Sources of Obligation

ARTURO PELAYO, plaintiff-appellant, vs. MARCELO LAURON, ET AL., defendants-appellees. | TORRES, J.:

G.R. No. L-4089 | January 12, 1909

Facts: On the 23rd of November, 1906, Arturo Pelayo, a physician residing in Cebu, filed a complaint against Marcelo
Lauron and Juana Abella setting forth that on or about the 13th of October of said year, at night, the plaintiff was called to
the house of the defendants, situated in San Nicolas, and that upon arrival he was requested by them to render medical
assistance to their daughter-in-law who was about to give birth to a child; that therefore, and after consultation with the
attending physician, Dr. Escao, it was found necessary, on account of the difficult birth, to remove the fetus by means of
forceps which operation was performed by the plaintiff, who also had to remove the afterbirth, in which services he was
occupied until the following morning, and that afterwards, on the same day, he visited the patient several times; that the
just and equitable value of the services rendered by him was P500, which the defendants refuse to pay without alleging
any good reason therefor; that for said reason he prayed that the judgment be entered in his favor as against the
defendants, or any of them, for the sum of P500 and costs, together with any other relief that might be deemed proper.

In answer to the complaint counsel for the defendants denied all of the allegation therein contained and alleged as a
special defense, that their daughter-in-law had died in consequence of the said childbirth, and that when she was alive
she lived with her husband independently and in a separate house without any relation whatever with them, and that, if
on the day when she gave birth she was in the house of the defendants, her stay their was accidental and due to
fortuitous circumstances; therefore, he prayed that the defendants be absolved of the complaint with costs against the
plaintiff.

Issue: Who is bound to pay the bill, whether the father and mother-in-law of the patient, or the husband of the latter?

Ruling: The HUSBAND.

According to article 1089 of the Civil Code, obligations are created by law, by contracts, by quasi-contracts, and by illicit
acts and omissions or by those in which any kind of fault or negligence occurs.

Obligations arising from law are not presumed. Those expressly determined in the code or in special laws, etc., are the
only demandable ones. Obligations arising from contracts have legal force between the contracting parties and must be
fulfilled in accordance with their stipulations. (Arts. 1090 and 1091.)

The rendering of medical assistance in case of illness is comprised among the mutual obligations to which the spouses are
bound by way of mutual support. (Arts. 142 and 143.)

If every obligation consists in giving, doing or not doing something (art. 1088), and spouses are mutually bound to
support each other, there can be no question but that, when either of them by reason of illness should be in need of
medical assistance, the other is under the unavoidable obligation to furnish the necessary services of a physician in order
that health may be restored, and he or she may be freed from the sickness by which life is jeopardized; the party bound
to furnish such support is therefore liable for all expenses, including the fees of the medical expert for his professional
services. This liability originates from the above-cited mutual obligation which the law has expressly established between
the married couple.

In the face of the above legal precepts it is unquestionable that the person bound to pay the fees due to the plaintiff for
the professional services that he rendered to the daughter-in-law of the defendants during her childbirth, is the husband
of the patient and not her father and mother- in-law, the defendants herein. The fact that it was not the husband who
called the plaintiff and requested his assistance for his wife is no bar to the fulfillment of the said obligation, as the
defendants, in view of the imminent danger, to which the life of the patient was at that moment exposed, considered that
medical assistance was urgently needed, and the obligation of the husband to furnish his wife in the indispensable
services of a physician at such critical moments is specially established by the law, as has been seen, and compliance
therewith is unavoidable; therefore, the plaintiff, who believes that he is entitled to recover his fees, must direct his action
against the husband who is under obligation to furnish medical assistance to his lawful wife in such an emergency.

From the foregoing it may readily be understood that it was improper to have brought an action against the
defendants simply because they were the parties who called the plaintiff and requested him to assist the
patient during her difficult confinement, and also, possibly, because they were her father and mother-in-law
and the sickness occurred in their house. The defendants were not, nor are they now, under any obligation
by virtue of any legal provision, to pay the fees claimed, nor in consequence of any contract entered into
between them and the plaintiff from which such obligation might have arisen.
 Accion Pauliana

KHE HONG CHENG, alias FELIX KHE, SANDRA JOY KHE and RAY STEVEN KHE, petitioners, vs. COURT OF
APPEALS, HON. TEOFILO GUADIZ, RTC 147, MAKATI CITY and PHILAM INSURANCE CO., INC., respondents. |
KAPUNAN, J.:

G.R. No. 144169 | March 28, 2001

Facts: Petitioner Khe Hong Cheng, alias Felix Khe, is the owner of Butuan Shipping Lines. The Philippine Agricultural
Trading Corporation shipped on board the vessel M/V PRINCE ERIC, owned by petitioner Khe Hong Cheng, 3,400 bags of
copra at Masbate, Masbate, for delivery to Dipolog City, Zamboanga del Norte. The said shipment of copra was covered
by a marine insurance policy issued by American Home Insurance Company (respondent Philam's assured). M/V PRINCE
ERIC, however, sank somewhere between Negros Island and Northeastern Mindanao, resulting in the total loss of the
shipment. Because of the loss, the insurer, American Home, paid the amount of P354,000.00 (the value of the copra) to
the consignee.

Having been subrogated into the rights of the consignee, American Home instituted Civil Case No. 13357 in the Regional
Trial Court (RTC) of Makati, Branch 147 to recover the money paid to the consignee, based on breach of contract of
carriage. While the case was still pending, or on December 20, 1989, petitioner Khe Hong Cheng executed deeds of
donations of parcels of land in favor of his children, herein co-petitioners Sandra Joy and Ray Steven.

The trial court rendered judgment against petitioner Khe Hong Cheng in Civil Case No. 13357 on December 29, 1993, four
years after the donations were made and the TCTs were registered in the donees names.

After the said decision became final and executory, a writ of execution was forthwith issued on September 14, 1995. Said
writ of execution, however, was not served. An alias writ of execution was, thereafter, applied for and granted in October
1996. Despite earnest efforts, the sheriff found no property under the name of Butuan Shipping Lines and/or petitioner
Khe Hong Cheng to levy or garnish for the satisfaction of the trial court's decision. When the sheriff, accompanied by
counsel of respondent Philam, went to Butuan City to enforce the alias writ of execution, they discovered that petitioner
Khe Hong Cheng no longer had any property and that he had conveyed the subject properties to his children.

Respondent Philam filed a complaint with the Regional Trial Court of Makati City, Branch 147, for the rescission of the
deeds of donation executed by petitioner Khe Hong Cheng in favor of his children and for the nullification of their titles
(Civil Case No. 97-415). Respondent Philam alleged, inter alia, that petitioner Khe Hong Cheng executed the aforesaid
deeds in fraud of his creditors, including respondent Philam.

Petitioners subsequently filed their answer to the complaint a quo. They moved for its dismissal on the ground that the
action had already prescribed. They posited that the registration of the deeds of donation on December 27, 1989
constituted constructive notice and since the complaint a quo was filed only on February 25, 1997, or more than four (4)
years after said registration, the action was already barred by prescription.

MD - Denied; CA affirmed the trial court's decision in favor of respondent Philam

Issue: Whether or not the action to rescind the donations has already prescribed; When did the four (4) year prescriptive
period as provided for in Article 1389 of the Civil Code for respondent Philam to file its action for rescission of the subject
deeds of donation commence to run?

Ruling:

Article 1389 of the Civil Code simply provides that, The action to claim rescission must be commenced within four years .
Since this provision of law is silent as to when the prescriptive period would commence, the general rule, i.e, from the
moment the cause of action accrues, therefore, applies. Article 1150 of the Civil Code is particularly instructive:

Art. 1150. The time for prescription for all kinds of actions, when there is no special provision which ordains otherwise,
shall be counted from the day they may be brought.

Indeed, this Court enunciated the principle that it is the legal possibility of bringing the action which determines the
starting point for the computation of the prescriptive period for the action. Article 1383 of the Civil Code provides as
follows:
Art. 1383. An action for rescission is subsidiary; it cannot be instituted except when the party suffering damage has no
other legal means to obtain reparation for the same.

It is thus apparent that an action to rescind or an accion pauliana must be of last resort, availed of only after all other
legal remedies have been exhausted and have been proven futile. For an accion pauliana to accrue, the following
requisites must concur:

1) That the plaintiff asking for rescission has a credit prior to the alienation, although demandable later; 2) That the
debtor has made a subsequent contract conveying a patrimonial benefit to a third person; 3) That the creditor has no
other legal remedy to satisfy his claim, but would benefit by rescission of the conveyance to the third person ; 4) That the
act being impugned is fraudulent; 5) That the third person who received the property conveyed, if by onerous title, has
been an accomplice in the fraud.[8] (Emphasis ours)

We quote with approval the following disquisition of the CA on the matter:

An accion pauliana accrues only when the creditor discovers that he has no other legal remedy for the satisfaction of his
claim against the debtor other than an accion pauliana. The accion pauliana is an action of a last resort. For as long as the
creditor still has a remedy at law for the enforcement of his claim against the debtor, the creditor will not have any cause
of action against the creditor for rescission of the contracts entered into by and between the debtor and another person
or persons. Indeed, an accion pauliana presupposes a judgment and the issuance by the trial court of a writ of execution
for the satisfaction of the judgment and the failure of the Sheriff to enforce and satisfy the judgment of the court. It
presupposes that the creditor has exhausted the property of the debtor. The date of the decision of the trial court against
the debtor is immaterial. What is important is that the credit of the plaintiff antedates that of the fraudulent alienation by
the debtor of his property. After all,

Even if respondent Philam was aware, as of December 27, 1989, that petitioner Khe Hong Cheng had executed the deeds
of donation in favor of his children, the complaint against Butuan Shipping Lines and/or petitioner Khe Hong Cheng was
still pending before the trial court. Respondent Philam had no inkling, at the time, that the trial court's judgment would be
in its favor and further, that such judgment would not be satisfied due to the deeds of donation executed by petitioner
Khe Hong Cheng during the pendency of the case. Had respondent Philam filed his complaint on December 27, 1989,
such complaint would have been dismissed for being premature. Not only were all other legal remedies for the
enforcement of respondent Philams claims not yet exhausted at the time the deeds of donation were executed and
registered. Respondent Philam would also not have been able to prove then that petitioner Khe Hong Chneg had no more
property other than those covered by the subject deeds to satisfy a favorable judgment by the trial court.

As mentioned earlier, respondent Philam only learned about the unlawful conveyances made by petitioner Khe
Hong Cheng in January 1997 when its counsel accompanied the sheriff to Butuan City to attach the
properties of petitioner Khe Hong Cheng. There they found that he no longer had any properties in his
name. It was only then that respondent Philam's action for rescission of the deeds of donation accrued
because then it could be said that respondent Philam had exhausted all legal means to satisfy the trial
court's judgment in its favor. Since respondent Philam filed its complaint for accion pauliana against petitioners on
February 25, 1997, barely a month from its discovery that petitioner Khe Hong Cheng had no other property to satisfy the
judgment award against him, its action for rescission of the subject deeds clearly had not yet prescribed.

WHEREFORE, premises considered, the petition is hereby DENIED for lack of merit.

Accion Pauliana; Simulated Contracts

THE MANILA BANKING CORPORATION, petitioner, vs. EDMUNDO S. SILVERIO and THE COURT OF
APPEALS, respondents. | CHICO-NAZARIO, J.:

G.R. No. 132887 | August 11, 2005

Facts: Purificacion Ver was the registered owner of two parcels of land located at La Huerta, Paraaque City.

On 16 April 1979, Purificacion Ver sold the properties to Ricardo C. Silverio, Sr. (Ricardo, Sr.) for P1,036,475.00. The
absolute deed of sale evidencing the transaction was not registered; hence, title remained with the seller, Purificacion Ver.
 On 22 February 1990, herein petitioner, The Manila Banking Corporation (TMBC), filed a complaint with the RTC of
Makati City for the collection of a sum of money with application for the issuance of a writ of preliminary attachment
against Ricardo, Sr. and the Delta Motors Corporation docketed as Civil Case No. 90-513. On 02 July 1990, by virtue of an
Order of Branch 62 of the RTC of Makati City, notice of levy on attachment of real property and writ of attachment were
inscribed on TCTs No. 31444 (452448) and No. 45926 (452452). On 29 March 1993, the trial court rendered its Decision in
favor of TMBC and against Ricardo, Sr. and the Delta Motors Corporation. The Decision was brought up to the Court of
Appeals for review.

In the meantime, on 22 July 1993, herein private respondent, Edmundo S. Silverio (Edmundo), the nephew of
judgment debtor Ricardo, Sr., requested TMBC to have the annotations on the subject properties cancelled as the
properties were no longer owned by Ricardo, Sr. This letter was referred to the Bangko Sentral Ng Pilipinas, TMBCs
statutory receiver. No steps were taken to have the annotations cancelled. Thus, on 17 December 1993, Edmundo filed in
the RTC of Makati City a case for Cancellation of Notice of Levy on Attachment and Writ of Attachment on Transfer
Certificates of Title. In his petition, Edmundo alleged that as early as 11 September 1989, the properties, subject matter
of the case, were already sold to him by Ricardo, Sr. As such, these properties could not be levied upon on 02 July 1990 to
answer for the debt of Ricardo, Sr. who was no longer the owner thereof. In its Answer with Compulsory Counterclaim,
TMBC alleged, among other things, that the sale in favor of Edmundo was void, therefore, the properties levied upon were
still owned by Ricardo, Sr., the debtor in Civil Case No. 90-513.

Issues: 1. Whether or not Petitioner TMBC can question the validity of the sale of the properties (under Article 1421 of
the civil code, the defense of nullity of a contract is available to third persons whose interests are directly affected) - YES

2. Whether or not the cancellation of the notice of levy on attachment and the writ of attachment made on the TCTs is
proper - NO

Ruling: An absolutely simulated contract, under Article 1346 of the Civil Code, is void. It takes place when the
parties do not intend to be bound at all. The characteristic of simulation is the fact that the apparent contract is not really
desired or intended to produce legal effects or in any way alter the juridical situation of the parties. Thus, where a person,
in order to place his property beyond the reach of his creditors, simulates a transfer of it to another, he does not really
intend to divest himself of his title and control of the property; hence, the deed of transfer is but a sham. Lacking,
therefore, in a fictitious and simulated contract is consent which is essential to a valid and enforceable contract.

When a contract is void, the right to set-up its nullity or non-existence is available to third persons whose
interests are directly affected thereby. The material interest of TMBC need not be belabored. Suffice it to say that as
judgment creditor of Ricardo, Sr., it has the right to protect its lien acquired through a writ of preliminary attachment as
security for the satisfaction of any judgment in its favor.

The Court of Appeals, however, erroneously ruled that TMBC should first go after the properties of its debtor, Ricardo, Sr.,
and, failing therein would be the only time it will acquire a material interest over the subject properties, thus:

Article 117 of the New Civil Code is very explicit that the right or remedy of the creditor to impugn the acts which the
debtor may have done to defraud them is subsidiary in nature. It can only be availed of in the absence of any other
legal remedy to obtain reparation for the injury. Otherwise stated, the right of accion pauliana can be availed of only
AFTER the creditor have exhausted all the properties of the debtor not exempt from executions.

This fact is not present in this case. Not a single proof was offered to show that oppositor-appellee had exhausted all
the properties of Ricardo Silverio before it tried to question the validity of the contract of sale. In fact, oppositor-
appellee never alleged in its pleadings that it had exhausted all the properties of Ricardo Silverio before it impugned
the validity of the sale made by Ricardo Silverio to petitioner-appellant.

This being the case, oppositor-appellee cannot and is not in the proper position to question the validity of the sale of
the subject properties by Ricardo Silverio to petitioner-appellant. Oppositor-appellee has not shown that it has the
material interest to question the sale.

Contrary to the position taken by the Court of Appeals, TMBC need not look farther than the subject properties to protect
its rights. The remedy of accion pauliana is available when the subject matter is a conveyance, otherwise
valid undertaken in fraud of creditors. Such a contract is governed by the rules on rescission which
prescribe, under Art. 1383 of the Civil Code, that such action can be instituted only when the party suffering
damage has no other legal means to obtain reparation for the same. The contract of sale before us, albeit
undertaken as well in fraud of creditors, is not merely rescissible but is void ab initio for lack of consent of the parties to
be bound thereby. A void or inexistent contract is one which has no force and effect from the very beginning, as if it had
never been entered into; it produces no effect whatsoever either against or in favor of anyone. Rescissible contracts, on
the other hand, are not void ab initio, and the principle, quod nullum est nullum producit effectum , in void and inexistent
contracts is inapplicable. Until set aside in an appropriate action, rescissible contracts are respected as being legally valid,
binding and in force. Tolentino, a noted civilist, distinguished between these two types of contracts entered into in fraud of
creditors, thus:

Absolute simulation implies that there is no existing contract, no real act executed; while fraudulent alienation means
that there is a true and existing transfer or contract. The former can be attacked by any creditor, including one
subsequent to the contract; while the latter can be assailed only by the creditors before the alienation. In absolute
simulation, the insolvency of the debtor making the simulated transfer is not a prerequisite to the nullity of the contract;
while in fraudulent alienation, the action to rescind, or accion pauliana, requires that the creditor cannot recover in any
other manner what is due him. Finally, the action to declare a contract absolutely simulated does not prescribe (articles
1409 and 1410); while the accion pauliana to rescind a fraudulent alienation prescribes in four years (article 1389).

IN SUM, considering that an absolutely simulated contract is not a recognized mode of acquiring ownership, the levy of
the subject properties on 02 July 1990 pursuant to a writ of preliminary attachment duly issued by the RTC in favor of
TMBC and against its debtor, Ricardo, Sr., was validly made as the properties were invariably his. Consequently, Edmundo,
who has no legal interest in these properties, cannot cause the cancellation of the annotation of such lien for the reasons
stated in his petition.

Extrajudicial Recission

NISSAN CAR LEASE PHILS., INC., Petitioner, v. LICA MANAGEMENT, INC. AND PROTON PILIPINAS,
INC., Respondents. | JARDELEZA, J.:

G.R. No. 176986 | January 13, 2016

Facts: LMI is the absolute owner of a property located at 2326 Pasong Tamo Extension, Makati City with a total area of
approximately 2,860 square meters. On June 24, 1994, it entered into a contract with NCLPI for the latter to lease the
property for a term often (10) years (or from July 1, 1994 to June 30, 2004) with a monthly rental of P308,000.00 and an
annual escalation rate often percent (10%). Sometime in September 1994, NCLPI, with LMFs consent, allowed its
subsidiary Nissan Smartfix Corporation (NSC) to use the leased premises.

Subsequently, NCLPI became delinquent in paying the monthly rent, such that its total rental arrearages amounted to
P1,741,520.85. In May 1996, Nissan and Lica verbally agreed to convert the arrearages into a debt to be covered by a
promissory note and twelve (12) postdated checks, each amounting to P162,541.95 as monthly payments starting June
1996 until May 1997.

While NCLPI was able to deliver the postdated checks per its verbal agreement with LMI, it failed to sign the promissory
note and pay the checks for June to October 1996. Thus, in a letter dated October 16, 1996, which was sent on October
18, 1996 by registered mail, LMI informed NCLPI that it was terminating their Contract of Lease due to arrears in the
payment of rentals. It also demanded that NCLPI (1) pay the amount of P2,651,570.39 for unpaid rentals and (2) vacate
the premises within five (5) days from receipt of the notice.

In the meantime, Proton sent NCLPI an undated request to use the premises as a temporary display center for "Audi"
brand cars for a period of ten (10) days. In the same letter, Proton undertook "not to disturb [NCLPI and LMI's] lease
agreement and ensure that [NCLPI] will not breach the same [by] lending the premises x x x without any
consideration." NCLPI acceded to this request.

On October 11, 1996, NCLPI entered into a Memorandum of Agreement with Proton whereby the former agreed to allow
Proton "to immediately commence renovation work even prior to the execution of the Contract of Sublease x x x." In
consideration, Proton agreed to transmit to NCLPI a check representing three (3) months of rental payments, to be
deposited only upon the due execution of their Contract of Sublease.

In a letter dated October 24, 1996, NCLPI, through counsel, replied to LMI's letter of October 16, 1996 acknowledging the
arrearages incurred by it under their Contract of Lease. Claiming, however, that it has no intention of abandoning the
lease and citing efforts to negotiate a possible sublease of the property, NCLPI requested LMI to defer taking court action
on the matter.

LMI, on November 8, 1996, entered into a Contract of Lease with Proton over the subject premises.
On November 12, 1996, LMI filed a Complaint for sum of money with damages seeking to recover from NCLPI the amount
of P2,696,639.97, equivalent to the balance of its unpaid rentals, with interest and penalties, as well as exemplary
damages, attorney's fees, and costs of litigation.

On November 20, 1996, NCLPI demanded Proton to vacate the leased premises. However, Proton replied that it was
occupying the property based on a lease contract with LMI. In a letter of even date addressed to LMI, NCLPI asserted that
its failure to pay rent does not automatically result in the termination of the Contract of Lease nor does it give LMI the
right to terminate the same. NCLPI also informed LMI that since it was unlawfully ousted from the leased premises and
was not deriving any benefit therefrom, it decided to stop payment of the checks issued to pay the rent.

In its Answer and Third-Party Complaint against Proton, NCLPI alleged that LMI and Proton "schemed" and "colluded" to
unlawfully force NCLPI (and its subsidiary NSC) from the premises. Since it has not abandoned its leasehold right, NCLPI
asserts that the lease contract between LMI and Proton is void for lack of a valid cause or consideration.

The trial court admitted the third-party complaint over LMI's opposition.

Issue: May a contract be rescinded extrajudicially despite the absence of a special contractual stipulation therefor?

Ruling: YES.

It is clear from the records that NCLPI committed substantial breaches of its Contract of Lease with LMI.

Under Paragraph 2, NCLPI bound itself to pay a monthly rental of P308,000.00 not later than the first day of every month
to which the rent corresponds. NCLPI, however, defaulted on its contractual obligation to timely and properly pay its rent,
the arrearages of which, as of October 16, 1996, amounted to P2,651,570.39. This fact was acknowledged and admitted
by NCLPI.

Aside from non-payment of rentals, it appears that NCLPI also breached its obligations under Paragraphs 4 and 5 of the
Contract of Lease which prohibit it from subleasing the premises or introducing improvements or alterations thereon
without LMI's prior written consent.

It is true that NCLP1 and LMI's Contract of Lease does not contain a provision expressly authorizing
extrajudicial rescission. LMI can nevertheless rescind the contract, without prior court approval, pursuant to
Art. 1191 of the Civil Code.

Art. 1191 provides that the power to rescind is implied in reciprocal obligations, in cases where one of the obligors should
fail to comply with what is incumbent upon him. Otherwise stated, an aggrieved party is not prevented from
extrajudicially rescinding a contract to protect its interests, even in the absence of any provision expressly providing for
such right. The rationale for this rule was explained in the case of University of the Philippines v. De los Angeles wherein
this Court held:

[T]he law definitely does not require that the contracting party who believes itself injured must first file suit
and wait for a judgment before taking extrajudicial steps to protect its interest. Otherwise, the party
injured by the other's breach will have to passively sit and watch its damages accumulate during the
pendency of the suit until the final judgment of rescission is rendered when the law itself requires that he
should exercise due diligence to minimize its own damages (Civil Code, Article 2203). (Emphasis and
underscoring supplied)

We are aware of this Court's previous rulings in Tan v. Court of Appeals, Iringan v. Court of Appeals, and EDS
Manufacturing, Inc. v. Healthcheck International, Inc., for example, wherein we held that extrajudicial rescission of a
contract is not possible without an express stipulation to that effect.

The seeming "conflict" between this and our previous rulings, however, is more apparent than real.

Whether a contract provides for it or not, the remedy of rescission is always available as a remedy against a defaulting
party. When done without prior judicial imprimatur, however, it may still be subject to a possible court review. In Golden
Valley Exploration, Inc. v. Pinkian Mining Company, we explained:

This notwithstanding, jurisprudence still indicates that an extrajudicial rescission based on grounds not specified in the
contract would not preclude a party to treat the same as rescinded. The rescinding party, however, by such course of
action, subjects himself to the risk of being held liable for damages when the extrajudicial rescission is questioned by the
opposing party in court. This was made clear in the case of U.P. v. De los Angeles, wherein the Court held as follows:
Of course, it must be understood that the act of a party in treating a contract as cancelled or resolved on account of
infractions by the other contracting party must be made known to the other and is always provisional, being ever subject
to scrutiny and review by the proper court. If the other party denies that rescission is justified, it is free to resort to judicial
action in its own behalf, and bring the matter to court. Then, should the court, after due hearing, decide that the
resolution of the contract was not warranted, the responsible party will be sentenced to damages; in the contrary case,
the resolution will be affirmed, and the consequent indemnity awarded to the party prejudiced.

In other words, the party who deems the contract violated may consider it resolved or rescinded, and act
accordingly, without previous court action, but it proceeds at its own risk. For it is only the final judgment of
the corresponding court that will conclusively and finally settle whether the action taken was or was not
correct in law. x x x (Emphasis and underscoring in the original)

The only practical effect of a contractual stipulation allowing extrajudicial rescission is "merely to transfer to the defaulter
the initiative of instituting suit, instead of the rescinder."

In fact, the rule is the same even if the parties' contract expressly allows extrajudicial rescission. The other party
denying the rescission may still seek judicial intervention to determine whether or not the rescission was
proper.

Having established that LMl can extrajudicially rescind its contract with NCLPI even absent an express contractual
stipulation to that effect, the question now to be resolved is whether this extrajudicial rescission was proper under the
circumstances.

As earlier discussed, NCLPI's non-payment of rentals and unauthorized sublease of the leased premises were both clearly
proven by the records. We thus confirm LMFs rescission of its contract with NCLPI on account of the latter's breach of its
obligations.

Onerous Obligation; Resolutory Condition

CENTRAL PHILIPPINE UNIVERSITY, petitioner, vs. COURT OF APPEALS, REMEDIOS FRANCO, FRANCISCO N.
LOPEZ, CECILIA P. VDA. DE LOPEZ, REDAN LOPEZ AND REMARENE LOPEZ, respondents. | BELLOSILLO, J.:

G.R. No. 112127 July 17, 1995

Facts: Sometime 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]), executed a deed of donation in favor of the latter of a parcel
of land identified as Lot No. 3174-B-1 of the subdivision plan Psd-1144, then a portion of Lot No. 3174-B, for which Transfer
Certificate of Title No. T-3910-A was issued in the name of the donee CPU with the following annotations copied 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;

3. The said land shall be called "RAMON LOPEZ CAMPUS", and the said college shall be under obligation to erect a
cornerstone bearing that name. Any net income from the land or any of its parks shall be put in a fund to be known as the
"RAMON LOPEZ CAMPUS FUND" to be used for improvements of said campus and erection of a building thereon.

On 31 May 1989, private respondents, who are 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. Private respondents also argued that petitioner had in fact
negotiated with the National Housing Authority (NHA) to exchange the donated property with another land owned by the
latter.

In its answer petitioner 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.
On 31 May 1991, the trial court held that petitioner failed to comply with the conditions of the donation and declared it
null and void. The court a quo further directed petitioner to execute a deed of the reconveyance of the property in favor of
the heirs of the donor, namely, private respondents herein.

Petitioner appealed to the Court of Appeals which ruled that the annotations at the back of petitioner's certificate of title
were resolutory conditions breach of which should terminate the rights of the donee thus making the donation revocable.

Issue: WON the quoted annotations in the certificate of title of petitioner are onerous obligations and resolutory
conditions of the donation which must be fulfilled non-compliance of which would render the donation revocable; - YES

WON the action has already prescribed - NO

WON the CA erred in remanding the case to the trial court for the fixing of the period within which petitioner would
establish a medical college - YES

Ruling: We find it difficult to sustain the petition. A clear perusal of the conditions set forth in the deed of donation
executed by Don Ramon Lopez, Sr., gives us no alternative but to conclude that his 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.

Under Art. 1181 of the Civil Code, on conditional obligations, the acquisition of rights, as well as the
extinguishment or loss of those already acquired, shall depend upon the happening of the 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 condition precedent or 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, otherwise, it would be invading the property rights of the donor.
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.

The claim of petitioner that prescription bars the instant action of private respondents is unavailing.

The condition imposed by the donor, i.e., the building of a medical school upon the land donated, depended upon the
exclusive will of the donee as to when this condition shall be fulfilled. When petitioner accepted the donation, it bound
itself to comply with the condition thereof. Since the time within which the condition should be fulfilled depended upon
the exclusive will of the petitioner, it has been held that its absolute acceptance and the acknowledgment of its
obligation provided in the deed of donation were sufficient to prevent the statute of limitations from
barring the action of private respondents upon the original contract which was the deed of donation.

Moreover, 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 in the instant case. A cause of action arises when that which should
have been done is not done, or that which should not have been done is done. In cases where there is no special
provision for such computation, recourse must be had to the rule that the period must be counted from the day on which
the corresponding action could have been instituted. It is the legal possibility of bringing the action which determines the
starting point for the computation of the period. In this case, the starting point begins with the expiration of a reasonable
period and opportunity for petitioner to fulfill what has been charged upon it by the donor.

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 petitioner to avail of the opportunity to comply
with the condition even if it be burdensome, to make the donation in its favor forever valid. 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.

Suspensive Period; Loss of right to make use of the period

FERNANDO A. GAITE, plaintiff-appellee, vs.ISABELO FONACIER, GEORGE KRAKOWER, LARAP MINES &
SMELTING CO., INC., SEGUNDINA VIVAS, FRNACISCO DANTE, PACIFICO ESCANDOR and FERNANDO
TY, defendants-appellants. | REYES, J.B.L., J.

G.R. No. L-11827 | July 31, 1961

Facts: Defendant-appellant Isabelo Fonacier was the owner and/or holder, either by himself or in a representative
capacity, of 11 iron lode mineral claims, known as the Dawahan Group, situated in the municipality of Jose Panganiban,
province of Camarines Norte.

By a "Deed of Assignment" dated September 29, 1952, Fonacier constituted and appointed plaintiff-appellee Fernando A.
Gaite as his true and lawful attorney-in-fact to enter into a contract with any individual or juridical person for the
exploration and development of the mining claims aforementioned on a royalty basis of not less than P0.50 per ton of ore
that might be extracted therefrom. On March 19, 1954, Gaite in turn executed a general assignment conveying the
development and exploitation of said mining claims into the Larap Iron Mines, a single proprietorship owned solely by and
belonging to him, on the same royalty basis provided for. Thereafter, Gaite embarked upon the development and
exploitation of the mining claims in question, opening and paving roads within and outside their boundaries, making other
improvements and installing facilities therein for use in the development of the mines, and in time extracted therefrom
what he claim and estimated to be approximately 24,000 metric tons of iron ore.

For some reason or another, Isabelo Fonacier decided to revoke the authority granted by him to Gaite to exploit and
develop the mining claims in question, and Gaite assented thereto subject to certain conditions. As a result, a document
entitled "Revocation of Power of Attorney and Contract" was executed on December 8, 1954 (Exhibit "A"),wherein Gaite
transferred to Fonacier, for the consideration of P20,000.00, plus 10% of the royalties that Fonacier would receive from
the mining claims, all his rights and interests on all the roads, improvements, and facilities in or outside said claims, the
right to use the business name "Larap Iron Mines" and its goodwill, and all the records and documents relative to the
mines. In the same document, Gaite transferred to Fonacier all his rights and interests over the "24,000 tons of iron ore,
more or less" that the former had already extracted from the mineral claims, in consideration of the sum of P75,000.00,
P10,000.00 of which was paid upon the signing of the agreement, and

b. The balance of SIXTY-FIVE THOUSAND PESOS (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 &
Smelting Co. Inc., its assigns, administrators, or successors in interests.

To secure the payment of the said balance of P65,000.00, Fonacier promised to execute in favor of Gaite a surety bond,
and pursuant to the promise, Fonacier delivered to Gaite a surety bond dated December 8, 1954 with himself (Fonacier)
as principal and the Larap Mines and Smelting Co. and its stockholders George Krakower, Segundina Vivas, Pacifico
Escandor, Francisco Dante, and Fernando Ty as sureties (Exhibit "A-1"). Gaite testified, however, that when this bond was
presented to him by Fonacier together with the "Revocation of Power of Attorney and Contract", Exhibit "A", on December
8, 1954, he refused to sign said Exhibit "A" unless another bond under written by a bonding company was put up by
defendants to secure the payment of the P65,000.00 balance of their price of the iron ore in the stockpiles in the mining
claims. Hence, a second bond, also dated December 8, 1954 (Exhibit "B"),was executed by the same parties to the first
bond Exhibit "A-1", with the Far Eastern Surety and Insurance Co. as additional surety, but it provided that the liability of
the surety company would attach only when there had been an actual sale of iron ore by the Larap Mines & Smelting Co.
for an amount of not less then P65,000.00, and that, furthermore, the liability of said surety company would automatically
expire on December 8, 1955. Both bonds were attached to the "Revocation of Power of Attorney and Contract", Exhibit
"A", and made integral parts thereof.

On the same day that Fonacier revoked the power of attorney he gave to Gaite and the two executed and signed the
"Revocation of Power of Attorney and Contract", Exhibit "A", Fonacier entered into a "Contract of Mining Operation",
ceding, transferring, and conveying unto the Larap Mines and Smelting Co., Inc. the right to develop, exploit, and explore
the mining claims in question, together with the improvements therein and the use of the name "Larap Iron Mines" and its
good will, in consideration of certain royalties. Fonacier likewise transferred, in the same document, the complete title to
the approximately 24,000 tons of iron ore which he acquired from Gaite, to the Larap & Smelting Co., in consideration for
the signing by the company and its stockholders of the surety bonds delivered by Fonacier to Gaite.

Up to December 8, 1955, when the bond Exhibit "B" expired with respect to the Far Eastern Surety and Insurance
Company, no sale of the approximately 24,000 tons of iron ore had been made by the Larap Mines & Smelting Co., Inc.,
nor had the P65,000.00 balance of the price of said ore been paid to Gaite by Fonacier and his sureties payment of said
amount, on the theory that they had lost right to make use of the period given them when their bond, Exhibit "B"
automatically expired. And when Fonacier and his sureties failed to pay as demanded by Gaite, the latter filed the present
complaint against them in the Court of First Instance of Manila for the payment of the P65,000.00 balance of the price of
the ore, consequential damages, and attorney's fees.

All the defendants except Francisco Dante set up the uniform defense that the obligation sued upon by Gaite was subject
to a condition that the amount 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., Inc.; that
up to the time of the filing of the complaint, no sale of the iron ore had been made, hence the condition had not yet been
fulfilled; and that consequently, the obligation was not yet due and demandable.

Issues: WON the obligation of appellant Fonacier to pay appellee Gaite the P65,000.00 (balance of the price of the iron
ore in question)is one with a period or term and not one with a suspensive condition, and that the term expired on
December 8, 1955 - YES

WON Fonacier and his sureties still have the right to insist that Gaite should wait for the sale or shipment of the ore before
receiving payment; or, in other words, whether or not they are entitled to take full advantage of the period granted them
for making the payment

Ruling: 1. We find the court below to be legally correct in holding that 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. That the parties to the contract Exhibit "A" did not intend any such state of things to prevail is
supported by several circumstances:

1) The words of the contract express no contingency in the buyer's obligation to pay: "The balance of Sixty-Five Thousand
Pesos (P65,000.00) will be paid out of the first letter of credit covering the first shipment of iron ores . . ." etc. There is no
uncertainty that the payment will have to be made sooner or later; what is undetermined is merely the exact date at
which it will be made. By the very terms of the contract, therefore, the existence of the obligation to pay is recognized;
only its maturity or demandability is deferred.

2) A contract of sale is normally commutative and onerous: not only does each one of the parties assume a correlative
obligation (the seller to deliver and transfer ownership of the thing sold and the buyer to pay the price),but each party
anticipates performance by the other from the very start. While in a sale the obligation of one party can be lawfully
subordinated to an uncertain event, so that the other understands that he assumes the risk of receiving nothing for what
he gives (as in the case of a sale of hopes or expectations, emptio spei), it is not in the usual course of business to do so;
hence, the contingent character of the obligation must clearly appear. Nothing is found in the record to evidence that
Gaite desired or assumed to run the risk of losing his 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 & Smelting Co., and the company's
stockholders, but also on one by a surety company; and the fact that appellants did put up such bonds indicates that they
admitted the definite existence of their obligation to pay the balance of P65,000.00.

3) 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 the appellants took steps to sell the ore. Appellants would thus be able to postpone payment indefinitely.
The desireability of avoiding such a construction of the contract Exhibit "A" needs no stressing.

4) Assuming that there could be doubt whether by the wording of the contract the parties indented a suspensive condition
or a suspensive period (dies ad quem) 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. The Civil Code of the Philippines,
Article 1378, paragraph 1, in fine, provides:

If the contract is onerous, the doubt shall be settled in favor of the greatest reciprocity of interests.

and there can be no question that greater reciprocity obtains if the buyer' obligation is deemed to be actually existing,
with only its maturity (due date) postponed or deferred, that if such obligation were viewed as non-existent or not binding
until the ore was sold.

The only rational view that can be taken is that the sale of the ore to Fonacier was a sale on credit, and not an aleatory
contract where the transferor, Gaite, would assume the risk of not being paid at all; and that the previous sale or
shipment of the ore was not a suspensive condition for the payment of the balance of the agreed price, but was intended
merely to fix the future date of the payment.

2.We agree with the court below that the appellant have forfeited the right to compel Gaite to wait for the sale of the ore
before receiving payment of the balance of P65,000.00, because of their failure to renew the bond of the Far Eastern
Surety Company or else replace it with an equivalent guarantee. The expiration of the bonding company's undertaking on
December 8, 1955 substantially reduced the security of the vendor's rights as creditor for the unpaid P65,000.00, a
security that Gaite considered essential and upon which he had insisted when he executed the deed of sale of the ore to
Fonacier (Exhibit "A"). The case squarely comes under paragraphs 2 and 3 of Article 1198 of the Civil Code of the
Philippines:

"ART. 1198. The debtor shall lose every right to make use of the period:

(1) . . .

(2) When he does not furnish to the creditor the guaranties or securities which he has promised.

(3) When by his own acts he has impaired said guaranties or securities after their establishment, and when through
fortuitous event they disappear, unless he immediately gives new ones equally satisfactory.

Appellants' failure to renew or extend the surety company's bond upon its expiration plainly impaired the
securities given to the creditor (appellee Gaite), unless immediately renewed or replaced.

There is no merit in appellants' argument that Gaite's acceptance of the surety company's bond with full knowledge that
on its face it would automatically expire within one year was a waiver of its renewal after the expiration date. No such
waiver could have been intended, for Gaite stood to lose and had nothing to gain barely; and if there was any, it could be
rationally explained only if the appellants had agreed to sell the ore and pay Gaite before the surety company's bond
expired on December 8, 1955. But in the latter case the defendants-appellants' obligation to pay became absolute after
one year from the transfer of the ore to Fonacier by virtue of the deed Exhibit "A.".

All the alternatives, therefore, lead to the same result: that Gaite acted within his rights in demanding payment and
instituting this action one year from and after the contract (Exhibit "A") was executed, either because the appellant
debtors had impaired the securities originally given and thereby forfeited any further time within which to pay; or because
the term of payment was originally of no more than one year, and the balance of P65,000.00 became due and payable
thereafter.

Tortuous Interference of Contract

SO PING BUN, petitioner, vs. COURT OF APPEALS, TEK HUA ENTERPRISES CORP. and MANUEL C.
TIONG, respondents. | QUISUMBING, J.

G.R. No. 120554 September 21, 1999

Facts: In 1963, Tek Hua Trading Co, through its managing partner, So Pek Giok, entered into lease agreements with lessor
Dee C. Chuan & Sons Inc. (DCCSI). Subjects of four (4) lease contracts were premises located at Nos. 930, 930-Int., 924-B
and 924-C, Soler Street, Binondo, Manila. Tek Hua used the areas to store its textiles. The contracts each had a one-year
term. They provided that should the lessee continue to occupy the premises after the term, the lease shall be on a month-
to-month basis.
When the contracts expired, the parties did not renew the contracts, but Tek Hua continued to occupy the premises. In
1976, Tek Hua Trading Co. was dissolved. Later, the original members of Tek Hua Trading Co. including Manuel C. Tiong,
formed Tek Hua Enterprising Corp., herein respondent corporation.

So Pek Giok, managing partner of Tek Hua Trading, died in 1986. So Pek Giok's grandson, petitioner So Ping Bun, occupied
the warehouse for his own textile business, Trendsetter Marketing.

On August 1, 1989, lessor DCCSI sent letters addressed to Tek Hua Enterprises, informing the latter of the 25% increase in
rent effective September 1, 1989. The rent increase was later on reduced to 20% effective January 1, 1990, upon other
lessees' demand. Again on December 1, 1990, the lessor implemented a 30% rent increase. Enclosed in these letters
were new lease contracts for signing. DCCSI warned that failure of the lessee to accomplish the contracts shall be deemed
as lack of interest on the lessee's part, and agreement to the termination of the lease. Private respondents did not answer
any of these letters. Still, the lease contracts were not rescinded.

On March 1, 1991, private respondent Tiong sent a letter to petitioner asking the latter to vacate the premises as he
decided to go back to textile business. Petitioner refused to vacate. On March 4, 1992, petitioner requested formal
contracts of lease with DCCSI in favor Trendsetter Marketing. So Ping Bun claimed that after the death of his grandfather,
So Pek Giok, he had been occupying the premises for his textile business and religiously paid rent. DCCSI acceded to
petitioner's request. The lease contracts in favor of Trendsetter were executed.

In the suit for injunction, private respondents pressed for the nullification of the lease contracts between DCCSI and
petitioner. They also claimed damages.

Issue: Whether so ping bun guilty of tortuous interference of contract

The foregoing issues involve, essentially, the correct interpretation of the applicable law on tortuous conduct, particularly
unlawful interference with contract. We have to begin, obviously, with certain fundamental principles on torts and
damages.

The elements of tort interference are: (1) existence of a valid contract; (2) knowledge on the part of the third person
of the existence of contract; and (3) interference of the third person is without legal justification or excuse.

A duty which the law of torts is concerned with is respect for the property of others, and a cause of action ex delicto may
be predicated upon an unlawful interference by one person of the enjoyment by the other of his private
property. This may pertain to a situation where a third person induces a party to renege on or violate his undertaking
under a contract. In the case before us, petitioner's Trendsetter Marketing asked DCCSI to execute lease contracts in its
favor, and as a result petitioner deprived respondent corporation of the latter's property right. Clearly, and as correctly
viewed by the appellate court, the three elements of tort interference above-mentioned are present in the instant case.

Authorities debate on whether interference may be justified where the defendant acts for the sole purpose of furthering
his own financial or economic interest. One view is that, as a general rule, justification for interfering with the business
relations of another exists where the actor's motive is to benefit himself. Such justification does not exist where his sole
motive is to cause harm to the other. Added to this, some authorities believe that it is not necessary that the interferer's
interest outweigh that of the party whose rights are invaded, and that an individual acts under an economic interest that
is substantial, not merely de minimis, such that wrongful and malicious motives are negatived, for he acts in self-
protection. Moreover justification for protecting one's financial position should not be made to depend on a comparison of
his economic interest in the subject matter with that of others. It is sufficient if the impetus of his conduct lies in a proper
business interest rather than in wrongful motives.

As early as Gilchrist vs. Cuddy, we held that where there was no malice in the interference of a contract, and the
impulse behind one's conduct lies in a proper business interest rather than in wrongful motives, a party
cannot be a malicious interferer. Where the alleged interferer is financially interested, and such interest motivates his
conduct, it cannot be said that he is an officious or malicious intermeddler.

In the instant case, it is clear that petitioner So Ping Bun prevailed upon DCCSI to lease the warehouse to his enterprise at
the expense of respondent corporation. Though petitioner took interest in the property of respondent corporation and
benefited from it, nothing on record imputes deliberate wrongful motives or malice on him.

Sec. 1314 of the Civil Code categorically provides also that, "Any third person who induces another to violate his
contract shall be liable for damages to the other contracting party." Petitioner argues that damage is an essential
element of tort interference, and since the trial court and the appellate court ruled that private respondents were not
entitled to actual, moral or exemplary damages, it follows that he ought to be absolved of any liability, including
attorney's fees.
It is true that the lower courts did not award damages, but this was only because the extent of damages was not
quantifiable. We had a similar situation in Gilchrist, where it was difficult or impossible to determine the extent of damage
and there was nothing on record to serve as basis thereof. In that case we refrained from awarding damages. We believe
the same conclusion applies in this case.

While we do not encourage tort interferers seeking their economic interest to intrude into existing contracts at the
expense of others, however, we find that the conduct herein complained of did not transcend the limits forbidding an
obligatory award for damages in the absence of any malice. The business desire is there to make some gain to the
detriment of the contracting parties. Lack of malice, however, precludes damages. But it does not relieve petitioner of the
legal liability for entering into contracts and causing breach of existing ones. The respondent appellate court correctly
confirmed the permanent injunction and nullification of the lease contracts between DCCSI and Trendsetter Marketing,
without awarding damages. The injunction saved the respondents from further damage or injury caused by petitioner's
interference.

Perfection of Contract; Withdrawal of Offer

MAMERTO LAUDICO and FRED M. HARDEN, plaintiffs-appellants, vs. ANUEL ARIAS RODRIGUEZ, ET
AL., defendants-appellants. | AVANCEA, J.

G.R. No. 16530 | March 31, 1922

Facts: On February 5, 1919, the defendant, Vicente Arias, who, with his codefendants, owned the building Nos. 205 to
221 on Carriedo Street, on his behalf and that of his coowners, wrote a letter to the plaintiff, Mamerto Laudico, giving him
an option to lease the building to a third person, and transmitting to him for that purpose a tentative contract in writing
containing the conditions upon which the proposed lease should be made. Later Mr. Laudico presented his coplaintiff, Mr.
Fred. M. Harden, as the party desiring to lease the building. On one hand, other conditions were added to those originally
contained in the tentative contract, and, on the other, counter-propositions were made and explanations requested on
certain points in order to make them clear. These negotiations were carried on by correspondence and verbally at
interviews held with Mr. Vicente Arias, no definite agreement having been arrived at until the plaintiff, Mr. Laudico, finally
wrote a letter to Mr. Arias on March 6, 1919, advising him that all his propositions, as amended and supplemented, were
accepted. It is admitted that this letter was received by Mr. Arias by special delivery at 2.53 p.m. of that day. On that
same day, at 11.25 in the morning, Mr. Arias had, in turn, written a letter to the plaintiff, Mr. Laudico, withdrawing the
offer to lease the building.

Issue: WON there was a perfected contract - NO

Ruling: Under article 1262, paragraph 2, of the Civil Code, an acceptance by letter does not have any effect until
it comes to the knowledge of the offerer. Therefore, before he learns of the acceptance, the latter is not yet bound
by it and can still withdraw the offer. Consequently, when Mr. Arias wrote Mr. Laudico, withdrawing the offer, he had the
right to do so, inasmuch as he had not yet receive notice of the acceptance. And when the notice of the acceptance was
received by Mr. Arias, it no longer had any effect, as the offer was not then in existence, the same having already been
withdrawn. There was no meeting of the minds, through offer and acceptance, which is the essence of the
contract. While there was an offer, there was no acceptance, and when the latter was made and could have
a binding effect, the offer was then lacking. Though both the offer and the acceptance existed, they did not
meet to give birth to a contract.

Our attention has been called to a doctrine laid down in some decisions to the effect that ordinarily notice of the
revocation of an offer must be given to avoid an acceptance which may convert into a binding contract, and that no such
notice can be deemed to have been given to the person to whom the offer was made unless the revocation was in fact
brought home to his knowledge.

This, however, has no application in the instant case, because when Arias received the letter of acceptance, his letter of
revocation had already been received. The latter was sent through a messenger at 11.25 in the morning directly to the
office of Laudico and should have been received immediately on that same morning, or at least, before Arias received the
letter of acceptance. On this point we do not give any credence to the testimony of Laudico that he received this letter of
revocation at 3.30 in the afternoon of that day. Laudico is interested in destroying the effect of this revocation so that the
acceptance may be valid, which is the principal ground of his complaint.

But even supposing Laudico's testimony to be true, still the doctrine invoked has no application here. With regard to
contracts between absent persons there are two principal theories, to wit, one holding that an acceptance by letter of an
offer has no effect until it comes to the knowledge of the offerer, and the other maintaining that it is effective from the
time the letter is sent.

The Civil Code, in paragraph 2 of article 1262, has adopted the first theory and, according to its most eminent
commentators, it means that, before the acceptance is known, the offer can be revoked, it not being necessary,
in order for the revocation to have the effect of impeding the perfection of the contract, that it be known by
the acceptant.

Under the second theory, the doctrine invoked by the plaintiffs is sound, because if the sending of the letter of
acceptance in itself really perfects the contract, the revocation of the offer, in order to prevent it, must be known to the
acceptor. But this consideration has no place in the first theory under which the forwarding of the letter of acceptance, in
itself, does not have any effect until the acceptance is known by the person who has made the offer.

Tender of Payment & Consignation; Subrogation

JENNEFER FIGUERA, AS SUBSTITUTED BY ENHANCE VISA SERVICES, INC., REPRESENTED BY MA. EDEN R.
DUMONT, PETITIONER, VS. MARIA REMEDIOS ANG, RESPONDENT | BRION, J.:

G.R. No. 204264, June 29, 2016

Facts: Maria Remedios Ang (Ang) is the registered owner of a single proprietorship business named "Enhance
Immigration and Documentation Consultants" (EIDC).

On December 16, 2004, Ang executed a "Deed of Assignment of Business Rights" (Deed) transferring all of her business
rights over the EIDC to Figuera for One Hundred Fifty Thousand Pesos (P150,000.00). In addition to the assignment of
rights, the parties also agreed that Ang shall pay the bills for electricity, telephone, office rentals, and the employees'
salaries up to the month of December 2004.

Without Ang's consent, Figuera paid all the utility bills amounting to P107,903.21 as of December 2004. On January 17,
2005, Figuera tendered only the amount of P42,096.79 to Ang, after deducting the amount paid for the utility bills from
the P150,000.00 consideration of the Deed.

Ang refused to accept Figuera's payment. Figuera mailed the Formal Tender of Payment and gave Ang five (5) days to
accept the amount. Despite the lapse of the 5-day period, however, Ang still refused to accept the payment.

Thus, Figuera filed a complaint for specific performance before the Regional Trial Court (RTC), Branch 9 of Cebu City
against Ang. Figuera consigned the amount of P42,096.79 to the RTC.

In her answer, Ang maintained that the amount due pursuant to the Deed is P150,000.00 and not just P42,096.79. She
argued that she cannot be compelled to accept the amount because it is not what was agreed upon.

On May 19, 2005, Figuera conveyed all her rights, assets, interests, liabilities, and causes of action over EIDC in favor of
the Enhance Visa Services, Inc. (EVSI) through a "Deed of Assignment Coupled with Interest." Thus, on June 14, 2005,
EVSI substituted Figuera, on motion, as plaintiff.

Issue: Whether or not legal compensation took place; Whether or not there was a valid tender of payment and
consignation. - YES

Ruling: For the CA to rule on whether there was a valid tender of payment and consignation, it must first determine the
amount that Figuera should have tendered. To do so, the appellate court must examine whether the principles of legal
subrogation and compensation, as Figuera argued, should be applied.

To recall, Figuera claims that the consideration for the assignment worth P150,000.00 should be reduced by P107,903.21,
representing the amount that she paid for the EIDC's utility bills. Figuera argues that her payment of the utility bills
subrogated her to the rights of Ang's creditors against Ang.

Article 1291 of the New Civil Code provides that the subrogation of a third person to the rights of the creditor is one of the
means to modify obligations. Subrogation, sometimes referred to as substitution, is "an arm of equity that may guide or
even force one to pay a debt for which an obligation was incurred but which was in whole or in part paid by another." It
transfers to the person subrogated the credit, with all the rights appertaining thereto, either against the debtor or against
third persons.

Subrogation of a third person in the rights of a creditor may either be legal or conventional. There is legal subrogation
when: (a) a creditor pays another preferred creditor, even without the debtor's knowledge; (b) a third person who is not
interested in the obligation pays with the express or tacit approval of the debtor; and (c) a person interested in the
fulfilment of the obligation pays, even without the knowledge of the debtor.

In the present case, Figuera based her claim on the third type of subrogation. She claims that as the EIDC's new owner,
she is interested in fulfilling Ang's obligation to pay the utility bills. Since the payment of the bills was long overdue prior
to the assignment of business rights to Figuera, the failure to settle the bills would eventually result in "the disconnection
of the electricity and telephone services, ejectment from the office premises, and resignation by some, if not all, of the
company's employees with the possibility of subsequent labor claims for sums of money." These utilities are obviously
necessary for the continuation of Figuera's business transactions.

A person interested in the fulfilment of the obligation is one who stands to be benefited or injured in the
enforcement of the obligation. The Court agrees with Figuera that it became absolutely necessary for her to pay the
bills since Ang did not do so when the obligation became due.

We note that both the RTC and the CA held that Figuera failed to prove that Ang had consented to the payment of the
EIDC bills; therefore, Figuera cannot deduct the amount she paid for the utility bills from the P150,000.00 consideration.

A clear reading, however, of Article 1302 of the New Civil Code would lead to a different conclusion. The, consent or
approval of the debtor is required only if a third person who is not interested in the fulfilment of the
obligation pays such. On the other hand, no such requirement exists in cases of payment by a creditor to
another creditor who is preferred, and by a person interested in the fulfilment of the obligation. Notably,
Article 1302 (1) and (3) does not require the debtor's knowledge.

Therefore, legal subrogation took place despite the absence of Ang's consent to Figuera's payment of the EIDC bills.
Figuera is now deemed as Ang's creditor by operation of law.

On Figuera's argument that legal compensation took place, and in effect, extinguished her obligation to Ang to the extent
of the amount Figuera paid for the EIDC bills, Article 1278 of the New Civil Code is instructive.

Article 1278 of the New Civil Code states that there is compensation when two persons, in their own right, are creditors
and debtors of one another. These elements must concur for legal compensation to apply: (1) each one of the debtors is
bound principally, and that the debtor is at the same time a principal creditor of the other; (2) both debts consist of a sum
of money, or if the things due be consumable, they be of the same kind and also of the same quality if the latter has been
stated; (3) both debts are due; (4) both debts are liquidated and demandable; and (5) there be no retention or
controversy over both debts commenced by third persons and communicated in due time to the debtor. When all these
elements are present, compensation takes effect by operation of law and extinguishes both debts to the corresponding
amount, even though both parties are without knowledge of the compensation. It operates even against the will of the
interested parties and even without their consent.

We find that all the elements of legal compensation are present in this case.

First, in the assignment of business rights, Figuera stood as Ang's debtor for the consideration amounting to P150,000.00.
Figuera, on the other hand, became Ang's creditor for the amount of P107,903.21 through Figuera's subrogation to the
rights of Ang's creditors against the latter.

Second, both debts consist of a sum of money, which are both due, liquidated, and demandable.

Finally, neither party alleged that there was any claim raised by third persons against said obligation.

In effect, even without the knowledge and consent of Ang or Figuera, their obligation as to the amount of P107,903.21
had already been extinguished. Consequently, Figuera owes Ang the remaining due amount of P42,096.79.

While the RTC and the CA correctly held that there was nothing in the Deed that grants Figuera an option to pay the utility
bills and to deduct the amount from the consideration, we stress that although not expressly written, laws are deemed
incorporated in every contract entered within our territories. Thus, the Court reads into the Deed the provisions of law on
subrogation and compensation.
With the determination of the amount of Figuera's obligation to Ang, the question left to be resolved is: Was there a valid
tender of payment and consignation?

Tender of payment is the act of offering to the creditor what is due him, together with the demand for the creditor to
accept it. To be valid, the tender of payment must be a "fusion of intent, ability, and capability to make good such offer,
which must be absolute and must cover the amount due."

As earlier discussed, the remaining amount due in Figuera's obligation is P42,096.79. Thus, Figuera's tender of the
remaining amount to Ang is valid and Ang offered no valid justification in refusing to accept the tender of payment. Due
to the creditor's refusal, without any just cause, to the valid tender of payment, the debtor is released from her obligation
by the consignation of the thing or sum due.

Cause or Consideration; In pari delicto

CONCHITA LIGUEZ, petitioner, vs. THE HONORABLE COURT OF APPEALS, MARIA NGO VDA. DE LOPEZ, ET
AL., respondents. | REYES, J.B.L., J.

G.R. No. L-11240 | December 18, 1957

Facts: The case began upon complaint 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. Plaintiff 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 the 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, the appellant Liguez was a minor, only 16 years of
age. While the deed recites

That the DONOR, Salvador P. Lopez, for and in the 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. (Paragraph 2, Exhibit "A")

the Court of Appeals found that when the donation was made, Lopez had been living with the parents of appellant for
barely a month; that the donation was made in view of the desire of Salvador P. Lopez, a man of mature years, to have
sexual relations with appellant Conchita Liguez; that Lopez had confessed to his love for appellant to the instrumental
witnesses, with the remark that her parents would not allow Lopez to live with her unless he first donated the land in
question; that after the donation, Conchita Liguez and Salvador P. Lopez lived together in the house that was built upon
the latter's orders, until Lopez was killed on July 1st, 1943, by some guerrillas who believed him to be pro-Japanese.

Issue: Whether or not the donation is void for having an illicit cause or consideration - NO

Ruling: Appellant vigorously contends that the Court of First Instance as well as the Court of Appeals erred in holding the
donation void for having an illicit cause or consideration. It is argued that under Article 1274 of the Civil Code of 1889
(which was the governing law in 1948, 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 do or is deemed causa 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." In consonance with this view, this Supreme Court in Philippine Long Distance Co.
vs. Jeturian * G.R. L-7756, July 30, 1955, like the Supreme Court of Spain in its decision of 16 Feb. 1899, has ruled that
bonuses granted to employees to excite their zeal and efficiency, with consequent benefit for the employer, do not
constitute donation having liberality for a consideration.

Here the facts as found by the Court of Appeals (and which we can not vary) 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.

The Court of Appeals rejected the appellant's claim on the basis of the well- known rule "in pari delicto non oritur actio" as
embodied in Article 1306 of 1889 (reproduced in Article 1412 of the new Civil Code):

ART. 1412. If the act in which the unlawful or forbidden cause consists does not constitute a criminal offense, the following
rules shall be observed:

(1) When the fault is on the part of both contracting parties, neither may recover what he has given by virtue of the
contract, or demand the performance of the other's undertaking;

(2) When only one of the contracting parties is at fault, he cannot recover, what he has given by reason of the contract, or
ask for fulfillment of what has been promised him. The other, who is not at fault, may demand the return of what he has
given without any obligation to comply with his promise.

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 xxx

The text of the articles makes it plain that 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 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. Costs
against appellees. So ordered.

Delay; Legal Interest

 RODRIGO RIVERA, Petitioner, v. SPOUSES SALVADOR CHUA AND S. VIOLETA CHUA, Respondents | PEREZ, J.:

G.R. No. 184458 | January 14, 2015

SPS. SALVADOR CHUA AND VIOLETA S. CHUA, Petitioners, v. RODRIGO RIVERA, Respondent

G.R. NO. 184472

Facts: The parties were friends of long standing having known each other since 1973: Rivera and Salvador
are kumpadres, the former is the godfather of the Spouses Chuas son.

On 24 February 1995, Rivera obtained a loan from the Spouses Chua:

PROMISSORY NOTE

120,000.00

FOR VALUE RECEIVED, I, RODRIGO RIVERA promise to pay spouses SALVADOR C. CHUA and VIOLETA SY CHUA, the sum of
One Hundred Twenty Thousand Philippine Currency (P120,000.00) on December 31, 1995.

It is agreed and understood that failure on my part to pay the amount of (P120,000.00) One Hundred Twenty Thousand
Pesos on December 31, 1995. (sic) I agree to pay the sum equivalent to FIVE PERCENT (5%) interest monthly from the
date of default until the entire obligation is fully paid for.

Should this note be referred to a lawyer for collection, I agree to pay the further sum equivalent to twenty percent (20%)
of the total amount due and payable as and for attorneys fees which in no case shall be less than P5,000.00 and to pay in
addition the cost of suit and other incidental litigation expense.

Any action which may arise in connection with this note shall be brought in the proper Court of the City of Manila.

Manila, February 24, 1995[.]

(SGD.) RODRIGO RIVERA

In October 1998, almost three years from the date of payment stipulated in the promissory note, Rivera, as partial
payment for the loan, issued and delivered to the Spouses Chua, as payee, a check numbered 012467, dated 30
December 1998, drawn against Riveras current account with the Philippine Commercial International Bank (PCIB) in the
amount of P25,000.00.

On 21 December 1998, the Spouses Chua received another check presumably issued by Rivera, likewise drawn against
Riveras PCIB current account, numbered 013224, duly signed and dated, but blank as to payee and amount. Ostensibly,
as per understanding by the parties, PCIB Check No. 013224 was issued in the amount of P133,454.00 with cash as
payee. Purportedly, both checks were simply partial payment for Riveras loan in the principal amount of P120,000.00.

Upon presentment for payment, the two checks were dishonored for the reason account closed.

As of 31 May 1999, the amount due the Spouses Chua was pegged at P366,000.00 covering the principal of P120,000.00
plus five percent (5%) interest per month from 1 January 1996 to 31 May 1999.

The Spouses Chua alleged that they have repeatedly demanded payment from Rivera to no avail. Because of Riveras
unjustified refusal to pay, the Spouses Chua were constrained to file a suit on 11 June 1999. The case was raffled before
the MeTC, Branch 30, Manila and docketed as Civil Case No. 163661.

In his Answer with Compulsory Counterclaim, Rivera countered that: (1) he never executed the subject Promissory Note;
(2) in all instances when he obtained a loan from the Spouses Chua, the loans were always covered by a security; (3) at
the time of the filing of the complaint, he still had an existing indebtedness to the Spouses Chua, secured by a real estate
mortgage, but not yet in default; (4) PCIB Check No. 132224 signed by him which he delivered to the Spouses Chua on 21
December 1998, should have been issued in the amount of only P1,300.00, representing the amount he received from the
Spouses Chuas saleslady; (5) contrary to the supposed agreement, the Spouses Chua presented the check for payment
in the amount of P133,454.00; and (6) there was no demand for payment of the amount of P120,000.00 prior to the
encashment of PCIB Check No. 0132224.
In the main, Rivera claimed forgery of the subject Promissory Note and denied his indebtedness thereunder.

Issues: [whether or not] the honorable CA committed gross legal error when it modified the appealed judgment by
reducing the interest rate from 60% per annum to 12% per annum in spite of the fact that Rivera never raised in his
answer the defense that the said stipulated rate of interest is exorbitant, unconscionable, unreasonable, inequitable,
illegal, immoral or void. - NO

Ruling: Article 1169 of the Civil Code explicitly provides:

Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially
demands from them the fulfillment of their obligation.

However, the demand by the creditor shall not be necessary in order that delay may exist:

(1) When the obligation or the law expressly so declare; or

(2) When from the nature and the circumstances of the obligation it appears that the designation of the time when the
thing is to be delivered or the service is to be rendered was a controlling motive for the establishment of the contract; or
(3) When demand would be useless, as when the obligor has rendered it beyond his power to perform.

In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a proper
manner with what is incumbent upon him. From the moment one of the parties fulfills his obligation, delay by the other
begins. (Emphasis supplied)

There are four instances when demand is not necessary to constitute the debtor in default: (1) when there is an express
stipulation to that effect; (2) where the law so provides; (3) when the period is the controlling motive or the principal
inducement for the creation of the obligation; and (4) where demand would be useless. In the first two paragraphs, it is
not sufficient that the law or obligation fixes a date for performance; it must further state expressly that after the period
lapses, default will commence.

We refer to the clause in the Promissory Note containing the stipulation of interest:

It is agreed and understood that failure on my part to pay the amount of (P120,000.00) One Hundred Twenty Thousand
Pesos on December 31, 1995. (sic) I agree to pay the sum equivalent to FIVE PERCENT (5%) interest monthly from the
date of default until the entire obligation is fully paid for.

which expressly requires the debtor (Rivera) to pay a 5% monthly interest from the date of default until the entire
obligation is fully paid for. The parties evidently agreed that the maturity of the obligation at a date certain, 31 December
1995, will give rise to the obligation to pay interest. The Promissory Note expressly provided that after 31 December
1995, default commences and the stipulation on payment of interest starts.

The date of default under the Promissory Note is 1 January 1996, the day following 31 December 1995, the due date of
the obligation. On that date, Rivera became liable for the stipulated interest which the Promissory Note says is equivalent
to 5% a month. In sum, until 31 December 1995, demand was not necessary before Rivera could be held liable for the
principal amount of P120,000.00. Thereafter, on 1 January 1996, upon default, Rivera became liable to pay the Spouses
Chua damages, in the form of stipulated interest.

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 thereto, 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. (Emphasis supplied)

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 Promissory Note provides for
an indemnity for damages upon default of Rivera which is the payment of a 5% monthly interest from the date of default.

We do not consider the stipulation on payment of interest in this case as a penal clause although Rivera, as obligor,
assumed to pay additional 5% monthly interest on the principal amount of P120,000.00 upon default.
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.

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.

In high relief, the stipulation in the Promissory Note is designated 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 P120,000.00. The measure of damages for the Riveras delay is limited to the interest stipulated in the Promissory
Note. In apt instances, in default of stipulation, the interest is that provided by law.

In this instance, the parties stipulated that in case of default, Rivera will pay interest at the rate of 5% a month or
60% per annum.

The appellate court found the 5% a month or 60% per annum interest rate, on top of the legal interest and attorneys
fees, steep, tantamount to it being illegal, iniquitous and unconscionable.

Significantly, the issue on payment of interest has been squarely disposed of in G.R. No. 184472 denying the petition of
the Spouses Chua for failure to sufficiently show any reversible error in the ruling of the appellate court, specifically the
reduction of the interest rate imposed on Riveras indebtedness under the Promissory Note. Ultimately, the denial of the
petition in G.R. No. 184472 is res judicata in its concept of bar by prior judgment on whether the Court of Appeals
correctly reduced the interest rate stipulated in the Promissory Note.

In this case, the petitions in G.R. Nos. 184458 and 184472 involve an identity of parties and subject matter raising
specifically errors in the Decision of the Court of Appeals. Where the Court of Appeals disposition on the propriety of the
reduction of the interest rate was raised by the Spouses Chua in G.R. No. 184472, our ruling thereon affirming the Court of
Appeals is a bar by prior judgment.

At the time interest accrued from 1 January 1996, the date of default under the Promissory Note, the then prevailing rate
of legal interest was 12% per annum under Central Bank (CB) Circular No. 416 in cases involving the loan or forbearance
of money. Thus, the legal interest accruing from the Promissory Note is 12% per annum from the date of default on 1
January 1996.

However, the 12% per annum rate of legal interest is only applicable until 30 June 2013, before the advent and effectivity
of Bangko Sentral ng Pilipinas (BSP) Circular No. 799, Series of 2013 reducing the rate of legal interest to 6% per
annum. Pursuant to our ruling in Nacar v. Gallery Frames, BSP Circular No. 799 is prospectively applied from 1 July 2013.
In short, the applicable rate of legal interest from 1 January 1996, the date when Rivera defaulted, to date when this
Decision becomes final and executor is divided into two periods reflecting two rates of legal interest: (1) 12% per
annum from 1 January 1996 to 30 June 2013; and (2) 6% per annum FROM 1 July 2013 to date when this Decision
becomes final and executory.

As for the legal interest accruing from 11 June 1999, when judicial demand was made, to the date when this Decision
becomes final and executory, such is likewise divided into two periods: (1) 12% per annum from 11 June 1999, the date of
judicial demand to 30 June 2013; and (2) 6% per annum from 1 July 2013 to date when this Decision becomes final and
executor.31 We base this imposition of interest on interest due earning legal interest on Article 2212 of the Civil Code
which provides that interest due shall earn legal interest from the time it is judicially demanded, although the obligation
may be silent on this point.

From the time of judicial demand, 11 June 1999, the actual amount owed by Rivera to the Spouses Chua could already be
determined with reasonable certainty given the wording of the Promissory Note.

We cite our recent ruling in Nacar v. Gallery Frames:

When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money,
the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn
legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 6% per
annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of
Article 1169 of the Civil Code.

When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages
awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be
adjudged on unliquidated claims or damages, except when or until the demand can be established with reasonable
certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the
time the claim is made judicially or extrajudicially (Art. 1169, Civil Code), but when such certainty cannot be so
reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of
the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained).
The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged.

When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest,
whether the case falls under paragraph 1 or paragraph 2, above, shall be 6% per annum from such finality until its
satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.

And, in addition to the above, judgments that have become final and executory prior to July 1, 2013, shall not be
disturbed and shall continue to be implemented applying the rate of interest fixed therein. (Emphasis supplied)

E. RAZON, INC. and ENRIQUE RAZON, petitioners, vs. PHILIPPINE PORTS AUTHORITY, PRIMITIVO S. SOLIS, JR.
and VICENTE T. SUAZO, JR., respondents. MARINA PORT SERVICES, INC., intervenor. | FERNAN, J.:

G.R. No. 75197

Facts: Petitioner E. Razon, Inc., also known as Metro Port Service, Inc. (MPSI), is a Philippine corporation organized on June
21, 1962 for the main purpose of bidding for the contract to manage all the piers in South Harbor, Manila. Co-petitioner
Enrique Razon was allegedly the 100% equity owner, having paid for the subscriptions of the other incorporators who
were mere nominees.

After a public bidding, petitioner ERI was awarded in 1966 a five-year contract to operate the arrastre service for Piers 3
and 5 at the South Harbor. Thereafter, it allegedly invested millions of pesos in acquiring port-handling equipment upon
assurance from the government that its contract would be renewed without public bidding. Thus, when the Bureau of
Customs informed petitioner ERI in 1971 of its decision to call for a new bidding and accordingly issued an invitation to bid
for the operation of the arrastre service for any and all piers in South Harbor, including Piers 3 and 5, petitioner ERI
instituted a special civil action for certiorari, prohibition, mandamus and injunction with preliminary and mandatory
injunction and/or restraining order before the then Court of First Instance of Manila against the Secretary of Finance,
Commissioner of Customs and members of the Bidding Committee to enjoin them from proceeding with the bidding and
to compel them to renew petitioner ERI's contract. The Court of First Instance, presided by Judge Juan Bocar, issued the
writ prayed for, whereupon then Secretary of Finance Cesar Virata elevated the case before this Court in G.R. No. 33426
entitled, "Cesar Virata, et al. vs. Hon. Juan Bocar, et al.

In a resolution dated May 13, 1971, this Court ordered the holding of a public bidding for all the piers, conditioned that no
final award should be given until further orders from the court.

An actual bidding was conducted for all the piers, with ERI emerging as the Bidding Committee's unanimous choice. The
selection was confirmed by this Court in Virata v. Bocar, 50 SCRA 468,489, thus:

IN VIEW OF ALL THE FOREGOING, herein petitioners are hereby directed to make the final award in favor of E. Razon,
Inc., as the best and most advantageous bidder of the contract to operate the arrastre service for all the piers in the
Manila South Harbor; ...

The management contract covering all the piers in the South Harbor was executed between petitioner ERI and the
government on January 18, 1974 for a term of five years effective January 1, 1974, renewable for another five years. In
August of the same year, petitioner ERI increased its capitalization from P2 Million to 20 Million.

In 1977 and early 1978, petitioner Razon allegedly initiated negotiations with respondent PPA either for the renewal of the
management contract or for an immediate public bidding, if necessary, but respondent PPA, which was represented in the
negotiations by the then General Manager, co-respondent Primitivo Solis, Jr., did not act on the request, reportedly due to
the unconcealed desire of people, close to then President Marcos to take over petitioner ERI .
Thereafter, in late 1978, petitioner Razon, who was then owner of about 93% of ERI's equity was allegedly coerced by
emissaries from then President Marcos into endorsing in blank ERI's stock certificates covering 60% equity. It is further
alleged that Razon did not receive a single centavo for these shares of stock as the checks purportedly payable to him as
payment of the shares were immediately endorsed by Razon to and taken by unnamed parties close to President Marcos.
The party close to President Marcos was later Identified as Alfredo "Bejo" Romualdez, the president's brother-in-law.

After the transfer, a new group reportedly took over the active control and management of petitioner company. Petitioner
Razon, was, however, retained as President, allegedly because of his acceptability and rapport with the shipping lines,
customs brokers and the unions, but without real powers as ERI's By-Laws were amended to make the office of the
executive vice-president more powerful than the president's which was vested with mere recommendatory functions.
Petitioner ERI's corporate name was also changed to Metro Port Service, Inc. (MPSI).

On December 31, 1978, the contract of petitioner ERI/MPSI expired. It was extended in 1979 to June 31, 1980, during
which month respondent PPA executed a new contract in favor of ERI for a term of eight (8) years, beginning July 1, 1980.

It is alleged that on February 26, 1986, after the ouster of the former government administration, petitioner Razon went to
South Harbor and took active control, supervision and management of MPSI. He called a special stockholders' meeting
whereby he was able to re-organize the Board of Directors by seating therein his own nominees and to restore the powers
of the President as well as the company's name through corresponding amendments of the By-Laws. He was likewise able
to convince the nominee company, Maximum Trading and Industrial Corporation (MATICO), in whose name the 60% equity
appeared to have been registered, to return the same to him under a "Deed of Reconveyance with Irrevocable Power of
Attorney" (Annex "B", Petition, pp. 54-55, Rollo). He caused the books of accounts to be audited by the accounting firm of
Sycip, Gorres and Velayo and exerted utmost efforts to improve service and revenue as well as to restore harmonious
relations with the unions. He further undertook ways and means to restore to working condition the cargo-handling
equipment in order to check delay in the delivery of cargoes, which efforts were acknowledged by respondent PPA in a
letter dated July 9, 1986 (Annex "C", Petition, p. 56, Rollo).

On July 18, 1986, some truckers staged a demonstration at the main gate of South Harbor to complain about Razon's
management of the arrastre operations. The demonstration lasted until noon of the same day.

At about 5:30 in the afternoon of July 18, 1986, a Friday, respondent PPA sent to petitioner ERI/MPSI a letter signed by a
co-respondent Solis, demanding explanation and reply to the complaints from shippers and others enumerated in said
letter and to the various violations of the management contract not later than 9:00 A.M. of the following day, July 19,
1986, (Annex "D", Petition, pp. 57-60, Rollo). In a television newscast in the evening of July 18, 1986, then Minister of
Transportation and Communications Hernando Perez was quoted to have given respondent PPA until Wednesday of the
following week, July 23, 1986, within which to investigate the complaints against MPSI and to submit its findings and
recommendations.

Apparently relying on the time frame announced by Minister Perez and finding the deadline set by respondent PPA in its
letter of July 18, 1986 too short, apart from the fact that it had no staff, it being a week-end, petitioner ERI prepared a
letter dated July 19, 1986, addressed to respondent PPA, stating that it would "reply early next week" (Annex "F", p. 61,
Rollo). It appears that this letter was never delivered to respondent PPA because there was allegedly no one in its office to
receive the same.

On the same day, July 19, 1986, respondent PPA informed petitioner ERI/MPSI thru a letter of even date that it was
canceling the management contract and taking over the cargo handling operations as well as the equipment of petitioner
"effective immediately" (Annex "G", Petition, p. 62, Rollo . On July 21, 1986, respondent PPA appointed Marina Port
Services, Inc. as interim operator of the arrastre service at South Harbor.

Meanwhile, at 10:05 A.M. of July 21, 1986, herein petitioners, thru counsels Atty. Rafael T. Durian and Florentino Tuason, Jr.
of Cruz, Agabin, Atienza and Alday Law firm, instituted the instant petition for certiorari with prayer for the issuance of a
preliminary restraining order and/or injunction. Less than an hour later or at 11:00 A.M., they filed a similar complaint
before the Regional Trial Court of Manila, which issued a temporary restraining order against respondent PPA at 3:00 P.M.
of the same day. Earlier, at 11:58 A.M., petitioners filed a "Withdrawal of Petition" with this Court. The "Withdrawal of
Petition" was vigorously opposed by the Solicitor-General in behalf of respondents who denounced petitioners' filing of the
two petitions in this Court and in the Regional Trial Court as proscribed "forum-shopping and double-dealing."

Pending action by the court on the "Withdrawal of Petition," petitioners filed a supplemental complaint with the RTC of
Manila to implead Manila Port Services, Inc. as correspondent therein. They likewise filed motu proprio a comment on the
Opposition to the Withdrawal of Petition, stating in the main that they intended to withdraw the instant petition before
filing the petition in the RTC but that there was a miscommunication between counsels and their messenger; that there
was no intention to forum-shop and that they deeply apologize for the delayed filing of the "Withdrawal of Petition. "
Finding the explanation proferred by petitioners to be "feeble and untenable", the Court resolved on July 31, 1986 to:

... a) DENY the motion to withdraw the instant petition; b) summarily DISMISS both the petition at bar as well as the
complaint in Civil Case No. 86-36754 of the Regional Trial Court of Manila and to SET ASIDE effective immediately the
temporary restraining order and any other orders or processes issued in the latter case as void and of no effect; and c)
SUSPEND Atty. Rafael T. Durian and Florentino Tuason, Jr. from the practice of law effective immediately and until further
orders. Said Attys. Durian and Tuason Jr. are hereby REQUIRED to show cause within ten (10) days from notice hereof why
the suspension should not stand, why no disbarment proceedings should be instituted against them and why no other
liability should attach to them by reason of their above-described acts of deceit, malpractice and gross misconduct (p.
122, Rollo).

On August 6, 1986, petitioners, assisted by Atty. Angel C. Cruz of the same Cruz, Agabin, Atienza and Alday Law Firm, filed
a Manifestation that they were abiding by the resolution of July 31, 1986 but "with express reservation to their filing a new
ordinary civil action before the competent RTC and the legal remedy to be availed of by Attys. Durian and Tuason, Jr. on
the matter of the disciplinary action taken against them." (pp. 147-148, Rollo).

On the same day, petitioners filed a third Identical complaint before the RTC of Manila, docketed as Civil Case No.
8637006. Upon motion of the Solicitor-General, this Court issued on August 14, 1986 a temporary restraining order
enjoining judge Alfin S. Vicencio, RTC, Branch 50, Manila from acting on Civil Case No. 86-37006 and the petitioners from
instituting further action elsewhere without leave of court. The Cruz, Agabin, Atienza and Alday Law Firm and Judge
Vicencio were likewise required to show cause why they should not be severally held in contempt of court and/or be held
administratively liable for malpractice (p. 233, Rollo). Both complied with this resolution, as did Attys. Durian and Tuason,
Jr. with the resolution of July 31, 1986 by filing a "Compliance with Urgent Plea for Immediate Lifting of Suspension" (p.
150, Rollo).

Meanwhile, on August 18, 1986, petitioners thru new counsel N. J. Quisumbing and Associates, filed a motion for
reconsideration of the resolution of August 14, 1986 and for leave to file suit whether in the Supreme Court or any court
for judicial review of PPA's cancellation of Petitioner ERIs management contract. This was again opposed by the Solicitor-
General.

On September 13, 1986, Marina Port Services, Inc. filed a motion for intervention, which was in turn opposed by
Petitioners.

On October 30, 1986, the Court resolved to: a) make permanent the temporary restraining order issued on August 14,
1986 inasmuch as this Court has resolved to entertain the instant petition to accord petitioners access to the courts: b)
allow the intervention of Marina Port Services, Inc. in the present case; and c) to lift the suspension of Attys. Rafael T.
Durian and Florentino A. Tuason, Jr. effective immediately. (p. 435-A, Rollo).

Petitioners contend that they were denied their right to due process when respondent PPA cancelled the Management
Contract without prior hearing and investigation. In support of this contention, they advance the theory that the
management contract is not an ordinary commercial contract, but more in the nature of a franchise or license, which, in
this case, has been impressed with property rights by reason of the length of time petitioners have been enjoying it, and
hence cannot be cancelled without according petitioners the opportunity to be heard on the alleged complaints and
contract violations. As a corollary, petitioners further assert that respondent PPA was not exercising proprietary functions,
i.e., as a party to a contract exercising its right to rescission or resolution when it cancelled petitioners' contract, but as a
regulatory body exercising adjudicatory powers in finding and concluding that petitioner ERI/MPSI had violated the
management contract. Hence, their contention that since said findings and conclusions were reached in violation of
petitioners' right to due process, the resultant cancellation is null and void.

Respondents PPA, et al. and intervenor Marina, on the other hand, submit in their joint memorandum the following
arguments:

1. Contrary to petitioners' assertion, the cancelled arrastre contract was previously awarded, not to petitioner Enrique
Razon or his old company, E. Razon, Inc., but to Metro Port Services, Inc. that President Marcos' brother-in-law, Alfredo
'Bejo" Romualdez, admittedly controlled.

2. Since the cancelled contract was the fruit of corruption in the Marcos government, it is a nullity and petitioners cannot
sue for its enforcement;

3. With his admission that he agreed to front for Romualdez with respect to the latter's illegal dealings with the Philippine
Port Authority, Razon forfeits his claim as having been a victim of the Marcos rule;
4. Besides, since petitioners themselves admit the existence of sufficient grounds for PPA's cancellation of Metro Port's
arrastre contract, they cannot complain;

5. Under the circumstances, respondent PPA was not required to hear petitioners prior to its cancellation of the contract;

6. Given the validity of PPA's cancellation of that contract and its takeover of the arrastre operations, the designation of
respondent Marina Port Services, Inc. to assist PPA in the operations is not for petitioner to question; and,

7. At all events, respondent MARINA is qualified to handle the limited task PPA assigned to it. (pp. 546-547, Rollo)

The Management Contract under consideration was executed by and between petitioner E. Razon, Inc. represented by its
President, herein co-petitioner Enrique Razon, and respondent PPA, represented by its then General Manager, E.S. Baclig,
Jr. on June 27, 1980 (Annex "A", Petition, p. 18, Rollo). By petitioners' own admission, at the time of the execution of the
Management Contract, petitioner E. Razon, Inc. later known as Metro Port Services, Inc. was controlled by Alfredo "Bejo"
Romualdez, brother-in-law of deposed President Marcos. Under Section 5 of the Anti-Graft and Corrupt Practices Act (R.A.
No. 3019) Romualdez, by reason of his relationship with the then President of the Philippines, was prohibited from
intervening, directly or indirectly, in any transaction or business with the government. Thus, the Management Contract,
entered into by E. Razon, Inc., ostensibly owned by petitioner Enrique Razon, but in fact controlled by Alfredo Romualdez
as 60% equity owner thereof, is null and void and of no effect, being one expressly prohibited by law (par. [7], Art. 1409,
Civil Code of the Philippines). Furthermore, as will be shown later, the Management Contract is the direct result of a
previous illegal contract and, therefore, is itself null and void under Article 1422 of the Civil Code.

Petitioners attempt to evade the consequence of the Romualdez connection by alleging that the 60% equity of petitioner
E. Razon, Inc. was obtained thru force and duress and without any monetary consideration whatsoever. Otherwise stated,
the transfer of the shares of stock to persons close to President Marcos, later disclosed to be Alfredo "Bejo" Romualdez
was, at the very least, voidable for lack of consent, or altogether void for being absolutely fictitious or simulated.

Verily, the transfer of the shares of stock of petitioner E. Razon, Inc. representing 60% equity to persons fronting for
Alfredo "Bejo" Romualdez was null and void. The invalidity springs not from vitiated consent nor absolute want of
monetary consideration, but for its having had an unlawful cause that of obtaining a government contract in violation
of law. While the general rule is that the causa of the contract must not be confused with the motives of the parties, this
case squarely fits into the exception that the motive may be regarded as causa when it predetermines the purpose of the
contract. (Liguez v. Court of Appeals, 102 Phil. 577). On the part of Romualdez, the motive was to be able to contract with
the government which he was then prohibited by law from doing, and on petitioner Razon's part, to be able to renew his
management contract. For it is scarcely disputable that Enrique Razon would not have transferred said shares of stock to
Romualdez without an assurance from the latter that he would be unduly favored with a renewal of the Management
Contract. Thus, it came to pass that by transferring 60% of the shares in his company to Romualdez, petitioner Enrique
Razon was able to secure an eight-year contract with respondent PPA and for six years before its cancellation benefit from
the proceeds thereof.

Petitioners' attempt to dissociate or divorce themselves from the illegality of the transfer and, consequently, of the
management contract, as well as their claim of innocence or being a victim of the Marcos regime must fail for the "view
has been taken ... that a party is a participant in the unlawful intention where we knows and intends that the subject
matter will be u for an illegal purpose and there would seem to be no doubt that one may be deemed to be a participant
in the other's unlawful design if he shares in the benefits of the violation of law. However, whether he is to derive any
benefit from the unlawful use of the subject matter is not the sole test. A test which has been said to be more confortable
to sound morality is whether he intends to aid the other in the unlawful object. He may be deemed to be a participant in
the unlawful purpose if, with knowledge thereof, he does anything which facilitates the carrying out of such purpose." (17
Am Jur 2d 515-516).

The transfer of the control of petitioner E. Razon, Inc. from petitioner Enrique Razon to Alfredo "Bejo" Romualdez, which
We have resolved to be null and void, served as the direct link to petitioner company's obtaining the Management
Contract. Being the direct consequence and result of a previous illegal contract, the Management Contract itself is null
and void as provided in Article 1422 of the Civil Code.

Elementary in the law of contracts is the principle that no judicial action is necessary for the annulment of a void contract.
Any such action would be merely declaratory. (Tolentino, Civil Code of the Philippines, Vol. IV, 1973 ed., p. 594). Thus, it
was well within the rights of respondent PPA to unilaterally cancel and treat as avoided the Management Contract and no
arbitrariness may be attached to its exercise of this right.

Besides, even if the Management Contract were valid and subsisting, the violations * of the contract committed by its
predecessor, Metro Port Services, Inc. which, except for the bare allegation that these were untrue, were not specifically
denied by petitioners, but on the contrary, unwittingly admitted with the allegation that Metro Port Services Inc.
mismanaged the arrastre operations, were grave and serious to justify immediate termination of the contract.

Respondent PPA is the government agency charged with the specific duty of supervising, controlling, regulating,
constructing, maintaining, operating and providing such facilities or services as are necessary in the ports vested in, or
belonging to it (Sec. 6, [ii], P.D. 857). It has the expertise to determine whether or not Marina Port Services Inc. has the
capability of discharging the tasks assigned to it as interim operator of arrastre service in South Harbor. Except in cases of
clear grave abuse of discretion, which has not been shown in the instant petition, the Court will not disturb such judgment
and substitute its own. (Meralco Securities Corp. v. Savellano, 117 SCRA 804; Anglo-Fil Trading Corp. v. Lazaro, 124 SCRA
494.)

WHEREFORE, the instant petition is hereby DISMISSED. Costs against petitioners.

SO ORDERED.

Teehankee, C.J., Yap, Narvasa, Melencio-Herrera, Gutierrez, Jr., Cruz, Paras, Feliciano, Gancayco, Padilla, Bidin,
Sarmiento, ** and Cortes, JJ., concur.

G.R. No. 107112 February 24, 1994

NAGA TELEPHONE CO., INC. (NATELCO) AND LUCIANO M. MAGGAY, petitioners,

vs.
THE COURT OF APPEALS AND CAMARINES SUR II ELECTRIC COOPERATIVE, INC. (CASURECO II), respondents.

Ernesto P. Pangalangan for petitioners.

Luis General, Jr. for private respondent.

NOCON, J.:

The case of Reyes v. Caltex (Philippines), Inc. 1 enunciated the doctrine that where a person by his contract charges
himself with an obligation possible to be performed, he must perform it, unless its performance is rendered impossible by
the act of God, by the law, or by the other party, it being the rule that in case the party desires to be excused from
performance in the event of contingencies arising thereto, it is his duty to provide the basis therefor in his contract.

With the enactment of the New Civil Code, a new provision was included therein, namely, Article 1267 which provides:

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

In the report of the Code Commission, the rationale behind this innovation was explained, thus:

The general rule is that impossibility of performance releases the obligor. However, it is submitted that when the service
has become so difficult as to be manifestly beyond the contemplation of the parties, the court should be authorized to
release the obligor in whole or in part. The intention of the parties should govern and if it appears that the service turns
out to be so difficult as to have been beyond their contemplation, it would be doing violence to that intention to hold their
contemplation, it would be doing violence to that intention to hold the obligor still responsible. 2

In other words, fair and square consideration underscores the legal precept therein.

Naga Telephone Co., Inc. remonstrates mainly against the application by the Court of Appeals of Article 1267 in favor of
Camarines Sur II Electric Cooperative, Inc. in the case before us. Stated differently, the former insists that the complaint
should have been dismissed for failure to state a cause of action.

The antecedent facts, as narrated by respondent Court of Appeals are, as follows:

Petitioner Naga Telephone Co., Inc. (NATELCO) is a telephone company rendering local as well as long distance telephone
service in Naga City while private respondent Camarines Sur II Electric Cooperative, Inc. (CASURECO II) is a private
corporation established for the purpose of operating an electric power service in the same city.
On November 1, 1977, the parties entered into a contract (Exh. "A") for the use by petitioners 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 in the following places:

(a) 3 units The Main Office of (private respondent);

(b) 2 Units The Warehouse of (private respondent);

(c) 1 Unit The Sub-Station of (private respondent) at Concepcion Pequea;

(d) 1 Unit The Residence of (private respondent's) President;

(e) 1 Unit The Residence of (private respondent's) Acting General Manager; &

(f) 2 Units To be determined by the General Manager. 3

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; (sic)4

It was prepared by or with the assistance of the other petitioner, Atty. Luciano M. Maggay, then a member of the Board of
Directors of private respondent and at the same time the legal counsel of petitioner.

After the contract had been enforced for over ten (10) years, private respondent filed on January 2, 1989 with the
Regional Trial Court of Naga City (Br. 28) C.C. No. 89-1642 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.

As second cause of action, private respondent alleged that starting with the year 1981, petitioners have used 319 posts in
the towns of Pili, Canaman, Magarao and Milaor, Camarines Sur, all outside Naga City, without any contract with it; that at
the rate of P10.00 per post, petitioners should pay private respondent for the use thereof the total amount of P267,960.00
from 1981 up to the filing of its complaint; and that petitioners had refused to pay private respondent said amount
despite demands.

And as third cause of action, private respondent complained about the poor servicing by petitioners of the ten (10)
telephone units which had caused it great inconvenience and damages to the tune of not less than P100,000.00

In petitioners' answer to the first cause of action, they averred that it should be dismissed because (1) it does not
sufficiently state a cause of action for reformation of contract; (2) it is barred by prescription, the same having been filed
more than ten (10) years after the execution of the contract; and (3) it is barred by estoppel, since private respondent
seeks to enforce the contract in the same action. Petitioners further alleged that their utilization of private respondent's
posts could not have caused their deterioration because they have already been in use for eleven (11) years; and that the
value of their expenses for the ten (10) telephone lines long enjoyed by private respondent free of charge are far in
excess of the amounts claimed by the latter for the use of the posts, so that if there was any inequity, it was suffered by
them.

Regarding the second cause of action, petitioners claimed that private respondent had asked for telephone lines in areas
outside Naga City for which its posts were used by them; and that if petitioners had refused to comply with private
respondent's demands for payment for the use of the posts outside Naga City, it was probably because what is due to
them from private respondent is more than its claim against them.

And with respect to the third cause of action, petitioners claimed, inter alia, that their telephone service had been
categorized by the National Telecommunication Corporation (NTC) as "very high" and of "superior quality."

During the trial, private respondent presented the following witnesses:

(1) Dioscoro Ragragio, one of the two officials who signed the contract in its behalf, declared that it was petitioner Maggay
who prepared the contract; that the understanding between private respondent and petitioners was that the latter would
only use the posts in Naga City because at that time, petitioners' capability was very limited and they had no expectation
of expansion because of legal squabbles within the company; that private respondent agreed to allow petitioners to use
its posts in Naga City because there were many subscribers therein who could not be served by them because of lack of
facilities; and that while the telephone lines strung to the posts were very light in 1977, said posts have become heavily
loaded in 1989.

(2) Engr. Antonio Borja, Chief of private respondent's Line Operation and Maintenance Department, declared that the
posts being used by petitioners totalled 1,403 as of April 17, 1989, 192 of which were in the towns of Pili, Canaman, and
Magarao, all outside Naga City (Exhs. "B" and "B-1"); that petitioners' cables strung to the posts in 1989 are much bigger
than those in November, 1977; that in 1987, almost 100 posts were destroyed by typhoon Sisang: around 20 posts were
located between Naga City and the town of Pili while the posts in barangay Concepcion, Naga City were broken at the
middle which had been bored by petitioner's linemen to enable them to string bigger telephone lines; that while the cost
per post in 1977 was only from P700.00 to P1,000.00, their costs in 1989 went up from P1,500.00 to P2,000.00,
depending on the size; that some lines that were strung to the posts did not follow the minimum vertical clearance
required by the National Building Code, so that there were cases in 1988 where, because of the low clearance of the
cables, passing trucks would accidentally touch said cables causing the posts to fall and resulting in brown-outs until the
electric lines were repaired.

(3) Dario Bernardez, Project Supervisor and Acting General Manager of private respondent and Manager of Region V of
NEA, declared that according to NEA guidelines in 1985 (Exh. "C"), for the use by private telephone systems of electric
cooperatives' posts, they should pay a minimum monthly rental of P4.00 per post, and considering the escalation of prices
since 1985, electric cooperatives have been charging from P10.00 to P15.00 per post, which is what petitioners should
pay for the use of the posts.

(4) Engineer Antonio Macandog, Department Head of the Office of Services of private respondent, testified on the poor
service rendered by petitioner's telephone lines, like the telephone in their Complaints Section which was usually out of
order such that they could not respond to the calls of their customers. In case of disruption of their telephone lines, it
would take two to three hours for petitioners to reactivate them notwithstanding their calls on the emergency line.

(5) Finally, Atty. Luis General, Jr., private respondent's counsel, testified that the Board of Directors asked him to study the
contract sometime during the latter part of 1982 or in 1983, as it had appeared very disadvantageous to private
respondent. Notwithstanding his recommendation for the filing of a court action to reform the contract, the former general
managers of private respondent wanted to adopt a soft approach with petitioners about the matter until the term of
General Manager Henry Pascual who, after failing to settle the matter amicably with petitioners, finally agreed for him to
file the present action for reformation of contract.

On the other hand, petitioner Maggay testified to the following effect:

(1) It is true that he was a member of the Board of Directors of private respondent and at the same time the lawyer of
petitioner when the contract was executed, but Atty. Gaudioso Tena, who was also a member of the Board of Directors of
private respondent, was the one who saw to it that the contract was fair to both parties.

(2) With regard to the first cause of action:

(a) Private respondent has the right under the contract to use ten (10) telephone units of petitioners for as long as it
wishes without paying anything therefor except for long distance calls through PLDT out of which the latter get only 10%
of the charges.

(b) In most cases, only drop wires and not telephone cables have been strung to the posts, which posts have remained
erect up to the present;

(c) Petitioner's linemen have strung only small messenger wires to many of the posts and they need only small holes to
pass through; and

(d) Documents existing in the NTC show that the stringing of petitioners' cables in Naga City are according to standard
and comparable to those of PLDT. The accidents mentioned by private respondent involved trucks that were either
overloaded or had loads that protruded upwards, causing them to hit the cables.

(3) Concerning the second cause of action, the intention of the parties when they entered into the contract was that the
coverage thereof would include the whole area serviced by petitioners because at that time, they already had subscribers
outside Naga City. Private respondent, in fact, had asked for telephone connections outside Naga City for its officers and
employees residing there in addition to the ten (10) telephone units mentioned in the contract. Petitioners have not been
charging private respondent for the installation, transfers and re-connections of said telephones so that naturally, they
use the posts for those telephone lines.

(4) With respect to the third cause of action, the NTC has found petitioners' cable installations to be in accordance with
engineering standards and practice and comparable to the best in the country.

On the basis of the foregoing countervailing evidence of the parties, the trial court found, as regards private respondent's
first cause of action, that 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, while private respondent should also be ordered to pay the monthly bills for the use of the
telephones also in Naga City. And taking into consideration the guidelines of the NEA on the rental of posts by telephone
companies and the increase in the costs of such posts, the trial court opined that a monthly rental of P10.00 for each post
of private respondent used by petitioners is reasonable, which rental it should pay from the filing of the complaint in this
case on January 2, 1989. And in like manner, private respondent should pay petitioners from the same date its monthly
bills for the use and transfers of its telephones in Naga City at the same rate that the public are paying.

On private respondent's second cause of action, the trial court found that the contract does not mention anything about
the use by petitioners of private respondent's posts outside Naga City. Therefore, the trial court held that for reason of
equity, the contract should be reformed by including therein the provision that for the use of private respondent's posts
outside Naga City, petitioners should pay a monthly rental of P10.00 per post, the payment to start on the date this case
was filed, or on January 2, 1989, and private respondent should also pay petitioners the monthly dues on its telephone
connections located outside Naga City beginning January, 1989.

And with respect to private respondent's third cause of action, the trial court found the claim not sufficiently proved.

Thus, the following decretal portion of the trial court's decision dated July 20, 1990:

WHEREFORE, in view of all the foregoing, decision is hereby rendered ordering the reformation of the agreement (Exh. A);
ordering the defendants to pay plaintiff's electric poles in Naga City and in the towns of Milaor, Canaman, Magarao and
Pili, Camarines Sur and in other places where defendant NATELCO uses plaintiff's electric poles, the sum of TEN (P10.00)
PESOS per plaintiff's pole, per month beginning January, 1989 and ordering also the plaintiff to pay defendant NATELCO
the monthly dues of all its telephones including those installed at the residence of its officers, namely; Engr. Joventino
Cruz, Engr. Antonio Borja, Engr. Antonio Macandog, Mr. Jesus Opiana and Atty. Luis General, Jr. beginning January, 1989.
Plaintiff's claim for attorney's fees and expenses of litigation and defendants' counterclaim are both hereby ordered
dismissed. Without pronouncement as to costs.

Disagreeing with the foregoing judgment, petitioners appealed to respondent Court of Appeals. In the decision dated May
28, 1992, respondent court affirmed the decision of the trial court, 5 but based on different grounds to wit: (1) that Article
1267 of the New Civil Code is applicable and (2) that the contract was subject to a potestative condition which rendered
said condition void. The motion for reconsideration was denied in the resolution dated September 10, 1992. 6Hence, the
present petition.

Petitioners assign the following pertinent errors committed by respondent court:

1) in making a contract for the parties by invoking Article 1267 of the New Civil Code;

2) in ruling that prescription of the action for reformation of the contract in this case commenced from the time it became
disadvantageous to private respondent; and

3) in ruling that the contract was subject to a potestative condition in favor of petitioners.

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.
Instead, the ruling in the case of Occea, et al. v. Jabson, etc., et al., 7 which interpreted the article, should be followed in
resolving this case. Besides, said article was never raised by the parties in their pleadings and was never the subject of
trial and evidence.
In applying Article 1267, respondent court rationalized:

We agree with appellant that in order that an action for reformation of contract would lie and may prosper, there must be
sufficient allegations as well as proof that the contract in question failed to express the true intention of the parties due to
error or mistake, accident, or fraud. Indeed, in embodying the equitable remedy of reformation of instruments in the New
Civil Code, the Code Commission gave its reasons as follows:

Equity dictates the reformation of an instrument in order that the true intention of the contracting parties may be
expressed. The courts by the reformation do not attempt to make a new contract for the parties, but to make the
instrument express their real agreement. The rationale of the doctrine is that it would be unjust and inequitable to allow
the enforcement of a written instrument which does not reflect or disclose the real meeting of the minds of the parties.
The rigor of the legalistic rule that a written instrument should be the final and inflexible criterion and measure of the
rights and obligations of the contracting parties is thus tempered to forestall the effects of mistake, fraud, inequitable
conduct, or accident. (pp. 55-56, Report of Code Commission)

Thus, Articles 1359, 1361, 1362, 1363 and 1364 of the New Civil Code provide in essence that where through mistake or
accident on the part of either or both of the parties or mistake or fraud on the part of the clerk or typist who prepared the
instrument, the true intention of the parties is not expressed therein, then the instrument may be reformed at the
instance of either party if there was mutual mistake on their part, or by the injured party if only he was mistaken.

Here, plaintiff-appellee did not allege in its complaint, nor does its evidence prove, that there was a mistake on its part or
mutual mistake on the part of both parties when they entered into the agreement Exh. "A", and that because of this
mistake, said agreement failed to express their true intention. Rather, plaintiff's evidence shows that said agreement was
prepared by Atty. Luciano Maggay, then a member of plaintiff's Board of Directors and its legal counsel at that time, who
was also the legal counsel for defendant-appellant, so that as legal counsel for both companies and presumably with the
interests of both companies in mind when he prepared the aforesaid agreement, Atty. Maggay must have considered the
same fair and equitable to both sides, and this was affirmed by the lower court when it found said contract to have been
fair to both parties at the time of its execution. In fact, there were no complaints on the part of both sides at the time of
and after the execution of said contract, and according to 73-year old Justino de Jesus, Vice President and General
manager of appellant at the time who signed the agreement Exh. "A" in its behalf and who was one of the witnesses for
the plaintiff (sic), both parties complied with said contract "from the very beginning" (p. 5, tsn, April 17, 1989).

That the aforesaid contract has become inequitous or unfavorable or disadvantageous to the plaintiff with the expansion
of the business of appellant and the increase in the volume of its subscribers in Naga City and environs through the years,
necessitating the stringing of more and bigger telephone cable wires by appellant to plaintiff's electric posts without a
corresponding increase in the ten (10) telephone connections given by appellant to plaintiff free of charge in the
agreement Exh. "A" as consideration for its use of the latter's electric posts in Naga City, appear, however, undisputed
from the totality of the evidence on record and the lower court so found. And it was for this reason that in the later (sic)
part of 1982 or 1983 (or five or six years after the subject agreement was entered into by the parties), plaintiff's Board of
Directors already asked Atty. Luis General who had become their legal counsel in 1982, to study said agreement which
they believed had become disadvantageous to their company and to make the proper recommendation, which study Atty.
General did, and thereafter, he already recommended to the Board the filing of a court action to reform said contract, but
no action was taken on Atty. General's recommendation because the former general managers of plaintiff wanted to adopt
a soft approach in discussing the matter with appellant, until, during the term of General Manager Henry Pascual, the
latter, after failing to settle the problem with Atty. Luciano Maggay who had become the president and general manager
of appellant, already agreed for Atty. General's filing of the present action. The fact that said contract has become
inequitous or disadvantageous to plaintiff as the years went by did not, however, give plaintiff a cause of action for
reformation of said contract, for the reasons already pointed out earlier. But this does not mean that plaintiff is completely
without a remedy, for we believe that the allegations of its complaint herein and the evidence it has presented sufficiently
make out a cause of action under Art. 1267 of the New Civil Code for its release from the agreement in question.

xxx xxx xxx

The understanding of the parties when they entered into the Agreement Exh. "A" on November 1, 1977 and the prevailing
circumstances and conditions at the time, were described by Dioscoro Ragragio, the President of plaintiff in 1977 and one
of its two officials who signed said agreement in its behalf, as follows:

Our understanding at that time is that we will allow NATELCO to utilize the posts of CASURECO II only in the City of Naga
because at that time the capability of NATELCO was very limited, as a matter of fact we do [sic] not expect to be able to
expand because of the legal squabbles going on in the NATELCO. So, even at that time there were so many subscribers in
Naga City that cannot be served by the NATELCO, so as a mater of public service we allowed them to sue (sic) our posts
within the Naga City. (p. 8, tsn April 3, 1989)
Ragragio also declared that while the telephone wires strung to the electric posts of plaintiff were very light and that very
few telephone lines were attached to the posts of CASURECO II in 1977, said posts have become "heavily loaded" in 1989
(tsn, id.).

In truth, as also correctly found by the lower court, despite the increase in the volume of appellant's subscribers and the
corresponding increase in the telephone cables and wires strung by it to plaintiff's electric posts in Naga City for the more
10 years that the agreement Exh. "A" of the parties has been in effect, there has been no corresponding increase in the
ten (10) telephone units connected by appellant free of charge to plaintiff's offices and other places chosen by plaintiff's
general manager which was the only consideration provided for in said agreement for appellant's use of plaintiffs electric
posts. Not only that, appellant even started using plaintiff's electric posts outside Naga City although this was not
provided for in the agreement Exh. "A" as it extended and expanded its telephone services to towns outside said city.
Hence, while very few of plaintiff's electric posts were being used by appellant in 1977 and they were all in the City of
Naga, the number of plaintiff's electric posts that appellant was using in 1989 had jumped to 1,403,192 of which are
outside Naga City (Exh. "B"). Add to this the destruction of some of plaintiff's poles during typhoons like the strong
typhoon Sisang in 1987 because of the heavy telephone cables attached thereto, and the escalation of the costs of
electric poles from 1977 to 1989, and the conclusion is indeed ineluctable that the agreement Exh. "A" has already
become too one-sided in favor of appellant to the great disadvantage of plaintiff, in short, the continued enforcement of
said contract has manifestly gone far beyond the contemplation of plaintiff, so much so that it should now be released
therefrom under Art. 1267 of the New Civil Code to avoid appellant's unjust enrichment at its (plaintiff's) expense. As
stated by Tolentino in his commentaries on the Civil Code citing foreign civilist Ruggiero, "equity demands a certain
economic equilibrium between the prestation and the counter-prestation, and does not permit the unlimited
impoverishment of one party for the benefit of the other by the excessive rigidity of the principle of the obligatory force of
contracts (IV Tolentino, Civil Code of the Philippines, 1986 ed.,
pp. 247-248).

We therefore, find nothing wrong with the ruling of the trial court, although based on a different and wrong premise (i.e.,
reformation of contract), that from the date of the filing of this case, appellant must pay for the use of plaintiff's electric
posts in Naga City at the reasonable monthly rental of P10.00 per post, while plaintiff should pay appellant for the
telephones in the same City that it was formerly using free of charge under the terms of the agreement Exh. "A" at the
same rate being paid by the general public. In affirming said ruling, we are not making a new contract for the parties
herein, but we find it necessary to do so in order not to disrupt the basic and essential services being rendered by both
parties herein to the public and to avoid unjust enrichment by appellant at the expense of plaintiff, said arrangement to
continue only until such time as said parties can re-negotiate another agreement over the same
subject-matter covered by the agreement Exh. "A". Once said agreement is reached and executed by the parties, the
aforesaid ruling of the lower court and affirmed by us shall cease to exist and shall be substituted and superseded by their
new agreement. . . .. 8

Article 1267 speaks of "service" which has become so difficult. Taking into consideration the rationale behind this
provision, 9 the term "service" should be understood as referring to the "performance" of the obligation. In the present
case, the obligation of private respondent consists in allowing petitioners 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, 10 Article 1267 states in our law the doctrine of unforseen 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.

In a nutshell, private respondent in the Occea case filed a complaint against petitioner before the trial court praying
for modification of the terms and conditions of the contract that they entered into by fixing the proper shares that should
pertain to them out of the gross proceeds from the sales of subdivided lots. We ordered the dismissal of the complaint
therein for failure to state a sufficient cause of action. We rationalized that the Court of Appeals misapplied Article 1267
because:

. . . respondent's complaint seeks not release from the subdivision contract but that the court "render
judgment modifying the terms and conditions of the contract . . . by fixing the proper shares that should pertain to the
herein parties out of the gross proceeds from the sales of subdivided lots of subject subdivision". The cited article (Article
1267) does not grant the courts (the) authority to remake, modify or revise the contract or to fix the division of shares
between the parties as contractually stipulated with the force of law between the parties, so as to substitute its own terms
for those covenanted by the parties themselves. Respondent's complaint for modification of contract manifestly has no
basis in law and therefore states no cause of action. Under the particular allegations of respondent's complaint and the
circumstances therein averred, the courts cannot even in equity grant the relief sought. 11

The ruling in the Occea case is not applicable because we agree with respondent court that the allegations in private
respondent's complaint and the evidence it has presented sufficiently made out a cause of action under Article 1267. We,
therefore, release the parties from their correlative obligations under the contract. However, our disposition of the present
controversy does not end here. We have to take into account the possible consequences of merely releasing the parties
therefrom: petitioners will remove the telephone wires/cables in the posts of private respondent, resulting in disruption of
their service to the public; while private respondent, in consonance with the contract 12 will return all the telephone units
to petitioners, causing prejudice to its business. We shall not allow such eventuality. Rather, we require, as ordered by the
trial court: 1) petitioners to pay private respondent for the use of its posts in Naga City and in the towns of Milaor,
Canaman, Magarao and Pili, Camarines Sur and in other places where petitioners use private respondent's posts, the sum
of ten (P10.00) pesos per post, per month, beginning January, 1989; and 2) private respondent to pay petitioner the
monthly dues of all its telephones at the same rate being paid by the public beginning January, 1989. The peculiar
circumstances of the present case, as distinguished further from the Occea case, necessitates exercise of our equity
jurisdiction. 13 By way of emphasis, we reiterate the rationalization of respondent court that:

. . . In affirming said ruling, we are not making a new contract for the parties herein, but we find it necessary to do so in
order not to disrupt the basic and essential services being rendered by both parties herein to the public and to avoid
unjust enrichment by appellant at the expense of plaintiff . . . . 14

Petitioners' assertion that Article 1267 was never raised by the parties in their pleadings and was never the subject of trial
and evidence has been passed upon by respondent court in its well reasoned resolution, which we hereunder quote as our
own:

First, we do not agree with defendant-appellant that in applying Art. 1267 of the New Civil Code to this case, we have
changed its theory and decided the same on an issue not invoked by plaintiff in the lower court. For basically, the main
and pivotal issue in this case is whether the continued enforcement of the contract Exh. "A" 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.

It is settled that when the trial court decides a case in favor of a party on a certain ground, the appellant court may
uphold the decision below upon some other point which was ignored or erroneously decided by the trial court (Garcia
Valdez v. Tuazon, 40 Phil. 943; Relativo v. Castro, 76 Phil. 563; Carillo v. Salak de Paz, 18 SCRA 467). Furthermore, the
appellate court has the discretion to consider an unassigned error that is closely related to an error properly assigned
(Paterno v. Jao Yan, 1 SCRA 631; Hernandez v. Andal, 78 Phil. 196). It has also been held that the Supreme Court (and this
Court as well) has the authority to review matters, even if they are not assigned as errors in the appeal, if it is found that
their consideration is necessary in arriving at a just decision of the case (Saura Import & Export Co., Inc. v. Phil.
International Surety Co. and PNB, 8 SCRA 143). For it is the material allegations of fact in the complaint, not the legal
conclusion made therein or the prayer, that determines the relief to which the plaintiff is entitled, and the plaintiff is
entitled to as much relief as the facts warrant although that relief is not specifically prayed for in the complaint (Rosales v.
Reyes and Ordoveza, 25 Phil. 495; Cabigao v. Lim, 50 Phil. 844; Baguioro v. Barrios, 77 Phil. 120). To quote an old but very
illuminating decision of our Supreme Court through the pen of American jurist Adam C. Carson:

"Under our system of pleading it is the duty of the courts to grant the relief to which the parties are shown to be entitled
by the allegations in their pleadings and the facts proven at the trial, and the mere fact that they themselves misconstrue
the legal effect of the facts thus alleged and proven will not prevent the court from placing the just construction thereon
and adjudicating the issues accordingly." (Alzua v. Johnson, 21 Phil. 308)

And in the fairly recent case of Caltex Phil., Inc. v IAC, 176 SCRA 741, the Honorable Supreme Court also held:

We rule that the respondent court did not commit any error in taking cognizance of the aforesaid issues, although not
raised before the trial court. The presence of strong consideration of substantial justice has led this Court to relax the
well-entrenched rule that, except questions on jurisdiction, no question will be entertained on appeal unless it has been
raised in the court below and it is within the issues made by the parties in their pleadings (Cordero v. Cabral, L-36789, July
25, 1983, 123 SCRA 532). . . .

We believe that the above authorities suffice to show that this Court did not err in applying Art. 1267 of the New Civil
Code to this case. Defendant-appellant stresses that the applicability of said provision is a question of fact, and that it
should have been given the opportunity to present evidence on said question. But defendant-appellant cannot honestly
and truthfully claim that it (did) not (have) the opportunity to present evidence on the issue of whether the continued
operation of the contract Exh. "A" has now become too one-sided in its favor and too inequitous, unfair, and
disadvantageous to plaintiff. As held in our decision, the abundant and copious evidence presented by both parties in this
case and summarized in said decision established the following essential and vital facts which led us to apply Art. 1267 of
the New Civil Code to this case:

xxx xxx xxx 15

On the issue of prescription of private respondent's action for reformation of contract, petitioners allege that respondent
court's ruling that the right of action "arose only after said contract had already become disadvantageous and unfair to it
due to subsequent events and conditions, which must be sometime during the latter part of 1982 or in 1983 . . ." 16 is
erroneous. In reformation of contracts, what is reformed is not the contract itself, but the instrument embodying the
contract. It follows that whether the contract is disadvantageous or not is irrelevant to reformation and therefore, cannot
be an element in the determination of the period for prescription of the action to reform.

Article 1144 of the New Civil Code provides, inter alia, that an action upon a written contract must be brought within ten
(10) years from the time the right of action accrues. Clearly, the ten (10) year period is to be reckoned from the time the
right of action accrues which is not necessarily the date of execution of the contract. As correctly ruled by respondent
court, private respondent's right of action arose "sometime during the latter part of 1982 or in 1983 when according to
Atty. Luis General, Jr. . . ., he was asked by (private respondent's) Board of Directors to study said contract as it already
appeared disadvantageous to (private respondent) (p. 31, tsn, May 8, 1989). (Private respondent's) cause of action to ask
for reformation of said contract should thus be considered to have arisen only in 1982 or 1983, and from 1982 to January
2, 1989 when the complaint in this case was filed, ten (10) years had not yet elapsed." 17

Regarding the last issue, petitioners allege that there is nothing purely potestative about the prestations of either party
because petitioner's permission for free use of telephones is not made to depend purely on their will, neither is private
respondent's permission for free use of its posts dependent purely on its will.

Apart from applying Article 1267, respondent court cited another legal remedy available to private respondent under the
allegations of its complaint and the preponderant evidence presented by it:

. . . we believe that the provision in said agreement

(a) That the term or period of this contract shall be as long as the party of the first part [herein appellant] has need for the
electric light posts of the party of the second part [herein plaintiff] 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 light post [sic]"; (Emphasis supplied)

is invalid for being purely potestative on the part of appellant as it leaves the continued effectivity of the aforesaid
agreement to the latter's sole and exclusive will as long as plaintiff is in operation. A similar provision in a contract of
lease wherein the parties agreed that the lessee could stay on the leased premises "for as long as the defendant needed
the premises and can meet and pay said increases" was recently held by the Supreme Court in Lim v. C.A., 191 SCRA 150,
citing the much earlier case of Encarnacion v. Baldomar, 77 Phil. 470, as invalid for being "a purely potestative condition
because it leaves the effectivity and enjoyment of leasehold rights to the sole and exclusive will of the lessee." Further
held the High Court in the Lim case:

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 of no equality exists between the lessor and
the lessee since the life of the contract is dictated solely by the lessee.

The above can also be said of the agreement Exh. "A" between the parties in this case. There is no mutuality and equality
between them under the afore-quoted provision thereof since the life and continuity of said agreement is made to depend
as long as appellant needs plaintiff's electric posts. And this is precisely why, since 1977 when said agreement was
executed and up to 1989 when this case was finally filed by plaintiff, it could do nothing to be released from or terminate
said agreement notwithstanding that its continued effectivity has become very disadvantageous and inequitous to it due
to the expansion and increase of appellant's telephone services within Naga City and even outside the same, without a
corresponding increase in the ten (10) telephone units being used by plaintiff free of charge, as well as the bad and
inefficient service of said telephones to the prejudice and inconvenience of plaintiff and its customers. . . . 18

Petitioners' allegations must be upheld in this regard. A potestative condition is a condition, the fulfillment of which
depends upon the sole will of the debtor, in which case, the conditional obligation is void. 19 Based on this definition,
respondent court's finding that the provision in the contract, to wit:

(a) 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. 20 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. 21 Nevertheless, in view of our discussions under
the first and second issues raised by petitioners, there is no reason to set aside the questioned decision and resolution of
respondent court.

WHEREFORE, the petition is hereby DENIED. The decision of the Court of Appeals dated May 28, 1992 and its resolution
dated September 10, 1992 are AFFIRMED.

SO ORDERED.

Narvasa, C.J., Padilla, Regalado and Puno, JJ., concur.

SPOUSES BENJAMIN C. MAMARIL AND SONIA P. MAMARIL, Petitioners, vs. THE BOY SCOUT OF THE
PHILIPPINES, AIB SECURITY AGENCY, INC., CESARIO PEA,* AND VICENTE GADDI, Respondents. | PERLAS-
BERNABE, J.:

G.R. No. 179382 January 14, 2013

Facts: Spouses Benjamin C. Mamaril and Sonia P. Mamaril (Sps. Mamaril) are jeepney operators since 1971. They would
park their six (6) passenger jeepneys every night at the Boy Scout of the Philippines' (BSP) compound located at 181
Concepcion Street, Malate, Manila for a fee of P300.00 per month for each unit. On May 26, 1995 at 8 o'clock in the
evening, all these vehicles were parked inside the BSP compound. The following morning, however, one of the vehicles
with Plate No. DCG 392 was missing and was never recovered. According to the security guards Cesario Pea (Pea) and
Vicente Gaddi (Gaddi) of AIB Security Agency, Inc. (AIB) with whom BSP had contracted for its security and protection, a
male person who looked familiar to them took the subject vehicle out of the compound.

On November 20, 1996, Sps. Mamaril filed a complaint for damages before the Regional Trial Court (RTC) of Manila,
Branch 39, against BSP, AIB, Pea and Gaddi. In support thereof, Sps. Mamaril averred that the loss of the subject vehicle
was due to the gross negligence of the above-named security guards on-duty who allowed the subject vehicle to be
driven out by a stranger despite their agreement that only authorized drivers duly endorsed by the owners could do so.
Pea and Gaddi even admitted their negligence during the ensuing investigation. Notwithstanding, BSP and AIB did not
heed Sps. Mamaril's demands for a conference to settle the matter. They therefore prayed that Pea and Gaddi, together
with AIB and BSP, be held liable for: (a) the value of the subject vehicle and its accessories in the aggregate amount
of P300,000.00; (b) P275.00 representing daily loss of income/boundary reckoned from the day the vehicle was lost; (c)
exemplary damages; (d) moral damages; (e) attorney's fees; and (f) cost of suit.

In its Answer, BSP denied any liability contending that not only did Sps. Mamaril directly deal with AIB with respect to the
manner by which the parked vehicles would be handled, but the parking ticket itself expressly stated that the
"Management shall not be responsible for loss of vehicle or any of its accessories or article left therein." It also claimed
that Sps. Mamaril erroneously relied on the Guard Service Contract. Apart from not being parties thereto, its provisions
cover only the protection of BSP's properties, its officers, and employees.

In addition to the foregoing defenses, AIB alleged that it has observed due diligence in the selection, training and
supervision of its security guards while Pea and Gaddi claimed that the person who drove out the lost vehicle from the
BSP compound represented himself as the owners' authorized driver and had with him a key to the subject vehicle. Thus,
they contended that Sps. Mamaril have no cause of action against them.

Issue: Whether or not (1) BSP should be held liable for the loss of their vehicle based on the Guard Service Contract and
the parking ticket it issued; and (2) the CA erred in deleting the RTC awards of damages and attorney's fees.

Ruling: Article 20 of the Civil Code provides that every person, who, contrary to law, willfully or negligently causes
damage to another, shall indemnify the latter for the same. Similarly, Article 2176 of the Civil Code states:

Art. 2176. Whoever by act or omission causes damage to another, there being fault or negligence, is obliged to pay for
the damage done. Such fault or negligence, if there is no preexisting contractual relation between the parties, is called a
quasi-delict and is governed by the provisions of this Chapter.

In this case, it is undisputed that the proximate cause of the loss of Sps. Mamaril's vehicle was the negligent act of
security guards Pea and Gaddi in allowing an unidentified person to drive out the subject vehicle. Proximate cause has
been defined as that cause, which, in natural and continuous sequence, unbroken by any efficient intervening cause,
produces the injury or loss, and without which the result would not have occurred.

Moreover, Pea and Gaddi failed to refute Sps. Mamaril's contention that they readily admitted being at fault during the
investigation that ensued.

On the other hand, the records are bereft of any finding of negligence on the part of BSP. Hence, no reversible error was
committed by the CA in absolving it from any liability for the loss of the subject vehicle based on fault or negligence.

Neither will the vicarious liability of an employer under Article 2180 of the Civil Code apply in this case. It is uncontested
that Pea and Gaddi were assigned as security guards by AIB to BSP pursuant to the Guard Service Contract. Clearly,
therefore, no employer-employee relationship existed between BSP and the security guards assigned in its premises.
Consequently, the latter's negligence cannot be imputed against BSP but should be attributed to AIB, the true employer of
Pea and Gaddi.

In the case of Soliman, Jr. v. Tuazon, the Court enunciated thus:

It is settled that where the security agency, as here, recruits, hires and assigns the work of its watchmen or security
guards, the agency is the employer of such guards and watchmen. Liability for illegal or harmful acts committed by the
security guards attaches to the employer agency, and not to the clients or customers of such agency. As a general rule, a
client or customer of a security agency has no hand in selecting who among the pool of security guards or watchmen
employed by the agency shall be assigned to it; the duty to observe the diligence of a good father of a family in the
selection of the guards cannot, in the ordinary course of events, be demanded from the client whose premises or property
are protected by the security guards. The fact that a client company may give instructions or directions to the security
guards assigned to it, does not, by itself, render the client responsible as an employer of the security guards concerned
and liable for their wrongful acts or omissions. Those instructions or directions are ordinarily no more than requests
commonly envisaged in the contract for services entered into with the security agency.

Nor can it be said that a principal-agent relationship existed between BSP and the security guards Pea and Gaddi as to
make the former liable for the latter's complained act. Article 1868 of the Civil Code states that "by the contract of
agency, a person binds himself to render some service or to do something in representation or on behalf of another, with
the consent or authority of the latter." The basis for agency therefore is representation, 21which element is absent in the
instant case. Records show that BSP merely hired the services of AIB, which, in turn, assigned security guards, solely for
the protection of its properties and premises. Nowhere can it be inferred in the Guard Service Contract that AIB was
appointed as an agent of BSP. Instead, what the parties intended was a pure principal-client relationship whereby for a
consideration, AIB rendered its security services to BSP.
Notwithstanding, however, Sps. Mamaril insist that BSP should be held liable for their loss on the basis of the Guard
Service Contract that the latter entered into with AIB and their parking agreement with BSP.

Such contention cannot be sustained.

Article 1311 of the Civil Code states:

Art. 1311. Contracts take effect only between the parties, their assigns and heirs, except in case where the rights and
obligations arising from the contract are not transmissible by their nature, or by stipulation or by provision of law. The heir
is not liable beyond the value of the property he received from the decedent.

If a contract should contain some stipulation in favor of a third person, he may demand its fulfillment provided he
communicated his acceptance to the obligor before its revocation. A mere incidental benefit or interest of a person is not
sufficient. The contracting parties must have clearly and deliberately conferred a favor upon a third person.

Thus, in order that a third person benefited by the second paragraph of Article 1311, referred to as a stipulation pour
autrui, may demand its fulfillment, the following requisites must concur: (1) There is a stipulation in favor of a third
person; (2) The stipulation is a part, not the whole, of the contract; (3) The contracting parties clearly and deliberately
conferred a favor to the third person - the favor is not merely incidental; (4) The favor is unconditional and
uncompensated; (5) The third person communicated his or her acceptance of the favor before its revocation; and (6) The
contracting parties do not represent, or are not authorized, by the third party. 22 However, none of the foregoing elements
obtains in this case.

It is undisputed that Sps. Mamaril are not parties to the Guard Service Contract.1wphi1 Neither did the subject
agreement contain any stipulation pour autrui. And even if there was, Sps. Mamaril did not convey any acceptance
thereof. Thus, under the principle of relativity of contracts, they cannot validly claim any rights or favor under the said
agreement.23 As correctly found by the CA:

First, the Guard Service Contract between defendant-appellant BSP and defendant AIB Security Agency is purely between
the parties therein. It may be observed that although the whereas clause of the said agreement provides that defendant-
appellant desires security and protection for its compound and all properties therein, as well as for its officers and
employees, while inside the premises, the same should be correlated with paragraph 3(a) thereof which provides that the
security agency shall indemnify defendant-appellant for all losses and damages suffered by it attributable to any act or
negligence of the former's guards.

Otherwise stated, defendant-appellant sought the services of defendant AIB Security Agency for the purpose of the
security and protection of its properties, as well as that of its officers and employees, so much so that in case of loss of
[sic] damage suffered by it as a result of any act or negligence of the guards, the security agency would then be held
responsible therefor. There is absolutely nothing in the said contract that would indicate any obligation and/or liability on
the part of the parties therein in favor of third persons such as herein plaintiffs-appellees. 24

Moreover, the Court concurs with the finding of the CA that the contract between the parties herein was one of lease 25 as
defined under Article 164326 of the Civil Code. It has been held that the act of parking a vehicle in a garage, upon
payment of a fixed amount, is a lease. 27 Even in a majority of American cases, it has been ruled that where a customer
simply pays a fee, parks his car in any available space in the lot, locks the car and takes the key with him, the possession
and control of the car, necessary elements in bailment, do not pass to the parking lot operator, hence, the contractual
relationship between the parties is one of lease. 28

In the instant case, the owners parked their six (6) passenger jeepneys inside the BSP compound for a monthly fee
of P300.00 for each unit and took the keys home with them. Hence, a lessor-lessee relationship indubitably existed
between them and BSP. On this score, Article 1654 of the Civil Code provides that "the lessor (BSP) is obliged: (1) to
deliver the thing which is the object of the contract in such a condition as to render it fit for the use intended; (2) to make
on the same during the lease all the necessary repairs in order to keep it suitable for the use to which it has been
devoted, unless there is a stipulation to the contrary; and (3) to maintain the lessee in the peaceful and adequate
enjoyment of the lease for the entire duration of the contract." In relation thereto, Article 1664 of the same Code states
that "the lessor is not obliged to answer for a mere act of trespass which a third person may cause on the use of the thing
leased; but the lessee shall have a direct action against the intruder." Here, BSP was not remiss in its obligation to provide
Sps. Mamaril a suitable parking space for their jeepneys as it even hired security guards to secure the premises; hence, it
should not be held liable for the loss suffered by Sps. Mamaril.
It bears to reiterate that the subject loss was caused by the negligence of the security guards in allowing a stranger to
drive out plaintiffs-appellants' vehicle despite the latter's instructions that only their authorized drivers may do so.
Moreover, the agreement with respect to the ingress and egress of Sps. Mamaril's vehicles were coordinated only with AIB
and its security guards,29 without the knowledge and consent of BSP. Accordingly, the mishandling of the parked vehicles
that resulted in herein complained loss should be recovered only from the tort feasors (Pea and Gaddi) and their
employer, AIB; and not against the lessor, BSP.30

Anent Sps. Mamaril's claim that the exculpatory clause: "Management shall not be responsible for loss of vehicle or any of
its accessories or article left therein"31 contained in the BSP issued parking ticket was void for being a contract of adhesion
and against public policy, suffice it to state that contracts of adhesion are not void per se. It is binding as any other
ordinary contract and a party who enters into it is free to reject the stipulations in its entirety. If the terms thereof are
accepted without objection, as in this case, where plaintiffs-appellants have been leasing BSP's parking space for more or
less 20 years,32 then the contract serves as the law between them. 33 Besides, the parking fee of P300.00 per month
or P10.00 a day for each unit is too minimal an amount to even create an inference that BSP undertook to be an insurer of
the safety of plaintiffs-appellants' vehicles.

On the matter of damages, the Court noted that while Sonia P. Mamaril testified that the subject vehicle had accessories
worth around !J50,000.00, she failed to present any receipt to substantiate her claim. 34 Neither did she submit any record
or journal that would have established the purported P275.0035 daily earnings of their jeepney. It is axiomatic that actual
damages must be proved with reasonable degree of certainty and a party is entitled only to such compensation for the
pecuniary loss that was duly proven. Thus, absent any competent proof of the amount of damages sustained, the CA
properly deleted the said awards.36

Similarly, the awards of moral and exemplary damages and attorney's fees were properly disallowed by the CA for lack of
factual and legal bases. While the RTC granted these awards in the dispositive portion of its November 28, 2001 decision,
it failed to provide sufficient justification therefor.37

WHEREFORE premises considered, the instant petition is DENIED. The May 31, 2007 Decision and August 16, 2007
Resolution of the Court of Appeals in CA-G.R. CV No. 75978 are AFFIRMFED.

SO ORDERED.

ESTELA M. PERLAS-BERNABE
Associate Justice

Commodatum; Mutuum

PRODUCERS BANK OF THE PHILIPPINES (now FIRST INTERNATIONAL BANK), petitioner, vs. HON. COURT OF
APPEALS AND FRANKLIN VIVES, respondents. | CALLEJO, SR., J.:

G.R. No. 115324 | February 19, 2003

Facts: Sometime in 1979, private respondent Franklin Vives was asked by his neighbor and friend Angeles Sanchez to
help her friend and townmate, Col. Arturo Doronilla, in incorporating his business, the Sterela Marketing and Services
(Sterela for brevity). Specifically, Sanchez asked private respondent to deposit in a bank a certain amount of money in the
bank account of Sterela for purposes of its incorporation. She assured private respondent that he could withdraw his
money from said account within a months time. Private respondent asked Sanchez to bring Doronilla to their house so
that they could discuss Sanchezs request.

On May 9, 1979, private respondent, Sanchez, Doronilla and a certain Estrella Dumagpi, Doronillas private secretary, met
and discussed the matter. Thereafter, relying on the assurances and representations of Sanchez and Doronilla, private
respondent issued a check in the amount of Two Hundred Thousand Pesos (P200,000.00) in favor of Sterela. Private
respondent instructed his wife, Mrs. Inocencia Vives, to accompany Doronilla and Sanchez in opening a savings account in
the name of Sterela in the Buendia, Makati branch of Producers Bank of the Philippines. However, only Sanchez, Mrs.
Vives and Dumagpi went to the bank to deposit the check. They had with them an authorization letter from Doronilla
authorizing Sanchez and her companions, in coordination with Mr. Rufo Atienza, to open an account for Sterela Marketing
Services in the amount of P200,000.00. In opening the account, the authorized signatories were Inocencia Vives and/or
Angeles Sanchez. A passbook for Savings Account No. 10-1567 was thereafter issued to Mrs. Vives.
Subsequently, private respondent learned that Sterela was no longer holding office in the address previously given to
him. Alarmed, he and his wife went to the Bank to verify if their money was still intact. The bank manager referred them
to Mr. Rufo Atienza, the assistant manager, who informed them that part of the money in Savings Account No. 10-1567
had been withdrawn by Doronilla, and that only P90,000.00 remained therein. He likewise told them that Mrs. Vives could
not withdraw said remaining amount because it had to answer for some postdated checks issued by Doronilla. According
to Atienza, after Mrs. Vives and Sanchez opened Savings Account No. 10-1567, Doronilla opened Current Account No. 10-
0320 for Sterela and authorized the Bank to debit Savings Account No. 10-1567 for the amounts necessary to cover
overdrawings in Current Account No. 10-0320. In opening said current account, Sterela, through Doronilla, obtained a loan
of P175,000.00 from the Bank. To cover payment thereof, Doronilla issued three postdated checks, all of which were
dishonored. Atienza also said that Doronilla could assign or withdraw the money in Savings Account No. 10-1567 because
he was the sole proprietor of Sterela.

Private respondent tried to get in touch with Doronilla through Sanchez. He received a letter from Doronilla, assuring him
that his money was intact and would be returned to him. On August 13, 1979, Doronilla issued a postdated check for Two
Hundred Twelve Thousand Pesos (P212,000.00) in favor of private respondent. However, upon presentment thereof by
private respondent to the drawee bank, the check was dishonored. Doronilla requested private respondent to present the
same check on September 15, 1979 but when the latter presented the check, it was again dishonored.

Private respondent referred the matter to a lawyer, who made a written demand upon Doronilla for the return of his
clients money. Doronilla issued another check for P212,000.00 in private respondents favor but the check was again
dishonored for insufficiency of funds.

Private respondent instituted an action for recovery of sum of money in the Regional Trial Court (RTC) in Pasig, Metro
Manila against Doronilla, Sanchez, Dumagpi and petitioner. The case was docketed as Civil Case No. 44485. He also filed
criminal actions against Doronilla, Sanchez and Dumagpi in the RTC. However, Sanchez passed away on March 16, 1985
while the case was pending before the trial court. RTC of Pasig, Branch 157 against Arturo J. Doronila, Estrella Dumagpi
and Producers Bank of the Philippines, and ordered them to pay plaintiff Franklin Vives jointly and severally

Issue: WON the transaction between the defendant Doronilla and respondent Vives was one of simple loan and not
accommodation; - COMMODATUM

Ruling: No error was committed by the Court of Appeals when it ruled that the transaction between private respondent
and Doronilla was a commodatum and not a mutuum. A circumspect examination of the records reveals that the
transaction between them was a commodatum. Article 1933 of the Civil Code distinguishes between the two kinds of
loans in this wise:

By the contract of loan, one of the parties delivers to another, either something not consumable so that the latter may
use the same for a certain time and return it, in which case the contract is called a commodatum; or money or other
consumable thing, upon the condition that the same amount of the same kind and quality shall be paid, in which case the
contract is simply called a loan or mutuum.

Commodatum is essentially gratuitous.

Simple loan may be gratuitous or with a stipulation to pay interest.

In commodatum, the bailor retains the ownership of the thing loaned, while in simple loan, ownership passes to the
borrower.

The foregoing provision seems to imply that if the subject of the contract is a consumable thing, such as money, the
contract would be a mutuum. However, there are some instances where a commodatum may have for its object a
consumable thing. Article 1936 of the Civil Code provides:

Consumable goods may be the subject of commodatum if the purpose of the contract is not the consumption of the
object, as when it is merely for exhibition.

Thus, if consumable goods are loaned only for purposes of exhibition, or when the intention of the parties is to lend
consumable goods and to have the very same goods returned at the end of the period agreed upon, the loan is
a commodatum and not a mutuum.

The rule is that the intention of the parties thereto shall be accorded primordial consideration in determining the actual
character of a contract. In case of doubt, the contemporaneous and subsequent acts of the parties shall be considered in
such determination.
As correctly pointed out by both the Court of Appeals and the trial court, the evidence shows that private respondent
agreed to deposit his money in the savings account of Sterela specifically for the purpose of making it appear that said
firm had sufficient capitalization for incorporation, with the promise that the amount shall be returned within thirty (30)
days. Private respondent merely accommodated Doronilla by lending his money without consideration, as a favor to his
good friend Sanchez. It was however clear to the parties to the transaction that the money would not be removed from
Sterelas savings account and would be returned to private respondent after thirty (30) days.

Doronillas attempts to return to private respondent the amount of P200,000.00 which the latter deposited in Sterelas
account together with an additional P12,000.00, allegedly representing interest on the mutuum, did not convert the
transaction from a commodatum into a mutuum because such was not the intent of the parties and because the
additional P12,000.00 corresponds to the fruits of the lending of the P200,000.00. Article 1935 of the Civil Code expressly
states that [t]he bailee in commodatum acquires the use of the thing loaned but not its fruits. Hence, it was only proper
for Doronilla to remit to private respondent the interest accruing to the latters money deposited with petitioner.

Neither does the Court agree with petitioners contention that it is not solidarily liable for the return of private respondents
money because it was not privy to the transaction between Doronilla and private respondent. The nature of said
transaction, that is, whether it is a mutuum or a commodatum, has no bearing on the question of petitioners liability for
the return of private respondents money because the factual circumstances of the case clearly show that petitioner,
through its employee Mr. Atienza, was partly responsible for the loss of private respondents money and is liable for its
restitution.

Surety; Guaranty

AYALA INVESTMENT & DEVELOPMENT CORP. and ABELARDO MAGSAJO, petitioners, vs. COURT OF APPEALS
and SPOUSES ALFREDO & ENCARNACION CHING, respondents. | MARTINEZ, J.

G.R. No. 118305 | February 12, 1998

Under Article 161 of the Civil Code, what debts and obligations contracted by the husband alone are considered for the
benefit of the conjugal partnership which are chargeable against the conjugal partnership? Is a surety agreement or an
accommodation contract entered into by the husband in favor of his employer within the contemplation of the said
provision?

Facts: Philippine Blooming Mills (hereinafter referred to as PBM) obtained a P50,300,000.00 loan from petitioner Ayala
Investment and Development Corporation (hereinafter referred to as AIDC). As added security for the credit line extended
to PBM, respondent Alfredo Ching, Executive Vice President of PBM, executed security agreements on December 10, 1980
and on March 20, 1981 making himself jointly and severally answerable with PBMs indebtedness to AIDC.

PBM failed to pay the loan. Thus, on July 30, 1981, AIDC filed a case for sum of money against PBM and respondent-
husband Alfredo Ching with the then Court of First Instance of Rizal (Pasig), Branch VIII, entitled Ayala Investment and
Development Corporation vs. Philippine Blooming Mills and Alfredo Ching, docketed as Civil Case No. 42228.

After trial, the court rendered judgment ordering PBM and respondent-husband Alfredo Ching to jointly and severally pay
AIDC the principal amount of P50,300,000.00 with interests.

Pending appeal of the judgment in Civil Case No. 42228, upon motion of AIDC, the lower court issued a writ of execution
pending appeal. Upon AIDCs putting up of an P8,000,000.00 bond, a writ of execution dated May 12, 1982 was
issued. Thereafter, petitioner Abelardo Magsajo, Sr., Deputy Sheriff of Rizal and appointed sheriff in Civil Case No. 42228,
caused the issuance and service upon respondents-spouses of a notice of sheriff sale dated May 20, 1982 on three (3) of
their conjugal properties. Petitioner Magsajo then scheduled the auction sale of the properties levied.

On June 9, 1982, private respondents filed a case of injunction against petitioners with the then Court of First Instance of
Rizal (Pasig), Branch XIII, to enjoin the auction sale alleging that petitioners cannot enforce the judgment against the
conjugal partnership levied on the ground that, among others, the subject loan did not redound to the benefit of the said
conjugal partnership. Upon application of private respondents, the lower court issued a temporary restraining order to
prevent petitioner Magsajo from proceeding with the enforcement of the writ of execution and with the sale of the said
properties at public auction.

AIDC filed a petition for certiorari before the Court of Appeals, questioning the order of the lower court enjoining the
sale. Respondent Court of Appeals issued a Temporary Restraining Order on June 25, 1982, enjoining the lower court from
enforcing its Order of June 14, 1982, thus paving the way for the scheduled auction sale of respondents-spouses conjugal
properties.

On June 25, 1982, the auction sale took place. AIDC being the only bidder, was issued a Certificate of Sale by petitioner
Magsajo, which was registered on July 2, 1982. Upon expiration of the redemption period, petitioner sheriff issued the final
deed of sale on August 4, 1982 which was registered on August 9, 1983.

Issue: WON : court erred in ruling that the obligation incurred by respondent husband did not redound to the benefit of
the conjugal partnership of the private respondent; court erred in ruling that the act of respondent husband in securing
the subject loan is not part of his industry, business or career from which he supports his family. - NO

Ruling: X X X From the foregoing jurisprudential rulings of this Court, we can derive the following conclusions:

(A) If the husband himself is the principal obligor in the contract, i.e., he directly received the money and services to be
used in or for his own business or his own profession, that contract falls within the term x x x x obligations for the benefit
of the conjugal partnership. Here, no actual benefit may be proved. It is enough that the benefit to the family is apparent
at the time of the signing of the contract. From the very nature of the contract of loan or services, the family stands to
benefit from the loan facility or services to be rendered to the business or profession of the husband. It is immaterial, if in
the end, his business or profession fails or does not succeed. Simply stated, where the husband contracts obligations on
behalf of the family business, the law presumes, and rightly so, that such obligation will redound to the benefit of the
conjugal partnership.

(B) On the other hand, if the money or services are given to another person or entity, and the husband acted only as
a surety or guarantor, that contract cannot, by itself, alone be categorized as falling within the context of obligations for
the benefit of the conjugal partnership. The contract of loan or services is clearly for the benefit of the principal debtor
and not for the surety or his family. No presumption can be inferred that, when a husband enters into a contract of surety
or accommodation agreement, it is for the benefit of the conjugal partnership. Proof must be presented to establish
benefit redounding to the conjugal partnership.

The evidence of petitioner indubitably show that co-respondent Alfredo Ching signed as surety for the P50M loan
contracted on behalf of PBM. Petitioner should have adduced evidence to prove that Alfredo Chings acting as surety
redounded to the benefit of the conjugal partnership. The reason for this is as lucidly explained by the respondent court:

The loan procured from respondent-appellant AIDC was for the advancement and benefit of Philippine Blooming Mills and
not for the benefit of the conjugal partnership of petitioners-appellees. Philippine Blooming Mills has a personality distinct
and separate from the family of petitioners-appellees - this despite the fact that the members of the said family happened
to be stockholders of said corporate entity.

xxxxxxxxx

x x x. The burden of proof that the debt was contracted for the benefit of the conjugal partnership of gains, lies with the
creditor-party litigant claiming as such. In the case at bar, respondent-appellant AIDC failed to prove that the debt was
contracted by appellee-husband, for the benefit of the conjugal partnership of gains. What is apparent from the facts of
the case is that the judgment debt was contracted by or in the name of the Corporation Philippine Blooming Mills and
appellee-husband only signed as surety thereof. The debt is clearly a corporate debt and respondent-appellants right of
recourse against appellee-husband as surety is only to the extent of his corporate stockholdings. It does not extend to the
conjugal partnership of gains of the family of petitioners-appellees. x x x x x x.

In all our decisions involving accommodation contracts of the husband, we underscored the requirement that: there must
be the requisite showing x x x of some advantage which clearly accrued to the welfare of the spouses or benefits to his
family or that such obligations are productive of some benefit to the family. Unfortunately, the petition did not present any
proof to show: (a) Whether or not the corporate existence of PBM was prolonged and for how many months or years;
and/or (b) Whether or not the PBM was saved by the loan and its shares of stock appreciated, if so, how much and how
substantial was the holdings of the Ching family.

Such benefits (prospects of longer employment and probable increase in the value of stocks) might have been already
apparent or could be anticipated at the time the accommodation agreement was entered into. But would those benefits
qualify the transaction as one of the obligations x x x for the benefit of the conjugal partnership? Are indirect and remote
probable benefits, the ones referred to in Article 161 of the Civil Code?

We agree with the respondent court. Indeed, considering the odds involved in guaranteeing a large amount
(P50,000,000.00) of loan, the probable prolongation of employment in PBM and increase in value of its stocks, would be
too small to qualify the transaction as one for the benefit of the suretys family. Verily, no one could say, with a degree of
certainty, that the said contract is even productive of some benefits to the conjugal partnership.

We likewise agree with the respondent court (and this view is not contested by the petitioners) that the provisions of the
Family Code is applicable in this case. These provisions highlight the underlying concern of the law for the conservation of
the conjugal partnership; for the husbands duty to protect and safeguard, if not augment, not to dissipate it.

This is the underlying reason why the Family Code clarifies that the obligations entered into by one of the spouses must
be those that redounded to the benefit of the family and that the measure of the partnerships liability is to the extent that
the family is benefited.

These are all in keeping with the spirit and intent of the other provisions of the Civil Code which prohibits any of the
spouses to donate or convey gratuitously any part of the conjugal property. Thus, when co-respondent Alfredo Ching
entered into a surety agreement he, from then on, definitely put in peril the conjugal property (in this case, including the
family home) and placed it in danger of being taken gratuitously as in cases of donation.

In the second assignment of error, the petitioner advances the view that acting as surety is part of the business or
profession of the respondent-husband.

The fact that on several occasions the lending institutions did not require the signature of the wife and the husband
signed alone does not mean that being a surety became part of his profession. Neither could he be presumed to have
acted for the conjugal partnership.

Article 121, paragraph 3, of the Family Code is emphatic that the payment of personal debts contracted by the husband
or the wife before or during the marriage shall not be charged to the conjugal partnership except to the extent that they
redounded to the benefit of the family.

Here, the property in dispute also involves the family home. The loan is a corporate loan not a personal one. Signing as a
surety is certainly not an exercise of an industry or profession nor an act of administration for the benefit of the family.