC ordered from the respondent one unit
of Hino Prime Mover that the respondent delivered on the same date. On
September 29, 1992, FUCC again ordered from the respondent one unit of Isuzu
Transit Mixer that was also delivered to the petitioners. For the two purchases,
FUCC partially paid in cash, and the balance through post-dated checks.

Upon presentment of the checks for payment, the respondent learned

that FUCC had ordered the payment stopped. The respondent immediately
demanded the full settlement of their obligation from the petitioners, but to no
avail. Instead, the petitioners informed the respondent that they were withholding
payment of the checks due to the breakdown of one of the dump trucks they had
earlier purchased from respondent, specifically the second dump truck delivered
on May 27, 1992.

Due to the refusal to pay, the respondent commenced this action for
collection on April 29, 1993, seeking payment of the unpaid balance in the amount
of P735,000.00 represented by the two checks.

Petitioners averred that they had stopped the payment on the two
checks worth P735,000.00 because of the respondent’s refusal to repair the second
dump truck; and that they had informed the respondent of the defects in that unit
but the respondent had refused to comply with its warranty, compelling them to
incur expenses for the repair and spare parts. They prayed that the respondent
return the price of the defective dump truck worth P830,000.00 minus the amounts
of their two checks worth P735,000.00, with 12% per annum interest on the
difference of P90,000.00 from May 1993 until the same is fully paid; that the
respondent should also reimburse them the sum of P247,950.00 as their expenses
for the repair of the dump truck, with 12% per annum interest from December 16,
1992, the date of demand, until fully paid

ISSUE:
Whether or not petitioners could avail themselves of legal compensation.

HELD:
YES, legal compensation is permissible.

A debt is liquidated when its existence and amount are determined.

Accordingly, an unliquidated claim set up as a counterclaim by a defendant can be
set off against the plaintiff’s claim from the moment it is liquidated by judgment.
Article 1290 of the Civil Code provides that when all the requisites mentioned in
Article 1279 of the Civil Code are present, compensation takes effect by operation
of law, and extinguishes both debts to the concurrent amount.

Article 1279. In order that compensation may be proper, it

is necessary:

(1) That each of the obligors be bound principally, and that

he be at the same time a principal creditor of the other;

(2) That both debts consists in a sum of money, or if the

things due are consumable, they be of the same kind, and
also of the same quality if the latter has been stated;

(3) That the two debts be due;

(4) That they be liquidated and demandable;

(5) That over neither of them there be any retention or

controversy, commenced by third persons and
communicated in due time to the debtor.

RTC already found that petitioners were entitled to the amount of

₱71,350.00 stated in their counterclaim, and the CA concurred in the finding.
Verily, factual findings of the trial court, when affirmed by the CA, are conclusive
on the Court when supported by the evidence on record.

With petitioners’ expenses for the repair of the dump truck being already
established and determined with certainty by the lower courts, it follows that legal
compensation could take place because all the requirements were present. Hence,
the amount of P71,350.00 should be set off against petitioners’ unpaid obligation
of P735,000.00, leaving a balance of P663,650.00, the amount petitioners still
owed to respondent.
PHILIPPINE TRUST COMPANY, v. FLORO ROXAS AND EUFEMIA ROXAS,
G.R. No. 171897, October 14, 2015
JARDELEZA, J.:

Although legal compensation takes place by operation of law, it must be alleged

and proved as a defense by the debtor who claims its benefits. Only after it is
proved will its effects retroact to the moment when all the requisites under
Article 1279 of the Civil Code have concurred.

FACTS:

The Spouses Roxas procured loans from PTC to finance their real estate
business.These loans were secured by real estate mortgages on the Spouses
Roxas' real properties. The Spouses Roxas, PTC, and Roben Construction and
Furnishing Group, Inc. entered into "a contract of building construction. This was
superseded by a new "contract of building construction" executed by and among
PTC, Spouses Roxas, and Dominguez. Dominguez substituted Roben Construction
as the contractor under the same terms and conditions of the contract.

Due to financial difficulties, however, the Spouses Roxas did not finish the housing
project. As a result, they did not receive monthly rentals from prospective lessees
of the houses, which led to missed amortization payments in their loans from PTC.5
Dominguez filed a complaint against PTC and the Spouses Roxas for breach of the
contract of building construction.

When the Spouses Roxas filed their answer they included a cross-claim against
PTC. In response, PTC filed a counterclaim against the Spouses Roxas on their
unpaid loan obligation amounting to Php 3,053,738.50 plus interest and, in default
of such payments, the foreclosure of the real estate mortgages executed by the
Spouses Roxas in favor of PTC. After trial on the merits, the trial court rendered a
decision in favor of Dominguez. It denied PTC's counterclaim for lack of sufficient
proof, without prejudice to the filing of a collection suit against the Spouses Roxas.
Both PTC and the Spouses Roxas appealed to the Court of Appeals, docketed as
CA-G.R. CV No. 30340. To this date, the same remains pending.

In a parallel development, while the case was still pending in the trial court, PTC,
filed with the provincial sheriff a petition for extrajudicial foreclosure of the same
real estate mortgages, The Spouses Roxas opposed the petition and filed a verified
complaint against PTC for damages with preliminary injunction . The court ruled
in favor of Spouses Roxas and issued permanent injunction and condemning PTC
to pay civil damages.

The Court of Appeals affirmed the decision of the RTC. The decision became final
and executory, prompting the Spouses Roxas to file a Motion for Execution. PTC
responded by filing an Opposition to the Motion for Execution, where it raised for
the first time legal compensation to offset the judgment debt due to the Spouses
Roxas. However the court ruled that PTC was

ISSUE:

Whether or not the principle of legal compensation may be applied to offset the
judgment debt of petitioner PTC and the loan obligation Spouses Roxas ?

RULING:

NO, The RTC and the Court of Appeals also correctly ruled that PTC should have
raised the argument on legal compensation at the trial stage.

Even if we assume that legal compensation was not waived and was otherwise
timely raised, we find that not all requisites of legal compensation are present in
this case. Under Article 1279, in order for legal compensation to take place, the
following requisites must concur: (a) that each one of the obligors be bound
principally, and that he be at the same time a principal creditor of the other; (b)
that both debts consist in a sum of money, or if the things due are consumable,
they be of the same kind, and also of the same quality if the latter has been stated;
(c) that the two debts be due; (d) that they be liquidated and demandable; and
(e) that over neither of them there be any retention or controversy, commenced
by third persons and communicated in due time to the debtor.

Here, the fourth requisite is absent. A debt is liquidated when its existence and
amount are determined.37 Compensation can only take place between certain and
liquidated debts; it cannot extend to unliquidated, disputed claims.38 Since the
loan obligation, including its amount and demandability, is still being disputed in
CA-G.R. CVNo. 30340, PTC's credit cannot be considered liquidated as of yet.
Consequently, no legal compensation could have taken place between PTC's loan
credit and the Spouses Roxas' judgment credit.

CALIFORNIA MANUFACTURING COMPANY, INC. VS. ADVANCED

TECHNOLOGY SYSTEM, INC.;
G.R. NO. 202454; APRIL 25, 2017
SERENO, C.J.:
ARTICLE 1279. In order that compensation may be proper, it is necessary: (1)
That each one of the obligors be bound principally, and that he be at the same
time a principal creditor of the other; (2) That both debts consist in a sum of
money, or if the things due are consumable, they be of the same kind, and also of
the same quality if the latter has been stated; (3) That the two debts be due;
(4)
That they be liquidated and demandable; (5) That over neither of them there be
any retention or controversy, commenced by third persons and communicated in
due time to the debtor.

FACTS:

Petitioner CMCI is a domestic corporation engaged in the food and beverage

manufacturing business while respondent ATSI is a domestic corporation that
fabricates and distributes food processing machinery and equipment, spare parts,
and allied products. CMCI leased from ATSI a Prodopak machine used to pack
products in 20-ml pouches. Upon receipt of an open purchase order, ATSI
delivered the machine to CMCI’s plant.

ATSI filed a Complaint for Sum of Money against CMCI to collect the unpaid
rentals for the months of June, July, August, and September 2003.CMCI moved
for the dismissal of the complaint on the ground of extinguishment of obligation
through legal compensation contending that:

1. ATSI was one and the same with Processing Partners and Packaging
Corporation (PPPC), which was a toll packer of CMCI products. To support this
allegation, CMCI submitted copies of the Articles of Incorporation and General
Information Sheets (GIS)of the two corporations and pointed out that ATSI was
even a stockholder of PPPC as shown in the latter’s GIS;
2. Upon the request of PPPC, CMCI advanced P4 million as mobilization fund,
which the PPPC President and CEO Francis Celones committed to pay, deductible
from PPPC’s monthly invoice to CMCI beginning in October 2000;
3. In a letter dated 30 July 2001, PPPC’s EVP FelicisimaCelones proposed to
set off PPPC’s obligation to pay the mobilization fund with the rentals for the
Prodopak machine;
4. The proposal was binding on both PPPC and ATSI because Felicisima was
an officer and a majority stockholder of the two corporations. Moreover, she
allegedly represented to the new management of CMCI that she was authorized
to request the offsetting of PPPC’s obligation with ATSI’s receivable from CMCI,
and that
5. ATSI was even liable for the balance of PPPC’s unpaid obligation even after
deducting the rentals for the Prodopak machine. PPPC’s debt arising from the
mobilization fund was allegedly amounting to P10,766,272.24.

ISSUE:
Whether or not there is legal compensation between ATSI’s claim against CMCI on
one hand, and the latter’s claim against PPPC on the other hand.

HELD:

ARTICLE 1279. In order that compensation may be proper, it is necessary:

(1) That each one of the obligors be bound principally, and that he be at the same
time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable,
they be of the same kind, and also of the same quality if the latter has been stated;
(3) That the two debts be due;

(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced
by third persons and communicated in due time to the debtor.

The law, therefore, requires that the debts be liquidated and demandable.
Liquidated debts are those whose exact amounts have already been determined.

CMCI has not presented any credible proof, or even just an exact computation, of
the supposed debt of PPPC. It claims that the mobilization fund that it had
advanced to PPPC was in the amount of P4 million. Yet, Felicisima’s proposal to
conduct offsetting in her letter dated 30 July 2001 pertained to a P3.2 million debt
of PPPC to CMCI. Meanwhile, in its Answer to ATSI’s complaint, CMCI sought to
set off its unpaid rentals against the alleged P10 million debt of PPPC. The
uncertainty in the supposed debt of PPPC to CMCI negates the latter’s
invocation of legal compensation as justification for its non-payment of
the rentals for the subject Prodopak machine.

Starbright Sales Company vs. Phil. Realty Corp.

G.R. No. 177936, January 8, 2012. J. Abad

Doctrine:A subjective novation results through substitution of the person of the

debtor or through subrogation of a third person to the rights of the creditor. To
accomplish a subjective novation through change in the person of the debtor,
the old debtor needs to be expressly released from the obligation and the third
person or new debtor needs to assume his place in the relation.

Facts:

-Ramon Licup wrote Msgr. Cirilos, offering to buy 3 parcels of land in Parañaque
that The Holy See and Philippine Realty Corporation (PRC) owned for ₱1,240.00
per square meter. Licup accepted the responsibility for removing the illegal settlers
on the land and enclosed a check for ₱100,000.00 to "close the transaction.Msgr.
Cirilos, representing The Holy See and PRC, signed his name on the conforme
portion of the letter and accepted the check. But the check could not be encashed
due to Licup’s stop-order payment.

-Licup wrote Msgr. Cirilos requesting that the titles to the land be instead
transferred to petitioner Starbright Sales Enterprises, Inc. (SSE). He enclosed a
new check for the same amount. SSE’s representatives, Mr. and Mrs. Cu, did not
sign the letter.Msgr. Cirilos wrote SSE, requesting it to remove the occupants on
the property and, should it decide not to do this, Msgr. Cirilos would return to it
the ₱100,000.00 that he received. SSE replied with an updated proposal. It would
be willing to comply with Msgr. Cirilos’ condition provided the purchase price is
lowered to ₱1,150.00 per square meter.

-Msgr. Cirilos wrote back, rejecting the updated proposal. He said that other buyers
were willing to acquire the property on an as is, where is basis at ₱1,400.00 per
square meter. He gave SSE seven days within which to buy the property at
₱1,400.00 per square meter, otherwise, Msgr. Cirilos would take it that SSE has
lost interest in the same. He enclosed a check for ₱100,000.00 in his letter as
refund of what he earlier received.

-Subsequently, SSE wrote Msgr. Cirilos that they already had a perfected contract
of sale in the April 17, 1988 letter which he signed and that, consequently, he
could no longer impose amendments such as the removal of the informal settlers
at the buyer’s expense and the increase in the purchase price.

-SSE claimed that it got no reply from Msgr. Cirilos and that the next thing they
knew, the land had been sold to Tropicana Properties on March 30, 1989. SSE
demanded rescission of that sale. Meanwhile, Tropicana Properties sold the three
parcels of land to Standard Realty.

-SSE filed a complaint for annulment of sale and reconveyance with damages
before the RTC. In its decision, the Parañaque RTC treated the April 17, 1988 letter
between Licum and Msgr. Cirilos as a perfected contract of sale between the
parties. Msgr. Cirilos attempted to change the terms of contract and return SSE’s
initial deposit but the parties reached no agreement regarding such change. Since
such agreement was wanting, the original terms provided in the April 17, 1988
letter continued to bind the parties. However, CA reversed the ruling. Hence, this
appeal.

ISSUE/S:
1. Whether there was a novation when Mr.Licup requested the ownership be
transferred to SSE?

RULING:
-Yes. But when Licup ordered a stop-payment on his deposit and proposed in his
April 26, 1988 letter to Msgr. Cirilos that the property be instead transferred to
SSE, a subjective novation took place.
-A subjective novation results through substitution of the person of the debtor or
through subrogation of a third person to the rights of the creditor. To accomplish
a subjective novation through change in the person of the debtor, the old debtor
needs to be expressly released from the obligation and the third person or new
debtor needs to assume his place in the relation.

-Novation serves two functions one is to extinguish an existing obligation, the other
to substitute a new one in its place requiring concurrence of four requisites: 1) a
previous valid obligation; 2) an agreement of all parties concerned to a new
contract; 3) the extinguishment of the old obligation; and 4) the birth of a valid
new obligation.]Notably, Licup and Msgr. Cirilos affixed their signatures on the
original agreement embodied in Licups letter of April 26, 1988. No similar letter
agreement can be found between SSE and Msgr. Cirilos.

HEIRS OF FRANCO V. GONZALES

A new obligation extinguishes a prior agreement only when the substitution is

unequivocally declared, or the old and the new obligations are incompatible on
every point. A compromise of a final judgment operates as a novation of the
judgment obligation upon compliance with either of these two conditions.

Facts:
Defendants Servando Franco and Leticia Mendel obtained loans from Veronica
Gonzales for the latter was engaged in the business of financing under the
company Gonzales Credit Enterprises. There were three loans which the Servando
and Leticia secured with the respondent, which was not paid on maturity. The third
loan was secured by a property was owned by one Leticia MakalintalYapintchay,
who issued a special power of attorney in favor of Leticia Medel, authorizing her
to execute the mortgage. The fourth loan was engaged with Dr. Rafael Mendel,
the husband of Leticia Mendel of P 60,000 by executing a promissory note which
consolidates the other previous loans which totals to P 500,000.

Upon maturity of the new promissory note, the defendants failed to pay their
obligation. So, the plaintiffs filed a complaint for the collection of the full amount
of the loan, plus interests and other charges. Servando contended that he did not
obtain any loan from the respondents, he was not benefited from its proceed and
he signed the promissory note as a witness.

With the various appeals and motion for reconsideration with the RTC and CA, it
was decided that the parties should be liable for the loans. Servando opposed that
he and the respondents had agreed to fix the entire obligation at P775,000.00.
According to Servando, their agreement, which was allegedly embodied in a
receipt dated February 5, 1992, whereby he made an initial payment of
P400,000.00 and promised to pay the balance of P375,000.00 on February 29,
1992, superseded the July 23, 1986 promissory note. But the RTC ruled over
Servando’s opposition and moved to the execution of the judgment for it is final
and executory. Then, Servando’s heirs, on account of his intervening death,
appealed that there was novation is the judgment that transpired upon the
decision of the court on December 9, 1991 and February 5, 1992.

Issue:

Whether there is novation between the judgments rendered by the courts.

Ruling:

There is no novation in the instant case.

There is no novation when there is no irreconcilable incompatibility between the

old and the new obligations. There is no novation in case of only slight
modifications; hence, the old obligation prevails. Extinguishment of the old
obligation is a necessary element for novation and the new one will arise from
such.

Novation arises when there is a substitution of an obligation by a subsequent one

that extinguishes the first, either by changing the object or the principal conditions,
or by substituting the person of the debtor, or by subrogating a third person in the
rights of the creditor. For a valid novation to take place, there must be, therefore:
(a) a previous valid obligation; (b) an agreement of the parties to make a new
contract; (c) an extinguishment of the old contract; and (d) a valid new contract.
In short, the new obligation extinguishes the prior agreement only when the
substitution is unequivocally declared, or the old and the new obligations are
incompatible on every point. A compromise of a final judgment operates as a
novation of the judgment obligation upon compliance with either of these two
conditions.

On the receipt of February 5, 1992 did not create a new obligation incompatible
with the old one under the promissory note that was issued. It was only a payment
of the obligation of Servando and did not establish a new obligation. The Court
ruled that the payment of the obligation does not novate the instrument that only
expressly recognize the old obligation, or changes only the terms of the payment,
or adds other obligation that is not incompatible with the old ones, or the new
contract merely supplements the old one. The new contract that is a mere
reiteration, acknowledgement or ratification of the old contract with slight
modifications or alterations as to the cause or object or principal conditions can
stand together with the former one, and there can be no incompatibility between
them. Moreover, a creditor’s acceptance of payment after demand does not
operate as a modification of the original contract.

Novation is not presumed by the parties, there should be an expressed agreement

that would abrogate the old one in favor of the new one. In the absence of the
express agreement, the old and the new obligation should be incompatible on
every point. The incompatibility of the obligation is that the two obligations cannot
stand together, each one having independence from each other.

S.C. Megaworld Construction and Development Corporation v Engr.

Luis U. Parada
GR No. 183804 September 11, 2013
Reyes, J.

Novation is never presumed but must be clearly and unequivocally shown.In

order to change the person of the debtor, the former debtor must be expressly
released from the obligation, and the third person or new debtor must assume
the former’s place in the contractual relation. The old debtor must be released
from the obligation, otherwise there is no valid novation.
Facts:
SC Megaworld bought electrical lighting materials from Genlite Industries, a sole
proprietorship owned by Engr. Parada for its Read-Rite Project in Laguna. SC
Megaworld was unable to pay for the purchase on the due date but blamed it on
its failure to collect under its subcontract with EnviroKleen. It was however able to
persuade EnviroKleen to agree to settle its purchase, but after paying the
respondent P250,000, EnviroKleen stopped making further payments, leaving an
outstanding balance of P816,627.00. It also ignored the various demands of Engr.
Parada, who then filed a suit in the RTC.

SC Megaworld’s Argument:
It denied liability, claiming that it was released from its indebtedness to the
respondent by reason of the novation of their contract, which took place when the
respondent accepted the partial payment of EnviroKleen in its behalf and thereby
agreed to the substitution of EnviroKleen as the new debtor in the petitioner’s
place.

RTC:
Ruled in favour of the respondent and ordered the petitioner to pay the respondent

CA:
Affirmed the ruling of the RTC. CA noted that there is nothing in the 2 letters of
the respondent to EnviroKleen which would imply that he consented to the alleged
novation and that he intended to release the petitioner from its primary obligation
to pay him for its purchase of lighting materials. The respondent’s acceptance was
limited to merely accepting EnviroKleen as an additional debtor from which he
could demand payment, but without releasing the petitioner as the principal
debtor.
Issue:
W/n there was a novation of the contract

Ruling:
None. Novation is never presumed but must be clearly and unequivocally shown.
Novation is a mode of extinguishing an obligation by changing its objects or
principal obligations, by substituting a new debtor in place of the old one, or by
subrogating a third person to the rights of the creditor.

In order to change the person of the debtor, the former debtor must be expressly
released from the obligation, and the third person or new debtor must assume the
former’s place in the contractual relation. The old debtor must be released from
the obligation, otherwise there is no valid novation.

From the circumstances, the court ruled that it cannot infer any clear or
unequivocal consent by the respondent to the release of the petitioner from the
obligation to pay the cost of the lighting materials. In fact, from the letters of the
respondent to EnviroKleen, it can be said that it retained the option to go after the
petitioner if EnviroKleen failed to settle the petitioner’s debt.

The mere substitution of debtors will not result in novation, and the fact that the
creditor accepts payments from a third person, who has assumed the obligation,
will merely result in the addition of debtors and not novation, and the creditor may
enforce the obligation against both debtors. If there is no agreement as to
solidarity, the first and new debtors are considered obligated jointly.

FELIPE O. MAGBANUA, et al.v. RIZALINO UY

G.R. No. 161003, 6 May 2005, THIRD DIVISION,(Panganiban, J.)

For an obligation to be extinguished by another, the law requires either of

these two conditions: (1) the substitution is unequivocally declared, or (2) the old
and the new obligations are incompatible on every point. A compromise of a final
judgment operates as a novation of the judgment obligation, upon compliance
with either requisite.

FACTS:

As a final consequence of the final and executory decision of the Supreme

Court in Rizalino P. Uyv. National Labor Relations Commission, et al. (GR No.
117983, September 6, 1996), the wage differentials that are due to the eight
complainants (petitioners) amounted to P1,487,312.69. The petitioners then filed
a Motion for Issuance of Writ of Execution. Respondent RizalinoUy filed a
Manifestation requesting that the cases be terminated and closed, stating that the
judgment award as computed had been complied with to the satisfaction of
petitioners. Said Manifestation was also signed by the eight petitioners. Together
with the Manifestation is a Joint Affidavit of petitioners, attesting to the receipt of
payment from respondent and waiving all other benefits due them in connection
with their complaint. Petitioners then filed an Urgent Motion for Issuance of Writ
of Execution wherein they confirmed that each of them only received P40,000 from
respondent. Respondent opposed the motion on the ground that the judgment
award had been fully satisfied, but petitioners, in their Reply, claimed that they
received only partial payments of the judgment award. Months later, six of the
eight petitioners filed a Manifestation requesting that the cases be considered
closed and terminated as they are already satisfied of what they have received
from respondent. Together with said Manifestation is a Joint Affidavit in the local
dialect, of the six petitioners attesting that they have no more collectible amount
from respondent and if there is any, they are abandoning and waiving the same.

ISSUE:

Whether or not the compromise of a final judgment operates as a novation

of the judgment obligation.

RULING:

YES. The principle of novation supports the validity of a compromise after

final judgment. Novation, a mode of extinguishing an obligation, is done by
changing the object or principal condition of an obligation, substituting the person
of the debtor, or surrogating a third person in the exercise of the rights of the
creditor.

For an obligation to be extinguished by another, the law requires either of

these two conditions: (1) the substitution is unequivocally declared, or (2) the old
and the new obligations are incompatible on every point. A compromise of a final
judgment operates as a novation of the judgment obligation, upon compliance
with either requisite. In the present case, the incompatibility of the final judgment
with the compromise agreement is evident, because the latter was precisely
entered into to supersede the former.
PHIL CHARTER v. PETROLEUM. GR NO. 180898, 18 APRIL 2012,
MENDOZA J.
(There is no Novation in this case)

Novation of a contract is never presumed. In the absence of an express

agreement, novation takes place only when the old and the new obligations are
incompatible on every point

On January 27, 1999, Petroleum Distributors and Services

Corporation (PDSC), entered into a building contract with N.C. Francia
Construction Corporation (FCC), for the construction of a four-story
commercial and parking complex known as Park N Fly Building (Park N
Fly). The parties agreed that the construction work would begin on February 1,
1999. Under the Project Evaluation and Review Technique Critical Path
Method (PERT-CPM), the project was divided into two stages: Phase 1 and Phase
2. The project should be turned over by October 21, 1999. Further, to ensure
compliance with its obligation, FCC procured Performance Bond from Philippine
Charter Insurance Corporation (PCIC) to secure full and faithful performance of its
obligation under the Building Contract.

During the Phase 1 of the project, PDSC noticed that FCC was sixteen (16) days
behind schedule. In a Letter dated March 25, 1999, it reminded FCC to catch up
with the schedule of the projected work path, or it would impose the penalty of
1/10 of the 1% of the contract price. The problem, however, was not addressed,
as the delay increased to 30 days and ballooned to 60 days. Consequently,
on September 10, 1999, PDSC and FCC executed a memorandum of
agreement (MOA), wherein the parties agreed to revise the work
schedule of the projectprovided all other terms and conditions of the
Building Contract of 27 January 1999 not inconsistent herewith shall
remain in full force and effect. As a consequence, Performance Bond No.
31915 was extended up to March 2, 2000.

For failure of FCC to accomplish the project within the agreed completion period,
PDSC, in a letter dated December 3, 1999, informed FCC that it was terminating
their contract. Subsequently, PDSC sent demand lettersto FCC and PCIC asking for
remuneration pursuant to Performance Bond. Despite notice, PDSC did not receive
any reply from either FCC or PCIC, constraining it to file a complaint. In its answer,
PCIC provides that PDSCs claim against it had been waived, abandoned or
extinguished by the September 10, 1999 MOA.

ISSUE:

Whether or not the September 10, 1999 MOA executed by PDSC and FCC
extinguished PCIC’s liability under the performance bond

RULING:

NO. In order that an obligation may be extinguished by another which

substitutes the same, it is imperative that it be so declared in unequivocal terms,
or that the old and new obligation be in every point incompatible with each
other. Undoubtedly, a surety is released from its obligation when there is a
material alteration of the principal contract in connection with which the bond is
given, such as a change which imposes a new obligation on the promising party,
or which takes away some obligation already imposed, or one which changes the
legal effect of the original contract and not merely its form. In this case, however,
no new contract was concluded and perfected between PDSC and FCC. A reading
of the September 10, 1999 MOA reveals that only the revision of the work schedule
originally agreed upon was the subject thereof. The parties saw the need to adjust
the work schedule because of the various subcontracting made by PDSC. In fact,
it was specifically stated in the MOA that all other terms and conditions of the
Building Contract of 27 January 1999 not inconsistent herewith shall remain in full
force and effect.There was no new contract/agreement which could be considered
to have substituted the Building Contract. In fact, the testimony of the President
and Chief Executive Officer of the principal obligor FCC, it candidly disclosed and
admitted that no new PERT/CPM was actually attached to the Memorandum of
Agreement.

Accordingly, there is no compelling reason to declare that novation ensued under

the prevailing circumstances. The execution of the Memorandum of Agreement
dated 10 September 1999 does not constitute a novation of the Building Contract
dated 27 January 1999. There lies no incompatibility between the two contracts
as their principal object and conditions remained the same. While there is really
no hard and fast rule to determine what might constitute to be a sufficient change
that can bring about novation, the touchtone for contrariety, however, would be
an irreconcilable incompatibility between the old and the new obligations.

ACE FOODS, INC. v MICRO PACIFIC TECHNOLOGIES CO., LTD.

G.R. No. 200602 December 11, 2013
PERLAS-BERNABE, J.:

Novation, in its broad concept, may either be extinctive or modificatory. It is

extinctive when an old obligation is terminated by the creation of a new obligation
that takes the place of the former; it is merely modificatory when the old obligation
subsists to the extent it remains compatible with the amendatory agreement. In
either case, however, novation is never presumed, and the animus novandi,
whether totally or partially, must appear by express agreement of the parties, or
by their acts that are too clear and unequivocal to be mistaken.

Facts:
ACE Foods is a domestic corporation engaged in the trading and distribution of
consumer goods in wholesale and retail bases,while MTCL is one engaged in the
supply of computer hardware and equipment.
On September 26, 2001, MTCL sent a letter-proposal for the delivery and sale of
the subject products to be installed at various offices of ACE Foods. The said
proposal provides for the following terms, “TERMS: Thirty (30) days upon delivery.
VALIDITY: Prices are based on current dollar rate and subject to changes without
prior notice. DELIVERY: Immediate delivery for items on stock, otherwise thirty
(30) to forty-five days upon receipt of Purchase Order. WARRANTY: One (1) year
on parts and services. Accessories not included in warranty.” It was accepted by
ACE Foods and accordingly issued Purchase Order No. 100023(Purchase Order)
for the subject products amounting to ₱646,464.00 (purchase price). Thereafter,
MTCL delivered the said products to ACE Foods as reflected in Invoice No.
7733 (Invoice Receipt). The fine print of the invoice states, inter alia, that
"title to sold property is reserved in MICROPACIFIC TECHNOLOGIES CO.,
LTD. until full compliance of the terms and conditions of above and
payment of the price" (title reservation stipulation). After delivery, the
subject products were then installed and configured in ACE Foods’s premises.

MTCL’s demands against ACE Foods to pay the purchase price, however, remained
unheeded. Instead of paying the purchase price, ACE Foods sent MTCL a Letter,
stating that it "has been returning the subject products to MTCL thru its sales
representative, Mr. Mark Anteola who has agreed to pull out the said products but
had failed to do so up to now."
Eventually, ACE Foods lodged a Complaint against MTCL before the RTC, praying
that the latter pull out from its premises the subject products since MTCL breached
its "after delivery services" obligations to it, particularly, to: (a) install and
configure the subject products; (b) submit a cost benefit study to justify the
purchase of the subject products; and (c) train ACE Foods’s technicians on how to
use and maintain the subject products. ACE Foods likewise claimed that the
subject products MTCL delivered are defective and not working.

MTCL, on the other hand, maintained that it had duly complied with its obligations
to ACE Foods and that the subject products were in good working condition when
they were delivered, installed and configured in ACE Foods’s premises. It even
conducted a training course for ACE Foods’s representatives/employees. Further,
MTCL posited that ACE Foods refused and failed to pay the purchase price for the
subject products despite the latter’s use of the same for a period of 9 months. As
such, MTCL prayed that ACE Foods be compelled to pay the purchase price, as
well as damages related to the transaction.

Issues:
1. Whether or not ACE Foods should pay MTCL the purchase price for the subject
products.
2. Whether or not the title reservation stipulation novated the transaction from a
contract of sale into a contract to sell

Ruling:
1. Yes, ACE Foods should pay MTCL the purchase price for the subject products.
The Court ruled that the parties have agreed to a contract of sale and not to a
contract to sell. Bearing in mind its consensual nature, a contract of sale had been
perfected at the precise moment ACE Foods, as evinced by its act of sending MTCL
the Purchase Order, accepted the latter’s proposal to sell the subject products in
consideration of the purchase price of ₱646,464.00. From that point in time, the
reciprocal obligations of the parties – i.e., on the one hand, of MTCL to deliver the
said products to ACE Foods, and, on the other hand, of ACE Foods to pay the
purchase price therefor within thirty (30) days from delivery – already arose and
consequently may be demanded.

2. No, the title reservation stipulation did not novate the contract between the
parties from contract of sale to contract to sell.
Records are bereft of any showing that the said stipulation novated the contract
of sale between the parties which, to repeat, already existed at the precise moment
ACE Foods accepted MTCL’s proposal. To be sure, novation, in its broad concept,
may either be extinctive or modificatory. It is extinctive when an old obligation is
terminated by the creation of a new obligation that takes the place of the former;
it is merely modificatory when the old obligation subsists to the extent it remains
compatible with the amendatory agreement. In either case, however, novation is
never presumed, and the animus novandi, whether totally or partially, must appear
by express agreement of the parties, or by their acts that are too clear and
unequivocal to be mistaken.
In the present case, it has not been shown that the title reservation stipulation
appearing in the Invoice Receipt had been included or had subsequently modified
or superseded the original agreement of the parties. The fact that the Invoice
Receipt was signed by a representative of ACE Foods does not, by and of itself,
prove animus novandi since: (a) it was not shown that the signatory was
authorized by ACE Foods (the actual party to the transaction) to novate the original
agreement; (b) the signature only proves that the Invoice Receipt was received
by a representative of ACE Foods to show the fact of delivery; and (c) as matter
of judicial notice, invoices are generally issued at the consummation stage of the
contract and not its perfection, and have been even treated as documents which
are not actionable per se, although they may prove sufficient delivery. Thus,
absent any clear indication that the title reservation stipulation was actually agreed
upon, the Court must deem the same to be a mere unilateral imposition on the
part of MTCL which has no effect on the nature of the parties’ original agreement
as a contract of sale. Perforce, the obligations arising thereto, among others, ACE
Foods’s obligation to pay the purchase price as well as to accept the delivery
of the goods, remain enforceable and subsisting.
ARCO PULP AND PAPER CO., INC vs. DAN T. LIM (G.R. No. 206806)

Novation must be stated in clear and unequivocal terms to extinguish an

obligation. It cannot be presumed and may be implied only if the old and new
contracts are incompatible on every point.

Respondent Lim delivered scrap papers worth 7,220,968.31 to Arco Pulp and
Paper. The parties allegedly agreed that Arco Pulp and Paper would either pay
Dan T. Lim the value of the raw materials or deliver to him their finished products
of equivalent value.On the same day, Arco Pulp and Paper and a certain Eric Sy
executed a memorandum of agreement where Arco Pulp and Paper bound
themselves to deliver their finished products to Megapack Container Corporation,
owned by Eric Sy, for his account. According to the memorandum, the raw
materials would be supplied by Dan T. Lim, through his company, Quality Paper
and Plastic Products. The memorandum of agreement reads as follows:

Per meeting held at ARCO, it has been mutually agreed between Mrs. Candida A.
Santos and Mr. Eric Sy that ARCO will deliver 600 tons Test Liner at the price of
₱18.50 per kg. toMegapack Container for Mr. Eric Sy’s account.

Dan T.Lim sent a letter to Arco Pulp and Paper demanding payment of the amount
of 7,220,968.31, but no payment was made to him. Dan T. Lim filed a
complaint for collection of sum of money with prayer for attachment with the
Regional Trial Court.

RTC dismissed the complaint reasoning that there is novation by virtue of the
memorandum of agreement executed between Arco Pulp and Paper and Eric Sy
which extinguished the obligation of petitioner Arco Pulp to respondent Lim. On
appeal, CA reversed the decision of the RTC and held that there was no novation,
but there exist an alternative obligation.

Issue: Whether the obligation between the parties was extinguished by novation?

Ruling:

No. The memorandum of agreement did not constitute a novation of the original
contract.

Article 1292. In order that an obligation may be extinguished by another which

substitute the same, it is imperative that it be so declared in unequivocal terms,
or that the old and the new obligations be on every point incompatiblewith each
other.

Article 1293. Novation which consists in substituting a new debtor in the place of
the original one, may be made even without the knowledge or against the will of
the latter, but not without the consent of the creditor. Payment by the new
debtor gives him the rights mentioned in Articles 1236 and 1237.

Because novation requires that it be clear and unequivocal, it is never presumed,

thus:

In the civil law setting, novatio is literally construed as to make new. So it is deeply
rooted in the Roman Law jurisprudence, the principle — novatio non praesumitur
—that novation is never presumed. At bottom, for novation to be a jural reality,
its animus must be ever present, debitum pro debito — basically extinguishing the
old obligation for the new one.39 (Emphasis supplied) There is nothing in the
memorandum of agreement that states that with its execution, the
obligation of petitioner Arco Pulp and Paper to respondent would be
extinguished.It also does not state that Eric Sy somehow substituted
petitioner Arco Pulp and Paper as respondent’s debtor. It merely shows
that petitioner Arco Pulp and Paper opted to deliver the finished products to a third
person instead.

xxx Novation must be expressly consented to. Moreover, the conflicting intention
and acts of the parties underscore the absence of any express disclosure or
circumstances with which to deduce a clear and unequivocal intent by the parties
to novate the old agreement. (Emphasis supplied)
In this case, respondent was not privy to the memorandum of agreement, thus,
his conformity to the contract need to be secured. This is clear from the first line
of the memorandum, which states:

Per meeting held at ARCO, April 18, 2007, it has been mutually agreed between
Mrs. Candida A. Santos and Mr. Eric Sy. . . .

If the memorandum of agreement was intended to novate the original agreement

between the parties, respondent must have first agreed to the substitution of Eric
Sy as his new debtor. The memorandum of agreement must also state in clear and
unequivocal terms that it has replaced the original obligation of petitioner Arco
Pulp and Paper to respondent. Neither of these circumstances is present in this
case.

Petitioner Arco Pulp and Paper’s act of tendering partial payment to respondent
also conflicts with their alleged intent to pass on their obligation to Eric Sy. When
respondent sent his letter of demand to petitioner Arco Pulp and Paper, and not
to Eric Sy, it showed that the former neither acknowledged nor consented to the
latter as his new debtor. These acts, when taken together, clearly show that
novation did not take place. Since there was no novation, petitioner Arco Pulp and
Paper’s obligation to respondent remains valid and existing. Petitioner Arco Pulp
and Paper, therefore, must still pay respondent the full amount of ₱7,220,968.31.
So Ordered.
SAURA IMPORT and EXPERT CO., INC., vs DBP

The action thus taken by both parties was in the nature of mutual desistance
which is a mode of extinguishing obligations. It is a concept that derives from
the principle that since mutual agreement can create a contract, mutual
disagreement by the parties can cause its extinguishment.

FACTS:

In July 1952, Saura, Inc., applied to DBP, for an industrial loan of P500,000 to be
used for the construction of a factory building, to pay the balance of the jute mill
machinery and equipment and as additional working capital. The loan application
was approved to be secured first by mortgage on the factory buildings, the land
site, and machinery and equipment to be installed.

The mortgage was registered and documents for the promissory note were
executed. The mortgage was subsequently cancelled to make way for the
registration of a mortgage contract over the same property in favor of DBP the
latter having issued Saura a letter of credit for the release of the jute machinery.

As security, Saura execute a trust receipt in favor of the Prudential. For failure of
Saura to pay said obligation, DBP sued Saura.
SauraInc, commenced an action against DBP alleging failure on the latter to
comply with its obligations to release the loan applied for and approved, thereby
preventing the plaintiff from completing or paying contractual commitments it had
entered into, in connection with its jute mill project.

ISSUE:
Whether or not the obligation was extinguished through mutual desistance of the
parties.

HELD:

YES. The obligation between the parties is extinguished through mutual

desistance.

When an application for a loan of money was approved by resolution of the

respondent corporation and the corresponding mortgage was executed and
registered, there arises a perfected consensual contract.

It should be noted that DBP imposed two conditions (availability of raw materials
and increased production) when it granted the loan in the amount of P500,000.00.

However, since Saura, Inc. was in no position to comply with DBPs conditions. So
instead of complying with these 2 conditions and insisting that the loan be released
as agreed upon, Saura, Inc. instead asked that the mortgage be cancelled. The
action thus taken by both parties was in the nature of mutual desistance
which is a mode of extinguishing obligations. It is a concept that derives
from the principle that since mutual agreement can create a contract, mutual
disagreement by the parties can cause its extinguishment.
ANGEL V. TALAMPAS vs. MOLDEX REALTY, INC. | G.R. No. 170134 | June
17, 2015
BRION, J.

1. Contracts have the force of law between the parties and must be complied
with in good faith. A contracting party’s failure, without legal reason, to comply
with contract stipulations breaches their contract and can be the basis for the
award of damages to the other contracting party.

2. Consent is manifested by the meeting of the offer and the acceptance

upon the thing and the cause which are to constitute the contract.The offer must
be certain, and the acceptance, whether express or implied, must be absolute.An
acceptance is considered absolute and unqualified when it is identical in all
respects with that of the offer so as to produce consent or ameeting of the minds.

FACTS:
Petitioner is the owner and general manager of AVTJ Construction a
business engaged in general engineering and building. Petitioner entered into a
contract with Moldex to develop a residential subdivision in Cavite. The contract
price is Php10.5M in which Moldex paid Php500,000 at the start of the contract.
The project started on January 14, 1993 and is to be completed 300 days from its
commencement.
The Project Manager ordered petitioner to suspend the work due to change
in the subdivision plan. The supposed 1 week suspension lasted for 3 weeks.
Subsequently, the petitioner received a notice that Moldex have decided to
terminate the contractmainly due to a business decision. With this, the Petitioner
demanded the payment of equipment rentals and 20% of the contract price from
Moldex. Due to the unheeded demands, Petitioner filed a complaint for breach of
contract and damages against the Moldex.
RTC: The court ruled against Moldex. There is breach of contract on the
ground that respondent’s reason for termination, i.e., "project redesign," was not
a stipulated ground for the unilateral termination under the parties’
contract.Moldex is also liable for fraud for failing to disclose to the petitioner the
lack of a conversion clearance certificate for the Metrogate subdivision. The RTC
considered the conversion clearance to be a material consideration for the
petitioner in entering the contract with the respondent. With this, the court ordered
for the payment of damages and other claims.
CA: The CA reversed RTC’s ruling. There is no breach of contract. The
contract was not unilaterally terminated because the Engr. Talampas, son of the
petitioner, had a meeting with the project manager of Moldex to confirm with the
termination.

ISSUE:
Whether or not the respondent is guilty of breach of contract.

RULING:

YES.
Contracts have the force of law between the parties and must be complied
with in good faith. A contracting party’s failure, without legal reason, to comply
with contract stipulations breaches their contract and can be the basis for the
award of damages to the other contracting party.
Moldex failed to comply with its contractual stipulations on the unilateral
termination when it terminated their contract due to the redesign of the
MetrogateSilang Estates’ subdivision plan.

Paragraph 8 of the parties’ contract limits the instances when the respondent
(referred to as owner in the contract) or the petitioner (referred to as contractor
in the contract) may unilaterally terminate their agreement. The respondent could
not have validly and unilaterally terminated its contract with the petitioner, as the
latter has not committed any of the stipulated acts of default. Thus, the
respondent’s termination of the subject contract violated the parties’ agreement
as the reason for the termination, i.e., the redesign of the project’s subdivision
plan, was not a stipulated cause for the unilateral termination under Paragraph 8.1
of their contract.

Moldexcontended that the petitioner ratified the termination of their

contract by accepting payments for progress billings, costs of equipment
mobilization/demobilization, refund of insurance bond payments, and the release
of retention fees. However, the petitioner’s receipt of these payments does not
appear to be acts of ratification or consent to the contract’s termination.

Consent is manifested by the meeting of the offer and the acceptance upon the
thing and the cause which are to constitute the contract. The offer must be certain,
and the acceptance, whether express or implied, must be absolute. An acceptance
is considered absolute and unqualified when it is identical in all respects with that
of the offer so as to produce consent or ameeting of the minds.
There was no meeting of the minds between the parties on the matter of
termination because the petitioner’s acceptance of the respondent’s offer to
terminate was not absolute.

To terminate their contract, the respondent offered to pay the petitioner billings
for accomplished works, unrecouped costs of equipment mobilization and
demobilization, unrecouped payment of insurance bond, and the release of all
retention fees ― payments that the petitioner accepted or received.
But despite receipt of payments, no absolute acceptance of the
respondent’s offer took place because the petitioner still demanded the payment
of equipment rentals, cost of opportunity lost, among others. In fact, the payments
received were for finished or delivered works and for expenses incurred for the
respondent’s account. By making the additional demands, the petitioner effectively
made a qualified acceptance or a counteroffer, which the respondent did not
accept. Under these circumstances, we see no full consent.
*CAVEAT: This digest only concerns itself with the issue of “unilateral
withdrawal” which is only a minute issue in this case since this is a labor
dispute. I advise that the reader peruse it with care and try to cross
reference it with the full text. *Puro labor issues kasi. Thank you!

G.R. No. 189262, July 06, 2015

GBMLT MANPOWER SERVICES, INC., Petitioner, v. MA. VICTORIA H.
MALINAO, Respondent.

Facts:

Malinao applied for a job as a teacher in an Ethiopian University (Alemaya

University), she was accepted to be a accounting lecturer with a salary of 900USD.
Upon her arrival, she was informed by the Vice Minister of the Ministry of Education
that her credentials would have to be re-evaluated, because it appeared that she
did not have a master's degree. Respondent was given a new contract for signing,
which at first she refused to sign. However, upon reading that it was a duplicate
of the original contract, she affixed her signature.
After a month, she unilaterally decided to discontinue teaching, reason being is
that her specialty was auditing and not accounting. Then after, there was a
memorandum circulated lowering the ranks of Filipino teachers, which affected her
that also resulted to lowering her salary to 600USD. There was a new contract to
that effect, but Malinao refused to sign.

Together with her affected Filipino colleagues, she went to the Ministry of
Education to protest the re-ranking and asked for a dialogue between the
management. During the meeting, respondent raised her hand in order to be
acknowledged to speak. However, Vice President Alamirew told her, "You are not
allowed to speak before this meeting. Alemaya University does not need your
services anymore, you are terminated, you are fired."

Later that afternoon, Vice President Alamirew apologized to respondent for the
retort, saying that she thought the latter was the leader of the protest before the
Ministry of Education. Nevertheless, in a letter dated 28 March 2006, respondent
requested Vice President Alamirew to issue a notice of termination to her "in order
not to prolong [her] agony."

Another memorandum was posted to the effect that students actually petitioned
for her removal and her qualifications are doubtful having no master’s degree (but
she was a CPA and a law graduate) and hence she was given a notice of
termination, which provided for a 3-month leeway before termination. During that
period she was offered a job on the Auditing Department of the University.
However, she signified her intention to reject the offered post because of some
ruckus on her first day of the job and manifested that she does not deserve to be
insulted.

Issue: W/N Malinao was illegally terminated

Held:

NO.
Respondent never denied the grounds cited in the notice of termination. In fact,
in her letter dated 31 March 2006 addressed to Mr. Keno, she affirmed that the
students "told [her] bluntly that they do not want [her] style [of teaching]."
In the exercise of the right to terminate a contract without cause, one party need
only to give the other prior written notice as provided in the contract. Despite the
grounds cited in the notice of termination, Alemaya University opted to take the
"no cause" route in terminating the Contract of Employment. In this case, the
contract provided that the other party be given a three-month advance notice, a
requirement that Alemaya University complied with.

It is well to note that the right to terminate the Contract of Employment at will
was also available to respondent, who exercised that right when she signified her
change of mind and rejected the job at the Internal Audit Department. This detail
was appreciated even by the labor arbiter who found that respondent had quit her
job.

It cannot be denied that when respondent accepted the post offered at the Internal
Audit Department, the parties had decided to revert to the status quo ante of
harmonious employment relationship and to do away with the previous termination
of her employment. Respondent's letter to President Kassa is illuminative of this
point:

Dear Prof. Belay:

I am glad to accept the job at the Internal Audit Department. It is an

honor to work under the Office of the President. Be rest assured that I will
try my very best to live up to your expectations.

My only concern is the proximity of my residence in Harar to the campus.

Convenience is necessary for the effective and efficient performance of
my duties and responsibilities. The job is a tough one that will need my
full attention and concentration. I may make use of Saturdays and
Sundays for the job.

Further, the Harar residence will be very crowded as there will be two
families with children or a total of seventeen (17) persons who will be
occupying the said residence when the family of Ms. Irene Ycoy arrives on
the second week of May.

In consideration thereof, may I request that I be provided with a separate

housing unit inside the campus?

Thank you very much.

Nothing in the letter gives the impression that respondent understood that the
engagement was temporary or effective only until the three-month grace period
was through as provided in the termination letter. She even requested a separate
housing unit inside the campus. As correctly found by the NLRC, the logical
conclusion is that the parties had agreed to let her employment continue in the
university under the Contract of Employment, albeit in a different capacity. When
respondent later decided that she did not want the new job for personal reasons,
she exercised her right to terminate the Contract of Employment.

Respondent made a belated unilateral declaration in her letter to President Kassa

dated 27 April 2006. Indeed, her declaration therein that "the advance notice of
termination is still in force and effect"cannot operate to transfer responsibility for
the termination of the Contract of Employment to Alemaya University. Ultimately,
it was she who terminated the Contract of Employment, and she cannot now claim
that she was illegally dismissed.
Naga Telephone Co., Inc. vs. Court of Appeals

Considering practical needs and the demands of equity and good faith, the
disappearance of the basis of a contract gives rise to a right to relief in favor of
the party prejudiced.

Facts: The Naga Telephone Co., Inc. (NATELCO) and the Camarines Sur II
Electric Cooperative, Inc. (CASURECO) entered into a contract whereby the electric
light posts of the latter will be used by the former for its telephone service. In
consideration for the use of CASURECO’s posts, NATELCO agreed to install, free
of charge, 10 telephone connections for the use of the former.

However, after some time, CASURECO filed a suit against NATELCO for the
reformation of their contract, the former contending that the same had become
one-sided in favor of the latter. It likewise alleged that after several years of
NATELCO’s use of the posts, the telephone cables strung thereon have become
much heavier with the increase in the volume of NATELCO’s subscribers, worsened
by the fact that their linemen bore holes through the posts at which points those
posts were broken during typhoons.

Issue: Whether or not the parties to the contract should be released

therefrom.

Ruling: Yes. Article 1267 of the New Civil Code speaks of “service” which
has become so difficult. Taking into consideration the rationale behind this
provision, the term “service” should be understood as referring to “performance”
of the obligation. In the present case, the obligation of CASURECO consists in
allowing NATELCO to use its posts in Naga City, which is the service contemplated
in said article. Furthermore, a bare reading of this article reveals that it is not a
requirement thereunder that the contract be for future service with future unusual
change. According to Senator Arturo M. Tolentino, Article 1267 states in our law
the doctrine of unforeseen events. This is said to be based on the discredited
theory of rebus sic stantibus in public international law; under this theory, the
parties stipulate in the light of certain prevailing conditions, and once these
conditions cease to exist the contract also ceases to exist. Considering practical
needs and the demands of equity and good faith, the disappearance of the basis
of a contract gives rise to a right to relief in favor of the party prejudiced.

The Court eventually released the parties from the contract but obligated
them to compensate each other for the benefit which each received from the other
such as payment for the use of the posts by NATELCO and payment for the use of
the telephone service by CASURECO. The Court took into consideration the
possible consequences of releasing the parties from their obligations under the
contract: disruption of NATELCO’s service to the public and prejudice to
CASURECO’s business.
PNCC v. Court of Appeals

The principle of rebus sic stantibus does not fit in with the facts of the case.
Under this theory, the parties stipulate in the light of certain prevailing
conditions, and once these conditions cease to exist, the contract also ceases to
exist. Article 1267 provides: “ When the service has become so difficult to be
manifestly beyond the contemplation of the parties, the obligor may also be
released therefrom, in whole or in part.”

Facts:

This petition for review on certiorari has its roots in a civil case which was sparked
by petitioner’s refusal to pay the rentals as stipulated on an undivided portion of a
parcel of land owned by private respondents, the Raymundos.

The lease contract provides that the lease shall be for a period of 5 years,
commencing on the date of issuance of the industrial clearance by the Ministry of
Human Settlements, renewable for a like or other period at the option of the lessee
under the same terms and conditions. The lessee shall pay to the lessor a monthly
rate of 20,000 as rental. The same shall be increased yearly by 5% based on the
agreed monthly rate. The first annual rate (240,000) shall be due and payable
upon the execution of the contract and the succeeding annual rents shall be
payable every 12 months thereafter. It is understood that the property shall be
used by the lessee as the site of a rock crushing plant and field office, sleeping
quarters and canteen. The lessee was granted the right to construct the necessary
structures and improvements necessary for or incidental to the lessee’s purposes.
Petitioner obtained from the Ministry of Human Settlements a Temporary Use
Permit for the proposed rock crushing project. This shall be valid for 2 years unless
sooner revoked by the Ministry.

Private respondents wrote petitioner requesting payment of the first annual rental
which was due and payable upon the execution of the contract. Petitioner,
however, argued that payment of rental would commence on the date of the
issuance of an industrial clearance by the Ministry, and not from the date of the
signing of the contract. It then expressed its intention to terminate the
contract, as it had decided to cancel or discontinue with the rock
crushing project due to financial as well as technical difficulties.

The private respondents refused to accede to petitioner’s request for the

pretermination of the contract. They insisted on the performance of the obligation
of the petitioner and reiterated their demand for the payment of the first annual
rental. This was, however, left unheeded. Consequentially, private respondents
filed an action against petitioner for specific performance with damages.

The trial court rendered a decision ordering petitioner to pay the private
respondents the amount equivalent to the rentals for 2 years. This decision was
affirmed by the Court of Appeals, hence, this appeal.

Invoking Art. 1266 and the principle of rebus sic stantibus, petitioner asserts that
it should be released from the obligatory force of the contract of lease because
the purpose of the contract did not materialize due to unforeseen events and
causes beyond its control (due to abrupt change in political climate after the EDSA
Revolution and financial difficulties).

Issue: Whether the cancellation of the contract is valid under the principle of rebus
sic stantibus

Ruling:

It is a fundamental rule that contracts, once, perfected, bind both contracting

parties, and obligations arising therefrom have the force of law between the parties
and should be complied with in good faith. But the law recognizes exceptions to
the principle of the obligatory force of contracts . One exception is laid down in
Art. 1266 of the NCC: “The debtor in obligations to do shall be released when the
prestation becomes legally or physically impossible without the fault of the
obligor”.

Petitioner cannot successfully take refuge in the said article, since it is applicable
only to obligations “to do” and not to obligations “to give”. The obligation to pay
rentals or deliver the thing in a contract of lease falls within the prestation to give;
hence, it is not covered within the scope of Art. 1266. At any rate, the unforeseen
event and causes mentioned by petitioner are not the legal or physical
impossibilities contemplated in said article. Besides, petitioner failed to state
specifically the circumstances brought about by the abrupt change in the political
climate in the country except the alleged prevailing uncertainties in government
policies on infrastructure projects.

The principle of rebus sic stantibus does not fit in with the facts of the case. Under
this theory, the parties stipulate in the light of certain prevailing conditions, and
once these conditions cease to exist, the contract also ceases to exist. Article 1267
provides: “ When the service has become so difficult to be manifestly beyond the
contemplation of the parties, the obligor may also be released therefrom, in whole
or in part.”

This article, however, is not an absolute application of the principle of rebus sic
stantibus, which would endanger the security of contractual relations. The parties
to the contract must be presumed to have assumed the risks of unfavorable
developments. It is therefore only in absolutely exceptional changes of
circumstances that equity demands assistance for the debtor.

Petitioner’s poor financial condition will not release it from the binding effect of the
contract. Mere pecuniary inability to fulfill an engagement does not discharge a
contractual obligation, nor does it constitute a defense to an action for specific
performance.
OSMENA V. SSS
G.R. No. 165272/ September 13, 2007
GARCIA, J:

Under the theory of rebus sic stantibus, the parties stipulate in the light of
certain prevailing conditions, and once these conditions cease to exist, the
contract also ceases to exist.

FACTS:

SSS, placed under the direction and control of Social Security Commission
(SSC), took steps to liquefy its long-term investments including its shareholdings
in EPCIB. BDO Capital and SSS thus signed a Letter-Agreement, for the sale of
187.8 million EPCIB shares at P43.50 per share.

COA expressed the opinion that the sale was subject to guidelines in its
Circular, and so, would be adhering to the general policy of public auction. The
parties agreed on a final draft version of the Share Purchase Agreement (SPA) for
the specified price of P43.50 which DOJ approved.

SSC then passed Res. No. 428 approving the sale of the EPCIB shares
through the Swiss Challenge method.

SSS advertised an Invitation to Bid, however, even before the bid envelopes
could be opened, the herein petitioners commenced the instant special civil action
for certiorari, assailing the legality of the Swiss Challenge andInstruction to
Bidders in the SSC resolution under which the SSS undertakes to offer the shares
to BDO should no bidder or prospective bidder qualify. [Under the Swiss
Challenge format, one of the bidders is given the option or preferential right to
match the winning bid.]
 Petitioners assert, in gist, that a public bidding with a Swiss
Challenge component is contrary to COA Circular No. 89-296 and public policy
which requires adherence to competitive publicbidding in a government-contract
award to assure the best price possible for government assets. They expressed
the belief that if properly bidded out in accordance with COA Circular, the shares
could be sold at a price of at least Sixty Pesos (P60.00) per share.

Respondents submit that the sale of subject shares is exempt from the
tedious public bidding requirement of COA. Theyadd that the bidding-exempt
status of the shares did not prevent the SSS from proceeding with the bidding as
contemplated in the assailed resolution as a measure to validate the adequacy of
the unit price BDO Capital offered therefor and to possibly obtain a higher price
than its definitive offer of P43.50 per share.
Pending consideration of the petition, supervening events and
corporate movements transpired that radically altered the factual
complexion of the case:
1. BDO made public its intent to merge with EPCIB.
2. GSIS publicly announced receiving from an undisclosed entity an
offer to buy its stake in EPCIB.
3. SM Investments Corporation, an affiliate of BDO and BDO
Capitalcommenceda mandatory tender offer covering the purchase
of the entire outstanding capital stock of EPCIB at P92.00 per share.
The SC then issued a Resolution requiring the parties to confirm news
reports that price of subject shares has been agreed upon at P92; and if so, to
manifest whether this case has become moot.

ISSUE:
Whether the case has become moot and academic and thus rebus sic stantibus
will apply.

RULING:
YES.
It appears that BDO, or BDO-EPCI, Inc., had since issued BDO common
shares to respondent SSS corresponding to the number of its former EPCIB
shareholdings under the ratio and exchange procedure prescribed in the Plan of
Merger. In net effect, SSS, once the owner of a block of EPCIB shares, is now a
large stockholder of BDO-EPCI, Inc.
The supervening BDO-EPCIB merger has so effected changes in the
circumstances of SSS and BDO/BDO Capital as to render the fulfillment of any of
the obligations that each may have agreed to undertake under either the Letter-
Agreement, the SPA or the Swiss Challenge packagelegally impossible. When the
service has become so difficult as to be manifestly beyond the contemplation of
the parties, total or partial release from a prestation and from the counter-
prestation is allowed.
Under the theory of rebus sic stantibus,the parties stipulate in the light of
certain prevailing conditions, and once these conditions cease to exist, the contract
also ceases to exist. Upon the facts obtaining in this case, it is abundantly
clear that the conditions in which SSS and BDO Capital and/or BDO
executed the Letter-Agreement upon which the pricing component
at P43.50 per share of the Invitation to Bid was predicated, have ceased
to exist. Accordingly, the implementation of the Letter-Agreement or of the
challenged resolution cannot plausibly push through.

So vs FoodFest, G.R. 183268, April 7, 2010

CARPIO MORALES, J.

The parties to the contract must be presumed to have assumed the risks of
unfavorable developments. It is, therefore, only in absolutely exceptional changes
of circumstances that equity demands assistance for the debtor.

Facts:

Food Fest Land Inc. (Food Fest) entered into a Contract of Lease with Daniel T.
So (So) over a commercial space in San Antonio Village, Makati City for a period
of three years on which Food Fest intended to operate a Kentucky Fried Chicken
carry out branch. The parties entered into a preliminary agreement, the pertinent
portion of which stated:

The lease shall not become binding upon us unless and until the government
agencies concerned shall authorize, permit or license us to open and maintain our
business at the proposed Lease Premise. In such case, the agreement may be
canceled and all rights and obligations hereunder shall cease.

While Food Fest was able to secure the necessary licenses and permits for the
first year(1999), it failed to commence business operations. For the year 2000,
Food Fest’s application for renewal of barangay business clearance was held in
abeyance. Food Fest communicated its intent to terminate the lease contract to
So who, however, did not accede and instead offered to help Food Fest secure
authorization from the barangay. In August 2000, Food Fest, for the second time,
purportedly informed So of its intent to terminate the lease, and it in fact stopped
paying rent. So reiterated his offer to help it secure clearance from the barangay.
Food Fest demurred to the offer. So demanded payment of rentals from Food Fest
from September 2000 to March 2001. Food Fest denied any liability, however, and
started to remove its fixtures and equipment from the premises. On April 2, 2001,
So sent Food Fest a Final Notice of Termination with demand to pay and to vacate

On April 26, 2001, So filed a complaint for ejectment and damages against Food
Fest before the (MeTC) ofMakatiCity.

Ruling of the Court: MeTC rendered judgment in favor of So.

On appeal, the Regional Trial Court (RTC) reversed the MeTC

Decision.

On petition for review, the Court of Appeals declared that Food Fest’s
obligation to pay rent was not extinguished upon its failure to secure
permits to operate.

Issue: Whether or not Food Fest’s obligation to pay was extinguished due to its
failure to secure permits to operate?

Held:

Food Fests invokes the principle of rebus sic stantibus as enunciated in Article 1267
of the Civil Code, which renders the lease contract functus officio, and
consequently release it from responsibility to pay rentals. The Court is not
persuaded. Article 1267 provides:

Article 1267. When the service has become so difficult as to be manifestly beyond
the contemplation of the parties, the obligor may also be released therefrom, in
whole or in part.

This article, which enunciates the doctrine of unforeseen events, is not, however,
an absolute application of the principle of rebus sic stantibus, which would
endanger the security of contractual relations. The parties to the contract must be
presumed to have assumed the risks of unfavorable developments. It is, therefore,
only in absolutely exceptional changes of circumstances that equity demands
assistance for the debtor.

Food Fest claims that its failure to secure the necessary business permits and
licenses rendered the impossibility and non-materialization of its purpose in
entering into the contract of lease, in support of which it cites the earlier-quoted
portion of the preliminary agreement of the parties. It is clear that the condition
set forth in the preliminary agreement pertains to the initial application of Food
Fest for the permits, licenses and authority to operate. It should not be construed
to apply to Food Fest’s subsequent applications.
The cause or essential purpose in a contract of lease is the use or enjoyment of a
thing. A party’s motive or particular purpose in entering into a contract does not
affect the validity or existence of the contract; an exception is when the realization
of such motive or particular purpose has been made a condition upon which the
contract is made to depend. The exception does not apply here.

Food Fest was able to secure the permits, licenses and authority to operate when
the lease contract was executed. Its failure to renew these permits, licenses and
authority for the succeeding year, does not, however, suffice to declare the lease
functus officio, nor can it be construed as an unforeseen event to warrant the
application of Article 1267.

Contracts, once perfected, are binding between the contracting parties.

Obligations arising therefrom have the force of law and should be complied with
in good faith. Food Fest cannot renege from the obligations it has freely assumed
when it signed the lease contract.
Comglasco Corporation v. Santos Car Check Center
GR No. 202989, 25 March 2015

Rebus Sic Stantibus - agreement is valid only if the same conditions prevailing at
time of contracting continue to exist at the time of performance.
Payment of lease rentals does not involve a prestation “to do” envisaged in
Articles 1266 and 1267 which has been
rendered legally or physically impossible without the fault of the obligor-
lessor. Article 1267 speaks of a prestation involving service which has been
rendered so difficult by unforeseen subsequent events as to be manifestly beyond
the contemplation of the parties.

FACTS:

On August 16, 2000, respondent Santos Car Check Center Corporation

(Santos), owner of a showroom located at 75 Delgado Street, in Iloilo City, leased
out the said space to petitioner Comglasco Corporation (Comglasco), an entity
engaged in the sale, replacement and repair of automobile windshields, for a
period of five years at a monthly rental of P60,000.00 for the first year, P66,000.00
on the second year, and P72,600.00 on the third through fifth years.
On October 4, 2001, Comglasco advised Santos through a letter that it was
pre- terminating their lease contract effective December 1, 2001. Santos refused
to accede to the pre-termination, reminding Comglasco that their contract was for
five years. On January 15, 2002, Comglasco vacated the leased premises and
stopped paying any further rentals. Santos sent several demand letters, which
Comglasco completely ignored. On September 15, 2003, Santos sent its final
demand letter, which Comglasco again ignored. On October 20, 2003, Santos filed
suit for breach of contract.

Petitioner’s Argument:
 Comglasco invoked Paragraph 15 of the parties' lease
contractwhich permits pre-termination with cause in the first three years and
without cause after the third year. Citing business reverses which it ascribed to
the 1997 Asian financial crisis, Comglasco insists that under Article 1267 of the
Civil Code it is exempted from its obligation under the contract, because its
business setback is the "cause" contemplated in their lease which authorized it to
pre-terminate the same.

ISSUE: Whether the principle of rebus sic stantibus may properly be invoked?

RULING: NO.

Relying on Article 1267 of the Civil Code to justify its decision to pre-
terminate its lease with Santos, Comglasco invokes the 1997 Asian currency crisis
as causing it much difficulty in meeting its obligations. But in PNCC, the Court
held that the payment of lease rentals does not involve a prestation “to
do” envisaged in Articles 1266 and 1267 which has been rendered
legally or physically impossible without the fault of the obligor-
lessor. Article 1267 speaks of a prestation involving service which has
been rendered so difficult by unforeseen subsequent events as to be
manifestly beyond the contemplation of the parties.[emphasis supplied] To
be sure, the Asian currency crisis befell the region from July 1997 and for sometime
thereafter, but Comglasco cannot be permitted to blame its difficulties on the said
regional economic phenomenon because it entered into the subject lease only on
August 16, 2000, more than three years after it began, and by then Comglasco
had known what business risks it assumed when it opened a new shop in Iloilo
City.

This situation is no different from the Court’s finding in PNCC wherein PNCC
cited the assassination of Senator Benigno Aquino Jr. (Senator Aquino) on August
21, 1983 and the ensuing national political and economic crises as putting it in
such a difficult business climate that it should be deemed released from its lease
contract. The Court held that the political upheavals, turmoils, almost daily mass
demonstrations, unprecedented inflation, and peace and order deterioration which
followed Senator Aquino’s death were a matter of judicial notice, yet despite this
business climate, PNCC knowingly entered into a lease with therein respondents
on November 18, 1985, doing so with open eyes of the deteriorating conditions of
the country. The Court rules now, as in PNCC, that there are no “absolutely
exceptional changes of circumstances that equity demands assistance for the
debtor.”
TAGAYTAY REALTY CO., INC.,vs.ARTURO G. GACUTAN,

G.R. No. 160033, BERSAMIN, J.

For Article 1267 to apply, the following conditions should concur, namely: (a) the
event or change in circumstances could not have been foreseen at the time of the
execution of the contract; (b) it makes the performance of the contract extremely
difficult but not impossible; (c) it must not be due to the act of any of the parties;
and (d) the contract is for a future prestation. The requisites did not concur herein
because the difficulty of performance under Article 1267 of the Civil Code should
be such that one party would be placed at a disadvantage by the unforeseen
event.Mere inconvenience, or unexepected impediments, or increased expenses
did not suffice to relieve the debtor from a bad bargain.

Facts:

On September 6, 1976, the respondent entered into a contract to sell with the
petitioner for the purchase on installment of a residential lot with an area of 308
square meters situated in the Foggy Heights Subdivision then being developed by
the petitioner. Earlier, on June 30, 1976, the petitioner executed an express
undertaking in favor of the respondent, as follows:

We hereby undertake to complete the development of the roads, curbs, gutters,

drainage system, water and electrical systems, as well as all the amenities to be
introduced in FOGGY HEIGHTS SUBDIVISION, such as, swimming pool, pelota
court, tennis and/or basketball court, bath house, children’s playground and a
clubhouse within a period of two years from 15 July 1976, on the understanding
that failure on their part to complete such development within the stipulated period
shall give the VENDEE the option to suspend payment of the monthly amortization
on the lot/s he/she purchased until completion of such development without
incurring penalty interest.
It is clearly understood, however, that the period or periods during which we
cannot pursue said development by reason of any act of God, any act or event
constituting force majeure or fortuitous event, or any restriction, regulation, or
prohibition by the government or any of its branches or instrumentalities, shall
suspend the running of said 2-year period and the running thereof shall resume
upon the cessation of the cause of the stoppage or suspension of said
development.

In his letter dated November 12, 1979,7 the respondent notified the petitioner that
he was suspending his amortizations because the amenities had not been
constructed in accordance with the undertaking. Despite receipt of the
respondent’s other communications requesting updates on the progress of the
construction of the amenities so that he could resume his amortization,8 the
petitioner did not reply.

On October 4, 1990, the respondent sued the petitioner for specific performance
in the HLURB, praying that the petitioner be ordered to accept his payment of the
balance of the contract without interest and penalty, and to deliver to him the title
of the property.

In its answer, the petitioner sought to be excused from performing its obligations
under the contract, invoking Article 1267 of the Civil Code as its basis. It contended
that the depreciation of the Philippine Peso since the time of the execution of the
contract, the increase in the cost of labor and construction materials, and the
increase in the value of the lot in question were valid justifications for its release
from the obligation to construct the amenities.

In its position paper, the petitioner stated that it had purposely suspended the
construction of the amenities which would have deteriorated at any rate because
its lot buyers had not constructed their houses in the subdivision.

Issue:

Was the petitioner released from its obligation to construct the amenities in the
Foggy Heights Subdivision?

Ruling:

Petitioner was not relieved from its statutory and contractual obligations to
complete the amenities

The arguments of the petitioner to be released from its obligation to construct the
amenities lack persuasion.

To start with, the law is not on the side of the petitioner.

Under Section 20 of Presidential Decree No. 957, all developers, including the
petitioner, are mandated to complete their subdivision projects, including the
amenities, within one year from the issuance of their licenses.

There is no question that the petitioner did not comply with its legal obligation to
complete the construction of the subdivision project, including the amenities,
within one year from the issuance of the license. Instead, it unilaterally opted to
suspend the construction of the amenities to avoid incurring maintenance
expenses. In so opting, it was not driven by any extremely difficult situation that
would place it at any disadvantage, but by its desire to benefit from cost savings.
Such cost-saving strategy dissuaded the lot buyers from constructing their houses
in the subdivision, and from residing therein.

Considering that the petitioner’s unilateral suspension of the construction of the

amenities was intended to save itself from costs, its plea for relief from its
contractual obligations was properly rejected because it would thereby gain a
position of advantage at the expense of the lot owners like the respondent. Its
invocation of Article 1267 of the Civil Code, which provides that "(w)hen the service
has become so difficult as to be manifestly beyond the contemplation of the
parties, the obligor may also be released therefrom in whole or in part," was
factually unfounded. For Article 1267 to apply, the following conditions should
concur, namely: (a) the event or change in circumstances could not have been
foreseen at the time of the execution of the contract; (b) it makes the performance
of the contract extremely difficult but not impossible; (c) it must not be due to the
act of any of the parties; and (d) the contract is for a future prestation.The
requisites did not concur herein because the difficulty of performance under Article
1267 of the Civil Code should be such that one party would be placed at a
disadvantage by the unforeseen event.Mere inconvenience, or unexepected
impediments, or increased expenses did not suffice to relieve the debtor from a
bad bargain.

And, secondly, the unilateral suspension of the construction had preceded the
worsening of economic conditions in 1983; hence, the latter could not reasonably
justify the petitioner’s plea for release from its statutory and contractual obligations
to its lot buyers, particularly the respondent. Besides, the petitioner had the legal
obligation to complete the amenities within one year from the issuance of the
license (under Section 20 of Presidential Decree No. 957), or within two years from
July 15, 1976 (under the express undertaking of the petitioner). Hence, it should
have complied with its obligation by July 15, 1978 at the latest, long before the
worsening of the economy in 1983.
Iloilo Jar Corporation, Petitioner
Vs Comglasco Corporation Aguila Glass, Respondent
Justice Mendoza GR No. 219509 January 18, 2017

The parties to the contract must be presumed to have assumed the risks
of unfavorable developments. It is therefore only in absolutely exceptional
changes of circumstances that equity demands assistance for the debtor.

Facts :

Iloilo Jar (lessor) and Comglasco (lessee) entered into a 3-year lease contract over
a warehouse. After 1 year, Comglasco requested for the pre-termination of the
lease. Iloilo Jar rejected request on the ground that the pre-termination was not
stipulated in the contract. Comglasco, nonetheless, removed all its stocks and
equipment in the premises. Afterwards, Comglasco no longer paid all rentals
accruing from the date of its withdrawal of equipment. Demand letters were sent
by Iloilo Jar but the same were ignored by Comglasco.

Thus, Iloilo Jar filed a civil action for breach of contract and damages before the
RTC.

Comglasco averred that it was released from its obligation from the lease contract.
The consideration thereof had become so difficult due to the global and regional
economic crisis that had plagued the economy. Though it received the demand
letters, it did not amount to a refusal to pay rent because the lease contract had
been pre-terminated. Comglasco invoked Article 1267 of the Civil Code which
provides that “When the service has become so difficult as to be manifestly beyond
the contemplation of the parties, the obligor may also be released therefrom, in
whole or in part.”

RTC ruled in favor of Iloilo Jar and ordered Comglasco to pay the unpaid rentals.
It held that Article 1267 is inapplicable to lease contract.
CA reversed ruling of RTC.

Issue:
Whether or not Art 1267 applies to the case

Ruling:

Comglasco’s position fails to impress because Art. 1267 applies only to obligations
to do and not to obligations to give.
In the case of Phil Natl Construction Corp v CA, the Court held that the
obligation to pay rentals in a contract of lease falls within the prestation to give.
Art. 1267 which enunciates the doctrine of unforeseen events is not, however, an
absolute application of the principle of rebus sic stantibus, which would endanger
the security of contractual relations. The parties to the contract must be presumed
to have assumed the risks of unfavorable developments. It is therefore only in
absolutely exceptional changes of circumstances that equity demands assistance
for the debtor.
The Court ruled that the economic crisis which may have caused lessee’s
financial problems is not an absolute exceptional change of circumstances that
equity demands assistance for the debtor.
HEIRS OF DR. MARIO S. INTAC and ANGELINA MENDOZA-INTAC
vs.COURT OF APPEALS and SPOUSES MARCELO ROY, JR. and JOSEFINA
MENDOZA-ROY and SPOUSES DOMINADOR LOZADA and MARTINA
MENDOZA-LOZADA
G.R. No. 173211, October 11, 2012, MENDOZA, J.

A contract, as defined in the Civil Code, is a meeting of minds, with respect to

the other, to give something or to render some service.

Facts:

Ireneo Mendoza (Ireneo), married to SalvacionFermin (Salvacion), was the owner

of the subject property located in Pag-asa, Quezon City which he purchased in
1954. Ireneo had two children: respondents Josefina and Martina (respondents),
Salvacion being their stepmother. When he was still alive, Ireneo, also took care
of his niece, Angelina, since she was three years old until she got married.

On October 25, 1977, Ireneo, with the consent of Salvacion, executed a

deed of absolute sale of the property in favor of Angelina and her husband, Mario
(Spouses Intac) to which TCT No. 242655 was issued. Despite the sale, Ireneo
and his family, including the respondents, continued staying in the premises and
paying the realty taxes. After Ireneo died intestate in 1982, his widow and the
respondents remained in the premises. After Salvacion died, respondents still
maintained their residence there.

The controversy arose when respondents sought the cancellation of TCT

No. 242655, claiming that the sale was only simulated and, therefore, void.
Spouses Intac resisted, claiming that it was a valid sale for a consideration.

In their Complaint, respondents alleged that when Ireneo was still alive,
Spouses Intac borrowed the title of the property (then TCT No. 106530) from him
to be used as collateral for a loan from a financing institution; that when Ireneo
informed respondents about the request of Spouses Intac, they objected because
the title would be placed in the names of said spouses and it would then appear
that the couple owned the property; that Ireneo, however, tried to appease them,
telling them not to worry because Angelina would not take advantage of the
situation considering that he took care of her for a very long time; that during his
lifetime, he informed them that the subject property would be equally divided
among them after his death; and that respondents were the ones paying the real
estate taxes over said property.

In their Answer, Spouses Intac countered, among others, that the subject
property had been transferred to them based on a valid deed of absolute sale and
for a valuable consideration; that the action to annul the deed of absolute sale had
already prescribed; that the stay of respondents in the subject premises was only
by tolerance during Ireneo’s lifetime because they were not yet in need of it at
that time; and that despite respondents’ knowledge about the sale that took place
on October 25, 1977, respondents still filed an action against them.

Issue:

WON the Deed of Absolute Sale, dated October 25, 1977, executed by and
between Ireneo Mendoza and SalvacionFermin, as vendors, and Mario Intac and
Angelina Intac, as vendees, involving the subject real property in Pagasa, Quezon
City, was a simulated contract or a valid agreement.

Ruling:

The Deed of Absolute Sale was a simulated contract.

A contract, as defined in the Civil Code, is a meeting of minds, with respect

to the other, to give something or to render some service. Article 1318 provides:
Art. 1318. There is no contract unless the following requisites concur:
(1) Consent of the contracting parties;
(2) Object certain which is the subject matter of the contract;
(3) Cause of the obligation which is established.

Accordingly, for a contract to be valid, it must have three essential

elements: (1) consent of the contracting parties; (2) object certain which is the
subject matter of the contract; and (3) cause of the obligation which is established.

All these elements must be present to constitute a valid contract. Consent

is essential to the existence of a contract; and where it is wanting, the contract is
non-existent. In a contract of sale, its perfection is consummated at the moment
there is a meeting of the minds upon the thing that is the object of the contract
and upon the price. Consent is manifested by the meeting of the offer and the
acceptance of the thing and the cause, which are to constitute the contract.
 In this case, the CA ruled that the deed of sale executed by Ireneo and
Salvacion was absolutely simulated for lack of consideration and cause and,
therefore, void. Articles 1345 and 1346 of the Civil Code provide:

Art. 1345. Simulation of a contract may be absolute or relative. The former

takes place when the parties do not intend to be bound at all; the latter, when the
parties conceal their true agreement.

Art. 1346. An absolutely simulated or fictitious contract is void. A relative

simulation, when it does not prejudice a third person and is not intended for any
purpose contrary to law, morals, good customs, public order or public policy binds
the parties to their real agreement.

If the parties state a false cause in the contract to conceal their real
agreement, the contract is only relatively simulated and the parties are still bound
by their real agreement. Hence, where the essential requisites of a contract are
present and the simulation refers only to the content or terms of the contract, the
agreement is absolutely binding and enforceable between the parties and their
successors in interest.

In absolute simulation, there is a colorable contract but it has no substance

as the parties have no intention to be bound by it. "The main characteristic of an
absolute simulation is that the apparent contract is not really desired or intended
to produce legal effect or in any way alter the juridical situation of the parties." "As
a result, an absolutely simulated or fictitious contract is void, and the parties may
recover from each other what they may have given under the contract."

In the case at bench, the Court is one with the courts below that no valid
sale of the subject property actually took place between the alleged vendors,
Ireneo and Salvacion; and the alleged vendees, Spouses Intac. There was simply
no consideration and no intent to sell it.

Critical is the testimony of Marietto, a witness to the execution of the subject

absolute deed of sale. He testified that Ireneo personally told him that he was
going to execute a document of sale because Spouses Intac needed to borrow the
title to the property and use it as collateral for their loan application. Ireneo and
Salvacion never intended to sell or permanently transfer the full ownership of the
subject property to Spouses Intac. Marietto was characterized by the RTC as a
credible witness.

Aside from their plain denial, petitioners failed to present any concrete
evidence to disprove Marietto’s testimony. They claimed that they actually paid
P150,000.00 for the subject property. They, however, failed to adduce proof, even
by circumstantial evidence, that they did, in fact, pay it. Even for the consideration
of P60,000.00 as stated in the contract, petitioners could not show any tangible
evidence of any payment therefor. Their failure to prove their payment only
strengthened Marietto’s story that there was no payment made because Ireneo
had no intention to sell the subject property.

Thus, the Court agrees with the courts below that the questioned contract
of sale was only for the purpose of lending the title of the property to Spouses
Intac to enable them to secure a loan. Their arrangement was only temporary and
could not give rise to a valid sale. Where there is no consideration, the sale is null
and void ab initio.

More importantly, Ireneo and his family continued to be in physical

possession of the subject property after the sale in 1977 and up to the present.
They even went as far as leasing the same and collecting rentals.

On another aspect, Spouses Intac failed to show that they had been paying
the real estate taxes of the subject property. They admitted that they started
paying the real estate taxes on the property for the years 1996 and 1997 only in
1999. They could only show two (2) tax receipts. Noticeably, petitioners’ tax
payment was just an afterthought.

The primary consideration in determining the true nature of a contract is

the intention of the parties. If the words of a contract appear to contravene the
evident intention of the parties, the latter shall prevail. Such intention is
determined not only from the express terms of their agreement, but also from the
contemporaneous and subsequent acts of the parties. As heretofore shown, the
contemporaneous and subsequent acts of both parties in this case, point to the
fact that the intention of Ireneo was just to lend the title to the Spouses Intac to
enable them to borrow money and put up a hospital in Sta. Cruz, Laguna. Clearly,
the subject contract was absolutely simulated and, therefore, void.

In view of the foregoing, the Court finds it hard to believe the claim of the
Spouses Intac that the stay of Ireneo and his family in the subject premises was
by their mere tolerance as they were not yet in need of it. As earlier pointed out,
no convincing evidence, written or testimonial, was ever presented by petitioners
regarding this matter. It is also of no moment that TCT No. 106530 covering the
subject property was cancelled and a new TCT (TCT No. 242655) was issued in
their names. The Spouses Intac never became the owners of the property despite
its registration in their names. After all, registration does not vest title.
MIAA vs. AVIA

Facts:
MIAA entered into a Contract of Lease with Avia Filipinas Internat’l Corp.
(AFIC), to allow the latter to use a portion and facilities of NAIA for 1 year. 3
months after, MIAA issued Admin Order No. 1 revising the rates of dues and fees,
which in effect increased the monthly rental stipulated. MIAA, however did not
require AFIC to pay the increase rental.
After the expiration of the contract, AFIC kept on paying the original rental
fee without protest on the part of MIAA.
3 years after the expiration of the contract, MIAA demanded the payment
in lump sum of the 37 months of unpaid amount of increase rental. AFIC refused,
so it was denied access to the premises but still continued paying the original rental
fee.
AFIC filed a complaint for damages and injunction in the RTC.
MIAA’s defense:
1. Stipulation under Par. 8.13 that states, “amendments in the lease contract
shall not be valid and binding unless and until made in writing by the
parties” is deemed complied with by the issuance of Admin Order No. 1,
which should be considered automatically incorporated.
2. Because, Par. 2.04 of the contract states “any subsequent amendment to
Admin Order No. 4 which will decrease of increase the monthly rental shall
be deemed incorporated herein.”
RTC and CA ruled in favor of AFIC.

Issue:
WON CA correctly interpreted the provisions of the lease contract pursuant to the
Civil Code?

Held:
Yes.

Article 1306 The contracting parties may establish such stipulations, clauses, terms
and conditions as they may deem convenient, provided they are not contrary to
law, morals, good customs, public order, or public policy. Article 1374 of the Civil
Code clearly provides that the various stipulations of a contract shall be interpreted
together, attributing to the doubtful ones that sense which may result from all of
them taken jointly.

Indeed, in construing a contract, the provisions thereof should not be read in

isolation, having in mind the intention of the parties and the purpose to be
achieved. In other words, the stipulations in a contract and other contract
documents should be interpreted together with the end in view of giving effect to
all.

Paragraphs 8.13 and 2.04 should be read together. It is clear that the intention of
the parties to subject such amendment to the conformity of both MIAA and AFIC.
Here, there was no showing that AFIC gave its consent to the said amendment.

HEIRS OF MANUEL UY EK LIONG VS. CASTILLO GR 176425, JUNE 5, 2013

“Although executed on the same day, it cannot likewise be gainsaid that the
Agreement and the Kasunduan are independent contracts, with parties, objects
and causes different from that of the other. Defined as a meeting of the minds
between two persons whereby one binds himself, with respect to the other to give
something or to render some service, a contract requires the concurrence of the
following requisites: (a) consent of the contracting parties; (b) object certain which
is the subject matter of the contract; and, (c) cause of the obligation which is
established.”

FACTS:
Alongside her husband, Felipe Castillo, respondent Mauricia Meer Castillo
was the owner of four parcels of land situated in SilanganMayao, Lucena City
registered under their names.With the death of Felipe, a deed of extrajudicial
partition over his estate was executed by his heirs.
Utilized as security for the payment of a tractor purchased by Mauricia’s
nephew, Santiago Rivera, from Bormaheco, Inc., it appears, however, that the
subject properties were subsequently sold at a public auction where Insurance
Corporation of the Philippines (ICP) tendered the highest bid, who later sold said
parcels in favor of Philippine Machinery Parts Manufacturing Co., Inc. (PMPMCI)
which, in turn, caused the same to be titled in its name.
On 29 September 1976, respondents and Buenaflor instituted Civil Case No.
8085 before the then Court of First Instance of Quezon, for the purpose of seeking
the annulment of the transactions and/or proceedings involving the subject
parcels, as well as the TCTs procured by PMPMCI.
Encountering financial difficulties in the prosecution, respondents and
Buenaflor entered into an Agreement whereby respondents entered into an
agreement whereby in exchange for the legal services of Atty. Zepeda and the
financial assistance of Manuel EyUkLiong, in the event of a favorable decision in
the civil case, Atty Zepeda and Manuel would be entitled to 40% of the realties
and/or monetary benefits which may be adjudicated in favor of the respondents.
Respondents, on the same day entered into a KASUNDUAN, agreeing to sell
the remaining 60% share in the land in favor of Manuel for the sum of 180k.
Manuel would pay a 1K down payment upon execution of the Kasunduan. They
agreed that any party violating the Kasunduanwould pay the aggrieved party a
penalty fixed in the sum of P50K, together with the attorney’s fees and litigation
expenses incurred should a case be subsequently filed in court.
The respondents won in the civil case. The land was divided in accordance
with the Agreement but the respondents refused to comply with the KASUNDUAN,
despite Manuel’s offer to pay the remaining 179K balance, claiming that the same
was void ab initio for being violativeviolative of Art 1491 of the NCC and the Canons
of Professional Responsibility.Article 1491 prohibits lawyers from acquiring by
purchase or assignment the property /rights involved in the litigation in which they
intervene by virtue of their profession. Manuel instituted an action for Specific
Performance and Damages against respondents.
ISSUE:
Whether theKasunduan should be given effect

HELD:

The Kasunduan is valid. When the terms of the contract are clear and leave
no doubt as to the intention of the parties, the literal meaning of its stipulation
should govern.

Although executed on the same day, it cannot likewise be gainsaid that the
Agreement and the Kasunduan are independent contracts, with parties, objects
and causes different from that of the other. Defined as a meeting of the minds
between two persons whereby one binds himself, with respect to the other to give
something or to render some service, a contract requires the concurrence of the
following requisites: (a) consent of the contracting parties; (b) object certain which
is the subject matter of the contract; and, (c) cause of the obligation which is
established. Executed in exchange for the legal services of Atty. Zepeda and the
financial assistance to be extended by Manuel, the Agreement concerned
respondents’ transfer of 40% of the avails of the suit, in the event of a favorable
judgment in Civil Case No. 8085. While concededly subject to the same suspensive
condition, the Kasunduan was, in contrast, concluded by respondents with Manuel
alone, for the purpose of selling in favor of the latter 60% of their share in the
subject parcels for the agreed price of ₱180,000.00. Given these clear distinctions,
petitioners correctly argue that the CA reversibly erred in not determining the
validity of the Kasunduan independent from that of the Agreement.

Viewed in the light of the autonomous nature of contracts enunciated

under Article 1306of the Civil Code, on the other hand, we find that the
Kasunduan was correctly found by the RTC to be a valid and binding contract
between the parties. Already partially executed with respondents’ receipt of
₱1,000.00 from Manuel upon the execution thereof, the Kasunduan simply
concerned the sale of the former’s 60% share in the subject parcel, less the
1,750-square meter portion to be retained, for the agreed consideration of
₱180,000.00. As a notarized document that carries the evidentiary weight
conferred upon it with respect to its due execution, the Kasunduan was shown to
have been signed by respondents with full knowledge of its contents, as may be
gleaned from the testimonies elicited from Philip and Leovina.

Although Philip had repeatedly claimed that respondents had been forced
to sign the Agreement and the Kasunduan, his testimony does not show such
vitiation of consent as would warrant the avoidance of the contract. He simply
meant that respondents felt constrained to accede to the stipulations insisted
upon by Atty. Zepeda and Manuel who were not otherwise willing to push
through with said contracts.

The Kasunduancontained a penal clause which provides that a party who

violates any of its provisions shall be liable to pay the aggrieved party a penalty
fixed at P50K, together with the attorney’s fees and litigation expenses incurred
by the latter should judicial resolution of the matter becomes necessary.The
obligor would then be bound to pay the stipulated indemnity without the necessity
of proof of the existence and the measure of damages caused by the breach. The
penalty clause generally substitutes the indemnity for damages and the payment
of interests in case of noncompliance.The rule is settled that a penal clause is not
limited to actual and compensatory damages.

R.S. TOMAS, INC. v. RIZAL CEMENT COMPANY, INC.

G.R. No. 173155, March 21, 2012
 Breach of contract is defined as the failure without legal reason to comply with
the terms of a contract. It is also defined as the failure, without legal excuse, to
perform any promise which forms the whole or part of the contract.

FACTS:

On December 28, 1990, Rizal (respondent) and R.S. Tomas (petitioner) entered
into a Contractfor the supply of labor, materials, and technical supervision of the
following projects:

1. J.O. #P-90-212 – Wiring and installation of primary and secondary lines

system.

2. J.O. #P-90-213 – Supply and installation of primary protection and

disconnecting switch.

3. J.O. #P-90-214 – Rewinding and conversion of one (1) unit 3125 KVA,
34.5 KV/2.4 KV, 3ø Transformer to 4000 KVA, 34.5 KV/480V, 3ø Delta
Primary, Wye with neutral secondary.6

R.S. Tomas agreed to perform the job orderswithin 120 days from the effectivity
of the contract. While Rizal Cement agreed to pay ₱2,944,000.00 for the job
orders. R.S. Tomas would be liable for liquidated damages of ₱29,440.00 per day
of delay in the completion of the projects which shall be limited to 10% of the
project cost.It obtained from Times Surety & Insurance Co. Inc. (Times Insurance)
a performance bondequivalent to 50% of the contract price or ₱1,458,618.18.
Pursuant to the terms of the contract, Rizal made an initial payment of
₱1,458,618.18 on January 8, 1991.

In a letterdated March 9, 1991, R.S. Tomas requested for an extension of 75 days

to complete the projects because of the need to import some of the materials
needed. It also asked for a price adjustment of ₱255,000.00 to cover the higher
cost of materials. On March 27, 1991, it requested for another 75 days extension
for the completion of the transformer portion of the projects for failure of its
supplier to deliver the materials.

On June 14, 1991, R.S. Tomas manifested its desire to complete the project as
soon as possible to prevent further losses and maintain goodwill between the
companies. It requested for Rizal’s assistance by facilitating the acquisition of
materials and supplies needed to complete J.O. #P-90-212 and J.O. #P-90-213 by
directly paying the suppliers. It further sought that it be allowed to back out from
J.O. #P-90-214 covering the rewinding and conversion of the damaged
transformer.
In response, Rizal, through counsel, manifested its observation that petitioner’s
financial status showed that it could no longer complete the projects. That it was
already in default failing to complete the projects within 120 days. Rizal terminated
the contract and demanded for the refund of the amount already paid. Rizal sent
another demand letter to Times Insurance for the payment of ₱1,472,000.00
performance bond.

On November 14, 1991, Rizal entered into two contracts with Geostar Philippines,
Inc. (Geostar) for the completion of the projects commenced but not completed
by petitioner for ₱3,435,000.00.

On December 14, 1991, R.S. Tomas reiterated its desire to complete J.O. #P-90-
212 and J.O. #P-90-213 and to exclude J.O. #P-90-214,but the same was denied
by Rizal. It pointed out that amicable settlement is impossible. Hence, the
Complaint for Sum of Money.

ISSUES:

1. Whether or not respondent was guilty of fraud or misrepresentation as to

the actual condition of the transformer subject of the contract
2. Whether or not there was breach of contract.
RULING:

1.R. S. Tomas tried to exempt itself from the consequences of its breach by passing
the fault to Rizal. That its failure to complete the project was due to the
misrepresentation of the Rizal. That more time and money were needed, because
the condition of the subject transformer was worse than the representations of
respondent.

Records show that R.S. Tomas asked for price adjustment and extension of time
to complete the projects in itsletters dated March 9, 1991 and March 27, 1991. But
nowhere in said letters did it claim that it could not finish the projects, particularly
the conversion of the transformer unit because the defects were worse than the
representation of respondent. In other words, there was no allegation of fraud,
bad faith, concealment or misrepresentation on the part of respondent as to the
true condition of the subject transformer.

It was only in its June 14, 1991 letter when it raised its observations that the
subject transformer needed more repairs than what it knew during the
bidding. More importantly, it admitted that it made a judgment error when it
quoted for only ₱440,770.00 for the contract relating to J.O. #P-90-214 based on
limited information.R.S.Tomas allegations that the transformer unit was severely
damaged and was beyond repair was not substantiated with any other evidence.
R.S. Tomas could have presented an independent expert witness whose opinion
may corroborate its stance that the transformer unit was indeed incapable of being
restored.

Assuming that the subject transformer was indeed in a damaged condition even
before the bidding, petitioner still failed to prove that respondent was guilty of bad
faith, fraud, deceit or misrepresentation.

Bad faith does not simply connote bad judgment or negligence; it imports a
dishonest purpose or some moral obliquity and conscious doing of a wrong, a
breach of a known duty through some motive or interest or ill will that partakes of
the nature of fraud. Fraud has been defined to include an inducement through
insidious machination. Insidious machination refers to a deceitful scheme or plot
with an evil or devious purpose. Deceit exists where the party, with intent to
deceive, conceals or omits to state material facts and, by reason of such omission
or concealment, the other party was induced to give consent that would not
otherwise have been given. These are allegations of fact that demand clear and
convincing proof. They are serious accusations that can be so conveniently and
casually invoked, and that is why they are never presumed. In this case, the
evidence presented is insufficient to prove that respondent acted in bad faith or
fraudulently in dealing with petitioner.

R.S. Tomas in fact admitted that its representatives were given the opportunity to
inspect the subject transformer before it offered its bid. If indeed the transformer
was completely sealed, it should have demanded that the same be opened if it
found it necessary before it offered its bid. As contractor, petitioner had been
remiss in its obligation to obtain as much information as possible on the actual
condition of the subject transformer or at least it should have provided a
qualification in its bid so as to make clear its right to claim contract price and time
adjustment. Considering that petitioner is a company engaged in the electrical
business and the contract it had entered into involved a sizable amount of money,
its failure to conduct an inspection of the subject transformer is inexcusable.

2.The bid submitted by R.S. Tomas may have been sufficient to be declared the
winner but it failed to anticipate all expenses necessary to complete the projects.
When it incurred expenses it failed to foresee, it began requesting for price
adjustment to cover the cost of high voltage bushing and difference in cost of
copper sheet and rectangular wire.However, the scope of work presented by
respondent specifically stated that the wires to be used shall be pure copper and
that there was a need to supply new bushings for the complete rewinding and
conversion of the Transformer.In other words, it was aware that there was a need
for complete replacement of windings to copper and of secondary bushings. It is,
therefore, improper to ask for additional amount to answer for the expenses that
were already part and parcel of the undertaking it was bound to perform. The
contract it entered into may have turned out to be an unwise investment, but there
is no one to blame but R.S. Tomas for plunging into an undertaking without fully
studying it in its entirety.

R.S. Tomas repeatedly asked for extension because of importation of materials.It

also repeatedly requested that Rizal make a direct payment to the suppliers
notwithstanding the fact that it contracted with R.S. Tomas for the supply of labor,
materials, and technical supervision. It is, therefore, expected that the latter would
be responsible in paying its suppliers because Rizal is not privy to their (petitioner
and its suppliers) contract. This is especially true in this case since respondent had
already made advance payments to petitioner. It appears, therefore, that in
offering its bid, the source and cost of materials were not seriously taken into
consideration. It appears, further, that R.S. Tomas had a hard time in fulfilling its
obligations that is why it asked for financial assistance from Rizal. This is contrary
from its representation that it was capable, competent, and duly licensed to
handle the projects.

In view of the foregoing disquisitions, there was not only delay but non-completion
of the projects undertaken by petitioner without justifiable ground. Undoubtedly,
petitioner is guilty of breach of contract. Breach of contract is defined as the failure
without legal reason to comply with the terms of a contract. It is also defined as
the failure, without legal excuse, to perform any promise which forms the whole
or part of the contract.In the present case, petitioner did not complete the projects.
This gives respondent the right to terminate the contract by serving petitioner a
written notice. The contract specifically stated that it may be terminated for such
cause.

Considering that petitioner was already in delay and in breach of contract, it is

liable for damages that are the natural and probable consequences of its breach
of obligation.Since advanced payments had been made by respondent, petitioner
is bound to return the excess vis-à-vis its work accomplishments. In order to finish
the projects, respondent had to contract the services of another contractor.

PHILIPPINE NATIONAL BANK, Petitioner, vs.SPOUSES ENRIQUE

MANALO & ROSALINDA JACINTO, ARNOLD J. MANALO, ARNEL J.
MANALO, and ARMA J. MANALO, Respondents.

FACTS:

Respondent Spouses Enrique Manalo and Rosalinda Jacinto (Spouses Manalo)

applied for an All-Purpose Credit Facility in the amount of ₱1,000,000.00 with
Philippine National Bank (PNB) to finance the construction of their house. After
PNB granted their application, they executed a Real Estate Mortgage on
November 3, 1993 in favor of PNB over their property covered by Transfer
Certificate of Title No. S- 23191 as security for the loan.The credit facility was
renewed and increased several times over the years. On September 20, 1996,
the credit facility was again renewed for ₱7,000,000.00. As a consequence, the
parties executed a Supplement to and Amendment of Existing Real Estate
Mortgage whereby the property covered by TCT No. 171859 was added as
security for the loan.

The additional security was registered in the names of respondents Arnold,

Arnel, Anthony, and Arma, all surnamed Manalo, who were their children.

It was agreed upon that the Spouses Manalo would make monthly payments on
the interest. However, PNB claimed that their last recorded payment was made
on December, 1997. Thus, PNB sent a demand letter to them on their overdue
account and required them to settle the account. PNB sent another demand
letter because they failed to heed the first demand.

After the Spouses Manalo still failed to settle their unpaid account despite the
two demand letters, PNB foreclose the mortgage. During the foreclosure sale,
PNB was the highest bidder for ₱15,127,000.00 of the mortgaged properties of
the Spouses Manalo. The sheriff issued to PNB the Certificate of Sale dated
November 13, 2000.

After more than a year after the Certificate of Sale had been issued to PNB, the
Spouses Manalo instituted this action for the nullification of the foreclosure
proceedings and damages. They alleged that they had obtained a loan for
₱1,000,000.00 from a certain Benito Tan upon arrangements made by Antoninus
Yuvienco, then the General Manager of PNB’s Bangkal Branch where they had
transacted; that they had been made to understand and had been assured that
the ₱1,000,000.00 would be used to update their account, and that their loan
would be restructured and converted into a long-term loan;that they had been
surprised to learn, therefore, that had been declared in default of their
obligations, and that the mortgage on their property had been foreclosed and
their property had been sold; and that PNB did not comply with Section 3 of Act
No. 3135, as amended

ISSUE: Whether or not there was mutuality of consentin the imposition of

interest rate on the spouses loan.

RULING: None.
The credit agreement executed succinctly stipulated that the loan would be
subjected to interest at a rate "determined by the Bank to be its prime rate plus
applicable spread, prevailing at the current month."This stipulation was carried
over to or adopted by the subsequent renewals of the credit agreement. PNB
thereby arrogated unto itself the sole prerogative to determine and increase the
interest rates imposed on the Spouses Manalo. Such a unilateral determination of
the interest rates contravened the principle of mutuality of contracts embodied in
Article 1308 of the Civil Code.

The Court has declared that a contract where there is no mutuality between the
parties partakes of the nature of a contract of adhesion, and any obscurity will
be construed against the party who prepared the contract, the latter being
presumed the stronger party to the agreement, and who caused the
obscurity. PNB should then suffer the consequences of its failure to specifically
indicate the rates of interest in the credit agreement

SILOS vs. PNB | G.R. No. 181045 | July 2, 2014 | Del Castillo, J.

Any modification in the contract, such as the interest rates, must be made
with the consent of the contracting parties. The minds of all the parties must meet
as to the proposed modification, especially when it affects an important aspect of
the agreement. In the case of loan agreements, the rate of interest is a principal
condition, if not the most important component. Thus, any modification thereof
must be mutually agreed upon; otherwise, it has no binding effect.

FACTS:

Spouses Eduardo and Lydia Silos (petitioners) obtained a credit line from Philippine
National Bank (PNB) secured by a Real Estate Mortgage over a parcel of land.
Pursuant to this, the Spouses issued promissory notes in favor of the bank and
signed a Credit Agreement. This Credit Agreement contained a stipulation that:

“The Borrower agrees that the Bank may modify the interest rate
in the Loan depending on whatever policy the Bank may adopt in the
future, including without limitation, the shifting from the floating interest
rate system to the fixed interest rate system, or vice versa. Where the Bank
has imposed on the Loan interest at a rate per annum, which is equal to
the Bank’s spread over the current floating interest rate, the Borrower
hereby agrees that the Bank may, without need of notice to the
Borrower, increase or decrease its spread over the floating
interest rate at any time depending on whatever policy it may adopt in
the future.(Emphases supplied)

ThePromissory Notes, on the other hand, contained a stipulation granting PNB

the right to increase or reduce interest rates "within the limits allowed
by law or by the Monetary Board."

The Real Estate Mortgage agreement provided the same right to increase or
reduce interest rates "at any time depending on whatever policy PNB
may adopt in the future."

Respondent regularly renewed the line and petitioners made good on the
promissory notes, religiously paying the interests without objection or fail. But in
1997, petitioners faltered when the interest rates soared due to the Asian financial
crisis. Petitioners’ sole outstanding promissory note for ₱2.5 millionbecame past
due, and despite repeated demands, petitioners failed to make good on the note.

Petitioners’ Arguments

Petitioners insist that the interest rate provision in the Credit Agreement should be
declared null and void, for they relegated to PNB the sole power to fix interest
rates based on arbitrary criteria or factors such as bank policy, profitability, cost
of money, foreign currency values, and bank administrative costs; spaces for
interest rates in the two Credit Agreements and the promissory notes were left
blank for PNB to unilaterally fill, and their consent or agreement to the interest
rates imposed thereafter was not obtained; the interest rate, which consists of the
prime rate plus the bank spread, is determined not by agreement of the parties
but by PNB’s Treasury Department in Manila. Petitioners conclude that by this
method of fixing the interest rates, the principle of mutuality of contracts is
violated, and public policy as well as Circular 905 of the then Central Bank had
been breached.

Respondent’s Arguments

For its part, respondent disputes petitioners’ claim that interest rates were
unilaterally fixed by it. It argues that because the Credit Agreement and promissory
notes contained both an escalation clause and a de-escalation clause, it may not
be said that the bank violated the principle of mutuality. Besides, the increase or
decrease in interest rates have been mutually agreed upon by the parties, as
shown by petitioners’ continuous payment without protest.

As for petitioners’ claim that interest rates imposed by it are null and void for the
reasons that PNB fixed interest rates on the basis of arbitrary policies and
standards left to its choosing, it counters that interest rates were fixed taking into
consideration increases or decreases as provided by law or by the Monetary Board,
the bank’s overall costs of funds, and upon agreement of the parties.

ISSUE:

Whether or not the interest rate provision in the Credit Agreement is valid.

RULING:

NO.

It is basic that there can be no contract in the true sense in the absence of
the element of agreement, or of mutual assent of the parties. If this assent is
wanting on the part of the one who contracts, his act has no more efficacy than if
it had been done under duress or by a person of unsound mind.Similarly, contract
changes must be made with the consent of the contracting parties. The minds of
all the parties must meet as to the proposed modification, especially when it affects
an important aspect of the agreement. In the case of loan contracts, it cannot be
gainsaid that the rate of interest is always a vital component, for it can make or
break a capital venture. Thus, any change must be mutually agreed upon,
otherwise, it is bereft of any binding effect.
 The court cannot countenance petitioner bank’s posturing that the
escalation clause at bench gives it unbridled right to unilaterally upwardly adjust
the interest on private respondents’ loan. That would completely take away from
private respondents the right to assent to an important modification in their
agreement, and would negate the element of mutuality in contracts. In Philippine
National Bank v. Court of Appeals, et al., (1991) the court held —

x xx The unilateral action of the PNB in increasing the interest rate on the
private respondent’s loan violated the mutuality of contracts ordained in
Article 1308 of the Civil Code:

Art. 1308. The contract must bind both contracting parties; its validity
or compliance cannot be left to the will of one of them.

In order that obligations arising from contracts may have the force of law
between the parties, there must be mutuality between the parties based on
their essential equality. A contract containing a condition which
makes its fulfillment dependent exclusively upon the uncontrolled
will of one of the contracting parties, is void . . . . Hence, even
assuming that the . . . loan agreement between the PNB and the private
respondent gave the PNB a license (although in fact there was none) to
increase the interest rate at will during the term of the loan, that license
would have been null and void for being violative of the principle of
mutuality essential in contracts. It would have invested the loan agreement
with the character of a contract of adhesion, where the parties do not
bargain on equal footing, the weaker party’s (the debtor) participation being
reduced to the alternative "to take it or leave it" . . . . Such a contract is a
veritable trap for the weaker party whom the courts of justice must protect
against abuse and imposition. (Emphases supplied)

In the present case, these stipulations must be once more invalidated. Here,
the lack of consent by the petitioners has been made obvious by the fact that they
signed the promissory notes in blank for the respondent to fill. The Court finds
credible the testimony of Lydia in this respect. Respondent failed to discredit her;
in fact, its witness PNB Kalibo Branch Manager Aspa admitted that interest rates
were fixed solely by its Treasury Department in Manila, which were then simply
communicated to all PNB branches for implementation. If this were the case, then
this would explain why petitioners had to sign the promissory notes in blank, since
the imposable interest rates have yet to be determined and fixed by respondent’s
Treasury Department in Manila.

Further, the stipulations in question no longer provide that the parties shall
agree upon the interest rate to be fixed; -instead, they are worded in such a way
that the borrower shall agree to whatever interest rate respondent fixes.
 Any modification in the contract, such as the interest rates, must be made
with the consent of the contracting parties. The minds of all the parties must meet
as to the proposed modification, especially when it affects an important aspect of
the agreement. In the case of loan agreements, the rate of interest is a principal
condition, if not the most important component. Thus, any modification thereof
must be mutually agreed upon; otherwise, it has no binding effect.

PHILIPPINE NATIONAL BANK v. TERESITA TAN DEE, ANTIPOLO

PROPERTIES, INC., (now PRIME EAST PROPERTIES, INC.) and AFP-
RSBS, INC.
G.R. No. 182128 February 19, 2014 REYES, J.:

Doctrine:Dacion en pago or dation in payment is the delivery and transmission of

ownership of a thing by the debtor to the creditor as an accepted equivalent of
the performance of the obligation. It is a mode of extinguishing an existing
obligation and partakes the nature of sale as the creditor is really buying the thing
or property of the debtor, the payment for which is to be charged against the
debtor’s debt.Dation in payment extinguishes the obligation to the extent of the
value of the thing delivered, either as agreed upon by the parties or as may be
proved, unless the parties by agreement – express or implied, or by their silence
– consider the thing as equivalent to the obligation, in which case the obligation is
totally extinguished.

Facts:

July 1994, respondent Teresita Tan Dee (Dee) bought from respondent Prime East
Properties Inc.(PEPI) a residential lot located in Binangonan, Rizal, with an area of
204 square meters, on an installment basis. Subsequently, PEPI assigned its rights
over a 213,093-sq m property on August 1996 to respondent Armed Forces of the
Philippines-Retirement and Separation Benefits System, Inc. (AFP-RSBS), which
included the property purchased by Dee. Thereafter, PEPI obtained a
₱205,000,000.00 loan from petitioner Philippine National Bank (petitioner),
secured by a mortgage over several properties, including Dee’s property. The
mortgage was cleared by the Housing and Land Use Regulatory Board (HLURB)
on September 18, 1996. After Dee’s full payment of the purchase price, a deed of
sale was executed by respondents PEPI and AFP-RSBS on July 1998 in Dee’s favor.
Consequently, Dee sought from the petitioner the delivery of the owner’s duplicate
title over the property, but to no avail. Thus, she filed with the HLURB a complaint
for specific performance to compel delivery of title by the petitioner, PEPI and AFP-
RSBS, among others. In its Decision dated May 21, 2003, the HLURB ruled in favor
of Dee, directing the petitioner to cancel/release the mortgage on Lot 12, Block
21-A, Village East Executive Homes covered by TCT No. 619608, and accordingly,
surrender/release the title thereof to Dee.

On March 15, 2004, HLURB Board of Commissioners affirmed the Decision. The
Office of the President affirmed the Board of Commissioners’ decision, August 4,
2004. August 13, 2007, CA affirmed the decision of the Office of the President.
Motion for reconsideration was denied. Hence this petition.

PEPI brought to the attention of the Court the subsequent execution of a

Memorandum of Agreement by PEPI and the petitioner. Said agreement was
executed pursuant to an Order by the RTC of Makati, in a petition for Rehabilitation
under the Interim Rules of Procedure on Corporate Rehabilitation filed by PEPI.
The RTC order approved PEPI’s modified Rehabilitation Plan, which included the
settlement of the latter’s unpaid obligations to its creditors by way of dacion of
real properties. The RTC also incorporated certain measures that were not included
in PEPI’s plan, one of which is that "[t]itles to the lots which have been fully paid
shall be released to the purchasers within 90 days after the dacion to the secured
creditors has been completed." Consequently, the agreement stipulated that as
partial settlement of PEPI’s obligation with the petitioner, the former absolutely
and irrevocably conveys by way of "dacion en pago" the properties listed therein,
which included the lot purchased by Dee. The petitioner also committed to –
[R]elease its mortgage lien on fully paid Mortgaged Properties upon
issuance of the certificates of title over the Dacioned Properties in the name
of the [petitioner]. The request for release of a Mortgaged Property shall
be accompanied with: (i) proof of full payment by the buyer, together with
a certificate of full payment issued by the Borrower x xx. The [petitioner]
hereby undertakes to cause the transfer of the certificates of title over the
Dacioned Properties and the release of the Mortgaged Properties with
reasonable dispatch.

Issue/s: WON the order of CA to release the title to Dee was proper, in lieu of the
dation in payment

Held:
YES.
Dacion en pago or dation in payment is the delivery and transmission of ownership
of a thing by the debtor to the creditor as an accepted equivalent of the
performance of the obligation. It is a mode of extinguishing an existing obligation
and partakes the nature of sale as the creditor is really buying the thing or property
of the debtor, the payment for which is to be charged against the debtor’s
debt.Dation in payment extinguishes the obligation to the extent of the value of
the thing delivered, either as agreed upon by the parties or as may be proved,
unless the parties by agreement – express or implied, or by their silence – consider
the thing as equivalent to the obligation, in which case the obligation is totally
extinguished.

There is nothing on record showing that the Memorandum of Agreement has been
nullified or is the subject of pending litigation; hence, it carries with it the
presumption of validity.Consequently, the execution of the dation in payment
effectively extinguished respondent PEPI’s loan obligation to the petitioner insofar
as it covers the value of the property purchased by Dee. This negates the
petitioner’s claim that PEPI must first redeem the property before it can cancel or
release the mortgage. As it now stands, the petitioner already stepped into the
shoes of PEPI and there is no more reason for the petitioner to refuse the
cancellation or release of the mortgage, for, as stated by the Court in one case, in
accepting the assigned properties as payment of the obligation, "the bank has
assumed the risk that some of the assigned properties are covered by contracts to
sell which must be honored under PD 957."Whatever claims the petitioner has
against PEPI and AFP-RSBS, monetary or otherwise, should not prejudice the
rights and interests of Dee over the property, which she has already fully paid for.

Dispositive Portion: WHEREFORE, the petition for review is DENIED for lack of
merit. The Court of Appeals is AFFIRMED. Petitioner PNB and other respondents
PEPI andAFP-RSBS are hereby ENJOINED to strictly comply with the HLURB
Decision dated May 21, 2003. SO ORDERED.

METROPOLITAN BANK AND TRUST COMPANY/BANK OF THE

PHILIPPINE ISLANDS/GLOBAL BUSINESS BANK, INC. v. WILFRED N.
CHIOK
G.R. Nos. 172652/175302/175394, November 26, 2014,
(Leonardo-De Castro, J.)

The right of rescission under Article 1191 of the Civil Code can only be
exercised in accordance with the principle of relativity of contracts under Article
1131..Metrobank and Global Bank are not parties to the contract to buy foreign
currency between Chiok and Nuguid. Therefore, they are not bound by such
contract and cannot be prejudiced by the failure of Nuguid to comply with the
terms thereof.
Facts:

Chiok usually buys dollars from Nuguid at the exchange rate prevailing on
the date of the sale. Chiok pays Nuguid either in cash or manager’s check, to be
picked up by the latter or deposited in the latter’s bank account. Chiok deposited
two manager’s check (Asian Bank) and one cashier’s check (Metrobank) in
Nuguid’s account with Far East Bank & Trust Company (BPI’s predecessor-in-
interest). Nuguid was supposed to deliver US$1,022,288.50, the dollar equivalent
of the three checks as agreed upon, in the afternoon of the same day. Nuguid,
however, failed to do so, prompting Chiok to request that payment on the three
checks be stopped.

Chiok filed a Complaint for damages with application for ex parte restraining
order and/or preliminary injunction with the Regional Trial Court (RTC) of Quezon
City against the spouses Gonzalo and MarinellaNuguid, and the depositary banks,
Asian Bank and Metrobank. The complaint was later amended to include the prayer
of Chiok to be declared the legal owner of the proceeds of the subject checks and
to be allowed to withdraw the entire proceeds thereof.

In their own Answer, the spouses Nuguid claimed that Gonzalo Nuguid had
delivered much more dollars than what was required for the three checks at the
time of payment. By way of special affirmative defense, the spouses Nuguid also
claims that since the subject checks had already been paid to him, Chiok is no
longer entitled to an injunction (to hold the payment of the subject checks), and
the case has already become moot.

RTC held that Nuguid failed to prove the delivery of dollars to Chiok. The
RTC went on to rule that manager’s checks and cashier’s checks may be the
subject of a Stop Payment Order from the purchaser on the basis of the payee’s
contractual breach.

On May 5, 2006, the Court of Appeals rendered the assailed Decision

affirming the RTC Decision with modifications. The CA held that Article 1191 of the
Civil Code provides a legal basis of the right of purchasers of MCs and CCs to make
a stop payment order on the ground of the failure of the payee to perform his
obligation to the purchaser. The appellate court ruled that such claim was impliedly
incorporated in Chiok’s complaint. The Court of Appeals held that by depositing
the subject checks to the account of Nuguid, Chiok had already performed his
obligation under the contract, and the subsequent failure of Nuguid to comply with
what was incumbent upon him gave rise to an action for rescission pursuant to
Article 1191 of the Civil Code. Article 1385 of the same Code provides that
rescission creates the obligation to return the things which were the object of the
contract, together with their fruits, and the price with its interest. The object of
the contract herein to buy foreign currency is the peso-value of the dollars bought
but in the form of negotiable instruments – Manager’s Check/Cashier’s Check.
Hence, respecting the negotiation thereof, and in order to afford complete relief
to Chiok, there arose the necessity for the issuance of the injunction restraining
the payment of the subject checks with the end in view of the eventual return of
the proceeds to give effect to Article 1385. In other words, the injunctive relief
was necessary in order not to render ineffectual the judgment in the instant case.

Issue:

Whether or not the purchaser of manager’s and cashier’s checks has the right to
have the checks cancelled byfiling an action for rescission of itscontract with the
payee

Held: NO.

The right to rescind is provided by Article 1191 of the Civil Code, which reads:
Art. 1191. The power to rescind obligations is implied in reciprocal ones, in
case one of the obligors should not comply with what is incumbent upon
him.

The injured party may choose between the fulfillment and the rescission of
the obligation, with the payment of damages in either case. He may also
seek rescission, even after he has chosen fulfillment, if the latter should
become impossible.

The court shall decree the rescission claimed, unless there be just cause
authorizing the fixing of a period. This is understood to be without prejudice
to the rights of third persons who have acquired the thing, in accordance
with Articles 1385 and 1388 and the Mortgage Law.

The cause of action supplied by the above article, however, is clearly

predicated upon the reciprocity of the obligations of the injured party and the
guilty party. Reciprocal obligations are those which arise from the same cause,
and in which each party is a debtor and a creditor of the other, such that the
obligation of one is dependent upon the obligation of the other. They are to be
performed simultaneously such that the performance of one is conditioned upon
the simultaneous fulfillment of the other.

When Nuguid failed to deliver the agreed amount to Chiok, the latter had a
cause of action against Nuguid to ask for the rescission of their contract. On the
other hand, Chiok did not have a cause of action against Metrobank and Global
Bank that would allow him to rescind the contracts of sale of the manager’s or
cashier’s checks, which would have resulted in the crediting of the amounts thereof
back to his accounts. Otherwise stated, the right of rescission under Article 1191
of the Civil Code can only be exercised in accordance with the principle of
relativity of contracts under Article 1131 of the same code, which provides:
Art. 1311. Contracts take effect only between the parties, their assigns and
heirs, except in case where the rights and obligations arising from the
contract are not transmissible by their nature, or by stipulation or by
provision of law. xxx.

In several cases, this Court has ruled that under the civil law principle of
relativity of contracts under Article 1131, contracts can only bind the parties
who entered into it, and it cannot favor or prejudice a third person, even if he is
aware of such contract and has acted with knowledge thereof.Metrobank and
Global Bank are not parties to the contract to buy foreign currency between Chiok
and Nuguid. Therefore, they are not bound by such contract and cannot be
prejudiced by the failure of Nuguid to comply with the terms thereof.

Neither could Chiok be validly granted a writ of injunction against Metrobank

and Global Bank to enjoin said banks from honoring the subject manager’s and
cashier’s checks. Chiok could have and should have proceeded directly against
Nuguid to claim damages for breach of contract and to have the very account
where he deposited the subject checks garnished under Section 7(d)46 and
Section 8,47 Rule 57 of the Rules of Court. Instead, Chiok filed an action to enjoin
Metrobank and Global Bank from complying with their primary obligation under
checks in which they are liable as both drawer and drawee.

FORT BONIFACIO DEVELOPMENT CORPORATION vs.VALENTIN L.

FONG
March 25, 2015 G.R. No. 209370PERLAS-BERNABE, J.:

Obligations arising from contracts have the force of law between the contracting
parties and should be complied with in good faith. The same principle on obligatory
force applies by extension to the contracting party’s assignees, in turn, by virtue
of the principle of relativity of contracts. The reason that a contracting party’s
assignees, although seemingly a third party to the transaction, remain bound by
the original party’s transaction under the relativity principle further lies in the
concept of subrogation, which inheres in assignment.

Facts:

On June 5, 2000, FBDC, a domestic corporation engaged in the real estate

development business, entered into a Trade Contract with MS Maxco Company,
Inc. (MS Maxco), then operating under the name "L&M Maxco, Specialist
Engineering Construction," for the execution of the structural and partial
architectural works of one of its condominium projects in Taguig City, the Bonifacio
Ridge Condominium (Project). Records show that FBDC had the right to withhold
five percent (5%) of the contract price as retention money.
Under the Trade Contract, FBDC had the option to hire other contractors to rectify
any errors committed by MS Maxco by reason of its negligence, act, omission, or
default, as well as to deduct or set-off any amount from the contract price in such
cases. Hence, when MS Maxco incurred delays and failed to comply with the terms
of the Trade Contract, FBDC took over and hired other contractors to complete the
unfinished construction. Unfortunately, corrective work had to likewise be done on
the numerous defects and irregularities caused by MS Maxco, which cost
P11,567,779.12 Pursuant to the Trade Contract, FBDC deducted the said amount
from MS Maxco’s retention money.
The Trade Contract likewise provided that MS Maxco is prohibited from
assigning or transferring any of its rights, obligations, or liabilities under
the said Contract without the written consent of FBDC.
Sometime in April 2005, FBDC received a letter dated April 18, 2005 (April 18,
2005 letter) from the counsel of Fong informing it that MS Maxco had already
assigned its receivables from FBDC to him (Fong) by virtue of a notarized Deed of
Assignment dated February 28, 2005. Under the Deed of Assignment, MS Maxco
assigned the amount of 1,577,115.90 to Fong as payment of the former’s
obligation to the latter, which amount was to be taken from the retention money
with FBDC. In its letter-reply dated October 11, 2005, FBDC acknowledged the five
percent (5%) retention money of MS Maxco, but asserted that the same was not
yet due and demandable and that it was already the subject of garnishment by
MS Maxco’s other creditors.
Despite Fong’s repeated requests, FBDC refused to deliver to Fong the amount
assigned by MS Maxco. Finally, in a letter dated January 31, 2006, FBDC informed
Fong that after the rectification of the defects in the Project, as well as the
garnishment made by MS Maxco’s creditors, nothing was left of its retention money
with FBDC from which Fong’s claims may be satisfied. This prompted Fong, doing
business under the name "VF Industrial Sales" to file the instant civil case, before
the RTC, against MS Maxco or FBDC for the payment of the sum of 1,577,115.90,
with legal interest due, costs of suit, and litigation expenses.

Issue: Whether or not FBDC was liable to pay Fong the amount of 1,577,115.90,
representing a portion of MS Maxco’s retention money.

Ruling:

No. (Pursuant to the Trade Contract, FBDC’s consent must first be

obtained before any assignment could take effect).
Obligations arising from contracts have the force of law between the contracting
parties and should be complied with in good faith. As such, the stipulations in
contracts are binding on them unless the contract is contrary to law, morals, good
customs, public order or public policy.
The same principle on obligatory force applies by extension to the contracting
party’s assignees, in turn, by virtue of the principle of relativity of contracts
which is fleshed out in Article 1311 of the Civil Code, viz.:Art. 1311. Contracts
take effect only between the parties, their assigns and heirs, except in case where
the rights and obligations arising from the contract are not transmissible by their
nature, or by stipulation or by provision of law. The heir is not liable beyond the
value of the property he received from the decedent.
The reason that a contracting party’s assignees, although seemingly a third party
to the transaction, remain bound by the original party’s transaction under the
relativity principle further lies in the concept of subrogation, which inheres in
assignment.
Case law states that when a person assigns his credit to another person, the latter
is deemed subrogated to the rights as well as to the obligations of the former. By
virtue of the Deed of Assignment, the assignee is deemed subrogated to the rights
and obligations of the assignor and is bound by exactly the same conditions as
those which bound the assignor. Accordingly, an assignee cannot acquire greater
rights than those pertaining to the assignor. The general rule is that an assignee
of a non- negotiable chose in action acquires no greater right than what was
possessed by his assignor and simply stands into the shoes of the latter.

Applying the foregoing, the Court finds that MS Maxco,as the Trade Contractor,
cannot assign or transfer any of its rights, obligations, or liabilities under
the Trade Contract without the written consent of FBDC, the Client, in view
of Clause 19.0 on "Assignment and Sub-letting" of the Trade Contract between
FBDC and MS Maxco which explicitly provides that:“The Trade Contractor [Ms
Maxco] shall not, without written consent of the Client [FBDC], assign
or transfer any of his rights, obligations or liabilities under this Contract
x xx.”

Fong, as mere assignee of MS Maxco’s rights under the Trade Contract it had
previously entered with FBDC, i.e., the right to recover any credit owing to any
unutilized retention money, is equally bound by the foregoing provision and
hence, cannot validly enforce the same without FBDC’s consent.
Without any proof showing that FBDC had consented to the assignment,
Fong cannot validly demand from FBDC the delivery of the sum of
1,577,115.90 that was supposedly assigned to him by MS Maxco as a
portion of its retention money with FBDC. The practical efficacy of the
assignment, although valid between Fong and MS Maxco, remains contingent on
FBDC's consent. Without the happening of said condition, only MS Maxco, and not
Fong, can collect on the credit. Note, however, that this finding does not preclude
any recourse that Fong may take against MS Maxco.

JUANA VDA. DE ROJALES, SUBSTITUTED BY HER HEIRS, REPRESENTED

BY CELERINA ROJALES-SEVILLA vs. MARCELINO DIME, SUBSTITUTED
BY HIS HEIRS
G.R. No. 194548, February 10, 2016

FACTS:

Petitioner Juana Vda. de Rojales owned a parcel of land (Lot 4-A) located at Barrio
Remanente, Municipality of Nasugbu, Batangas consisting of 2,064 square
meters.Respondent Marcelino Dime alleged that on May 16, 1999, petitioner
conveyed under a pacto de retro contract Lot 4-A in favor of respondent for and
in consideration of the sum of P2,502,932.10. Petitioner reserved the right to
repurchase the property for the same price within a period of nine (9) months from
March 24, 1999 to December 24, 1999.Despite repeated verbal and formal
demands to exercise her right, petitioner refused to exercise her right to
repurchase the subject property.
In her answer, petitioner denied the execution of the pacto de retro sale in favor
of respondent and alleged that she had not sold the subject property. She claimed
that the document presented by respondent was falsified since the fingerprint
appearing therein was not hers and the signature of the Notary Public Modesto S.
Alix was not his. She also averred that she filed falsification and use of falsified
documents charges against respondent. Sge alleged that she mortgaged the
subject property with the Batangas Savings and Loan Bank for P100,000.00 when
her daughter Violeta Rojales Rufo needed the money for application of overseas
work; Antonio Barcelon redeemed the property and paid P260,000.00 for the debt
plus the unpaid interest with the bank; when Barcelon entered the mayoralty race,
he demanded payment of the debt, then mortgaged the title of the subject
property with respondent; and the signatures appearing in the documents were
falsified.

Respondent passed away on June 22, 2002 before the trial on the merits of the
case ensued. Being his compulsory heirs, respondent's estranged wife Bonifacia
Dime and their children Cesario Antonio Dime and Marcelino Dime, Jr., substituted
him in the suit. The RTC ruled in favor of the petitioner. But the said ruling was
reversed by CA. Hence, this instant petition.

ISSUE: WON CA erred in ordering the consolidation of ownership and title in the
name of respondent Dime since his heirs have filed a motion to dismiss which
admitted therein that a ruling of the trial court in respondent's favor is tantamount
to unjust enrichment considering that Villamin provided the funds for the purchase
of the subject property.

RULING: No

Settled is the rule that a client has an undoubted right to settle her litigation
without the intervention of the attorney, for the former is generally conceded to
have exclusive control over the subject matter of the litigation and may at anytime,
if acting in good faith, settle and adjust the cause of action out of court before
judgment, even without the attorney's intervention. While we agree with the
petitioner that the heirs, as the client, has the exclusive control over the subject
matter of litigation and may settle the case without the attorney's intervention, we
deny the rationale of the filing of the motion to dismiss by the heirs. It was alleged
that they would be unjustly enriched should the court order the consolidation of
the title of Lot 4-A in the name of respondent since the source of the consideration
was Villamin, respondent's common-law wife.

As relevant to the case at bar, Articles 1311 and 1607 of the Civil Code
provide:ChanRoblesVirtualawlibrary
Article 1311. Contracts take effect only between the parties, their assigns
and heirs, except in case where the rights and obligations arising from the
contract are not transmissible by their nature, or by stipulation or by provision of
law. The heir is not liable beyond the value of the property he received from the
decedent.

If a contract should contain some stipulation in favor of a third person, he may

demand its fulfillment provided he communicated his acceptance to the obligor
before its revocation. A mere incidental benefit or interest of a person is
not sufficient. The contracting parties must have clearly and deliberately
conferred a favor upon a third person.

Article 1607. In case of real property, the consolidation of ownership in the vendee
by virtue of the failure of the vendor to comply with the provisions of article 1616
shall not be recorded in the Registry of Property without a judicial order, after the
vendor has been duly heard.
We have consistently held that the parties to a contract are the real parties-in-
interest in an action upon it.33 The basic principle of relativity of contracts is that
contracts can only bind the parties who entered into it, and cannot favor or
prejudice a third person, even if he is aware of such contract and has acted with
knowledge thereof.34 Hence, one who is not a party to a contract, and for whose
benefit it was not expressly made, cannot maintain an action on it.35 One cannot
do so, even if the contract performed by the contracting parties would incidentally
inure to one's benefit.36chanroblesvirtuallawlibrary

As evidenced by the contract of Pacto de Retro sale,37 petitioner, the vendor,

bound herself to sell the subject property to respondent, the vendee, and reserved
the right to repurchase the same property for the same amount within a period of
nine (9) months from March 24, 1999 to December 24, 1999.38 Therefore, in an
action for the consolidation of title and ownership in the name of vendee in
accordance with Article 161639 of the Civil Code, the indispensable parties are the
parties to the Pacto de Retro Sale - the vendor, the vendee, and their assigns and
heirs.

Villamin, as the alleged source of the consideration, is not privy to the contract of
sale between the petitioner and the respondent. Therefore, she could not maintain
an action for consolidation of ownership and title of the subject property in her
name since she was not a party to the said contract.Where there is no privity of
contract, there is likewise no obligation or liability to speak about. For not being
an heir or an assignee of the respondent, Villamin did not substitute respondent
in the personal rights and obligation in the pacto de retro sale by succession. Since
she is not privy to the contract, she cannot be considered as indispensable party
in the action for consolidation of title and ownership in favor of respondent. A
cursory reading of the contract reveals that the parties did not clearly and
deliberately confer a favor upon Villamin, a third person.

Unjust enrichment exists when a person unjustly retains a benefit at the loss of
another, or when a person retains money or property of another against the
fundamental principles of justice, equity and good conscience.44 The prevention of
unjust enrichment is a recognized public policy of the State, as embodied in Article
22 of the Civil Code which provides that "[e]very person who through an act of
performance by another, or any other means, acquires or comes into possession
of something at the expense of the latter without just or legal ground, shall return
the same to him."45chanroblesvirtuallawlibrary

We have consistently decreed that the nomenclature used by the contracting

parties to describe a contract does not determine its nature.64 The decisive factor
is their intention - as shown by their conduct, words, actions and deeds - prior to,
during, and after executing the agreement.65 Thus, even if a contract is
denominated as apacto de retro, the owner of the property may still disprove it by
means of parole evidence,66 provided that the nature of the agreement is placed
in issue by the pleadings filed with the trial court.67chanroblesvirtuallawlibrary

Petitioner failed to specifically allege in all her pleadings that she did not intend to
sell her property to respondent, instead, she maintained that there was no pacto
de retro sale because her thumbmark and the notary public's signature were
falsified. She should have raised the issue that respondent merely borrowed the
title from her and promised to pay her in her pleadings and not belatedly claimed
the same after the NBI ruled that the thumbmark in the contract was hers.

In light of petitioner's inconsistent and bare allegations and the conflicting

testimony of her other witness, we rule that petitioner failed to overcome the
presumption of regularity of the notarized contract of Pacto de Retro sale.
Moreover, this Court is unconvinced that petitioner has successfully proven that
her agreement with respondent was not a pacto de retro sale but a contract of
loan secured by a mortgage of the subject property.
Malbarosa v CA
402 SCRA 108 (2003)

The acceptance of an offer must be made known to the offeror. Unless the offeror
knows of the acceptance, there is no meeting of the minds of the parties, no real
concurrence of offer and acceptance. The offeror may withdraw its offer and
revoke the same before acceptance thereof by the offeree. The contract is
perfected only from the time an acceptance of an offer is made known to the
offeror.

FACTS:

Petitioner (Malbarosa) sent a letter of resignation and requested that his 1989
incentive compensation as president of Philtectic Corporation be paid to him. The
respondent (S.E.A. DEVELOPMENT CORP/S.E.A.) acceptedMalbarosa’s resignation
and stated that he was entitled to an incentive compensation in the amount of
P251,057.67 to be satisfied as follows:
o 1982 Mitsubishi Super saloon car at a value of P220,000.00.
o Membership shares of Tradestar International, Inc., a subsidiary.
Feeling dismayed, Malbarosaclaims that he is entitled to no less than P395,000 as
incentive compensation. He refused to sign the letter-offer and only put the
words: “Rec’d original for review purposes.”Despite the lapse of more than two
weeks, the S.E.A. had not received the original Letter-offer with the conformity of
Malbarosaon the space provided therefor. Consequently, S.E.A.decided to
withdraw its March 14, 1990 Offer. Meanwhile, the Board of Directors of S.E.A.
approved a resolution demanding fromMalbarosathe return of the
car.Malbarosacountered that he cannot comply with said demand as he already
accepted the Letter-offer of the S.E.A. when he affixed on March 28, 1990 his
signature on the original copy of the letter-offer. He further avers that he had
already impliedly accepted the offer when after said S.E.A’soffer, he retained
possession of the car.With the refusal of the Malbarosato return the vehicle, S.E.A.
filed a complaint for recovery of personal property with replevin with damages and
attorney’s fees.

ISSUE:Whether or not there was a valid acceptance on his (Malbarosa’s) part of

the March 14, 1990 Letter-offer of S.E.A.

HELD:

NO.When the letter-offer of the respondent was delivered to Malbarosa, he did

not accept or reject the offer for the reason that he needed time to decide whether
to reject or accept the same. Although Malbarosaclaims that he had affixed his
conformity to the letter-offer on March 28, 1990, he failed to transmit the said
copy toS.E.A. It was only on April 7, 1990 when Malbarosaappended to his letter
to theS.E.A. a copy of the said March 14, 1990 Letter-offer bearing his conformity
that he notified the S.E.A. of his acceptance to said offer.

Unfortunately, S.E.A. had already withdrawn its offer and had already notified
Malbarosaof said withdrawal via letter dated April 4, 1990 which was delivered to
the Malbarosaon the same day.Indubitably, there was no contract perfected by
the parties on the March 14, 1990 Letter-offer of the respondent.

Further, Malbarosa’splaint that he was not accorded by the respondent reasonable

time to accept or reject its offer does not persuade. It must be underscored that
there was no time frame fixed by S.E.A. for Malbarosato accept or reject its offer.
When the offeror has not fixed a period for the offeree to accept the offer, and
the offer is made to a person present, the acceptance must be made
immediately.Even if it is assumed that the petitioner was given a reasonable period
to accept or reject the offer of the respondent, the evidence on record shows that
from March 16, 1990 to April 3, 1990, the petitioner had more than two weeks
which was more than sufficient for the petitioner to accept the offer of the
respondent.. Unless and until the respondent received said copy of the letter-
offer, it cannot be argued that a contract had already been perfected between the
petitioner and the respondent.

Capalla v. COMELEC

On July 10, 2009, the Comelec and Smartmatic-TIM entered into a Contract for
the Provision of an Automated Election System for the May 10, 2010 Synchronized
National and Local Elections (AES Contract) which is a Contract of Lease with
Option to Purchase (OTP). The Comelec was given until December 31, 2010 within
which to exercise the option but opted not to exercise the same except for 920
units of PCOS machines with the corresponding canvassing/consolidation system
(CCS) for the special elections in certain areas in Basilan, Lanao del Sur and
Bulacan.

On March 6, 2012, the Comelec issued Resolution No. 9373 resolving to seriously
consider exercising the OTP subject to certain conditions. It issued another
Resolution numbered 9376 resolving to exercise the OTP in accordance with the
AES Contract.On March 29, 2012, it issued Resolution No. 9377 resolving to accept
Smartmatic-TIM’s offer to extend the period to exercise the OTP until March 31,
2012.The Agreement on the Extension of the OTP under the AES Contract
(Extension Agreement) was eventually signed on March 30, 2012.Finally, it issued
Resolution No. 9378 resolving to approve the Deed of Sale between the Comelec
andSmartmatic-TIM to purchase the latter’s PCOS machines to be used in the
upcoming 2013 elections.The Deed of Sale was forthwith executed.

Petitioners assail the constitutionality of the Comelec Resolutions on the grounds

that the option period provided for in the AES contract had already lapsed; that
the extension of the option period and the exercise of the option without
competitive public bidding contravene the provisions of RA 9184; and that the
Comelec purchased the machines in contravention of the standards laid down in
RA 9369. On the other hand, respondents argue on the validity of the subject
transaction based on the grounds that there is no prohibition either in the contract
or provision of law for it to extend the option period; that the OTP is not an
independent contract in itself, but is a provision contained in the valid and existing
AES contract that had already satisfied the public bidding requirements of RA 9184;
and that exercising the option was the most advantageous option of the Comelec.

Issue: Whether or not there was grave abuse of discretion amounting to lack or
excess of jurisdiction on the part of the Comelec in issuing the assailed Resolutions
and in executing the assailed Extension Agreement and Deed.

Held: No. A reading of the other provisions of the AES contract would show that
the parties are given the right to amend the contract which may include the period
within which to exercise the option. There is, likewise, no prohibition on the
extension of the period, provided that the contract is still effective. The Comelec
still retains P50M of the amount due Smartmatic-TIM as performance security,
which indicates that the AES contract is still effective and not yet terminated.
Consequently, pursuant to Article 19 of the contract, the provisions thereof may
still be amended by mutual agreement of the parties provided said amendment is
in writing and signed by the parties. Considering, however, that the AES contract
is not an ordinary contract as it involves procurement by a government agency,
the rights and obligations of the parties are governed not only by the Civil Code
but also by RA 9184. A winning bidder is not precluded from modifying or
amending certain provisions of the contract bidded upon. However, such changes
must not constitute substantial or material amendments that would alter the basic
parameters of the contract and would constitute a denial to the other bidders of
the opportunity to bid on the same terms.

The conclusions held by the Court in Power Sector Assets and Liabilities
Management Corporation (PSALM) v. Pozzolanic Philippines Incorporated and
Agan, Jr. v. Philippine International Air Terminals Co., Inc., (PIATCO) cannot be
applied in the present case. First, Smartmatic-TIM was not granted additional right
that was not previously available to the other bidders. The bidders were apprised
that aside from the lease of goods and purchase of services, their proposals should
include an OTP the subject goods. Second, the amendment of the AES contract is
not substantial. The approved budget for the contract was P11,223,618,400.00
charged against the supplemental appropriations for election modernization. Bids
were, therefore, accepted provided that they did not exceed said amount. The
competitive public bidding conducted for the AES contract was sufficient. A new
public bidding would be a superfluity. Lastly, the amendment of the AES contract
is more advantageous to the Comelec and the public because the
P7,191,484,739.48 rentals paid for the lease of goods and purchase of services
under the AES contract was considered part of the purchase price. For the Comelec
to own the subject goods, it was required to pay only P2,130,635,048.15. If the
Comelec did not exercise the option, the rentals already paid would just be one of
the government expenses for the past election and would be of no use to future
elections.

Portion of the Separate, Concurring Opinion of J. Sereno

A. The Treatment of Options, Extensions of Time for their Exercise, and their
Revival Under Contract Law

Had the parties been both private entities, then there would have been either no
legal dispute on the validity of the exercise of an option that was renewed after its
expiry, or, the legal dispute would have been quite easy to resolve. This is because
our law on contracts is quite straightforward on this matter. It is our government
procurement laws and regulations that have complicated the legal issues we need
to resolve.

First, the Civil Code is quite emphatic about respecting the autonomy of the wills
of the parties:

Art. 1306. The contracting parties may establish such stipulations, clauses, terms
and conditions as they may deem convenient, provided they are not contrary to
law, morals, good customs, public order, or public policy.

Among the stipulations that the parties can agree on is an "option" granted by one
party in favor of the other (Art. 1324, Civil Code). Samples of such contractually
created options can be found in some articles of the Civil Code, such as: (a) an
option to buy, which is embedded in a lease of personal property (Art. 1485) and
(b) sales on consignment in which the buyer has the option to return the goods or
pay the price thereof (Art. 1502).

Second. A contract when validly executed has the legal effect of binding the party
who has undertaken to give something or to render some service (Art. 1305). By
"binding," we mean that a legally enforceable right is created in favor of the person
who is to receive the "thing" or the service. This right has the force of law between
the contracting parties (Art. 1159, Civil Code).

Conversely, if the person who possesses the right to demand the performance of
the undertaking to give or to render a service, can demand the performance
thereof, he or she can also waive the same. This waiver has the effect of
extinguishing the obligation. A waiver is the abandonment or voluntary forfeiture
of a right. It operates in the same manner as a condonation or remission of a debt
under Articles 1231(3), and 1270-1274 of the Civil Code.

Examples of valid waivers can be found in the following articles of the Civil Code:
(a) a waiver evidenced by the delivery of a document evidencing a credit (Art.
1271); (b) the waiver of a right to assail a voidable contract through an act ratifying
the contract (Art. 1393); (c) the waiver of a condition in a sales contract (Art.
1545).

Third, if an option is conditioned on its exercise within a period, then this condition
that consists in a "period" or a deadline for its exercise can itself be waived. In a
contract of sale, for example, "where the obligation of either party . . . is subject
to any condition which is not performed, such party may refuse to proceed with
the contract or he may waive performance of the condition. (Art. 1545, Civil Code)"

Fourth, this waiver of a condition that consists in a deadline can be made by the
party in whose favor the deadline was constituted. Under Article 1196 of the Civil
Code, "[w]henever in an obligation a period is designated, it is presumed to have
been established for the benefit of both the creditor and the debtor, unless from
the tenor of the same or other circumstances, it should appear that the period has
been established in favor of one or of the other." An option that expires on a fixed
date is an obligation with a resolutory period that "take[s] effect at once, but
terminate[s] upon arrival of the day certain." An offeror can also always withdraw
an option under Article 1324 of the Civil Code, with the converse implication that
he or she can always extend the period for the acceptance of the offer.

Thus, an option to purchase exercisable within a fixed period, embedded in a lease

contract, expires after that fixed period, because the lapse thereof is a resolutory
condition that extinguishes the option to purchase. Both parties can agree to waive
the resolutory condition, however, in the form of an extension of the period for
performance, under the very clear provisions of the Civil Code. This accounts for
the commonness of renewed or revived options in private commercial agreements,
such as leases, sales, joint ventures, intellectual property rights contracts, etc.

The legal disputes that will arise in these situations would be easy to resolve.
Because both parties agreed to revive or renew an expired option, their agreement
binds both of them; and neither can assail the agreement simply on the ground
that the original option period has expired, and this extension agreement has the
force of law between them.

That the parties have the ability to revive dead or terminated contracts is so basic
a rule that it has consistently and implicitly been understood to be so by this Court.
In two injunction cases, the Court restated its understanding that a dead or
terminated contract can always be revived or renewed by mutual agreement of
the parties.6

The termination of a contract is not like the death of a natural being. It is the will
and the mutual understanding of the parties, rather than the form and solemnities,
that prevail in contract interpretation. Thus, a contract that on its face expires can,
by the mutual contracting action of the parties, even be pronounced by the court
to be continuing simply because the parties consider it to be so continuing. As the
eminent scholar on contracts put it:

"In the construction of an instrument, the intention of the parties is to be pursued.

The true agreement of the parties may be proved, as against the terms and
stipulations appearing in a written contract where a mistake or imperfection of the
writing, or its failure to express the true intent and agreement of the parties, is
put in issue by the pleadings, or there is an intrinsic ambiguity in the writing. When
the true intent and agreement of the parties is established, it must be given effect
and prevail over the bare words of the written contract."
SPOUSES OSCAR AND GINA GIRONELLA, Petitioners, vs. PHILIPPINE
NATIONAL BANK, Respondent

A contract is perfected by mere consent. In turn, consent is manifested by the

meeting of the offer and the acceptance upon the thing and the cause which are
to constitute the contract. The offer must be certain and the acceptance
seasonable and absolute. If qualified, the acceptance would merely constitute a
counter-offer as what occurred in this case.

Facts:

In separate Credit Agreements respectively dated 11 November 1991 and 16

January 1992, the Spouses Gironella obtained two (2) loans from PNB in the
amounts of Php7,500,000.00 and Php2,000,000.00 for the construction of the
Dagupan Village Hotel and Sports Complex. The loans were co-terminus, both
payable on installments and secured by the same real estate mortgage over a
parcel of land.

In May 1992, seeking to expand their hotel operations, the Spouses Gironella again
applied for another loan with PNB in the amount of. Php5,800,000.00 for the
construction of a restaurant bar and the purchase of a generator set.

The Spouses Gironella began to default in paying their prior two (2) loans. While
the parties were negotiating and discussing the restructuring of the Spouses
Gironella's loans, PNB made a couple of attempts to foreclose the mortgaged
property.

PNB wrote the Spouses Gironella and proposed, thus:

xxxRestructuring of this P14,380,000.00 into a full ysecured 10 year term loan
payable quarterly and
restructuring of P8,120,000.00, the other part of the accrued interest as of
December 14, 2000, on clean basis to be payable quarterly for five (5) years with
amortization from 1st to 19th quarters based on a 15-year payment scheme and
balloon payment on the 20th quarter.xxx

This proposed restructuring is still subject for evaluation and approval

of higher management and therefore tentative in nature.

Spouses Gironella gave a qualified acceptance of PNB's proposed restructuring but

PNB rejected finally the counter offer of the Spouses Gironella for the restructuring
of their loan.

As a result PNB re-filed its Petition for Extra-Judicial Foreclosure of the mortgaged
property.
Forthwith, the Spouses Gironella filed the Complaint before the RTC with prayer
for issuance of a Temporary Restraining Order (TRO) and preliminary injunction
to enjoin enforcement of the original credit agreements, and security therefor,
between the parties.

RTC granted the Complaint of the Spouses Gironella ruling that there was a
perfected and binding restructured credit agreement.

PNB appealed to the CA questioning the trial court's ruling. PNB argued that the
exchange of correspondence between the parties did not constitute a perfected
and binding restructuring agreement since there was no express acceptance by
either party of the other's counter-offer. PNB averred that it, in fact, finally rejected
the restructuring proposal of the Spouses Gironella

The appellate court granted the appeal of PNB and reversed the ruling of the trial
court.

Issue: Whether the restructuring agreement between the parties was perfected.

Ruling:

No.

To reach that moment of perfection, the parties must agree on the same thing in
the same sense, so that their minds meet as to all the terms. They must have a
distinct intention common to both and without doubt or difference; until all
understand alike, there can be no assent, and therefore no contract. The minds of
parties must meet at every point; nothing can be left open for further
arrangement. So long as there is any uncertainty or indefiniteness, or future
negotiations or considerations to be had between the parties, there is not a
completed contract, and in fact, there is no contract at all.

The Spouses Gironella's payments under its original loan account cannot be
considered as partial execution of the proposed restructuring loan agreement.
They were clearly made during the pendency of the negotiations on the
restructuring. Such pendency proves, absence, not presence of an agreement
ready for execution. At the time of payments only petitioners' obligation under the
original credit agreements were in existence. Indeed, the payment scheme under
the proposed restructuring was outlined by PNB only in the letter of 25 January
2000.

Further on this, negotiation begins from the time the prospective contracting
parties manifest their interest in the contract and ends at the moment of
agreement of the parties. Once there is concurrence of the offer and acceptance
of the object and cause, the stage of negotiation is finished.

This situation does not obtain in the case at bar. The letter dated 25 January .
2000 of PNB was qualifiedly accepted by the Spouses Gironella as contained in
their 7 February 2000 letter and constituted a counter-offer which PNB ultimately
rejected in its 8 March 2000 letter. The surrounding circumstances clearly show
that the parties were not past the stage of negotiation for the terms and conditions
of the restructured loan agreements. There was no meeting of the minds on the
restructuring of the loans. Thus, the Spouses Gironella's original Php9,500,000.00
loan agreement subsists.
C. W. ROSENSTOCK, as administrator of the estate of H. W. ELSER v.
EDWIN BURKE,
THE COOPER COMPANY, as intervenor

G.R. No. 20732, September 26, 1924, AVANCEÑA, J.:

The question whether or not an expression is a definite offer to purchase or merely

an invitation to a proposition being made to him, is one of intention of the person
using said expression, which is to be determined by the circumstances surrounding
the case.

Facts: The defendant Edwin Burke owned a motor yacht, known as Bronzewing,
which he acquired in Australia in the year 1920 for the purpose of reselling it. In
1922, the plaintiff H.W. Elser began negotiations with the defendant for the
purchase thereof. The plan of the plaintiff was to organize a yacht club and sell
the said yacht to it afterwards for P120,000, the P20,000 being his commission.
To this end, on February 12, 1922, the BurkegaveElser an option in writing in the
following terms:

For the purpose expressed by you of organizing a yacht club, I take pleasure
in confirming my verbal offer to you of the motor yacht Bronzewing, at a
price of one hundred and twenty thousand pesos (P120,000). This offer is
open for thirty days from date.

Elser proposed to make a voyage on board the yacht, with prominent

business men for the purpose of making a sale. Repairs were made to make the
yacht seaworthy again at the expense of Elser. The voyage was made but the Elser
never accepted the offer in the aforesaid letter of option.

Subsequently the parties agreed that the engine was to be replaced. They
negotiated once more for the salebut the renewed offer of Burke was initially
refused by Elser. On April 3, 1922, Burke went to Elser to speak to him and as a
result of such interview, the latter caused the writing of a letter in the presence of
the former, to wit:

MY DEAR MR. BURKE:

In connection with the yacht Bronzewing, I am in position and am willing
to entertain the purchase of it under the following terms:
(a) The purchase price to be P80,000, Philippine currency.
(b) Initial payment of P10,000 to be made within sixty (60) days.
(c) Payment of the balance to be made in installments of P5,000 per month,
with interest on deferred payments at 9 per cent payable semiannually.
(d) As security for the above, I am to deposit with you P80,000, in stock of
the J. K. Pickering Co., commercial value P400,000, book value P600,000.
Statement covering this will be furnished you on request.

On April 8, 1922, the defendant wrote a letter accepting said offer for the
purchase of the yacht and made a demand for its performance. Meanwhile, Elser
filed a complaint for collection of sum of money against Burke for the repairs on
the yacht he had paid for. In his answer, Burke alleged that the repairs were
agreed upon to be in exchange for the use of the yacht.As a cross-complaint, he
prayed that Elser be compelled to comply with the contract of purchase and pay
damages in the amount of P10,000.

Issue: WON there was a definite offer to purchase.

Held: There was no definite option; hence, there was no contract of sale.

To convey the idea of a resolution to purchase, a man of ordinary intelligence and

common culture would use these clear and simple words, I offer to purchase, I
want to purchase, I am in position to purchase. If Elser intended to buy the said
yacht, he would have expressed so in the plain manner, being a merchant himself.
It must be presumed that a man in his transactions in good faith uses the best
means of expressing his mind that his intelligence and culture permit so as to
convey his will unequivocally. But the he instead of used the expression I am in
position and am willing to entertain the purchase of the yacht. The word
"entertain" applied to an act does not mean the resolution to perform said act, but
simply a position to deliberate for deciding to perform or not to perform said act.
It seems clear that the letter of the plaintiff cannot be interpreted as a definite
offer to purchase the yacht, but simply a position to deliberate whether or not he
would purchase the yacht. It was but a mere invitation to a proposal being made
to him, which might be accepted by him or not.

The question whether or not an expression is a definite offer to purchase or merely

an invitation to a proposition being made to him, is one of intention of the person
using said expression, which is to be determined by the circumstances surrounding
the case. In the present case, the plaintiff never thought of acquiring the yacht for
his personal use, but for the purpose of selling it to another or to acquire it for
another for a commission. As of that time, there was yet no buyer. Also, the
resolution of the plaintiff to acquire the yacht depended upon him being able to
replace the engine, and this, in turn, depended upon the plaintiff being successful
in obtaining the P20,000 that the new engine was to cost. These circumstances
lead to the conclusion that the plaintiff was not in position to make a definite offer
during said time.

But above all, there is in the record positive proof that in writing this letter of the
3d of April the plaintiff had no intention to make thereby a definite offer. This letter
was written by his stenographer Mr. Parkins in his office and in the presence of
the defendant who has been there precisely for the purpose of speaking about this
purchase. According to the plaintiff when he was dictating that part wherein he
said that he was in position to entertain the purchase of the yacht, the defendant
interrupted him and suggested the elimination of the word entertain and the
substitution therefor of a definite offer, but after a discussion between them,
during which the plaintiff clearly said that he was not in position to make a definite
offer, the word entertain now appearing in the letter was preserved. The
stenographer Mr. Parkins and another employee of the plaintiff Mr. Guzman, who
were present, corroborate this statement of the plaintiff.

1 NICOLAS SANCHEZ vs SEVERINA RIGOS

FACTS:

On April 3, 1961, Nicolas Sanchez and Severina Rigos executed an instrument

entitled "Option to Purchase," whereby Mrs. Rigos "agreed, promised and
committed ... to sell" to Sanchez the sum of P1,510.00, a parcel of land within
two (2) years from said date with the understanding that said option shall be
deemed "terminated and elapsed," if "Sanchez shall fail to exercise his right to
buy the property" within the stipulated period. Inasmuch as several tenders of
payment of the sum of Pl,510.00, made by Sanchez within said period, were
rejected by Mrs. Rigos, on March 12, 1963, the former deposited said amount
with the Court of First Instance of Nueva Ecija and commenced against the latter
the present action, for specific performance and damages.

Rigos contended that the contract between the parties "is a unilateral promise to
sell, and the same being unsupported by any valuable consideration, by force of
the New Civil Code, is null and void

ISSUE: Whether or not there is an offer and an acceptance of such to render the
agreement reciprocally demandable.

HELD: YES

In his complaint, Sanchez alleges that, by virtue of the option under

consideration, "defendant agreed and committed to sell" and "the plaintiff agreed
and committed to buy" the land. Hence, plaintiff maintains that the promise
contained in the contract is "reciprocally demandable," pursuant to the first
paragraph of said Article 1479.

Although defendant had really "agreed, promised and committed" herself to sell
the land to the plaintiff, it is not true that the latter had, in turn, "agreed and
committed himself " to buy said property. The document does not bear out
plaintiff's allegation to this effect.

The option did not impose upon Sanchez the obligation to purchase defendant's
property. The instrument is not a "contract to buy and sell." It merely granted
plaintiff an "option" to buy. And both parties so understood it, as indicated by
the caption, "Option to Purchase," given by them to said instrument. Under the
provisions thereof, the defendant "agreed, promised and committed" herself to
sell the land therein described to the plaintiff for P1,510.00, but there is nothing
in the contract to indicate that her aforementioned agreement, promise and
undertaking is supported by a consideration "distinct from the price" stipulated
for the sale of the land.

In order that said unilateral promise may be "binding upon the promisor, Article
1479 requires the concurrence of a condition, namely, that the promise be
"supported by a consideration distinct from the price." Accordingly, the promisee
can not compel the promisor to comply with the promise, unless the former
establishes the existence of said distinct consideration. In other words,
the promisee has the burden of proving such consideration. Sanchez has not
even alleged the existence thereof in his complaint.

If the option is given without a consideration, it is a mere offer of a contract of

sale, which is not binding until accepted. If, however, acceptance is made
before a withdrawal, it constitutes a binding contract of sale, even
though the option was not supported by a sufficient consideration.

It can be taken for granted, as contended by the defendant, that the option
contract was not valid for lack of consideration. But it was, at least, an offer
to sell, which was accepted by latter, and of the acceptance the offerer
had knowledge before said offer was withdrawn. The concurrence of both
acts — the offer and the acceptance — could at all events have generated a
contract, if none there was before.

In other words, since there may be no valid contract without a cause or

consideration, the promisor is not bound by his promise and may, accordingly,
withdraw it. Pending notice of its withdrawal, his accepted promise
partakes, however, of the nature of an offer to sell which, if accepted,
results in a perfected contract of sale.

1 CAPALLA VS COMELEC

FACTS:

Comelec and Smartmatic-TIM entered into a Contract for the Provision of an

Automated Election System for the May 10, 2010 Synchronized National and
Local Elections (AES Contract) which is a Contract of Lease with Option to
Purchase (OTP) the goods listed therein consisting of the Precinct Count Optical
Scan (PCOS), both software and hardware. The parties agreed that the AES
Contract shall remain effective until the release of the performance security
posted by the Comelec. The Comelec was given until December 31, 2010 within
which to exercise the option to purchase. The option was, however, not
exercised within said period. The parties later entered into an extension
agreement giving the Comelec until March 31, 2012 within which to exercise it.

Herein petitioners, however, assailed the validity of such agreement on the

ground that the same requires another public bidding since it substantially
amended the terms of the contract. They also averred that such extension to
exercise the option will prejudice the governments interest.

In the assailed June 13, 2012 decision of the Supreme Court, the Court upheld
the validity of the transaction. Hence, the petitioners moved for reconsideration.

ISSUE: Whether or not the extension of the OTP in favor of Comelec is valid?

HELD: YES, THE EXTENSION IS VALID

In June 13, 2012 Decision, the court decided in favor of respondents and placed
a stamp of validity on the assailed resolutions and transactions entered into.
Based on the AES Contract, it has sustained the parties right to amend the same
by extending the option period. Considering that the performance security had
not been released to Smartmatic-TIM, the contract was still effective which can
still be amended by the mutual agreement of the parties, such amendment being
reduced in writing.

In this case, the contract is still effective because the performance security has
not been released. Thus, not only the option and warranty provisions survive but
the entire contract as well. In light of the contractual provisions, therefore, the
amendment of the option period was sustained. The amendment of a previously
bidded contract is not per se invalid. For it to be nullified, the amendment must
be substantial such that the other bidders were deprived of the terms and
opportunities granted to the winning bidder after it won the same and that it is
prejudicial to public interest.

Here, the extension of the option period means that the Comelec had more time
to determine the propriety of exercising the option. With the extension, the
Comelec could acquire the subject PCOS machines under the same terms and
conditions as earlier agreed upon. The end result is that the Comelec acquired
the subject PCOS machines with its meager budget and was able to utilize the
rentals paid for the 2010 elections as part of the purchase price.
CONCURRING OF J. SERENO (Please refer to the syllabus) Re: Offer
and Option

The Treatment of Options, Extensions of Time for their Exercise, and

their Revival Under Contract Law

Had the parties been both private entities, then there would have been either no
legal dispute on the validity of the exercise of an option that was renewed after
its expiry, or, the legal dispute would have been quite easy to resolve. This is
because our law on contracts is quite straightforward on this matter. It is our
government procurement laws and regulations that have complicated the legal
issues we need to resolve.

First, the Civil Code is quite emphatic about respecting the autonomy of the wills
of the parties:

Art. 1306. The contracting parties may establish such stipulations, clauses, terms
and conditions as they may deem convenient, provided they are not contrary to
law, morals, good customs, public order, or public policy.

Among the stipulations that the parties can agree on is an option granted by one
party in favor of the other (Art. 1324, Civil Code). Samples of such contractually
created options can be found in some articles of the Civil Code, such as: (a) an
option to buy, which is embedded in a lease of personal property (Art. 1485) and
(b)xxx

Second. x x x x

Third, if an option is conditioned on its exercise within a period, then this

condition that consists in a period or a deadline for its exercise can itself be
waived. In a contract of sale, for example, where the obligation of either party . .
. is subject to any condition which is not performed, such party may refuse to
proceed with the contract or he may waive performance of the condition. (Art.
1545, Civil Code)

Fourth, this waiver of a condition that consists in a deadline can be made by the
party in whose favor the deadline was constituted. Under Article 1196 of the Civil
Code, [w]henever in an obligation a period is designated, it is presumed to have
been established for the benefit of both the creditor and the debtor, unless from
the tenor of the same or other circumstances, it should appear that the period
has been established in favor of one or of the other. An option that expires on a
fixed date is an obligation with a resolutory period that take[s] effect at once,
but terminate[s] upon arrival of the day certain. An offeror can also always
withdraw an option under Article 1324 of the Civil Code, with the converse
implication that he or she can always extend the period for the acceptance of the
offer.

Thus, an option to purchase exercisable within a fixed period, embedded in a

lease contract, expires after that fixed period, because the lapse thereof is a
resolutory condition that extinguishes the option to purchase. Both parties can
agree to waive the resolutory condition, however, in the form of an extension of
the period for performance, under the very clear provisions of the Civil
Code. This accounts for the commonness of renewed or revived options in
private commercial agreements, such as leases, sales, joint ventures, intellectual
property rights contracts, etc.

That the parties have the ability to revive dead or terminated contracts is so
basic a rule that it has consistently and implicitly been understood to be so by
this Court. In two injunction cases, the Court restated its understanding that a
dead or terminated contract can always be revived or renewed by mutual
agreement of the parties. Xxx

MALBAROSA vs. CA and S.E.A. DEVELOPMENT CORP. (SEADC)

CALLEJO, SR., J.:

TOPIC: acceptance

"The acceptance of an offer must be made known to the offeror.Unless the offeror
knows of the acceptance, there is no meeting of the minds of the parties, no real
concurrence of offer and acceptance.The offeror may withdraw its offer and revoke
the same before acceptance thereof by the offeree."

FACTS:
Philtectic Corp and Commonwealth Insurance Co., Inc. were only two of the group
of companies wholly-owned and controlled by respondent S.E.A. Development
Corporation (SEADC). Malbarosa was the president Philtectic and an officer of
other corporations belonging to the SEADC.

SEADC assigned to malbarosa one of its vehicles for his use. He was also issued
membership certificates in the Architectural Center, Inc.

Da Costa was the president of the SEADC and Commonwealth, while Valero was
the Vice-Chairman of the Board of Directors of the SEADC and Vice-Chairman of
the Board of Directors of Philtectic.

Malborosa sent a letter to Valero tendering his resignation, from all his positions
in the SEADC and reiterating his request for the payment of his incentive
compensation.

OFFER
SEADC, through Valero, sent a letter-offer to Malborosa accepting his resignation,
and that he was entitled to an incentive worth P251K, and proposing that the
amount be satisfied by the car assigned to him and the membership share. (March
14, 1990 Letter-offer)

SEADC required that if the malborosa would agree to the offer, he would to affix
his conformity on the space provided at the bottom portion of the letter.

Da Costa handed to malborosa the original copy of the March 14, 1990 Letter-offer
for his conformity but malborosa was dismayed since he was expecting an
incentive of 395k and refused to sign.

WITHDRAWAL
Despite the lapse of more than two weeks, the SEADC had not received the original
Letter-offer with the conformity of the malborosa. SEADC decided to withdraw its
offer.

Philtectic, sent a letter to malborosa to return the car and his membership
certificate in the Architectural Center, Inc. within 24 hours from his receipt thereof,
malborosa received it on the same day.

Malborosa informed the philtec that he cannot comply with said demand as he
already accepted the March 14, 1990 Letter-offer of the SEADC when he affixed
on March 28, 1990 his signature on the original copy of the letter-offer.

With the refusal of the malborosa to return the vehicle, SEADC filed a complaint
for recovery of personal property.
MALBOROSA CONTENTION:

He alleged that he had already agreed on March 28, 1990 to the Letter-offer of
the SEADC and notified his acceptance; hence, he had the right to the possession
of the car. Philtectic had no right to withdraw the offer of the SEADC. The
malborosa testified he had decided to accept the offer of the SEADC, and had
affixed his signature on the space below the word Agree in the Letter-offer.

He adduced evidence that on March 9, 1990, he had written Valero that he was
agreeable to an incentive compensation of P218,000 to be settled by the SEADC
by transferring the car to the him valued at P180,000 and P38,000 worth of shares
of the Architectural Center, Inc. on the claim of Da Costa that SEADC was almost
bankrupt. However, he learned that the SEADC was financially sound; hence, he
had decided to receive his incentive compensation of P395,000 in cash.

On March 29, 1990, he called up the office of Da Costa to inform the latter of his
acceptance of the letter-offer. However, he was told by the telephone receptionist
of that Da Costa was out of the office so he asked o inform Da Costa that he had
called him up and that he had already accepted the letter-offer. The receptionist
promised to relay the message to Da Costa. Receptionist testified that she had
relayed the message to Da Costa and that the latter merely nodded his head.

TRIAL COURT: no perfected contract since no effective notification of acceptance.

CA: affirmed

ISSUE:
whether there was a valid acceptance on his part of the March 14, 1990
Letter-offer of the respondent;

HELD: NONE

Under Article 1318 of the Civil Code, the essential requisites of a contract are as
follows:

Art. 1318. There is no contract unless the following requisites concur:

(1) Consent of the contracting parties;
(2) Object certain which is the subject matter of the contract;
(3) Cause of the obligation which is established.

The contract does not come into existence.To produce a contract, there must be
acceptance of the offer which may be express or implied but must not qualify the
terms of the offer.The acceptance must be absolute.
The contract is perfected only from the time an acceptance of an offer is made
known to the offeror.If an offeror prescribes the exclusive manner in which
acceptance of his offer shall be indicated by the offeree, an acceptance of the offer
in the manner prescribed will bind the offeror. On the other hand, an attempt on
the part of the offeree to accept the offer in a different manner does not bind the
offeror.

An offer made inter praesentes must be accepted immediately. If the parties

intended that there should be an express acceptance, the contract will be
perfected only upon knowledge by the offeror of the express acceptance by the
offeree of the offer. An acceptance which is not made in the manner prescribed
by the offeror is not effective but constitutes a counter-offer which the offeror may
accept or reject.

In this case, on March 16, 1990, Da Costa handed over the original of the March
14, 1990 Letter-offer of the respondent to the petitioner. The respondent required
the petitioner to accept the offer by affixing his signature on the space provided
in said letter-offer and writing the date of said acceptance, thus foreclosing an
implied acceptance or any other mode of acceptance by the petitioner. However,
when the letter-offer of the respondent was delivered to the petitioner on March
16, 1990, he did not accept or reject the same for the reason that he needed time
to decide whether to reject or accept the same.

There was no contract perfected between the petitioner and the respondent
corporation. Although the petitioner claims that he had affixed his conformity to
the letter-offer on March 28, 1990, the petitioner failed to transmit the said copy
to the respondent. It was only on April 7, 1990 when the petitioner appended to
his letter to the respondent a copy of the said March 14, 1990 Letter-offer bearing
his conformity that he notified the respondent of his acceptance to said offer. But
then, the respondent, through Philtectic Corporation, had already withdrawn its
offer and had already notified the petitioner of said withdrawal via respondents
letter dated April 4, 1990 which was delivered to the petitioner on the same day.
Indubitably, there was no contract perfected by the parties on the March 14, 1990
Letter-offer of the respondent.

IN LIGHT OF ALL THE FOREGOING, the petition is dismissed. The Decision of the
Court of Appeals is AFFIRMED.
TRADERS ROYAL BANK vs. CUISON LUMBER CO., INC

BRION, J.:

Facts:

CLC obtained 2 loans secured by a real estate mortgage from TRB, through its
then president, Roman Cuison, Sr. CLCI failed to pay the Ioad, thus, the bank to
foreclose and the bank was the highest

Mrs. Cuison, widow wrote the bank indicating her offered terms of repurchase and
paid 50K and 85K to the latter which the it received and regarded as "earnest
money".

The bank drafted the TRB Repurchase Ageement. Despite the extensions of time
given CLCI failed to comply with the terms. CLCI paid another 50K to the bank.
The latter informed CLCI that the total amount of 185K it paid was not a deposit
but formed part of the earnest money under the TRB Repurchase agreement.

CLCI requested that its outstanding obligation be reduced to 1M, condoning

221K of the original amount. To show its commitment, CLCI paid another 300K
which the bank credited at earnest money. A year later, CLCI was informed that
its request was still under consideration by the bank's Manila office. TRB then
informed CLCI that the bank would resell the subject property for 3M
gave CLCI 15 days to submit a formal offer else the bank would sell the
property to 3rd parties. CLCI offered to repurchase the property for 1.5M given
that it had already tendered the amount of 400,000 as earnest money.

CLCI claimed that the bank breached the terms of repurchase, as it had wrongly
considered its payments as earnest money, instead of applying them to the
purchase price. The bank did not act on the demand. Instead, it informed CLCI
that the amounts it received were not earnest money, and that the bank was
willing to return these sums, less the amounts forfeited to answer for the
unremitted rentals on the subject property.

RTC favored respondent

CA reversed

Issue: WON a perfected contract of repurchase existed and can be enforced

between the parties.

Ruling: YES (HOWEVER EFFECTIVELY CANCELLED)

There was a perfected contract of repurchase however the bank effectively

cancelled the contract when it communicated with CLCI that it would sell the
subject property at a higher price to third parties, giving CLCI 15 days to make a
formal offer, and disregarding CLCI's counter-offer to buy the subject property for
P1.5 million. The decision is based on the following reasons:

1. The bank communicated its intent not to proceed with the repurchase as
above outlined and formally cancelled the TRB Repurchase Agreement in
its letters dated January 11 and 30, 1989 to CLCI.[35] Thus, CLCI's rights
acquired under the TRB Repurchase Agreement to repurchase the subject
property have been defeated by its own failure to comply with its obligations
under the agreement. The right to cancel for breach is provided under
paragraph 11 of the TRB Repurchase Agreement, as follows:
 11. Upon default of the buyer to pay two (2) successive
quarterly installments, contract is automatically cancelled
at the Bank's option and all payments already made shall be
treated as rentals or as liquidated damages;

2. Second, the respondents violated the terms and conditions of the TRB
Repurchase Agreement when they failed to pay their obligations under the
agreement as these obligations fell due.

3. TRB Repurchase Agreement reveals that the bank is allowed to apply the
respondents' payments first to the amounts due as interests and other
charges, before applying any payment to the repurchase price.

4. The petitioner bank cannot be said, as the CA ruled, to have already

waived the terms of the TRB Repurchase Agreement by extending the time
to pay and subsequently accepting late payments. The CA's conclusion lacks
factual and legal basis taking into account that the Statement of Account of
July 31, 1987, heretofore cited, which shows that the bank considered the
respondents already in default.
ANGEL V. TALAMPAS, JR., Petitioner, vs. MOLDEX REALTY, INC.,
Respondent. G.R. No. 170134, June 17, 2015, BRION, J.

Doctrine: Consent is manifested by the meeting of the offer and the acceptance
upon the thing and the cause which are to constitute the contract. The offer must
be certain, and the acceptance, whether express or implied, must be absolute. An
acceptance is considered absolute and unqualified when it is identical in all
respects with that of the offer so as to produce consent or a meeting of the minds.

Facts

Petitioner entered into a contract with the respondent to develop a residential

subdivision known as the Metrogate Silang Estates. The petitioner undertook to
perform roadworks, earthworks and site-grading, and to procure materials, labor,
equipment, tools and facilities, for the contract price of ₱10,500,000.00, to be paid
by the respondent through progress billings. The respondent made an initial down
payment of ₱500,000.00 at the start of the contract.

Construction works on the Metrogate project started and was projected to be

completed by the petitioner within three hundred (300) calendar days from this
starting date. However, Metrogate’s Project Manager, Engr. Honorio ‘Boidi’
Almeida, asked the petitioner to suspend construction work on the site for one
week due to a change in the project’s subdivision plan. The suspension lasted for
more than one week, leaving the petitioner’s personnel and equipment idle at the
site for three weeks. In a letter, the petitioner inquired from Engr. Almeida whether
the respondent would still push through with the project.

The petitioner received from the respondent’s Vice President, Engr. Jose Po, an
antedated letter that contained the respondent’s decision to terminate the parties’
contract. The letter bore the signature of Engr. Almeida and gave the petitioner
the ‘go signal’ to demobilize his equipment from the site.
Petitioner demanded from the respondent the payment of the following amounts:
(a) ₱1,485,000.00 as equipment rentals incurred for the period of suspension of
construction works on the Metrogate project, and (b) ₱2,100,000.00 or twenty
percent (20%) of the ₱10,500,000.00 contract price as cost of opportunity lost due
to the respondent’s early termination of their contract. The respondent received
the letter but refused to heed the petitioner’s demands.

Issue: Whether or not petitioner consented to the termination of the contract

Ruling

The respondent failed to prove the petitioner’s consent, express or

implied, to the termination of the subject contract. The respondent alleged
that there had been mutual termination of the parties’ contract during a meeting
held between Engr. Po of Moldex Realty Inc. and Engr. Talampas of AVTJ
Construction. However, this claim is not supported by evidence.

In the first place, the respondent failed to fully establish that a meeting took place
as alleged. The respondent presented no other evidence to prove that Engr. Po
and Engr. Talampas met to discuss the fate of their contract. No document or
record the minutes of their meeting appeared to have been made despite the
importance of their alleged discussion.

The respondent contended that the petitioner’s request for an official letter of
termination was proof that the latter consented to the termination of their contract.
We disagree with this view. The request for an official letter of termination does
not necessarily mean consent to the termination; by itself, the request for an
official letter of termination does not really signify an agreement; it was nothing
more than a request for a final decision from the respondent.

A close reading of petitioner’s letter shows that the petitioner’s intent was solely
to confirm whether the respondent would still push through with its decision to
terminate the contract. To our mind, the petitioner fully disclosed the intent behind
his letter and it was not consent. Thus, we find it erroneous to conclude, based on
this letter, that the petitioner had consented to the termination of the construction
contract.

Consent is manifested by the meeting of the offer and the acceptance

upon the thing and the cause which are to constitute the contract. The
offer must be certain, and the acceptance, whether express or implied,
must be absolute. An acceptance is considered absolute and unqualified
when it is identical in all respects with that of the offer so as to produce
consent or a meeting of the minds.

We find no such meeting of the minds between the parties on the matter of
termination because the petitioner’s acceptance of the respondent’s offer to
terminate was not absolute.

To terminate their contract, the respondent offered to pay the petitioner billings
for accomplished works, unrecouped costs of equipment mobilization and
demobilization, unrecouped payment of insurance bond, and the release of all
retention fees payments that the petitioner accepted or received.

But despite receipt of payments, no absolute acceptance of the respondent’s offer

took place because the petitioner still demanded the payment of equipment
rentals, cost of opportunity lost, among others. In fact, the payments received
were for finished or delivered works and for expenses incurred for the respondent’s
account. By making the additional demands, the petitioner effectively made a
qualified acceptance or a counteroffer, which the respondent did not accept. Under
these circumstances, we see no full consent.
MARIA GERVACIO BLAS, MANUEL GERVACIO BLAS, LEONCIO
GERVACIO BLAS and LODA GERVACIO BLAS, plaintiffs-appellants,

vs.

ROSALINA SANTOS, in her capacity as Special Administratrix of the

Estate of the deceased MAXIMA SANTOS VDA. DE BLAS, in Sp. Proc. No.
2524, Court of First Instance of Rizal, defendants-appellants. MARTA
GERVACIO BLAS and DR. JOSE CHIVI, defendants-appellants.

G.R. No. L-14070, March 29, 1961, LABRADOR, J.

Doctrine: All things which are not outside the commerce of men, including future
things, may be the object of a contract. All rights which are not intransmissible
may also be the object of contracts.

Facts

Simeon Blas contracted a first marriage with Marta Cruz sometime before 1898.
They had three children, only one of whom, Eulalio, left children, namely, Maria
Gervacio Blas, one of the plaintiffs, Marta Gervacio Blas, one of the defendants,
and Lazaro Gervacio Blas. Lazaro died in 1950, and is survived by three legitimate
children who are plaintiffs herein, namely, Manuel Gervacio Blas, Leoncio Gervacio
Blas and Loida Gervacio Blas.

Marta Cruz died in 1898, and the following year, Simeon Blas contracted a second
marriage with Maxima Santos. At the time of this second marriage, no liquidation
of the properties required by Simeon Blas and Marta Cruz was made. Three of the
properties left are fishponds located in Obando, Bulacan. Maxima Santos does not
appear to have apported properties to her marriage with Simeon Blas.

In 1936, Simeon Blas executed a will disposing half of his properties in favor of
Maxima the other half for payment of debts. In lieu of this, Maxima executed
a document, Exhibit A , that she will respect and obey all and every
disposition of said will and promises that she’ll be giving one-half of the
properties she’ll be acquiring to the heirs and legatees named in the will
of her husband. Simeon Blas died. Heirs of Simeon Blas with Marta learned that
Maxima did not comply with her promise.

This case was instituted by plaintiffs against the administratrix of the estate of
Maxima Santos, to secure a judicial declaration that one-half of the properties left
by said Maxima Santos Vda. de Blas and requesting that said properties so
promised be adjudicated to the plaintiffs.

TC held that said Exhibit "A" has not created any right in favor of plaintiffs which
can serve as a basis of the complaint; that neither can it be considered as a
valid and enforceable contract for lack of consideration and because it
deals with future inheritance. The court also declared that Exhibit "A" is not a
will because it does not comply with the requisites for the execution of a will; nor
could it be considered as a donation.

Issue

Whether or not the promise made by Maxima Santos is a valid contract even if the
object is a future inheritance.

Ruling

Yes. Exhibit A is a compromise and at the same time a contract with a sufficient
cause or consideration. It is not a contract on future inheritance.

Exhibit "A" appears to be the compromise defined in Article 1809 of the Civil Code
of Spain, in force at the time of the execution of Exhibit "A". Its preparation and
execution was ordered by Simeon Blas evidently to prevent his heirs by his first
marriage from contesting his will and demanding liquidation of the conjugal
properties acquired during his first marriage, and an accounting of the fruits and
proceeds thereof from the time of the death of his first wife.

It is not a contract on future inheritance since the document refers to existing

properties which she will receive by operation of law on the death of her husband,
because it is her share in the conjugal assets. It is an obligation or promise made
by the maker to transmit one-half of her share in the conjugal properties acquired
with her husband, which properties are stated or declared to be conjugal
properties in the will of the husband. The conjugal properties were in existence at
the time of the execution of Exhibit "A".

Spanish Civil Code, Article 1809.

Compromise is a contract by which each of the parties in interest, by giving,
promising, or retaining something avoids the provocation of a suit or terminates
one which has already been instituted.

Civil Code, Article 1347.

All things which are not outside the commerce of men, including future things,
may be the object of a contract. All rights which are not intransmissible may also
be the object of contracts.
BELINDA TAREDO, for herself and in representation of her brothers and
sisters, and TEOFILA CORPUZ TANEDO, representing her minor
daughter VERNA TANEDO, petitioners, vs. THE COURT OF
APPEALS, SPOUSES RICARDO M. TAREDO AND TERESITA
BARERA TAREDO, respondents.
G.R. No. 104482. January 22, 1996

DOCTRINE: Pursuant to Article 1347 of the Civil Code, (n)o contract may be
entered into upon a future inheritance except in cases expressly authorized by
law. Consequently, said contract made in 1962 is not valid and cannot be the
source of any right nor the creator of any obligation between the parties.
Ponente: J. Panganiban

FACTS:
On October 20, 1962, Lazaro Taredo executed a notarized deed of
absolute sale in favor of his eldest brother, Ricardo Taredo, and the latter’s wife,
Teresita Barera, private respondents herein, whereby he conveyed to the latter in
consideration of P1,500.00, one hectare of whatever share I shall have over Lot
No. 191 of the cadastral survey of Gerona, Province of Tarlac and the said
property being his future inheritance from his parents.
Upon the death of his father Matias, Lazaro executed an Affidavit of Conformity
dated February 28, 1980 to re-affirm, respect, acknowledge and validate the sale
he made in 1962. On January 13, 1981, Lazaro executed another notarized
deed of sale in favor of private respondents covering his undivided ONE
TWELVE (1/12) of a parcel of land known as Lot 191. He acknowledged
therein his receipt of P 10,000.00 as consideration therefor. Thereafter, Ricardo
learned that Lazaro sold the same property to his children, petitioners herein,
through a deed of sale dated December 29, 1980. Nevertheless, private
respondents successfully recorded the Deed of Sale in their favor in the Registry
of Deeds and the corresponding entry was made in Transfer Certificate of Title No.
166451.
Petitioners on July 16, 1982 filed a complaint for rescission (plus damages) of
the deeds of sale executed by Lazaro in favor of private respondents covering the
property inherited by Lazaro from his father. Petitioners claimed that their father,
Lazaro, executed an Absolute Deed of Sale dated December 29, 1980 conveying
to his ten children his allotted portion under the extrajudicial partition executed by
the heirs of Matias, which deed included the land in litigation (Lot 191). Private
respondents presented in evidence a Deed of Revocation of a Deed of Sale
dated March 12, 1981, wherein Lazaro revoked the sale in favor of petitioners for
the reason that it was simulated or fictitious - without any consideration
whatsoever.
 The trial court decided in favor of private respondents, holding that petitioners
failed to adduce a preponderance of evidence to support (their) claim. On appeal,
the Court of Appeals affirmed the decision of the trial court, ruling that the Deed
of Sale dated January 13, 1981 was valid and that its registration in good faith
vested title in said respondents.

ISSUE: Whether the 1962 Contract of Sale executed in favor of private

respondents is void ab initio pursuant to paragraph 2 of Article 1347 of the New
Civil Code, as the object involves a future inheritance.

RULING: YES. Pursuant to Article 1347 of the Civil Code, (n)o contract may be
entered into upon a future inheritance except in cases expressly authorized by law.
Consequently, said contract made in 1962 is not valid and cannot be the source of
any right nor the creator of any obligation between the parties. Hence, the affidavit
of conformity dated February 28, 1980, insofar as it sought to validate or ratify the
1962 sale, is also useless and, in the words of the respondent Court, suffers from
the same infirmity. Even private respondents in their memorandum concede this.
In context, the assailed Decision conceded it may be legally correct that a contract
of sale of anticipated future inheritance is null and void.

However, the sale made in 1962 involving future inheritance is not

really at issue here. The documents that are critical to the resolution of this case
are: (a) the deed of sale of January 13, 1981 in favor of private respondents
covering Lazaro’s undivided inheritance of one-twelfth (1/12) share in Lot No. 191,
which was subsequently registered on June 7, 1982; and (b) the deed of sale
dated December 29, 1980 in favor of petitioners covering the same property.
These two documents were executed after the death of Matias (and his spouse)
and after a deed of extrajudicial settlement of his (Matias) estate was executed,
thus vesting in Lazaro actual title over said property. In other words, these
dispositions, though conflicting, were no longer infected with the infirmities of the
1962 sale.

Petitioners contend that what was sold on January 13, 1981 was only one-half
hectare out of Lot No. 191, citing as authority the trial courts decision. As earlier
pointed out, what is on review in these proceedings by this Court is the Court of
Appeals decision - which correctly identified the subject matter of the January 13,
1981 sale to be the entire undivided 1/12 share of Lazaro in Lot No. 191 and which
is the same property disposed of on December 29, 1980 in favor of petitioners.
Critical in determining which of these two deeds should be given effect is the
registration of the sale in favor of private respondents with the register of deeds
on June 7, 1982. Article 1544 of the Civil Code governs the preferential rights of
vendees in cases of multiple sales, as follows:
 Art. 1544. If the same thing should have been sold to different
vendees, the ownership shall be transferred to the person who may
have first taken possession thereof in good faith, if it should be
movable property.

Should it be immovable property, the ownership shall belong to the

person acquiring it who in good faith first recorded it in the Registry
of Property.

Should there be no inscription, the ownership shall pertain to the

person who in good faith was first in the possession; and, in the
absence thereof, to the person who presents the oldest title,
provided there is good faith.

The property in question is land, an immovable, and following the above-

quoted law, ownership shall belong to the buyer who in good faith registers it first
in the registry of property. Thus, although the deed of sale in favor of private
respondents was later than the one in favor of petitioners, ownership would vest
to private respondents because of the undisputed fact of registration. On the other
hand, petitioners have not registered the sale to them at all.
Petitioners contend that they were in possession of the property and that
private respondents never took possession thereof. As between two purchasers,
the one who registered the sale in his favor has a preferred right over the other
who has not registered his title, even if the latter is in actual possession of the
immovable property. Thus, the petition is DENIED and the assailed Decision of
the Court of Appeals is AFFIRMED. No Costs.
[N.B. The spelling of parties’ surname in the SC Ruling is not consistent: Taedo,
Taredo or Tanedo]
CONCHITA LIGUEZ, Petitioner, v. THE HONORABLE COURT OF
APPEALS, MARIA NGO VDA. DE LOPEZ, ET AL., Respondents.
G.R. No. L-11240. December 18, 1957

DOCTRINE: Under Article 1274, of the Civil Code of 1889, liberality of the donor
is deemed causa only in those contracts that are of "pure" beneficience that is to
say, contracts designed solely and exclusively to procure the welfare of the
beneficiary, without any intent of producing any satisfaction for the donor;
contacts, in other words, in which the idea of self-interest is totally absent on the
part of the transferor. For this very reason, the same Article 1274 provides that in
remuneratory contracts, the consideration is the service or benefit for which the
remuneration is given; causa is not liberality in these cases because the contract
or conveyance is not made out of pure beneficience, but "solvendi animo."

The motive of the parties may be regarded as causa when it predetermines the
purpose of the contract.

Ponente: J. JBL Reyes

FACTS:

The case began upon complaint for recovery of land filed by petitioner-
appellant against the widow and heirs of the late Salvador P. Lopez to recover a
parcel of 51.84 hectares of land, situated in Barrio Bogac-Linot, of the municipality
of Mati, Province of Davao. Petitioner averred to be its legal owner, pursuant to a
deed of donation of said land, executed in her favor by the late owner, Salvador
P. Lopez, on 18 May 1943.

The defense interposed was that the donation was null and void for having
an illicit causa or consideration, which was plaintiff’s entering into marital relations
with Salvador P. Lopez, a married man; and that the property had been
adjudicated to the appellees as heirs of Lopez by the Court of First Instance, since
1949.

The Court of Appeals found that the deed of donation was prepared by the
Justice of the Peace of Mati, Davao, before whom it was signed and ratified on the
date aforesaid. At the time, petitioner Liguez was a minor, only 16 years of age.
While the deed recites —"That the DONOR, Salvador P. Lopez, for and in
consideration of his love and affection for the said DONEE, Conchita Liguez, and
also for the good and valuable services rendered to the DONOR by the DONEE,
does by these presents, voluntarily give, grant and donate to the said donee, etc."
 It was also ascertained by the Court of Appeals that the donated land
originally belonged to the conjugal partnership of Salvador P. Lopez and his wife,
Maria Ngo; that the latter had met and berated Conchita for living maritally with
her husband, sometime during June of 1943; that the widow and children of Lopez
were in possession of the land and made improvements thereon; that the land
was assessed in the tax rolls first in the name of Lopez and later in that of his
widow; and that the need of donation was never recorded.

Thus, Court of Appeals held that the deed of donation was inoperative, and
null and void (1) because the husband, Lopez, had no right to donate conjugal
property to the plaintiff appellant; and (2) because the donation was tainted with
illegal causa or consideration, of which donor and donee were participants.

ISSUE: Whether the donation made in favor of petitioner is void for having an
illicit causa or consideration?

RULING: YES, the donation is void for having an illicit causa.

In the instant case, the facts as found by the Court of Appeals demonstrate
that in making the donation in question, the late Salvador P. Lopez was not moved
exclusively by the desire to benefit appellant Conchita Liguez, but also to secure
her cohabiting with him, so that he could gratify his sexual impulses. This is clear
from the confession of Lopez to the witnesses Rodriguez and Ragay, that he was
in love with appellant, but her parents would not agree unless he donated the land
in question to her. Actually, therefore, the donation was but one part of an onerous
transaction (at least with appellant’s parents) that must be viewed in its totality.
Thus considered, the conveyance was clearly predicated upon an illicit causa.

Appellant seeks to differentiate between the alleged liberality of Lopez, as

causa for the donation in her favor, and his desire for cohabiting with appellant,
as motives that impelled him to make the donation, and quotes from Manresa and
the jurisprudence of this Court on the distinction that must be maintained between
causa and motives. It is well to note, however, that Manresa himself, while
maintaining the distinction and upholding the inoperativeness of the motives of
the parties to determine the validity of the contract, expressly excepts from the
rule those contracts that are conditioned upon the attainment of the motives of
either party. The same view is held by the Supreme Court of Spain holding that
the motive may be regarded as causa when it predetermines the purpose of the
contract.

It is scarsely disputable that Lopez would not have conveyed the property
in question had he known that appellant would refuse to cohabit with him; so that
the cohabitation was an implied condition to the donation, and being unlawful,
necessarily tainted the donation itself.
 Petitioner argued that under Article 1274 of the Civil Code of 1889 (which
was the governing law in 1943, when the donation was executed), "in contracts
of pure beneficence the consideration is the liberality of the donor", and that
liberality per se can never be illegal, since it is neither against law or morals or
public policy. The flaw in this argument lies in ignoring that under Article 1274,
liberality of the donor is deemed causa only in those contracts that are of "pure"
beneficence; that is to say, contracts designed solely and exclusively to procure
the welfare of the beneficiary, without any intent of producing any satisfaction for
the donor; contracts, in other words, in which the idea of self-interest is totally
absent on the part of the transferor. For this very reason, the same Article 1274
provides that in remuneratory contracts, the consideration is the service or benefit
for which the remuneration is given; causa is not liberality in these cases because
the contract or conveyance is not made out of pure beneficence, but "solvendi
animo."

It does not, however, follow that the plaintiff can [not] succeed in
this action. It is a familiar principle that the courts will not aid either party to
enforce an illegal contract, but will leave them both where it finds them; but where
the plaintiff can establish a cause of action without exposing its illegality, the vice
does not affect his right to recover. The American authorities cited by the plaintiff
fully sustain this doctrine. The principle applies equally to a defense. The law in
those Islands applicable to the case is found in article 1305 of the Civil Code,
shutting out from relief either of the two guilty parties to an illegal or vicious
contract.

The appellant seeks recovery of the disputed land on the strength

of a donation regular on its face. To defeat its effect, the appellees must
plead and prove that the same is illegal. But such plea on the part of the
Lopez heirs is not receivable, since Lopez himself, if living, would be
barred from setting up that plea; and his heirs, as his privies and
successors in interest, can have no better rights than Lopez himself.

Appellees, as successors of the late donor, being thus precluded from

pleading the defense of immorality or illegal causa of the donation, the total or
partial ineffectiveness of the same must be decided by different legal principles.
In this regard, the Court of Appeals correctly held that Lopez could not donate the
entirety of the property in litigation, to the prejudice of his wife Maria Ngo, because
said property was conjugal in character, and the right of the husband to donate
community property is strictly limited by law.

The donation made by the husband in contravention of law is not void in its
entirety, but only in so far as it prejudices the interest of the wife. In this regard,
as Manresa points out, the law makes no distinction between gratuitous transfers
and conveyances for a consideration. To determine the prejudice to the widow, it
must be shown that the value of her share in the property donated can not be
paid out of the husband’s share of the community profits. The requisite data,
however, are not available to us and necessitate a remand of the records to the
court of origin that settled the estate of the late Salvador P. Lopez.

The situation of the children and forced heirs of Lopez approximates that of
the widow. As privies of their parent, they are barred from invoking the illegality
of the donation. But their right to a legitime out of his estate is not thereby
affected, since the legitime is granted them by the law itself, over and above the
wishes of the deceased. Hence, the forced heirs are entitled to have the donation
set aside in so far as inofficious: i.e., in excess of the portion of free disposal.

In view of the foregoing, the decisions appealed from are reversed and set
aside, and the appellant Conchita Liguez declared entitled to so much of the
donated property as may be found, upon proper liquidation, not to prejudice the
share of the widow Maria Ngo in the conjugal partnership with Salvador P. Lopez
or the legitimes of the forced heirs of the latter. The records are ordered remanded
to the court of origin for further proceedings in accordance with this opinion.
MAXIMINO CARANTES (Substituted by Engracia Mabanta Carantes) vs.
COURT OF APPEALS, BILAD CARANTES, LAURO CARANTES, EDUARDO
CARANTES and MICHAEL TUMPAO

G.R. No. L-33360 April 25, 1977

CASTRO, C.J:

Facts:

Mateo Carantes, original owner of Lot No. 44 situated at Loakan, Baguio

City, died in 1913 leaving his widow Ogasia, and six children, namely, Bilad, Lauro,
Crispino, Maximino, Apung and Sianang,. In 1930, the government, in order to
expand the landing field of the Loakan Airport, filed for the expropriation of a
portion of Lot. No. 44. Said lot was subdivided into Lots. No. 44A to 44E for the
purpose.

In 1913, Maximino Carrantes was appointed the judicial administrator of

the estate of Mateo. On October 23, 1939 a deed denominated "Assignment of
Right to Inheritance" was executed by four of Mateo Carantes children, namely,
Bilad, Sianang, Lauro and Crispino, and the heirs of Apung Carantes (also a son of
Mateo who died in 1923), namely, Pitag, Bill, Alson, Eduardo and Juan, assigning
to Maximino Carantes their rights to inheritance in Lot No. 44. The stated monetary
consideration for the assignment was P1.00. However, the document contains a
recital to the effect that the said lots, "by agreement of all the direct heirs and
heirs by representation of the deceased Mateo Carantes as expressed and
conveyed verbally by him during his lifetime, rightly and exclusively belong to the
particular heir, Maximino Carantes, now and in the past in the exclusive,
continuous, peaceful and notorious possession of the same for more than ten
years."

On the same date Maximino Carantes sold to the Government Lots Nos. 44-
B and 44-C and divided the proceeds of the sale among himself and the other heirs
of Mateo.

One year later, the Court of First Instance, upon joint petition of the
Carantes heirs, issued an order cancelling O.C.T. No. 3 and TCT No. 2533 was
issued in its place.

On 16 March 1940, Max registered the deed of “Assignment of Right to

Inheritance”. Thus, TCT No. 2533 was cancelled and TCT 2540 was issued in the
name of Maximino. Also on the same date, Maximino, acting as exclusive owner
of the land covered by T.C.T. No. 2540, executed a formal deed of sale in favor of
the Government over Lots Nos. 44-B and 44-C. Lot No. 44-D and 44-E remained
under Maximino’s name.
 On 4 Sept. 1958, Bilad, Lauro, and Crispino, along with the surviving heirs
of Apung and Sianang filed complaint in the CFI alleging that they and/or their
predecessors-in-interest executed the deed of "Assignment of Right to
Inheritance", only because they were defrauded and were made to believe by the
defendant Maximino Carantes that the said instrument embodied the
understanding among the parties that it merely authorized the defendant
Maximino to convey portions of Lot No. 44 to the Government in their behalf to
minimize expenses and facilitate the transaction when the plaintiffs secured a copy
of the deed, that they came to know that the same purported to assign in favor of
Maximino their rights to inheritance from Mateo Carantes. The plaintiffs prayed
that the deed of "Assignment of Right to Inheritance" be declared null and void
and the parcels of land be ordered partitioned into six (6) equal shares and the
defendant Maximino Carantes be accordingly ordered to execute the necessary
deeds of conveyance in their favour.

Maximino, on the other hand, alleges among others that the plaintiffs' cause
of action is barred by the statute of limitations because the deed of assignment
was recorded in the Registry of Property at the latest on February 21, 1947, hence,
plaintiffs' cause of action accrued from the said date, and since pursuant to article
1144 of the new Civil Code an action based on a written contract must be brought
within ten years from the time the right of action accrues, plaintiffs' right to file
the complaint had already prescribed on September 4, 1958.

The trial court decided that the action of the heirs had already prescribed
since an action on fraud prescribes on four years from discovery of such, in this
case, on 16 March 1940 when Max registered the deed of assignment.

The Court of Appeals reversed and found that a constructive trust was
created and that the deed of "Assignment of Right to Inheritance" is void ab
initio and inexistent on the grounds that real consent was wanting and the
consideration of P1.00 is so shocking to the conscience that there was in fact no
consideration, hence, the action for the declaration of the contract's inexistence
does not prescribe pursuant to article 1410 of the new Civil Code.

Issue: Whether or not the deed of “Assignment of Right to Inheritance” is void

due to lack of consideration

Ruling: No.

The respondents' action may not be considered as one to declare the

inexistence of a contract for lack of consideration. It is total absence of cause or
consideration that renders a contract absolutely void and inexistent. In the case at
bar consideration was not absent. The sum of P1.00 appears in the document as
one of the considerations for the assignment of inheritance. In addition — and this
of great legal import — the document recites that the decedent Mateo Carantes
had, during his lifetime, expressed to the signatories to the contract that the
property subject-matter thereof rightly and exclusively belonged to the petitioner
Maximino Carantes. This acknowledgment by the signatories definitely constitutes
valuable consideration for the contract.
SPOUSES BERNARDO BUENAVENTURA et al. vs. COURT OF APPEALS,
SPOUSES LEONARDO JOAQUIN and FELICIANA LANDRITO et al.

G.R. No. 126376. November 20, 2003

CARPIO, J.:

Facts: Defendant spouses Leonardo Joaquin and Feliciana Landrito are the
parents of plaintiffs Consolacion, Nora, Emma and Natividad as well as of
defendants Fidel, Tomas, Artemio, Clarita, Felicitas, Fe, and Gavino, all surnamed
JOAQUIN.

Sought to be declared null and void ab initio are certain deeds of sale of real
property executed by defendant parents Leonardo Joaquin and Feliciana Landrito
in favor of their co-defendant children and the corresponding certificates of title
issued in their names, to wit:

1. Deed of Absolute Sale covering Lot 168-C-7 in favor of defendant

Felicitas Joaquin, for a consideration of P6,000.00;

2. Deed of Absolute Sale covering Lot 168-I-3 in favor of defendant Clarita

Joaquin, for a consideration of P12,000.00;

3 Deed of Absolute Sale covering Lot 168-I-1 in favor of defendant

spouses Fidel Joaquin and Conchita Bernardo, for a consideration
of P54,300.00;

4. Deed of Absolute Sale covering Lot 168-I-2 in favor of defendant

spouses Artemio Joaquin and Socorro Angeles, for a consideration
of P54,300.00;

5. Absolute Sale of Real Property covering Lot 168-C-4 in favor of Tomas

Joaquin, for a consideration of P20,000.00; and

6. Deed of Absolute Sale covering Lot 168-C-1 in favor of Gavino Joaquin,

for a consideration of P25,000.00.

In seeking the declaration of nullity of deeds of sale and certificates of title,

plaintiffs, in their complaint, aver that the deeds of sale are simulated as they are
NULL AND VOID AB INITIO because

a) Firstly, there was no actual valid consideration for the deeds of sale xxx
over the properties in litis;
 b) Secondly, assuming that there was consideration in the sums reflected
in the questioned deeds, the properties are more than three-fold
times more valuable than the measly sums appearing therein;

c) Thirdly, the deeds of sale do not reflect and express the true intent of
the parties (vendors and vendees); and

d) Fourthly, the purported sale of the properties in litis was the result of a
deliberate conspiracy designed to unjustly deprive the rest of the
compulsory heirs (plaintiffs herein) of their legitime.

Defendants, on the other hand aver (1) that plaintiffs do not have a cause of
action against them as well as the requisite standing and interest to assail their
titles over the properties in litis; (2) that the sales were with sufficient
considerations and made by defendants parents voluntarily, in good faith, and with
full knowledge of the consequences of their deeds of sale; and (3) that the
certificates of title were issued with sufficient factual and legal basis.

TC: Ruled in favor of the defendants and dismissed the complaint saying that the
testimony of the defendants, particularly that of the father will show that the Deeds
of Sale were all executed for valuable consideration. This assertion must prevail
over the negative allegation of plaintiffs.

CA: The Court of Appeals affirmed the decision of the trial court. It ruled that the
plaintiffs’ right to the properties of their defendant parents, as compulsory heirs,
is merely inchoate and vests only upon the latter’s death. While still alive,
defendant parents are free to dispose of their properties, provided that such
dispositions are not made in fraud of creditors. Also, it ruled that plaintiffs-
appellants are not parties to the deeds of sale in question. Neither do they claim
to be creditors of their defendant parents. Consequently, they cannot be
considered as real parties in interest to assail the validity of said deeds either for
gross inadequacy or lack of consideration or for failure to express the true intent
of the parties.

Plaintiffs-appellants anchor their action on the supposed impairment of their

legitime by the dispositions made by their defendant parents in favor of their
defendant brothers and sisters. But, as correctly held by the court a quo, the
legitime of a compulsory heir is computed as of the time of the death of the
decedent. Plaintiffs therefore cannot claim an impairment of their legitime while
their parents live.

Issues:
 1. Whether the Deeds of Sale are void for lack of consideration

2. Whether the Deeds of Sale are void for gross inadequacy of price

Ruling
1. No.
A contract of sale is not a real contract, but a consensual contract. As a
consensual contract, a contract of sale becomes a binding and valid contract upon
the meeting of the minds as to price. If there is a meeting of the minds of the
parties as to the price, the contract of sale is valid, despite the manner of payment,
or even the breach of that manner of payment. If the real price is not stated in
the contract, then the contract of sale is valid but subject to reformation. If there
is no meeting of the minds of the parties as to the price, because the price
stipulated in the contract is simulated, then the contract is void. Article 1471 of
the Civil Code states that if the price in a contract of sale is simulated, the sale is
void.
It is not the act of payment of price that determines the validity of a contract
of sale. Payment of the price has nothing to do with the perfection of the
contract. Payment of the price goes into the performance of the contract. Failure
to pay the consideration is different from lack of consideration. The former results
in a right to demand the fulfillment or cancellation of the obligation under an
existing valid contract while the latter prevents the existence of a valid contract.
Petitioners failed to show that the prices in the Deeds of Sale were absolutely
simulated. To prove simulation, petitioners presented Emma Joaquin Valdoz’s
testimony stating that their father, respondent Leonardo Joaquin, told her that he
would transfer a lot to her through a deed of sale without need for her payment
of the purchase price. The trial court did not find the allegation of absolute
simulation of price credible. Petitioners’ failure to prove absolute simulation of
price is magnified by their lack of knowledge of their respondent siblings’ financial
capacity to buy the questioned lots. On the other hand, the Deeds of Sale which
petitioners presented as evidence plainly showed the cost of each lot sold. Not
only did respondents’ minds meet as to the purchase price, but the real price was
also stated in the Deeds of Sale. As of the filing of the complaint, respondent
siblings have also fully paid the price to their respondent father.
2. No.
Articles 1355 of the Civil Code states:
Art. 1355. Except in cases specified by law, lesion or inadequacy of cause
shall not invalidate a contract, unless there has been fraud, mistake or undue
influence.

Article 1470 of the Civil Code further provides:

Art. 1470. Gross inadequacy of price does not affect a contract of

sale, except as may indicate a defect in the consent, or that the parties really
intended a donation or some other act or contract.

Petitioners failed to prove any of the instances mentioned in Articles 1355 and
1470 of the Civil Code which would invalidate, or even affect, the Deeds of
Sale. Indeed, there is no requirement that the price be equal to the exact value of
the subject matter of sale. All the respondents believed that they received the
commutative value of what they gave.
WT CONSTRUCTION, INC. v. THE PROVINCE OF CEBU
G.R. Nos. 208984 & 209245, 16 September 2015, FIRST DIVISION
(Perlas-Bernabe, J.)

Liabilities arising from construction contracts do not partake of loans or

forbearance of money but are in the nature of contracts of service.

FACTS:

The Province of Cebu was chosen to host the 12th ASEAN Summit. To cater
to the event, the Province of Cebu decided to construct the Cebu International
Convention Center (CICC) as venue for the ASEAN Summit. It engaged WT
Construction, Inc. (WTCI), the winning bidder of Phase I and II of CICC, to begin
construction. As Phase II neared completion, the Province of Cebu caused WTCI
to perform additional works on the project, to which WTCI agreed. After
completing the project and the additional works, WTCI billed the Province of Cebu,
but the latter refused to pay. Thus, WTCI filed a complaint for collection of money
before the RTC. The RTC ruled in favor of WTCI and ordered the Province of Cebu
to pay the cost of the additional works, with legal interest at the rate of 12% per
annum computed from the filing of the complaint until fully paid. The RTC found
that there was a perfected oral contract between the parties for the additional
works on CICC, and that WTCI must be duly compensated therefor under the
doctrine of quantum meruit; otherwise, the Province of Cebu would be unjustly
enriched. The CA affirmed but reduced the interest rate to 6% per annum given
that the liability of the Province of Cebu did not arise from a loan or forbearance
of money but from the non-payment of services rendered by WTCI.

ISSUE:

Whether or not the liability of the Province of Cebu is in the nature of a loan
or forbearance of money.

RULING:

NO. There is no question that the present case does not involve an
obligation arising from a loan; what is at issue is whether the liability of the
Province of Cebu involves a forbearance of money, based on WTCI’s claim that it
merely advanced the cost of the additional works. The Court has characterized a
transaction involving forbearance of money as follows: “The term “forbearance,”
within the context of usury law, has been described as a contractual obligation of
a lender or creditor to refrain, during a given period of time, from requiring the
borrower or debtor to repay the loan or debt then due and payable.” The Court
has explained that forbearance of money, goods, or credit refers to arrangements
other than loan agreements where a person acquiesces to the temporary use of
his money, goods or credits pending the happening of certain events or fulfillment
of certain conditions such that if these conditions are breached, the said person is
entitled not only to the return of the principal amount given, but also to
compensation for the use of his money equivalent to the legal interest since the
use or deprivation of funds is akin to a loan.

Applying the foregoing standards to the case at hand, the Court finds that
the liability of the Province of Cebu to WTCI is not in the nature of a forbearance
of money as it does not involve an acquiescence to the temporary use of WTCI’s
money, goods or credits. Rather, this case involves WTCI’s performance of a
particular service, i.e., the performance of additional works on CICC, consisting of
site development, additional structural, architectural, plumbing, and electrical
works thereon.

Verily, the Court has repeatedly recognized that liabilities arising from
construction contracts do not partake of loans or forbearance of money but are in
the nature of contracts of service. The Court has ruled that the liability arising
from the non-payment for the construction works, specifically the construction of
a diaphragm wall, capping beam, and guide walls, do not partake of a loan or
forbearance of money but is more in the nature of a contract of service. The Court,
therefore, sustains the CA’s ruling that the rate of legal interest imposable on the
liability of the Province of Cebu to WTCI is 6% per annum, in accordance with the
guidelines laid down in Eastern Shipping Lines, Inc. v. Court of Appeals.
In the matter of intestate estate of the deceased Juana Servando. JOSE
P. TINSAY v. JOVITA YUSAY and PETRA YUSAY
G.R. No. L-23126, 17 March 1925, EN BANC (Ostrand, J.)

Summary: A died leaving a widow, B. After his death his descendants made a
partition by a private instrument of certain lands, community property of his
marriage to B. Though B took no part in the partition her interest in the land was
nevertheless distributed among the descendants. On the strength of the partition
the descendants, among them the appellants, went into possession of the
respective portions allotted to them in said partition. Some years later the portions
of the appellants were registered in their names in a cadastral proceeding. Upon
the subsequent death of the widow B, the appellants as heirs of the widow claimed
a share of her interest in the land. Held: (a) That, B not being a party to the
partition agreement, the agreement standing alone was ineffective as to her
interest in the property partitioned; (b) that the partition of her interest among
her heirs before her death constituted a partition of a future inheritance and was
therefore invalid under the second paragraph of article 1271 of the Civil Code; (c)
that, nevertheless, if the appellants have accepted the benefit of the partition
agreement to the prejudice of the other heirs and refuse to make restitution of the
property received by them by virtue of said agreement, they are estopped from
repudiating the agreement and from claiming an interest in the property allotted
to the other heirs.

FACTS:

Juan Yusay died leaving a widow, Juana Servando, and five children,
Candido, Numeriana, Jovito, Jovita and Petra. His estate consisted of his interest
in a track of land divided into two lots by Calle Aldeguer and which was community
property of his marriage to Juana. Jovito Yusay purchased the interests of Candido
and Numeriana in the land, thus acquiring a three-fifths interest in the same.
Thereafter, Jovito died leaving a widow, Perpetua Sian, and five minor children. In
1911, Perpetua, for herself and in representation of her children, entered into an
agreement in writing with Jovita and Petra Yusay which purported to provide for
the partition of the subject land. The document stated that Jovita and Petra
expressly relinquish in favor of the children of Jovito any and all rights which they,
Jovita and Petra, might have in the land assigned to Perpetua and her children in
the partition.

During the cadastral proceedings of the subject land, Lots Nos. 241 and 713
were adjudicated to Perpetua on behalf of her children while Lots Nos. 283 and
744 were given to Jovita and Petra. Juana Servando filed a petition in the cadastral
case asking for the reopening of the case as to lots Nos. 241 and 713 on the
ground that she was the owner of a one-half interest in said lots, but that at the
time of the trial of the case Perpetua had falsely lead her to believe that a claim
had been presented in her behalf for her interest in the land. The petition for
reopening was granted. The two lots Nos. 241 and 713 were decreed in favor of
Juana and the children of Jovito in the proportions of an undivided half interest in
favor of Juana and the remaining one-half interest in favor of the children of
Perpetua in equal shares, the court holding in substance that Juana, not having
been a party to the partition made in 1911, her interests were not affected thereby.

After the death of Juana, Jose P. Tinsay was appointed administrator of her
estate. Jovita and Petra then sold lot No. 283 to one Vicente Tad-Y for the sum
of P20,000. This sum was collated to the inventory of the estate of Juana. The
court approved the scheme of partition and declared the proceeds of the sale of
lots Nos. 283 and 744 “fictitiously collationable” and held that this being in excess
of their share of the inheritance, Jovita and Petra could claim no further
participation in the other property described in the inventory and in the scheme of
partition.

ISSUE:

WON Jovita and Petra Yusay may claim their share from the property of
their late mother.

RULING:
Juana Servando not being a party to the partition agreement Exhibit 1, the
agreement standing alone was, of course, ineffective as against her. The attempt
to partition her land among her heirs, constituting a partition of a future
inheritance was invalid under the second paragraph of article 1271 of the Civil
Code and for the same reason the renunciation of all interest in the land which
now constitutes lots Nos. 241 and 713 made by the appellants in favor of the
children of Jovito Yusay would likewise be of no binding force as to the undivided
portion which belonged to Juana Servando. But if the parties entered into the
partition agreement in good faith and treated all of the land as a present
inheritance, and if the appellants on the strength of the agreement obtained their
Torrens title to the land alloted to them therein, and if Perpetua Sian in reliance
on the appellants' renunciation of all interest claimed by her on behalf of her
children in the cadastral case refrained from presenting any opposition to the
appellants' claim to the entire fee in the land assigned to them in the partition
agreement and if the appellants after the death of Juana Servando continued to
enjoy the benefits of the agreement refusing to compensate the heirs of Jovito
Yusay for the latter's loss of their interest in lots Nos. 283 and 744 through the
registration of the lots in the name of the appellants and the subsequent alienation
of the same to innocent third parties, said appellants are now estopped from
repudiating the partition agreement of 1911 and from claiming any further interest
in lots Nos. 241 and 713. There is, however, no reason why they should not be
allowed to share in the distribution of the other property left by Juana Servando.
 We may say further that if a case of estoppel should not be established, the
appellants might still, under article 1303 in relation with article 1073 of the Civil
Code, be compelled to restore to the estate of Juana Servando one- half of the
amount received by them from the sale of lots Nos. 283 and 744, unless it is shown
that Juana's interest in the lot was transferred to them either by sale or by valid
donation. The registration of land does not necessarily extinguish obligations of
that character.
Dizon vs Gaborro

G.R. No. L-36821 June 22, 1978

GUERRERO, J.

Facts: Dizon was the owner of the three (3) parcels of land, subject matter of this
litigation, situated in Mabalacat, Pampanga. He constituted a first mortgage lien in
favor of the Develop. ment Bank of the Philippines in order to secure a loan in the
sum of P38,000.00 trial a second mortgage lien in favor of the Philippine National
Bank to cure his indebtedness to said bank in the amount of P93,831.91.

Dizon defaulted in the payment of his debt, DBP forclosed the mortgage
extrajudicially pursuant to Act No. 3135.

Dizon met Gaborro whereby the latter became interested in the lands of Dizon.
Dizon originally intended to lease to Gaborro the property which had been lying
idle for some time. But as the mortgage was already foreclosed by the DPB trial
the bank in fact purchased the lands at the foreclosure sale they abandoned the
projected lease. They entered into two contracts that were captioned as Deed of
Sale with Assumption of Mortgage and Option to Purchase Real Estate.

The sum of P131,813.91 which purports to be the consideration of the sale was
not actually paid by Alfredo G. Gaborro to the petitioner. The said amount
represents the aggregate debts of the petitioner with the Development Bank of
the Philippines trial the Philippine National Bank.

After the execution of said contracts, Alfredo G. Gaborro took possession of the
three parcels of land in question.

Gaborro sent a letter to DBP informing the latter about the two contracts executed
between him and Dizon, he stated that the ownership of the said properties were
transferred to him and that said obligation to pay said loan were transferred to
him as well. Accordingly DBP executed a conditional sale on the said properties,
after which Gaborro introduced improvements cultivated the kinds raised
sugarcane and other crops. He likewise paid the land taxes thereon.

Dizon through his lawyer wrote Gaborro informing him that he is already willing to
reimburse what Gaborro paid to DPB however Gaborro did not accede the
demands of Dizon. Thus, Dizon filed a complaint in CFI Pampanga alleging that
the two contracts which they have executed do not reflect the true intention of
their agreement. Dizon contended that the two deeds constitute in fact a single
transaction that their real agreement was not an absolute e of the d of land but
merely an equitable mortgage or conveyance by way of security for the
reimbursement or refund by Dizon to Gaborro of any and all sums which the latter
may have paid on account of the mortgage debts in favor of the DBP and the PNB.

Gaborro denied the allegations of Dizon contending that both contracts expressed
the true agreement of the parties.

Issue: W/N the 'Deed of Sale with Assumption of Mortgage', trial Option to
Purchase Real Estate" two instruments executed by trial between Dizon and
Gaborro constitute an absolute sale of the three parcels of land therein described

Held: No. The true intention of the parties is that respondent Gaborro would
assume and pay the indebtedness of petitioner Dizon to DBP and PNB, and in
consideration therefor, respondent Gaborro was given the possession, the
enjoyment and use of the lands until petitioner can reimburse fully the respondent
the amounts paid by the latter to DBP and PNB, to accomplish the following ends:
(a) payment of the bank obligations; (b) make the lands productive for the benefit
of the possessor, respondent Gaborro, (c) assure the return of the land to the
original owner, petitioner Dizon, thus rendering equity and fairness to all parties
concerned.
Such an instrument cannot be legally considered a real and unconditional sale of
the parcels of land, firstly, because there was absolutely no money consideration
therefor, as admittedly stipulated the sum of P131,831.91 mentioned in the
document as the consideration "receipt of which was acknowledged" was not
actually paid; and secondly, because the properties had already been previously
sold by the sheriff at the foreclosure sale, thereby divesting the petitioner of his
full right as owner thereof to dispose and sell the lands.

The agreement between petitioner Dizon and respondent Gaborro is one of those
inanimate contracts under Art. 1307 of the New Civil Code whereby petitioner and
respondent agreed "to give and to do" certain rights and obligations respecting
the lands and the mortgage debts of petitioner which would be acceptable to the
bank. but partaking of the nature of the antichresis insofar as the principal parties,
petitioner Dizon and respondent Gaborro, are concerned.

Since, there was a mistake between two parties to execute two contracts the
instruments must therefore be reformed in accordance with the intention and legal
rights and obligations of the parties. Thus, Dizon is granted the right within one
year from finality of this decision to a reconveyance of the properties in litigation
upon payment and reimbursement to respondent estate of o G. Gaborro of the
amounts actually paid by Gaborro or his estate on account of the principal only of
Dizon's original loans with the Development Bank of the Philippines and Philippine
National Bank
Hernaez vs De los Angeles

G.R. No. L-27010 April 30, 1969

REYES, J.B.L., Acting C.J.

Facts: Hernaez is an actress filed a complaint against Hollywood Far East

Productions, Inc. and its President and General Manager Ramon Valenzuela to
recover the balance for here services as leading actress in two motion pictures
produced by the company. Upon motion of the defendant, the court through
Judge Delos Angeles dismissed the case because the "claim of plaintiff was not
evidenced by any written document, either public or private", and the complaint
"was defective on its face" for violating Articles 1356 and 1358 of the Civil Code,
in that the contract sued upon was not alleged to be in writing; that in Article 1358
the writing was absolute and indispensable, because the amount involved exceeds
five hundred pesos.

Issue: W/N the court below abuse its discretion in ruling that a contract for
personal services involving more than P500.00 was either invalid of unenforceable
under the last paragraph of Article 1358 of the Civil Code of the Philippines

Held: Yes. Both the court a quo as well as the private respondents herein were
grossly mistaken in holding that because petitioner Dauden's contract for services
was not in writing the same could not be sued upon, or that her complaint should
be dismissed for failure to state a cause of action because it did not plead any
written agreement.

The basic error in the court's decision lies in overlooking that in our contractual
system it is not enough that the law should require that the contract be in writing,
as it does in Article 1358. The law must further prescribe that without the writing
the contract is not valid or not enforceable by action.
Generally under Article 1315 contracts are perfected by mere consent exception is
provide under the second portion of Article 1316 which provides that “when the
law requires that a contract be in some form in order that it may be valid or
enforceable, or that a contract be proved in a certain way, that requirement is
absolute and indispensable.”

While, It is true that it appears included in Article 1358, last clause, providing that
"all other contracts where the amount involved exceeds five hundred pesos must
appear in writing, even a private one." But Article 1358 nowhere provides that the
absence of written form in this case will make the agreement invalid or
unenforceable. On the contrary, Article 1357 clearly indicates that contracts
covered by Article 1358 are binding and enforceable by action or suit despite the
absence of writing.
ZAMORA v. MIRANDA
Peralta, J. (2012)

Art. 1358, which requires the embodiment of certain contracts in a public

instrument, is only for convenience, and registration of the instrument only
adversely affects third parties. Formal requirements are, therefore, for the benefit
of third parties. Non-compliance therewith does not adversely affect the validity of
the contract nor the contractual rights and obligations of the parties thereunder.

Facts
Petitioner is the widow of the late Fernando Zamora, the son of Alberto Zamora.
Respondent Beatriz Miranda is the cousin of Alberto, while respondent Rose Marie
Miranda-Guanio is the daughter of Beatriz.

Beatriz was the registered owner of the property in question, which is a parcel of
land located in Davao City.

According to petitioner, her father-in-law, Alberto, through an encargado, Eduardo

Cecilio, was in possession of the property in question. She was designated by
Alberto as his assistant on land matters. The property in question was turned over
to her and she was introduced to Cecilio. Alberto told her that the property in
question was owned by Beatriz whose family was permanently residing in Manila.

Petitioner allegedly contacted Beatriz, and petitioner was given a calling card and
was told to see her. She claimed that she went to the residence of Beatriz in
Quezon City. While there, they talked about the property in question and Beatriz
drew a sketch depicting the location of the property. Thereafter, she alleged that
Beatriz sold to her the said property for the sum of P50,000. An acknowledgment
of the receipt of the amount of P50,000 was prepared, and Beatriz allegedly signed
the same. The receipt was dated October 23, 1972. In the sketch and
acknowledgment, there is a notation "Documents for Agdao Property follows." This
notation referred to the property in Agdao, which was the subject of negotiation.

Petitioner prepared the document relative to the Agdao property.

Petitioner further claimed that after 1972, she rented out portions of the property
in question. Cecilio allegedly continued to be her encargado as there were
squatters on the property. The tenants reported to her that there were two men
who went to the property in question. She met Atty. Cabebe and Mr. Joe Ang. She
informed them that she was the owner of the property in question as she bought
it in 1972. After sometime, she learned that the occupants of the property in
question were being harassed and were told to vacate. She went to Manila and
confronted Beatriz, and told her that she would file a case in court.
She filed with the RTC an action for specific performance, annulment of sale and
certificate of title, damages, with preliminary injunction and temporary restraining
order. She principally prays that she be declared the owner of the subject property;
that Beatriz be ordered to execute a deed of sale in her favor; and that the sale of
the subject property in favor of respondents Ang be nullified.

Issue
Can the receipt dated October 23, 1972 evidencing sale of real property, being a
private document, be a basis of petitioner's claim over the subject property?

Ruling
NO. Art. 1358, which requires the embodiment of certain contracts in a public
instrument, is only for convenience, and registration of the instrument only
adversely affects third parties. Formal requirements are, therefore, for the benefit
of third parties. Non-compliance therewith does not adversely affect the validity of
the contract nor the contractual rights and obligations of the parties thereunder.

However, the receipt dated October 23, 1972 cannot prove ownership over the
subject property as Beatriz's signature on the receipt, as vendor, has been found
to be forged by the NBI handwriting expert, the trial court and the CA.
As the receipt has no evidentiary value to prove petitioner's claim of ownership
over the property in question, there is no need to discuss the other issues raised
by petitioner based on the assumption that she has a valid claim over the subject
property.

SAN MIGUEL PROPERTIES, INC. (SMPI) v. BF HOMES, INC.

Leonardo-De Castro, J. (2015)
Art. 1358 does not require the accomplishment of the acts or contracts in a public
instrument in order to validate the act or contract but only to insure its efficacy.

The Statute of Frauds simply provides the method by which the contracts
enumerated therein may be proved but does not declare them invalid
because they are not reduced to writing. The effect of non-compliance
with the requirement of the Statute is simply that no action can be
enforced unless the requirement is complied with. Clearly, the form
required is for evidentiary purposes only. It is applicable only to contracts
which are executory and not to those which have been consummated
either totally or partially.

Facts
BF Homes, Inc. is the owner of several parcels of land located in the BF Homes
Parañaque Subdivision, particularly identified as Italia II lots.

BF Homes, represented by Florencio B. Orendain, as rehabilitation receiver

appointed by the SEC; and SMPI, represented by Federico Gonzales, President,
entered into three successive Deeds of Absolute Sale whereby the former sold to
the latter a total of 130 Italia II lots for the aggregate consideration of
P106,247,701.

SMPI completed the payments for the 130 Italia II lots. In compliance with Sec.
3 of all the three Deeds of Absolute Sale, BF Homes delivered the TCTs to SMPI
but only for 110 of the 130 Italia II lots purchased by SMPI.

SMPI, thru counsel, sent BF Homes a letter demanding the delivery of the
remaining 20 TCT.

BF Homes failed or refused to heed the demand of SMPI. Consequently, SMPI

filed a Complaint for specific performance with damages before the HLURB to
compel BF Homes to deliver the remaining 20 TCTs to SMPI.

Issue
Whether SMPI is entitled to the delivery of the remaining 20 TCTs for the lots it
purchased from BF Homes

Ruling
YES. Upon full payment of the agreed price, petitioner is mandated by
law to deliver the title of the lot or unit to the buyer.

Art. 1358(1) of the Civil Code requires that "acts and contracts which have for their
object the creation, transmission, modification or extinguishment of real rights
over immovable property" must appear in a public document; and sales of real
property or of an interest therein shall be governed by Art. 1403(2) and 1405 of
the same Code.

Art. 1358 does not require the accomplishment of the acts or contracts in a public
instrument in order to validate the act or contract but only to insure its efficacy.

The Statute of Frauds simply provides the method by which the contracts
enumerated therein may be proved but does not declare them invalid
because they are not reduced to writing. By law, contracts are obligatory in
whatever form they may have been entered into, provided all the essential
requisites for their validity are present. However, when the law requires that
a contract be in some form in order that it may be valid or enforceable,
or that a contract be proved in a certain way, that requirement is
absolute and indispensable. Consequently, the effect of non-compliance
with the requirement of the Statute is simply that no action can be
enforced unless the requirement is complied with. Clearly, the form
required is for evidentiary purposes only. Hence, if the parties permit a contract to
be proved, without any objection, it is then just as binding as if the Statute has
been complied with.
The Statute is applicable only to contracts which are executory and not
to those which have been consummated either totally or partially. If a
contract has been totally or partially performed, the exclusion of parol
evidence would promote fraud or bad faith, for it would enable the
defendant to keep the benefits already derived by him from the
transaction in litigation, and at the same time, evade the obligations,
responsibilities or liabilities assumed or contracted by him thereby. This
rule, however, is predicated on the fact of ratification of the contract
within the meaning of Art. 1405 either (1) by failure to object to the
presentation of oral evidence to prove the same, or (2) by the
acceptance of benefits under them.

The Deeds of Absolute Sale are enforceable. First, the Deeds are already in writing
and signed by the parties, and only lack notarization, a formality which SMPI could
compel BF Homes to comply with. As private documents, the Deeds are still binding
between the parties and the conveyance of the 130 Italia II lots by BF Homes to
SMPI by virtue of said Deeds is valid. And second, the Deeds were already ratified
as BF Homes had accepted the benefits from said contracts when it received full
payment from SMPI of the purchase price for the 130 Italia II lots. The Deeds
were also substantially performed considering that BF Homes had previously
delivered to SMPI the TCTs for 110 out of the 130 lots, only refusing to deliver the
TCTs for the remaining 20 lots.
KABISIG REAL WEALTH DEV., INC. and FERNANDO C. TIO
vs.
YOUNG BUILDERS CORPORATION

G.R. No. 212375

FACTS:

Sometime in April 2001, Kabisig Real Wealth Dev., Inc. (Kabisig), through
Ferdinand Tio (Tio), contracted the services of Young Builders Corporation
(Young Builders) to supply labor, tools, equipment, and materials for the
renovation of its building in Cebu City. Young Builders then finished the work in
September 2001 and billed Kabisig for P4,123,320.95. However, despite
numerous demands, Kabisig failed to pay. It contended that no written contract
was ever entered into between the parties and it was never informed of the
estimated cost of the renovation. Thus, Young Builders filed an action for
Collection of Sum of Money against Kabisig.

The RTC ruled in favor of Young builder and CA affirmed the RTC ruling finding
Kabisig and Tio liable against Young builder.

Issue:

Whether or not Kabisig is liable to Young Builders for the damages claimed.

HELD:

YES. Under the Civil Code, a contract is a meeting of minds, with respect to the
other, to give something or to render some service. Article 1318 reads:

Art. 1318. There is no contract unless the following requisites concur:

(1) Consent of the contracting parties;

(2) Object certain which is the subject matter of the contract; and

(3) Cause of the obligation which is established.

Accordingly, for a contract to be valid, it must have the following essential

elements: (1) consent of the contracting parties; (2) object certain, which is the
subject matter of the contract; and (3) cause of the obligation which is
established. Consent must exist, otherwise, the contract is nonexistent. Consent
is manifested by the meeting of the offer and the acceptance of the thing and
the cause, which are to constitute the contract. By law, a contract of sale, is
perfected at the moment there is a meeting of the minds upon the thing that is
the object of the contract and upon the price. Indeed, it is a consensual contract
which is perfected by mere consent

Kabisig's claim as to the absence of a written contract between it and Young

Builders simply does not hold water. It is settled that once perfected, a
contract is generally binding in whatever form, whether written or oral,
it may have been entered into, provided the aforementioned essential
requisites for its validity are present. Article 1356 of the Civil Code
provides:

Art. 1356. Contracts shall be obligatory in whatever form they may have been
entered into, provided all the essential requisites for their validity are present.

There is nothing in the law that requires a written contract for the
agreement in question to be valid and enforceable. Also, the Court notes
that neither Kabisig nor Tio had objected to the renovation work, until it was
already time to settle the bill.
PAULINO GARCIA,
vs.
MARIA BISAYA, ET AL.

G.R. No. L-8060 September 28, 1955

FACTS:

On May 20, 1952, plaintiff filed a complaint against the defendants in the Court
of First Instance of Oriental Mindoro, alleging that on November 12, 1938,
defendants executed in favor of plaintiff a deed of sale covering a parcel of land
therein described; that the said land "was erroneously designated by the parties
in the deed of sale as an unregistered land (not registered under Act 496, nor
under the Spanish Mortgage Law) when in truth and in fact said land is a portion
of a big mass of land registered under Original Certificate of Title No. 6579 in the
Office of the Register of Deeds of Oriental Mindoro"; that despite persistent
demand from plaintiff to have the error corrected, defendants have refused to do
so. Plaintiff, therefore, prayed for judgment ordering defendants to make the
aforesaid correction in the deed of sale. Answering the complaint, defendants
denied having executed the alleged deed of sale and pleaded prescription as a
defense. Traversing the plea of prescription, plaintiff alleged, among other
things, that he "was without knowledge of the error sought to be corrected at
the time the deed of sale was executed and for many years thereafter," having
discovered th e said error "only recently".

The trial court dismissed the case on the ground of prescription, hence this
petition.

Issue: Whether or not prescription is proper in this case.

HELD: No. Both appellant and appellees apparently regard the present action as
one for the reformation of an instrument under Chapter 4, Title II, Book IV of
the new Civil Code. Specifically, the object sought is the correction of an alleged
mistake in a deed of sale covering a piece of land. The action being upon a
written contract, it should prescribe in ten years counted from the day it could
have instituted his action to correct an error in a deed until that error was
discovered. There being nothing in the pleadings to show that the error was
discovered more than ten years before the present action was filed on May 20,
1952, while, on the other hand, there is allegation that the error was discovered
"only recently", we think the action prescribed before the factual basis for
prescription had been established and clarified by evidence.
 However, the appellant's complaint states no cause of action, for it fails
to allege that the instrument to the reformed does not express the real
agreement or intention of the parties. Such allegation is essential since
the object sought in an action for reformation is to make an instrument
conform to the real agreement or intention of the parties. (Art. 1359,
new Civil Code; 23 R. C. L., par. 2.) But the complaint does not even
allege what the real agreement or intention was. How then is the court to
know that the correction sought will make the instrument conform to what was
agreed or intended by the parties? It is not the function of the remedy of
reformation to make a new agreement, but to establish and perpetuate
the true existing one. (23 R. C. L., par. 4, p.311.)

Moreover, court do not reform instruments merely for the sake of

reforming them, but only to enable some party to asserts right under
them as reformed. (23 R. C. L., par. 2). If the instrument in the present case is
reformed by making it state that the land therein conveyed is already covered by
a Torrens certificate of title, what right will the appellant, as vendee, be able to
assert under the reformed instrument when according to himself—or his counsel
states in his brief—said title is in the name of Torcuata Sandoval, obviously a
person other than the vendor? Would not the sale to him then be ineffective,
considering that he would be in the position of one who knowingly purchased
property not belonging to the vendor?.

Perhaps appellant's real grievance is that he has been led to enter into the
contract of sale through fraud or misrepresentation on the part of the vendor or
in the mistaken belief that, as stated in the deed, the property he was buying
was unregistered land. But if that be the case, article 1359 of the new Civil Code
expressly provides that "the proper remedy is not reformation of the instrument
but annulment of the contract." Appellant's complaint, however, does not ask for
the annulment of the deed; neither does it contain allegations essential to an
action for that purpose.
YOLANDA ROSELLO-BENTIR, SAMUEL PORMIDA and CHARITO
PORMIDA, petitioners, vs. HONORABLE MATEO M. LEANDA, in his
capacity as Presiding Judge of RTC, Tacloban City, Branch 8, and LEYTE
GULF TRADERS, INC., respondents

G.R. 128991 | April 12, 2000

Kapunan, J. | Topic: Reformation of Instruments

A suit for reformation of an instrument may be barred by lapse of time. The

prescriptive period for actions based upon a written contract and for reformation
of an instrument is ten (10) years under Article 1144 of the Civil Code.

FACTS:
On May 15, 1992, respondent Leyte Gulf Traders, Inc. (herein referred to
as respondent corporation) filed a complaint for reformation of instrument, specific
performance, annulment of conditional sale and damages with prayer for writ of
injunction against petitioners Yolanda Rosello-Bentir and the spouses Samuel and
Charito Pormida. Respondent corporation alleged that it entered into a contract of
lease of a parcel of land with petitioner Bentir for a period of twenty (20) years
starting May 5, 1968. According to respondent corporation, the lease was extended
for another four (4) years or until May 31, 1992. On May 5, 1989, petitioner Bentir
sold the leased premises to petitioner spouses Samuel Pormada and Charito
Pormada.

Respondent corporation questioned the sale alleging that it had a right of

first refusal. Rebuffed, it filed Civil Case No. 92-05-88 seeking the reformation of
the expired contract of lease on the ground that its lawyer inadvertently omitted
to incorporate in the contract of lease executed in 1968, the verbal agreement or
understanding between the parties that in the event petitioner Bentir leases or
sells the lot after the expiration of the lease, respondent corporation has the right
to equal the highest offer.

ISSUE:
Whether the complaint for reformation of instrument has prescribed

HELD:
Yes, complaint for reformation of instrument has already
prescribed. The remedy of reformation no longer lies. N
 The remedy of reformation of an instrument is grounded on the principle of
equity where, in order to express the true intention of the contracting parties, an
instrument already executed is allowed by law to be reformed.

A suit for reformation of an instrument may be barred by lapse of time. The

prescriptive period for actions based upon a written contract and for reformation
of an instrument is ten (10) years under Article 1144 of the Civil Code. The
prescriptive period of ten (10) years provided for in Art. 1144 applies by operation
of law, not by the will of the parties. Therefore, the right of action for reformation
accrued from the date of execution of the contract of lease in 1968.

In the case at bar, respondent corporation had ten (10) years from 1968,
the time when the contract of lease was executed, to file an action for reformation.
Sadly, it did so only on May 15, 1992 or twenty-four (24) years after the cause of
action accrued, making its cause of action stale, hence, time-barred.
SARMING VS DY

383 SCRA 131 | June 6, 2002

Quisumbing, J. | Topic: Reformation of Instruments

All the requisites for the reformation of an instrument are present in the
case at bar. There was a meeting of the minds between the parties to the contract
but the deed did not express the true intention of the parties due to the designation
of the lot subject of the deed. The totality of the evidence clearly indicates that
what was intended to be sold to Alejandra Delfino was Lot 4163 and not Lot 5734.

FACTS:
A controversy arose regarding the sale of Lot 4163 which was half-owned
by the original defendant, Silveria Flores, although it was solely registered under
her name. The other half was originally owned by Silveria’s brother, Jose. On
January 1956, the heirs of Jose entered into a contract with plaintiff Alejandra
Delfino, for the sale of their one-half share of Lot 4163 after offering the same to
their co-owner, Silveria, who declined for lack of money. Silveria did not object to
the sale of said portion to Alejandra.

Atty. Deogracias Pinili, Alejandra’s lawyer then prepared the document of

sale. In the preparation of the document however, OCT no. 4918-A, covering Lot
5734, and not the correct title covering Lot 4163 was the one delivered to Pinili.

Unaware of the mistake committed, Alejandra immediately took possession

of Lot 4163 and introduced improvements on the said lot.

Two years later, when Alejandra Delfino purchased the adjoinin portion of
the lot she had been occupying, she discovered that what was designated in the
deed, Lot 5734, was the wrong lot. Thus, Alejandra and the vendors filed for the
feformation of the Deed of Sale.

ISSUE:
Whether reformation is proper in this case

RULING:
Yes, reformation is proper in this case.
 Reformation is that remedy in equity by means of which a written
instrument is made or construed so as to express or inform to the real intention of
the parties.

An action for reformation of instrument under this provision of law may

prosper only upon the concurrence of the following requisites:
(1) there must have been a meeting of the minds of the parties to
the contract;
(2) the instrument does not express the true intention of the parties;
and
(3) the failure of the instrument to express the true intention of the
parties is due to mistake, fraud, inequitable conduct or accident.

In this case, all of the mentioned requisites are present. There was a
meeting of the minds between the parties to the contract but the deed did not
express the true intention of the parties due to the designation of the lot subject
of the deed. There is no dispute as to the intention of the parties to sell the land
to Alejandra Delfino but there was a mistake as to the designation of the lot
intended to be sold as stated in the Settlement of Estate and Sale. The totality of
the evidence clearly indicates that what was intended to be sold to Alejandra
Delfino was Lot 4163 and not Lot 5734.
SPOUSES BONIFACIO AND LUCIA PARAS,
vs.
KIMWA CONSTRUCTION AND DEVELOPMENT CORPORATION,

April 8, 2015 LEONEN, J.:

Interpretation of contracts

Facts:

Lucia Paras was "concessionaire of a sand and gravel permit and Kimwa is a
"construction firm that sells concrete aggregates to contractors and haulers in
Cebu." They entered into a contract "Agreement for Supply of Aggregates"
(Agreement) where 40,000 cubic meters of aggregates were "allotted" by Lucia as
supplier to Kimwa.

Pursuant to the Agreement, within few days Kimwa hauled 10,000 cubic meters of
aggregates. Sometime after this, however, Kimwa stopped hauling aggregates.
Claiming that in so doing, Kimwa violated the Agreement, Lucia filed the Complaint
for breach of contract with damages that is now subject of this Petition.

Petitioners’ complaint:

Kimwa wanted to be assured of the 40,000 cubic meters of aggregates; Lucia

countered that her concession area was due to be rechanneled on May 15, 1995,
when her Special Permit expires. Because of this, Lucia emphasized that she would
be willing to enter into a contract with Kimwa ONLY IF Kimwa promises to haul
all 40,000 cubic meters before May 15, 1995

Kimwa then assured Lucia that it would take only two to three months for it to
completely haul the aggregates (This was in December, meaning all the
aggregates would be hauled by February or March).

Respondent’s Answer:

Asserted that the Agreement articulated the parties' true intent that 40,000 cubic
meters was a maximum limit and that May 15, 1995 was never set as a deadline.

Invoking the Parol Evidence Rule, it insisted that Spouses Paras were barred from
introducing evidencewhich would show that the parties had agreed differently.

(because in their written agreement no stipulation as to date when the hauling

should be finish)
ISSUE: 1. Whether or not there is violation of the parol evidence rule.

2. W/N respondent is liable for failing to haul 30,000 cubic meters of aggregates
from petitioner Lucia Paras' permitted area by May 15, 1995.YES

Held:

No, Considering how the Agreement’s mistake, imperfection, or supposed failure

to express the parties’ true intent was successfully put in issue in petitioners
Spouses Paras’ Complaint (and even responded to by respondent Kimwa in its
Answer), this case falls under the exceptions provided by Rule 130, Section 9 of
the Revised Rules on Evidence. Accordingly, the testimonial and documentary
parol evidence sought to be introduced by petitioners Spouses Paras, which attest
to these supposed flaws and what they aver to have been the parties’ true intent,
may be admitted and considered. The intent of the parties is taken into
consideration.

The Special Permit’s condition also shows that a total of only about 40,000 cubic
meters of aggregates may be extracted by petitioner Lucia Paras from the
permitted area lends credence to the position that the aggregates "allotted" to
respondent Kimwa was in consideration of its corresponding commitment to haul
all 40,000 cubic meters.

2. Yes, it is already established that respondent Kimwa was obliged to haul a total
of 40,000 cubic meters of aggregates on or before May 15, 1995.
MANUEL ORIA Y GONZALES, plaintiff-appellant,
vs.
JOSE McMICKING, as sheriff of the city of Manila,
GUTIERREZ HERMANOS, MIGUEL GUTIERREZ DE CELIS, DANIEL PEREZ,
and LEOPOLDO CRIADO,defendants-appellees.

G.R. No. L-7003 January 18, 1912

MORELAND, J.:

Art. 1387. All contracts by virtue of which the debtor alienates property by
gratuitous title are presumed to have been entered into in fraud of creditors,
when the donor did not reserve sufficient property to pay all debts contracted
before the donation.

FACTS
Gutierrez Hermanos filed an action for recovery of a sum of money against Oria
Hermanos & Co. and herein plaintiff filed an action for recovery also for the same
defendant. Before the institution of the suits, members of the Company dissolved
their relations and entered into liquidation. Tomas Oria y Balbas acting in behalf
of his co-owners entered into a contract with the herein plaintiff for the purpose
of transferring and selling all the property which the Oria Hermanos & Co. owned
and among the goods stated on that instrument was the steamship Serpantes
and which the subject of this litigation. When the Trail Court resolved the action
for recovery filed by Gutierrez Hermanos and jugdment was in his favor, The
sheriff demanded to Tomas Oria y Balbas to make payment but the latter said
there were no funds to pay the same. The sheriff then levied on the steamer,
took possession of the same and announced it for public auction. Herein plaintiff
claimed that he is the owner of the steamer by virtue of the selling of all the
properties of the said Company.

ISSUES

is the sale from Oria Hermanos to Manuel Oria y Gonzalez fraudulent against the
creditors of Oria Hermanos, making the transfer of the steamship void as to the
creditors, and as to Gutierrez Hermanos in particular
HELD
At the time of said sale the value of the assets of Oria Hermanos & Co., as stated
by the partners themselves, was P274,000. The vendee of said sale was a son of
Tomas Oria y Balbas and a nephew of the other two persons heretofore
mentioned which said three brothers together constituted all of the members of
said company.The plaintiff is a young man of 25 years old and has no property
before the said selling. The court had laid down the rules in determining whether
a there has been fraud prejudicing creditors: 1) consideration of conveyance is
fictitious; 2) transfer was made while the suit against him (Tomas Oria y Balbas)
was pending; 3) sale by insolvent debtor; 4) evidence of insolvency; 5) transfer
of all properties; 6) the sale was made between father and son; 7) and the
failure of the vendee to take exclusive possession of the property. The case at
bar shows every one of the badges of fraud.
SIGUAN V. LIM

318 SCRA 725 November 19, 1999

1. The action to rescind contracts in fraud of creditors is known as accion

pauliana. For this action to prosper, the following requisites must be present: (1)
the plaintiff asking for rescission has a credit prior to the alienation, although
demandable later; (2) the debtor has made a subsequent contract conveying a
patrimonial benefit to a third person; (3) the creditor has no other legal remedy to
satisfy his claim; (4) the act being impugned is fraudulent; (5) the third person
who received the property conveyed, if it is by onerous title, has been an
accomplice in the fraud.

2. Only the creditor who brought the action for rescission can benefit from the
rescission; those who are strangers to the action cannot benefit from its effects.
And the revocation is only to the extent of the plaintiff creditors unsatisfied credit;
as to the excess, the alienation is maintained.

FACTS:

LIM issued two Metrobank checks in the sums of P300,000 and P241,668,
respectively, payable to cash. Upon presentment by petitioner with the drawee
bank, the checks were dishonored for the reason account closed. Demands to
make good the checks proved futile. As a consequence, petitioner filed criminal
cases for violation of Batas Pambansa Blg. 22 against LIM. On 29 December 1992,
RTC convicted LIM as charged.

Meanwhile, on 2 July 1991, a Deed of Donation conveying parcels of land

purportedly executed by LIM on 10 August 1989 in favor of her children was
registered with the Office of the Register of Deeds of Cebu City. New transfer
certificates of title were thereafter issued in the names of the donees.

Petitioner then filed an accion pauliana against LIM and her children to rescind
the questioned Deed of Donation and to declare as null and void the new transfer
certificates of title issued for the lots covered by the questioned Deed. Petitioner
claimed that LIM, through a Deed of Donation, fraudulently transferred all her
real property to her children in bad faith and in fraud of creditors,
including her; that LIM conspired and confederated with her children in
antedating the questioned Deed of Donation, to petitioners and other creditors
prejudice; and that LIM, at the time of the fraudulent conveyance, left no sufficient
properties to pay her obligations.
 On the other hand, LIM denied any liability to petitioner. She maintained that
it was not antedated but was made in good faith at a time when she had sufficient
property.

ISSUE:

Whether the questioned Deed of Donation was made in fraud of petitioner and,
therefore, is rescissible.

RULING:

NO. The general rule is that rescission requires the existence of creditors at the
time of the alleged fraudulent alienation, and this must be proved as one of the
bases of the judicial pronouncement setting aside the contract. Without any prior
existing debt, there can neither be injury nor fraud. While it is necessary that the
credit of the plaintiff in the accion pauliana must exist prior to the fraudulent
alienation, the date of the judgment enforcing it is immaterial. Even if the
judgment be subsequent to the alienation, it is merely declaratory, with retroactive
effect to the date when the credit was constituted. In the instant case, the alleged
debt of LIM in favor of petitioner was incurred in August 1990, while the deed of
donation was purportedly executed on 10 August 1989.

The fact that the questioned Deed was registered only on 2 July 1991 is not
enough to overcome the presumption as to the truthfulness of the statement of
the date in the questioned deed, which is 10 August 1989. Petitioners claim against
LIM was constituted only in August 1990, or a year after the questioned
alienation. Thus, the first two requisites for the rescission of contracts are
absent.

Even assuming arguendo that petitioner became a creditor of LIM prior to the
celebration of the contract of donation, still her action for rescission would not fare
well because the third requisite was not met. Under Article 1381 of the Civil Code,
contracts entered into in fraud of creditors may be rescinded only when the
creditors cannot in any manner collect the claims due them. Also, Article 1383 of
the same Code provides that the action for rescission is but a subsidiary remedy
which cannot be instituted except when the party suffering damage has no other
legal means to obtain reparation for the same. The term subsidiary remedy has
been defined as the exhaustion of all remedies by the prejudiced creditor to collect
claims due him before rescission is resorted to. It is, therefore, essential that the
party asking for rescission prove that he has exhausted all other legal means to
obtain satisfaction of his claim. Petitioner neither alleged nor proved that
she did so. On this score, her action for the rescission of the questioned
deed is not maintainable even if the fraud charged actually did exist.
 The fourth requisite for an accion pauliana to prosper is not present
either.

Article 1387, first paragraph, of the Civil Code provides: All contracts by virtue
of which the debtor alienates property by gratuitous title are presumed to have
been entered into in fraud of creditors when the donor did not reserve sufficient
property to pay all debts contracted before the donation. Likewise, Article 759 of
the same Code, second paragraph, states that the donation is always presumed
to be in fraud of creditors when at the time thereof the donor did not reserve
sufficient property to pay his debts prior to the donation. For this presumption of
fraud to apply, it must be established that the donor did not leave adequate
properties which creditors might have recourse for the collection of their credits
existing before the execution of the donation.

As earlier discussed, petitioners alleged credit existed only a year after the
deed of donation was executed. She cannot, therefore, be said to have been
prejudiced or defrauded by such alienation.

Lastly, It should be noted that the complainant Victoria Suarez in the other
Estafa case filed against LIM, albeit a creditor prior to the questioned alienation,
is not a party to this accion pauliana. Article 1384 of the Civil Code provides that
rescission shall only be to the extent necessary to cover the damages
caused. Under this Article, only the creditor who brought the action for rescission
can benefit from the rescission; those who are strangers to the action cannot
benefit from its effects. And the revocation is only to the extent of the plaintiff
creditors unsatisfied credit; as to the excess, the alienation is maintained. Thus,
petitioner cannot invoke the credit of Suarez to justify rescission of the subject
deed of donation.
SPOUSES VELARDE vs. COURT OF APPEALS
G.R. No. 108346 July 11, 2001

A substantial breach of a reciprocal obligation, like failure to pay the price in the
manner prescribed by the contract, entitles the injured party to rescind the
obligation. Rescission abrogates the contract from its inception and requires a
mutual restitution of benefits received.

FACTS:

A Deed of Sale with Assumption of Mortgage was executed by defendant

Raymundo, as vendor, in favor of plaintiff Velarde, as vendee. Under this contract,
Velarde paid P800,000.00 to Raymundo and assumed to pay the mortgage
obligations on the property in the amount of P1,800,000.00 in favor of BPI
agreeing to faithfully comply with the terms and conditions in the Real Estate
Mortgage executed by Raymundo in favor of BPI. It appears that the negotiated
terms for the payment of the balance of P1.8 million was from the proceeds of a
loan that plaintiffs were to secure from a bank with defendants help. Defendants
had a standing approved credit line with the Bank of the Philippine Islands
(BPI). The parties agreed to avail of this, subject to BPIs approval of an application
for assumption of mortgage by plaintiffs. Pending BPIs approval of the application,
plaintiffs were to continue paying the monthly interests of the loan secured by a
real estate mortgage. Plaintiffs paid BPI the monthly interest on the loan pursuant
to said agreements. Plaintiffs were then advised that the Application for
Assumption of Mortgage with BPI was not approved. This prompted them not to
make further payments. Such non-payment thereafter prompted the defendants
to send a notarial notice of cancellation/rescission of the intended sale of the
subject property allegedly due to the latters failure to comply with the terms and
conditions of the Deed of Sale with Assumption of Mortgage and the Undertaking.
Consequently, petitioners filed a Complaint against private respondents for specific
performance, nullity of cancellation, writ of possession and damages.

Petitioners claim that the rescission of the contract by private respondents

was not justified, inasmuch as the former had signified their willingness to pay the
balance of the purchase price only a little over a month from the time they were
notified of the disapproval of their application for assumption of
mortgage. Petitioners also aver that the breach of the contract was not substantial
as would warrant a rescission.
ISSUE:

Whether or not the private respondents have the right to rescind the contract.

RULING:

YES. Private respondents right to rescind the contract finds basis in Article 1191 of
the Civil Code, which explicitly provides as follows:

Art. 1191. -- The power to rescind obligations is implied in reciprocal ones, in case
one of the obligors should not comply with what is incumbent upon him.

The injured party may choose between fulfillment and the rescission of the
obligation, with the payment of damages in either case. He may also seek
rescission even after he has chosen fulfillment, if the latter should become
impossible.

The right of rescission of a party to an obligation under Article 1191 of the

Civil Code is predicated on a breach of faith by the other party who violates the
reciprocity between them. The breach contemplated in the said provision is the
obligor’s failure to comply with an existing obligation. When the obligor cannot
comply with what is incumbent upon it, the obligee may seek rescission and, in
the absence of any just cause for the court to determine the period of compliance,
the court shall decree the rescission.

In the present case, private respondents validly exercised their right

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

True, petitioners expressed their willingness to pay the balance of the

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

Considering that the rescission of the contract is based on Article 1191 of the
Civil Code, mutual restitution is required to bring back the parties to their original
situation prior to the inception of the contract. Accordingly, the initial payment
of P800,000 and the corresponding mortgage payments in the amounts
of P27,225, P23,000 and P23,925 (totaling P874,150.00) advanced by petitioners
should be returned by private respondents, lest the latter unjustly enrich
themselves at the expense of the former.

Rescission creates the obligation to return the object of the contract. It can be
carried out only when the one who demands rescission can return whatever he
may be obliged to restore. To rescind is to declare a contract void at its inception
and to put an end to it as though it never was. It is not merely to terminate it and
release the parties from further obligations to each other, but to abrogate it from
the beginning and restore the parties to their relative positions as if no contract
has been made.
Miguel vs. Montanez

G.R. No. 191336, January 25, 2012. J. Reyes

Doctrine: The language of this Article 2041, particularly when contrasted with
that of Article 2039, denotes that no action for rescission is required in said
Article 2041, and that the party aggrieved by the breach of a compromise
agreement may, if he chooses, bring the suit contemplated or involved in his
original demand, as if there had never been any compromise agreement, without
bringing an action for rescission thereof. He need not seek a judicial declaration
of rescission, for he may "regard" the compromise agreement already
"rescinded"

Facts:

On February 1, 2001, respondent Jerry Montanez (Montanez) secured a loan of

One Hundred Forty-Three Thousand Eight Hundred Sixty-Four Pesos
(₱143,864.00), payable in one (1) year, or until February 1, 2002, from the
petitioner. The respondent gave a collateral therfor his house and lot.

Due to the respondent’s failure to pay the loan, the petitioner filed a complaint
against the respondent before the Lupong Tagapamayapa of Barangay San Jose,
Rodriguez, Rizal. The parties entered into a Kasunduang Pag-aayos wherein the
respondent agreed to pay his loan in installments in the amount of Two
Thousand Pesos (₱2,000.00) per month, and in the event the house and lot
given as collateral is sold, the respondent would settle the balance of the loan in
full. However, the respondent still failed to pay, and on December 13, 2004, the
Lupong Tagapamayapa issued a certification to file action in court in favor of the
petitioner.

On April 7, 2005, the petitioner filed before the Metropolitan Trial Court (MeTC)
of Makati City, a complaint for collection of sum of money. After trial, MeTC
rendered a decision in favour of petitioner, on appeal, RTC affirmed the decision.
However, in the CA, it reversed the decision. Hence, this petition.

ISSUE:

Whether or not the petitioner could validly rescind the Kasunduang

Pag-aayos without having it judicially rescinded?
RULING:

YES. It must be emphasized, however, that enforcement by execution of the

amicable settlement, either under the first or the second remedy, is only
applicable if the contracting parties have not repudiated such settlement within
ten (10) days from the date thereof in accordance with Section 416 of the Local
Government Code. If the amicable settlement is repudiated by one party, either
expressly or impliedly, the other party has two options, namely, to enforce the
compromise in accordance with the Local Government Code or Rules of Court as
the case may be, or to consider it rescinded and insist upon his original demand.
This is in accord with Article 2041 of the Civil Code, which qualifies the broad
application of Article 2037, viz:

If one of the parties fails or refuses to abide by the compromise, the other party
may either enforce the compromise or regard it as rescinded and insist upon his
original demand.

In the instant case, the respondent did not comply with the terms and conditions
of the Kasunduang Pag-aayos. Such non-compliance may be construed as
repudiation because it denotes that the respondent did not intend to be bound
by the terms thereof, thereby negating the very purpose for which it was
executed. Perforce, the petitioner has the option either to enforce the
Kasunduang Pag-aayos, or to regard it as rescinded and insist upon his original
demand, in accordance with the provision of Article 2041 of the Civil Code.
Having instituted an action for collection of sum of money, the petitioner
obviously chose to rescind the Kasunduang Pag-aayos. As such, it is error on the
part of the CA to rule that enforcement by execution of said agreement is the
appropriate remedy under the circumstances.Considering that the Kasunduang
Pag-aayos is deemed rescinded by the non-compliance of the respondent of the
terms thereof, remanding the case to the trial court for the enforcement of said
agreement is clearly unwarranted.
Ada vs. Baylon

G.R. No. 182435, August 13,2012. J. Villarama

Doctrine: The rescission of a contract under Article 1381(4) of the Civil Code
only requires the concurrence of the following: first, the defendant, during the
pendency of the case, enters into a contract which refers to the thing subject of
litigation; and second, the said contract was entered into without the knowledge
and approval of the litigants or of a competent judicial authority. As long as the
foregoing requisites concur, it becomes the duty of the court to order the
rescission of the said contract.

FACTS:
This case involves a donation inter vivos which was executed by
Respondent Ada in favour of Florante, which was executed during the
pendency of the case.

On July 3, 1996, the petitioners filed with the RTC a Complaint4 for partition,
accounting and damages against Florante, Rita and Panfila. They alleged therein
that Spouses Baylon, during their lifetime, owned 43 parcels of land all situated
in Negros Oriental. After the death of Spouses Baylon, they claimed that Rita
took possession of the said parcels of land and appropriated for herself the
income from the same. Using the income produced by the said parcels of land,
Rita allegedly purchased two parcels of land, Lot No. 4709 and half of Lot No.
4706, situated in Canda-uay, Dumaguete City. The petitioners averred that Rita
refused to effect a partition of the said parcels of land.

In their Answer, Florante, Rita and Panfila asserted that they and the petitioners
co-owned 22 out of the 43 parcels of land mentioned in the latter’s complaint,
whereas Rita actually owned 10 parcels of land out of the 43 parcels which the
petitioners sought to partition, while the remaining 11 parcels of land are
separately owned by Petra Cafino Adanza, Florante, Meliton Adalia, Consorcia
Adanza, Lilia and Santiago Mendez. Further, they claimed that Lot No. 4709 and
half of Lot No. 4706 were acquired by Rita using her own money. They denied
that Rita appropriated solely for herself the income of the estate of Spouses
Baylon, and expressed no objection to the partition of the estate of Spouses
Baylon, but only with respect to the co-owned parcels of land.

Upon learning of the said donation, the petitioners filed a Supplemental Pleading
dated February 6, 2002, praying that the said donation in favor of the
respondent be rescinded in accordance with Article 1381(4) of the Civil Code.
They further alleged that Rita was already sick and very weak when the said
Deed of Donation was supposedly executed and, thus, could not have validly
given her consent thereto.

Florante and Panfila opposed the rescission of the said donation, asserting that
Article 1381(4) of the Civil Code applies only when there is already a prior judicial
decree on who between the contending parties actually owned the properties
under litigation.

RTC ruled in favour of the petitioners. However, on appeal to the CA, The CA
held that before the petitioners may file an action for rescission, they must first
obtain a favorable judicial ruling that Lot No. 4709 and half of Lot No. 4706
actually belonged to the estate of Spouses Baylon and not to Rita. Until then, the
CA asserted, an action for rescission is premature.

ISSUE/S:

1. Whether or not the deed of donation can be rescinded?

2. Whether or not the Rescission under Article 1381(4) of the Civil Code
is preconditioned
upon the judicial determination as to the ownership?

RULING:

1. YES. Here, contrary to the CA’s disposition, the RTC aptly ordered the
rescission of the donation inter vivos of Lot No. 4709 and half of Lot No.
4706 in favor of Florante. The petitioners had sufficiently established the
presence of the requisites for the rescission of a contract pursuant to
Article 1381(4) of the Civil Code. It is undisputed that, at the time they
were gratuitously conveyed by Rita, Lot No. 4709 and half of Lot No. 4706
are among the properties that were the subject of the partition case then
pending with the RTC. It is also undisputed that Rita, then one of the
defendants in the partition case with the RTC, did not inform nor sought
the approval from the petitioners or of the RTC with regard to the
donation inter vivos of the said parcels of land to Florante.

Although the gratuitous conveyance of the said parcels of land in favor of

Florante was valid, the donation inter vivos of the same being merely an
exercise of ownership, Rita’s failure to inform and seek the approval of the
petitioners or the RTC regarding the conveyance gave the petitioners the
right to have the said donation rescinded pursuant to Article 1381(4) of
the Civil Code.
2. No. It bears stressing that the right to ask for the rescission of a contract
under Article 1381(4) of the Civil Code is not contingent upon the final
determination of the ownership of the thing subject of litigation. The
primordial purpose of Article 1381(4) of the Civil Code is to secure the
possible effectivity of the impending judgment by a court with respect to
the thing subject of litigation. It seeks to protect the binding effect of a
court’s impending adjudication vis-à-vis the thing subject of litigation
regardless of which among the contending claims therein would
subsequently be upheld. Accordingly, a definitive judicial determination
with respect to the thing subject of litigation is not a condition sine qua
non before the rescissory action contemplated under Article 1381(4) of
the Civil Code may be instituted.

Moreover, conceding that the right to bring the rescissory action pursuant
to Article 1381(4) of the Civil Code is preconditioned upon a judicial
determination with regard to the thing subject litigation, this would only
bring about the very predicament that the said provision of law seeks to
obviate. Assuming arguendo that a rescissory action under Article 1381(4)
of the Civil Code could only be instituted after the dispute with respect to
the thing subject of litigation is judicially determined, there is the
possibility that the same may had already been conveyed to third persons
acting in good faith, rendering any judicial determination with regard to
the thing subject of litigation illusory. Surely, this paradoxical eventuality
is not what the law had envisioned.
Cadwallader & Co vs. Smith Bell & Co.

Facts:

In May 1902, the Pacific Export Lumber Company of Portland shipped upon the
steamer Quito five hundred and eighty-one (581) piles to the defendant, Henry W.
Peabody & Company, at Manila, it was stipulated that they’ll receive a commission
of one half of whatever sum was obtained over $15 for each pile and 5 per cent
of the price of the piles sold. August 2, Peabody and Company wrote the agent of
the Pacific Company at Shanghai that for lack of a demand the piles would have
to be sold at considerably less than $15 a piece; in response they telegraphed him
an offer of $12 per piece.

On July 9, Peabody & Company had entered into negotiations with the Insular
Purchasing Agent for the sale of piles at $20 a piece. August 4, Insular Purchasing
Agent sold to the Government two hundred and thirteen (213) piles at $19 each.
More of them were afterwards sold to the Government at the same figure. Thus it
is clear that at the time when the agents were buying from their principal these
piles at $12 a piece on the strength of their representation that no better price
was obtainable, they had already sold a substantial part of them at $19. In these
transactions the defendant, Smith, Bell & Company, were associated with the
defendants, Henry W. Peabody & Company, who conducted the negotiations, and
are consequently accountable with them.

Issue: Whether or not the contract of sale is subject for annulment.

Held:

Yes. Concealing from their principal the negotiations with the Government,
resulting in a sale of the piles at 19 a piece and in misrepresenting the condition
of the market, the agents committed a breach of duty from which they should
benefit. The contract of sale to themselves thereby induced was founded on their
fraud and was subject to annulment by the aggrieved party. (Civil Code, articles
1265 and 1269.) Upon annulment the parties should be restored to their original
position by mutual restitution. (Article 1303 and 1306.) Therefore the defendants
are not entitled to retain their commission realized upon the piles included under
the contract so annulled. In respect of the 213 piles, which at the time of the
making of this contract on August 5 they had already sold under the original
agency, their commission should be allowed.
PNB vs THE PHILIPPINE VEGETABLE OIL CO.

FACTS:

In 1920, the Vegetable Oil Co found itself in financial straits. It was in debt of
approximately P30M. PNB was the largest creditor, owing the bank P17M. PNB was
secured principally by a real and chattel mortgage for P3.5M. The Vegetable Oil
Co executed another chattel mortgage in favor of the bank on its vessels
Tankerville and HS Everette to guarantee the payment of sums not to exceed P4M.

Mr. Phil C. Whitaker, the General Manager of the Vegetable Oil Co., made his first
offer to pledge certain private properties to secure the creditors of the Oil
Company. At the instance of Mr. Whitaker but inspired to action by the PNB, a
receiver for the Oil Company was appointed by the CFI Manila.

During the period when a receiver was in control of the Oil Company, Creditors
transferred to Mr. Whitaker a part of their claims against the Oil Company via an
agreement. PNB was not a direct party to the agreement although its officials had
full knowledge of its accomplishment and its general manager placed his OK at the
end of the final draft. PNB then obtained a new mortgage from the Oil Company.
Shortly thereafter, the receivership for the Oil Company was terminated (Feb
1922). The bank suspended the operations of the Company, and closed the plant.

PNB Bank filed an action to foreclose its mortgage on the property of the Vegetable
Oil Company. The Vegetable Oil Company on its part countered with certain special
defenses with a counterclaim for P6,000,000. Phil. C. Whitaker presented a
complaint in intervention. The judgment rendered was in favor of the PNB and
against the defendant which was ordered to pay the sum of P15,787,454.54,
representing the liquidation between the plaintiff and the defendant, with legal
interest. The counterclaim and the complaint in intervention were dismissed.

ISSUE: W/N the PNB ever made any contract binding the bank to provide the
necessary operating capital to the Vegetable Oil Co.

HELD:

The issue relates to the applicability or non-applicability of the Statue of Frauds.

The broad view is that the Statute of Frauds applies only to agreements not to be
performed on either side within a year from the making thereof. Mr. Whitaker has
entirely performed his part of the agreement, equity would argue that all evidence
be admitted to prove the alleged agreement.
Portions of the minutes of the Board of Directors disclose that the Board authorized
advances to the Oil Company to the extent of more than P1M. No contract entered
into by the General Manager of the Bank would be valid unless made with the
advice and consent of its Board of Directors. What the Board had decreed was that
the Oil Company be financed under the receivership to the extent of P500,000. No
indication that the Board had ever consented to an agreement for practically
unlimited backing of the Oil Company, or that it had ratified any such promise
made by the General Manager.

No definite agreement binding on the bank but only a general intimation proffered
by the General Manager of the Bank in conference that his bank contemplated
financing the operations of the Oil Company.

Case remanded to the lower court for entry of judgment and further proceedings.

Manuel Singsong v Isabela Sawmill

GR No. L-27343 February 28, 1979
Fernandez, J.:
Doctrine:
As a rule, a contract cannot be assailed by one who is not a party thereto.
However, when a contract prejudices the rights of a third person, he may file an
action to annul the contract.
This Court has held that a person, who is not a party obliged principally or
subsidiarily under a contract, may exercised an action for nullity of the contract if
he is prejudiced in his rights with respect to one of the contracting parties, and
can show detriment which would positively result to him from the contract in which
he has no intervention.

Facts:
On January 30, 1951, the defendants Leon Garibay, Margarita G. Saldejeno,
and Timoteo Tubungbanua entered into a Contract of Partnership under the firm
name "Isabela Sawmill". Sometime in 1956, the plaintiff Oppen, Esteban, Inc. sold
a motor truck and two tractors to the partnership Isabela Sawmill for the sum of
P20,500. In order to pay the said price, the partnership agreed to make
arrangements with International Harvester Company so that International
Harvester Company would sell farm machinery to Oppen, Esteban, Inc. with the
understanding that the price was to be paid by the partnership. The partnership
was not able to pay in full International Harvester Company. As such it was still
indebted to Oppen, Esteban, Inc.
On April 25, 1958, one of the partners, Saldajeno, filed a complaint against
the partnership and her co-partners. A document entitled “Assignment of Rights
with Chattel Mortgage” was executed between Saldajeno and her co-partners over
the motor truck and the 2 tractors. (Partnership was dissolved)
Thereafter, the defendants, Garibay and Tubungbanua instead of
liquidating the partnership, decided not to divide the assets and properties
between them but continued the business of said partnership under the same
name.
Sometime in 1959, the Sheriff of Negros Occidental published notices that
the truck and tractors that were involved in the case “Saldajeno vs Leon Garibay’,
were to be sold in a public auction. As a result of the auction, a Certificate of Sale
was awarded to Saldajeno. Saldajeno then sold to Pan Oriental Lumber Company
the truck and tractors.
Oppen, Esteban, Inc. filed a case against Isabela Sawmill, Saldajeno,
Garibay and Tubungbanua praying that the Chattel Mortgage executed by them
be declared null and void being in fraud of creditors of the defendant partnership.

Issue:
W/n the Chattel Mortgage can be declared null and void by a person not part of
the contract

Ruling:
The contention of the appellant that the appellees cannot bring an action
to annul the chattel mortgage of the properties of the partnership executed by
Leon Garibay and Timoteo Tubungbanua in favor of Margarita G. Saldajeno has
no merit.
As a rule, a contract cannot be assailed by one who is not a party thereto.
However, when a contract prejudices the rights of a third person, he may file an
action to annul the contract.
This Court has held that a person, who is not a party obliged principally or
subsidiarily under a contract, may exercise an action for nullity of the contract if
he is prejudiced in his rights with respect to one of the contracting parties, and
can show detriment which would positively result to him from the contract in which
he has no intervention.
The plaintiffs-appellees were prejudiced in their rights by the execution of
the chattel mortgage over the properties of the partnership "Isabela Sawmill" in
favopr of Margarita G. Saldajeno by the remaining partners, Leon Garibay and
Timoteo Tubungbanua. Hence, said appellees have a right to file the action to
nullify the chattel mortgage in question.

Metropolitan Fabrics, Inc. v Prosperity Credit Resources Inc.

GR No. 154390 March 17, 2014
Bersamin, J.:

Doctrine:
Where the consent was given through fraud, the contract was voidable, not void
ab initio. This is because a voidable or annullable contract is existent, valid and
binding, although it can be annulled due to want of capacity or because of vitiated
consent of one of the parties.
Article 1390, in relation to Article 1391 of the Civil Code, provides that if the
consent of the contracting parties was obtained through fraud, the contract is
considered voidable and may be annulled within 4 years from the time of the
discovery of the fraud. The discovery of fraud is reckoned from the time the
document was registered in the Register of Deeds in view of the rule that
registration was notice to the whole world.

Facts:

Metropolitan Fabrics, Incorporated, a family corporation, owned a 5.8 hectare

industrial compound. Pursuant to a loan agreement with Manphil Investment
Corporation (Manphil), the said lot was subdivided into 11 lots, with Manphil
retaining four lots as mortgage security. The other seven lots were released to
MFI.

In July 1984, MFI sought from PCRI a loan in the amount of P3,443,330.52. PCRI,
also a family–owned corporation licensed since 1980 to engage in money lending,
was represented by Domingo Ang (“Domingo”) its president, and his son Caleb,
vice–president. The parties knew each other because they belonged to the same
family association, the Lioc Kui Tong Fraternity.
On the basis only of his interview with Enrique, feedback from the stockholders
and the Chinese community, as well as information given by his own father
Domingo, and without further checking on the background of Enrique, Caleb
recommended the approval of the P3.44 million with an interest ranging from 24%
to 26% per annum and a term of between five and ten years. It sufficed for Caleb
that Enrique was a well–respected Chinese businessman, that he was the president
of their Chinese family association, and that he had other personal businesses
aside from MFI, such as the Africa Trading.

The plaintiffs delivered to PCRI twenty–four (24) checks, bearing no dates and
amounts, to cover the amortization payments, all signed in blank by Enrique and
Natividad. The 7 titles to the lots were also delivered to Domingo and Caleb.

In September 1984, the first amortization check bounced for insufficient fund due
to MFI’s continuing business losses. It was then that the appellees allegedly
learned that PCRI had filled up the 24 blank checks with dates and amounts that
reflected a 35% interest rate per annum, instead of just 24%, and a two–year
repayment period, instead of 10 years.

On September 4, 1986, Enrique received a Notice of Sheriff’s Sale dated August

29, 1986, announcing the auction of the seven lots on September 24, 1986 due
to unpaid indebtedness of P10.5 million. (Enrique subsequently died and was
substituted by his daughter Vicky.)

Vicky insisted that prior to the auction notice, they never received any statement
or demand letter from the defendants to pay P10.5 million, nor did the
defendants inform them of the intended foreclosure.

Issues:

a. W/n the mortgage contract and its foreclosure should be declared null and
void
b. W/n the action to assail the real estate mortgage already prescribed
Ruling:

a. No. The contract was merely voidable. As the record show, the petitioners
really agreed to mortgage their properties as security for their loan, and
signed the deed of mortgage for the purpose. Thereafter, they delivered
the TCTs of the properties subject of the mortgage to the respondents. The
petitioners’ contentions of absence of consent was unproved. To begin with,
they neither alleged nor established that they had been forced or coerced
to enter into the mortgage. Also, they had freely and voluntarily applied for
the loan, executed the mortgage contract and turned over the TCTs of their
properties. Lastly, contrary to the defense of absence of consent, Vicky’s
testimony tended at best to prove the vitiation of their consent through
insidious words, machination or misrepresentations amounting to fraud,
which showed that the contract was voidable.

Where the consent was given through fraud, the contract was voidable, not
void ab initio. This is because a voidable or annullable contract is existent,
valid and binding, although it can be annulled due to want of capacity or
because of vitiated consent of one of the parties.

b. Yes. Article 1390, in relation to Article 1391 of the Civil Code, provides that
if the consent of the contracting parties was obtained through fraud, the
contract is considered voidable and may be annulled within 4 years from
the time of the discovery of the fraud. The discovery of fraud is reckoned
 from the time the document was registered in the Register of Deeds in view
of the rule that registration was notice to the whole world.
Thus, because the mortgage was registered on September 5, 1984, they
had until September 5, 1988, within which to assail the validity of the
mortgage. But their complaint was instituted in the RTC only on October
10, 1991. Hence, the action was already prescribed and must be dismissed.

UY SOO LIM v. BENITO TAN UNCHUAN, et al.

G.R. No. 12605, 7 September 1918, EN BANC (Fisher, J.)

The right of a minor to rescind, upon attaining his majority, a contract

entered into during his minority is subject to the conditions (1) that the election to
rescind must be made within a reasonable time after majority and (2) that all of
the consideration which was in the minor’s possession upon his reaching majority
must be returned. The disposal of any part of the consideration after the
attainment of majority imports an affirmance of the contract.

Not only should plaintiff have refunded all moneys in his possession upon
filing his action to rescind, but, by insisting upon receiving and spending such
consideration after reaching majority, knowing the rights conferred upon him by
law, he must be held to have forfeited any right to bring such action.

FACTS:
At the age of about thirteen, Santiago Pastrano Uy Toco, a Chinese,
unmarried, came from China to reside in the Philippines. He married Candida
Vivares, a Filipina with whom he had two daughters, Francisca and Concepcion. At
the time of this marriage, Santiago Pastrano possessed very little property — a
tienda worth about two thousand pesos. The large estate left by him at his death
was acquired by him during his marriage with Candida Vivares. Santiago Pastrano
returned to China where he remained for little less than a year. While there, he
entered into illicit relations with a Chinese woman, Chan Quieg, also referred to as
Chan Ni Yu.

Santiago Pastrano then returned to the Philippines where he remained till

his death in Cebu. He never saw Chan Quieg again, but received letters from her
informing him that she had borne him a son, Uy Soo Lim, the present plaintiff. He
died without ever having seen Uy Soo Lim, but under the belief that he was his
only son, and it was in this belief that he dictated the provisions of his will. The
persons who survived Santiago Pastrano were his wife, Candida Vivares, his
daughters, Francisca Pastrano and Concepcion Pastrano, Chan Quieg, and the
plaintiff Uy Soo Lim.

By the terms of his will, Santiago Pastrano attempted to dispose of the

greater part of his estate in favor of Uy Soo Lim. The will was duly probated in the
CFI, and the defendant Benito Tan Unchuan, husband of the defendant Francisca
Pastrano, was named in the will as executor. Basilio Uy Bundan, one of the
defendants herein and brother of Santiago Pastrano, was named by the testator
as guardian of Francisca Pastrano, Concepcion Pastrano, and Uy Soo Lim, who
were all three minors at the time of the death of the testator.

Candida Vivares filed a motion in the matter of the testamentary estate of

Santiago Pastrano in which she claimed the right as the widow of the deceased to
one-half of all the estate, and asked that the administration of said estate reopened
and the rights of the persons readjudged and determined according to law. A
motion of similar purport was filed by her in the matter of the guardianship of Uy
Soo Lim et al.

Francisca Pastrano and Concepcion Pastrano filed a motion in the

guardianship of Uy Soo Lim et al., in which they opposed the distribution of the
estate of Santiago Pastrano in accordance with the terms of his will, alleging that
Uy Soo Lim was not entitled under the law to the amount of the estate assigned
him in the will, since the marriage alleged therein of Santiago Pastrano with Chan
Quieg was null and void therefore Uy Soo Lim was not a son, legitimate or
illegitimate, of said Santiago Pastrano.

Chan Quieg, then temporarily in the port of Cebu, executed a deed whereby
she sold and relinquished to Francisca Pastrano all her right, title, and interest in
the estate of Santiago Pastrano. Subsequently, Chan Quieg executed a public
document in which she gave her consent to the sale by Uy Soo Lim of his right
and interest in said estate “in case the same should be necessary by virtue of any
legal requirements of the laws of the Philippine Islands.”

Three years after attaining age of minority, Uy Soo Lim commenced the
present action in the CFI for the purpose of vacating the orders of the lower court
of December 11, 1911 and to rescind and annul the contract by which he had sold
and transferred to Francisca Pastrano his interest in the estate of Santiago
Pastrano. The complaint alleges as one of the reasons for setting aside plaintiff’s
sale of his rights to Francisca Pastrano that defendants Benito Tan Unchuan and
Basilio Uy Bundan induced the plaintiff to execute the deed of cession by conspiring
together to exercise under influence upon the plaintiff, by taking advantage of his
youth, passions, and inexperience, by misrepresenting materials facts concerning
the value of the property and interest in questions, and by concealing others.

ISSUE: WON the contract in question is voidable on the ground that Uy’s consent
was obtained by fraud or undue influence.

RULING: NO. It is expressly stated in the contract, which plaintiff now seeks to
repudiate, that notwithstanding the statement to the contrary in Pastrano’s will,
the latter was in fact the sole owner of the business referred to in that document.
Plaintiff therefore had full information regarding the assets which composed the
Pastrano’s estate, and surrounded as he was by skillful and competent advisers,
we have no doubt that he was fully aware of the value of those assets.

The trial court found that plaintiff was a minor at the time of the execution
of the contract in question, but that he not only failed to repudiate it promptly
upon reaching his majority but tacitly ratified it by disposing of the greater part of
the proceeds after he became of age and after he had full knowledge of the facts
upon which he now seeks to disaffirm the agreement.

The above decisions are based upon justice and sound sense, and have
peculiar application to the case now before us. Here, plaintiff not only showed a
personal knowledge of his rights under this contract prior to and at the time of
reaching majority, but he was surrounded by able advisers, legal and otherwise,
retained to protect his interests. As a result of his failure to disaffirm promptly on
reaching majority, he received a balance of P30,000 upon the contact, which
amount certainly would not have been paid if it had been known that he was about
to attempt to repudiate his agreement. This amount was not only collected by Uy
Soo Lim after reaching majority, but was effectually disposed of as rapidly as
possible.

When plaintiff reached majority, there was P62,412.67 of the original

consideration available for refund, and there still remained P55,000 when he filed
his suit to rescind. This sum could have been returned to Francisca Pastrano or
held by the court for her account.

Positive statutory law, no less than uniform court decisions, require, as a

condition precedent to rescission of a contract on account of minority that the
consideration received be refunded. We cite and quote as follows:
ART. 1295 (Civil Code). Rescission obliges the return of the things which
were the objects of the contract, with their fruits and the sum with interest;
therefore it can only be carried into effect when the person who may have claimed
it can return that which, on his part, he is bound to do.
ART. 1304 (Civil Code). When the nullity arises from the incapacity of
one of the contracting parties, the incapacitated person is not obliged to make
restitution, except to the extent he has profited by the thing or by the sum he may
have received.
ART. 1308 (Civil Code). While one of the contracting parties does not
return that which he is obliged to deliver by virtue of the declaration of nullity, the
other cannot be compelled to fulfill, on his part, what is incumbent on him.

Not only should plaintiff have refunded all moneys in his possession upon
filing his action to rescind, but, by insisting upon receiving and spending such
consideration after reaching majority, knowing the rights conferred upon him by
law, he must be held to have forfeited any right to bring such action.

Article 1314, Civil Code, provides as follows:

The action for nullity of a contract shall also be extinguished when the thing
which is the object thereof should be lost by fraud or fault of the person having
the right to bring the action.

If the cause of the action should be the incapacity of any of the contracting
parties, the loss of the thing shall be no obstacle for the action to prevail, unless
it has occurred by fraud or fault on the part of the plaintiff after having acquired
capacity.

Plaintiff has disposed of the whole of the P85,000 which was paid him in
consideration of the execution of the contract he is now seeking to annul. The
record establishes beyond peradventure of doubt that he is utterly without funds
to reimburse this consideration.
 A leading case on the general subject is that of Manning vs. Johnson: “
xxx...If the infant after he arrives at age is shown to be possessed of the
consideration paid him, whether it be property, money or choses in action, and
either disposes of it so that he cannot restore it, or retains it for an unreasonable
length of time after attaining his majority, this amounts to an affirmance of the
contract. So likewise if it be shown that he has the power to restore the thing that
he received, he cannot be allowed to rescind without first making restitution.”

Certainly the rule as above stated is far and equitable. The contract
involved herein is an executed contract. If plaintiff had succeeded in having the
contract set aside it would have left him in the same position as that in which he
stood when it was executed — that is to say, he would have been compelled to
face the contention that he was lawfully entitled to little or nothing. Had he made
restitution of all the money which came into his hands after he attained his
majority, a decision in favor of the claims of the widow and legitimate daughters
of Santiago Pastrano would not have been a wholly barren victory for them. By
consuming the last centavo of the proceeds of the contract plaintiff placed himself
in a position where he was bound to enjoy the most advantageous position
whatever might be the outcome of the litigation. To give countenance to such
conduct would be to encourage deliberate bad faith.

On the assumption, therefore, that plaintiff might have had a right to

rescind this contract on the ground of minority, his action fails.

(1) Because, with a full knowledge of his rights in the premises, he failed to
disaffirm his contract within a reasonable time after reaching majority; and

(2) Because he not only failed to tender, or offer to produce and pay the
consideration in esse when he reached majority, and when he filed his action, but
proceeded, after such events, to demand, collect and dispose of such consideration
when according to his own statement under oath he had no other funds with which
to make reimbursement.
SPOUSES FERNANDO and LOURDES VILORIA v. CONTINENTAL
AIRLINES, INC.,
G.R. No. 188288, 16 January 2012, SECOND DIVISION (Reyes, J.)

Under Article 1392 of the Civil Code, “ratification extinguishes the action to
annul a voidable contract.”

FACTS:

While in the United States, Fernando Viloria purchased for himself and his
wife, Lourdes, two (2) round trip airline tickets from San Diego, California to
Newark, New Jersey on board Continental Airlines. Fernando purchased the tickets
at US$400.00 each from a travel agency called “Holiday Travel” and was attended
by a certain Margaret Mager. According to Spouses Viloria, Fernando agreed to
buy the said tickets after being informed by Mager that there were no available
seats at Amtrak, an intercity passenger train service provider in the United States.
Per the tickets, Spouses Viloria were scheduled to leave for Newark on August 13,
1997 and return to San Diego on August 21, 1997. Subsequently, Fernando
requested Mager to reschedule their flight to Newark to an earlier date. Mager
informed him that flights to Newark via Continental Airlines were already fully
booked and offered the alternative of a round trip flight via Frontier Air. Fernando
decided to reserve two (2) seats with Frontier Air.

After 3 weeks, as he was having second thoughts on traveling via Frontier

Air, Fernando went to the Greyhound Station where he saw an Amtrak station
nearby. Fernando made inquiries and was told that there are seats available and
he can travel on Amtrak anytime and any day he pleased. Fernando then
purchased two (2) tickets for Washington, D.C. From Amtrak, Fernando went to
Holiday Travel and confronted Mager with the Amtrak tickets, telling her that she
had misled them into buying the Continental Airlines tickets by misrepresenting
that Amtrak was already fully booked. Fernando demanded for a refund but Mager
was firm in her position that the subject tickets are non-refundable.

Upon returning to the Philippines, Fernando sent a letter to CAI demanding

a refund and alleging that Mager had deluded them into purchasing the subject
tickets. Continental later denied Fernando’s request for a refund and advised him
that he may take the subject tickets to any Continental ticketing location for the
re-issuance of new tickets within two (2) years from the date they were issued.
Continental Micronesia informed Fernando that the subject tickets may be used as
a form of payment for the purchase of another Continental ticket, albeit with a re-
issuance fee (March Letter). Fernando went to Continental’s ticketing office at
Ayala Avenue, Makati City to have the subject tickets replaced by a single round
trip ticket to Los Angeles, California under his name but was informed that Lourdes’
ticket was non-transferable, thus, cannot be used for the purchase of a ticket in
his favour. He was also informed that a round trip ticket to Los Angeles was
US$1,867.40 so he would have to pay what will not be covered by the value of his
San Diego to Newark round trip ticket.

Consequently, Fernando demanded for the refund of the subject tickets as

he no longer wished to have them replaced. In addition to the dubious
circumstances under which the subject tickets were issued, Fernando claimed that
CAI’s act of charging him with US$1,867.40 for a round trip ticket to Los Angeles,
which other airlines priced at US$856.00, and refusal to allow him to use Lourdes’
ticket, breached its undertaking under its March Letter. The Spouses Viloria filed
a complaint against CAI, praying that CAI be ordered to refund the money they
used in the purchase of the subject tickets. According to CAI, one of the conditions
attached to their contract of carriage is the non-transferability and non-
refundability of the subject tickets. The RTC held that Spouses Viloria are entitled
to a refund in view of Mager’s misrepresentation in obtaining their consent in the
purchase of the subject tickets. On appeal, the CA reversed.
Issues:

(1) Assuming that CAI is bound by the acts of Holiday Travel’s agents and
employees, WON the representation of Mager as to unavailability of seats at
Amtrak be considered fraudulent as to vitiate the consent of Spouse Viloria in the
purchase of the subject tickets.

(2) Assuming that Mager’s representation constitutes causal fraud, WON the
Spouses Viloria were deemed to have ratified the subject contracts.

RULING:

(1) NO. Even on the assumption that CAI may be held liable for the
acts of Mager, still, Spouses Viloria are not entitled to a refund. Mager’s
statement cannot be considered a causal fraud that would justify the
annulment of the subject contracts that would oblige CAI to indemnify
Spouses Viloria and return the money they paid for the subject tickets.

Article 1390, in relation to Article 1391 of the Civil Code, provides that if the
consent of the contracting parties was obtained through fraud, the contract is
considered voidable and may be annulled within four (4) years from the time of
the discovery of the fraud. Once a contract is annulled, the parties are obliged
under Article 1398 of the same Code to restore to each other the things subject
matter of the contract, including their fruits and interest.

On the basis of the foregoing and given the allegation of Spouses Viloria
that Fernando’s consent to the subject contracts was supposedly secured by Mager
through fraudulent means, it is plainly apparent that their demand for a refund is
tantamount to seeking for an annulment of the subject contracts on the ground of
vitiated consent. Whether the subject contracts are annullable, the Court is
required to determine whether Mager’s alleged misrepresentation constitutes
causal fraud. Under Article 1338 of the Civil Code, there is fraud when, through
insidious words or machinations of one of the contracting parties, the other is
induced to enter into a contract which, without them, he would not have agreed
to. In order that fraud may vitiate consent, it must be the causal (dolo causante),
not merely the incidental (dolo incidente), inducement to the making of the
contract. The Court has defined causal fraud as “a deception employed by one
party prior to or simultaneous to the contract in order to secure the consent of the
other.”

To quote Tolentino again, the “misrepresentation constituting the fraud

must be established by full, clear, and convincing evidence, and not merely by a
preponderance thereof. The deceit must be serious. The fraud is serious when it
is sufficient to impress, or to lead an ordinarily prudent person into error; that
which cannot deceive a prudent person cannot be a ground for nullity. The
circumstances of each case should be considered, taking into account the personal
conditions of the victim.”

The fraud alleged by Spouses Viloria has not been satisfactorily established
as causal in nature to warrant the annulment of the subject contracts. In fact,
Spouses Viloria failed to prove by clear and convincing evidence that Mager’s
statement was fraudulent. The Court finds the only proof of Mager’s alleged fraud,
which is Fernando’s testimony that an Amtrak had assured him of the perennial
availability of seats at Amtrak, to be wanting. As CAI correctly pointed out and as
Fernando admitted, it was possible that during the intervening period of three (3)
weeks from the time Fernando purchased the subject tickets to the time he talked
to said Amtrak employee, other passengers may have cancelled their bookings and
reservations with Amtrak, making it possible for Amtrak to accommodate them.

(2) YES. Even assuming that Mager’s representation is causal

fraud, the subject contracts have been impliedly ratified when Spouses
Viloria decided to exercise their right to use the subject tickets for the
purchase of new ones. Under Article 1392 of the Civil Code, “ratification
extinguishes the action to annul a voidable contract.”

Ratification of a voidable contract is defined under Article 1393 of the Civil

Code as follows: “Ratification may be effected expressly or tacitly. It is understood
that there is a tacit ratification if, with knowledge of the reason which renders the
contract voidable and such reason having ceased, the person who has a right to
invoke it should execute an act which necessarily implies an intention to waive his
right. Implied ratification may take diverse forms, such as by silence or
acquiescence; by acts showing approval or adoption of the contract; or by
acceptance and retention of benefits flowing therefrom.”

Simultaneous with their demand for a refund on the ground of Fernando’s

vitiated consent, Spouses Viloria likewise asked for a refund based on CAI’s
supposed bad faith in reneging on its undertaking to replace the subject tickets
with a round trip ticket from Manila to Los Angeles. In doing so, Spouses Viloria
are actually asking for a rescission of the subject contracts based on contractual
breach. Resolution, the action referred to in Article 1191, is based on the
defendant’s breach of faith, a violation of the reciprocity between the parties and
in Solar Harvest, Inc. v. Davao Corrugated Carton Corporation, this Court ruled
that a claim for a reimbursement in view of the other party’s failure to comply with
his obligations under the contract is one for rescission or resolution.

However, annulment under Article 1390 of the Civil Code and rescission
under Article 1191 are two (2) inconsistent remedies. In resolution, all the
elements to make the contract valid are present; in annulment, one of the essential
elements to a formation of a contract, which is consent, is absent. In resolution,
the defect is in the consummation stage of the contract when the parties are in
the process of performing their respective obligations; in annulment, the defect is
already present at the time of the negotiation and perfection stages of the
contract. Accordingly, by pursuing the remedy of rescission under Article 1191, the
Vilorias had impliedly admitted the validity of the subject contracts, forfeiting their
right to demand their annulment. A party cannot rely on the contract and claim
rights or obligations under it and at the same time impugn its existence or validity.
Indeed, litigants are enjoined from taking inconsistent positions.

ECE REALTY AND DEVELOPMENT INC. v. RACHEL G. MANDAP

G.R. No. 196182, September 1, 2014, Peralta, J.

In order to constitute fraud that provides basis to annul contracts, it must

be fraud in obtaining the consent of the party

Facts:

Petitioner ECE Realty started the construction of a condominium project

called Central Park Condominium Building. However, printed advertisements were
made indicating that the said project was to be built in Makati City. Mandap agreed
to buy a unit from the above project by paying a reservation fee, downpayment
and monthly installments. Mandap and the representatives of petitioner executed
a Contract to Sell. In the said Contract, it was indicated that the condominium
project is located in Pasay City.

More than two years after the execution of the Contract to Sell, respondent,
through her counsel, wrote petitioner a letter demanding the return of payments
she made, on the ground that the condominium was being built in Pasay City and
not in Makati City as indicated in its printed advertisements. Respondent then filed
a complaint for the annulment of her contract with petitioner, the return of her
payments, and damages

Issue:

Whether the fraud is sufficient ground to nullify the contract

Ruling:

NO. Article 1338 of the Civil Code provides that “[t]here is fraud when
through insidious words or machinations of one of the contracting parties, the
other is induced to enter into a contract which, without them, he would not have
agreed to.” In addition, under Article 1390 of the same Code, a contract is voidable
or annullable “where the consent is vitiated by mistake, violence, intimidation,
undue influence or fraud.” Also, Article 1344 of the same Code provides that “[i]n
order that fraud may make a contract voidable, it should be serious and should
not have been employed by both contracting parties.”

Jurisprudence has shown that in order to constitute fraud that provides

basis to annul contracts, it must fulfill two conditions: First, the fraud must be dolo
causante or it must be fraud in obtaining the consent of the party. This is referred
to as causal fraud. The deceit must be serious. The fraud is serious when it is
sufficient to impress, or to lead an ordinarily prudent person into error; that which
cannot deceive a prudent person cannot be a ground for nullity. The circumstances
of each case should be considered, taking into account the personal conditions of
the victim. Second, the fraud must be proven by clear and convincing evidence
and not merely by a preponderance thereof.

Petitioner is guilty of false representation of a fact but the misrepresentation

made by petitioner in its advertisements does not constitute causal fraud which
would have been a valid basis in annulling the contract. This is evidenced by its
printed advertisements indicating that its subject condominium project is located
in Makati City when, in fact, it is in Pasay City. The Supreme Court agreed with the
Housing and Land Use Arbiter, the HLURB Board of Commissioners, and the Office
of the President, in condemning petitioner's deplorable act of making
misrepresentations in its advertisements and in issuing a stern warning that a
repetition of this act shall be dealt with more severely. However, the
misrepresentation made by petitioner in its advertisements does not constitute
causal fraud.
 TONGSON v. EMERGENCY PAWNSHOP BULA, INC. G.R. No. 167874
January 15, 2010, Carpio, J.

There is fraud when, through insidious words or machinations of one of the

contracting parties, the other is induced to enter into a contract which, without
them, he would not have agreed to.

Facts:

Napala offered to purchase from the Spouses Tongson their parcel of land
for P3,000,000. The Spouses Tongson executed with Napala a Memorandum of
Agreement. Respondents' lawyer prepared a Deed of Absolute Sale indicating the
consideration as only P400,000. When Carmen Tongson "noticed that the
consideration was very low, she called Napala but the latter told her not to worry
as he would be the one to pay for the taxes and she would receive the net amount
of P3,000,000. The parties executed another Memorandum of Agreement, which
allegedly replaced the first Memorandum of Agreement, showing that the selling
price of the land was only P400,000. Upon signing the Deed of Absolute Sale,
Napala paid P200,000 in cash to the Spouses Tongson and issued a postdated PNB
check in the amount of P2,800,000, representing the remaining balance of the
purchase price of the subject property. Thereafter, TCT No. 143020 was cancelled
and TCT No. T-186128 was issued in the name of EPBI.

When presented for payment, the PNB check was dishonored for the reason
"Drawn Against Insufficient Funds." Despite the Spouses Tongson's repeated
demands to either pay the full value of the check or to return the subject parcel
of land, Napala failed to do either. The Spouses Tongson filed a Complaint for
Annulment of Contract and Damages with a Prayer for the Issuance of a
Temporary Restraining Order and a Writ of Preliminary Injunction.

Claiming that their consent was vitiated, the Spouses Tongson point out
that Napala's fraudulent representations of sufficient funds to pay for the property
induced them into signing the contract of sale. Such fraud, according to the
Spouses Tongson, renders the contract of sale void. On the contrary, Napala insists
that the Spouses Tongson willingly consented to the sale of the subject property
making the contract of sale valid. Napala maintains that no fraud attended the
execution of the sales contract.

Issue:

Whether the consent of the Spouses Tongson was vitiated by fraud.

Ruling:

NO. The subject matter of the sale is the lot owned by the Spouses Tongson
and the selling price agreed upon by the parties is P3,000,000. There is no dispute
as regards the presence of the two requisites for a valid sales contract, namely,
(1) a determinate subject matter and (2) a price certain in money. The problem
lies with the existence of the remaining element, which is consent of the
contracting parties, specifically, the consent of the Spouses Tongson to sell the
property to Napala.

While no causal fraud attended the execution of the sales contract, there is
fraud in its general sense, which involves a false representation of a fact, when
Napala inveigled the Spouses Tongson to accept the postdated PNB check on the
representation that the check would be sufficiently funded at its maturity. The
fraud surfaced when Napala issued the worthless check to the Spouses Tongson,
which is not during the negotiation and perfection stages of the sale. The fraud
existed in the consummation stage of the sale when the parties are in the process
of performing their respective obligations under the perfected contract of sale.

Under Article 1338 of the Civil Code, there is fraud when, through insidious
words or machinations of one of the contracting parties, the other is induced to
enter into a contract which, without them, he would not have agreed to. In order
that fraud may vitiate consent, it must be the causal (dolo causante), not merely
the incidental (dolo incidente), inducement to the making of the contract.
Additionally, the fraud must be serious.

The Court found no causal fraud in this case to justify the annulment of the
contract of sale between the parties. The misrepresentation by Napala that the
postdated PNB check would not bounce on its maturity hardly equates to dolo
causante. Napala's assurance that the check he issued was fully funded was not
the principal inducement for the Spouses Tongson to sign the Deed of Absolute
Sale. Even before Napala issued the check, the parties had already consented to
the sale transaction. The Spouses Tongson were never tricked into selling their
property to Napala. On the contrary, they willingly accepted Napala's offer to
purchase the property at P3,000,000. There was a meeting of the minds as to the
object of the sale as well as the consideration therefor.

THE ROMAN CATHOLIC CHURCH v. REGINO PANTE

BRION, J.:

For mistake as to the qualification of one of the parties to vitiate consent,

two requisites must concur:
1. the mistake must be either with regard to the identity or with regard
to the qualification of one of the contracting parties; and
2. the identity or qualification must have been the principal
consideration for the celebration of the contract.

FACTS:

The Church owned a 32-square meter lot that measured 2x16 meters located in
Canaman, Camarines Sur. The said lot was the subject of a contract of sale
between the Church and respondent Regino Pante. The contract between them
fixed the purchase price at P11,200.00, with the initial P1,120.00 payable as down
payment, and the remaining balance payable in three years or until September 25,
1995.

On June 28, 1994, the Church sold in favor of the spouses Rubi a 215-square
meter lot that included the lot previously sold to Pante. The spouses Rubi asserted
their ownership by erecting a concrete fence over the lot sold to Pante, effectively
blocking Pante and his family’s access from their family home to the municipal
road. As no settlement could be reached between the parties, Pante instituted with
the RTC an action to annul the sale between the Church and the spouses Rubi,
insofar as it included the lot previously sold to him.

The Church filed its answer with a counterclaim, seeking the annulment of its
contract with Pante. The Church alleged that its consent to the contract was
obtained by fraud when Pante, in bad faith, misrepresented that he had been an
actual occupant of the lot sold to him, when in truth, he was merely using the 32-
square meter lot as a passageway from his house to the town proper. It contended
that it was its policy to sell its lots only to actual occupants. Since the spouses Rubi
and their predecessors-in-interest have long been occupying the 215-square meter
lot that included the 32-square meter lot sold to Pante, the Church claimed that
the spouses Rubi were the rightful buyers.

The RTC ruled in favor of the Church and annulled the contract between the
Church and Pante, pursuant to Article 1390 of the Civil Code. The CA reversed the
RTCs ruling.

ISSUE:

Whether or not the contract is voidable.

RULING:

No. The contract is valid. No misrepresentation existed vitiating the seller’s

consent and invalidating the contract.

The Civil Code clarifies the nature of mistake that vitiates consent:

Article 1331. In order that mistake may invalidate consent, it should refer
to the substance of the thing which is the object of the contract, or to
 those conditions which have principally moved one or both parties to
enter into the contract.

Mistake as to the identity or qualifications of one of the parties will vitiate

consent only when such identity or qualifications have been the principal
cause of the contract.

A simple mistake of account shall give rise to its correction.

In the present case, the Church contends that its consent to sell the lot was given
on the mistaken impression arising from Pante’s fraudulent misrepresentation that
he had been the actual occupant of the lot.

Contrary to the Church’s contention, the actual occupancy or residency of a buyer

over the land does not appear to be a necessary qualification that the Church
requires before it could sell its land. Had this been indeed its policy, then neither
Pante nor the spouses Rubi would qualify as buyers of the 32-square meter lot, as
none of them actually occupied or resided on the lot since, given the size of the
lot, it could serve no other purpose than as a mere passageway; it is unthinkable
to consider that a 2x16-meter strip of land could be mistaken as anyone’s
residence.

The court finds it unlikely that Pante could successfully misrepresent himself as
the actual occupant of the lot; this was a fact that the Church (which has a parish
chapel in the same barangay where the lot was located) could easily verify had it
conducted an ocular inspection of its own property. The surrounding circumstances
actually indicate that the Church was aware that Pante was using the lot merely
as a passageway.
ECE REALTY AND DEVELOPMENT INC., v. RACHEL G. MANDAP

G.R. No. 196182, September 01, 2014

PERALTA, J.:

In the present case, this Court finds that petitioner is guilty of false representation
of a fact. This is evidenced by its printed advertisements indicating that its subject
condominium project is located in Makati City when, in fact, it is in Pasay City.
However, that misrepresentation made by ECE in its advertisements does not
constitute causal fraud which would have been a valid basis in annulling the
Contract to Sell between the parties.

FACTS:

ECE Realty is a corporation engaged in the building and development of

condominium units. Sometime in 1995, it started the construction of a
condominium project called Central Park Condominium Building located along
Jorge St., Pasay City. However, printed advertisements were made indicating
therein that the said project was to be built in Makati City.
In December 1995, Mandap agreed to buy a unit from the above project by paying
a reservation fee and, thereafter, down payment and monthly installments. They
executed a Contract to Sell which indicates that the condominium project is located
in Pasay City.

More than two years after the execution of the Contract to Sell, wrote petitioner a
letter demanding the return of the payments she made, on the ground that she
subsequently discovered that the condominium project was being built in Pasay
City and not in Makati City as indicated in its printed advertisements. However,
instead of answering respondent's letter, petitioner sent her a written
communication informing her that her unit is ready for inspection and occupancy
should she decide to move in.

Treating the letter as a form of denial of her demand, respondent filed a complaint
with the Housing and Land Use Regulatory Board (HLURB) seeking the annulment
of her contract with ECE, the return of her payments, and damages.

HLURB dismissed Mandap's complaint for lack of merit. Mandap filed an appeal
with the Office of the President which was also dismissed. Mandap then filed a
petition for review with the CA which ruled in her favor. Hence this petition.

ISSUE:

Whether or not ECE was guilty of fraud which is a sufficient ground to nullify its
contract with Mandap.

RULING:

ECE is not guilty of fraud. Article 1338 of the Civil Code provides that “there is
fraud when through insidious words or machinations of one of the contracting
parties, the other is induced to enter into a contract which, without them, he would
not have agreed to.” In addition, under Article 1390 of the same Code provides
that a contract is voidable or annullable “where the consent is vitiated by mistake,
violence, intimidation, undue influence or fraud.”

Also, Article 1344 of the same Code provides that “in order that fraud may make
a contract voidable, it should be serious and should not have been employed by
both contracting parties.”

Jurisprudence has shown that in order to constitute fraud that provides basis to
annul contracts, it must fulfill two conditions.
 First, the fraud must be dolo causante or it must be fraud in obtaining the
consent of the party. This is referred to as causal fraud. The deceit must be
serious. The fraud is serious when it is sufficient to impress, or to lead an
ordinarily prudent person into error; that which cannot deceive a prudent
person cannot be a ground for nullity. The circumstances of each case
should be considered, taking into account the personal conditions of the
victim.

Second, the fraud must be proven by clear and convincing evidence and
not merely by a preponderance thereof.

In the present case, this Court finds that petitioner is guilty of false representation
of a fact. This is evidenced by its printed advertisements indicating that its subject
condominium project is located in Makati City when, in fact, it is in Pasay City.
However, that misrepresentation made by ECE in its advertisements does not
constitute causal fraud which would have been a valid basis in annulling the
Contract to Sell between the parties.

The Court ruled that, Mandap failed to show that “the essential and/or moving
factor that led her to give her consent and agree to buy the unit was precisely the
project's advantageous or unique location in Makati City – to the exclusion of other
places or city x x x.” In other words, respondent failed to prove that the location
of the said project was the causal consideration or the principal inducement which
led her into buying her unit in the said condominium project.

Indeed, evidence shows that respondent proceeded to sign the Contract to Sell
despite information contained therein that the condominium is located in Pasay
City. This only means that she still agreed to buy the subject property regardless
of the fact that it is located in a place different from what she was originally
informed. If she had a problem with the property's location, she should not have
signed the Contract to Sell and, instead, immediately raised this issue with
petitioner.
G.R. No. 154390, March 17, 2014

METROPOLITAN FABRICS, INC. AND ENRIQUE

ANG, Petitioners, v. PROSPERITY CREDIT RESOURCES INC., DOMINGO
ANG AND CALEB ANG, Respondents.

The genuineness and due execution of a deed of real estate mortgage that has
been acknowledged before a notary public are presumed. Any allegation of fraud
and forgery against the deed must be established by clear and competent
evidence.

Facts: Metropolitan Fabrics, Incorporated (mortgagor-plaintiff), a family

corporation, owned a 5.8 hectare industrial compound at No. 685 Tandang Sora
Avenue, Novaliches, Quezon City. Pursuant to a P2 million, 10–year 14% per
annum loan agreement with Manphil Investment Corporation (Manphil), the said
lot was subdivided into 11 lots, with Manphil retaining four lots as mortgage
security. The other seven lots, were released to MFI.

MFI sought from PCRI a loan in the amount of P3,443,330.52, the balance of the
cost of its boiler machine, to prevent its repossession by the seller. PCRI, also a
family–owned corporation licensed to engage in money lending, was represented
by Domingo Ang (“Domingo”) its president, and his son Caleb, vice–president.

To reciprocate the gesture of PCRI, Enrique, together with his wife Natividad
Africa, vice–president, and son Edmundo signed the blank forms “at their office at
685 Tandang Sora Avenue, Novaliches, Quezon City.” The signing was allegedly
witnessed by Vicky, Ellen and Alice, all surnamed Ang, without any PCRI
representative present. Immediately thereafter, Enrique and Vicky proceeded to
the PCRI office at 1020 Soler St., Binondo.

In order to return the trust of Domingo and Caleb and their gesture of the early
release of the loan, that Enrique and Vicky entrusted to the defendants their seven
(7) titles.

Unable to pay the loan, PROSPERITY CREDIT RESOURCES INC forclosed the said
property.

Plaintiffs filed a case with the RTC seeking to nullify the real estate mortgage and
the foreclosure. Their contention is that, respondents committed fraud when the
officers of Metropolitan were made to sign the deed of real estate mortgage in
blank.

RTC rendered judgment in favour of the plaintiffs declaring the real estate
mortgage and the subsequent foreclosure made by the defendants on the
plaintiffs’ properties null and void and the titles issued in favor of the defendants
canceled and ordered reconveyed to the plaintiffs. On appeal CA reversed the
decision of the RTC.

Issue: Whether or not respondents committed fraud when the officers of

Metropolitan were made to sign the deed of real estate mortgage in blank?

Held: No.

According to Article 1338 of the Civil Code, there is fraud when one of the
contracting parties, through insidious words or machinations, induces the other to
enter into the contract that, without the inducement, he would not have agreed
to. Yet, fraud, to vitiate consent, must be the causal (dolo causante), not merely
the incidental (dolo incidente), inducement to the making of the
contract.14 In Samson v. Court of Appeals,15 causal fraud is defined as “a deception
employed by one party prior to or simultaneous to the contract in order to secure
the consent of the other.”16

Fraud cannot be presumed but must be proved by clear and convincing

evidence.17 Whoever alleges fraud affecting a transaction must substantiate his
allegation, because a person is always presumed to take ordinary care of his
concerns, and private transactions are similarly presumed to have been fair and
regular.18 To be remembered is that mere allegation is definitely not evidence;
hence, it must be proved by sufficient evidence.

xxx The evidence adduced by Vicky Ang, the lone witness for petitioners, tried to
cast doubt on the contents and due execution of the deed of real estate mortgage
by pointing to certain irregularities. But she could not be effective for the purpose
because she had not been among the signatories of the deed.

Petitioners freely and voluntarily surrendered to respondents the seven transfer

certificates of title (TCTs) of their lots. Such surrender of the TCTs evinced their
intention to offer the lots as collateral for the performance of their obligations
contracted with respondents. They thereby confirmed the genuineness and due
execution of the deed of real estate mortgage. Surely, they would not have
surrendered the TCTs had their intention been otherwise.

Contrary to their modified defense of absence of consent, Vicky Ang’s testimony

tended at best to prove the vitiation of their consent through insidious words,
machinations or misrepresentations amounting to fraud, which showed that the
contract was voidable. Where the consent was given through fraud, the contract
was voidable, not void ab initio.29This is because a voidable or annullable contract
is existent, valid and binding, although it can be annulled due to want of capacity
or because of the vitiated consent of one of the parties.30

With the contract being voidable, petitioners’ action to annul the real estate
mortgage already prescribed. Article 1390, in relation to Article 1391 of the Civil
Code, provides that if the consent of the contracting parties was obtained through
fraud, the contract is considered voidable and may be annulled within four years
from the time of the discovery of the fraud.31 The discovery of fraud is reckoned
from the time the document was registered in the Register of Deeds in view of the
rule that registration was notice to the whole world.32 Thus, because the mortgage
involving the seven lots was registered on September 5, 1984, they had until
September 5, 1988 within which to assail the validity of the mortgage. But their
complaint was instituted in the RTC only on October 10, 1991.33 Hence, the action,
being by then already prescribed, should be dismissed.
G.R. No. L-25400 January 14, 1927
THE PHILIPPINE NATIONAL BANK, plaintiff-appellee, vs.THE
PHILIPPINE VEGETABLE OIL CO., INC., defendant-appellee.
PHIL. C. WHITAKER, intevenor-appellant.

xxx Undue influence, which is a general and abstract conception, exists to some
extent, it does not constitute a cause for annulment of the contract so far as it
affects the consent, unless the same amounts to violence, or intimidation, or
constitutes fraud, or produces substantial error on the part of the other
contracting party.

xxx Fraud is not presumed. In order to annul a contract for fraud it must have
been committed by one of the contracting parties. (under the dissenting opinion
it states that: “The appellant, not having been a party to this mortgage and not
being a representative of any of those who have intervened therein, is not,
principally or subsidiarily, bound by virtue thereof, and, consequently, has no
action and cannot impugn its validity.”

xxx Incidental fraud committed by a third party, which is not sufficient cause for
the annulment of a contract, but only for an action for damages against the said
third party.

Note: Please read dissenting opinion.

Facts: The Vegetable Oil Company owed the PNB P17,000,000. Over P13,000,000
were due the other creditors. The Philippine National Bank was secured principally
by a real and chattel mortgage for P3,500,000. On The Vegetable Oil Company
executed another chattel mortgage in favor of the bank on its vessels to
guarantee the payment of sums not to exceed P4,000,000.

Mr. Whitaker (stockholder of Vegetable Oil Company) made his first offer to pledge
certain private properties to secure the creditors of the Oil Company. At the
instance of Mr. Whitaker but inspired to such action by the bank, a receiver for the
Vegetable Oil Company was appointed by the Court of First Instance.

There was a new mortgage executed by Vegetable Oil Company on February 20,
1922 in favor of PNB. Shortly thereafter, the receivership for the Vegetable Oil
Company was terminated. The bank suspended the operation of the Vegetable Oil
Company in and definitely closed the Oil Company's plant.

Philippine National Bank filed an action to foreclose its mortgage on the property
of the Vegetable Oil Company. Phil. C. Whitaker presented a complaint in
intervention. The judgment rendered was in favor of the plaintiff and against the
defendant which was ordered to pay the sum of P15,787,454.54, representing the
liquidation between the plaintiff and the defendant with the addition of the usual
order to foreclose the mortgage.

The trial Court rendered judgment declaring that the execution of the mortgage
has been legally and validly executed by the Philippine Vegetable Oil Co., Inc
because such was the free act of the defendant.

Issue: Whether or not the mortgage entered into by PNB and Philippine Vegetable
Oil Company is a voidable contract?

Held: Yes.

Held:

Validity of the Philippine National Bank — Philippine Vegetable Oil Co., Inc.,
mortgage of February 10, 1922.

xxx To all this the appellee as well as the trial court have answered that while it is
true that the document was executed on February 20, 1922, at a time when the
properties of the mortgagor were under receivership, the mortgage was not
acknowledged before a notary public until March 8, 1922, after the court had
determined that the necessity for a receiver no longer existed. But the additional
fact remains that while the mortgage could not have been executed without the
dissolution of the receivership, such dissolution was apparently secured
through representations made to the court by counsel for the bank that
the bank would continue to finance the operations of the Vegetable Oil
Company. Instead of so doing, the bank within less than two months after
the mortgage was recorded, withdrew its support from the Vegetable Oil
Company, and in effect closed its establishment. Also it must not be
forgotten that the hands of other creditors were tied pursuant to the creditors'
agreement of June 27, 1921.

To place emphasis on the outstanding facts, it must be repeated that the mortgage
was executed while a receiver was in charge of the Vegetable Oil Company. A
mortgage accomplished at such a time by the corporation under
receivership and a creditor would be a nullity. The mortgage was definitely
perfected subsequent to the lifting of the receivership pursuant to implied promises
that the bank would continue to operate the Vegetable Oil Company. It was then
accomplished when the Philippine National Bank was a dominating influence in the
affairs of the Vegetable Oil Company. It would be unconscionable to allow the
bank, after the hands of the other creditors were tied, virtually to appropriate to
itself all the property of the Vegetable Oil Company.

Whether we consider the action taken as not expressing the free will of the
Vegetable Oil Company, or as disclosing undue influence on the part of the
Philippine National Bank in procuring the mortgage, or as constituting deceit under
the civil law, or whether we go still further and classify the facts as constructive
fraud, the result is the same. The mortgage is clearly voidable.

SC held that the Philippine National Bank-Philippine Vegetable Oil Co., mortgage
of February 20, 1922, has not been legally executed by the Philippine Vegetable
Oil Co., Inc., and consequently cannot be given effect.

Separate Opinions AVANCEÑA, C. J., with whom concurs

VILLAMOR, J., concurring and dissenting in part:

The insinuation made in the majority opinion of undue influence, deceit and fraud
on the part of the plaintiff as grounds for declaring this mortgage void, is absolutely
unsupported by the record.

Supposing that undue influence, which is a general and abstract

conception, exists to some extent, it does not constitute a cause for
annulment of the contract so far as it affects the consent, unless the
same amounts to violence, or intimidation, or constitutes fraud, or
produces substantial error on the part of the other contracting party.
(Art. 1265, Civil Code.) The mere intervention of the two representatives of the
plaintiff in the Board of Directors of the defendant and, on the other hand, no act
has been proved to have been executed by them in connection with the mortgage
which might be considered as undue influence. Neither has it been shown that
anything was done which might constitute a fraud on the part of the plaintiff in
the execution of this mortgage.
Fraud is not presumed. The only thing which can be considered in connection
with this point is the supposed promise given to the defendant to finance its
operations. But, according to the majority opinion, there is no indication of any act
of the Board of Directors of the plaintiff corporation which might imply consent to
an agreement to give unlimited support to the defendant, nor ratification of any
promise to this effect made by the general manager. In order to annul a
contract for fraud it must have been committed by one of the contracting
parties. (Art. 1269, Civil Code.)

On the other hand, the general manager of the plaintiff as also admitted in the
majority decision, only intimated generally that the plaintiff corporation would
finance its operations. Moreover, it was proven that the plaintiff did in fact furnish
the defendant with capital in order that it might continue operating for some time,
and continued to furnish it with capital even after the execution of the mortgage,
which, at any rate, is a compliance with the supposed promise.

It is evident that, if the plaintiff, either directly or through its general

manager, did not make any promise to furnish capital to the defendant
without any limitation for its operation, and did in fact furnish it with
capital to some extent, it cannot be said to have acted fraudulently. The
plaintiff was not bound to take a chance when it was clearly seen that the
defendant was running behind and, in defense of its interests and in consideration
of its resources, it had a right to stop when it deemed it unwise to continue any
longer. Furthermore, any unfulfilled promise made to the defendant by the
general manager of the plaintiff, without the authorization of the latter,
does not constitute such fraud and cause for the annulment of the
contract.

Upon this theory, at most, it might be an incidental fraud committed by a

third party, which is not sufficient cause for the annulment of a contract,
but only for an action for damages against the said third party. (Art. 1270,
Civil Code.)

At any rate, the appellant-intervenor cannot seek the annulment of this mortgage
under the provisions of article 1302 of the Civil Code, according to which only
those persons who are principally or subsidiarily bound by the contract may bring
the action. The appellant, not having been a party to this mortgage and not being
a representative of any of those who have intervened therein, is not, principally or
subsidiarily, bound by virtue thereof, and, consequently, has not action and cannot
impugn its validity.
Carbonnel v Poncio, 103 Phil 655 (1958)

Doctrine:

It is well settled in this jurisdiction that the Statute of Frauds is applicable only to
executory contracts, not to contracts that are totally or partially performed.

Facts:

Plaintiff Rosario Carbonnel alleges that she purchased from defendant Jose Poncio,
a parcel of land excluding the improvements thereon. Plaintiff Carbonnel paid a
sum certain and agreed to assume Poncio’s obligation with the Republic Savings
Bank amounting to P1177.48, with the understanding that the balance would be
payable upon execution of the corresponding deed of conveyance. One of the
conditions of the sale was that Poncio would continue staying in said land for one
year, as stated in a document signed by him. However, Poncio refused to execute
the corresponding deed of sale, despite repeated demand. Thereafter, Poncio sold
the same property to defendants Ramon R. Infante and Emma Infante, who knew,
of the first sale to plaintiff. Therefore, Carbonell filed a suit praying that she be
declared owner of the land in question, that the sale to the Infantes be annulled
and that Poncio be required to execute the
corresponding deed of conveyance in her favor; that the Register of Deeds of Rizal
be directed to issue the corresponding title in her name and that defendants be
sentenced to pay damages.
Defendants moved to dismiss said complaint upon the ground that plaintiff’s claim
is
unenforceable under the Statute of Frauds.

Issue:
Whether or not the plaintiff’s claim is unenforceable under the Statute of Frauds

Ruling:

It is well settled in this jurisdiction that the Statute of Frauds is applicable only to
executory contracts, not to contracts that are totally or partially performed.

In executory contracts there is a high tendency of fraud because unless they be in

writing there can be no proof or evidence to prove the intention of the contracting
parties. The Statue (of Frauds) has been enacted to prevent fraud.

However, if the contract has been partially or totally performed, the exclusion of
parol evidence (in the absence of statute of frauds) would promote fraud of bad
faith for it will enable the defendant to keep the benefits already denied by him
from the transaction in litigation and at the same time evade the obligations and
liabilities assumed or contracted by him.

Therefore it is not enough for the party to allege partial performance as a defense
in order to benefit from the non-application of the statute of frauds; --- the
rejection of any testimonial evidence on partial performance would nullify the rule
that the Statue of Frauds is inapplicable to partially executed contracts --- would
lead to the evil that the statue of fraud seeks to prevent.

Note:

A sold a parcel of land to B subject to the condition that A will be allowed

to stay in the property for one year while B is still paying the balance in
installments. (the contract is partially executed).

A subsequently sold the same property to C, hence B filed a suit against

A.

A alleged that the contract (in favor of B) is unenforceable since it did

not comply with the requirement under the Statute of Frauds.

Issue: W/N the defense of A that the contract is unenforceable will

prosper (against a partially executed contract)

Held: NO. in partially executed contracts, the rule on statute of frauds

may be relaxed as the plaintiff may be allowed to prove through oral
testimony the validity and due execution of the contract in issue.
Limketkai vs CA

FACTS:

Philippine Remnants was the owner of a piece of land which it then entrusted to
BPI. Pedro Revilla was authorized by BPI to sell the lot for PHP1000/sqm. Revilla
contacted Alfonso Lim who agreed to buy the land. Alfonso Lim and Albino
Limketkai went to BPI and were entertained by VP Albano and Asst. VP Aromin.
BPI set the price at 1,100 while Limketkai haggled to 900. They subsequently
agreed on Php1,000 on cash basis. Alfonso Lim asked if it was possible to pay on
terms and BPI officials said there was no harm in trying to ask for payment in
terms but if disapproved, the price would have to be paid in cash. Limketkai paid
the initial 10% with the remaining 90% to follow. Two or three days later, Alfonso
Lim found out that their offer had been frozen and then went to BPI to tender full
payment of 33M to Albano but was refused by both Albano & Bona.

Issue:

W/N there was a perfected contract of sale

Held:

Perfection of the contract took place when Aromin and Albano, acting for BPI,
agreed to sell and Alfonso Lim & Albino Limketkai, agreed to buy the lot at
Php1000/sqm. A consensual contract is perfected upon mere meeting of the minds
and although the deed of sale had yet to be notarized, it does not mean that no
contract was perfected. Consent is manifested by the meeting of the offer and
acceptance upon the thing, and the cause which are to constitute the contract.
The offer must be certain and acceptance absolute. Limketkai’s acceptance was
qualified and therefore, was actually a counter offer.

SWEDISH MATCH VS. CA | G.R. NO. 128120 | OCTOBER 20, 2004

TINGA, J.
However, when the law requires that a contract be in some form in order
that it may be valid or enforceable, or that a contract be proved in a certain way,
that requirement is absolute and indispensable. Consequently, the effect of non-
compliance with the requirement of the Statute is simply that no action can be
enforced unless the requirement is complied with. Clearly, the form required is for
evidentiary purposes only. Hence, if the parties permit a contract to be proved,
without any objection, it is then just as binding as if the Statute has been complied
with.
FACTS:

Swedish Match is a corporation organized under the laws of Sweden not

doing business in the Philippines. It has 3 subsidiary corporations in the
Philippines--Phimco, Provident Tree Farms, Inc., and OTT/Louie (Phils.), Inc.
STORA, the parent company of Swedish Match sold the latter to SMNV of
Netherlands, a corporation existing under the laws of Netherlands.

Enriquez, the VP of the management company of the Swedish Match group,

was authorized by SMNV to negotiate subject to the approval by the board.
Enriquez was instructed that Phimco should be sold due to tight loan covenants of
SMNV. AFP-RSBS, ALS, and Lintonjua, herein respondents, tendered offer to
acquire the Phimco shares. Lintonjua submitted with the petitioner a firm offer to
buy the entire shares of Phimco. Rossi, the CEO of petitioner, extended its
appreciation of Lintonjua’s offer and suggested to conduct further studies to assess
Phimco’s profitability.

After several exchange of correspondence between petitioner and

Lintonjua, the latter was disappointed as to the petitioner’s change of scheme in
the bidding process particularly the acceptance by the petitioner of new bidders
who are not among the 4 contending groups. Lintonjua informed Rossi that it will
be impossible for them to submit the financial statements required on the agreed
date. Two days before the deadline of the offer, Lintonjua again informed Rossi of
their inability to submit final offer but stated that on a certain date, they will be
able to have a better offer than their contenders and that they will pay within 10
days from execution of contract.

Subsequently, Rossi informed Lintonjua of the rejection of the latter’s bid.

However, the bid did not materialize, so the petitioner then offered to Lintonjua
the purchase of Phimco’s share with the condition that failure to complete the
negotiation within 15 days, the shares will be offered to other bidders. Lintonjua
expressed his disagreement as to the new terms of the sale. He emphasized that
the new offer constituted an attempt to reopen the already perfected contract of
sale of the shares in his favor. He intimated that he could not accept the new
terms and conditions contained therein.

Respondent filed an action before the RTC for specific performance. They
averred that the management of Phimco induced the petitioner to violate its
contract with the respondent. Respondents prayed that the sale and transfer of
Phimco’s shares be enjoined and the sale to third parties shall be annulled.
Petitioners filed a motion for a preliminary hearing of their defense of bar by the
Statute of Frauds

RTC: No perfected contract between petitioners and respondents.

CA: The series of written communications between petitioners and

respondents collectively constitute a sufficient memorandum of their agreement
under Article 1403 of the Civil Code.

ISSUE:

Whether the appellate court erred in reversing the trial court’s decision
dismissing the complaint for being unenforceable under the Statute of Frauds.

RULING:

YES.

The Statute of Frauds embodied in Article 1403, paragraph (2), of the Civil
Code requires certain contracts enumerated therein to be evidenced by some note
or memorandum in order to be enforceable. The term Statute of Frauds is
descriptive of statutes which require certain classes of contracts to be in writing.
The Statute does not deprive the parties of the right to contract with respect to
the matters therein involved, but merely regulates the formalities of the contract
necessary to render it enforceable. Evidence of the agreement cannot be received
without the writing or a secondary evidence of its contents.
 The Statute, however, simply provides the method by which the contracts
enumerated therein may be proved but does not declare them invalid because
they are not reduced to writing. By law, contracts are obligatory in whatever form
they may have been entered into, provided all the essential requisites for their
validity are present. However, when the law requires that a contract be in some
form in order that it may be valid or enforceable, or that a contract be proved in
a certain way, that requirement is absolute and indispensable. Consequently, the
effect of non-compliance with the requirement of the Statute is simply that no
action can be enforced unless the requirement is complied with. Clearly, the form
required is for evidentiary purposes only. Hence, if the parties permit a contract to
be proved, without any objection, it is then just as binding as if the Statute has
been complied with.

The purpose of the Statute is to prevent fraud and perjury in the

enforcement of obligations depending for their evidence on the unassisted memory
of witnesses, by requiring certain enumerated contracts and transactions to be
evidenced by a writing signed by the party to be charged.

However, for a note or memorandum to satisfy the Statute, it must be

complete in itself and cannot rest partly in writing and partly in parol. The note or
memorandum must contain the names of the parties, the terms and conditions of
the contract, and a description of the property sufficient to render it capable of
identification. Such note or memorandum must contain the essential elements of
the contract expressed with certainty that may be ascertained from the note or
memorandum itself, or some other writing to which it refers or within which it is
connected, without resorting to parol evidence.

Contrary to the Court of Appeals conclusion, the exchange of

correspondence between the parties hardly constitutes the note or memorandum
within the context of Article 1403 of the Civil Code. Rossis letter dated 11 June
1990, heavily relied upon by respondents, is not complete in itself. First, it does
not indicate at what price the shares were being sold. In paragraph (5) of the
letter, respondents were supposed to submit their final offer in U.S. dollar terms,
at that after the completion of the due diligence process. The paragraph
undoubtedly proves that there was as yet no definite agreement as to the price.
Second, the letter does not state the mode of payment of the price. In fact,
Litonjua was supposed to indicate in his final offer how and where payment for
the shares was planned to be made.

Evidently, the trial courts dismissal of the complaint on the ground of

unenforceability under the Statute of Frauds is warranted
NERI V. HEIRS OF UY | G.R. NO. 194366 | OCTOBER 10, 2012

PERLAS-BERNABE, J.
ART. 1317. No one may contract in the name of another without being
authorized by the latter or unless he has by law a right to represent him.
A contract entered into in the name of another by one who has no authority
or legal representation, or who has acted beyond his powers, shall be
unenforceable, unless it is ratified, expressly or impliedly, by the person on whose
behalf it has been executed, before it is revoked by the other contracting party.

ART. 1403. The following contracts are unenforceable, unless they are
ratified:
(1) Those entered into the name of another person by one who has been given
no authority or legal representation, or who has acted beyond his powers;

FACTS:

Anunciacion had 7 children—2 from her first marriage with Gonzalo and 5
from her second marriage with Neri. Anunciacion died intestate so Neri executed
Extra-Judicial Settlement of the Estate with Absolute Deed of Sale adjudicating
among themselves the subject property and conveying the same to Spouses Uy.

The children of Neri filed a complaint for annulment of sale of the said
homestead properties against spouses Uy for having been sold during the
prohibited period. The heirs of Uy countered that the sale took place beyond the
5-year prohibitory period from the issuance of the homestead patents. Likewise,
they denied knowledge of the exclusion of the 2 children from the first marriage

RTC: The extrajudicial settlement of the estate with absolute deed of sale
is void for depriving the 2 children of their hereditary rights.
 CA: Reversed RTC’s ruling.

ISSUE:

Whether the absolute deed of sale is enforceable.

RULING:

YES.

The disputed sale entered into by Enrique in behalf of his minor children
without the proper judicial authority, unless ratified by them upon reaching the
age of majority, is unenforceable in accordance with Articles 1317 and 1403(1) of
the Civil Code which provide:

ART. 1317. No one may contract in the name of another without being authorized
by the latter or unless he has by law a right to represent him.
A contract entered into in the name of another by one who has no authority or
legal representation, or who has acted beyond his powers, shall be unenforceable,
unless it is ratified, expressly or impliedly, by the person on whose behalf it has
been executed, before it is revoked by the other contracting party.
ART. 1403. The following contracts are unenforceable, unless they are ratified:
(1) Those entered into the name of another person by one who has been given
no authority or legal representation, or who has acted beyond his powers;
xxx

Ratification means that one under no disability voluntarily adopts and gives
sanction to some unauthorized act or defective proceeding, which without his
sanction would not be binding on him. It is this voluntary choice, knowingly made,
which amounts to a ratification of what was theretofore unauthorized, and
becomes the authorized act of the party so making the ratification. Once ratified,
expressly or impliedly such as when the person knowingly received benefits from
it, the contract is cleansed from all its defects from the moment it was
constituted, as it has a retroactive effect.

Records, however, show that Rosa had ratified the extrajudicial settlement
of the estate with absolute deed of sale.

Clearly, the foregoing statements constituted ratification of the settlement

of the estate and the subsequent sale, thus, purging all the defects existing at the
time of its execution and legitimizing the conveyance of Rosa’s 1/16 share in the
estate of Anunciacion to spouses Uy. The same, however, is not true with respect
to Douglas for lack of evidence showing ratification.
 Considering, thus, that the extrajudicial settlement with sale is invalid and
therefore, not binding on Eutropia, Victoria and Douglas, only the shares of
Enrique, Napoleon, Alicia, Visminda and Rosa in the homestead properties have
effectively been disposed in favor of spouses Uy. "A person can only sell what he
owns, or is authorized to sell and the buyer can as a consequence acquire no more
than what the seller can legally transfer.

IGLESIA FILIPINA INDEPENDIENTE vs HEIRS of BERNARDINO TAEZA

FACTS: Iglesia Filipina Independiente (IFI) was the owner of a parcel of land
(Lot 3653) subdivided into four. From 1973-1976, Suprme Bishop Rev. Macario
Ga, sold one lot to Bienvenido de Guzman and two lots to Bernardino Taeza.

Taeza registered the subject parcels of land and transfer certificates were issued
in his name. He then occupied a portion of the land.

In January 1990, IFI filed for annulment of sale annulment of the subject parcels
of land against Rev. Ga and the defendant Bernardino Taeza on the ground that
Rev. Ga was not authorized to sell. The RTC rendered judgment in favor of IFI.
The CA reversed such decision. It ruled that IFI being a corporation sole, validly
transferred ownership over the land in question through its Supreme Bishop, who
was at the time the administrator of all properties and the official representative
of the church. It further held that [t]he authority of the then Supreme Bishop Rev.
Ga to enter into a contract and represent the plaintiff-appellee cannot be assailed,
as there are no provisions in its constitution and canons giving the said authority
to any other person or entity.

ISSUE: W/N the deed of sale with mortgage is null and void or unenforceable?

HELD: The issue boils down to the question of whether then Supreme
Bishop Rev. Ga is authorized to enter into a contract of sale in behalf of petitioner.

Petitioner maintains that there was no consent to the contract of sale as Supreme
Bishop Rev. Ga had no authority to give such consent. It emphasized that Article
IV (a) of their Canons provides that "All real properties of the Church located or
situated in such parish can be disposed of only with the approval and conformity
of the laymen's committee, the parish priest, the Diocesan Bishop, with sanction
of the Supreme Council, and finally with the approval of the Supreme Bishop, as
administrator of all the temporalities of the Church." It is alleged that the sale was
done without the required approval mentioned in the Canons;

The Trial court also found that the laymen's committee indeed made its objection
to the sale known to the Supreme Bishop but the latter still executed the contract
of sale despite such opposition. He clearly acted beyond his powers: This case
clearly falls under the category of unenforceable contracts mentioned in Article
1403, paragraph (1) of the Civil Code, which provides, thus:

Art. 1403. The following contracts are unenforceable, unless they are ratified:

(1) Those entered into in the name of another person by one who has been
given no authority or legal representation, or who has acted beyond his
powers;

Petition Granted. IFI is the rightful owner of subject lots.

Natividad vs. Natividad

The present petition arose from an action for specific performance and/or recovery
of sum of money filed against herein respondents by the spouses Leandro
Natividad (Leandro) and Juliana Natividad (Juliana), who are the predecessors of
herein petitioners.

In their Complaint, Leandro and Juliana alleged that sometime in 1974, Sergio
Natividad (Sergio), husband of respondent Juana Mauricio-Natividad (Juana) and
father of respondent Jean Natividad-Cruz (Jean), obtained a loan from the
Development Bank of the Philippines (DBP). As security for the loan, Sergio
mortgaged two parcels of land, one of which is co-owned and registered in his
name and that of his siblings namely, Leandro, Domingo and Adoracion. This
property is covered by Original Certificate of Title (OCT) No. 5980. Sergio's siblings
executed a Special Power of Attorney authorizing him to mortgage the said
property. The other mortgaged parcel of land, covered by OCT No. 10271, was
registered in the name of Sergio and Juana. Subsequently, Sergio died without
being able to pay his obligations with DBP. Since the loan was nearing its maturity
and the mortgaged properties were in danger of being foreclosed, Leandro paid
Sergio's loan obligations. Considering that respondents were unable to reimburse
Leandro for the advances he made in Sergio's favor, respondents agreed that
Sergio's share in the lot which he co-owned with his siblings and the other parcel
of land in the name of Sergio and Juana, shall be assigned in favor of Leandro and
Juliana. Leandro's and Sergio's brother, Domingo, was tasked to facilitate the
transfer of ownership of the subject properties in favor of Leandro and Juliana.
However, Domingo died without being able to cause such transfer. Subsequently,
despite demands and several follow-ups made by petitioners, respondents failed
and refused to honor their undertaking.

Respondents filed their Answer denying the allegations in the complaint and raising
the following defenses: (1) respondents are not parties to the contract between
Sergio and DBP; (2) there is neither verbal nor written agreement between
petitioners and respondents that the latter shall reimburse whatever
payment was made by the former or their predecessor-in-interest; (3)
Jean was only a minor during the execution of the alleged agreement and is not a
party thereto; (4) that whatever liability or obligation of respondents is already
barred by prescription, laches and estoppel; (5) that the complaint states no cause
of action as respondents are not duty-bound to reimburse whatever alleged
payments were made by petitioners; and (6) there is no contract between the
parties to the effect that respondents are under obligation to transfer ownership
in petitioners' favor as reimbursement for the alleged payments made by
petitioners to DBP.

Petitioners, insist that there was a verbal agreement between respondents and
Leandro, their predecessor-in-interest, wherein the subject properties shall be
assigned to the latter as reimbursement for the payments he made in Sergio's
favor. To support this contention, petitioners relied heavily on the Extrajudicial
Settlement Among Heirs, which was executed by respondents to prove that there
was indeed such an agreement and that such a Settlement is evidence of the
partial execution of the said agreement.

Issue: W/N the contract is enforceable.

Held:

Suffice it to say that there is no partial execution of any contract, whatsoever,

because petitioners failed to prove, in the first place, that there was a verbal
agreement that was entered into.
Even granting that such an agreement existed, the CA did not commit any error in
ruling that the assignment of the shares of Sergio in the subject properties in
petitioners' favor as payment of Sergio's obligation cannot be enforced if there is
no written contract to such effect. Under the Statute of Frauds, an agreement to
convey real properties shall be unenforceable by action in the absence of a written
note or memorandum thereof and subscribed by the party charged or by his agent.
As earlier discussed, the pieces of evidence presented by petitioners, consisting of
respondents' acknowledgment of Sergio's loan obligations with DBP as embodied
in the Extrajudicial Settlement Among Heirs, as well as the cash voucher which
allegedly represents payment for taxes and transfer of title in petitioners' name do
not serve as written notes or memoranda of the alleged verbal agreement.

The foregoing, notwithstanding, the Court finds it proper to reiterate the CA ruling
that, in any case, since respondents had already acknowledged that Sergio had,
in fact, incurred loan obligations with the DBP, they are liable to reimburse the
amount paid by Leandro for the payment of the said obligation even if such
payment was made without their knowledge or consent.

Article 1236 of the Civil Code clearly provides that:

The creditor is not bound to accept payment or performance by a third person

who has no interest in the fulfillment of the obligation, unless there is a stipulation
to the contrary.

Whoever pays for another may demand from the debtor what he has paid, except
that if he paid without the knowledge or against the will of the debtor, he can
recover only insofar as the payment has been beneficial to the debtor.

Neither can respondents evade liability by arguing that they were not parties to
the contract between Sergio and the DBP. As earlier stated, the fact remains that,
in the Extrajudicial Settlement Among Heirs, respondents clearly acknowledged
Sergio's loan obligations with the DBP. Being Sergio's heirs, they succeed not only
to the rights of Sergio but also to his obligations.

De Leon vs. Dela Llana

Distinction between a relatively simulated contract and an absolutely

simulated contract. In the former, the parties agreed to be bound by their true
agreement, though the contract does not state the true intent of the parties, and
the simulation only relates to form and not to the true intent of the parties; the
parties are still bound by their true agreement. Whereas, in the latter, the parties
did not intend to be bound by the contract at all, as in the present case where the
lease contract was entered into only for purposes of formality in order to satisfy
the requirements of the Philippine Charity Sweepstakes Office (PCSO) to operate
a lottery franchise.

Facts: Gilbert dela Llana (Gilbert) filed an ejectment suit against Robert de
Leon and a certain Gil de Leon (collectively referred to as respondents) for non-
payment rentals on the property leased by the respondents for the purpose of
operating a lottery outlet. The respondents, on the other hand, countered that the
undated lease contract between them and Gilbert is simulated, and hence, are not
bound by the same.

The trial court ruled that the lease contract is a relatively simulated contract,
although based from its ratiocination, it is one which is absolutely simulated, and
therefore, void.

Issue: Whether or not the lease contract is simulated.

Ruling: Yes. The lease contract is absolutely simulated, and hence, a void
contract. The Supreme Court noted that the lower court erred only in the
terminology employed by it, since based from its (lower court) ratiocination, there
is a clear case of absolute simulation of the lease contract. The Court further delved
on the distinction between a relatively simulated contract and an absolutely
simulated contract:
 If the parties state a false cause in the contract to conceal
their real agreement, the contract is only relatively simulated and the
parties are still bound by their real agreement. Hence, where the
essential requisites of a contract are present and the simulation
refers only to the content or terms of the contract, the agreement is
absolutely binding and enforceable between the parties and their
successors-in-interest.

In absolute simulation, there is a colorable contract but it has

no substance as the parties have no intention to be bound by it. “The
main characteristic of an absolute simulation is that the apparent
contract is not really desired or intended to produce legal effect or
in any way alter the juridical situation of the parties.” “As a result,
an absolutely simulated or fictitious contract is void, and the parties
may recover from each other what they may have given under the
contract.”

The Court took into consideration the finding of the lower court that
the parties did not intend to be bound by the undated lease contract, mainly
because the same was only entered into for purposes of formality to comply
with the requirements of the PCSO before one can operate a lottery outlet.
Tolentino vs. Latagan

A forged or fraudulent document may become the root of a valid title, if

the property has already been transferred from the name of the owner to that of
the forger, and then to that of an innocent purchaser for value.

Facts: The title to the subject property in this case was disputed by the
parties on the ground that the purchaser acquired her title thereto through a
simulated sale on account of forgery of the sellers’ signatures in the deed of sale.
Thus, a suit was filed in the trial court for quieting of title, recovery of property
and damages claim that since the sale was simulated and/or fictitious for being a
forgery, all transactions emanating from it are null and void.

Issue: Whether or not a forged deed of sale can be the source of a valid
title.

Ruling: The Court found that there was forgery of the signatures of Amado
and Modesta in the deed of sale dated January 14, 1970.

In Rufloe v. Burgos, the Court held that a forged deed of sale is null and
void and conveys no title, for it is a well-settled principle that no one can give what
one does not have; nemo dat quod non habet. One can sell only what one owns
or is authorized to sell, and the buyer can acquire no more right than what the
seller can transfer legally. Due to the forged Deed of Absolute Sale dated January
14, 1970, Servillano acquired no right over the subject property which he could
convey to his daughter, Maria. All the transactions subsequent to the falsified sale
between the Servillano and his daughter are likewise void, namely, the Deeds of
Absolute Sale of the subject property that Servillano executed on May 25, 1971
and November 24, 1977 in favor his daughter, as well as the Self-Adjudication of
Real Property.

However, it has also been consistently ruled that that a forged or fraudulent
document may become the root of a valid title, if the property has already been
transferred from the name of the owner to that of the forger, and then to that of
an innocent purchaser for value. This doctrine emphasizes that a person who deals
with registered property in good faith will acquire good title from a forger and be
absolutely protected by a Torrens title. This is because a prospective buyer of a
property registered under the Torrens system need not go beyond the title,
especially when she has no notice of any badge of fraud or defect that would place
her on guard.

TINGALAN v. SPOUSES MELLIZA

A void contract produces no legal effect whatsoever in accordance with the

principle “quad nullum est nullum producit effectum.” It could not transfer title to
the subject property, it is not susceptible of ratification and the action for the
declaration of its absolute nullity is imprescriptible.

Facts:

Tingalan sold a parcel of land to spouses Melliza Since then, respondents have
been in actual, exclusive, peaceful, uninterrupted and adverse possession of the
subject property. The Owner’s Duplicate of title and Tax Declaration were also
issued under the names of the spouses who paid for the transfer and real property
taxes pertaining to the property in question.20 years later, one Elena Tunanan
filed an adverse claim over the subject property. Petitioner countered and
demanded that the respondents vacate the property, but the latter refused
claiming ownership over the same as supported by the Deed of Absolute Sale
executed between them and the petitioner. Petitioner then filed a case for quieting
of title and recovery of possession.

Petitioner claims that he remains to be the owner of the property as his title under
the OCT has never been cancelled and the said sale was null and void since the
Deed was executed within the five-year prohibitory period under the Public Land
Act (a free patent was issued under his name over the property in 1976 and he is
the original owner in fee simple of the same). He also contends that the Deed was
written in English language which he could neither speak nor understand. Also,
being a member of the cultural minority, that Deed should have been approved by
the Chairman of the Commission on National Integration.

Issue: Whether the Contract of sale is valid

Ruling:
The contract of sale is null and void from inception for being contrary to law and
public policy. As a void contract, it is imprescriptible and not susceptible of
ratification. The law is clear under Section 118 of the Public Land Act, that unless
made in favor of the government or any of its branches, units or institutions, lands
acquired under free patent of homestead provisions shall not be subject to any
form of encumbrance for a term of five years from and after the date of issuance
of the patent or grant.

The subject land could not have been validly alienated or encumbered because at
the time they entered into the contract, it was just 1 year from the grant of the
patent to the petitioner. Hence it was way within 5 years from the date of the
issuance of the free patent.

The subject contract, being null and void from inception, did not pass any rights
over the property from the petitioner to respondents.
CLEMENTE v. COURT OF APPEALS

Simulation takes place when the parties do not really want the contract they
have executed to produce the legal effects expressed by its wordings. Under
Article 1345, the simulation of a contract may either be absolute or relative. The
former takes place when the parties do not intend to be bound at all; the latter,
when the parties conceal their true agreement.

Facts:

Adela owned 3 adjoining parcels of land in Quezon City, subdivided as lots 32, 34
and 35-B. During her lifetime, Adela allowed her 4 children and her grandchildren
the use and possession of the properties and its improvements. Sometime in 1985
and 1987, Adela simulated the transfer of lots 32 and 34 to her two grandsons,
Carlos and Dennis. As a consequence, TCTs were issued respectively under their
names. Lot 35-B remained with Adela. It is undisputed that the transfers were
never intended to vest title to Carlos and Dennis who both will return the lots to
Adela when requested.

On 1989, prior to Adela and petitioner’s departure for the US, Adela requested
Carlos and Dennis to execute a deed of reconveyance over lots 32 and 34. The
deed of reconveyance was executed on the same day and was registered with the
Registry of Deeds. Subsequently, Adela executed a deed of absolute sale over lots
32 and 34 in favor of petitioner, Clemente. On the same day, Adela also executed
a Special Power of Attorney in favor of petitioner. Petitioner’s authority under the
SPA included the power to administer, take charge and manage, for Adela’s
benefit, the properties and all her other real and personal properties in the
Philippines.

Petitioner and Adela then left for US. When petitioner returned to the Philippines,
she registered the sale over lots 32 and 34 with the RD and the respective TCTs
were then issued in the name of petitioner. In 1990, Adela died in the US and was
succeeded by her 4 children.
Thereafter, petitioner sought to eject 2 of Adela’s children, who were then staying
in the properties. Only then did the children of Adela learn of the transfer of titles
to petitioner. They then filed a complaint for reconveyance of property against
petitioner. They sought the nullification of the Deeds of Absolute Sale. They alleged
that Adela only wanted to help petitioner travel to the US, by making it appear
that petitioner has ownership of the properties. Also, they alleged that no
consideration was given by petitioner to Adela in exchange for the simulated
conveyances.

Issue: Whether the conveyances were

Ruling:

The Deeds of Absolute Sale between petitioner and Adela are null and void for lack
of consent and consideration.

While the deeds of absolute sale appear to be valid on their face, the courts are
not completely precluded to consider evidence aliunde in determining the real
intention of the parties. This is especially true when the validity of the contracts
was put in issue by one of the parties in his pleadings. Here, private respondents
assail the validity of the Deeds by alleging that they were simulated and lacked
consideration.
Here, there was no valid contract of sale between the parties because of the
absence of consent. The contract was a mere simulation. Simulation takes place
when the parties do not really want the contract they have executed to produce
the legal effects expressed by its wordings. Under Article 1345, the simulation of
a contract may either be absolute or relative. The former takes place when the
parties do not intend to be bound at all; the latter, when the parties conceal their
true agreement.

In absolute simulation, there appears to be a valid contract but there is actually

none because the element of consent is lacking. This is so because the parties do
not actually intend to be bound by the terms of the contract. In determining the
true nature of a contract, the primary test is the intention of the parties. If the
words of a contract appear to contravene the evident intention of the parties, the
latter shall prevail. Such intention is determined not only from the express terms
of their agreement, but also from the contemporaneous and subsequent acts of
the parties. This is especially true in a claim of absolute simulation where a
colorable contract is executed.

Moreover, there is finding that the contract was not supported by a consideration.
Article 1471 of the NCC provides that if the price is simulated, the sale is void.
Thus, although the contracts state that the purchase price was paid by petitioner
to Adela, the evidence shows that the contrary is true, because no money changed
hands.
TANCHULING VS. CANTELA
G.R. No. 209284, November 10, 2015
PERLAS-BERNABE, J

FACTS
Sps. Vicente and Renee Tanchuling, and Cantela executed a deed of sale covering
two parcels of land. On the face of the deed, the sum of P400,000 appears as the
consideration for Cantela's purported purchase of the properties. Vicente delivered
the owner's copies of the TCTs to Cantela, although it is undisputed that none of
the parties are in actual physical possession of the properties.

When Sps. Tanchuling tried to recover the TCTs from Cantela, the latter refused
despite the former's earnest demands, prompting them to file a complaint. They
alleged that the subject deed was absolutely simulated, hence, null and void, given
that: (a) there was no actual consideration paid by Cantela; (b) the deed was
executed to merely show to their neighbors that they are the true owners of the
properties, considering that there are portions thereof being illegally sold by a
certain John Mercado to unsuspecting and ignorant buyers; and (c) Cantela
simultaneously executed an undated Deed of Absolute Sale reconveying the
properties in their favor.

Cantela insisted that the sale of the properties to him was valid as he bought it for
P400,000. He further averred that the undated deed was surreptitiously inserted
by Sps. Tanchuling in the copies of the subject deed presented to him for signing.

ISSUE:
Whether or not the subject deed is simulated, hence, null and void.

RULING:
Sps. Tanchuling never intended to transfer the properties to Cantela; hence, the
subject deed was absolutely simulated and in consequence, null and void.
Simulation takes place when the parties do not really want the contract they have
executed to produce the legal effects expressed by its wordings. Simulation or
vices of declaration may be either absolute or relative.

A contract of purchase and sale is null and void and produces no effect whatsoever
where it appears that the same is without cause or consideration which should
have been the motive thereof, or the purchase price which appears thereon
as paid but which in fact has never been paid by the purchaser to the
vendor.

The parties never intended to be bound by any sale agreement. Instead, the
subject deed was executed merely as a front to show the public that Sps.
Tanchuling were the owners of the properties in order to deter the group of John
Mercado from illegally selling the same.
MILAGROS C. REYES VS. FELIX P. ASUNCION
G.R. No. 196083, November 11, 2015
PERALTA, J.:

FACTS
Petitioner claims that since the early 80s, she and her late husband were the
owners of a parcel of land which is also a sugarcane plantation and forms part of
a U.S. Military Reservation. Sometime in 1986, petitioner hired respondent as a
caretaker of the subject land.

In 1997, the Bases Conversion and Development Authority (BCDA) launched a

resettlement program for the victims of the Mt. Pinatubo eruption and began to
look for possible resettlement sites in Tarlac and the subject lot was among those
considered.

Thereafter, according to petitioner, in order to prevent the BCDA from converting

her property into a resettlement site, she and respondent executed a contract,
where she transferred her rights over the subject land to the respondent.

Petitioner claimed to have remained the absolute owner and possessor of the
subject land and presently occupies the same as a sugarcane plantation and even
mills the sugarcane harvested at the Central Azucarera de Tarlac for her own
benefit. She also stated that the respondent continued working for her but the
latter's employment was severed when petitioner discovered that respondent sold
the former's pigs and cows.

Respondent then filed a complaint for estafa against petitioner alleging that the
latter failed and refused to give respondent his share of the total harvests on the
subject land for the years 1993-1999, using their contract as basis. However, the
said complaint was dismissed for lack of probable cause.

Petitioner then filed a Complaint against respondent before the RTC for the
declaration of nullity of the subject contract.
ISSUE
Whether the subject contract was merely simulated, thus is null and void.

RULING

The contract is valid. The petitioner failed to prove the contract was simulated.

It is petitioner's contention that the subject contract is purely simulated, since it

purports a transfer of rights over the subject land in favor of the respondent. When
petitioner executed the contract, it was never her intention to transfer her rights
over the subject land as the primordial consideration was to prevent the BCDA
from taking over the property. She also asserts that she and the respondent agreed
to make the said false appearance in the contract. However, the RTC and the CA
found no other evidence to support the said allegations and the self-serving
averments of the petitioner. This Court is in agreement with the RTC and the CA
as to the insufficiency of evidence to prove that there was indeed a simulation of
contract.
The Civil Code provides:

Art. 1345. Simulation of a contract may be absolute or relative. The former takes
place when the parties do not intend to be bound at all; the latter, when the parties
conceal their true agreement.

Art. 1346. An absolutely simulated or fictitious contract is void. A relative

simulation, when it does not prejudice a third person and is not intended for any
purpose contrary to law, morals, good customs, public order or public policy binds
the parties to their real agreement.

In absolute simulation, there is a colorable contract but it has no substance as

the parties have no intention to be bound by it. The main characteristic of an
absolute simulation is that the apparent contract is not really desired or intended
to produce legal effect or in any way alter the juridical situation of the parties. As
a result, an absolutely simulated or fictitious contract is void, and the parties may
recover from each other what they may have given under the contract. However,
if the parties state a false cause in the contract to conceal their real agreement,
the contract is relatively simulated and the parties are still bound by their real
agreement. Hence, where the essential requisites of a contract are present and
the simulation refers only to the content or terms of the contract, the agreement
is absolutely binding and enforceable between the parties and their successors-in-
interest.

The primary consideration in determining the true nature of a contract is the

intention of the parties. If the words of a contract appear to contravene the evident
intention of the parties, the latter shall prevail. Such intention is determined not
only from the express terms of their agreement, but also from the
contemporaneous and subsequent acts of the parties.

The burden of proving the alleged simulation of a contract falls on those who
impugn its regularity and validity. A failure to discharge this duty will result in the
upholding of the contract.

The finding of the CA is correct when it ruled that petitioner failed to present
evidence to prove that respondent acted in bad faith or fraud in procuring her
signature or that he violated their real intention, if any, in executing it.
Fullido vs. Grilli
GR 215014, February 29, 2016

FACTS: Sometime in 1994, Grilli, an Italian national, met Fullido in Bohol and
courted her. In 1995, Grilli decided to build a residential house where he and
Fullido would stay whenever he would be vacationing in the country.

Grilli financially assisted Fullido in procuring a lot located in Biking I, Dauis,

Bohol, from her parents which was registered in her name under Transfer
Certificate of Title (TCT) No. 30626.5 On the said property, they constructed a
house, which was funded by Grilli. Upon completion, they maintained a common-
law relationship and lived there whenever Grilli was on vacation in the Philippines
twice a year.

In 1998, Grilli and Fullido executed a contract of lease, a memorandum of

agreement (MOA) and a special power of attorney8 (SPA), to define their
respective rights over the house and lot.

The lease contract stipulated, among others, that Grilli as the lessee, would rent
the lot, registered in the name of Fullido, for a period of fifty (50) years, to be
automatically renewed for another fifty (50) years upon its expiration in the
amount of P10,000.00 for the whole term of the lease contract; and that Fullido
as the lessor, was prohibited from selling, donating, or encumbering the said lot
without the written consent of Grilli. SPA allowed her to administer, manage, and
transfer the house and lot on behalf of Fullido.

Initially, their relationship was harmonious, but it turned sour after 16 years of
living together. Both charged each other with infidelity. They could not agree
who should leave the common property, and Grilli sent formal letters to Fullido
demanding that she vacate the property, but these were unheeded. On
September 8, 2010, Grilli filed a complaint for unlawful detainer with prayer for
issuance of preliminary injunction against Fullido before the MCTC
Grilli’s position: He discovered she was pregnant, led him to believe it was his.
But he still allowed Fullido to live in his house in another room without rent. She
let her two children, siblings and parents stay. Property damaged and his
personal belongings stolen or lost. Her family was hostile to him.

Fullido’s position: Met as 17 when she was a cashier at a supermarket, he was a

tourist. She was young, he assured her and her parents that they would be
eventually be married in 3 years. He offered to build a house for her on land she
exclusively owned which would become their conjugal abode. It lasted for 18
years, until Fullido found another woman. He threatened her and beat her and
her children. Even though Grilli funded the construction, she owned it and
contributed to the value by supervising construction and maintaining their
household.

ISSUE: Whether or not the contract is void

HELD: Yes.

The lease contract and the MOA circumvent the constitutional restraint against
foreign ownership of lands.

The prohibition, however, is not limited to the sale of lands to foreigners. It also
covers leases of lands amounting to the transfer of all or substantially all the
rights of dominion. In the landmark case of Philippine Banking Corporation v. Lui
She,28 the Court struck down a lease contract of a parcel of land in favor of a
foreigner for a period of ninety-nine (99) years with an option to buy the land for
fifty (50) years. Where a scheme to circumvent the Constitutional prohibition
against the transfer of lands to aliens is readily revealed as the purpose for the
contracts, then the illicit purpose becomes the illegal cause rendering the
contracts void. Thus, if an alien is given not only a lease of, but also an
option to buy, a piece of land by virtue of which the Filipino owner
cannot sell or otherwise dispose of his property, this to last for 50
years, then it becomes clear that the arrangement is a virtual transfer
of ownership whereby the owner divests himself in stages not only of the right
to enjoy the land but also of the right to dispose of it — rights which constitute
ownership. If this can be done, then the Constitutional ban against alien
landholding in the Philippines, is indeed in grave peril.

Based on the above-cited constitutional, legal and jurisprudential limitations, the

Court finds that the lease contract and the MOA in the present case are null and
void for virtually transferring the reigns of the land to a foreigner.
As can be gleaned from the contract, the lease in favor of Grilli was for a period
of fifty (50) years, automatically extended for another fifty (50) years upon the
expiration of the original period. Moreover, it strictly prohibited Fullido from
selling, donating, or encumbering her land to anyone without the written consent
of Grilli. For a measly consideration of PI 0,000.00, Grilli would be able to
absolutely occupy the land of Fullido for 100 years, and she is powerless to
dispose the same. The terms of lease practically deprived Fullido of her property
rights and effectively transferred the same to Grilli.

Worse, the dominion of Grilli over the land had been firmly cemented by the
terms of the MOA as it reinforced Grilli's property rights over the land because,
first, it brazenly dictated that ownership of the land and the residential building
resided with him. Second, Fullido was expressly prohibited from transferring the
same without Grilli's conformity. Third, Grilli would permanently reside in the
residential building. Fourth, Grilli may capriciously dispose Fullido's property once
their common-law relationship is terminated. This right was recently exercised
when the land was transferred to Guibone. Lastly, Fullido shall be compelled to
transfer the land to Grilli if a law would be passed allowing foreigners to own real
properties in the Philippines.

Evidently, the lease contract and the MOA operated hand-in-hand to strip Fullido
of any dignified right over her own property. The term of lease for 100 years was
obviously in excess of the allowable periods under P.D. No. 471. Even Grilli
admitted that "this is a case of an otherwise valid contract of lease that went
beyond the period of what is legally permissible."34 Grilli had been empowered to
deprive Fullido of her land's possession, control, disposition and even its
ownership. The jus possidendi, jus utendi, jus fruendi, jus abutendi and, more
importantly, the jus disponendi - the sum of rights which composes ownership -
of the property were effectively transferred to Grilli who would safely enjoy the
same for over a century. The title of Fullido over the land became an empty and
useless vessel, visible only in paper, and was only meant as a dummy to fulfill a
foreigner's desire to own land within our soils.

It is disturbing how these documents were methodically formulated to

circumvent the constitutional prohibition against land ownership by foreigners.
The said contracts attempted to guise themselves as a lease, but a closer
scrutiny of the same revealed that they were intended to transfer the dominion
of a land to a foreigner in violation of Section 7, Article XII of the 1987
Constitution. Even if Fullido voluntary executed the same, no amount of consent
from the parties could legalize an unconstitutional agreement. The lease contract
and the MOA do not deserve an iota of validity and must be rightfully struck
down as null and void for being repugnant to the fundamental law. These void
documents cannot be the source of rights and must be treated as mere scraps of
paper.

A void contract cannot be the source of any right; it cannot be utilized in an

ejectment suit. Clearly, Contracts may be declared void even in a summary
action for unlawful detainer because, precisely, void contracts do not produce
legal effect and cannot be the source of any rights. To emphasize, void contracts
may not be invoked as a valid action or defense in any court proceeding,
including an ejectment suit.

On the issue of in pari delicto, the Court held: “The application of the doctrine of
in pari delicto is not always rigid. An accepted exception arises when its
application contravenes well-established public policy. In this jurisdiction, public
policy has been defined as that principle of the law which holds that no subject
or citizen can lawfully do that which has a tendency to be injurious to the public
or against public good. Thus, wherever public policy is advanced by either party,
they may be allowed to sue relief against the transaction.

In the present case, both Grilli and Fullido were undoubtedly parties to a void
contract. Fullido, however, was not barred from filing the present petition before
the court because the matters at hand involved an issue of public policy,
specifically the Constitutional prohibition against land ownership by aliens.
Joey R. Peña vs. Jesus Delos Santos and the Heirs of Rosita Delos
Santos Flores
G.R. No. 202223 March 2, 2016
Reyes, J.

Article 1491(5) of the Civil Code expressly prohibits lawyers from acquiring
property or rights that may be the object of any litigation in which they may take
part by virtue of their profession.

FACTS: Jesus Delos Santos and Rosita Delos Santos Flores were the judgment
awardees of the two-thirds portion or 9,915 square meters of four adjoining lots
designated as Lots 393-A, 393-B, 394-D and 394-E, located in Boracay Island,
Malay, Aklan, representing as their shares in the intestate estate of Leonardo
delos Santos.

Peña averred that he is the transferee of Jesus and Rosita's adjudged allotments
over the subject lots. He claimed that he bought the same from Atty. Romeo
Robiso who acquired the properties from Jesus and Rosita through assignment
and sale.

The plaintiffs opposed Pefia's motion claiming that the conveyance made by
Jesus and Rosita in favor of Atty. Robiso was null and void for being a prohibited
transaction because the latter was their counsel in the case.

RTC upheld that the conveyance made by Jesus and Rosita in favor of Atty.
Robiso is valid since it was not made during the pendency of litigation but after
judgment has been rendered. CA reversed the decision of the RTC.

ISSUE: Whether the deeds of conveyance between Atty. Robiso and Jesus and
Rosita were void.

RULING: Yes. Article 1491(5) of the Civil Code expressly prohibits lawyers from
acquiring property or rights that may be the object of any litigation in which they
may take part by virtue of their profession. Records show that the judicial action
over the subject lots was still in the appellate proceedings stage when they were
conveyed to Jesus and Rosita's counsel, Atty. Robiso.
Clearly then, since the property conveyed to Atty. Robiso by Jesus and Rosita
was still the object of litigation, the deeds of conveyance executed by the latter
are deemed inexistent. Under Article 1409 of the Code, contracts, which are
expressly prohibited or declared void by law, are considered inexistent and void
from the beginning.

WHEREFORE, foregoing considered, the Motion for Reconsideration is hereby

DENIED for lack of merit.
LIGUEZ v. COURT OF APPEALS

G.R. No. L-11240, December 18, 1957

FACTS:

Conchita Liguez (Conchita) filed a complaint against the widow and heirs of
Salvador Lopez (Salvador) to recover a parcel of 51.84 hectares of land in Davao.
She averred to be its legal owner, pursuant to a deed of donation executed in her
favor by Salvador. At the time the deed was executed, Conchita was 16. She had
also been living with Salvador’s parents for barely a month. The deed of donation
recites that the donor Salvador, “for and in consideration of his love and affection”
for Conchita, and “also for the good and valuable services rendered to [Salvador]
by [Conchita], does by these presents, voluntarily give, grant and donate…”

The Court of Appeals found that the donation was made in view of Salvador
Lopez’s desire to have sexual relations with Conchita. Furthermore, Conchita’s
parents would not allow Conchita to live with him unless he first donated the
subject land. The donated land originally belonged to the conjugal partnership of
Salvador and his wife, Maria Ngo.

Conchita averred that under Art. 1274 (of the 1889 Civil Code), “in contracts
of pure beneficence the consideration is the liberality of the donor,” and liberality
per se can never be illegal, since it is neither against law or morals or public policy.

ISSUES:

1. Whether the conveyance was predicated on illegal causa? – YES

2. Whether the alienation of conjugal property was void? Only insofar

as it prejudices Maria Ngo.

RULING:

1. It is argued that under Article 1274 (now Art. 1350) of the Civil Code of 1889
(which was the governing law in 1948, when the donation was executed),
liberality of the donor is deemed causa only in contracts that are of
“pure” beneficence, or contracts designed solely and exclusively to
procure the welfare of the beneficiary, without any intent of producing
any satisfaction for the donor. In this case, Salvador was not moved
exclusively by the desire to benefit Conchita, but also to secure her
cohabiting with him, and so that he could gratify his sexual impulses.
This is clear from Salvador’s confession to two witnesses that he was in love with
her.

Lopez would not have conveyed the property in question had he known that
Conchita would refuse to cohabit with him. The cohabitation was an implied
condition to the donation and being unlawful, necessarily tainted the donation.
Therefore, the donation was but one part of an onerous transaction (with
Conchita’s parents) that must be viewed in its totality.

2. Savador Lopez could not donate the entirety of the property to the prejudice
of his wife. The donation is void only insofar as it prejudices the interest of his
wife.

No pari delicto: The facts are more suggestive of seduction than of

immoral bargaining on the part of appellant.

In our opinion, the Court of Appeals erred in applying to the present case
the pari delicto rule. First, because it can not be said that both parties here had
equal guilt when we consider that as against the deceased Salvador P. Lopez, who
was a man advanced in years and mature experience, the appellant was a mere
minor, 16 years of age, when the donation was made; that there is no finding
made by the Court of Appeals that she was fully aware of the terms of
the bargain entered into by and Lopez and her parents; that, her
acceptance in the deed of donation (which was authorized by Article 626
of the Old Civil Code) did not necessarily imply knowledge of conditions
and terms not set forth therein; and that the substance of the testimony of
the instrumental witnesses is that it was the appellant's parents who insisted on
the donation before allowing her to live with Lopez. These facts are more
suggestive of seduction than of immoral bargaining on the part of appellant. It
must not be forgotten that illegality is not presumed, but must be duly and
adequately proved.

In the second place, the rule that parties to an illegal contract, if equally guilty,
will not be aided by the law but will both be left where it finds them, has been
interpreted by this Court as barring the party from pleading the illegality of
the bargain either as a cause of action or as a defense. Memo auditor
propriam turpitudinem allegans. The appellant seeks recovery of the
disputed land on the strength of a donation regular on its face. To defeat
its effect, the appellees must plead and prove that the same is illegal.
But such plea on the part of the Lopez heirs is not receivable, since
Lopez, himself, if living, would be barred from setting up that plea; and
his heirs, as his privies and successors in interest, can have no better
rights than Lopez himself.

Appellees, as successors of the late donor, being thus precluded from pleading
the defense of immorality or illegal causa of the donation, the total or partial
ineffectiveness of the same must be decided by different legal principles. In this
regard, the Court of Appeals correctly held that Lopez could not donate the entirety
of the property in litigation, to the prejudice of his wife Maria Ngo, because said
property was conjugal in character and the right of the husband to donate
community property is strictly limited by law (Civil Code of 1889, Arts. 1409, 1415,
1413; Baello vs. Villanueva, 54 Phil. 213).

FINAL WORDS: Conchita Liguez entitled to so much of the donated property as

may be found, upon proper liquidation, not to prejudice the share of the widow
Maria Ngo in the conjugal partnership or the legitimes of Salvador’s forced heirs.
The records are remanded to the court of origin for further proceedings.
RELLOSA v. GAW CHEE HUN

G.R. No. L-1411. September 29, 1953

FACTS:

On February 2, 1944, Dionisio Rellosa sold to Gaw Chee Hun a parcel of

land, together with the house erected thereon, situated in the City of Manila,
Philippines, for the sum of P25,000. The vendor remained in possession of the
property under a contract of lease entered into on the same date between the
same parties.

Alleging that the sale was executed subject to the condition that the
vendee, being a Chinese citizen, would obtain the approval of the Japanese Military
Administration in accordance with (seirei) No. 6 issued on April 2, 1943, by the
Japanese authorities, and said approval has not been obtained, and that, even if
said requirement were met, the sale would at all events be void under article XIII,
section 5, of our Constitution.

The vendor instituted the present action in the Court of First Instance of
Manila seeking the annulment of the sale

ISSUES:

1. Whether the sale was void because it is against the constitution? YES.

2. Whether the petitioner can have the sale declared null and void and
recover the property considering the effect of the law governing rescission of
contracts? NO.

RULING:

1. The sale in question having been entered into in violation of the

Constitution. It is no longer necessary to consider now the question relative to the
validity of Seirei No. 6 of the Japanese Military Administration for the simple reason
that in our opinion the law that should govern the particular transaction is not the
above directive but the Constitution adopted by the then Republic of the
Philippines on September 4, 1943, it appearing that the aforesaid transaction was
executed on February 2, 1944, which provisions are similar to those contained in
our present Constitution. In the recent case of Krivenko vs. Register of Deeds, 79
Phil. 461, wherein this court held that "under the Constitution aliens may not
acquire private or public agricultural lands, including residential lands."
This matter has been once more submitted to the court for deliberation, but the
ruling was reaffirmed. This ruling fully disposes of the question touching on the
validity of the sale of the property herein involved.

2. The sale in question having been entered into in violation of the Constitution,
the next question to be determined is, can petitioner have the sale declared null
and void and recover the property considering the effect of the law governing
rescission of contracts? Our answer must of necessity be in the negative following
the doctrine laid down in the case of Trinidad Gonzaga de Cabauatan, et al. vs. Uy
Hoo, et al., 88 Phil. 103, wherein we made the following pronouncement: "We
can, therefore, say that even if the plaintiffs can still invoke the Constitution, or
the doctrine in the Krivenko Case, to set aside the sale in question, they are now
prevented from doing so if their purpose is to recover the lands that they have
voluntarily parted with, because of their guilty knowledge that what they were
doing was in violation of the Constitution. They cannot escape this conclusion
because they are presumed to know the law. As this court well said: 'A party to
an illegal contract cannot come into a court of law and ask to have his
illegal objects carried out. The law will not aid either party to an illegal
agreement; it leaves the parties where it finds them.' The rule is expressed
in the maxims: 'Ex dolo malo non oritur actio,' and 'In pari delicto potior est
conditio defendentis.' (Bough and Bough vs. Cantiveros and Hanopol, 40 Phil., 210,
216.)"

(Remedy of the State: (1) action for reversion, or (2) escheat to the state.)
ALFRED FRITZ FRENZEL vs. EDERLINA P. CATITO, G.R. No. 143958, July
11, 2003, CALLEJO, SR., J.

A contract that violates the Constitution and the law, is null and void and vests no
rights and creates no obligations. It produces no legal effect at all.

Facts:

Petitioner Alfred Fritz Frenzel is an Australian citizen of German descent. He

married Teresita Santos, a Filipino citizen. In 1981, Alfred and Teresita separated
from bed and board without obtaining a divorce.

He met Ederlina Catito, a Filipina and a native of Bajada, Davao City in Sydney.
Unknown to Alfred, she resided for a time in Germany and was married to Klaus
Muller, a German national. Alfred and Ederlina went to the Philippines.

Alfred told Ederlina that he was married but that he was eager to divorce his wife
in Australia. Alfred proposed marriage to Ederlina, but she replied that they should
wait a little bit longer.

When Alfred returned to the Philippines, he visited Ederlina in her Manila residence
and found it unsuitable for her. He decided to purchase a house and lot owned by
Victoria Binuya Steckel in San Francisco del Monte, Quezon City. Since Alfred knew
that as an alien he was disqualified from owning lands in the Philippines, he agreed
that only Ederlina's name would appear in the deed of sale as the buyer of the
property, as well as in the title covering the same. After all, he was planning to
marry Ederlina and he believed that after their marriage, the two of them would
jointly own the property.

On July 28, 1984, while Alfred was in Papua New Guinea, he received a Letter
dated December 7, 1983 from Klaus Muller who was then residing in Berlin,
Germany. Klaus informed Alfred that he and Ederlina had been married on October
16, 1978 and had a blissful married life until Alfred intruded.

In the meantime, Alfred decided to purchase another house and lot, owned by
Rodolfo Morelos covered by TCT No. 92456 located in Peña Street, Bajada, Davao
City. Alfred again agreed to have the deed of sale made out in the name of
Ederlina.

Alfred purchased another parcel of land from one Atty. Mardoecheo

Camporedondo, located in Moncado, Babak, Davao, covered by TCT No. 35251.
Alfred once more agreed for the name of Ederlina to appear as the sole vendee in
the deed of sale.

Alfred and Ederlina's relationship started deteriorating. Ederlina had not been able
to secure a divorce from Klaus.

In the meantime, on November 7, 1985, Alfred filed a complaint against Ederlina

with the Regional Trial Court, Davao City, for specific performance, declaration of
ownership of real and personal properties, sum of money, and damages.

In her answer, Ederlina denied all the material allegations in the complaint,
insisting that she acquired the said properties with her personal funds, and as
such, Alfred had no right to the same. She alleged that the deeds of sale, the
receipts, and certificates of titles of the subject properties were all made out in her
name.

The petitioner contends that he purchased the three parcels of land subject of his
complaint because of his desire to marry the respondent, and not to violate the
Philippine Constitution. He was, however, deceived by the respondent when the
latter failed to disclose her previous marriage to Klaus Muller. It cannot, thus, be
said that he and the respondent are "equally guilty;" as such, the pari
delicto doctrine is not applicable to him. He acted in good faith, on the advice of
the respondent's uncle, Atty. Mardoecheo Camporedondo. There is no evidence
on record that he was aware of the constitutional prohibition against aliens
acquiring real property in the Philippines when he purchased the real properties
subject of his complaint with his own funds. The transactions were not illegal per
se but merely prohibited, and under Article 1416 of the New Civil Code, he is
entitled to recover the money used for the purchase of the properties. At any rate,
the petitioner avers, he filed his complaint in the court a quo merely for the
purpose of having him declared as the owner of the properties, to enable him to
sell the same at public auction. Applying by analogy Republic Act No. 133 as
amended by Rep. Act No. 4381 and Rep. Act No. 4882, the proceeds of the sale
would be remitted to him, by way of refund for the money he used to purchase
the said properties. To bar the petitioner from recovering the subject properties,
or at the very least, the money used for the purchase thereof, is to allow the
respondent to enrich herself at the expense of the petitioner in violation of Article
22 of the New Civil Code.

Issue:

Whether or not the sale of the three parcel of land in favor of petitioner valid

Ruling:
No.

Section 14, Article XIV of the 1973 Constitution provides, as follows:

Save in cases of hereditary succession, no private land shall be transferred

or conveyed except to individuals, corporations, or associations qualified to
acquire or hold lands in the public domain.

Lands of the public domain, which include private lands, may be transferred or
conveyed only to individuals or entities qualified to acquire or hold private lands
or lands of the public domain. Aliens, whether individuals or corporations, have
been disqualified from acquiring lands of the public domain. Hence, they have also
been disqualified from acquiring private lands.

Even if, as claimed by the petitioner, the sales in question were entered into by
him as the real vendee, the said transactions are in violation of the Constitution;
hence, are null and void ab initio. A contract that violates the Constitution and the
law, is null and void and vests no rights and creates no obligations. It produces no
legal effect at all. The petitioner, being a party to an illegal contract, cannot come
into a court of law and ask to have his illegal objective carried out. One who loses
his money or property by knowingly engaging in a contract or transaction which
involves his own moral turpitude may not maintain an action for his losses. To him
who moves in deliberation and premeditation, the law is unyielding. The law will
not aid either party to an illegal contract or agreement; it leaves the parties where
it finds them. Under Article 1412 of the New Civil Code, the petitioner cannot have
the subject properties deeded to him or allow him to recover the money he had
spent for the purchase thereof. Equity as a rule will follow the law and will not
permit that to be done indirectly which, because of public policy, cannot be done
directly. Where the wrong of one party equals that of the other, the defendant is
in the stronger position . . . it signifies that in such a situation, neither a court of
equity nor a court of law will administer a remedy. The rule is expressed. in the
maxims: EX DOLO ORITUR ACTIO and IN PARI DELICTO POTIOR EST CONDITIO
DEFENDENTIS.

The petitioner cannot feign ignorance of the constitutional proscription, nor claim
that he acted in good faith, let alone assert that he is less guilty than the
respondent. The petitioner is charged with knowledge of the constitutional
prohibition. As can be gleaned from the decision of the trial court, the petitioner
was fully aware that he was disqualified from acquiring and owning lands under
Philippine law even before he purchased the properties in question; and, to skirt
the constitutional prohibition, the petitioner had the deed of sale placed under the
respondent's name as the sole vendee thereof:
Such being the case, the plaintiff is subject to the constitutional restrictions
governing the acquisition of real properties in the Philippines by aliens.

DOMINGO GONZALO vs. JOHN TARNATE, JR., G.R. No. 160600, January
15, 2014, BERSAMIN, J.

The illegality of the Sub-Contract Agreement necessarily affects the Deed of

Assignment because the rule is that an illegal agreement cannot give birth to a
valid contract.

Facts:

After the Department of Public Works and Highways (DPWH) had awarded on July
22, 1997 the contract for the improvement of the Sadsadan-Maba-ay Section of
the Mountain Province-Benguet Road in the total amount of 7 014 963 33 to his
company, Gonzalo Construction, petitioner Domingo Gonzalo (Gonzalo)
subcontracted to respondent John Tarnate, Jr. (Tarnate) on October 15, 1997, the
supply of materials and labor for the project under the latter’s business known as
JNT Aggregates. Their agreement stipulated, among others, that Tarnate would
pay to Gonzalo eight percent and four percent of the contract price, respectively,
upon Tarnate’s first and second billing in the project.

In furtherance of their agreement, Gonzalo executed on April 6, 1999 a deed of

assignment whereby he, as the contractor, was assigning to Tarnate an amount
equivalent to 10% of the total collection from the DPWH for the project. This 10%
retention fee (equivalent to ₱233,526.13) was the rent for Tarnate’s equipment
that had been utilized in the project. In the deed of assignment, Gonzalo further
authorized Tarnate to use the official receipt of Gonzalo Construction in the
processing of the documents relative to the collection of the 10% retention fee
and in encashing the check to be issued by the DPWH for that purpose. The deed
of assignment was submitted to the DPWH on April 15, 1999. During the
processing of the documents for the retention fee, however, Tarnate learned that
Gonzalo had unilaterally rescinded the deed of assignment by means of an affidavit
of cancellation of deed of assignment dated April 19, 1999 filed in the DPWH on
April 22, 1999; and that the disbursement voucher for the 10% retention fee had
then been issued in the name of Gonzalo, and the retention fee released to him.

Tarnate demanded the payment of the retention fee from Gonzalo, but to no avail.
Thus, he brought this suit against Gonzalo to recover the retention fee of
₱233,526.13, moral and exemplary damages for breach of contract, and attorney’s
fees.
In his answer, Gonzalo admitted the deed of assignment and the authority given
therein to Tarnate, but averred that the project had not been fully implemented
because of its cancellation by the DPWH, and that he had then revoked the deed
of assignment. He insisted that the assignment could not stand independently due
to its being a mere product of the subcontract that had been based on his contract
with the DPWH; and that Tarnate, having been fully aware of the illegality and
ineffectuality of the deed of assignment from the time of its execution, could not
go to court with unclean hands to invoke any right based on the invalid deed of
assignment or on the product of such deed of assignment.

Issue:

Whether or not the deed of assignment was a valid and binding contract

Ruling:

No.

There is no question that every contractor is prohibited from subcontracting with

or assigning to another person any contract or project that he has with the DPWH
unless the DPWH Secretary has approved the subcontracting or assignment. This
is pursuant to Section 6 of Presidential Decree No. 1594.

Gonzalo, who was the sole contractor of the project in question, subcontracted the
implementation of the project to Tarnate in violation of the statutory prohibition.
Their subcontract was illegal, therefore, because it did not bear the approval of
the DPWH Secretary. Necessarily, the deed of assignment was also illegal, because
it sprung from the subcontract. As aptly observed by the CA:

x x x. The intention of the parties in executing the Deed of Assignment was merely
to cover up the illegality of the sub-contract agreement. They knew for a fact that
the DPWH will not allow plaintiff-appellee to claim in his own name under the Sub-
Contract Agreement.

Obviously, without the Sub-Contract Agreement there will be no Deed of

Assignment to speak of. The illegality of the Sub-Contract Agreement necessarily
affects the Deed of Assignment because the rule is that an illegal agreement
cannot give birth to a valid contract. To rule otherwise is to sanction the act of
entering into transaction the object of which is expressly prohibited by law and
thereafter execute an apparently valid contract to subterfuge the illegality. The
legal proscription in such an instance will be easily rendered nugatory and
meaningless to the prejudice of the general public.

Under Article 1409 (1) of the Civil Code, a contract whose cause, object or purpose
is contrary to law is a void or inexistent contract. As such, a void contract cannot
produce a valid one. To the same effect is Article 1422 of the Civil Code, which
declares that "a contract, which is the direct result of a previous illegal contract, is
also void and inexistent."

According to Article 1412 (1) of the Civil Code, the guilty parties to an illegal
contract cannot recover from one another and are not entitled to an affirmative
relief because they are in pari delicto or in equal fault. The doctrine of in pari
delicto is a universal doctrine that holds that no action arises, in equity or at law,
from an illegal contract; no suit can be maintained for its specific performance, or
to recover the property agreed to be sold or delivered, or the money agreed to be
paid, or damages for its violation; and where the parties are in pari delicto, no
affirmative relief of any kind will be given to one against the other.1

Nonetheless, the application of the doctrine of in pari delicto is not always rigid. An
accepted exception arises when its application contravenes well-established public
policy. In this jurisdiction, public policy has been defined as "that principle of the
law which holds that no subject or citizen can lawfully do that which has a tendency
to be injurious to the public or against the public good."

There is no question that Tarnate provided the equipment, labor and materials for
the project in compliance with his obligations under the subcontract and the deed
of assignment; and that it was Gonzalo as the contractor who received the
payment for his contract with the DPWH as well as the 10% retention fee that
should have been paid to Tarnate pursuant to the deed of assignment. Considering
that Gonzalo refused despite demands to deliver to Tarnate the stipulated 10%
retention fee that would have compensated the latter for the use of his equipment
in the project, Gonzalo would be unjustly enriched at the expense of Tarnate if the
latter was to be barred from recovering because of the rigid application of the
doctrine of in pari delicto. The prevention of unjust enrichment called for the
exception to apply in Tarnate’s favor.
Pilipino Telelphone Corporation (Piltel), Petitioner
Vs Delfino Tecson, Respondent
Justice Vitug GR No. 156966 May 7, 2004

Contract of adhesion is not per se inefficacious. The rule is that, should

there be ambiguities in a contract of adhesion, such ambiguities are to be
construed against the party that prepared it. If, however, the stipulations are
not obscure, but are clear and leave no doubt on the intention of the parties, the
literal meaning of its stipulations must be held controlling.
Facts :

Tecson applied for 6 cellular phone subscriptions with Piltel on various

dates. Each application was approved and covered by a mobile service agreement.

Subsequently, Tecson filed with the RTC of Iligan City, Lanao del Norte, a
complaint against Piltel for a “Sum of Money and Damages. Piltel moved for
dismissal of the complaint on the ground of improper venue, citing a common
provision in the mobile service agreements – “Venue of all suits arising from the
Agreement shall be in the proper courts of Makati; subscriber hereby expressly
waives any other venues.”

RTC denied motion to dismiss. CA affirmed decision of trial court. CA

anchored its decision on the thesis that the subscription agreement being a mere
contract of adhesion, does not bind Tecson on the venue stipulation.

Issue:

Whether or not the agreement being a contract of adhesion is inefficacious

and does not bind Tecson on the venue stipulation

Ruling:

Indeed, the contract herein involved is a contract of adhesion. But such an

agreement is not per se inefficacious. The rule instead is that, should there be
ambiguities in a contract of adhesion, such ambiguities are to be construed against
the party that prepared it. If, however, the stipulations are not obscure, but are
clear and leave no doubt on the intention of the parties, the literal meaning of its
stipulations must be held controlling.

As held in DBP v National Merchandising Corp., the contracting parties,

being of age and businessmen of experience, were presumed to have acted with
due care and to have signed the assailed documents with full knowledge of their
import.
 A contract duly executed is the law between the parties, and they are
obliged to comply fully and not selectively with its terms. A contract of adhesion is
no exception.
Alpha Insurance and Surety Co., Petitioner
Vs Arsenia Sonia Castor, Respondent
Justice Peralta GR No. 1981 74 September 2,
2013

A contract of insurance is a contract of adhesion which must be construed

liberally in favor of the insured and strictly against the insurer in order to
safeguard the latter’s interest. Any ambiguity therein should be resolved against
the insurer, to preclude the insurer from non-compliance with his obligation
Facts :

Castor entered in a contract of insurance with Alpha Ins involving her

vehicle. The contract of insurance obligates Alpha Ins to pay Castor the amount of
P 630,000 in case of loss or damage to said vehicle during the period Feb 26, 2007
to Feb 26, 2008.

On April 16, 2007, Castor instructed her driver to bring vehicle to an auto-
shop for a tune up. However, her driver no longer returned the vehicle. Castor
reported the incident to the police and concomitantly notified Alpha Ins of the said
loss and demanded payment of the insurance proceeds.

Alpha Ins denied the insurance claim citing a provision in the insurance
contract that “ The Company shall not be liable to pay for any malicious damage
caused by the Insured, any member of his family or by a person in the Insured’s
service.”

Castor filed a complaint for Sum of Money with Damages against Alpha Ins
before the RTC

Alpha Ins argued that the word “damage” means loss due to injury or harm
to person, property or reputation, and should be construed to cover malicious
“loss” as in “theft”. It asserted that the loss of vehicle as a result of it being stolen
by Castor’s driver is excluded from the policy.

RTC ruled in favor of Castor. CA affirmed ruling of the trial court. CA held
that exception does not cover loss but only damage because the terms of the
insurance policy are ambiguous, such that the parties themselves disagree about
the meaning of particular provisions. The policy will be construed by the courts
liberally in favor of the assured and strictly against the insurer.

Issue:

Whether or not CA committed grave abuse of discretion when it adjudged

in favor of Castor

Ruling:
 If the intention of Alpha Ins was to include “loss” within the term “damage”
then logic dictates that it should have used the term “damage” alone in the entire
policy. Alpha Ins, after liberally using the words “loss” and “damage” in the entire
policy, suddenly went specific by using the word “damage” only in the policy’s
exception regarding “malicious damage”. Now, Alpha Ins would like this Court to
believe that it really intended the word “damage” in the term “malicious damage”
to include theft of the vehicle. The Court does not find this contention of Alpha Ins
to be well taken.

When the terms of insurance contract contain limitations on liability, courts

should construe them in such a way as to preclude the insurer from non-
compliance with his obligation. Being a contract of adhesion, the terms of an
insurance contract are to be construed strictly against the party which prepared
the contract, the insurer. By reason of the exclusive control of the insurance
company over the terms and phraseology of the insurance contract, ambiguity
must be strictly interpreted against the insurer and liberally in favor of the insured,
especially to avoid forfeiture.
PAULINO M. EJERCITO, JESSIE M. EJERCITO and JOHNNY D. CHANG vs.
ORIENTAL ASSURANCE CORPORATION, G.R. No. 192099, July 8, 2015,
SERENO, CJ.

With regard to the contention that the Deed of Indemnity is a contract of adhesion,
the Court has consistently held that contracts of adhesion are not invalid per se
and that their binding effects have been upheld on numerous occasions. the
pretension that petitioners did not consent to the renewal of the bond is belied by
the fact that the terms of the contract which they voluntarily entered into contained
a clause granting authority to the Company to grant or consent to the renewal of
the bond. Having entered into the contract with full knowledge of its terms and
conditions, petitioners are stopped from asserting that they did so under the
ignorance of the legal effect of the contract or the undertaking.

Facts:

On 10 May 1999, respondent Oriental Assurance Corporation, through its Executive

Vice President Luz N. Cotoco issued a Surety Bond in favor of FFV Travel & Tours,
Inc. (Company). The bond was intended to guarantee the Company’s payment of
airline tickets purchased on credit from participating members of International Air
Transport Association (IATA) to the extent of 3million.

On the same day, petitioners and Merissa C. Somes (Somes) executed a Deed of
Indemnity in favor of respondent. The Surety Bond was effective for one year from
its issuance until 10 May 2000. It was renewed for another year, from 10 May
2000 to 10 May 2001, as shown in Bond Endorsement No. OAC-2000/0145 dated
17 April 2000. The corresponding renewal premium amounting to 15,024.54 was
paid by the insured corporation under Official Receipt No. 100262.

FFV Travel & Tours, Inc. has been declared in default for failure to pay its
obligations amounting 5,484,086.97 and USD 18,760.98 as of 31 July 2000.
Consequently, IATA demanded payment of the bond, and respondent heeded the
demand on 28 November 2000 as evidenced by China Bank Check No. 104949.
IATA executed a Release of Claim on 29 November 2000 acknowledging payment
of the surety bond.

Respondent sent demand letters to petitioners and Somes for reimbursement of

the 3 million pursuant to the indemnity agreement. For their failure to reimburse
respondent, the latter filed a collection suit.

Issue: Whether or not the Deed of Indemnity is a contract of adhesion, therefore,

invalid

Ruling: No.
The contract of indemnity is the law between the parties. it is a cardinal rule in
the interpretation of a contract that if its terms are clear and leave no doubt on
the intention of the contracting parties, the literal meaning of its stipulation shall
control. The CA aptly found provisions in the contract that could not exonerate
petitioners from their liability.

Clearly, as far as respondent is concerned, petitioners have expressly bound

themselves to the contract, which provides for the term granting authority to the
company to renew the original bond. The terms of the contract are clear, explicit
and unequivocal. Therefore, the subsequent acts of the Company, through Somes,
the led to the renewal of the surety bond are binding on petitioners as well.

The intention of Somes to renew the bond cannot be denied, as she paid the
renewal premium and even submitted the renewed bond to IATA.

With regard to the contention that the Deed of Indemnity is a contract of adhesion,
the Court has consistently held that contracts of adhesion are not invalid per se
and that their binding effects have been upheld on numerous occasions. the
pretension that petitioners did not consent to the renewal of the bond is belied by
the fact that the terms of the contract which they voluntarily entered into contained
a clause granting authority to the Company to grant or consent to the renewal of
the bond. Having entered into the contract with full knowledge of its terms and
conditions, petitioners are stopped from asserting that they did so under the
ignorance of the legal effect of the contract or the undertaking.

It is true that on some occasions, the Court has struck down such contract as void
when the weaker party is imposed upon in dealing with the dominant party is
reduced to the alternative of accepting the contract or leaving it, completely
deprived of the opportunity to bargain on equal footing. This reasoning cannot be
used in the instant case. One of the petitioners, Paulino M. Ejercito, is a lawyer
who cannot feign ignorance of the legal effect of his undertaking. Petitioners could
have easily inserted a remark in the clause granting authority to the Company to
renew the original bond, if the renewal thereof was their intention.

The rule that ignorance of the contents of an instrument does not ordinarily affect
the liability of the one who signs it may also be applied to this Indemnity
Agreement. And the mistake of petitioners as to the legal effect of their obligation
is ordinarily no reason for relieving them of liability.
VICENTE D. CABANTING and LALAINE V. CABANTING vs. BPI FAMILY
SAVINGS BANK, INC., G.R. No. 201927, PERALTA, J.

A contract of adhesion, wherein one party imposes a ready-made form of contract

on the other, is not strictly against the law. A contract of adhesion is as
binding as ordinary contracts, the reason being that the party who
adheres to the contract is free to reject it entirely. Contrary to petitioner's
contention, not every contract of adhesion is an invalid agreement
Facts:

On January 14, 2003, petitioners bought on installment basis from Diamond Motors
Corporation a 2002 Mitsubishi Adventure SS MT and for value received, petitioners
also signed, executed and delivered to Diamond Motors a Promissory Note with
Chattel Mortgage. Therein, petitioners jointly and severally obligated themselves
to pay Diamond Motors the sum of P836,032.00, payable in monthly installments
in accordance with the schedule of payment indicated therein, and which
obligation is secured by a chattel mortgage on the aforementioned motor vehicle.
On the day of the execution of the document, Diamond Motors, with notice to
petitioners, executed a Deed of Assignment, thereby assigning to BPI Family
Savings Bank, Inc. (BPI Family) all its rights, title and interest to the Promissory
Note with Chattel Mortgage.

Come October 16, 2003, however, a Complaint was filed by BPI Family against
petitioners for Replevin and damages before the Regional Trial Court of
Manila (RTC), praying that petitioners be ordered to pay the unpaid portion of the
vehicle's purchase price, accrued interest thereon at the rate of 36% per annum as
of August 26, 2003, 25% attorney's fees and 25% liquidated damages, as
stipulated on the Promissory Note with Chattel Mortgage. BPI Family alleged that
petitioners failed to pay three (3) consecutive installments and despite written
demand sent to petitioners through registered mail, petitioners failed to comply
with said demand to pay or to surrender possession of the vehicle to BPI Family.

In their Answer, petitioners alleged that they sold the subject vehicle to one Victor
S. Abalos, with the agreement that the latter shall assume the obligation to pay
the remaining monthly installments. It was then Abalos who made payments to
BPI Family through his personal checks, and BPI Family accepted the post-dated
checks delivered to it by Abalos. The checks issued by Abalos for the months of
May 2003 to October 2003 were made good, but subsequent checks were
dishonored and not paid. Petitioners pointed out that BPI Family should have sued
Abalos instead of them.

Issue: Whether or not such stipulation (waiving the necessity of notice and
demand to make the obligation due and payable ) should be deemed invalid as
the document they executed was a contract of adhesion

Ruling: No.

No prior demand was necessary to make petitioners' obligation due and payable.
The Promissory Note with Chattel Mortgage clearly stipulated that "[i]n case of
my/our [petitioners'] failure to pay when due and payable, any sum which I/We x
x x or any of us may now or in the future owe to the holder of this note x x x then
the entire sum outstanding under this note shall immediately become due and
payable without the necessity of notice or demand which I/We hereby waive."
Petitioners argue that such stipulation should be deemed invalid as the document
they executed was a contract of adhesion. It is impmiant to stress the Court's
ruling in Dia v. St. Ferdinand Memorial Park, Inc., 7 to wit:

A contract of adhesion, wherein one party imposes a ready-made form of contract

on the other, is not strictly against the law. A contract of adhesion is as
binding as ordinary contracts, the reason being that the party who
adheres to the contract is free to reject it entirely. Contrary to petitioner's
contention, not every contract of adhesion is an invalid agreement. As we had the
occasion to state in Development Bank of the Philippines v. Perez:

x x x In discussing the consequences of a contract of adhesion, we held in Rizal

Commercial Banking Corporation v. Court of Appeals:

It bears stressing that a contract of adhesion is just as binding as ordinary

contracts. It is true that we have, on occasion, struck down such contracts as void
when the weaker party is imposed upon in dealing with the dominant bargaining
party and is reduced to the alternative of taking it or leaving it, completely deprived
of the opportunity to bargain on equal footing, Nevertheless, contracts of
adhesion are not invalid per se; they are not entirely prohibited. The one
who adheres to the contract is in reality free to reject it entirely; if he
adheres, he gives his consent.

The validity or enforceability of the impugned contracts will have to be

determined by the peculiar circumstances obtaining in each case and the
situation of the parties concerned.Indeed, Article 24 of the New Civil Code
provides that "[in] all contractual, property or other relations, when one of
the·parties is at a disadvantage on account of his moral dependence, ignorance,
indigence, mental weakness, tender age, or other handicap, the courts must be
vigilant for his protection." x x x8

Here, there is no proof that petitioners were disadvantaged, uneducated or utterly

inexperienced in dealing with financial institutions; thus, there is no reason for the
court to step in and protect the interest of the supposed weaker party.

Verily, petitioners are bound by the aforementioned stipulation in the Promissory

Note with Chattel Mortgage waiving the necessity of notice and demand to make
the obligation due and payable.
Buenaventura vs. Metrobank

Facts:
Buenaventura executed 2 Promissory notes in favor of Metrobank. After
their maturity, there remained unpaid balance despite repeated demands.

Metrobank filed an action for recovery of sum of money.

Buenaventura claimed she rediscounted checks with Metrobank. She

received these checks from Imperial as partial payment of the purchase price of a
property she sold to him. However, Metrobank required her to execute the said
PNs making her a guarantor of the payments of these checks.
Buenaventura’s defenses:
1. Rediscounting does not create a loan obligation.
2. PNs she executed were contracts of adhesion because her only participation
in their execution was affixing her signature; and that the terms of the
promissory notes should be strictly construed against the respondent as the
party responsible for their preparation.
Metrobank’s defense:
The terms and conditions of the promissory notes were clear and
unambiguous; hence, there was no room or need for interpretation thereof.

Issue:
WON the PNs were contracts of adhesion?

Ruling:
Yes, but such circumstance alone did not necessarily entitle her to bar their literal
enforcement against her if their terms were unequivocal.
The promissory notes were written as follows:

FOR VALUE RECEIVED, I/we jointly and severally promise to pay Metropolitan Bank
and Trust Company, at its office x x x the principal sum of PESOS xx x, Philippine
currency, together with interest and credit evaluation and supervision fee (CESF)
thereon at the effective rate of• x x x per centum x x x per annum, inclusive, from
date hereof and until fully paid.

As a rule, indeed, the contract of adhesion is no different from any other contract.
Its interpretation still aligns with the literal meaning of its terms and conditions
absent any ambiguity, or with the intention of the parties. The terms and
conditions of the promissory notes involved herein, being clear and beyond doubt,
should then be enforced accordingly.
Sanchez vs. Mapalad Realty

Facts:
Mapalad Realty was the registered owner of 4 parcels of land. Jose Campos
executed an affidavit admitting that Mapalad was one of the companies held in
trust for former President Marcos.
Campos turned over, all assets, properties, records and documents pertaining
to Mapalad Realty to the Cory Administration. Writs of sequestration were against
Mapalad and all its properties.
Rolando Josef, appointed Vice President/Treasurer and GM of Mapalad,
discovered for that there was 4 TCTs missing. He inquired about it and discovered
Mapalad’s former director and general manager took them.
 Nordelak Development Corporation filed a notice of adverse claim over the
subject properties based on deed of sale purportedly executed by Miguel
Magsaysay in his capacity as President and board chairman of Mapalad.
Magsaysay Inc., a corporation controlled by Miguel Magsaysay, acquired
ownership of all the shares of stock of Mapalad however was terminated after
selling all his shares to Novo Properties
Mapalad commenced the present action for annulment of deed of sale and
reconveyance of title against Nordelak. During the pendency of the case, Nordelak
sold the subject property to a certain Manuel Luis Sanchez, now petitioner.
Issue:
Whether or not there is a valid sale between Mapalad and Nordelak.

Ruling:
None.
By the contract of sale, one of the contracting parties obligates himself to
transfer ownership of and to deliver a determinate thing and the other party to
pay therefore a price certain in money or its equivalent
The essential requisites of a valid contract of sale are
(a) consent of the contracting parties,
(b) object certain, and
(c) cause of obligation.

Consent may be given only by a person with legal capacity to give consent. In
the case of juridical person such as corporation like Mapalad, consent may only be
granted through its officers who have been duly authorized by its board of
directors.
In the present case, consent was purportedly given by Miguel Magsaysay, the
person who signed for and in behalf of Mapalad in the deed of absolute sale.
However, during the trial, he admitted to be no longer connected with Mapalad
because he already divested all his interests in said corporation as early as 1982.
Even assuming, for the sake of argument, the signatures were genuine, it would
still be voidable for lack of authority resulting in his capacity to give consent on
the part of Mapalad.
JUAN P. CABRERA vs. HENRY YSAAC

G.R. No. 166790, November 19, 2014

LEONEN, J.:

Doctrine: A contract is a meeting of minds between two persons whereby one

binds himself, with respect to the other, to give something or to render some
service." For there to be a valid contract, there must be consent of the contracting
parties, an object certain which is the subject matter of the contract, and cause of
the obligation which is established. Sale is a special contract. The seller obligates
himself to deliver a determinate thing and to transfer its ownership to the buyer.
In turn, the buyer pays for a price certain in money or its equivalent. A "contract
of sale is perfected at the moment there is a meeting of minds upon the thing
which is the object of the contract and upon the price." The seller and buyer must
agree as to the certain thing that will be subject of the sale as well as the price in
which the thing will be sold. The thing to be sold is the object of the contract,
while the price is the cause or consideration.

FACTS: The heirs of Luis and Matilde Ysaac co-owned a 5,517-square-meter

parcel of land located in Sabang, Naga City. One of them is respondent, Henry
Ysaac. Ysaac leased out portions of the property to several lessees. Juan Cabrera,
one of the lessees, leased a 95-square-meter portion of the land beginning in 1986.

Later, Henry Ysaac needed money and offered to sell the 95-square-meter piece
of land to Cabrera. He told Ysaac that the land was too small for his needs because
there was no parking space for his vehicle. To address Cabrera’s concerns, Ysaac
expanded his offer to include the two adjoining lands he was then leasing to the
Borbe family and the Espiritu family. Those three parcels of land have a combined
area of 439-square-meters. However, Ysaac warned Cabrera that the sale for those
two parcels could only proceed if the two families agree to it.

Cabrera accepted the new offer. The settled price was ₱250.00 per square meter,
but Cabrera could only pay in full after his retirement on June 15, 1992. Ysaac
agreed but demanded for an initial payment of ₱1,500.00, which was paid.

According to Cabrera, Ysaac informed him that the Borbe family and the Espiritu
family were no longer interested in purchasing the properties they were leasing.
Since Mamerta Espiritu of the Espiritu family initially considered purchasing the
property and had made an initial deposit for it, Cabrera agreed to reimburse this
earlier payment. Cabrera paid ₱6,100.00. Ysaac issued a receipt for this amount.
₱3,100.00 of the amount was reimbursed to Mamerta and, in turn, she gave
Cabrera the receipts issued to her by Ysaac.

On June 15, 1992, Cabrera tried to pay the balance of the purchase price to Ysaac.
However, he was in the United States. The only person in Ysaac’s residence was
his wife who refused to accept Cabrera’s payment.

Sometime in September 1993, Cabrera alleged that Ysaac approached him,

requesting to reduce the area of the land subject of their transaction. Part of the
439-square-meter land was going to be made into a barangay walkway, and
another part was being occupied by a family that was difficult to eject of which
Cabrera agreed to. The land was surveyed again. According to Cabrera, Ysaac
agreed to shoulder the costs of the resurvey, which Cabrera advanced in the
amount of ₱3,000.00.

The resurvey shows that the area now covered by the transaction was 321 square
meters. Cabrera intended to show the sketch plan and pay the amount due for the
payment of the lot. However, on that day, Ysaac was in Manila. Once more, Ysaac’s
wife refused to receive the payment because of lack of authority from her husband.

On September 21, 1994, Ysaac’s counsel, Atty. Luis Ruben General, wrote a letter
addressed to Atty. Leoncio Clemente, Cabrera’s counsel. Atty. General informed
Atty. Clemente that his client is formally rescinding the contract of sale because
Cabrera failed to pay the balance of the purchase price of the land between May
1990 and May 1992. The letter also stated that Juan Cabrera’s initial payment of
₱1,500.00 and the subsequent payment of ₱6,100.00 were going to be applied as
payment for overdue rent of the parcel of land Cabrera was leasing. The allegation
of Cabrera that Ysaac agreed to shoulder the costs of the resurveying was
denied. Cabrera, together with his uncle, Delfin Cabrera, went to Ysaac’s house on
September 16, 1995 to settle the matter. Ysaac told Cabrera that he could no
longer sell the property because the new administrator of the property was his
brother, Franklin Ysaac.

Due to Cabrera’s inability to enforce the contract of sale between him and Ysaac,
he decided to file a civil case for specific performance he prayed for the execution
of a formal deed of sale and for the transfer of the title of the property in his name.
He tendered ₱69,650.00 to the clerk of court as payment of the remaining balance
of the original sale price.

Before the RTC decided the case, the property was sold to the local government
of Naga City. The property was turned into a project for the urban poor of the city.
During the trial, Corazon Borbe Combe of the Borbe family testified that contrary
to what Cabrera claimed, her family never agreed to sell the land they were
formerly leasing from Ysaac. The Borbe family bought the property from Naga
City’s urban poor program.

RTC: Ruled that the contract of sale between Cabrera and Ysaac was duly
rescinded when the former failed to pay the balance of the purchase price in the
period agreed upon. That there was an agreement between them as to the sale of
land and the corresponding unit price. However, aside from the receipts turned
over by Mamerta Espiritu to Cabrera, there was no "evidence that the other
adjoining lot occupants agreed to sell their respective landholdings". It also
doubted that Cabrera was willing and able to pay Henry Ysaac on June 15, 1992
because after the said refusal of Ysaac’s wife, he did not bother to write Ysaac or
to any of the co-owners his intention to pay for the land or he could have consigned
the amount in court at the same time notifying Ysaac of the consignation.

CA: Agreed with the RTC that there was a perfected contract of sale. That even if
the subject of the sale is part of Henry Ysaac’s undivided property, a co-owner
may sell a definite portion of the property. The contract of sale was not validly
rescinded for the rescission to be valid under Article 1592, it should have been
done through a judicial or notarial act and not merely through a letter.

ISSUE: Whether there was a valid contract of sale.

RULING: There was no valid contract of sale between petitioner and respondent.

As defined by the Civil Code, "[a] contract is a meeting of minds between two
persons whereby one binds himself, with respect to the other, to give something
or to render some service." For there to be a valid contract, there must be consent
of the contracting parties, an object certain which is the subject matter of the
contract, and cause of the obligation which is established. Sale is a special
contract. The seller obligates himself to deliver a determinate thing and to transfer
its ownership to the buyer. In turn, the buyer pays for a price certain in money or
its equivalent. A "contract of sale is perfected at the moment there is a meeting of
minds upon the thing which is the object of the contract and upon the price." The
seller and buyer must agree as to the certain thing that will be subject of the sale
as well as the price in which the thing will be sold. The thing to be sold is the
object of the contract, while the price is the cause or consideration.

The object of a valid sales contract must be owned by the seller. If the seller is
not the owner, the seller must be authorized by the owner to sell the object.

Specific rules attach when the seller co-owns the object of the contract. Sale of a
portion of the property is considered an alteration of the thing owned in common.
Under the Civil Code, such disposition requires the unanimous consent of the other
co-owners. However, the rules also allow a co-owner to alienate his or her part in
the co-ownership.

If the alienation precedes the partition, the co-owner cannot sell a definite portion
of the land without consent from his or her co-owners. He or she could only sell
the undivided interest of the co-owned property. As summarized in Lopez v.
Ilustre, "[i]f he is the owner of an undivided half of a tract of land, he has a right
to sell and convey an undivided half, but he has no right to divide the lot into two
parts, and convey the whole of one part by metes and bounds."

The undivided interest of a co-owner is also referred to as the "ideal or abstract

quota" or "proportionate share." On the other hand, the definite portion of the
land refers to specific metes and bounds of a co-owned property. Hence, prior to
partition, a sale of a definite portion of common property requires the consent of
all co-owners because it operates to partition the land with respect to the co-owner
selling his or her share. The co-owner or seller is already marking which portion
should redound to his or her autonomous ownership upon future partition.
The object of the sales contract between petitioner and respondent was a definite
portion of a co-owned parcel of land. At the time of the alleged sale between
petitioner and respondent, the entire property was still held in common.

Respondent has "no right to sell or alienate a concrete, specific or determinate

part of the thing owned in common, because his right over the thing is represented
by quota or ideal portion without any physical adjudication."

There was no showing that respondent was authorized by his co-owners to sell
the portion of land occupied by Juan Cabrera, the Espiritu family, or the Borbe
family. Without the consent of his co-owners, respondent could not sell a definite
portion of the co-owned property.

Respondent had no right to define a 95-square-meter parcel of land, a 439-square-

meter parcel of land, or a 321-square-meter parcel of land for purposes of selling
to petitioner. The determination of those metes and bounds are not binding to the
co-ownership and, hence, cannot be subject to sale, unless consented to by all the
co-owners.

At best, the agreement between petitioner and respondent is a contract to sell,

not a contract of sale. A contract to sell is a promise to sell an object, subject to
suspensive conditions. Without the fulfillment of these suspensive conditions, the
sale does not operate to determine the obligation of the seller to deliver the object.
AGNES V. GUISON VS. HEIRS OF LOREÑO TERRY, ET AL.
G.R. No. 191914, August 9, 2017
SERENO, C.J.:

Doctrine: Article 1458 of the Civil Code describes a contract of sale as a

transaction by which “one of the contracting parties obligates himself to transfer
the ownership of and to deliver a determinate thing, and the other to pay therefore
a price certain in money or its equivalent.” The elements of a perfected contract
of sale are the following: (1) the meeting of the minds of the parties or their
consent to a transfer of ownership in exchange for a price; (2) the determinate
object or subject matter of the contract; and (3) the price certain in money or its
equivalent as consideration for the sale. The absence of any of these elements
renders a contract void.

FACTS: Sometime in 1995, a Deed of Absolute Sale of parcel of land in Moonwalk,

Danicop, Catanduanes, with an area of 1.3894 hectares, identified as Lot No.
10628-pt. was executed in favor of respondent Terry by Angeles Vargas, the father
of petitioner Agnes Guison. In the deed, Vargas acknowledged receipt of the
payment for the lot in the amount of P5,557.60.
Later, Terry sold certain parts of the lot to third parties. In 1996, Vargas and Terry
executed an Agreement of Revocation of Sale (Revocation Agreement) relating to
the same parcel of land. The instrument stated that Vargas had erroneously sold
the entire area of Lot 10628-pt to Terry. That their true intention was only to
convey a 3,000-square-meter portion of the land whose actual location would later
be determined by both parties in a separate document, considering that there was
no monetary consideration for the transaction. They agreed to revoke the earlier
Deed of Absolute Sale and affirmed the conveyance of the 3,000-square-meter
potion,

Vargas died with no agreement executed regarding the actual location of the land.
Then, a Partition Agreement was entered into by the Heirs of Vargas, represented
by Guison, and Terry. The instrument, which was executed for the purpose of
physically segregating the 3,000-square-meter portion allotted to Terry.

Thereafter, Terry sold other portions of the property to third parties. Later, the
heirs of Vargas executed an Extrajudicial Settlement of Estate Among Heirs. In
that instrument, Lot 10628-pt was allotted to Guison as part of her share of the
estate.

Then, Guison filed a Complaint for annulment of contracts, accion publiciana, and
damages against Terry and all those who had allegedly purchased portions of Lot
10628-pt from him. The instruments sought to be annulled were the following: (a)
the original Deed of Absolute Sale executed by Vargas in favor of Terry; (b) the
Agreement of Revocation of Sale signed by Vargas and Terry; (c) the Partition
Agreement entered into by petitioner and Terry; and (d) the Deeds of Absolute
Sale executed by Terry in favor of third parties.

Guison argued that the original Deed of Absolute Sale and the Agreement of
Revocation of Sale should be considered void for lack of consideration. That the
nullity of those earlier instruments led to the invalidity of the Partition Agreement,
because it was signed in the mistaken belief that Terry had a right to the property.

Terry filed refuted those assertions, he insisted that the 3,000-square-meter lot
was conveyed to him by Vargas. Terry explained that the property was in fact
originally owned by his grandfather, but incorrectly registered in the name of
Vargas. That the original Deed of Absolute Sale was executed to rectify the error
in registration and restore the property to its rightful owner. He further alleged
that he had only signed the Agreement of Revocation of Sale in consideration of
his closeness to the Vargas family and in order to avoid litigation. That petitioner
herself confirmed the validity of the instruments of sale by executing the Partition
Agreement after the death of Vargas.

RTC: Rendered a Decision in favor of Gusion citing the absence of certain

elements of a sale, it declared that the Deed of Absolute Sale, Revocation
Agreement, and Partition Agreement were invalid contracts because of want of
monetary consideration and failure of the contract to reflect the true intention of
the parties. Thus, there was no sale at all. That The Agreement of Revocation of
[S]ale merely affirms the intention of the parties to transfer the 3,000 sq. m. lot
and specify the actual location in a separate document and the absence of
agreement as to the price confirms that it was also without valuable consideration.

CA: Reversed the RTC ruling. While recognizing the nullity of the Deed of Absolute
Sale given the parties’ admission that there was no consideration for the
transaction, it found no reason to invalidate the Revocation Agreement. It ruled
that this independent document proved the true intent of the parties to transfer
3,000 square meters of the disputed property to Terry, even without consideration.

ISSUE: Whether or not the Revocation Agreement and Partition Agreement are
null and void on the ground that there is absence of the meeting of the minds as
to the consideration of the sale.

RULING: The Revocation Agreement and the Partition Agreement are null and
void because of the absence of the required meeting of the minds regarding the
consideration for the sale. Consequently, the property was never validly
conveyed to Terry.

Nevertheless, petitioner is estopped from questioning the title of those who

purchased the lot from Terry and relied upon petitioner’s representations in the
Partition Agreement.

Based on the provisions of the Revocation Agreement and the Partition Agreement,
we conclude that the two instruments must be read as part of a single contract of
sale. In the Revocation Agreement, the parties recognized the transfer of a 3,000-
square meter portion of Lot No. 10628-pt to Terry. However, instead of identifying
the specific segment of the property allegedly conveyed, they stipulated that “the
actual location of the said 3,000 square meters shall be determined by both parties
in a separate document consonant with this agreement, but forming a part hereof.”
That separate document was the Partition Agreement subsequently executed by
the parties to physically segregate the portion of the property sold to Terry.

It is therefore evident that the two instruments in question are not separate
contracts, but are mere components of the same sales transaction. Accordingly,
we must examine both documents together to determine whether a valid contract
of sale exists.

Article 1458 of the Civil Code describes a contract of sale as a transaction by which
“one of the contracting parties obligates himself to transfer the ownership of and
to deliver a determinate thing, and the other to pay therefore a price certain in
money or its equivalent.” The elements of a perfected contract of sale are the
following: (1) the meeting of the minds of the parties or their consent to a transfer
of ownership in exchange for a price; (2) the determinate object or subject matter
of the contract; and (3) the price certain in money or its equivalent as
consideration for the sale. The absence of any of these elements renders a
contract void.

In this case, the Revocation Agreement and the Partition Agreement are
silent on the matter of consideration. Neither instrument mentions the
purchase price for the sale of the lot. Not all the elements of a perfected contract
of sale were present. In particular, there was no sufficient evidence that the parties
ever agreed on a specific purchase price for the property.

While the purchase price for the property was not indicated on either of the
instruments, Terry insist that consideration was paid twice for the same lot
(P5,557.60 upon the execution of the original Deed of Absolute Sale and P3,000
upon the signing of the Revocation Agreement). On the other hand, petitioner
contends that there was no consideration stated in the Revocation Agreement,
because the parties agreed to determine the price of the property in a separate
document.

Terry failed to present any evidence other than his bare testimony. He insisted
during his testimony that he had paid for the property. In his Answer, however,
he never asserted the payment of consideration as a defense. Instead, he
emphasized that the Deed of Absolute Sale was executed by Vargas to return the
land to him as the heir of the true owner of the property.

Further, Terry did not mention any form of consideration in connection with the
Revocation Agreement. In fact, he admitted that no consideration was given to
him in exchange for his consent to the revocation of the earlier contract. He
supposedly agreed to the revocation only because of his closeness to the Vargas
family and in order to avoid litigation. This statement directly contradicts his later
assertion that there was monetary consideration for the sale.

In the same manner, the allegation made by petitioner that the parties agreed to
the sale of the lot at the prevailing market price is bereft of factual basis. Given
that both the Revocation Agreement and the Partition Agreement are silent on the
issue of consideration, and further considering the conflicting accounts of the
parties themselves as to the exact amount of the purchase price, the parties
therefore did not reach any agreement as to the amount of monetary
consideration for the property.

This lack of consensus as to the price prevented the perfection of the sale. The
law requires a definite agreement as to a “price certain”. As there was no sufficient
evidence of a meeting of the minds between the parties with regard to the
consideration for the sale, the transaction is null and void.
DIRECTOR OF LANDS vs. ABABA (1979)

FACTS:

Atty. Alberto Fernandez is the adverse claimant of Lots No. 5600 and 5602 in Ce
bu.Fernandez was retained as counsel by petitioner Maximo Abarquez in a civil c
ase for the annulment of a contract of sale with right of repurchase andfor the re
covery of the land for said lots against Agripina Abarquez.

The CFI of Cebu ruled against Maximo so he appealed to the CA.

Maximo litigated as a pauper in the lower court and engaged the services of Fern
andez on a contingent basis, liable to compensate his lawyer forthe appeal by obl
iging himself to give 1/2 of whatever he might recover from the 2 lots should the
appeal prosper.

Lots 5600 and 5602 were part of the estate of Maximo’s deceased parents, which
were partitioned to Maximo and Agripina, his sister, as heirs.
Subsequently, CA annulled the deed of pacto de retro and ruled in favor of Maxi
mo. A TCT was issued in Maximo’s name over his adjudged share.

Atty. Fernandez waited for Maximo to comply with his obligation under the execu
ted document by him to deliver 1/2 of the recovered land.Maximo refused to co
mply with his obligation and instead offered to sell the whole land to petitioner-
spouses Larrazabal.

Atty. Fernandez took stops to protect his interest by filing to annotate an attorne
y’s lien on the TCT and by notifying the Larrazabal spouses of hisclaim over 1/2 p
ortion of the land.
Notwithstanding the annotation of the adverse claim, Maximo conveyed by deed
of absolute sale 2/3 of the lands to spouses Larrazabal.Spouses Larrazabal subse
quently filed for cancellation of adverse claim on the new TCT.Atty. Fernandez fil
ed the present appeal to deny the petition for cancellation of adverse claim.
ISSUE: Whether or not the contract for contingent fee as basis of the interest of
Atty. Fernandez is prohibited by article 1491 of the Civil Code

HELD:

Art.1491only prohibits the sale or assignment between the lawyer and his client,
of property which is the subject of litigation.In other words, for theprohibition to
operate, the sale or transfer of the property must take place'during the pendency
of the litigation involving the property.

UnderAmerican Law, the prohibition does not applyto cases where after completi
on of litigation the lawyer accepts on account of his fee, an
interest the assets realized by the litigation.
There is a clear distraction between such cases and one in which the lawyer spec
ulates on the outcomeof the matter in which he is employed.

A contract for a contingent fee is not covered by Article 1491 because the tranfer
or assignment of the property in litigation takes effect only after the finality of a
favorable judgment. In the instant case, the attorney's fees of Atty. Fernandez,
consisting of one-half (1/2) of whatever Maximo Abarquez might recover from
his share in the lots in question, is contingent upon the success of the appeal.
Hence, the payment of the attorney's fees, that is, the transfer or assignment of
one-half (1/2) of the property in litigation will take place only if the appeal
prospers. Therefore, the tranfer actually takes effect after the finality of a
favorable judgment rendered on appeal and not during the pendency of the
litigation involving the property in question. Consequently, the contract for a
contingent fee is not covered by Article 1491.

Spouses Larrazabal having purchased the property with the knowledge of the
adverse claim, they are therefore in bad faith. Consequently, they are estopped
from questioning the validity of the adverse claim.

(At your own risk : Topic is parties in a contract of sale, medyo vague yung case
pero siguro gusto lang sabihin is dapat parties must be limited to sell only their
interest, parang nemo dat quod non habet...)
Vda de Laig vs CA

FACTS

On June 1, 1948, a deed of sale was executed by and between Petre Galero as
vendor and Atty. Benito K. Laig as vendee, whereby the former sold to the latter
the land. This deed of sale was executed in the house of Carmen Verzo and
witnessed by Claudio Muratalla and Rosario Verzo Villarente, sister of Carmen
Verzo. Original Certificate of Title No. 1097 was delivered by Galero to Atty. Laig

Unfortunately, vendee Atty. Benito failed to solicit the approval of the Secretary
of Agriculture and Natural Resources. It was only after Atty. Laig's death that his
wife,Rosario, noticed the deficiency. Petitioner then wrote to the Register of
Deeds, respondent Baldomero M. Lapak, stating that the land had been sold to
her late husband, requesting that she be informed of any claim of ownership by
other parties. Lapak replied it was still intact and took note of her letter.
Petitioner filed with the Bureau of Lands an affidavit together with copy of the
deed of sale in her husband's favor to have the ownership over the land
transferred to her husband's name. Meanwhile, Galero, with the assistance of
Atty. Jose L. Lapak, son of Baldomero M. Lapak, sought in court the issuance of
a second owner's duplicate copy of OCT No. 1097, claiming that his first
duplicate of said OCT was lost during World War 11.

In a span of four days - a second owner's duplicate copy was issued by

respondent in favor of Galero. And right on that same day, Galero executed in
favor of respondent Carmen Verzo a deed of sale of the land in issue for the sum
of P600.00. The deed of sale in Verzo's favor was registered, and Transfer
Certificate of Title No. T-1055, in lieu of OCT No. 1097, which was cancelled, was
issued in her name. On January 26, 1953, petitioner Vda. de Laig, thru counsel,
her brother Atty. Dimaano, inquired from the Register of Deeds of Camarines
Norte if it was true that OCT No. 1097 in favor of Galero had already been
cancelled and a transfer certificate of title had been issued in favor of another
person. Respondent Register of Deeds Lapak replied in the affirmative.
Petitioner together with her minor children, filed the present action against
respondents Carmen Verzo, Petre Galero, the Director of Lands, the Register of
Deeds of Camarines Norte and the Secretary of Agriculture and Natural
Resources praying for the annulment of the sale in favor of Carmen Verzo and
the cancellation of the second owner's duplicate of Original Certificate of Title
No. 1097 and Transfer Certificate of Title No. T-1055 by declaring the first OCT
No. 1097 valid and effective or in the alternative, by ordering Carmen Verzo to
reconvey the land in question to petitioners, plus P5,000.00 by way of damages.

ISSUE: WON respondent Carmen Verzo should be considered as the rightful

owner of the land in question; and

HELD:

No, according to Article 19. “Every person must, in the exercise of his rights and
in the performance of his duties, act with justice, give everyone his due, and

observe honesty and good faith.” The records reveal that respondent Carmen
Verzo was not in good faith when she facilitated the registration of her deed of
sale. The following indicia of bad faith characterized NOT ONLY her act of
registering her deed of sale, BUT ALSO her purchase of the disputed realty.

At the time of the sale of the land in question by Petre Galero to Atty. Benito K.
Laig, the latter was a boarder of Carmen Verzo in her house. Atty. Benito K. Laig,
as her boarder, must have mentioned to Carmen Verzo, his landlady, the land
sold to him by Galero. By the same token, Carmen Verzo must have known such
sale. One of the witnesses to the deed of sale executed by and between Atty.
Laig and Petre Galero was Rosario Verzo Villarente, Carmen Verzo's very own
sister who was at that time living with her in her house, where Atty. Laig then
boarded.
SARILI v. LAGROSA | G.R. No. 193517 | January 15, 2014

Article 1874 of the Civil Code provides that "[w]hen a sale of a piece of land or
any interest therein is through an agent, the authority of the latter shall be in
writing; otherwise, the sale shall be void."

FACTS

On February 17, 2000, respondent, represented by his attorney-in-fact

Lourdes Labios Mojica (Lourdes) via a special power of attorney dated November
25, 1999 (November 25, 1999 SPA), filed a complaint against Sps. Sarili and the
Register of Deeds of Caloocan City (RD) before the RTC, alleging, among others,
that he is the owner of a certain parcel of land situated in Caloocan City covered
by TCT No. 55979 (subject property) and has been religiously paying the real
estate taxes therefor since its acquisition on November 29, 1974. Respondent
claimed that he is a resident of California, USA, and that during his vacation in the
Philippines, he discovered that a new certificate of title to the subject property was
issued by the RD in the name of Victorino married to Isabel Amparo (Isabel), i.e.,
TCT No. 262218, by virtue of a falsified Deed of Absolute Saledated February 16,
1978 (February 16, 1978 deed of sale) purportedly executed by him and his wife,
Amelia U. Lagrosa (Amelia). He averred that the falsification of the said deed of
sale was a result of the fraudulent, illegal, and malicious acts committed by Sps.
Sarili and the RD in order to acquire the subject property and, as such, prayed for
the annulment of TCT No. 262218, and that Sps. Sarili deliver to him the
possession of the subject property, or, in the alternative, that Sps. Sarili and the
RD jointly and severally pay him the amount of ₱1,000,000.00, including moral
damages as well as attorney’s fees.

In their answer, Sps. Sarili maintained that they are innocent purchasers
for value, having purchased the subject property from Ramon B. Rodriguez
(Ramon), who possessed and presented a Special Power of Attorney (subject SPA)
to sell/dispose of the same, and, in such capacity, executed a Deed of Absolute
Sale dated November 20, 1992 (November 20, 1992 deed of sale) conveying the
said property in their favor. In this relation, they denied any participation in the
preparation of the February 16, 1978 deed of sale, which may have been merely
devised by the "fixer" they hired to facilitate the issuance of the title in their
names. Further, they interposed a counterclaim for moral and exemplary
damages, as well as attorney’s fees, for the filing of the baseless suit.

ISSUE: Whether or not there was a valid conveyance of the subject property to
Sps. Sarili.

RULING

NO.

The general rule is that every person dealing with registered land may safely rely
on the correctness of the certificate of title issued therefor and the law will in no
way oblige him to go beyond the certificate to determine the condition of the
property. However, a higher degree of prudence is required from one who buys
from a person who is not the registered owner, although the land object of the
transaction is registered. In such a case, the buyer is expected to examine not
only the certificate of title but all factual circumstances necessary for him to
determine if there are any flaws in the title of the transferor. The buyer also has
the duty to ascertain the identity of the person with whom he is dealing with and
the latter’s legal authority to convey the property.

The strength of the buyer’s inquiry on the seller’s capacity or legal authority to sell
depends on the proof of capacity of the seller. If the proof of capacity consists of
a special power of attorney duly notarized, mere inspection of the face of such
public document already constitutes sufficient inquiry. If no such special power of
attorney is provided or there is one but there appears to be flaws in its notarial
acknowledgment, mere inspection of the document will not do; the buyer must
show that his investigation went beyond the document and into the circumstances
of its execution.

In the present case, it is undisputed that Sps. Sarili purchased the subject property
from Ramos on the strength of the latter’s ostensible authority to sell under the
subject SPA. The said document, however, readily indicates flaws in its notarial
acknowledgment since the respondent’s community tax certificate (CTC) number
was not indicated thereon. Despite this irregularity, however, Sps. Sarili failed to
show that they conducted an investigation beyond the subject SPA and into the
circumstances of its execution as required by prevailing jurisprudence. Hence, Sps.
Sarili cannot be considered as innocent purchasers for value.

Settled is the rule that a defective notarization will strip the document of its public
character and reduce it to a private instrument, and the evidentiary standard of its
validity shall be based on preponderance of evidence. The due execution and
authenticity of the subject SPA are of great significance in determining the validity
of the sale entered into by Victorino and Ramon since the latter only claims to be
the agent of the purported seller (i.e., respondent). Article 1874 of the Civil Code
provides that "[w]hen a sale of a piece of land or any interest therein is through
an agent, the authority of the latter shall be in writing; otherwise, the sale shall
be void." In other words, if the subject SPA was not proven to be duly executed
and authentic, then it cannot be said that the foregoing requirement had been
complied with; hence, the sale would be void.

After a judicious review of the case, the Court holds that the due execution and
authenticity of the subject SPA were not sufficiently established.

While Ramon identified the signature of respondent on the subject SPA based on
his alleged familiarity with the latter’s signature, he, however, stated no basis for
his identification of the signatures of respondent’s wife Amelia and the witness,
Evangeline F. Murral, and even failed to identify the other witness, who were also
signatories to the said document. In other words, no evidence was presented to
authenticate the signatures of the other signatories of the subject SPA outside
from respondent.

Besides, respondent’s signature appearing on the subject SPA is not similar to his
genuine signature appearing in the November 25, 1999 SPA in favor of
Lourdes, especially the signature appearing on the left margin of the first page.

Unrebutted too is the testimony of respondent who, during trial, attested to the
fact that he and his wife, Amelia, had immigrated to the USA since 1968 and
therefore could not have signed the subject SPA due to their absence.

Further, records show that the notary public, Atty. Ramon S. Untalan, failed to
justify why he did not require the presentation of respondent’s CTC or any other
competent proof of the identity of the person who appeared before him to
acknowledge the subject SPA as respondent’s free and voluntary act and deed
despite the fact that he did not personally know the latter and that he met him for
the first time during the notarization. He merely relied on the representations of
the person before him and the bank officer who accompanied the latter to his
office, and further explained that the reason for the omission of the CTC was
"because in [a] prior document, [respondent] has probably given us already his
residence certificate." This "prior document," was not, however, presented during
the proceedings below, nor the CTC number ever identified.

Thus, in light of the totality of evidence at hand, the Court agrees with the CA’s
conclusion that respondent was able to preponderate his claims of forgery against
the subject SPA. In view of its invalidity, the November 20, 1992 sale relied on by
Sps. Sarili to prove their title to the subject property is therefore void.

ARCHES vs. DIAZ | G.R. No. L-27136 | April 30, 1973

Where the petition of the vendee in a pacto de retro sale is for a judicial order
pursuant to Article 1607 of the Civil Code, so that consolidation of ownership by
virtue of the failure of the vendor to redeem may be recorded in the Registry of
Property, the right of action to foreclose the mortgage or to collect the
indebtedness arises from the judgment of the court declaring the contract as
equitable mortgage.

FACTS

On January 21, 1954 Maria B. Vda. de Diaz allegedly executed in favor of

the late Jose A. Arches a deed of sale with pacto de retro * over a parcel of land
for and in consideration of P12,500.00. Jose A. Arches during his lifetime filed a
petition to consolidate ownership over the lot but the defendant opposed the
petition alleging among other things that the said deed of sale with pacto de
retro did not express the true intention of the parties, which was merely to
constitute a mortgage on the proper security for a loan. The petition was denied,
with the court holding that the contract was indeed an equitable mortgage. This
judgment became final and executory on August 29, 1965. Pursuant to this
judgment, the petitioner demanded the return of the consideration amounting to
P12, 500.00 plus the costs he incurred for the reconstitution of the title to the
subject Lot in the name of the vendor and in paying the real estate taxes on said
lot for the years 1951 to 1960.

Instead of answering the complaint the defendant moved to dismiss it on

the grounds of multiplicity of suit and res judicata, alleging that the decision of the
cadastral court declaring the sale with pacto de retro as an equitable mortgage
constitutes an adjudication of the right to foreclose the mortgage or to collect the
indebtedness.

ISSUE: Whether or not the petitioner can recover the consideration of the pacto
de retro sale despite it being declared an equitable mortgage.
RULING: YES.

The decision of the cadastral court, holding in effect that the sale with pacto
de retro was an equitable mortgage and consequently dismissing the petition to
consolidate ownership, did not constitute an adjudication of the right to foreclose
the mortgage or to collect the indebtedness. In the case of Correa vs. Mateo and
Icasiano, wherein an unrecorded pacto de retro sale was construed as an
equitable mortgage, it was ruled that the plaintiff had the right "within sixty days
after final judgment, for a failure to pay the amount due and owing him, to
foreclose his mortgage in a proper proceeding and sell all or any part of the ten
parcels of land to satisfy his debt." In effect this Court recognized the right of the
plaintiff to enforce his lien in a separate proceeding notwithstanding the fact that
he had failed to obtain judgment declaring him the sole and absolute owner of the
parcels of land in question.

Strictly speaking, where the petition of the vendee in a pacto de

retro sale is for a judicial order pursuant to Article 1607 of the Civil Code,
so that consolidation of ownership by virtue of the failure of the vendor
to redeem may be recorded in the Registry of Property, the right of
action to foreclose the mortgage or to collect the indebtedness arises
from the judgment of the court declaring the contract as equitable
mortgage. Although an alternative prayer to this effect may be made in the
petition, the same cannot but be conditional, that is, only in the event such a
declaration made, contrary to the plaintiff's claim and the principal relief he seeks.
His failure to make that alternative prayer, and the failure of the court to grant it
in the judgment dismissing the petition, should not be considered as a bar to
collecting the indebtedness in a proper action for that purpose.
ROCKVILLE EXCEL INTERNATIONAL EXIM CORPORATION v. SPOUSES
OLIGARIO CULLA and BERNARDITA MIRANDA
G.R. No. 155716 October 2, 2009 BRION, J.:

Facts:
The spouses Oligario and Bernardita (Sps. Culla) are the registered owners of a
parcel of land. They mortgaged this property to PS Bank to secure a loan of
₱1,400,000.00. Sometime in 1993, the Office of the Clerk of Court and the Ex-
Officio Sheriff issued a Sheriff’s Notice of Sale for the extrajudicial foreclosure of
the property. To prevent the foreclosure, Oligario approached Rockville –
represented by its president and chairman, Diana Young – for financial assistance.
Rockville accommodated Oligario’s request and extended him a loan of
₱1,400,000.00. This amount was increased by ₱600,000.00 for the cash advances
Oligario requested, for a total loan amount of ₱2,000,000.00.

According to Rockville, when Oligario failed to pay the ₱2,000,000.00 loan after
repeated demands and promises to pay, the Sps. Culla agreed to pay their
indebtedness by selling to Rockville another property the spouses owned in Brgy.
Calicanto, Batangas City (property). The property has an area of approximately
7,074 square meters. Since a survey of the surrounding properties revealed that
the property is worth more than the Sps. Culla’s ₱2,000,000.00 loan, the parties
agreed to fix the purchase price at ₱3,500,000.00. As narrated by Rockville, it
accepted the offer for a dacion en pago; on June 25, 1994, Rockville and Oligario
executed a Deed of Absolute Sale over the property. While the property was a
conjugal property of the Sps. Culla, only Oligario signed the Deed of Absolute Sale.
Rockville asserted that, by agreement with the Sps. Culla, Rockville would pay the
additional ₱1,500,000.00 after Bernardita affixes her signature to the Deed of
Absolute Sale. However, when Bernardita continued to refuse to sign the Deed of
Absolute Sale, Rockville caused the annotation of an adverse claim on TCT No. T-
19538 in order to protect its interest in the property. Furthermore, Rockville tried
to transfer the title of the property in its name but the Registry of Deeds refused
to carry out the transfer, given the absence of Bernardita’s signature in the Deed
of Absolute Sale.

Rockville filed a complaint for Specific Performance and Damages before the
Regional Trial Court (RTC) of Batangas City, Branch 2 against the Sps. Culla,
praying that the lower court order Bernardita to sign the Deed of Absolute Sale or,
in the alternative, to authorize the sale even without Bernardita’s signature. In
their Answer, the Sps. Culla alleged that the purported Deed of Absolute Sale failed
to reflect their true intentions, as the deed was meant only to guarantee the debt
to Diana Young, not to Rockville. Contrary to Rockville’s contention, the agreement
was that the ₱1,500,000.00 had to be paid before Bernardita would sign the Deed
of Absolute Sale. When neither Rockville nor Diana Young paid the ₱1,500,000.00,
the Sps. Culla volunteered to repay the ₱2,000,000.00 and opted to rescind the
sale. RTC, on October 26, 1999 decided the case in favour of the respondents. It
dismissed Rockville’s complaint after finding that the transaction between the
parties was in reality an equitable mortgage, not an absolute sale. On October 9,
2002 decision, the CA concluded that the purported contract of sale between
Rockville and the Sps. Culla was in reality an equitable mortgage based on the
following factual circumstances: (a) the glaring inadequacy in the consideration
for the sale and the actual market value of the property; (b) the fact that the Sps.
Culla remained in possession of the property even after the execution of the Deed
of Absolute Sale; (c) the fact that Rockville never paid the Sps. Culla the agreed
₱1,500,000.00 balance in the purchase price; and (d) Rockville’s continuous grant
of extensions to the Sps. Culla to pay their loan despite the execution of the deed
of sale. Hence this petition.

Issue/s: Whether the Deed of Absolute Sale is really an absolute sale of real
property or an equitable mortgage

Held:
The factual findings of the RTC and the CA that no agreement of sale was perfected
between Rockville and the Sps. Culla is correct. On the contrary, what they
denominated as a Deed of Absolute Sale was in fact an equitable mortgage. An
equitable mortgage has been defined "as one which although lacking in some
formality, or form or words, or other requisites demanded by a statute,
nevertheless reveals the intention of the parties to charge real property as security
for a debt, there being no impossibility nor anything contrary to law in this intent."A
contract of sale is presumed to be an equitable mortgage when any of the following
circumstances, enumerated in Article 1602 of the Civil Code, is present.

In the present case, three attendant circumstances indicate that the purported
sale was in fact an equitable mortgage. First, the Sps. Culla retained possession of
the property. Second, Rockville kept a part of the purchase price. Third, as
previously discussed, Rockville continued to give the Sps. Culla extensions on the
period to repay their loan even after the parties allegedly agreed to a dacion en
pago. These circumstances, coupled with the clear and unequivocal testimonies of
Oligario and Bernardita that the purpose of the Deed of Absolute Sale was merely
to guarantee their loan, clearly reveal the parties’ true intention to execute an
equitable mortgage and not a contract of sale. That a contract where the vendor
remains in physical possession of the land, as lessee or otherwise, is an equitable
mortgage is well-settled. The reason for this rule lies in the legal reality that in a
contract of sale, the legal title to the property is immediately transferred to the
vendee; retention by the vendor of the possession of the property is inconsistent
with the vendee’s acquisition of ownership under a true sale. It discloses, in the
alleged vendee, a lack of interest in the property that belies the truthfulness of the
sale.

According to Rockville, it took possession of the property, albeit constructively and

not through actual occupation. Rockville contends, too, that its possession of the
title to the property and its subsequent attempt to register the property in its name
are clear indicators of its intent to enforce the contract of sale. We cannot agree
with these positions. In the first place, the Sps. Culla retained actual possession of
the property and this was never disputed. Rockville itself admits this in its petition,
but claims in justification that since the property is contiguous to the site of the
Sps. Culla’s family home, it would have been impossible for Rockville to obtain
actual possession of the property. Regardless of where the property is located,
however, if the transaction had really been a sale as Rockville claimed, it should
have asserted its rights for the immediate delivery and possession of the lot instead
of allowing the Sps. Culla to freely stay in the premises. Its failure to do so suggests
that Rockville did not truly intend to enforce the contract of sale.

Moreover, we observe that while Rockville did take steps to register the property
in its name, it did so more than two years after the Deed of Absolute Sale was
executed, and only after Oligario’s continued failure to pay the ₱2,000,000.00 loan.
In addition, Rockville admitted that it never paid the ₱1,500,000.00 balance to the
Sps. Culla. As found by the RTC, while Rockville claims that it deposited this
amount with May Bank of Malaysia and notified Oligario of the deposit, no evidence
was presented to support this claim. Besides, even if this contention had been
true, the deposit in a foreign bank was neither a valid tender of payment nor an
effective consignation. Lastly, the numerous extensions granted by Rockville to
Oligario to pay his debt after the execution of the Deed of Sale convince us that
the parties never intended to enter into a contract of sale; instead, the intent was
merely to secure the payment of Oligario’s loan. WHEREFORE, premises
considered, we DENY the petition for lack of merit; the assailed Decision dated is
thus AFFIRMED. Costs against the petitioner. SO ORDERED.
DOLORES ADORA MACASLANG v. RENATO AND MELBA ZAMORA
G.R. No. 156375 May 30, 2011 BERSAMIN, J.:

Facts: On March 10, 1999, the respondents filed a complaint for unlawful detainer
in the MTCC, alleging that "the [petitioner] sold to [respondents] a residential land
located in Sabang, DanaoCity" and that "the [petitioner] requested to be allowed
to live in the house" with a "promise to vacate as soon as she would be able to
find a new residence." They further alleged thatdespitetheir demand after a year,
the petitioner failed or refused to vacate the premises.

Despite the due service of the summons and copy of the complaint, the petitioner
did not file heranswer. The MTCC declared her in default upon the respondents’
motion to declare her in default, and proceeded to receive the respondents’ oral
testimony and documentary evidence. Thereafter, on September 13, 1999, the
MTCC rendered judgment against her. The petitioner appealed to the RTC, which
rendered a decision on May 18, 2000 dismissing the complaint for failure to state
a cause of action. The respondents appealed to the CA, assailing the RTC’s decision
for "disregarding the allegations in the complaint" in determining the existence or
non-existence of a cause of action. On July 3, 2002, the CA reversed and set aside
the RTC’s decision and reinstated the MTCC’s decision in favor of the respondents.

Issue/s: Whether there was a sale or an equitable mortgage

Held: Equitable mortgage. The respondents’ cause of action for unlawful

detainer was based on their supposed right to possession resulting from their
having acquired it through sale. The RTC dismissed the complaint based on its
following findings, [that] there is conflict between the allegation of the complaint
and the document attached thereto. Simply stated, plaintiff alleged that she
bought the house of the defendant for ₱100,000.00 on September 10, 1997 as
stated in an alleged Deed of Absolute Sale marked as Exhibit "A" to the complaint.
Insofar as plaintiff is concerned, the best evidence is the said Deed of Absolute
Sale.

The Court is surprised why in plaintiff’s letter dated February 11, 1998, marked as
Exhibit "C" and attached to the same complaint, she demanded from the defendant
the whooping sum of ₱1,101,089.90. It must be remembered that this letter was
written five (5) months after the deed of absolute sale was executed. The same
letter (Exhibit "C") is not a letter of demand as contemplated by law and
jurisprudence. The plaintiff simply said that she will appreciate payment per
notarized document. There is no explanation what this document is.

Plaintiff’s letter dated April 28, 1998 (Exhibit "D") contradicts her allegation that
she purchased the house and lot mentioned in the complaint. Exhibit "D", which is
part of the pleading and a judicial admission clearly shows that the house and lot
of the defendant was not sold but mortgaged. A portion of the letter (Exhibit "D")
reads: ‘This is to give notice that since the mortgage to your property has long
expired and that since the property is already in my name, I will be taking over
the occupancy of said property two (2) months from date of this letter.’ Exhibit
"E", which is a letter dated January 21, 1999, shows the real transaction between
the parties in their case. To reiterate, the consideration in the deed of sale (Exhibit
"A") is ₱100,000.00 but in their letter (Exhibit "E") she is already demanding the
sum of ₱1,600,000.00 because somebody was going to buy it for ₱2,000,000.00.

There are indications that point out that the real transaction between the parties
is one of equitable mortgage and not sale. Despite holding herein that the
respondents’ demand to vacate sufficed, we uphold the result of the RTC decision
in favor of the petitioner. This we do, because the respondents’ Exhibit C and
Exhibit E, by demanding payment from the petitioner, respectively, of
₱1,101,089.90 and ₱1,600,000.00, revealed the true nature of the transaction
involving the property in question as one of equitable mortgage, not a sale. Our
upholding of the result reached by the RTC rests on the following circumstances
that tended to show that the petitioner had not really sold the property to the
respondents, contrary to the latter’s averments, namely: (a)The petitioner, as the
vendor, was paid the amount of only ₱100,000.00, a price too inadequate in
comparison with the sum of ₱1,600,000.00 demanded in Exhibit E; (b) The
petitioner retained possession of the property despite the supposed sale; and (c)
The deed of sale wasexecuted as a result or by reason of the loan the respondents
extended to the petitioner,because they still allowed the petitioner to "redeem"
the property by paying her obligation under the loan.

Submissions of the petitioner further supported the findings of the RTC on the
equitable mortgage. Firstly, there was the earlier dated instrument (deed of pacto
de retro) involving the same property, albeit the consideration was only
₱480,000.00, executed between the petitioner as vendor a retro and the
respondent Renato Zamora as vendee a retro. Secondly, there were two receipts
for the payments the petitioner had made to the respondents totaling
₱300,000.00. And, thirdly, the former secretary of respondent Melba Zamora
executed an affidavit acknowledging that the petitioner had already paid a total of
₱500,000.00 to the respondents. All these confirmed the petitioner’s claim that
she remained the owner of the property and was still entitled to its possession.

Article 1602 of the Civil Code enumerates the instances when a contract,
regardless of its nomenclature, may be presumed to be an equitable mortgage,
namely:
(a) When the price of a sale with right to repurchase is unusually
inadequate;
(b) When the vendor remains in possession as lessee or otherwise;
 (c) When upon or after the expiration of the right to repurchase another
instrument extending the period of redemption or granting a new period is
executed;
(d)When the purchaser retains for himself a part of the purchase price;
(e)When the vendor binds himself to pay the taxes on the thing sold; and,
(f) In any other case where it may be fairly inferred that the real intention
of the parties is that the transaction shall secure the payment of a debt or
the performance of any other obligation.

The circumstances earlier mentioned were, indeed, badges of an equitable

mortgage within the context of Article 1602 of the Civil Code. WHEREFORE, we
grant the petition for review on certiorari; set aside the decision promulgated on
July 3, 2002 by the Court of Appeals; and dismiss the complaint for unlawful
detainer for lack of a cause of action. The respondents shall pay the costs of suit.
SO ORDERED.

LOMISES ALUDOS, deceased, substituted by FLORA ALUDOS v. JOHNNY

M. SUERTE

June 18, 2012 (BRION, J.)

FACTS:
Lomises acquired from the Baguio City Government the right to occupy two stalls
in the Hangar Market in Baguio City. Subsequently, he entered into an agreement
with respondent Johnny M. Suerte for the transfer of all improvements and rights
over the two market stalls (Stall Nos. 9 and 10) for the amount of P260,000.00.
Johnny gave a down payment of P45,000.00 to Lomises, who acknowledged
receipt of the amount in a document executed on the same date as the agreement.

Johnny made a subsequent payment of P23,000.00; hence, a total of P68,000.00

of the P260,000.00 purchase price had been made. Before full payment could be
made, however, Lomises backed out of the agreement and returned the
P68,000.00 the mother and the father of Johnny, respectively.

Johnny protested the return of his money, and insisted on the continuation and
enforcement of his agreement with Lomises. When Lomises refused Johnnys
protest, Johnny filed a complaint against Lomises before the RTC Baguio City, for
specific performance with damages.

RTC nullified the agreement between Johnny and Lomises for failure to secure the
consent of the Baguio City Government to the agreement. Lomises appealed the
RTC decision to the CA, arguing that the real agreement between the parties was
merely one of loan, and not of sale; he further claimed that the loan had been
extinguished upon the return of the P68,000.00 to Johnnys mother, Domes.

CA rejected Lomises claim that the true agreement was one of loan. The CA found
that there were two agreements entered into between Johnny and Lomises: one
was for the assignment of leasehold rights and the other was for the sale of the
improvements on the market stalls. The CA agreed with the RTC that the
assignment of the leasehold rights was void for lack of consent of the lessor, the
Baguio City Government. The sale of the improvements, however, was valid
because these were Lomises private properties.

ISSUE: What is the nature of the contract of sale of improvements and assignment
of leasehold rights?

HELD:
What existed was an equitable mortgage, as contemplated in Article 1602, in
relation with Article 1604, of the Civil Code. An equitable mortgage has been
defined as one which although lacking in some formality, or form or words, or
other requisites demanded by a statute, nevertheless reveals the intention of the
parties to charge real property as security for a debt, there being no impossibility
nor anything contrary to law in this intent. Article 1602 of the Civil Code lists down
the circumstances that may indicate that a contract is an equitable mortgage:

Art. 1602. The contract shall be presumed to be an equitable mortgage, in any of

the following cases:

(1) When the price of a sale with right to repurchase is unusually inadequate;

(2) When the vendor remains in possession as lessee or otherwise;

(3) When upon or after the expiration of the right to repurchase another
instrument extending the period of redemption or granting a new period is
executed;

(4) When the purchaser retains for himself a part of the purchase price;

(5) When the vendor binds himself to pay the taxes on the thing sold;

(6) In any other case where it may be fairly inferred that the real intention of the
parties is that the transaction shall secure the payment of a debt or the
performance of any other obligation.

In any of the foregoing cases, any money, fruits, or other benefit to be received
by the vendee as rent or otherwise shall be considered as interest which shall be
subject to the usury laws.

Based on Lomises allegations in his pleadings, we consider three circumstances to

determine whether his claim is well-supported. First, Johnny was a mere college
student dependent on his parents for support when the agreement was executed,
and it was Johnnys mother, Domes, who was the party actually interested in
acquiring the market stalls. Second, Lomises received only P48,000.00 of the
P68,000.00 that Johnny claimed he gave as down payment; Lomises said that the
P20,000.00 represented interests on the loan. Third, Lomises retained possession
of the market stalls even after the execution of the agreement. Whether separately
or taken together, these circumstances do not support a conclusion that the parties
only intended to enter into a contract of loan.

That Johnny was a mere student when the agreement was executed does not
indicate that he had no financial capacity to pay the purchase price. At that time,
Johnny was a 26-year old third year engineering student who operated as a
businessman as a sideline activity and who helped his family sell goods in the
Hangar Market. During trial, Johnny said he would get a loan from his grandfather.
That he did not have the full amount at the time the agreement was executed
does not necessarily negate his capacity to pay the purchase price, since he had
16 months to complete the payment. Apart from Lomises bare claim that it was
Johnnys mother, Domes, who was interested in acquiring his market stalls, we find
no other evidence supporting the claim that Johnny was merely acting as a dummy
for his mother.

Lomises contends that of the P68,000.00 given by Johnny, he only received

P48,000.00, with the remaining P20,000.00 retained by Johnny as interest on the
loan. If the transaction was indeed a loan and the P20,000.00 interest was already
prepaid by Lomises, the return of the full amount of P68,000.00 by Lomises to
Johnny (through his mother, Domes) would not make sense.

That Lomises retained possession of the market stalls even after the execution of
his agreement with Johnny is also not an indication that the true transaction
between them was one of loan. Johnny had yet to complete his payment and, until
Lomises decided to forego with their agreement, had four more months to pay;
until then, Lomises retained ownership and possession of the market stalls.
Lomises cannot feign ignorance of the import of the terms of the receipt of
September 8, 1984 by claiming that he was an illiterate old man. A witness testified
not only of the fact of the sale, but also that Lomises daughter, Dolores, translated
the terms of the agreement from English to Ilocano for Lomises benefit; Lomises
himself admitted this fact. If Lomises believed that the receipt of September 8,
1984 did not express the parties true intent, he could have refused to sign it or
subsequently requested for a reformation of its terms. Lomises rejected the
agreement only after Johnny sought to enforce it.

Hence, the CA was correct in characterizing the agreement between Johnny and
Lomises as a sale of improvements and assignment of leasehold rights, and uphold
the validity of the sale of improvements because these were Lomises private
properties.
PABLO P. GARCIA vs. YOLANDA VALDEz VILLAR

June 27, 2012 (LEONARDO-DE CASTRO, J.)

FACTS:

Lourdes Galas (with daughter), mortgaged the subject property to Yolanda Villar
as security for a loan (P2,000,000). Subsequently, Galas (with Pingol), mortgaged
the same property to Pablo Gacia as security for a loan (P1,000,000). Both REMs
provided that the mortgagee’s consent is necessary in case of subsequent
encumbrance or alienation of the property. Galas sold said property to Villar.

Upon default of Galas, Garcia sought to foreclose the property. Garcia alleged that
when Villar purchased the subject property, she acted in bad faith and with malice
as she knowingly and willfully disregarded the provisions on laws on judicial and
extrajudicial foreclosure of mortgaged property. Garcia further claimed that when
Villar purchased the subject property, Galas was relieved of her contractual
obligation and the characters of creditor and debtor were merged in the person of
Villar. Villar opposed saying that the second REM made in favour of Garcia was
without her knowledge and consent, hence void. She averred that there could be
no subrogation as the assignment of credit was done with neither her knowledge
nor prior consent. Villar added that Garcia should seek recourse against Galas and
Pingol, with whom he had privity insofar as the second mortgage of property is
concerned.

Issue: 1) WON the mortgage to Garcia and the sale to Villar is valid

2) Whether or not the sale of the subject property to Villar was in violation of the
prohibition on pactum commissorium;

3) WON Garcia could judicially foreclose the subject property.

Held:

1. Second REM to Garcia and the sale of the subject property to Villar are
valid. While it is true that the annotation of the first REM to Villar on contained a
restriction on further encumbrances without the mortgagee’s prior consent, this
restriction was nowhere to be found in the Deed of REM. If it were the intention
of the parties to impose such restriction, they would have and should have
stipulated such in the Deed of REM itself. Neither did this Deed proscribe the sale
or alienation of the subject property during the life of the mortgages. Nowhere
was it stated in the Deed that Galas could not opt to sell the subject property to
Villar, or to any other person. Such stipulation would have been void anyway, as
it is not allowed under Article 2130 of the Civil Code, to wit:

Art. 2130. A stipulation forbidding the owner from alienating the immovable
mortgaged shall be void.

2. Garcia claims that the stipulation appointing Villar, the mortgagee, as the
mortgagors attorney-in-fact, to sell the property in case of default in the payment
of the loan, is in violation of the prohibition on pactum commissorium, as stated
under Article 2088 of the Civil Code, viz:

Art. 2088. The creditor cannot appropriate the things given by way of pledge or
mortgage, or dispose of them. Any stipulation to the contrary is null and void.

The following are the elements of pactum commissorium:

(1) There should be a property mortgaged by way of security for the payment of
the principal obligation; and (2) There should be a stipulation for automatic
appropriation by the creditor of the thing mortgaged in case of non-payment of
the principal obligation within the stipulated period.[39]

Villars purchase of the subject property did not violate the prohibition on pactum
commissorium. The power of attorney did not provide that the ownership over the
subject property would automatically pass to Villar upon Galas’s failure to pay the
loan on time. What it granted was the mere appointment of Villar as attorney-in-
fact, with authority to sell or otherwise dispose of the subject property, and to
apply the proceeds to the payment of the loan. This provision is customary in
mortgage contracts, and is in conformity with Article 2087 of the Civil Code, which
reads:

Art. 2087. It is also of the essence of these contracts that when the principal
obligation becomes due, the things in which the pledge or mortgage consists may
be alienated for the payment to the creditor.

Galass decision to eventually sell the subject property to Villar for an additional
P1,500,000.00 was well within the scope of her rights as the owner of the subject
property. The subject property was transferred to Villar by virtue of another and
separate contract, which is the Deed of Sale. Garcia never alleged that the transfer
of the subject property to Villar was automatic upon Galass failure to discharge
her debt, or that the sale was simulated to cover up such automatic transfer.

3. Garcia’s action of foreclosure of mortgage cannot prosper.

Real nature of a mortgage:

Art. 2126. The mortgage directly and immediately subjects the property upon
which it is imposed, whoever the possessor may be, to the fulfillment of the
obligation for whose security it was constituted.

A mortgage is a real right, which follows the property, even after subsequent
transfers by the mortgagor. “A registered mortgage lien is considered inseparable
from the property inasmuch as it is a right in rem.” The sale or transfer of the
mortgaged property cannot affect or release the mortgage; thus the purchaser or
transferee is necessarily bound to acknowledge and respect the encumbrance. In
fact, under Art. 2129 of the Civil Code, the mortgage on the property may still be
foreclosed despite the transfer, viz:

Art. 2129. The creditor may claim from a third person in possession of the
mortgaged property, the payment of the part of the credit secured by the property
which said third person possesses, in terms and with the formalities which the law
establishes.

While we agree with Garcia that since the second mortgage, of which he is the
mortgagee, has not yet been discharged, we find that said mortgage subsists and
is still enforceable. However, Villar, in buying the subject property with notice that
it was mortgaged, only undertook to pay such mortgage or allow the subject
property to be sold upon failure of the mortgage creditor to obtain payment from
the principal debtor once the debt matures. Villar did not obligate herself to replace
the debtor in the principal obligation, and could not do so in law without the
creditor’s consent. Therefore, the obligation to pay the mortgage indebtedness
remains with the original debtors Galas and Pingol.

The mere fact that the purchaser of an immovable has notice that the acquired
realty is encumbered with a mortgage does not render him liable for the payment
of the debt guaranteed by the mortgage, in the absence of stipulation or condition
that he is to assume payment of the mortgage debt.
 SPS. FELIPE SOLITARIOS and JULIA TORDA vs. SPS. GASTON JAQUE
and LILIA JAQUE
G.R. No. 199852 November 12, 2014 VELASCO, JR., J.

A purported contract of sale where the vendor remains in physical possession of

the land, as lessee or otherwise, is an indicium of an equitable mortgage. The
reason for this rule lies in the legal reality that in a contract of sale, the legal title
to the property is immediately transferred to the vendee. Thus, retention by the
vendor of the possession of the property is inconsistent with the vendee’s
acquisition of ownership under a true sale. It discloses, in the alleged vendee, a
lack of interest in the property that belies the truthfulness of the sale.

Facts:

The property subject of this suit is a parcel of agricultural land designated as Lot
4089, consisting of 40,608 square meters, and located in Calbayog, Samar. It was
originally registered in the name of petitioner Felipe Solitarios and thereafter, in
the name of the respondents, spouses Gaston and Lilia Jaque (the Jaques).

In a Complaint for Ownership and Recovery of Possession with the RTC of

Calbayog City, the respondents spouses Jaque alleged that they purchased Lot
4089 from the petitioners, spouses Solitarios in stages. According to respondents,
they initially bought one-half of Lot No. 4089 for ₱7,000.00. This sale is allegedly
evidenced by a notarized Deed of Sale dated May 8, 1981. Two months later, the
spouses Solitarios supposedly mortgaged the remaining half of Lot 4089 to the
Jaques via a Real Estate Mortgage (REM) dated July 15, 1981, to securea loan
amounting to ₱3,000.00.

After almost two (2) years, the spouses Solitarios finally agreed to sell the
mortgaged half. However, instead of executing a separate deed of sale for the
second half, they executed a Deed of Sale dated April 26, 1983 for the whole lot
to save on taxes, by making it appear that the consideration for the sale of the
entire lot was only ₱12,000.00 when the Jaques actually paid ₱19,000.00 in cash
and condoned the spouses Solitarios’ ₱3,000.00 loan.

On the basis of this second notarized deed, the Jaques had OCT No. 1249 cancelled
and registered Lot 4089 in their name under TCT No. 745.
For their part, the spouses Solitarios denied selling Lot 4089 and explained that
they merely mortgaged the same to the Jaques after the latter helped them
redeem the land from the Philippine National Bank (PNB).

The spouses Solitarios narrated that, way back in 1975, they obtained a loan from
PNB secured by a mortgage over Lot 4089. They were able to pay this loan and
redeem their property with their own funds. Shortly thereafter, in 1976, they again
mortgaged their property to PNB to secure a ₱5,000.00 loan. This time, the Jaques
volunteered to pay the mortgage indebtedness, including interests and charges
and so gave the spouses Solitarios ₱7,000.00 for this purpose. However, this
accommodation was made, so the spouses Solitarios add, with the understanding
that they would pay back the Jaques by delivering to them a portion of the produce
of Lot 4089, in particular, one half of the produce of the rice land and one-fourth
of the produce of the coconut land. The spouses Solitarios contended that this
agreement was observed by the parties until May 2000, when Gaston Jaque
informed them that he was taking possession of Lot 4089 as owner. And to their
surprise, Gaston Jaque showed them the Deeds of Sale dated May 8, 1981 and
April 26, 1983, the REM contract dated July 15, 1981, and TCT No. 745 to prove
his claim. The spouses Solitarios contended that these deeds of sale were fictitious
and their signatures therein forged. Further, the spouses Solitarios challenge the
validity of the title, alleging that the Jaques acquired it through fraud and
machinations and by taking advantage of their ignorance and educational
deficiency. Thus, they prayed that the RTC: (1) cancel TCT No. 745; (2) declare
the adverted deeds of sales dated May 8, 1981 and April 26, 1983 as null and void;
(3) declare them the true and lawful owners of Lot 4089; and (4) award them
moral and actual damages.

During the course of the trial, and in compliance with the February 7, 2001 Order
of the RTC, the spouses Solitarios deposited with the court a quothe Jaques’
purported share in the produce of Lot 4089 for the years 2001-2003, which
amounted to 16,635.60.

On April 15, 2004, the RTC rendered a Decision upholding the validity of the deeds
of sale in question and TCT No. 745, rejecting the allegations of forgery and fraud.
However, in the same breath, the RTC declared that what the parties entered into
was actually an equitable mortgage as defined under Article 1602 in relation to
Article 1604 of the New Civil Code, and not a sale. Consequently, the RTC ordered,
among others, the reformation of the Deeds ofSale dated May 9,1981 and April
26, 1983, and the cancellation of TCT No. 745 in the name of the Jaques.
On appeal, the CA reversed and set aside the RTC Decision, rejecting the trial
court’s holding that the contract between the parties constituted an equitable
mortgage

Issue: Whether or not the parties effectively entered into a contract of absolute
sale or an equitable mortgage of Lot 4089.

Ruling: The transaction is actually one of equitable mortgage.

Article 1602 in relation to Article 1604 of the Civil Code enumerates several
instances whena contract, purporting to be, and in fact styled as, an absolute sale,
is presumed to be an equitable mortgage, thus:

Art. 1602. The contract shall be presumed to be an equitable mortgage, in any of

the following cases:

(1) When the price of a sale withright to repurchase is unusually

inadequate;
(2) When the vendor remains inpossession as lessee or otherwise;
(3) When upon or after the expiration of the right to repurchase another
instrument extending the period of redemption or granting a new period is
executed;
(4) When the purchaser retains for himself a part of the purchase price;
(5) When the vendor binds himself to pay the taxes on the thing sold;
(6) In any other case where it may be fairly inferred that the real intention
of the parties is that the transaction shall secure the payment of a debt or
the performance of any other obligation.

In any of the foregoing cases, any money, fruits, or other benefit to be received
by the vendee as rent or otherwise shall be considered as interest which shall be
subject to the usury laws. Art. 1604. The provisions of Article 1602 shall also apply
to a contract purporting to be an absolute sale.

As evident from Article 1602 itself, the presence of any of the circumstances set
forth therein suffices for a contract to be deemed an equitable mortgage. No
concurrence or an overwhelming number is needed.

With the foregoing in mind, We thus declare that the transaction between the
parties of the present case is actually one of equitable mortgage pursuant to the
foregoing provisions ofthe Civil Code. It has never denied by respondents that the
petitioners, the spouses Solitarios, have remained in possession of the subject
property and exercised acts of ownership over the said lot even after the purported
absolute sale of Lot 4089. This fact is immediately apparent from the testimonies
of the parties and the evidence extant on record, showing that the real intention
of the parties was for the transaction to secure the payment of a debt. Nothing
more.

During pre-trial, the Jaques admitted that the spouses Solitarios were in possession
of the subject property. Gaston Jaque likewise confirmed that petitioners were
allowed to produce copra and till the rice field, which comprise one-half of the lot
that was previously covered by the real estate mortgage, after said portion was
allegedly sold to them.

This Court had held that a purported contract of sale where the vendor remains in
physical possession of the land, as lessee or otherwise, is an indicium of an
equitable mortgage. In Rockville v. Sps. Culla, We explained that the reason for
this rule lies in the legal reality that in a contract of sale, the legal title to the
property is immediately transferred to the vendee. Thus, retention by the vendor
of the possession of the property is inconsistent with the vendee’s acquisition of
ownership under a true sale. It discloses, in the alleged vendee, a lack of interest
in the property that belies the truthfulness of the sale.

During the period material to the present controversy, the petitioners, spouses
Solitarios, retained actual possession of the property. This was never disputed. If
the transaction had really been one of sale, as the Jaques claim, they should have
asserted their rights for the immediate delivery and possession of the lot instead
of allowing the spouses Solitarios to freely stay in the premises for almost
seventeen (17) years from the time of the purported sale until their filing ofthe
complaint. Human conduct and experience reveal that an actual owner of a
productive land will not allow the passage of a long period of time, as in this case,
without asserting his rights of ownership.

To stress, Article 1602(6) of the Civil Code provides that a transaction is presumed
to be an equitable mortgage:

(6) In any other case where it may be fairly inferred that the real intention of the
parties is that the transaction shall secure the payment of a debt or the
performance of any other obligation.

This provision may very well be applied in this case. There is sufficient basis to
indulge in the presumption that the transaction between the parties was that of
an equitable mortgage and that the spouses Solitarios never wanted to sell the
same to the Jaques.

HEIRS OF ANTERO SOLIVA vs. SEVERINO, JOEL, GRACE, CENON, JR.,

RENATO, EDUARDO, HILARIO, all surnamed SOLIVA, ROGELIO V.
ROLEDA, and SANVIC ENTERPRISES, INC.
G.R. No. 159611 April 22, 2015 BRION, J.

In the absence of any evidence which shows intent, on the part of Juana and
Cenon, to enter into a mortgage or to use the property sold to secure a debt; or
of any fact or circumstance which may reasonably lead this Court to conclude the
existence of such intent, we cannot but be convinced that the transaction covered
by the 1970 Deed is a true and valid sale, not an equitable mortgage.

Facts:

The Spouses Ceferino (also known as Rufino) Soliva and Juana Endeza possessed
and owned, during their lifetime, three parcels of land in Calbayog City.

Ceferino died in 1954, while Juana died in 1972. They had five children, namely:
Dorotea (deceased), Cenon, Severino, Victoriano and Antero. Dorotea is survived
by Romeo and Sergio. Earlier or on June 22, 1949, Mancol sold to Cenon the 1,600-
square meter portion of Parcel 2 through a notarized deed entitled "Escritura de
Compra-Venta Absoluta." As Cenon then lived in Manila, he left the possession and
enjoyment of this portion to his parents. However, when Ceferino died in 1954,
Cenon took over the administration of the entire estate, including Parcel 1.

In March 1959, Severino received as his share in their parents’ estate the 5,136-
square meter rice land covered by TD No. 14298. Severino subsequently sold this
lot through a Deed of Absolute Sale to Fortunato Calagos on April 30, 1959.
On November 13, 1970, Juana sold to Cenon Parcel 2 through a Deed of
Conditional Sale with Pacto A Retro (1970 Pacto de Retro Sale). In 1975, TD No.
24419 covering Parcel 2 was cancelled and TD No. 38009 was issued in the name
of Cenon.

On January 21, 1986, Cenon sold to Roleda a 4,092-square meter portion of Parcel
2. TD No. 38009 was subsequently cancelled and TD No. 4778 was issued in
Roleda’s name.

On August 14, 1991, Roleda sold to SEI, through Poraque, the 4,092-square meter
portion which he bought from Cenon, along with Lot 2-C of the Plan of Land which
Roleda acquired from a certain Silverio Agura.

Meanwhile, Cenon died in 1987; he was survived by his children, namely: Joel,
Grace, Cenon, Renato, Eduardo and Hilario.

Issue: Whether or not the 1970 Pacto de Retro sale is a true sale or an equitable
mortgage.

Ruling:

The 1970 Conditional Sale with Pacto de Retro is a true sale, not an
equitable mortgage under Article 1602 of the Civil Code.

An equitable mortgage is one which, although lacking the proper formalities, form
or words, or other requisites prescribed by law for a mortgage, nonetheless shows
the real intention of the parties to make the property subject of the contract as
security for debt and contains nothing impossible or anything contrary to law in
this intent.

A contract of sale, whether an absolute sale or with a right of repurchase, is

presumed by law to be an equitable mortgage under any of the following
circumstances:

Art. 1602. The contract shall be presumed to be an equitable mortgage, in any of

the following cases:

1. When the price of a sale with right to repurchase is unusually inadequate;

2. When the vendor remains in possession as lessee or otherwise;
3. When upon or after the expiration of the right to repurchase another
instrument extending the period of redemption or granting a new period is
executed;
4. When the purchaser retains for himself a part of the purchase price;
 5. When the vendor binds himself to pay the taxes on the thing sold;
6. In any other case where it may be fairly inferred that the real intention
of the parties is that the transaction shall secure the payment of a debt or
the performance of any other obligation.

In any of the foregoing cases, any money, fruits, or other benefit to be received
by the vendee as rent or otherwise shall be considered as interest which shall be
subject to the usury laws.

For the presumption of an equitable mortgage to arise under any of the

circumstances enumerated in Article1602, however, two requisites must concur:
(a) that the parties entered into a contract denominated as a contract of sale; and
(b) that their intention was to secure an existing debt by way of mortgage.

The CA debunked Antero’s argument that the 1970 Pacto de Retro Sale was an
equitable mortgage because it found nothing which supports his theory that the
"sale with right to repurchase was executed to secure a debt." Moreover, it pointed
out that Cenon’s administration of the property from 1962 up to his death in 1987
indubitably shows that he had, all the while, been in constructive possession of
the property.

Of course, we did not fail to notice the clause in the 1970 Deed stating that "after
the lapse of said period the parties may execute another document for any
extension of the right of repurchase." Antero equates this with Article 1602 (3) of
the Civil Code which states that "[w]hen upon or after the expiration of the right
to repurchase, another instrument extending the period of redemption or granting
a new period is executed."

This clause alone, however, did not and cannot sufficiently give the 1970 Pacto de
Retro sale the character of an equitable mortgage. Note that the clause used the
word "may" in allowing the parties to execute another contract to extend the right
of repurchase. "May" is a permissive word which simply provides for a situational
possibility – of extending Juana’s exercise of her repurchase right – that, in this
case did not even materialize.

Thus, in the absence of any evidence which shows intent, on the part of Juana
and Cenon, to enter into a mortgage or to use the property sold to secure a debt;
or of any fact or circumstance which may reasonably lead this Court to conclude
the existence of such intent, we cannot but be convinced that the transaction
covered by the 1970 Deed is a true and valid sale, not an equitable mortgage.
Finally, we are not unaware of the equitable-mortgage presumption that the law
accords in situations when doubt exists as to the true intent of the parties to the
contract. This legal presumption, however, applies only when doubt, in fact, exists
as to the nature of the agreement of the parties.

When no doubt exists from the facts and the evidence, and the parties to the
transaction (specifically Juana as the vendor a retro in this case), never questioned
the nature of their agreement as one of mortgage, then this legal presumption
shall not and cannot apply. After all, the contract is the law between them and
where its terms are clear and leaves no doubt on their intention, the courts would
have no choice but to uphold them.

MARCELINO REPUELA AND CIPRIANO REPUELA v. STATE OF THE

SPOUSES OTILLO LARAWAN AND JULIANA BACUS
G.R. No. 219638, December 07, 2016

FACTS:

Spouses Repuela owned Lot No. 3357 (subject property) in Talisay City,
Cebu. After they had passed away, their children Marcelino and Cipriano,
succeeded them as owners of the subject property. After the death of their
parents, the Repuela brothers went to the house of Otillo Larawan to borrow
P200.00 for Marcelino's fare to Iligan City; that to secure the loan, the Spouses
Larawan required them to turn over the certificate of title for Lot No. 3357; that
they were made to sign a purported mortgage contract but they were not given a
copy of the said document; that Cipriano affixed his signature while Marcelino,
being illiterate, just placed his thumb mark on the document; that they remained
in possession of the land despite the mortgage and had been planting bamboos,
corn, bananas, and papayas thereon and sharing the produce between them; and
that they also paid the taxes due on the property.

In October 2002, the Repuelas discovered that the Spouses Larawan did
not pay the taxes and the tax declaration on the subject property was already in
the latter’s names as early as 1964; that in the Registry of Deeds of Cebu, the TCT
was already cancelled and a new TCT had been issued to Otillo; that Spouses
Larawan were able to transfer the certificate of title to their names by virtue of
the Extajudicial Declaration of Heirs and Sale bearing the signature of her father
Cipriano and the thumb mark of her uncle Marcelino; and that her father and uncle
remembered that they were made to sign a blank document. Hence, the Repuela
brothers were compelled to file a complaint for the annulment of the Extrajudicial
Declaration of Heirs and Sale and the cancellation of the new TCT.

For the Estate of Spouses Larawan, on the other hand, the transaction
between the Repuela brothers and Otillo was a sale and not a mortgage of a parcel
of land; that the document prepared was Extrajudicial Declaration of Heirs and
Sale was prepared; that their family had been in possession of the subject property
and they had harvested and enjoyed the produce of the land such as bamboos,
jackfruit and 100 coconut trees; and that there were no other persons claiming
ownership over the land, as the Repuela brothers never offered to redeem the
subject property from their family.

After the trial, the RTC decided in favor of the Repuela brothers. It held that
the transaction between the parties was not a sale but an equitable mortgage.
However, the CA reversed the said ruling of the RTC. Hence, this present petition.

ISSUE: WON the Extrajudicial Declaration of Heirs and Sale amounted to an

equitable mortgage.

RULING: YES

An equitable mortgage is one which, although lacking in some formality, or

form, or words, or other requisites demanded by a statute, reveals the intention
of the parties to charge real property as security for a debt, and contains nothing
impossible or contrary to law. For a presumption of an equitable mortgage to arise,
two requisites must first be satisfied, namely: that the parties entered into a
contract denominated as a contract of sale and that their intention was to secure
an existing debt by way of mortgage. There is no single conclusive test to
determine whether a deed of sale, absolute on its face, is really a simple loan
accommodation secured by a mortgage. Article 1602, in relation to Article 1604 of
the Civil Code, however, enumerates several instances when a contract, purporting
to be, and in fact styled as, an absolute sale, is presumed to be an equitable
mortgage. Thus:

ART. 1602. The contract shall be presumed to be an equitable mortgage, in any

of the following cases:

(1) When the price of a sale with right to repurchase is unusually inadequate;

(2) When the vendor remains in possession as lessee or otherwise;

(3) When upon or after the expiration of the right to repurchase another
instrument extending the period of redemption or granting a new period is
executed;

(4) When the purchaser retains for himself a part of the purchase price;

(5) When the vendor binds himself to pay the taxes on the thing sold;

(6) In any other case where it may be fairly inferred that the real
intention of the parties is that the transaction shall secure the payment
of a debt or the performance of any other obligation.

In any of the foregoing case, any money, fruits, or other benefit to be received by
the vendee as rent or otherwise shall be considered as interest which shall be
subject to the usury laws.

ART. 1604. The provisions of Article 1602 shall also apply to a contract
purporting to be an absolute sale. [Emphases and underscoring supplied]

Evident from Article 1602, the presence of any of the circumstances set
forth therein suffices for a contract to be deemed an equitable mortgage. No
concurrence or an overwhelming number is needed. In other words, the fact that
some or most of the circumstances mentioned are absent in a case will not negate
the existence of an equitable mortgage. In this case, it appears that two (2)
instances enumerated in Article 1602 — possession of the subject property and
inference that the transaction was in fact a mortgage attended the assailed
transaction.

From the attending circumstances of the case, it can be inferred that the
real intention of the Repuela brothers was to secure their indebtedness from
Spouses Larawan. They needed money for Marcelino's fare so they went to the
house of Otillo to borrow P200.00. Considering that Spouses Larawan would only
agree to extend the loan if they would surrender their certificate of title over the
subject property, they obliged in the belief that its purpose was only to secure
their loan. In other words, they surrendered the title to Spouses Larawan as
security to obtain the much needed loan. It was never their intention to sell the
subject property.

Granting that indeed Cipriano and Marcelino, signed and thumbmarked,

respectively, the Extrajudicial Declaration of Heirs and Sale, there is still reason to
believe that they did so without understanding the real nature, effects and
consequences of what they did as they were never explained to them. Cipriano,
who only finished Grade One, and Marcelino, an illiterate, were in dire need of
money. As such, the possibility that they affixed their conformity to the onerous
contract to their detriment just to get the loan was not remote. In dire need as
they were, they signed a document despite knowing that it did not express their
real intention. "Necessitous men are not, truly speaking, free men; but to answer
a present emergency, will submit to any terms that the crafty may impose upon
them." For this reason, the Repuela brothers should be given the protection
afforded by the Civil Code provisions on equitable mortgage. Furthermore, it must
be pointed out that the law accords the equitable mortgage presumption in
situations when doubt exists as to the true intent of the parties to the contract, as
in this case. Courts are generally inclined to construe one purporting to be a sale
as an equitable mortgage, which involves a lesser transmission of rights and
interests over the property in controversy.

ROBERTO Z. LAFORTEZA, GONZALO Z. LAFORTEZA, MICHAEL Z.

LAFORTEZA, DENNIS Z. LAFORTEZA, and LEA Z. LAFORTEZA
vs. ALONZO MACHUCA
G.R. No. 137552. June 16, 2000

FACTS:

In the exercise of the authority of Special Power of Attorney , on January

20, 1989, the heirs of the late Francisco Q. Laforteza represented by Roberto Z.
Laforteza and Gonzalo Z. Laforteza, Jr. entered into a Memorandum of Agreement
(Contract to Sell) with the Alonzo Machucha over the subject property for the sum
of SIX HUNDRED THIRTY THOUSAND PESOS (P630,000.00) payable as follows:

(a) P30,000.00 as earnest money, to be forfeited in favor of the

Lafortezas if the sale is not effected due to the fault of the Machucha;

(b) P600,000.00 upon issuance of the new certificate of title in the

name of the late Francisco Q. Laforteza and upon execution of an
 extra-judicial settlement of the decedents estate with sale in favor of
Machucha.

On January 20, 1989, Machucha paid the earnest money of 30,000.00 plus
rentals for the subject property. On September 18, 1998, the heirs of Laforteza
furnished to Machucha a copy of the reconstituted title to the subject property,
advising him that he had thirty (3) days to produce the balance of P600,000.00
under the MOA. Machucha sent the heirs a letter requesting for an extension of
the THIRTY (30) DAYS deadline up to November 15, 1989 within which to produce
the balance. The extension, however, does not appear to have been approved by
Gonzalo Z. Laforteza, the second attorney-in-fact as his conformity does not
appear to have been secured.

On November 15, 1989, Machucha informed the defendant heirs that he

already had the balance of P600,000.00 covered by United Coconut Planters Bank
Managers Check. However, the heirs refused to accept the balance and informed
him that the subject property was no longer for sale. They informed Machucha
that they were canceling the MOA (Contract to Sell) in view of his failure to comply
with his contractual obligations. Thereafter, Machucha reiterated his request to
tender payment of the balance but the heirs insisted on the rescission of the
Memorandum of Agreement. Thereafter, Machucha filed an action for specific
performance.

The petitioners contend that the Memorandum of Agreement is merely a

lease agreement with "option to purchase". As it was merely an option, it only
gave the respondent a right to purchase the subject property within a limited
period without imposing upon them any obligation to purchase it. Since the
respondents tender of payment was made after the lapse of the option agreement,
his tender did not give rise to the perfection of a contract of sale. However, both
the lower court and the CA still ruled in favor of Machucha. Hence, this present
petition.

ISSUE: WON the MOA is an Option Contract, Contract to Sell, or a Contract of

Sale.

RULING: The MOA entered into between the parties was one of sale and lease.

A contract of sale is a consensual contract and is perfected at the moment

there is a meeting of the minds upon the thing which is the object of the contract
and upon the price. From that moment the parties may reciprocally demand
performance subject to the provisions of the law governing the form of
contracts. The elements of a valid contract of sale under Article 1458 of the Civil
Code are (1) consent or meeting of the minds; (2) determinate subject matter and
(3) price certain in money or its equivalent.

In the case at bench, there was a perfected agreement between the

petitioners and the respondent whereby the petitioners obligated themselves to
transfer the ownership of and deliver the house and lot and the respondent to pay
the price amounting to six hundred thousand pesos (P600,000.00). All the
elements of a contract of sale were thus present.

The issuance of the new certificate of title in the name of the late Francisco
Laforteza and the execution of an extrajudicial settlement of his estate was not a
condition which determined the perfection of the contract of sale. Petitioners
contention that since the condition was not met, they no longer had an obligation
to proceed with the sale of the house and lot is unconvincing. In the case at bar,
there was already a perfected contract. The condition was imposed only on the
performance of the obligations contained therein. Considering however that the
title was eventually "reconstituted" and that the petitioners admit their ability to
execute the extrajudicial settlement of their fathers estate, the respondent had a
right to demand fulfillment of the petitioners obligation to deliver and transfer
ownership of the house and lot.

What further militates against petitioners argument that they did not enter
into a contract of sale is the fact that the respondent paid thirty thousand pesos
(P30,000.00) as earnest money. Earnest money is something of value to show that
the buyer was really in earnest, and given to the seller to bind the bargain.
Whenever earnest money is given in a contract of sale, it is considered as part of
the purchase price and proof of the perfection of the contract.

Although the memorandum agreement was also denominated as a

"Contract to Sell", we hold that the parties contemplated a contract of sale. A deed
of sale is absolute in nature although denominated a conditional sale in the
absence of a stipulation reserving title in the petitioners until full payment of the
purchase price, In such cases, ownership of the thing sold passes to the vendee
upon actual or constructive delivery thereof, The mere fact that the obligation of
the respondent to pay the balance of the purchase price was made subject to the
condition that the petitioners first deliver the reconstituted title of the house and
lot does not make the contract a contract to sell for such condition is not
inconsistent with a contract of sale.
Spouses Valenzuela v. Kalayaan Development & Industrial corporation
G.r. No. 163244 June 22, 2009 Ponente: J Peralta

The non-payment of the purchase price renders the contract to sell ineffective and
without force and effect. Unlike a contract of sale, where the title to the property
passes to the vendee upon the delivery of the thing sold, in a contract to sell,
ownership is, by agreement, reserved to the vendor and is not to pass to the
vendee until full payment of the purchase price. Otherwise stated, in a contract
of sale, the vendor loses ownership over the property and cannot recover it until
and unless the contract is resolved or rescinded; whereas, in a contract to sell,
title is retained by the vendor until full payment of the purchase price. In the latter
contract, payment of the price is a positive suspensive condition, failure of which
is not a breach but an event that prevents the obligation of the vendor to convey
title from becoming effective.

FACTS: Kalayaan Development & Industrial Corporation (Kalayaan) discovered

that Spouses Jose and Gloria Valenzuela (Sps. Valenzuela) occupied and built a
house on a parcel of land it owned. Kalayaan demanded that they vacate said
property, however, upon negotiation, Sps. Valenzuela and Kalayaan entered into
a Contract to Sell wherein Sps. Valenzuela would purchase 236 square meters of
the subject property for P1,416,000 in twelve equal monthly installments.
Unfortunately, Sps. Valenzuela were only able to pay 10 monthly installments.
They then requested Kalayaan to issue a deed of sale for 118 square meters of
the lot where their house stood since they had paid half the purchase price.
Meanwhile, the sister of one of the Sps. Valenzuela assumed the remaining balance
for the 118 square meters of the subject property which Kalayaan accepted.
Kalayaan however still demanded Sps. Valenzuela to pay their outstanding
obligation, but such demands remained unheeded. Kalayaan thus filed a Complaint
for the Rescission of Contract and Damages against Sps. Valenzuela.

Sps. Valenzuela on the other hand argued that the original contract was novated.
When Kalayaan accepted the payments made by the new debtor (sister of one of
the Sps. Valenzuela), it waived its right to rescind the previous contract. Thus, the
action for rescission filed by Kalayaan against them is unfounded.

ISSUE: Whether or not Kalayaan may validly rescind the contract to sell with Sps.
Valenzuela

HELD: YES. The parties' contract to sell explicitly provides that Kalayaan "shall
execute and deliver the corresponding deed of absolute sale over" the subject
property to the petitioners "upon full payment of the total purchase price." Since
Sps. Valenzuela failed to fully pay the purchase price for the entire property,
Kalayaan's obligation to convey title to the property did not arise as well. Thus,
Kalayaan may validly cancel the contract to sell its land to petitioner, not because
it had the power to rescind the contract, but because their obligation thereunder
did not arise (emphasis supplied J)

The non-fulfillment by Sps. Valenzuela of their obligation to pay, which is a

suspensive condition for the obligation of Kalayaan to sell and deliver the title to
the property, rendered the Contract to Sell ineffective and without force and effect.
The parties stand as if the conditional obligation had never existed. Inasmuch as
the suspensive condition did not take place, Kalayaan cannot be compelled to
transfer ownership of the property to petitioners.

SPS. MONTECALVO vs. HEIRS OF EUGENIA T. PRIMERO

In contract to sell, the payment of the purchase price in installments within the
period stipulated, constituted a positive suspensive condition, the failure of which
is not really a breach but an event that prevents the obligation of the seller to
convey title in accordance with Article 1184 of the Civil Code. A contract to sell is
commonly entered into in order to protect the seller against a buyer who intends
 to buy the property in installment by withholding ownership over the property
until the buyer effects full payment therefor

FACTS: A property registered in the name of Eugenia Primero (Primero) is leased

to Irene Montecalvo (Montecalvo). Primero eventually entered into an un-notarized
Agreement with Montecalvo under the condition that Montecalvo would deposit
the amount of P40,000.00 which shall form part of the down payment equivalent
to 50% of the purchase price and that Montecalvo would pay the balance of the
down payment during the term of negotiation of 30 to 45 days from receipt of said
deposit. In case of default in the payment of the down payment, the deposit would
be returned and the Agreement will be deemed terminated. Subsequently,
Montecalvo failed to pay the full down payment within the stipulated negotiation
period. Nonetheless, she continued to stay on the disputed property, and still made
several payments. On the other hand, Primero did not return the deposit and
refused to accept further payments.

Montecalvo caused a survey of lot and the segregation of a portion but Primero
opposed her claim and asked her to vacate the property. Primero filed a complaint
for unlawful detainer against Montecalvos before the MTC of Iligan City

ISSUE: Whether the Primero can be compelled to execute the required deed of
sale after the agreed consideration was paid and possession thereof is delivered
to and enjoyed by the buyer

HELD: NO. In resolving the issue, we have to determine first whether the
agreement entered into by Montecalvo and Primero is contact to sell or contract
of sale. The absence of a provision in the Agreement transferring title from the
owner to the buyer is taken as a strong indication that the Agreement is a contract
to sell. As stated in the Agreement, the payment of the purchase price, in
installments within the period stipulated, constituted a positive suspensive
condition, the failure of which is not really a breach but an event that prevents the
obligation of the seller to convey title in accordance with Article 1184 of the Civil
Code. Hence, for petitioners' failure to comply with the terms and conditions laid
down in the Agreement, the obligation of the predecessor-in-interest of the
respondents to deliver and execute the corresponding deed of sale never arose.

G.R. No. 194785 July 11, 2012

MENDOZA, J.

VIRGILIO S. DAVID vs. MISAMIS OCCIDENTAL II ELECTRIC

COOPERATIVE, INC.
David was engaged in the business of supplying electrical hardware for rural
electric cooperatives like respondent Misamis.

Misamis, represented by Engr. Rada and Dir. Jimenez, entered into an agreement
with David for the latter to import a transformer in behalf of Misamis. They agreed
to the total value of P5.2M with 50% to be paid as downpayment, and other
expenses for the account of the buyer.

However, the Board Resolution of Misamis states that the purchase was to be
financed through a loan from the National Electrification Administration (NEA). As
there was no immediate action on the loan application, Engr. Rada requested
David to deliver the transformer even without the downpayment. David agreed
provided that an interest of 24% per annum shall be paid. Engr. Rada acquiesced
to the condition. The goods were shipped to Ozamiz City. In the Bill of Lading, a
sales invoice was included which stated the agreed interest rate of 24% per
annum.

Nothing was heard from Misamis for sometime after the shipment, Medina, a
representative of David went to Ozamiz City to check on the shipment as well as
confered with Engr. Rada who told him that the loan was not yet released and
asked if it was possible to withdraw the shipped items. Medina agreed.

No payment was made for months. A demand letter was sent to Misamis, to which
Engr. Rada replied that the goods were still in the warehouse of the shipping
company and that the loan had not been approved. Medina went back to Ozamiz
City where he found out that the goods had already been released to Misamis
evidenced by the shipping company’s copy of the Bill of Lading.

Demand letters and statements of accounts were regularly sent to Misamis and
were never disputed.

David filed a complaint for specific performance with damages with the RTC.

The RTC dismissed the complaint. It found that although a contract of sale was
perfected, it was not consummated because David failed to prove that there was
indeed a delivery of the subject item and that MOELCI received it.

Aggrieved, David appealed his case to the CA.

The CA affirmed the ruling of the RTC, reasoning out that David failed to offer any
textual support that the “quotation letter” was a contract of sale instead of a mere
price quotation agreed to by Misamis’ representatives; that the RTC erred in stating
that a contract of sale was perfected between the parties despite the irregularities
that tainted their transaction. Further, the fact that MOELCI’s representatives
agreed to the terms embodied in the agreement would not preclude the finding
that said contract was at best a mere contract to sell.

Issue: WHETHER OR NOT THERE WAS A PERFECTED CONTRACT OF SALE.

Held:

Yes. An examination of the alleged contract to sell, "Exhibit A," despite its
unconventional form, would show that said document, with all the stipulations
therein and with the attendant circumstances surrounding it, was actually a
Contract of Sale. The rule is that it is not the title of the contract, but its express
terms or stipulations that determine the kind of contract entered into by the
parties.

First, there was meeting of minds as to the transfer of ownership of the subject
matter.

Second, the document specified a determinate subject matter.

Third, there is delivery by presumption of law, Article 1523 of the Civil Code
provides:

Where, in pursuance of a contract of sale, the seller is authorized or required to

send the goods to the buyer delivery of the goods to a carrier, whether named by
the buyer or not, for the purpose of transmission to the buyer is deemed to be a
delivery of the goods to the buyer, except in the cases provided for in Article 1503,
first, second and third paragraphs, or unless a contrary intent appears. (Emphasis
supplied)

Thus, the delivery made by David to the shipping company was deemed to be a
delivery to Misamis.

PETITION GRANTED - Misamis ordered to pay David Php 5,472,722.27 with 12%
interest per annum, to be reckoned from the filing of the complaint until fully paid.
G.R. No. 179965 February 20, 2013
DEL CASTILLO, J.

NICOLAS P. DIEGO vs. RODOLFO P. DIEGO and EDUARDO P. DIEGO

It is settled jurisprudence, to the point of being elementary, that an agreement

which stipulates that the seller shall execute a deed of sale only upon or after
payment of the purchase price is a contract to sell, not a contract of sale.
In Reyes v. Tuparan, this Court declared in categorical terms that "[w]here the
vendor promises to execute a deed of absolute sale upon the completion by the
vendee of the payment of the price, the contract is only a contract to sell. The
aforecited stipulation shows that the vendors reserved title to the subject
property until full payment of the purchase price."

In this case, it is not disputed as in tact both parties agreed that the deed of sale
shall only be executed upon payment of the remaining balance of the purchase
price. Thus, pursuant to the above stated jurisprudence, we similarly declare that
the transaction entered into by the parties is a contract to sell.

Nicolas and his brother Rodolfo entered into an oral contract to sell covering
Nicolas’s share, fixed at ₱500,000.00, as co-owner of the family’s Diego Building.
Rodolfo made a downpayment of ₱250,000.00. It was agreed that the deed of sale
shall be executed upon payment of the remaining balance of ₱250,000.00.
However, Rodolfo failed to pay the remaining balance.

Nicolas’s share in the rents were not remitted to him by his other brother Eduardo,
but were given to Rodolfo instead.

Nicolas filed a Complaint against Rodolfo and Eduardo before the RTC, praying
that an accounting be rendered, his shares in the rents be delivered, and that
Eduardo and Rodolfo be held solidarily liable for attorney’s fees and litigation
expenses.

The trial court dismissed the complaint for lack of merit and ordering Nicolas to
execute a deed of absolute sale in favor of Rodolfo upon payment by the latter of
the ₱250,000.00 balance of the agreed purchase price. The trial court ruled that
as early as 1993, Nicolas was no longer entitled to the fruits of his aliquot share in
the Diego Building because he had "ceased to be a co-owner" thereof. That when
Nicolas received the ₱250,000.00 downpayment, a "contract of sale" was
perfected. Consequently, Nicolas is obligated to convey such share to Rodolfo,
without right of rescission. Finally, the trial court held that the ₱250,000.00 balance
from Rodolfo will only be due and demandable when Nicolas executes an absolute
deed of sale.

The CA sustained the trial court’s Decision in toto. The CA held that since there
was a perfected contract of sale between Nicolas and Rodolfo, the latter may
compel the former to execute the proper sale document. Besides, Nicolas’s
insistence that he has since rescinded their agreement in 1997 proved the
existence of a perfected sale. It added that Nicolas could not validly rescind the
contract because: "1) Rodolfo ha[d] already made a partial payment; 2) Nicolas
ha[d] already partially performed his part regarding the contract; and 3) Rodolfo
opposes the rescission."10

The CA then proceeded to rule that since no period was stipulated within which
Rodolfo shall deliver the balance of the purchase price, it was incumbent upon
Nicolas to have filed a civil case to fix the same. But because he failed to do so,
Rodolfo cannot be considered to be in delay or default.

Finally, the CA made another interesting pronouncement, that by virtue of the

agreement Nicolas entered into with Rodolfo, he had already transferred his
ownership over the subject property and as a consequence, Rodolfo is legally
entitled to collect the fruits thereof in the form of rentals. Nicolas’ remaining right
is to demand payment of the balance of the purchase price, provided that he first
executes a deed of absolute sale in favor of Rodolfo.

Issues: Whether or not the contract entered into by Nicolas and Rodolfo was a
contract to sell.

Held:

This stipulation, i.e., to execute a deed of absolute sale upon full payment of the
purchase price, is a unique and distinguishing characteristic of a contract to sell.
In Reyes v. Tuparan, this Court ruled that a stipulation in the contract, "[w]here
the vendor promises to execute a deed of absolute sale upon the completion by
the vendee of the payment of the price," indicates that the parties entered into
a contract to sell. According to this Court, this particular provision is tantamount
to a reservation of ownership on the part of the vendor. Explicitly stated, the Court
ruled that the agreement to execute a deed of sale upon full payment of the
purchase price "shows that the vendors reserved title to the subject property until
full payment of the purchase price."
b) The acknowledgement receipt signed by Nicolas as well as the
contemporaneous acts of the parties show that they agreed on a contract to sell,
not of sale. The absence of a formal deed of conveyance is indicative of a contract
to sell. The parties could have executed a document of sale upon receipt of the
partial payment but they did not. This is thus an indication that Nicolas did not
intend to immediately transfer title over his share but only upon full payment of
the purchase price. Having thus reserved title over the property, the contract
entered into by Nicolas is a contract to sell. In addition, Eduardo admitted that he
and Rodolfo repeatedly asked Nicolas to sign the deed of sale but the latter refused
because he was not yet paid the full amount.

c) Nicolas did not surrender or deliver title or possession to Rodolfo. Moreover,

there could not even be a surrender or delivery of title or possession to the
prospective buyer Rodolfo. This was made clear by the nature of the agreement,
by Nicolas’s repeated demands for the return of all rents unlawfully and unjustly
remitted to Rodolfo by Eduardo, and by Rodolfo and Eduardo’s repeated demands
for Nicolas to execute a deed of sale which, as we said before, is a recognition on
their part that ownership over the subject property still remains with Nicolas.

It must be stressed that it is anathema in a contract to sell that the prospective

seller should deliver title to the property to the prospective buyer pending the
latter’s payment of the price in full. It certainly is absurd to assume that in the
absence of stipulation, a buyer under a contract to sell is granted ownership of the
property even when he has not paid the seller in full. If this were the case, then
prospective sellers in a contract to sell would in all likelihood not be paid the
balance of the price.

This ponente has had occasion to rule that "[a] contract to sell is one where the
prospective seller reserves the transfer of title to the prospective buyer until the
happening of an event, such as full payment of the purchase price. What the seller
obliges himself to do is to sell the subject property only when the entire amount
of the purchase price has already been delivered to him. ‘In other words, the full
payment of the purchase price partakes of a suspensive condition, the
nonfulfillment of which prevents the obligation to sell from arising and thus,
ownership is retained by the prospective seller without further remedies by the
prospective buyer.’ It does not, by itself, transfer ownership to the buyer."43

The remedy of rescission is not available in contracts to sell. We hold that when
Rodolfo failed to fully pay the purchase price, the contract to sell was deemed
terminated or cancelled. In Reyes v. Tuparan, we held that "petitioner’s obligation
to sell the subject properties becomes demandable only upon the happening of
the positive suspensive condition, which is the respondent’s full payment of the
purchase price. Without respondent’s full payment, there can be no breach of
contract to speak of because petitioner has no obligation yet to turn over the
title. Respondent’s failure to pay in full the purchase price in full is not the breach
of contract contemplated under Article 1191 of the New Civil Code but rather just
an event that prevents the petitioner from being bound to convey title to
respondent." Otherwise stated, Rodolfo has no right to compel Nicolas to transfer
ownership to him because he failed to pay in full the purchase price.

G.R. No.171692, June 03, 2013

SPOUSES DELFIN O. TUMIBAY AND AURORA T. TUMIBAY-DECEASED;
GRACE JULIE ANN TUMIBAY MANUEL, LEGAL
REPRESENTATIVE, Petitioners, v. SPOUSES MELVIN A. LOPEZ AND
ROWENA GAY T. VISITACION LOPEZ, Respondents.
DEL CASTILLO, J.:

In a contract to sell, the seller retains ownership of the property until the buyer
has paid the price in full. A buyer who covertly usurps the seller's ownership of
the property prior to the full payment of the price is in breach of the contract and
the seller is entitled to rescission because the breach is substantial and
fundamental as it defeats the very object of the parties in entering into the contract
to sell.

Facts:
In their Complaint, petitioners alleged that they are the owners of a parcel
of land located in Sumpong, Malaybalay, Bukidnon which is in the name of
petitioner Aurora. According to Aurora, her sister Reynalda Visitacion (Reynalda)
sold the subject land to her daughter, Rowena Gay T. Visitacion Lopez (respondent
Rowena), through a deed of sale for an unconscionable amount of P95,000.00
although said property had a market value of more than P2,000,000.00. Further,
the subject sale was done without the knowledge and consent of petitioners.
Petitioners prayed that (1) the deed of sale be declared void ab initio, (2) the
subject land be reconveyed to petitioners, and (3) respondents be ordered to pay
damages.

Respondents averred that the petitioners executed a special power of

attorney (SPA) in favor of Reynalda granting the latter the power to offer for sale
the subject land and that sometime in 1994, respondent Rowena and petitioners
agreed that the former would buy the subject land for the price of P800,000.00 to
be paid on installment. Respondent Rowena paid the monthly installments and a
deed of sale was executed and the corresponding title was issued in favor of
respondent Rowena.

Petitioners admitted the existence of the SPA but claimed that Reynalda
violated the terms thereof when she (Reynalda) sold the subject land without
seeking the approval of petitioners as to the selling price.

RTC rendered a Decision in favor of petitioners, In ruling in favor of

petitioners, the trial court held: (1) the SPA merely authorized Reynalda to offer
for sale the subject land for a price subject to the approval of the petitioners; (2)
Reynalda violated the terms of the SPA when she sold the subject land to her
daughter, respondent Rowena, without first seeking the approval of petitioners as
to the selling price thereof; (3) the SPA does not sufficiently confer on Reynalda
the authority to sell the subject land; (4) Reynalda, through fraud and with bad
faith, connived with her daughter, respondent Rowena, to sell the subject land to
the latter.

CA rendered the assailed Decision reversing the judgment of the trial court.
In reversing the trial court’s Decision, the appellate court ruled that: (1) the SPA
sufficiently conferred on Reynalda the authority to sell the subject land; (2)
although there is no direct evidence of petitioners’ approval of the selling price of
the subject land, petitioner Aurora’s acts of receiving two money orders and
several dollar checks from respondent Rowena over the span of three years
amount to the ratification of any defect in the authority of Reynalda under the
SPA; (3) petitioners are estopped from repudiating the sale after they had received
the deposits totaling $12,000.00; (5) petitioners impliedly ratified the subject SPA
and contract of sale as well as its effects.

Issue: Whether there was a perfected contract of sale between petitioners and
respondent Rowena is a contract of sale or contract to sell.

Ruling:

Petitioners and respondent Rowena entered into a contract to sell over the subject
land.
There was, indeed, a contractual agreement between the parties for the purchase
of the subject land and that this agreement partook of an oral contract to sell for
the sum of P800,000.00. A contract to sell has been defined as “a bilateral contract
whereby the prospective seller, while expressly reserving the ownership of the
subject property despite delivery thereof to the prospective buyer, binds himself
to sell the said property exclusively to the prospective buyer upon fulfillment of
the condition agreed upon, that is, full payment of the purchase price.” In a
contract to sell, “ownership is retained by the seller and is not to pass until the full
payment of the price x x x.” It is “commonly entered into so as to protect the seller
against a buyer who intends to buy the property in installment[s] by withholding
ownership over the property until the buyer effects full payment therefor.”

In the case at bar, while there was no written agreement evincing the intention of
the parties to enter into a contract to sell, its existence and partial execution were
sufficiently established by, and may be reasonably inferred from the actuations of
the parties, to wit: (1) the title to the subject land was not immediately transferred,
through a formal deed of conveyance, in the name of respondent Rowena prior to
or at the time of the first payment of $1,000.00 by respondent Rowena to
petitioner Aurora on January 25, 1995; (2) after this initial payment, petitioners
received 22 intermittent monthly installments from respondent Rowena in the sum
of $500.00; and, (3) in her testimony, respondent Rowena admitted that she had
the title to the subject land transferred in her name only later on or on July 23,
1997, through a deed of sale, because she believed that she had substantially paid
the purchase price thereof, and that she was entitled thereto as a form of security
for the installments she had already paid.
G.R. No. 190016 October 2, 2013
FREDERICK VENTURA, MARITES VENTURA-ROXAS, and PHILIP
VENTURA (HEIRS OF DECEASED DOLORES C. VENTURA), Petitioners,
vs.
HEIRS OF SPOUSES EUSTACIO T. ENDAYA and TRINIDAD L. ENDAYA,
namely, TITUS L. ENDAYA, ENRICO L. ENDAYA, and JOSEPHINE
ENDAYA-BANTUG, Respondents.

PERLAS-BERNABE, J.:

A contract to sell is defined as a bilateral contract whereby the prospective seller,

while expressly reserving the ownership of the subject property despite delivery
thereof to the prospective buyer, binds himself to sell the said property exclusively
to the latter upon his fulfillment of the conditions agreed upon, i.e., the full
payment of the purchase price and/or compliance with the other obligations stated
in the contract to sell. Given its contingent nature, the failure of the prospective
buyer to make full payment and/or abide by his commitments stated in the
contract to sell prevents the obligation of the prospective seller to execute the
corresponding deed of sale to effect the transfer of ownership to the buyer from
arising.

Facts:

On June 29, 1981, Dolores Ventura (Dolores) entered into a Contract to Sell
(contract to sell) with spouses Eustacio and Trinidad Endaya (Sps. Endaya) for the
purchase of two parcels of land denominated as Lots 8 and 9, Block 3, situated in
Marian Road II, Marian Park (now Barangay San Martin de Porres), Parañaque
City, Metro Manila. The contract to sell provides that the purchase price of
₱347,760.00shall be paid by Dolores in the following manner: (a) down payment
of ₱103,284.00 upon execution of the contract; and (b) the balance of ₱244,476.00
within a 15-year period (payment period), plus 12% interest per annum (p.a.) on
the outstanding balance and 12% interest p.a. on arrearages. It further provides
that all payments made shall be applied in the following order: first, to the
reimbursement of real estate taxes and other charges; second, to the interest
accrued to the date of payment; third, to the amortization of the principal
obligation; and fourth, to the payment of any other accessory obligation
subsequently incurred by the owner in favor of the buyer. It likewise imposed upon
Dolores the obligation to pay the real property taxes over the subject properties,
or to reimburse Sps. Endaya for any tax payments made by them, plus 1% interest
per month. Upon full payment of the stipulated consideration, Sps. Endaya
undertook to execute a final deed of sale and transfer ownership over the same in
favor of Dolores.

Meanwhile, Dolores was placed in possession of the subject properties and allowed
to erect a building thereon. However, on April 10, 1992, before the payment period
expired, Dolores passed away. On November 28, 1996, Dolores’ children, Frederick
Ventura, Marites Ventura-Roxas, and Philip Ventura (petitioners), filed before the
RTC a Complaint for specific performance, seeking to compel Sps. Endaya to
execute a deed of sale over the subject properties. In this regard, they averred
that due to the close friendship between their parents and Sps. Endaya, the latter
did not require the then widowed Dolores to pay the down payment stated in the
contract to sell and, instead, allowed her to pay amounts as her means would
permit. The payments were made in cash as well as in kind, and the same were
recorded by respondent Trinidad herself in a passbook16 given to Dolores to
evidence the receipt of said payments. As of June 15, 1996, the total payments
made by Dolores and petitioners amounted to ₱952,152.00, which is more than
the agreed purchase price of ₱347,760.00, including the 12%interest p.a. thereon
computed on the outstanding balance.

However, when petitioners demanded the execution of the corresponding deed of

sale, Sps. Endaya refused. For their part, Sps. Endaya countered that Dolores did
not pay the stipulated down payment and remitted only a total of 22 installments.
After her death in1992, petitioners no longer remitted any installment. Sps. Endaya
also averred that prior to Dolores' death, the parties agreed to a restructuring of
the contract to sell whereby Dolores agreed to give a "bonus" of ₱265,673.93 and
to pay interest at the increased rate of 24% p.a. on the outstanding balance. They
further claimed that in April 1996, when the balance of the purchase price stood
at ₱1,699,671.69, a final restructuring of the contract to sell was agreed with
petitioners, fixing the obligation at ₱3,000,000.00. Thereafter, the latter paid a
total of ₱380,000.00 on two separate occasions, leaving a balance of
₱2,620,000.00. In any event, Sps. Endaya pointed out that the automatic
cancellation clause under the foregoing contract rendered the same cancelled as
early as 1981 with Dolores’ failure to make a down payment and to faithfully pay
the installments hence, petitioners’ complaint for specific performance must fail.

RTC found that petitioners were able to prove by a preponderance of evidence the
fact of full payment of the purchase price for the subject properties. As such, it
ordered Sps. Endaya to execute a deed of absolute sale covering the sale of the
subject properties in petitioners’ favor and to pay them attorney's fees and costs
of suit.

CA reversed and set aside the RTC ruling. It found that petitioners were not able
to show that they fully complied with their obligations under the contract to sell.
It observed that aside from the payment of the purchase price and 12% interest
p.a. on the outstanding balance, the contract to sell imposed upon petitioners the
obligations to pay 12% interest p.a. on the arrears and to reimburse Sps. Endaya
the amount of the pertinent real estate taxes due on the subject properties, which
the former, however, totally disregarded as shown in their summary of payments.

Issues: Whether or not the contract between the parties is a contract of sale or
contract to sell.

Ruling:

It is a contract to sell.

Thorough review of the records reveals no sufficient reason to warrant the reversal
of the CA’s August 18, 2006 Decision dismissing petitioners' complaint for specific
performance which sought to enforce the contract to sell and to compel
respondents to execute a deed of sale over the subject properties.

To note, while the quality of contingency inheres in a contract to sell, the same
should not be confused with a conditional contract of sale. In a contract to sell,
the fulfillment of the suspensive condition will not automatically transfer ownership
to the buyer although the property may have been previously delivered to him.
The prospective seller still has to convey title to the prospective buyer by entering
into a contract of absolute sale. On the other hand, in a conditional contract of
sale, the fulfillment of the suspensive condition renders the sale absolute and the
previous delivery of the property has the effect of automatically transferring the
seller’s ownership or title to the property to the buyer.

Keeping with these principles, the Court finds that respondents had no obligation
to petitioners to execute a deed of sale over the subject properties. As aptly
pointed out by the CA, aside from the payment of the purchase price and 12%
interest p.a. on the outstanding balance, the contract to sell likewise imposed upon
petitioners the obligation to pay the real property taxes over the subject properties
as well as 12% interest p.a. on the arrears. However, the summary of payments
as well as the statement of account submitted by petitioners clearly show that only
the payments corresponding to the principal obligation and the 12% interest p.a.
on the outstanding balance were considered in arriving at the amount of
₱952,152.00. The Court has examined the petition as well as petitioners'
memorandum and found no justifiable reason for the said omission. Hence, the
reasonable conclusion would therefore be that petitioners indeed failed to comply
with all their obligations under the contract to sell and, as such, have no right to
enforce the same. Consequently, there lies no error on the part of the CA in
reversing the RTC Decision and dismissing petitioners’ complaint for specific
performance seeking to compel respondents to execute a deed of sale over the
subject properties.

ACE FOODS, INC. v MICRO PACIFIC TECHNOLOGIES CO., LTD.

G.R. No. 200602 December 11, 2013
PERLAS-BERNABE, J.:

A contract is what the law defines it to be, taking into consideration its essential
elements, and not what the contracting parties call it. The real nature of a
contract may be determined from the express terms of the written agreement
and from the contemporaneous and subsequent acts of the contracting parties.
However, in the construction or interpretation of an instrument, the intention
of the parties is primordial and is to be pursued. The denomination or title
given by the parties in their contract is not conclusive of the nature of its
contents.

Facts: ACE Foods, Inc. is engaged in the trading and distribution of consumer
goods, while MTCL is one engaged in the supply of computer hardware and
equipment.

MTCL sent a letter-proposal for the delivery and sale of the subject products to be
installed at various offices of ACE Foods. The said proposal provides for the
following terms: “TERMS: Thirty (30) days upon delivery. VALIDITY: Prices are
based on current dollar rate and subject to changes without prior notice.
DELIVERY: Immediate delivery for items on stock, otherwise thirty (30) to forty-
five days upon receipt of Purchase Order. WARRANTY: One (1) year on parts and
services. Accessories not included in warranty.”

It was accepted by ACE Foods and accordingly issued purchase order for the
subject products amounting to ₱646,464. Thereafter, MTCL delivered the said
products to ACE Foods as reflected in the invoice receipt. The fine print of the
invoice states that "title to sold property is reserved in MICROPACIFIC
TECHNOLOGIES CO., LTD. until full compliance of the terms and conditions of
above and payment of the price" (title reservation stipulation). After delivery, the
subject products were then installed and configured in ACE Foods’s premises.

MTCL’s demanded for the payment of the purchase price. Instead of paying the
purchase price, ACE Foods sent MTCL a Letter, stating that it "has been returning
the subject products to MTCL thru its sales representative, Mr. Mark Anteola who
has agreed to pull out the said products but had failed to do so up to now."

Eventually, ACE Foods filed a Complaint against MTCL before the RTC, praying that
the latter pull out from its premises the subject products since MTCL breached its
"after delivery services" obligations to it, particularly, to: (a) install and configure
the subject products; (b) submit a cost benefit study to justify the purchase of the
subject products; and (c) train ACE Foods’s technicians on how to use and maintain
the subject products. ACE Foods likewise claimed that the subject products MTCL
delivered are defective and not working.

MTCL maintained that it had duly complied with its obligations to ACE. For its part,
MTCL alleged that ACE Foods refused and failed to pay the purchase price for the
subject products despite the latter’s use of the same for a period of 9 months.
Hence, MTCL prayed that ACE Foods be compelled to pay the purchase price with
damages.

Issues: Whether or not the contract was a contract of sale or a contract to sell.

Ruling: The contract was a perfected contract of sale.

A contract is what the law defines it to be, taking into consideration its essential
elements, and not what the contracting parties call it. The real nature of a contract
may be determined from the express terms of the written agreement and from the
contemporaneous and subsequent acts of the contracting parties. However, in the
construction or interpretation of an instrument, the intention of the parties is
primordial and is to be pursued. The denomination or title given by the parties
in their contract is not conclusive of the nature of its contents.
A contract of sale is a consensual contract and does not require a specific form for
its validity. Upon perfection of the contract, the parties may reciprocally demand
performance, i.e., the vendee may compel transfer of ownership of the object of
the sale, and the vendor may require the vendee to pay the thing sold.

In contrast, a contract to sell is defined as a bilateral contract whereby the

prospective seller, while expressly reserving the ownership of the property despite
delivery thereof to the prospective buyer, binds himself to sell the property
exclusively to the prospective buyer upon fulfilment of the condition agreed upon,
i.e., the full payment of the purchase price. A contract to sell may not even be
considered as a conditional contract of sale where the seller may likewise
reserve title to the property subject of the sale until the fulfilment of a suspensive
condition, because in a conditional contract of sale, the first element of consent is
present, although it is conditioned upon the happening of a contingent event which
may or may not occur.

In this case, the Court concurs with the CA that the parties have agreed to a
contract of sale and not to a contract to sell as adjudged by the RTC. Bearing in
mind its consensual nature, a contract of sale had been perfected at the precise
moment ACE Foods, as evinced by its act of sending MTCL the Purchase Order,
accepted the latter’s proposal to sell the subject products in consideration of the
purchase price of ₱646,464.00. From that point in time, the reciprocal obligations
of the parties – i.e., on the one hand, of MTCL to deliver the said products to ACE
Foods, and, on the other hand, of ACE Foods to pay the purchase price therefor
within thirty (30) days from delivery – already arose and consequently may be
demanded. From that moment, the parties may reciprocally demand performance,
subject to the provisions of the law governing the form of contracts.

The title reservation stipulation in the sales invoice did not novate the perfected
contract of sale into a contract to sell in the absence of any proof that the said
stipulation was accepted by the other party with the intention to novate.
OPTIMUM DEVELOPMENT BANK vs. SPOUSES BENIGNO V. JOVELLANOS
and LOURDES R. JOVELLANOS

G.R. No. 189145 December 4, 2013

PERLAS-BERNABE, J.:

In a contract to sell, the prospective seller binds himself to sell the property
subject of the agreement exclusively to the prospective buyer upon fulfilment of
the condition agreed upon which is the full payment of the purchase price but
reserving to himself the ownership of the subject property despite delivery
thereof to the prospective buyer. The full payment of the purchase price in a
contract to sell is a suspensive condition, the non-fulfilment of which prevents
the prospective seller’s obligation to convey title from becoming effective.

Facts:

In 2005, Sps. Jovellanos entered into a Contract to Sell with Palmera Homes, Inc.
for the purchase of a residential house and lot in Caloocan City for a total
consideration of ₱1,015,000. Sps. Jovellanos took possession of the subject
property upon a down payment of ₱91,500.00, undertaking to pay the remaining
balance of the contract price in equal monthly installments of ₱13,107.00 for a
period of 10 years starting June 12, 2005.

Subsequently, Palmera Homes assigned all its rights, title and interest in the
Contract to Sell in favor of petitioner Optimum Development Bank through a Deed
of Assignment. Optimum then issued a notarized Notice of Delinquency and
Cancellation of Contract to Sell on April 10, 2006 for Sps. Jovellanos’ failure to pay
their monthly installments despite several written and verbal notices.

In a final Demand Letter dated May 25, 2006, Optimum required Sps. Jovellanos
to vacate and deliver possession of the subject property within seven (7) days
which, however, remained unheeded. Hence, Optimum filed a complaint for
unlawful detainer before the MeTC. Despite having been served with summons,
together with a copy of the complaint, Sps. Jovellanos failed to file their answer
within the prescribed reglementary period, thus prompting Optimum to move for
the rendition of judgment.

Thereafter, Sps. Jovellanos filed their opposition with motion to admit answer,
questioning the jurisdiction of the court, among others. (SC held that MeTC has
jurisdiction over the unlawful detainer suit and that it has the authority to
provisionally determine the validity of the contract upon which the right to
possession mainly rests.)

Issue: Whether or not the contract to sell was validly cancelled.

Ruling:

In a contract to sell, the prospective seller binds himself to sell the property subject
of the agreement exclusively to the prospective buyer upon fulfilment of the
condition agreed upon which is the full payment of the purchase price but
reserving to himself the ownership of the subject property despite delivery thereof
to the prospective buyer. The full payment of the purchase price in a contract to
sell is a suspensive condition, the non-fulfilment of which prevents the prospective
seller’s obligation to convey title from becoming effective, as in this case.

Further, it is significant to note that given that the Contract to Sell in this case is
one which has for its object real property to be sold on an installment basis, hence,
RA 6552, or the "Realty Installment Buyer Protection Act" (Maceda Law) will apply.
The Maceda Law recognizes in conditional sales of all kinds of real estate the right
of the seller to cancel the contract upon non-payment of an installment by the
buyer, which is simply an event that prevents the obligation of the vendor to
convey title from acquiring binding force. It also provides the right of the buyer on
installments in case he defaults in the payment of succeeding installments, viz.:
 xxx

(2) Where he has paid less than two years in installments,

Sec. 4. x x x the seller shall give the buyer a grace period of not
less than sixty days from the date the installment became due. If
the buyer fails to pay the installments due at the expiration of the
grace period, the seller may cancel the contract after thirty days
from receipt by the buyer of the notice of cancellation or the
demand for rescission of the contract by a notarial act.

Since Sps. Jovellanos failed to pay the monthly instalments, Optimum may cancel
the contract provided it complies with Section 4 of RA 6552 as when the buyers
have paid less than two (2) years-worth of installments. There are three (3)
requisites, namely: 1.) the seller shall give the buyer a 60-day grace period to
be reckoned from the date the installment became due; 2.) the seller must give
the buyer a notice of cancellation/demand for rescission by notarial act if
the buyer fails to pay the installments due at the expiration of the said grace
period; and 3.) the seller may actually cancel the contract only after thirty (30)
days from the buyer’s receipt of the said notice of cancellation/demand for
rescission by notarial act.

In the present case, the 60-day grace period automatically operated in favor of
the buyers, Sps. Jovellanos, and took effect from the time that the maturity dates
of the installment payments lapsed. With the said grace period having expired
without any payment on the part of Sps. Jovellanos, Optimum then issued a
notarized Notice of Delinquency and Cancellation of Contract on April 10, 2006.
Finally, in proceeding with the actual cancellation of the contract to sell, Optimum
gave Sps. Jovellanos an additional thirty (30) days within which to settle their
arrears and reinstate the contract, or sell or assign their rights to another.

It was only after the expiration of the thirty day (30) period did Optimum treat the
contract to sell as effectively cancelled – making as it did a final demand upon Sps.
Jovellanos to vacate the subject property only on May 25, 2006. Thus, based on
the foregoing, the Court finds that there was a valid and effective cancellation of
the Contract to Sell in accordance with Section 4 of RA 6552 and since Sps.
Jovellanos had already lost their right to retain possession of the subject property
as a consequence of such cancellation, their refusal to vacate and turn over
possession to Optimum makes out a valid case for unlawful detainer as properly
adjudged by the MeTC.