CHAPTER 3

Gaite vs. Fonacier

by Bernardo, Ivy

Doctrine:
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.

Recit-ready:
Fonacier was the owner of mineral claims in Camarines Norte, called Dawahan Group. He appointed Gaite as his
attorney-in-fact to enter into a contract with any individual or juridical person for the exploration and development
of his mining claims. Gaite conveyed the development and exploitation to Larap Iron Mines, a proprietorship he
owned. Soon, Fonacier revoked the authority he gave Gaite, which Gaite accepted but on the condition that Fonacier
pay him a sum of P75,000. The 10,000 would be paid upon the signing of the agreement, and the 65,000 to be paid
upon the first shipment or local sale of the iron ores. To ensure the payment, Fonacier and Gaite entered into two
surety bonds, the second one, called Exhibit B, was with a surety company called Far Eastern Surety and Insurance
Co, who will shoulder the liability (in case of Fonaciers inability to fulfill the obligation) until December 5, 1955.
When December 5, 1955 came, the surety bond expired, yet no shipment or sale of iron ore had been made, nor has
Gaite been paid the 65,000 Fonacier promised to pay. Because of this, Gaite filed a complaint before the Court of
First Instance in Manila. During the trial, Fonacier and the other defendants argued that the payment was a condition
precedent, meaning the obligation can only be demanded upon the shipment or sale of the first sale of the iron ores.
But since neither of that happened, Gaite cant demand for payment yet. However the lower court ruled in favor of
Gaite, arguing that the condition was one with a term and that it should have been paid before December 5, 1955.
The issue to be resolved is whether the obligation became due and demandable on December 5. The Court ruled that
YES THE OBLIGATION IS DEMANDABLE because it was a condition with a term, and not a suspensive
condition. A conditional obligation is predicated by the happening of a future and uncertain event. If the condition
doesnt happen, the obligation is deemed to be nonexistent. However, in this case, Gaite was clear and certain in his
resolve to collect the payment Fonacier owed him, the question was just when the payment is to be made, which
Gaite resolved through the execution of the surety bond. Thus, the condition in their agreement cannot have been a
suspensive condition.

Facts:
- Isabelo Fonacier was the owner of iron lode mineral claims also known as the Dawahan Group in the province of
Camarines Norte.
- Fonacier appointed Fernando 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.
- Using his powers, Gaite conveyed the development and exploitations of those mining claims to his proprietorship,
Larap Iron Mines.
- Soon, Fonacier decided to revoke the authority he gave to Gaite. Gaite agreed to give up his rights and interests in
the claims, and even allowed Fonacier to use the business name Larap Iron Mines, its goodwill and all the records
and documents relative to the mines.
- However Gaite required certain conditions, specifically the payment of P75,000:
o 10,000 to be paid upon the signing of their agreement
o 65,000 to be paid after the first shipment or sale of iron ores.
- To ensure the payment, Fonacier executed two surety bonds, Exhibit A and B. The relevant bond here is the second
surety bond (Exhibit B), which was executed by Fonacier and the other defendants to the case, with Far Eastern
Surety and Insurance Co, a surety company whose liability for the P65,000 will expire on December 8, 1955.
o A surety company is one who promises to pay the obligee (Gaite) the money that the principal
(Fonacier) owes him if the principal fails to meet that obligation.
- December 8, 1955 came, and the bond with Far Eastern Surety and Insurance Company expired, but there has still
been no sale of the iron ore, nor has Gaite been paid his 65,000.
- Because of this, Gaite filed a complaint with the Court of First Instance in Manila because Fonacier hasnt paid him
yet.
- DEFENDANTS: The obligation to pay Gaite is a conditional obligation, meaning it can only be demanded after the
first shipment or sale of iron ore, as stipulated in the agreement. Because the condition hasnt been fulfilled, the
obligation isnt due and demandable.
- LOWER COURT: Ruled in favor of Gaite. It argued that the obligation to pay Gaite was one with a term, or in other
words, it should be aid upon the sale of sufficient iron ore by defendants within one year or before December 8,
1955.
Issue:
WON the obligation of Fonacier and his sureties to pay Gaite the money became due and demandable when the
defendants failed to renew Exhibit B which expired on December 8, 1955
Held: YES
- The condition that the shipment or sale of the iron ore isnt a condition precedent (or suspensive) to the payment of
the balance of P65,000, it was only a suspensive period of 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.
o The words of the contract express no contingency in the buyers obligation to pay. 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. The existence of the obligation to pay is recognized, only its maturity or
demandability is deferred.
o Gaite is also obviously did not desire to risk losing his right over the ore without getting paid for it, nor did
Fonacier assume that Gaito wanted to assume that risk. Thus, there is no uncertainty or contingency that
characterized the payment of the 65,000.
o To consider that the payment of the 65,000 is a condition precedent would be tantamount to leaving the
payment at the discretion of Fonacier. If this was the case, Fonacier would be able to postpone the payment
indefinitely.
o Article 1378 of the Civil Code: if the contract is onerous, the doubt shall be settled in favor of the greatest
reciprocity of interests. Since the sale is onerous, the rules should be in favor of the greater reciprocity.
Clearly the greater reciprocity would be if the buyers obligation is deemed to be actually existing, with
only its maturity (due date) postponed or deferred than if the obligation was viewed as nonexisting or not
binding until the ore was sold.
- he sale of the ore to Fonacier was a sale on credit, and not an aleatory contract where Gaite would assume the risk of
ot being paid at all.
- The previous sale or shipment of 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.

Gonzales vs. Heirs of Cruz

by Reyes, Phoebe

Doctrine:
When the consent of a party to a contract is given subject to the fulfillment of a suspensive condition, the contract is
not perfected unless that condition is first complied with. There can be no rescission of an obligation as yet non -
existent, because the suspensive condition has not happened.

Recit-ready: Paula Cruz and Heirs of Cruz (owner of a parcel of land) entered into a Contract of Lease/Purchase
with petitioner. The contract stipulated that after one year of signing, respondents shall purchase the land at 1M
pesos within 2 years period with interest. The 9th clause required the lessors to obtain a separate and distinct T.C.T
of the leased land within 4 years, after which a new contract would be executed.

Petitioner did not exercise his option to purchase the property immediately after the expiration of the one-year lease.
Thus, a letter was sent to petitioner informing him of the lessor's decision to rescind the Contract of Lease/Purchase
due to a breach committed. He was told to vacate, but he refused. The problem was brought to the Barangay, but he
did not appear. Paula Cruz died, and the land was under extrajudicial partition. Another letter was sent demanding
petitioner to vacate, but he did not.
Matter was brought to RTC. RTC interpreted the 9th clause to mean that the respondents had obliged themselves to
obtain a TCT in the name of petitioner and that this obligation was a condition precedent to petitioner's purchase of
the property. Since respondents had not performed their obligation, they could not compel petitioner to buy the
parcel of land. The CA took the opposite view, holding that the property should be purchased first before
respondents may be obliged to obtain a TCT in the name of petitioner-lessee-buyer.

SC held that the clear intent of the ninth paragraph was for respondents to obtain a separate and distinct TCT in their
names. Only after the title is assured may the obligation to buy the land and to pay the sums stated in the Contract be
enforced within the period stipulated. Because the ninth clause required respondents to obtain a separate and distinct
TCT in their names and not in the name of petitioner, it logically follows that such undertaking was a condition
precedent to the latter's obligation to purchase and pay for the land. Put differently, petitioner's obligation to
purchase the land is a conditional one and is governed by Article 1181 of the Civil Code.

Facts:
Paula Cruz together with the heirs of Thomas and Paula Cruz, the sole proprietor and manager of Felgon Farms, of a
half portion of a parcel of land in the Province of Rizal covered by TCT 12111 entered into a Contract of
Lease/Purchase with petitioner. The contract stipulated that after one year of signing, respondents shall purchase the
land at 1M pesos within 2 years period with interest. They shall also pay 2,500 per hectare as annual rent.

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

Gonzales paid the annual rent in accordance with the contract. However, he did not exercise his option to purchase
the property immediately after the expiration of the one-year lease. He remained in possession of the property
without paying the purchase price provided for in the Contract and without paying any further rentals.

A letter was sent by one of the heirs to Gonzales, informing him of the lessor's decision to rescind the Contract of
Lease/Purchase due to a breach committed by the defendant. It also served as a demand to vacate the premise within
10 days. Gonzales refused to vacate. It was brought before the Barangay. He refused to appear before the Barangay,
thus a certification allowing the case to be brought to Court was issued.

Paula Cruz died. The heirs sent another demand letter for Gonzales to vacate, but he did not heed.

Alleging breach of the provisions of the Contract of Lease/Purchase, the plaintiffs filed a complaint for recovery of
possession of the property.

RTC ruled that the heirs cannot rescind the Contract of Purchase in view of the fact that there is a condition
precedent which the plaintiffs have not fulfilled (paragraph 9 of the contract). It is the defendant now who has the
option to either rescind or demand the performance of the contract.

CA reversed the trial court's ruling. RTC interpreted the condition that before the appellee exercises his option to
purchase the property by paying the purchase price, the appellants must first transfer the title to the property in the
appellees name. CA found it absurd. In the normal course of things anent the sale of real properties dictates that
there must first be payment of the agreed purchase price before transfer of title to the vendees name can be made.
That was the reason for the 4 year period to transfer the title (as it would take some time).

Issue:
WON the transfer of title is a condition precedent to the obligation to purchase and pay for the land

Held/Ratio:
Basic is the rule in the interpretation of contracts that if some stipulation therein should admit of several meanings, it
shall be understood as bearing that import most adequate to render it effectual. Considering the antecedents of the
ownership of the disputed lot, it appears that petitioners interpretation renders clause nine most effectual.
Thus, the clear intent of the ninth paragraph was for respondents to obtain a separate and distinct TCT in their
names. This was necessary to enable them to show their ownership of the stipulated portion of the land and their
concomitant right to dispose of it. Absent any title in their names, they could not have sold the disputed parcel of
land.

Because the property remained registered in the names of their predecessors-in-interest, private respondents could
validly sell only their undivided interest in the estate of Severo Cruz, the extent of which was however not shown in
the records. There being no partition of the estate thus far, there was no guarantee as to how much and which portion
would be adjudicated to respondents.

The appellate court's literal interpretation of the first portion of paragraph nine renders the latter portion thereof
ineffectual. In other words, that portion can only mean that the respondents should first obtain a TCT in their names,
after which petitioner is given time to purchase and pay for the property.

In sum, we hold that the ninth provision was intended to ensure that respondents would have a valid title over the
specific portion they were selling to petitioner. Only after the title is assured may the obligation to buy the land and
to pay the sums stated in the Contract be enforced within the period stipulated. Verily, the petitioner's obligation to
purchase has not yet ripened and cannot be enforced until and unless respondents can prove their title to the property
subject of the Contract.

Ninth Clause Was a Condition Precedent

Because the ninth clause required respondents to obtain a separate and distinct TCT in their names and not in the
name of petitioner, it logically follows that such undertaking was a condition precedent to the latter's obligation to
purchase and pay for the land. Put differently, petitioner's obligation to purchase the land is a conditional one and is
governed by Article 1181 of the Civil Code.

Respondents Cannot Rescind the Contract

In the same vein, respondents cannot rescind the contract, because they have not caused the transfer of the TCT to
their names, which is a condition precedent to petitioner's obligation. This Court has held that there can be no
rescission (or more properly, resolution) of an obligation as yet non-existent, because the suspensive condition has
not happened.

Coronel vs. CA
by Lu, Kyle

Doctrine: A contract to sell is different from a conditional contract of sale. The difference between the two is that in
the former, ownership is retained until the completion of payment. The latter on the other hand is that the condition
makes the obligation demandable and that ownership is immediately transferred.

Recit-ready:

Defendant-Appellant Romulo Coronel owned a property in Quezon City which he agreed sold to Ramona Alcaraz
for 1,240,000 pesos on the condition that after the Coronels have successfully transferred the TCT from the name of
their father to their name, they would execute a deed of absolute sale and Alcaraz shall immediately pay the balance
of 1,190,000 pesos. This was stipulated in a document Receipt of Down Payment where Concepcion Alcaraz,
Ramonas mother, paid the down payment. The property was transferred to Ramona Alcaraz on a different date.
On February 18, 1985, Coronel sold the same property to another buyer, Catalina, for the amount of 1,580,000 pesos
with 300,000 pesos as down payment. Due to this transaction, Coronel rescinded his contract with Alcaraz and
deposited to the bank the down payment he received.
Concepcion Alcaraz filed a civil case in the RTC demanding specific performance of the contract and caused an
annotation of lis pendens for the same property. On a different date, Coronel executed a deed of absolute sale in
favor of Catalina which made Catalina cause an adverse claim on the said property.
The RTC ruled in favor of Alcaraz and ordered that 1) Coronel perform the obligation as stipulated, 2) that the TCT
issued to Catalina be cancelled, and 3) that Coronel and Catalina vacate the said property. Coronel filed an MR with
the RTC but was dismissed. The CA affirmed the ruling of the RTC.
The issue is WON sale between Alcaraz and Coronel constituted a conditional contract of sale with a suspensive
condition rather than a contract to sell.
The Court answered yes. The Court held that the contract between Alcaraz and Coronel was a conditional contract of
sale with a suspensive condition because 1) Coronel did not reserve the ownership of the title until full payment
which can only lead to an interpretation that 2) the intent of the contract is to immediately transfer the ownership
once it was sold.
The Court said that the suspensive condition in this case happened on February 6, 1985 when the TCT was
transferred from the name of Coronels father to his heirs. When the said condition was fulfilled, the obligations of
the party in the contract of sale became mutually demandable. As of that point in time, reciprocal obligations of both
buyer and seller arose.

Facts:
Defendant-Appellant Romulo Coronel owned a house and lot in Quezon City with TCT No. 119627. On January
19, 1985, Concepcion executed a document entitled Receipt of Down Payment in favor of Ramona Patricia
Alcaraz. The document indicated:

Received from Miss Ramona Patricia Alcaraz of 146 Timog, Quezon City, the sum of Fifty Thousand Pesos
purchase price of our inherited house and lot, covered by TCT No. 119627 of the Registry of Deeds of Quezon City,
in the total amount of P1,240,000.00. We bind ourselves to effect the transfer in our names from our deceased father,
Constancio P. Coronel, the transfer certificate of title immediately upon receipt of the down payment above-stated.
On our presentation of the TCT already in or name, We will immediately execute the deed of absolute sale of said
property and Miss Ramona Patricia Alcaraz shall immediately pay the balance of the P1,190,000.00.

Concepcion Alcaraz (Ramonas mother) paid Coronel the down payment of 50,000 and the property was transferred
to Alcarazs name on a different date.

On February 18, 1985, Concepcion sold the same property to Catalina for the amount of 1,580,000 after the has paid
300,000 pesos. This transaction resulted with Concepcion rescinding his obligation with Alcaraz and returning the
down payment paid by Alcaraz in trust with the bank.

Concepcion Alcaraz instituted a case in the RTC demanding specific performance of Coronels obligation with
Ramona and caused an annotation of lis pendens at the back of the TCT 327403. Afterwards, Coronel executed the
deed of absolute sale in favor of Catalina. Catalina caused an annotation of a notice of adverse claim for the same
property in the Registry of Deeds of Quezon City.

The RTC ruled in favor of Concepcion. The decision ordered the specific performance of Coronels specific
performance and at the same time cancelling the TCT issued to intervenor-appellant Catalina. An MR was filed to
the RTC by Coronel but was dismissed as well. The CA on the other hand ruled in favor of the Concepcion by
affirming the decision of the RTC. Hence this case.

Issue:

Whether the sale between Alcaraz and Coronel constituted a conditional contract of sale with a suspensive condition
rather than a contract to sell.

Held/Ratio:

Yes. The Court held that the contract between Alcaraz and Coronel constituted a conditional contract of sale with a
suspensive condition.
Because the petitioners declared in the Receipt of Down Payment their stipulation to sell the property without the
reservation of title until full payment of the entire purchase price, the natural and ordinary idea conveyed is that they
sold their property with the intention to transfer the title immediately to the buyer (Alcaraz). Thus such, agreement
cannot be understood as a contract to sell because there was no express reservation of ownership of the property.

By stipulating that the Coronels would sell the property once theyve successfully transferred the TCT to their name,
the Court held that the plain reading of the contract indicates that it was a conditional contract of sale with the
suspensive condition of the Coronels successfully transferring the TCT to their name which was fulfilled on
February 6, 1985.

When the said condition was fulfilled, the obligations of the party in the contract of sale became mutually
demandable. As of that point in time, reciprocal obligations of both buyer and seller arose.

Reyes vs. Tuparan

by Perez, Paolo

Doctrine: In a Contract of Conditional Sale, a sellers obligation to sell the subject properties becomes demandable
only upon the happening of the positive suspensive condition, which is the buyers full payment of the purchase
price. Without buyers full payment, there can be no breach of contract to speak of because seller has no obligation
yet to turn over the title.

Facts:
Petitioner Reyes owned a 1,274 sq. m. residential and commercial lot in Valenzuela City. On that property, she had
erected a 3-storey building as well as a residential apartment building. In 1989, Respondent Tuparan leased from
petitioner a space on the ground floor of Reyes building for her pawnshop business for a monthly rental of P4,000.
A close friendship arose between the two which led to Tuparan investing thousands of pesos in Reyes
financing/lending business from February-May 1990 with an interest rate of 6%/month.

On June 1998, Reyes mortgaged the subject real properties to the Farmers Saving Bank and Loan Bank, Inc. (FSL
Bank) to secure a loan of P2M payable in installments. As a gesture of friendship, Tuparan verbally offered to
conditionally buy Reyes properties for P4.2M on installment basis without interest and to assume the bank loan.

After Reyes verbal acceptance of all the conditions, both parties worked together to obtain FSL Banks approval for
respondent to assume her outstanding bank account, which (the approval of FSL) they later obtained.

On November 1990, the parties and FSL Bank executed the corresponding Deed of Conditional Sale of Real
Properties with Assumption of Mortgage. Due to their closeness, both parties chose not to reduce into writing the
other terms of their agreement.

Under the deed of conditional sale, respondent was bound to pay the petitioner a lump sum of P1.2M as part of the
purchase price in 3 fixed installments. Respondent, however, defaulted in the payment of her obligations on their
due dates. Instead of paying the amounts due in lump sum on their respective maturity dates, respondent paid
petitioner in small amounts from time to time.

Reyes also averred that despite her success in finding a prospective buyer for the real properties within the 3-month
period agreed upon, Tuparan went back on her promise to allow the cancellation of their conditional sale (one of the
conditions in the conditional sale was that if Reyes was able to find a 3rd party buyer within 3 months, the
conditional sale between her and Tuparan would be cancelled).

Since December 1990, Tuparan had taken possession of the subject properties and had been continuously collecting
and receiving monthly rental income from the tenants of the buildings without sharing it with the petitioner. Then, in
1992, Tuparan offered P751,000 to Reyes as full payment of the purchase price of the subject real properties and
demanded the simultaneous execution of the corresponding deed of absolute sale.
Respondent countered, among others, that the tripartite agreement erroneously designated by the petitioner as a
Deed of Conditional Sale of Real Property with Assumption of Mortgage was actually a pure and absolute contract
of sale with a term period. It could not be considered a conditional sale because the acquisition of contractual rights
and the performance of the obligation therein did not depend upon a future and uncertain event.

Reyes brought the matter to the RTC seeking a rescission of their contract based on Tuparans failure to pay the
purchase price which, the former argues, is a breach of contract which warrants the remedy of rescission she seeks.

The RTC, in 2006, handed down its decision finding that respondent failed to pay in full the P4.2M total purchase
price of the subject real properties leaving a balance of P805,000. The checks and receipts presented by Tuparan
referred not to the payment of the property to Reyes but to the mortgage obligation with FSL Bank. The RTC also
considered the deed executed by the two parties and FSL to be a contract to sell, not a contract of sale. Finally, the
RTC held that a rescission was not available to Reyes because Tuparans non-payment in full of the purchase price
may not be considered a substantial and fundamental breach of the contract.

The CA rendered its decision affirming with modification the RTC Decision.The CA agreed with the RTC that the
contract entered into by the parties is a contract to sell but ruled that the remedy of rescission could not apply
because the respondent's failure to pay the petitioner the balance of the purchase was not a breach of contract, but
merely an event that prevented the seller (Reyes) from conveying title to the purchaser (Tuparan).

Issue: W/N the CA was correct in ruling that there was no legal basis for the rescission of the Deed of
Conditional Sale with Assumption of Mortgage.

Held/Ratio: YES. CA committed no reversible error.

Based on the provisions of the contract of the parties, the title and ownership of the subject properties remains with
the petitioner until the respondent fully pays the balance of the purchase price and the assumed mortgage obligation.

Therefore, the petitioner's obligation to sell the subject properties becomes demandable only upon the happening of
the positive suspensive condition, which is the respondent's full payment of the purchase price. Without respondent's
full payment, there can be no breach of contract to speak of because petitioner has no obligation yet to turn over the
title. Respondent's failure to pay in full the purchase price is not the breach of contract contemplated under Article
1191 of the New Civil Code but rather just an event that prevents the petitioner from being bound to convey title to
the respondent.

Court fully agrees with the CA when it resolved: "Considering, however, that the Deed of Conditional Sale was not
cancelled by Vendor Reyes (petitioner) and that out of the total purchase price of the subject property in the amount
of ?4,200,000.00, the remaining unpaid balance of Tuparan (respondent) is only ?805,000.00, a substantial amount
of the purchase price has already been paid.It is only right and just to allow Tuparan to pay the said unpaid balance
of the purchase price to Reyes."

Granting that a rescission can be permitted under Article 1191, the Court still cannot allow it for the reason that,
considering the circumstances, there was only a slight or casual breach in the fulfillment of the obligation.

Out of the P1,200,000.00 remaining balance, respondent paid on several dates the first and second installments of
P200,000.00 each. She, however, failed to pay the third and last installment of P800,000.00 due on December 31,
1991. Nevertheless, on August 31, 1992, respondent, through counsel, offered to pay the amount of P751,000.00,
which was rejected by petitioner for the reason that the actual balance was P805,000.00 excluding the interest
charges.

Considering that out of the total purchase price of P4,200,000.00, respondent has already paid the substantial
amount of P3,400,000.00, more or less, leaving an unpaid balance of only P805,000.00, it is right and just to allow
her to settle, within a reasonable period of time, the balance of the unpaid purchase price. The Court agrees with the
courts below that the respondent showed her sincerity and willingness to comply with her obligation when she
offered to pay the petitioner the amount of P751,000.00.

Central Philippine University vs. CA

by Fabia, Johan

Doctrine: In an onerous donation, the condition is a resolutory one where non-fulfillment makes the donation
revocable

Recit-ready: This case is about the donation of land to CPU for the purpose of building a medical school. After 50
years, the heirs of the donor filed a case for annulment of donation since CPU hasnt built a medical school given
that 50 years has already passed. CPU alleged that the conditions are not resolutory ones. The court held that these
conditions are resolutory ones and that non fulfillment of the condition will make the donation revocable. After 50
years, CPU has slept on its obligation thus donation is revoked.

Facts: In 1939, Don Ramon Lopez Sr.( a director of the school) donated a parcel of land to CPU for the use of a
medical college. On May 31 1989, the heirs filed an annulment case for the said property since CPU failed its
obligation to build a medical school. CPU alleged that it has obliged with the condition because it hasnt used the
property for any other purpose.
RTC held that they failed to comply with the obligation making the donation null and void.
CA affirmed it and held that the conditions are resolutory ones

Issue: WON the donation is onerous and the conditions are onerous.

Held/Ratio: Donations with conditions like the one at bar are considered onerous conditions which are resolutory. It
cannot be a suspensive condition because it would be stepping on the rights of the donor before it could build the
school thus making the condition void. CPU slept on its obligations for 50 years thus the donation is revocable.

Quijada vs. CA
G.R. No. 126444. December 4, 1998.
by Hernandez, Justine

Doctrine:

When a person donates land to another on a condition, the condition imposed is not a condition precedent or a
suspensive condition, but a resolutory one.

Recit-ready:

Petitioners are heirs of the late Trinidad Quijada. Trinidad inherited a 2 hectare land. April 5,1956, Trininad along
with her siblings, executed a deed of donation in favor of the Municipality of Talacogon, with condition that the
land shall be used exclusively as part of the campus of the proposed Provincial High School in Talacogon.

Despite the donation, Trininad still has possession of the land and sold 1 hectare to Regalado. Subsequently,
Trinidad sold the remaining 1 hectare to Regalado but this time verbally, no deed of sale but it evidenced by receipts
of payment.

Regalado sold portions of the land to respondents. (Fernando Bautista, Rodolfo Goloran, Efren Guden and Ernesto
Goloran.)

The Municipality was not able to finish the school thus returning the ownership of the property to the donors.

In the meantime, respondent Mondejar conveyed portions of the land to the other respondents
On July 5,1988. Petitioners (heirs) filed against the respondents stating that their late mother did sell the property. If
it was true that she (Trinidad) sold the property, it would be null and void since it was already donated to the
Municipality thus the ownership is with the Municipality.

RTC ruled in favor of the heirs, ruling that Trinidad had no capacity to sell because the ownership of the land was
already with the Municipality.

CA reversed, ruling that the sale made by Trinidad Quijada to respondent Mondejar was valid as the former retained
an inchoate interest on the lots by virtue of the automatic reversion clause in the deed of donation.

Whether the sale between Trinidad and Regalado is valid considering the capacity of the vendor to execute the
contract in view of the conditional deed of donation?

Yes. When the property was donated to the Municipality, the ownership was transferred to them but wait theres
more, there was a condition. A resolutory condition, though it was not stated in the condition on how long the
condition was, it was evident that the Municipality had intended to build the school. Again, tho not stated how long,
the Municipality still gave back the property to the donors thus the ownership was transferred. Making the sale valid
since ownership was returned.

Moreover, the petitioners contention that since the lots were owned by the municipality at the time of the sale, they
were outside the commerce of men under Article 1409(4)(Those whose object is outside the commerce of men) of
the NCC; thus, the contract involving the same is inexistent and void from the beginning. However, nowhere in
Article 1409(4) is it provided that the properties of a municipality, whether it be those for public use or its
patrimonial property are outside the commerce of men. The objects referred to as outsides the commerce of man are
those which cannot be appropriated, such as the open seas and the heavenly bodies.

Facts:

Petitioners, as heirs of the late Trinidad Quijada, filed a complaint against private respondents for quieting of title,
recovery of possession and ownership of parcels of land with claim for attorneys fees and damages. Plaintiffs
appellees (petitioners) are the children of the late Trinidad Corvera Vda. de Quijada.

Trinidad Quijada together with her sisters Leonila Corvera Vda. de Sequea and Paz Corvera Cabiltes and brother
Epapiadito Corvera executed a conditional deed of donation of the two-hectare parcel of land subject of the case in
favor of the Municipality of Talacogon, the condition being that the parcel of land shall be used solely and
exclusively as part of the campus of the proposed provincial high school in Talacogon

Apparently, Trinidad remained in possession of the parcel of land despite the donation. On July 29, 1962, Trinidad
sold one (1) hectare of the subject parcel of land to defendant appellant Regalado Mondejar. Subsequently, Trinidad
verbally sold the remaining one (1) hectare to defendant appellant (respondent) Regalado Mondejar without the
benefit of a written deed of sale and evidenced solely by receipts of payment.

In 1980, the heirs of Trinidad, who at that time was already dead, filed a complaint for forcible entry against
defendant appellant (respondent) Regalado Mondejar, which complaint was, however, dismissed for failure to
prosecute.

In 1987, the proposed provincial high school having failed to materialize, the Sangguniang Bayan of the
municipality of Talacogon enacted a resolution reverting the two (2) hectares of land donated back to the donors

In the meantime, defendant appellant (respondent) Regalado Mondejar sold portions of the land to defendants
appellants (respondents) Fernando Bautista, Rodolfo Goloran, Efren Guden and Ernesto Goloran.
On July 5, 1988, plaintiffs appellees (petitioners) filed this action against defendants appellants (respondents). In
the complaint, plaintiffs appellees (petitioners) alleged that their deceased mother never sold, conveyed, transferred
or disposed of the property in question to any person or entity much less to Regalado Mondejar save the donation
made to the Municipality of Talacogon in 1956; that at the time of the alleged sale to Regalado Mondejar by Trini
dad Quijada, the land still belongs to the Municipality of Talacogon, hence, the supposed sale is null and void.

The court a quo rendered judgment in favor of plaintiffs appellees (petitioners): firstly because Trinidad Quijada
had no legal title or right to sell the land to defendant Mondejar in 1962, 1966, 1967 and 1968, the same not being
hers to dispose of because ownership belongs to the Municipality of Talacogon and, secondly, that the deed of sale
executed by Trinidad Quijada in favor of Mondejar did not carry with it the conformity and acquiescence of her
children, more so that she was already 63 years old at the time, and a widow

On appeal, the Court of Appeals reversed and set aside the judgment a quo ruling that the sale made by Trinidad
Quijada to respondent Mondejar was valid as the former retained an inchoate interest on the lots by virtue of the
automatic reversion clause in the deed of donation.

Thereafter, petitioners filed a motion for reconsideration. When the CA denied their motion, petitioners instituted a
petition for review to this Court arguing principally that the sale of the subject property made by Trinidad Quijada to
respondent Mondejar is void, considering that at that time, ownership was already transferred to the Municipality of
Talacogon. On the contrary, private respondents contend that the sale was valid, that they are buyers in good faith,
and that petitioners case is barred by laches.

Issue:

Whether the sale between Trinidad and Regalado is valid considering the capacity of the vendor to execute the
contract in view of the conditional deed of donation?

Held/Ratio:

Yes. (SC affirms) We affirm the decision of the respondent court.

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

When the Municipalitys acceptance of the donation was made known to the donor, the former became the new
owner of the donated propertydonation being a mode of acquiring and transmitting ownershipnotwithstanding
the condition imposed by the donee. The donation is perfected once the acceptance by the donee is made known to
the donor. Accordingly, ownership is immediately transferred to the latter and that ownership will only revert to the
donor if the resolutory condition is not fulfilled.

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

So long as the resolutory condition subsists and is capable of fulfillment, the donation remains effective and the
donee continues to be the owner subject only to the rights of the donor or his successors ininterest under the deed of
donation. Since no period was imposed by the donor on when must the donee comply with the condition, the latter
remains the owner so long as he has tried to comply with the condition within a reasonable period. Such period,
however, became irrelevant herein when the doneeMunicipality manifested through a resolution that it cannot
comply with the condition of building a school and the same was made known to the donor. Only thenwhen the
nonfulfillment of the resolutory condition was brought to the donors knowledge that ownership of the donated
property reverted to the donor as provided in the automatic reversion clause of the deed of donation.

Sale, being a consensual contract, is perfected by mere consent, which is manifested the moment there is a meeting
of the minds as to the offer and acceptance thereof on three (3) elements: subject matter, price and terms of payment
of the price. Ownership by the seller on the thing sold at the time of the perfection of the contract of sale is not an
element for its perfection. What the law requires is that the seller has the right to transfer ownership at the time the
thing sold is delivered. Perfection per se does not transfer ownership which occurs upon the actual or constructive
delivery of the thing sold. A perfected contract of sale cannot be challenged on the ground of nonownership on the
part of the seller at the time of its perfection; hence, the sale is still valid.

The consummation, however, of the perfected contract is another matter. It occurs upon the constructive or actual
delivery of the subject matter to the buyer when the seller or her successors ininterest subsequently acquires
ownership thereof.

Such circumstance happened in this case when petitionerswho are Trinidad Quijadas heirs and successorsin-
interestbecame the owners of the subject property upon the reversion of the ownership of the land to them.
Consequently, ownership is transferred to respondent Mondejar and those who claim their right from him. Article
1434 of the New Civil Code supports the ruling that the sellers title passes by operation of law to the buyer. This
rule applies not only when the subject matter of the contract of sale is goods, but also to other kinds of property,
including real property

There is also no merit in petitioners contention that since the lots were owned by the municipality at the time of the
sale, they were outside the commerce of men under Article 1409(4) of the NCC; thus, the contract involving the
same is inexistent and void from the beginning. However, nowhere in Article 1409(4) is it provided that the
properties of a municipality, whether it be those for public use or its patrimonial property are outside the commerce
of men.

Besides, the lots in this case were conditionally owned by the municipality. To rule that the donated properties are
outside the commerce of men would render nugatory the unchallenged reasonableness and justness of the condition
which the donor has the right to impose as owner thereof. Moreover, the objects referred to as outsides the
commerce of man are those which cannot be appropriated, such as the open seas and the heavenly bodies.

Lao Lim vs. CA

by Sarte, Ross

Doctrine:

A stipulation in a contract of lease allowing the lessee to continue occupying the premises as long as he pays rent is
void because it would leave to the lessee the sole power to determine whether the lease should continue or not.

Recit-ready:

Pursuant to a compromise agreement, petitioner (lessee) & respondent (lessor) entered into a contract of lease for a
term of 3 years. After 2 terms of lease, petitioner expressed that he would no longer renew the contract for another
term. However, respondent refused to leave. This prompted the petitioner to file an ejectment suit. MTC, RTC, CA
all ruled in favor of the respondent stating that the lease contract was a continuous one the period of which depended
upon the lessees need for the premises and his ability to pay. In arriving at the decision, the lower courts relied on a
condition in the lease contract which state that That the term of the lease shall be renewed every three years XXX
for as long as defendant needed the premises and can meet and pay the said increases
SC ruled that the condition was void since it was a potestative condition or one which depended solely on the will
of the lessee. It essentially left the effectivity of the leasehold rights on the sole will of the respondent.
Facts:

Private respondent entered into a contract of lease with petitioner for a period of three (3) years, from 1976
to 1979. After respondent refused to vacate premises following expiration of the term, petitioner filed
ejectment suit.
However, the case was terminated by a judicially approved compromise agreement entered into by the
parties wherein petitioner agreed to lease the property to respondent for a term of 3 years, renewable for
another 3.
After 2 terms of lease, petitioner informed respondent that he would not be renewing the contract for
another term but petitioner refused to leave.
Because of private respondents refusal to vacate the premises, petitioner filed another ejectment suit with
the MTC of Manila.
MTC DISMISSED petition stating that the lease contract has not expired, being a continuous one the
period whereof depended upon the lessees need for the premises and his ability to pay the rent.
Court relied on the following condition stated in the contract:
That the term of the lease shall be renewed every three years XXX for as long as defendant
needed the premises and can meet and pay the said increases
Both RTC and CA affirmed the decision of the MTC citing that the aforementioned stipulation in the
contract is valid, being a resolutory condition and, therefore, beyond the ambit of Article 1308 of the Civil
Code

Issue:

Whether or not the stipulation in the contract stating that "for as long as defendant needed the premises and can
meet and pay the said increases" is valid

Held/Ratio:

No. Contrary to the ruling of respondent court, the disputed stipulation is a purely potestative condition because it
leaves the effectivity and enjoyment of leasehold rights to the sole and exclusive will of the lessee.

In an action for ejectment, the defense interposed by the lessees that the contract of lease authorized them to
continue occupying the premises as long as they paid the rents is untenable because it would leave to the lessees the
sole power to determine whether the lease should continue or not. If this defense were to be allowed, so long as
defendants elected to continue the lease by continuing the payment of the rentals, the owner would never be able to
discontinue it; conversely, although the owner should desire the lease to continue, the lessees could effectively
thwart his purpose if they should prefer to terminate the contract by the simple expedient of stopping payment of the
rentals.

Respondent ordered to vacate premises.

* Note: Court held that this was a suspensive condition since the renewal of the lease depended on such condition.

MD Taylor vs. Uy Tieng

by Dy, Ramon

Doctrine: A stipulation in the contract which gives one of the parties the right to cancel the contract due to a
condition is valid. Even though the reason for the condition is due to the independent will of the party

Recit-ready:
Taylor contracted with Uy Tieng to establish an oil factory
 Established a contract which contained a clause, that if the machinery did not arrive in
manila, Uy Tieng had the right to cancel the contract
The machinery did not arrive. Due to the alleged intentional will of Taylor because he
foresaw that the oil business might not have large returns anymore
Uy Tieng cancelled the contract.
Valid? YES
They had the right to exercise the clause in the contract.
The reason for the condition can be for ANY REASON intentional will is valid
The cancellation of the contract will be dependent on the will of one of the parties
due to a condition. But this circumstance does not make the stipulation illegal.
Interpretation of the court should not be restrictive cancellation of the contract due
to ANY CAUSE
To impose this interpretation upon those words would in our opinion constitute an unjustifiable invasion of the power of
the parties to establish the terms which they deem advisable

Facts:
December 12 1918 Taylor contracted his services to Tan Liuan & Co a superintendent of oil
factory
The contract lasted 2 years 600 salary for 1 year. 700 salary for 2 year plus 60 electricity
st nd

bills
Time of agreement, no machinery yet for the factory Stipulation in the contract.
Should the machinery to be installed in factory fail for any reason, within period of 6
months, to arrive in the city of Manila within a period of six months from date hereof
the contract may be cancelled by the party at its option. Such cancellation not to occur
before the expiration of 6 months
Machinery did not arrive in Manila within 6 months,
Was alleged to be because of the will of MD Taylor, the machinery and equipment did not arrive in
manila
o Saw that oil business might not have large returns anymore
o Cancelled the contract through their own will
o Utilized the clause in the contract that if the machinery did not arrive
= cancellation of contract
o INTENTIONALLY CANCELLED THE CONTRACT
Interpretation of creditor: Were assailing that the cancellation of
the contract was because of the own will of the debtor. They said that
it should be interpreted as the condition was because of causes not
relative to the will of the debtor

Issue: W/N The right to cancellation of the contract by only one of the parties was just or not JUSTIFIED

Held/Ratio:
Defendants had the right to cancel the
Contract in the contingency that occurred.
The language used in the stipulation should be
given effect in its ordinary sense, without
technicality or circumvention; and in this sense
it is believed that the parties to the contract
must have understood it.
Article 1256 of the Civil Code in our opinion creates no impediment to the
insertion in a contract for personal service of a resolutory condition
permitting the cancellation of the contract by one of the parties.

the cancellation of a contract in accordance with conditions agreed upon

beforehand is fulfilment
The cancellation of the contract will be dependent on the will of one of the
parties due to a condition. But this circumstance does not make the
stipulation illegal.
Interpretation of the court should not be restrictive cancellation of the
contract due to ANY CAUSE
To impose this interpretation upon those words would in our opinion
constitute an unjustifiable invasion of the power of the parties to establish
the terms which they deem advisable
Catungal vs. Rodriguez
by Geraldez, Nico
s
Doctrine: Paragraph 1(b) of the Conditional DOS, stating that respondent shall pay the balance of the purchase
price when he has successfully negotiated and secured a road right of way, is not a condition on the perfection of the
contract nor on the validity of the entire contract or its compliance as contemplated in Article 1308. It is a condition
imposed only on respondents obligation to pay the remainder of the purchase price. In our view and applying
Article 1182, such a condition is not purely potestative as petitioners contend. It is not dependent on the sole will of
the debtor but also on the will of third persons who own the adjacent land and from whom the road right of way
shall be negotiated. This type of mixed condition is expressly allowed under Article 1182 of the Civil Code.

Recit-ready: Catungal and Rodriguez entered into a deed of sale wherein the Catungals will be selling Rodriguez
land in Talamban, Cebu City with an area of 65,246 sqm. The DOS stipulated that the sale of the property would be
dependent on the creation of a road right of way cutting across the national road toward the property. Rodriguez
attempted to secure the road right ofway but to no avail as he was having a hard time purchasing the properties
around the road.
Catungals decided to cancel the contract because Rodriguez was taking too long.
Rodriguez filed a case with the RTC to enjoin Catungals from cancelling the contract. CA affirmed.
Catungal is now assessing the contract for being void ab initio because they allege that the DOS is potestative and
that only Rodriguez has the option to rescind the contract.
Rodriguezs option to rescind the contract is not purely potestative but rather also subject to the same mixed
condition as his obligation to pay the balance of the purchase price i.e., the negotiation of a road right of way. In the
event the condition is fulfilled (or the negotiation is successful), Rodriguez must pay the balance of the purchase
price. In the event the condition is not fulfilled (or the negotiation fails), Rodriguez has the choice either (a) to not
proceed with the sale and demand return of his downpayment or (b) considering that the condition was imposed for
his benefit, to waive the condition and still pay the purchase price despite the lack of road access. This is the most
just interpretation of the parties contract that gives effect to all its provisions.
Facts:

Agapita T. Catungal (Agapita) owned a parcel of land with an area of 65,246 square meters, in her name situated in
the Barrio of Talamban, Cebu City.
On April 23, 1990, Agapita, with the consent of her husband Jose, entered into a Contract to sell with respondent
Rodriguez. Subsequently, the Contract to Sell was purportedly upgraded into a Conditional Deed of Sale dated July
26, 1990 between the same parties
The provisions of the Conditional Deed of Sale pertinent to the present dispute are quoted below:
1. Vendor to sell property for total 25,000,000
a. 500,000 downpayment upon signing of this deed of sale
b. The balance of 24,500,000 shall be payable in five separate checks, first (4.5m), remaining four (5m) each
payable:

After the vendee successfully negotiates, secures and provides a road right of way in cutting across lot
10884 up to the national road. Either by widening the existing road right of way or by securing a new road right of
way. If however said Road Right of Way could not be negotiated, the VENDEE shall give notice to the VENDOR
for them to reassess and solve the problem by taking other options and should the situation ultimately prove futile,
he shall take steps to rescind or cancel the herein Conditional Deed of Sale.
5. That the VENDEE has the option to rescind the sale. In the event the VENDEE exercises his option to rescind the
herein Conditional Deed of Sale, the VENDEE shall notify the VENDOR by way of a written notice relinquishing
his rights over the property. The VENDEE shall then be reimbursed by the VENDOR the sum of FIVE HUNDRED
THOUSAND PESOS (P500,000.00) representing the downpayment, interest free, payable but contingent upon the
event that the VENDOR shall have been able to sell the property to another party. [8]
Rodriguez purportedly secured the necessary surveys and plans.
Catungal requested an advance of P5,000,000.00. Rodriquez refused on the ground that the amount was substantial
and was not due under the terms of their agreement. Shortly after, he learned that Catungals were offering property
to 3 party.
rd

November 15, 1990 Rodriguez received a letter from Catungal saying that the contract has been cancelled.
Rodriquez made a complaint to enjoin Catungals.
Catungal claims that they had the right to rescind the contract in view of (1) Rodriguezs failure to negotiate the road
right of way despite the lapse of several months since the signing of the contract, and (2) his refusal to pay the
additional amount of P5,000,000.00 asked by the Catungals. The Catungals contended that Rodriguez did not have
an exclusive right to rescind the contract and that the contract, being reciprocal, meant both parties had the right to
rescind. The spouses Catungal further claimed that it was Rodriguez who was in breach of their agreement and
[23]

guilty of bad faith which justified their rescission of the contract

Rodriguez eventually found out that the Catungals were hindering him from securing a road right of way by talking
to the owners of the properties in the road right of way as they were currently in talks with third party interested
buyers.
RTC ruled in favor of Rodriguez, finding that: (a) under the contract it was complainant (Rodriguez) that had the
option to rescind the sale; (b) Rodriguezs obligation to pay the balance of the purchase price arises only upon
successful negotiation of the road right of way; (c) he proved his diligent efforts to negotiate the road right of way;
(d) the spouses Catungal were guilty of misrepresentation which defeated Rodriguezs efforts to acquire the road
right of way; and (e) the Catungals rescission of the contract had no basis and was in bad faith.
CA affirmed the decision of the RTC
In MOR counsel for Catungal argued for the first time that paragraphs 1(b) and 5 of the Conditional Deed of Sale,
[49]

whether taken separately or jointly, violated the principle of mutuality of contracts under Article 1308 of the Civil
Code and thus, said contract was void ab initio.

Catungal spouses died.

Heirs of Catungal Spouses brought issue to the SC which essentially argued that the Court of Appeals erred in not
finding that paragraphs 1(b) and/or 5 of the Conditional Deed of Sale, violated the principle of mutuality of contracts
under Article 1308 of the Civil Code. Thus, said contract was supposedly void ab initio and the Catungals rescission
thereof was superfluous.
Issue: WON Paragraphs 1(b) and 5 of the Conditional Deed of Sale is void for violating the principle of mutuality
of contracts under Article 1308 of the Civil Code?

Held/Ratio: NO
It is elementary that in conditional obligations, the acquisition of rights, as well as the extinguishment or loss of
those already acquired, shall depend upon the happening of the event which constitutes the condition .

In the past, this Court has distinguished between a condition imposed on the perfection of a contract and a condition
imposed merely on the performance of an obligation. While failure to comply with the first condition results in the
failure of a contract, failure to comply with the second merely gives the other party the option to either refuse to
proceed with the sale or to waive the condition.
Art. 1545. Where the obligation of either party to a contract of sale is subject to any condition which is not
performed, such party may refuse to proceed with the contract or he may waive performance of the condition x x x.
Paragraph 1(b) of the Conditional DOS, stating that respondent shall pay the balance of the purchase price when he
has successfully negotiated and secured a road right of way, is not a condition on the perfection of the contract nor
on the validity of the entire contract or its compliance as contemplated in Article 1308. It is a condition imposed
only on respondents obligation to pay the remainder of the purchase price. In our view and applying Article
1182, such a condition is not purely potestative as petitioners contend. It is not dependent on the sole will of the
debtor but also on the will of third persons who own the adjacent land and from whom the road right of way shall be
negotiated
This type of mixed condition is expressly allowed under Article 1182 of the Civil Code.
The Catungals interpretation of the foregoing stipulation was that Rodriguezs obligation to negotiate and secure a
road right of way was one with a period and that period, i.e., enough time to negotiate, had already lapsed by the
time they demanded the payment of P5,000,000.00 from respondent. Even assuming arguendo that the Catungals
were correct that the respondents obligation to negotiate a road right of way was one with an uncertain period, their
rescission of the Conditional Deed of Sale would still be unwarranted.

Also, Catungals demand of the initial 5m was premature as Rodriguez was allotted significant time to secure and negotitate
for a road right of way

Petitioners posited that the above stipulation was the deadliest provision in the Conditional Deed of Sale for
violating the principle of mutuality of contracts since it purportedly rendered the contract subject to the will of
respondent.
We do not agree.
In sum, Rodriguezs option to rescind the contract is not purely potestative but rather also subject to the same mixed
condition as his obligation to pay the balance of the purchase price i.e., the negotiation of a road right of way. In the
event the condition is fulfilled (or the negotiation is successful), Rodriguez must pay the balance of the purchase
price. In the event the condition is not fulfilled (or the negotiation fails), Rodriguez has the choice either (a) to not
proceed with the sale and demand return of his downpayment or (b) considering that the condition was imposed for
his benefit, to waive the condition and still pay the purchase price despite the lack of road access. This is the most
just interpretation of the parties contract that gives effect to all its provisions.

International Hotel Corp. Vs. Joaquin

by Bautista, Paolo

Doctrine:

In constructive fulfillment under Art. 1186, two requisites need to be satisfied, (1) intent of the obligor to prevent
the fulfillment of the obligation and (2) actual prevention of the fulfillment

Recit-ready:

Joaquin offered to help IHC obtain a foreign loan which was to be guaranteed by DBP. Joaquin and IHC tried to
obtain a loan from Barnes International. However, Barnes failed to deliver the needed loan. Joaquin and IHC then
negotiated a loan with Weston which DBP refused to be a guarantor of. Due to Joaquins failure to secure the loan,
IHC cancelled the 17,000 shares of stock previously issued to Joaquin as payment for their services. Joaquin then
filed a case sought to obtain compensation for his services. He alleged that IHCs actions in negotiating with Barnes
caused him to fail in the fulfillment of his obligation. Lower courts ruled that Joaquin constructively fulfilled his
obligation when he was prevented by IHC from doing so.
SC held that there was no constructive fulfillment under Art. 1186. This is because there is an absence of the
requisite of intent on the part of the obligor to prevent the fulfillment of the obligation. There was also no substantial
performance under Art. 1234 because the failure to perform in this case was not to be considered a slight breach.
However, IHC is nonetheless liable to pay because of constructive fulfillment of a mixed conditional obligation.
This is an obligation with a condition dependent partly on the will of one of the parties and partly on the will of a 3 rd

party or by chance. The existing rule in a mixed conditional obligation is that when the condition was not fulfilled
but the obligor did all in his power to comply with the obligation, the condition should be deemed satisfied.
Considering that the respondents were able to secure an agreement with Weston, and subsequently tried to reverse
the prior cancellation of the guaranty by DBP, we rule that they thereby constructively fulfilled their obligation.

Facts:

Francisco B. Joaquin, Jr. submitted a proposal to the Board of Directors of the International Hotel Corporation (IHC)
for him to render technical assistance in securing a foreign loan for the construction of a hotel, to be guaranteed by
the Development Bank of the Philippines (DBP)
On July 11, 1969, shortly after submitting the application to DBP, Joaquin wrote to IHC to request the payment of
his fees for his services. Joaquin intimated his amenability to receive shares of stock instead of cash in view of
IHCs financial situation. IHC granted their request for payment.
Negotiations with Materials Handling Corporation and, later on, with its principal, Barnes International (Barnes),
ensued. While the negotiations with Barnes were ongoing, Joaquin and Jose Valero, the Executive Director of IHC,
met with another financier, the Weston International Corporation (Weston), to explore possible financing. 11 When
Barnes failed to deliver the needed loan, IHC informed DBP that it would submit Weston for DBPs
consideration.12As a result, DBP cancelled its previous guaranty
On December 13, 1971, IHC entered into an agreement with Weston, and communicated this development to DBP
on June 26, 1972. However, DBP denied the application for guaranty for failure to comply with the conditions
contained in its November 12, 1971 letter. 14

Due to Joaquins failure to secure the needed loan, IHC, through its President Bautista, canceled the 17,000 shares of
stock previously issued to Joaquin and Suarez as payment for their services.
Consequently, Joaquin and Suarez commenced this action for specific performance, annulment, damages and
injunction.
the complaint alleged that the cancellation of the shares had been illegal, and had deprived them of their right to
participate in the meetings and elections held by IHC; that Barnes had been recommended by IHC President
Bautista, not by Joaquin; that they had failed to meet their obligation because President Bautista and his son had
intervened and negotiated with Barnes instead of Weston; that DBP had canceled the guaranty because Barnes had
failed to release the loan; and that IHC had agreed to compensate their services with 17,000 shares of the common
stock plus cash of P1,000,000.00. 16

IHC, filed an answer claiming that the shares issued to Joaquin and Suarez as compensation for their "past and
future services" had been issued in violation of Section 16 of the Corporation Code; that Joaquin and Suarez had not
provided a foreign financier acceptable to DBP; and that they had already received P96,350.00 as payment for their
services.
Under its decision rendered on August 26, 1993, the RTC held IHC liable pursuant to the second paragraph of
Article 1284 of the Civil Code. The RTC found that Joaquin and Suarez had failed to meet their obligations when
IHC had chosen to negotiate with Barnes rather than with Weston, the financier that Joaquin had recommended;
RTC ordered that Joaquin be paid 200,000 and Suarez 50,000
CA concurred with the RTC, upholding IHCs liability under Article 1186 of the Civil Code. It ruled that in the
context of Article 1234 of the Civil Code, Joaquin had substantially performed his obligations and had become
entitled to be paid for his services; and that the issuance of the shares of stock was ultra vires for having been issued
as consideration for future services. Instead of shares of stock, defendant-appellant IHC is ordered to pay plaintiff-
appellant Joaquin a total of P700,000.00 and plaintiff-appellant Suarez P200,000.00, both to be paid in cash.

Issue:

WHETHER OR NOT THE COURT OF APPEALS IS CORRECT IN AWARDING COMPENSATION AND EVEN
MODIFYING THE PAYMENT TO HEREIN RESPONDENTS DESPITE NON-FULFILLMENT OF THEIR
OBLIGATION TO HEREIN PETITIONER

Held/Ratio:

Article 1186 and Article 1234 of the Civil Code cannot be the source of IHCs obligation to pay respondents IHC
argues that it should not be held liable because: (a) it was Joaquin who had recommended Barnes; and (b) IHCs
negotiation with Barnes had been neither intentional nor willfully intended to prevent Joaquin from complying with
his obligations.
IHCs argument is meritorious.
Article 1186 of the Civil Code reads:
Article 1186. The condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment.
This provision refers to the constructive fulfillment of a suspensive condition, whose application calls for two
32

requisites, namely: (a) the intent of the obligor to prevent the fulfillment of the condition, and (b) the actual
prevention of the fulfillment. Mere intention of the debtor to prevent the happening of the condition, or to place
ineffective obstacles to its compliance, without actually preventing the fulfillment, is insufficient.
33
The error lies in the CAs failure to determine IHCs intent to pre-empt Joaquin from meeting his obligations. The
June 20, 1970 minutes of IHCs special board meeting discloses that Joaquin impressed upon the members of the
Board that Materials Handling was offering more favorable terms for IHC.
Evidently, IHC only relied on the opinion of its consultant in deciding to transact with Materials Handling and, later
on, with Barnes. In negotiating with Barnes, IHC had no intention, willful or otherwise, to prevent Joaquin and
Suarez from meeting their undertaking. Such absence of any intention negated the basis for the CAs reliance on
Article 1186 of the Civil Code.
Nor do we agree with the CAs upholding of IHCs liability by virtue of Joaquin and Suarezs substantial
performance. In so ruling, the CA applied Article 1234 of the Civil Code, which states:
Article 1234. If the obligation has been substantially performed in good faith, the obligor may recover as though
there had been a strict and complete fulfillment, less damages suffered by the obligee.
It is well to note that Article 1234 applies only when an obligor admits breaching the contract after honestly and
faithfully performing all the material elements thereof except for some technical aspects that cause no serious harm
to the obligee. IHC correctly submits that the provision refers to an omission or deviation that is slight, or technical
36

and unimportant, and does not affect the real purpose of the contract.
Needless to say, finding the foreign financier that DBP would guarantee was the essence of the parties contract, so
that the failure to completely satisfy such obligation could not be characterized as slight and unimportant as to have
resulted in Joaquin and Suarezs substantial performance that consequentially benefitted IHC. Consequently, Article
1234 did not apply.
IHC is nonetheless liable to pay under the rule on constructive fulfillment of a mixed conditional obligation
Notwithstanding the inapplicability of Article 1186 and Article 1234 of the Civil Code, IHC was liable based on the
nature of the obligation.
To secure a DBP-guaranteed foreign loan did not solely depend on the diligence or the sole will of the respondents
because it required the action and discretion of third persons an able and willing foreign financial institution to
provide the needed funds, and the DBP Board of Governors to guarantee the loan. Such third persons could not be
legally compelled to act in a manner favorable to IHC. There is no question that when the fulfillment of a condition
is dependent partly on the will of one of the contracting parties, or of the obligor, and partly on chance, hazard or
44

the will of a third person, the obligation is mixed. The existing rule in a mixed conditional obligation is that when
45

the condition was not fulfilled but the obligor did all in his power to comply with the obligation, the condition
should be deemed satisfied. 46

Considering that the respondents were able to secure an agreement with Weston, and subsequently tried to reverse
the prior cancellation of the guaranty by DBP, we rule that they thereby constructively fulfilled their obligation.
Considering the absence of an agreement, and in view of respondents constructive fulfillment of their obligation,
the Court has to apply the principle of quantum meruit in determining how much was still due and owing to
respondents. Under the principle of quantum meruit, a contractor is allowed to recover the reasonable value of the
services rendered despite the lack of a written contract
Under the established circumstances, we deem the total amount of P200,000.00 to be reasonable compensation for
respondents services under the principle of quantum meruit.
ACCORDINGLY, the Court DENIES the petition for review on certiorari; and AFFIRMS the decision of the Court
of Appeals promulgated on November 8, 2002 in C.A.-G.R. No. 47094 subject to the MODIFICATIONS that: (a)
International Hotel Corporation is ordered to. pay Francisco G. Joaquin, Jr. and Rafael Suarez P100,000.00 each as
compensation for their services, and (b) the award of P20,000.00 as attorney's fees is deleted.

Golden Valley vs. Pinkian Mining (Inaction, mining, substantial)

By Santiago, Monch

Doctrine: Article 1191, Rescission (Resolution) of reciprocal obligations. Right to rescind an obligation must be
invoked judicially, except when contract itself provides for extra-judicial rescission; Power to rescind is implied in
reciprocal obligations; Extra-judicial rescission.

Facts: (PMC) is the owner of 81 mining claims, 15 of which were covered by Mining Lease Contract (MLC) No.
MRD-56, while the remaining 66 had pending applications for lease. PMC entered into an Operating Agreement
(OA) with petitioner Golden Valley Exploration Incorporation(GVEI),granting the latter "full, exclusive and
irrevocable possession, use, occupancy, and control over the[mining claims], and every matter pertaining to the
examination, exploration, development and mining of the [mining claims] for a period of 25 years.

PMC extra-judicially rescinded the Operating Agreement in a letter to GVEI upon the latters violations thereof.
GVEI contested the rescission, averring that its obligation to pay royalties to PMC arises only when the mining
claims are placed in commercial production which condition has not yet taken place. It also reminded PMC of its
prior payment of the amount of P185,000.00 as future royalties in exchange for PMCs express waiver of any breach
or default on the part of GVEI.

PMC no longer responded to GVEI. Instead, it entered into a Memorandum of Agreement (MOA) with Copper
Valley, Inc. (CVI), whereby the latter was granted the right to "enter, possess, occupy and control the mining claims"
and "to explore and develop the mining claims, mine or extract the ores, mill, process and beneficiate and/or dispose
the mineral products in any method or process," among others, for a period of 25 years.

GVEI filed a Complaint for Specific Performance, Annulment of Contract and Damages against PMC and CVI. The
RTC ruled in its favor, holding that since the mining claims have not been placed in commercial production, there is
no demandable obligation yet for GVEI to pay royalties to PMC. It further declared that no fault or negligence may
be attributed to GVEI for the delay in the commercial production of the mining claims because the non-issuance of
the requisite Mineral Production Sharing Agreement (MPSA)and other government permits, licenses, and consent
were all affected by factors beyond GVEIs control.

The CA reversed the RTC ruling, finding that while the OA gives PMC the right to rescind only on the ground of
(GVEIs) failure to pay the stipulated royalties, Article 1191 of the Civil Code allows PMC the right to rescind the
agreement based on a breach of any of its provisions. It further held that the inaction of GVEI for a period of more
than seven (7) years to operate the areas that were already covered by a perfected mining lease contract and to
acquire the necessary permits and licenses amounted to a substantial breach of the OA , the very purpose of which
was the mining and commercial distribution of derivative products that may be recovered from the mining property

Issue: The central issue for the Courts resolution is whether or not there was a valid rescission of the OA

Held/Ratio: In reciprocal obligations, either party may rescind the contract upon the others substantial breach of the
obligation/s he had assumed thereunder.

More accurately referred to as resolution, the right of rescission under Article 1191 is predicated on a breach of faith
that violates the reciprocity between parties to the contract. This retaliatory remedy is given to the contracting party
who suffers the injurious breach on the premise that it is "unjust that a party be held bound to fulfill his promises
when the other violates his.

As a general rule, the power to rescind an obligation must be invoked judicially and cannot be exercised solely on a
partys own judgment that the other has committed a breach of the obligation. This is so because rescission of a
contract will not be permitted for a slight or casual breach, but only for such substantial and fundamental violations
as would defeat the very object of the parties in making the agreement. As a well-established exception, however, an
injured party need not resort to court action in order to rescind a contract when the contract itself provides that it
may be revoked or cancelled upon violation of its terms and conditions the Court therefore affirms the correctness of
the CAs Decision upholding PMCs unilateral rescission of the OA due to GVEIs non-payment of royalties
considering the parties express stipulation in the OA that said agreement may be cancelled on such ground. By
expressly stipulating in the OA that GVEIs non-payment of royalties would give PMC sufficient cause to cancel or
rescind the OA, the parties clearly had considered such violation to be a substantial breach of their agreement. Thus
PMCs extra-judicial rescission of the OA based on the said ground was valid.

While it remains apparent that PMC had not judicially invoked the other grounds to rescind in this case, the only
recognizable effect, however, is with respect to the reckoning point as to when the contract would be formally
regarded as rescinded. Where parties agree to a stipulation allowing extra-judicial rescission, no judicial decree is
necessary for rescission to take place; the extra-judicial rescission immediately releases the party from its obligation
under the contract, subject only to court reversal if found improper.ed On the other hand, without a stipulation
allowing extra-judicial rescission, it is the judicial decree that rescinds, and not the will of the rescinding party.

An extra-judicial 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 extra-judicial rescission is questioned by the opposing party in court.

The Court has determined that the other grounds raised by PMC in its Letter dated June 8, 1999 to GVEI (the
existence of which had not been convincingly disputed herein) amounts to the latter's substantial breach of the OA.
To the Court's mind, said infractions, when taken together, ultimately resulted in GVEI's failure to faithfully perform
its primordial obligation under the OA to explore and develop PMC's mining claims as well as to put the same into
commercial operation. Accordingly, PMC's rescission of the OA on the foregoing grounds, in addition to the ground
of non-payment of royalties, is equally valid.

UP vs. De Los Angeles (UP-Loggers)

by Mordeno, Gia

Doctrine:
The party that deems itself to be injured may rescind a contract without the need of judicial action. In doing so, they
must make the rescission known to the other party. The other party may seek judicial action if it the rescission denies
them of due process. Should there be a judicial action, the final judgment of the court shall determine the awarding
of damages.

Recit-ready:
Facts
UP entered into a logging agreement with ALUMCO to cut, collect, and remove timber from the Land
Grant in consideration of payment to UP.
ALUMCO began its operations and failed to pay its payments. They received notice that UP will rescind
the contract. It then executed an instrument stating that the creditor, UP, shall have the right to rescind the
agreement without the necessity of judicial suit and shall be awarded damages.
ALUMCO resumed operations and again failed to pay its payments. UP finally rescinded the contract and it
was no longer in effect.
UP conducted a bid for the next concessionaire and awarded it to Sta. Clara Logging Inc. ALUMCO filed
a petition to enjoin UP from conducting the bid but the contract has been already concluded.
ALUMCO declared UP in contempt and directed Sta. Clara from conducting its operations. ALUMCO
claims that their nonpayment was the fault of its former manager and they could not sell the logs because of
their rotten state. They also claimed that the rescission was invalid because there was no court order
declaring so.
Issue
Whether or not a UP can treat the contract rescinded may disregard the same before and judicial
pronouncement to that effect.
Held
The Court ruled that the rescission was valid. The parties have previously agreed in the instrument executed
by ALUMCO that the creditor may rescind the contract in case of nonpayment. There is nothing in the law
that prohibits the parties from entering into agreement that violation of the terms of the contract would
cause cancellation even without court intervention.

Facts:
UP operated and developed a timber concession or Land Grant for additional income for its support. On
November 2, 1960, UP and ALUMCO entered into a logging agreement which granted exclusive authority,
for a period starting from the date of agreement to December 31, 1965 and extendible for 5 years by mutual
agreement, to cut, collect and remove timber from the Land Grant, in consideration of payment to UP of
royalties, forest fees, etc.
 ALUMCO cut and removed timber as of December 8, 1964 and incurred P219 362.94 but had failed to pay
despite the demand of UP. It later received notice that UP would rescind or terminate the logging
agreement. ALUMCO executed an instrument stating that in case the debtor fails to comply with the
promises in the agreement, the creditor shall have the right to rescind the agreement without the necessity
of judicial suit and the creditor shall be entitled to P50, 000 for liquidate damages. ALUMCO continued its
logging operation and again incurred an unpaid account from its operations from December 9, 1965 to July
15, 1965. On July 19, 1965, UP informed ALUMCO that it had rescinded the contract and it was no longer
in effect. They also filed a complaint against ALUMCO for the collection of the payment and prayed for
and obtained an order for preliminary attachment and preliminary injunction restraining ALUMCO from
continuing its logging operations.
Before the issuance of the preliminary injunction, UP conducted a bidding for the next concessionaire. It
was awarded to Sta. Clara Lumber Company. The logging contract was signed on February 16, 1966.
On November 12, 1965 ALUMCO filed a petition to enjoin UP from conducting the bidding and issued
such order on February 25, 1965. UP received the order on the same date after it had concluded its contract
with Sta. Clara.
ALUMCO declared UP in contempt and directed Sta. Clara from conducting logging operations. UP moved
for reconsideration but was denied. ALUMCO did not deny any the allegations in the petition. However, in
its defense, it blamed its former general manager Cesar Guy for its inability to pay the sum of money. They
also reasoned the failure to pursue the manner of payments because the logs were rotten and could not be
sold to Sta. Clara. They claimed that the rescission made by UP was invalid because there was no court
order.

Issue:
Whether or not a UP can treat the contract rescinded may disregard the same before and judicial
pronouncement to that effect.

Held/Ratio:

Yes.
Respondent contend that it is only after a final court decree declaring the contract rescinded for UP to
disregard ALUMCOs right under the contract and treat the agreement as breached and of no force or
effect.
UP and ALUMCO had expressly stipulated that upon the default by the debtor, the creditor has the right
and power to consider the agreement as rescinded without the necessity of any judicial suit.
The Court has stated that there is nothing in the law that prohibits the parties from entering into agreement
that violation of the terms of the contract would cause cancellation even without court intervention.
The party that cancelled the contract must make known to the other contracting party that the contract has
been cancelled. The cancellation of the contract is provisional and is subject to the scrutiny y and review by
the proper court. If the other party denies that the rescission is justified, it may resort to judicial action.
After judicial action, the decision rendered by the court will determine if the responsible parties will
sentenced to damages. It is through the final judgment of the court that will settle whether the action was
correct in law. It does not require that the party injured must first file suit and wait for a judgment before
rescinding the contract.
In light of the foregoing principles, UP proved that there was a breach of contract and defaults in payment
by ALUMCO to the extent that the court issued a writ of preliminary injunction stopping ALUMCO
operations and the denial of its motions to lift injunctions. ALUMCOs excuse that the misconduct of its
former manager and the rotten logs are not sufficient excuses for non-payment.

Maglasang vs. Northwestern

by Yarra, Johan
Doctrine (Substantial breach and casual breach): Substantial breach is defined as that breach that defeats the
object of the parties in entering into an agreement (a ground for rescission). A slight or casual breach is defined as
the breach that does not fundamentally defeat the object of the parties in entering into an agreement. There must be a
failure, without legal excuse, to perform any promise which forms the whole or part of the contract.

Recit-ready: Northwestern entered into a contract with herein petitioner for the construction of a modern IBS to get
accreditation from CHED. Two contracts were executed for the project at the cost of PhP2.97M. It is essentially
agreed upon that the installation must be compliant to the standards of CHED and IMO. To execute the contract,
Northwestern paid 1M as down payment. But months after, it would halt the ongoing project because the materials
delivered for the IBS were substandard (old, no instruction manuals, and warranty certificates, reconditioned
machines, did not satisfy the standards of CHED and IMO). Because of the stoppage of work, the petitioner filed a
complaint before the RTC praying that the respondent pay the remaining balance. RTC held both parties at fault and
ordered for mutual restitution. CA affirmed but declared that there was a rescission of contract because GL
Enterprises committed substantial breach for supplying defective materials for the project. Hence, this petition.

The pertinent issue to be resolved is whether the CA erred in finding substantial breach on the part of GL
Enterprises.
The SC agrees with the CA that there was rescission of the contract due to substantial breach . Substantial
breach is defined as that breach that defeats the object of the parties in entering into an agreement. It is an essential
requisite of the contract that the project must meet the standards of the CHED and the IMO, so that Northwestern
can get accredited to offer maritime-related courses as well as effectively facilitate the learning of its students.This
object is defeated by the fact that the materials delivered and used to build the IBS were plainly substandard and
defective (refer to the specific examples in the ruling). As SC stated, by no stretch of the imagination could these
form part of the most modern IBS compliant with the IMO and CHED standards.To complete the discussion, the SC
disagrees with the courts a quo holding that Northwestern committed slight or casual breach for stopping the work
(contract called for the completion of IBS). To be held liable for committing such, there must be a failure without
legal excuse to perform any promise (that is not fundamental) which forms the whole or part of the contract. In the
case at bar, Northwestern was justified for terminating the job, as it just prudently avoided unnecessary expenses and
the highly possible rejection of the IBS.

Petition denied and the decision of CA is hereby affirmed.

Facts: Northwestern University, Inc. (herein respondent) is an educational institution offering maritime-related
courses. It engaged the services of herein petitioner GL Enterprises for the installation of a new Integrated Bridge
System (IBS) in Laoag City. The reason is that the IBS will be the students training laboratory and is required by
CHED before a school could offer maritime transportation programs. The intention is to supply and install specific
components in order to build the most modern IBS which would be compliant to the standards of International
Maritime Organization (IMO) and to CHED.
Two contracts were executed for the said purpose. The first contract partly reads: That in consideration of the
payment herein mentioned to be made by the First Party (defendant), the Second Party agrees to furnish, supply,
install, and integrate the most modern IBS located at Northwestern University followed by further specifications
as to what shall be supplied and installed composing the IBS. The project cost as computed in this contract equaled
to PhP2.7M. The second contract was essentially the same, but it only stated additional requirements to be built to
compose the IBS. The cost was PhP270,000. Common to both contracts are the ff. provisions: (1) the IBS and its
components must be compliant with the IMO and CHED standard and with manuals for simulators/major
equipment; (2) the contracts may be terminated if one party commits a substantial breach of its undertaking, (3) any
dispute under the agreement shall first be settled mutually between the parties, but if not obtained, resort shall be
sought in the courts of law.
Subsequently, Northwestern paid 1M as down payment. Two months after the execution of contract, GL Enterprises
delivered materials to the project site, but upon starting installation, Northwestern halted the operations primarily
because the materials delivered were substandard (old, no instruction manuals and warranty certificates, contained,
indicative of being reconditioned machines, did not meet IMO and CHED standards).And so Northwestern
demanded compliance and suggested an amicable settlement. However, GL Enterprises filed a complaint for breach
of contract and prayed that they be paid PhP1.97M (remaining balance), moral, exemplary, attorneys fees, and
litigation expenses, cost of suit. They contend that the breach of contract arose from the order of work stoppage
preventing the installation of materials for IBS. In its defense, Northwestern asserted since the equipment delivered
were not in accordance with the specifications in the contract, all succeeding works would be futile and would entail
unnecessary expenses.
The RTC held both parties at fault. It found that Northwestern unduly halted the operations, even if the contracts
called for a completed project to be evaluated by the CHED. In turn, the breach committed by GL Enterprises
consisted of the delivery of substandard equipment that were not compliant with IMO and CHED standards. And so
it ordered mutual restitution, which would thereby restore the parties to their original positions.
Both parties appealed to the CA, but the latter held that the one guilty of substantial breach and liable for attorneys
fees is GL Enterprises. The essence of the contract was to install an IBS compliant with the CHED and IMO
standards. The delivery of defective equipment which was considered as a substantial breach as it defeated the
object of the contract. Applying Art. 1191 of the Civil Code, the CA declared the rescission of the contracts and
affirmed the RTCs order of mutual restitution but added the grant of P50,000 by way of attorneys fees.
Issue: Hence this petition to the SC. The pertinent issue to be resolved is whether the CA erred in (1) finding
substantial breach on the part of GL Enterprises; (2) refusing petitioners claims for damages, and (3) awarding
attorneys fees to Northwestern

Held/Ratio: No. The SC agrees with the CA that the correct provision to apply is Article 1191. The former
emphasizes that in rescission of contracts, there must be substantial breach. In Cannu v. Galang, substantial
breaches, unlike slight or casual, are defined as fundamental breaches that defeat the object of the parties in entering
into an agreement. But this is still dependent on the attending circumstances. In its discussion, the SC expounded on
why there was a substantial breach. It stressed that it is clear from the provisions of the contract that the materials to
be delivered must be compliant with the CHED and IMO standards and must be complete with manuals (refer back
to the contracts), with the goal of obtaining CHED accreditation for Northwesterns maritime-related courses.
Pursuant to CHED Memorandum Order No. 10, Series of 1999, as amended by CMO No. 13, Series of 2005,
generally the standard was to build an IBS which would effectively facilitate the learning of the students. In this
regard, GL Enterprises failed in meeting these responsibilities. The testimonial evidence of the respondent quoted by
the CA specifies on why the materials delivered were defective and substandard. E.g. (1) the gyrocompass has no
marker, no model, no serial number, no gimbal, no gyroscope and a bulb to work it properly to point the true North
(it is important that the students know how to locate the true North, (2) the steering was that of an ordinary
automobile, etc. As pointed out by the SC, by no stretch of the imagination could these form part of the most modern
IBS compliant with the IMO and CHED standards.
The SC also rejects the petitioners assertion that Northwestern should have waited for the completion of the IBS. As
a response, SC quotes and agrees with the CA that the respondent could not just sit still and wait for such day that its
accreditation may not be granted by CHED due to the apparent substandard equipment installed in the bridge
system.
As related to the doctrine involved in this case, SC also discussed regarding slight or casual breach. It was defined as
a breach that does not fundamentally defeat the object of the parties in entering into an agreement. There must be a
failure, without legal excuse, to perform any promise which forms the whole or part of the contract. And that in
contrast to the ruling of the appellate court, the SC argued that Northwestern is not liable for a casual breach (note
that the contract called for a completion of the IBS to be evaluated by CHED) since its order of stoppage was
justified. It constituted a legal excuse to prevent the highly possible rejection of the IBS. As to the damages, the
Supreme Court concurred with the CA in disallowing GL Enterprises to claim actual awards for unrealized profits,
moral, exemplary damages. It also ordered the petitioner to pay the attorneys fees of Northwestern. The assailed
decision of CA is hereby affirmed.

CJ Yulo vs. Roman Catholic BIshop

by Dalumpines, Mikey

Doctrine: Casual breaches of contract do not automatically render said contract recissible

Recit-ready: Petitioner C-J Yulo & Sons, Inc. donated land to respondent Roman Catholic Bishop of San Pablo, Inc. for the purpose of
establishing a home for the less fortunate aged and other elderly of Laguna.
Petitioner made the donation under the conditions that the land was to be used specifically for the above purpose, but the donees may utilize parts
of the land not needed for the home as agricultural land or to be leased out to meet expenses and develop the home BUT only with the express
written consent of petitioner. Otherwise, the donation would be revoked and the land taken back by the petitioner.
After the land had been donated, respondents leased out part of the land in 3 different instances, all of which were without the express written
consent of petitioner.

Hence, the petitioner filed a case against respondents in the Calamba RTC for revocation and return of the donation due to noncompliance with
the conditions. The RTC judged in favor of petitioner.

After which, respondent elevated the case to the Court of Appeals, who reversed the RTC decision and judged in favor of the respondent,
upholding the donation on the grounds that such onerous donation was covered by the law on obligations and contracts, and that the lack of
written consent only equates to a casual breach which does warrant revocation of donation as opposed to substantial breach which defeats the
purpose of the contract which was perfected, according to article 1191.

Petitioner then assailed the CA decision by bringing the present case up to the SC. The SC upheld the CA decision, agreeing that the CA was
correct in applying oblicon law and classifying the matter as an onerous donation, wherein said lack of written consent secured by respondents
only amounted to a casual breach of contract which does not warrant rescission because it did not detract from the purpose of the donation and
was not substantial enough of a breach.

Wherefore, the petition is DENIED and the CA decision is AFFIRMED.

Facts: - Petitioner C-J Yulo & Sons, Inc. owned a parcel of land in Canlubang, Calamba, Laguna (TCT T-82803).
Petitioner donated said land to respondent Roman Catholic Bishop of San Pablo, Inc, a religious
corporation (associated with the Church and actual bishop).
Donation was made with conditions, essentially specifically designating the land for a home for the
underprivileged elderly and infirm of the local community, with any unused portion of the land allowed to
be used as agricultural land for the institutions use or to be leased out for the purpose of defraying
expenses.
Such usage could only be done with the EXPRESS WRITTEN CONSENT of petitioner. Otherwise,
donation would be revoked and the land taken back.
After the donation, respondents leased out the land thrice (once as a sugarcane plantation, 2nd as a ranch,
3rd as a cattle fattening facility) none of which had the express written consent stated above.
Petitioner filed a case against respondents in the Calamba RTC for revocation of donation due to
breach/noncompliance of their donation conditions (no consent, still no facility for the elderly, currently
being leased out).
RTC judged in favor of petitioners.
Respondents assailed RTC decision with the CA.
CA judged in favor of respondents, reversing RTC decision.
Petitioner assailed CA decision with the SC.
SC judged in favor of respondents, denying petition and upholding CA decision.
SC agreed with CAs finding that the donation was onerous and that it would be under oblicon law. Under
Art. 1191, only a substantial breach of contract which detracts from the purpose of the perfected contract
will be grounds for rescission. In this case, it is only a casual breach, and evidence suggests that the
respondents were being prudent and looking for ways to fulfill their charitable purpose.
Wherefore, petition is DENIED and CA decision is UPHELD.

Issue: WON the lack of written consent in this case is a grounds for rescission of the donation (substantial vs. casual
breach)

Held/Ratio: NO. Said breach is only a casual breach of contract which did not detract from the purpose of the
onerous donation, and is therefore not a grounds for revocation of donation.

Velarde vs. CA
by Reyes, Phoebe

Doctrine:
A substantial breach of a reciprocal obligation, like failure to pay the price in the manner prescribed by the contract,
entitles the injured party to rescind the obligation. Rescission abrogates the contract from its inception and requires a
mutual restitution of benefits received.
Recit-ready:
Private respondent executed a Deed of Sale with Assumption of Mortgage as vendor, in favor of petitioner, as
vendee. The conditions were that the vendee would pay 800K Pesos to the vendor, and assume mortgage obligation
on the property in the amount of 1.8M Pesos in favor of BPI in the name of the vendor. While waiting for the
assumption of the mortgage obligations on the property purchased to be approved by BPI, vendee shall continue to
pay the said loan in the name of private respondent.

Respondents paid mortgage obligations to BPI for 3 months. However, they were informed that the Application for
Assumption of Mortgage with BPI was not approved, and they stopped making any further payment. Private
respondent sent petitioners a notice of cancellation/rescission of the intended sale of the subject property allegedly
due to the latters failure to comply with the terms and conditions of the Deed of Sale.

Petitioners filed a complaint for specific performance, nullity of cancellation, writ of possession and damages. RTC
dismissed the complaint. Petitioner filed for MR. MR was granted. Judge ordered parties to proceed with the sale.

Private respondents appealed to CA. CA dismissed petitioner's complaint. The agreement of the parties involved a
reciprocal obligation, the non-fulfillment of which entitles the other party to rescind the contract. Thus, the non-
payment of the mortgage obligation by petitioner would create a right to demand payment or to rescind the contract,
or to criminal prosecution.

Petitioner appealed to SC. SC ruled that there was a breach of contract, that petitioners did not perform their
correlative obligation of paying the contract price in the manner agreed upon. Thus, private respondents validly
exercised their right to rescind the contract. Considering that the rescission of the contract is based on Article 1191
of the Civil Code, mutual restitution is required to bring back the parties to their original situation prior to the
inception of the contract. Rescission creates the obligation to return the object of the contract. To rescind is to
declare a contract void at its inception and to put an end to it as though it never was. It is not merely to terminate it
and release the parties from further obligations to each other, but to abrogate it from the beginning and restore the
parties to their relative positions as if no contract has been made.

Facts:

David Raymundo [private respondent] is the absolute and registered owner of a parcel of land, together with the
house and other improvements thereon. Defendant George Raymundo [private respondent] is David's father who
negotiated with petitioners for the sale of said property, which was, however, under lease.

On August 8, 1986, a Deed of Sale with Assumption of Mortgage was executed by defendant David Raymundo, as
vendor, in favor of plaintiff Avelina Velarde, as vendee. The conditions were that the vendee would pay 800K Pesos
to the vendor, and assume mortgage obligation on the property in the amount of 1.8M Pesos in favor of BPI in the
name of the vendor. While waiting for the assumption of the mortgage obligations on the property purchased to be
approved by BPI, vendee shall continue to pay the said loan in the name of David Raymundo. In the event that
vendee violates any of the terms and conditions of the said Deed of Real Estate Mortgage, the 800k and payments
made with BPI, shall be forfeited in favor of David Raymundo without necessity of notice or any judicial
declaration to that effect, and that Raymundo resumes the ownership.

Petitioners paid BPI for 3 months. They were advised that the Application for Assumption of Mortgage with BPI
was not approved, and they stopped making any further payment. Private respondent informed petitioners that their
non-payment to the mortgage bank constituted non-performance of their obligation.

They sent petitioners a notarial notice of cancellation/rescission of the intended sale of the subject property allegedly
due to the latter's failure to comply with the terms and conditions of the Deed of Sale with Assumption of Mortgage
and the Undertaking.
Petitioners filed a complaint for specific performance, nullity of cancellation, writ of possession and damages. RTC
dismissed the complaint. Petitioner filed for MR. MR was granted. Judge ordered parties to proceed with the sale.

Private respondents appealed to CA. CA dismissed petitioner's complaint. CA ruled that part of the consideration of
the sale was the assumption by Velarde of the mortgage obligation of Raymundo in the amount of P1.8 million.
BPI's approval would mean that payment of mortgage obligation will now be in the name of Velarde. And in
the event said application is disapproved, Velarde had to pay in full. The disapproval by BPI of the application
for assumption of mortgage cannot be used as an excuse for Velardes non-payment of the balance of the purchase
price. The agreement of the parties involved a reciprocal obligation wherein the obligation of one is a resolutory
condition of the obligation of the other, the non-fulfillment of which entitles the other party to rescind the contract.
Thus, the non-payment of the mortgage obligation by petitioner would create a right to demand payment or to
rescind the contract, or to criminal prosecution.

Petitioner appealed to SC.

Issue:
WON CA erred in holding that the rescission (resolution) of the contract by private respondents was justified.

Held/Ratio:
There was a breach of contract. In a contract of sale, the seller obligates itself to transfer the ownership of and
deliver a determinate thing, and the buyer to pay therefor a price certain in money or its equivalent. Private
respondent already performed their obligation through the execution of the Deed of Sale, which effectively
transferred ownership of the property to petitioner through constructive delivery. Petitioners, on the other hand, did
not perform their correlative obligation of paying the contract price in the manner agreed upon.

In the present case, private respondents validly exercised their right to rescind the contract, because of the failure of
petitioners to comply with their obligation to pay the balance of the purchase price. Indubitably, the latter violated
the very essence of reciprocity in the contract of sale, a violation that consequently gave rise to private respondents
right to rescind the same in accordance with law.

As discussed earlier, the breach committed by petitioners was the nonperformance of a reciprocal obligation, not a
violation of the terms and conditions of the mortgage contract. Therefore, the automatic rescission and forfeiture of
payment clauses stipulated in the contract does not apply. Instead, Civil Code provisions shall govern and regulate
the resolution of this controversy.

Considering that the rescission of the contract is based on Article 1191 of the Civil Code, mutual restitution is
required to bring back the parties to their original situation prior to the inception of the contract. Accordingly,
the initial payment of P800,000 and the corresponding mortgage payments for 3 months advanced by petitioners
should be returned by private respondents, lest the latter unjustly enrich themselves at the expense of the former.

Rescission creates the obligation to return the object of the contract. It can be carried out only when the one
who demands rescission can return whatever he may be obliged to restore. To rescind is to declare a contract
void at its inception and to put an end to it as though it never was. It is not merely to terminate it and release
the parties from further obligations to each other, but to abrogate it from the beginning and restore the
parties to their relative positions as if no contract has been made.

Gotesco Properties v. Fajardo (Rescission, Article 1191)

GR 201167
February 27, 2013
Doctrine: The effects of rescission under Article 1385 of the Code are equally applicable to cases under Article 1191.

Recit Ready Digest

Spouses Fajardo entered into a contract to sell with Gotesco Properties Inc. to purchase a lot where Sps. Fajardo
pays the petitioner 126,000 pesos for 10 years including a 9% interest per annum while Gotesco Properties Inc. shall
execute a final deed of sale upon full payment. The Fajardos completed their payment but despite subsequent
demands, GPI failed to comply with its obligations to execute the deed, deliver the title, and provide for the physical
possession of the lot. This led them to file an action for rescission of contract with damages. In its defense, GPI
contends that its failure to comply with the obligations was due to the pending litigation for inscription of the lots.
The HLURB, HLURB Board of Commissioners, the Office of the President, and the Court of Appeals all ruled in
favor of the Fajardo with the CA modifying the ruling that the refunded amount be equivalent to the prevailing
market value of the land following Solid Homes. Hence this petition.

The issue is Whether Spouses Fajardo have the right to rescind the contract considering that GPIs non-compliance
was due to an event beyond their control. Yes.

The Court held that there was a substantial breach of contract due to GPIs long delay in the performance of the
obligation which was unreasonable and unjustifiable for GPI only acted on Fajardos demands when it was brought
in court. Hence Fajardo can avail of the remedy of rescission.

In rescinding the contract, it is not enough that the parties be free from their respective obligations. Rescission aims
to put the parties back to where they were before entering in the obligation

With respect to the rescission, the Court held that it is noteworthy to point out that rescission does not merely
terminate the contract and release the parties from further obligations to each other, but abrogates the contract
from its inception and restores the parties to their original positions as if no contract has been made.
Consequently, mutual restitution, which entails the return of the benefits that each party may have received as a
result of the contract, is thus required.

[S]ince Article 1385 of the Civil Code expressly and clearly states that rescission creates the obligation to return
the things which were the object of the contract, together with their fruits, and the price with its interest, the Court
finds no justification to sustain petitioners position that said Article 1385 does not apply to rescission under Article
1191.

Facts
On January 24, 1995, Spouses Fajardo entered into a contract to sell with Gotesco Properties Inc. (GPI) for the
purchase of a 100 sq. meter lot in Evergreen Executive Village located at Novaliches, Quezon City. The said subject
lot is a portion of a bigger lot with the mother title TCT 244250.
In the contract, the parties stipulated that Spouses Fajardo promised to pay 126,000 pesos for 10 years including
a 9% interest per annum. On the other hand, GPI promised to execute a final deed of sale in favor of the spouses
upon full payment of the stipulated consideration.
However, when the spouses Fajardo were able to pay the full amount on January 17, 2000, GPI failed to execute
1) the deed and 2) to deliver the title and 3) the physical possession of the lot despite the spouses subsequent
demands. This led the Fajardos to file a case with the House and Land Use Regulatory Board NCR (HLURB-
NCR) for specific performance of the contract or rescission of contract with damages against GPI on the ground that
GPI violated Section 20 of PD 957 or The Condominium and Subdivision Buyers Protective Decree for failing to
provide the utilities in the subdivision and boundary marks.
GPI on its part contended that the failure to deliver the title to the Fajardos was beyond GPIs control for the title
was subject to litigation. Hence, Fajardos prayer for rescission remained inapplicable for GPI is willing to comply
with the obligation but was only prevented by circumstances beyond their control.
The HLURB ruled in favor of Spouses Fajardo reasoning that the obligation between the parties became
demandable when the Fajardos completed their payment. GPIs failure to meet the obligation constituted a
substantial breach in obligation making rescission applicable.
The HLURB Board of Commissioners, the Office of the President, and the Court of Appeals ruled in affirmed the
ruling of the HLURB that the Fajardos should be refunded the amount paid. The CA modified the ruling that the
refund should amount to the prevailing market value following the ruling in Solid Homes v. Tan. Hence this petition.

Issue
 Whether Spouses Fajardo have the right to rescind the contract considering that GPIs non-compliance was due
to an event beyond their control. Yes.

Ruling
The Court held that there was a substantial breach in contract between petitioner GPI and respondents Fajardo
because the long delay in GPIs performance of the obligation was unreasonable and unjustified. A perusal of the
records would show that GPI only filed for the petition when spouses Go filed for an action to rescind the contract
and refund the amount they paid with legal interests.
With respect to the rescission, the Court held that it is noteworthy to point out that rescission does not merely
terminate the contract and release the parties from further obligations to each other, but abrogates the contract from
its inception and restores the parties to their original positions as if no contract has been made. Consequently, mutual
restitution, which entails the return of the benefits that each party may have received as a result of the contract, is
thus required.
[S]ince Article 1385 of the Civil Code expressly and clearly states that rescission creates the obligation to return
the things which were the object of the contract, together with their fruits, and the price with its interest, the Court
finds no justification to sustain petitioners position that said Article 1385 does not apply to rescission under Article
1191.

Iringan vs. CA
by Perez, Paolo

Doctrine:

Even if the right to rescind is available to the injured party, the obligation is not ipso facto erased by the failure of
the other party to comply with his obligation. Party entitled to rescind should apply to the court for a decree of
rescission. The operative act which produces the resolution of the contract is the decree of the court.

Facts:

In March 1985, private respondent Antonio Palao sold to petitioner Iringan an undivided portion of a lot in
Tuguegarao. Parties executed a Deed of Sale with the purchase price of P295,000, payable as follows:

a .P10K upon execution, with vendor to acknowledge receipt

b. P140K on or before April 1985

c. P145K on or before December 1985

When the 2nd payment was due, Iringan paid only P40K which caused Palao to send a letter to the former stating
that Palao considered the contract rescinded and that he would not accept any further payment considering that
Iringan failed to comply with his obligation to pay the full amount of the second installment.

In August 1985, Iringan replied that he was not opposing the revocation of the Deed of Sale but asked for
reimbursement (payment for the lot, atty fees, interest, geodetic engg fees). Palao declined to reimburse.

In February 1989, Iringan proposed that the P50K he had already paid for the land be reimbursed or that he be sold
an equivalent portion of the land. Palao replied that Iringans standing obligation had reached P61.6K representing
arrears for rentals from Oct. 1985 Mar. 1989.

In 1991, Palao filed for Judicial Confirmation of Rescission of Contract and Damages against Iringan and his wife.
Iringan replied that since the contract of sale had been consummated, Palaos remedy was that of collection of
balance and not rescission. Iringan further alleged that he had always been ready and willing to comply with his
obligations in the contract.

RTC Affirmed rescission of Contract of Sale, ordered Iringan to vacate lot

CA Affirmed RTC decision

Issue: W/N Contract of Sale was Properly Rescinded

Held/Ratio: Yes. Rescission was valid.

Iringan contended that no rescission was validly effected simply by virtue of the letter sent by Palao stating that he
was rescinding the contract of sale. He further contends that a judicial or notarial act is necessary before one party
can unilaterally effect a rescission.

Palao argued that the right to rescind is vested by law on the obligee and since the petitioner did not oppose
the intent to rescind the contract, Iringan in effect agreed to it and had the legal effect of a mutually agreed
rescission.

Under Art. 1191, the right to resolve reciprocal obligations is deemed implied in case one of the obligors shall fail to
comply with what is incumbent upon him. But that right must be invoked judicially.

Consequently, even if the right to rescind is available to the injured party, the obligation is not ipso facto erased by
the failure of the other party to comply with his obligation. Party entitled to rescind should apply to the court for a
decree of rescission. The operative act which produces the resolution of the contract is the decree of the court.

Since a judicial or notarial act is required for a valid rescission, the letter written by Palao declaring his intention to
rescind did not operate to validly rescind the contract. However, when he brought the matter to RTC for Judicial
Confirmation of Rescission and Damages, he complied with the requirement of the law for judicial decree of
rescission.

The complaint categorically stated that the purpose was 1) to compel appellants to formalize in a public document,
their mutual agreement of revocation and rescission; and/or 2) to have a judicial confirmation of the said
revocation/rescission xxx.

Jurisprudence dictates that even a crossclaim found in the Answer could constitute a judicial demand for rescission
that satisfies the requirement of law.
(may discussion pa tungkol sa moral damages and prescription ng action to rescind pero di ko na sinama. Check
niyo na lang yung case kung gusto niyo malaman, page 49 nung escra)

Chua vs. Victorio

by Fabia, Johan

Doctrine: The right to extrajudicial rescission is inherent in filing ejectment cases or unlawful detainer against the
lessees.

Recit-ready: This is a case involving three ejectment suits where the issue is about the raising of prices. The first
one was resolved by agreeing to a 100% increase in their rent and an option to increase rent by 25% every 4 years
after a survey of Panganiban street. After 4 years, the lessor imposed a 25% increase in the rates which the lessees
refuse to pay. Another ejectment suit was filed where the lessees agreed to pay the 25% increase. After 4 years from
the previous increase, another increase was made which is more than double the rate amounting to 15000. Lessees
argue that it is more than the increase allowed by the compromise agreement. SC held that the previous contract was
already rescinded by filing the ejectment case. Since the pay was monthly and they have not fixed a period, it is
considered to be a monthly contract. Lessor has the right to increase the price.

Facts: The issue is about 3 units

1990- Compromise agreement: 100% increase and 25% increase every 4 years after survey
1994- Ejectment case filed and granted
1996- Lessor accepted payments from Lessees
1998- Increase by more than twice or to 15000
Petitioners assail that this increase is too much than that of the compromise agreement.

Issue:WON the compromise agreement is still valid

Held/Ratio: In ejectment cases or unlawful detainer, it is inherent that the lessor has the right to extrajudicially
rescind the contract since it is one of the rights to defend the lessor. The compromise agreement is already rescinded
the lessor has the right to increase the prices. They also didnt fix a period so it became a monthly contract which is
renewed every payment which makes their 4 years lease contention invalid.

Sancho vs. Lizzaraga

No. 33580. February 6, 1931
by Hernandez, Justine

Doctrine:
Right to demand rescission of the partnership contract: casual breach does not give action for rescission.

Recit-ready:
Sancho and Lizarraga entered into a contract of partnership. Sancho thereafter brought an action for the rescission of
the partnership and prayed for the reimbursement of the 50 000 investment he contributed with interest at 12% per
annum against Lizarraga.

Lizarraga denied allegations and asked for the dissolution of their partnership and payment to him as manager and
administrator of the partnership of P500 monthly from October 15, 1920 [the day the contract was entered into] until
final dissolution.

CFI Manila proceedings proved Lizarraga had not contributed all the capital he bound himself to invest and that
Sancho demanded Lizarraga to liquidate partnership. CFI declared partnership dissolved on account of the
expiration period for which it was constituted and ordered liquidation of the partnership.

The plaintiff appealed from said decision praying for the rescission of the partnership contract between him and the
defendant in accordance with Art. 1124.

The Supreme Court ruled that plaintiff has not acquired the right to demand rescission of the partnership contract
according to Article 1124 of the Civil Code. The Court rationalized that owing to the defendants failure to pay to the
partnership the whole amount which he bound himself to, he became indebted to the partnership for the remainder,
with interest and any damages occasioned thereby, but the plaintiff did not thereby acquire the right to demand
rescission of the partnership contract according to article 1124 of the Code. Article 1124 cannot be applied to the
case in question, because it refers to the resolution of obligations in general, whereas articles 1681 and 1682 [of Old
Civil Code] specifically refer to the contract of partnership in particular. And it is a well known principle that special
provisions prevail over general provisions. Hence, SC dismissed the appeal left the decision appealed from in full
force.

Facts:
The plaintiff brought an action for the rescission of a partnership contract between himself and the defendant,
entered into on October 15, 1920, the reimbursement by the latter of his 50,000 peso investment therein, with
interest at 12 percent per annum from October 15, 1920, with costs, and any other just and equitable remedy against
said defendant.

The defendant denies generally and specifically all the allegations of the complaint which are incompatible with his
special defenses, cross complaint and counterclaim, setting up the latter and asking for the dissolution of the
partnership, and the payment to him as its manager and administrator of P500 monthly from October 15, 1920, until
the final dissolution, with interest, one half of said amount to be charged to the plaintiff. He also prays for any other
just and equitable remedy.

The Court of First Instance of Manila, having heard the cause, and finding it duly proved that the defendant had not
contributed all the capital he had bound himself to invest, and that the plaintiff had demanded that the defendant
liquidate the partnership, declared it dissolved on account of the expiration of the period for which it was
constituted, and ordered the defendant, as managing partner, to proceed without delay to liquidate it, submitting to
the court the result of the liquidation together with the accounts and vouchers within the period of thirty days from
receipt of notice of said judgment, without costs.

In the brief filed by counsel for the appellee, a preliminary question is raised purporting to show that this appeal is
premature and therefore will not lie. The point is based on the contention that inasmuch as the liquidation ordered by
the trial court, and the consequent accounts, have not been made and submitted, the case cannot be deemed
terminated in said court and its ruling is not yet appealable.

Issue:
Whether or not the plaintiff acquired the right to demand rescission of the partnership contract according to article
1124 of the Civil Code?

Held/Ratio:
No. Owing to the defendant's failure to pay to the partnership the whole amount which he bound himself to pay, he
became indebted to it for the remainder, with interest and any damages occasioned thereby, but the plaintiff did not
thereby acquire the right to demand rescission of the partnership contract according to article 1124 of the Code. This
article cannot be applied to the case in question, because it refers to the resolution of obligations in general, whereas
articles 1681 and 1682 specifically refer to the contract of partnership in particular. And it is a well known principle
that special provisions prevail over general provisions.

Buce vs. CA
by Sarte, Ross

Doctrine:
Absent any language indicating otherwise, a period indicated in an obligation is deemed to be for the benefit of both
parties.

Recit-ready:
Respondent and petitioner entered into a contract of lease for a period of 15 years renewable for another 10. Upon
the expiration of the lease period, respondent through his counsel, informed the petitioner that the rent had increased
to P1,576.58 pursuant to the provisions of the rent control law. However, petitioner only furnished checks for
P400.00 which respondent refused to accept. Petitioner thereafter filed petition for specific performance with prayer
for consignation. Petitioner claimed that the phrase in the lease agreement which stated that the lease would be
renewable for another 10 years signified an automatic renewal upon expiration of initial 15 year lease period. SC
held that the phrase DOES NOT signify automatic renewal. SC applied Article 1196 and the doctrine in Fernandez
ruling which essentially states that in a reciprocal contract like a lease, the period must be deemed to have been
agreed upon for the benefit of both parties, absent language showing that the term was deliberately set for the benefit
of the lessee or lessor alone. Therefore renewal of the contract was not deemed to be automatic but subject to a
mutual agreement of both parties.

Facts:
Petitioner leased a parcel of land located at Quirino Avenue, Pandacan, Manila. The lease contract was for a
period of fifteen years to commence on 1 June 1979 and to end on 1 June 1994 subject to renewal for
another ten (10) years, under the same terms and conditions.
During her stay, petitioner was allowed to make improvements on the property
 Private respondents counsel wrote petitioner informing her of the increase in the rent to P1,576.58
effective January 1992 pursuant to the provisions of the Rent Control Law. Petitioner, however, tendered
checks for only P400 each, payable to Jose Tiongco as administrator. Respondents refused to accept.
Petitioner filed with the RTC of Manila a complaint for specific performance with prayer for consignation.
She prayed that private respondents be ordered to accept the rentals in accordance with the lease contract
and to respect the lease of fifteen years, which was renewable for another ten years, at the rate of P200 a
month.
Respondents claimed that they were justified in refusing the checks since they were not in accordance with
the Rent Control Law and that the phrase in the lease contract authorizing renewal for another ten
years does not mean automatic renewal rather, it contemplates a mutual agreement between the
parties
RTC declared the lease contract automatically renewed for ten years and considered as evidence thereof (a)
the stipulations in the contract giving the lessee the right to construct buildings and improvements and (b)
the filing by petitioner of the complaint almost one year before the expiration of the initial term of fifteen
years
CA reversed the decision of the RTC, and ordered petitioner to immediately vacate the leased premises on
the ground that the contract expired on 1 June 1994 without being renewed.
According to the CA, the phrase this lease shall be for a period of fifteen (15) years effective June 1, 1979,
subject to renewal for another ten (10) years, under the same terms and conditions is unclear as to who
may exercise the option to renew.
It applied the ruling in Fernandez v. CA that without a stipulation that the option to renew the lease is solely
for the benefit of one party any renewal of a lease contract must be upon the agreement of the parties. And
in the absence of such agreement, contract cannot be renewed. Hence current petition.

Issue:
1.) WON the phrase "subject to renewal for another (10) years signifies an automatic renewal or a mere option to
renew.
2.) If it is a mere option, who may exercise the same or for whose benefit was it stipulated?

Held/Ratio:
1.) The phrase does not provide an automatic renewal.There is nothing in the stipulations in the contract and the
parties actuation that shows that the parties intended an automatic renewal or extension of the term of the contract.
Neither the filing of the complaint a year before the expiration of the 15-year term nor private respondents
acceptance of the increased rentals nor the stipulation of the contract allowing improvements on the property has any
bearing on the intention of the parties regarding renewal.
2.) In a reciprocal contract like a lease, the period must be deemed to have been agreed upon for the benefit of both
parties, absent language showing that the term was deliberately set for the benefit of the lessee or lessor alone. We
are not aware of any presumption in law that the term was deliberately set for the benefit of the lessee alone
In the case at bar, it was not specifically indicated who may exercise the option to renew, neither was it stated that
the option was given for the benefit of herein petitioner. Thus, pursuant to the Fernandez ruling and Article 1196 of
the Civil Code, the period of the lease contract is deemed to have been set for the benefit of both parties. Renewal of
the contract may be had only upon their mutual agreement or at the will of both of them. Since the private
respondents were not amenable to a renewal, they cannot be compelled to execute a new contract when the old
contract terminated.

Gregorio Araneta vs. Phil. Sugar

by Dy, Ramon

Doctrine:

Recit-ready: Tuason owns a parcel of land in QC. Sells part of it to Phil Sugar through Araneta. Stipulation in the
contract of sale, to build Sto Domingo church, as well as construct streets beside the church
Phil sugar was not able to finish building the streets due to informal settlers. Phil sugar filed complaint in RTC for
araneta to comply w/ obligation. Lower court fixed a period of 2 years for Phil Araneta to comply with obligation.

Lower court had no basis to fix the period of 2 years. Courts must have legal basis in fixing the period of obligations

Facts:
JM Tuason owns land in QC (Sta Mesa Heights)
Sold part of it to Philippine Sugar through Araneta
Contract of purchase stipulations
Build Sto Domingo church and convent
Construct streets on the NE and NW and SW sides of the land
Philippine Sugar finished construction of the church
- Araneta was not able to finish the streets due to informal settlers
Phil Sugar filed complaint against Araneta to comply with their obligation.
- Defense of Araneta
o action was premature since its obligation to construct the streets in question was without a definite period
which needs to be fixed first by the court in a proper suit
Plaintiff prayed that court fix a period for defendants to comply the obligation
Lower court: "the proven facts precisely warrants the fixing of such a period",
- 2 years period was given\

Issue: w/n the court was correct in fixing the period for the obligation NO

Held/Ratio:
Amended decision is defective in that no basis is stated to support
the conclusion that the period should be set at two years after
finality of the judgment.
last paragraph of Article 1197"the courts shall determine such
period as may under the circumstance have been
probably contemplated by the parties."
statement manifestly insufficient to explain how the two-year period given
to petitioner herein was arrived at.
Article 1197 of the Civil Code involves a two-step process. The Court must first
determine that "the obligation does not fix a period" (or that the period is made to
depend upon the will of the debtor), "but from the nature and the circumstances it
can be inferred that a period was intended" (Art. 1197, pars. 1 and 2). This preliminary
point settled, the Court must then proceed to the second step, and decide what
period was "probably contemplated by the parties"
Court can not fix a period merely because in its opinion it is or should
be reasonable, but must set the time that the parties are shown to have
intended.

Macasaet vs. Macasaet

by Geraldez, Nico

Doctrine: In the absence of a stipulation on this point, Article 1197 of the Civil Code allows the courts to fix the
duration or the period. Article 1197 - If the obligation does not fix a period, but from its nature and the
circumstances it can be inferred that a period was intended, the courts may fix the duration thereof . The courts shall
also fix the duration of the period when it depends upon the will of the debtor. In every case the courts shall
determine such period as may under the circumstances have been probably contemplated by the parties. Once fixed
by the courts, the period cannot be changed by them. Article 1197, however, applies to a situation in which the
parties intended a period. Such qualification cannot be inferred from the facts of the present case.

Recit-ready:
Petitioners - Ismael and Teresita Macasaet (Son and wife)
Respondents - Vicente and Rosario Macasaet (Parents)
Respondents filed with the MTCC of Lipa an ejectment suit against their son and his wife alleging that they were the
owners of 2 parcels of land in Lipa City. In 1992 by way of verbal lease agreement petitioners were living in said
properties and despite the agreement of a rental fee, petitioners failed to pay the monthly rate of P500. Petitioners
deny the existence of the verbal agreement and insist that this should be part of their inheritance. MTC ruled in favor
of respondents and ordered petitioners to vacate the property stating that petitioners were not occupying the lots by
virtue of verbal agreement but by tolerance by respondents as parents. It also stated that successional rights were
inchoate. RTC affirmed MTC decision but said that petitioners hsould be reimbursed for the improvements. CA
sustained ruling of 2 lower courts saying that they were here by tolerance of respondents and that their stay there
became illegal the moment they received letter demanding them to leave. ISSUE: WON there are valid grounds for
the ejectment of the children and WON the court can fix a fixed period if it is not mentioned in the contract HELD:
Petitioners had the right to occupy the property but the duration and the period is unknown. In the absence of a
stipulation on this point, Article 1197 of the Civil Code allows the courts to fix the duration or the period. Article
1197 - If the obligation does not fix a period, but from its nature and the circumstances it can be inferred that a
period was intended, the courts may fix the duration thereof. The courts shall also fix the duration of the period
when it depends upon the will of the debtor. In every case the courts shall determine such period as may under the
circumstances have been probably contemplated by the parties. Once fixed by the courts, the period cannot be
changed by them. Article 1197, however, applies to a situation in which the parties intended a period. Such
qualification cannot be inferred from the facts of the present case. No period was intended by the parties. Their mere
failure to fix the duration of their agreement does not necessarily justify or authorize the courts to do so. Thus, there
was no longer any reason for petitioners to be living in the property.

Facts:
Petitioners Ismael and Teresita Macasaet and Respondents Vicente and Rosario Macasaet are first-degree relatives.
Ismael is the son of respondents, and Teresita is his wife
On December 10, 1997, the parents filed MTCC of Lipa City an ejectment suit against the children allegeging that
they were the owners of two (2) parcels of land situated at Banay-banay, Lipa City; that by way of a verbal lease
agreement, Ismael and Teresita occupied these lots in March 1992 and used them as their residence and the situs of
their construction business; and that despite repeated demands, petitioners failed to pay the agreed rental of P500 per
week.
Petitioners denied the existence of any verbal lease agreement. They added that it was the policy of respondents to
allot the land they owned as an advance grant of inheritance in favor of their children. Thus, they contended that the
one of lots had been allotted to Ismael as advance inheritance. On the other hand, the other lot was allegedly given to
petitioners as payment for construction materials used in the renovation of respondents house.
The MTC ruled in favor of respondents and ordered petitioners to vacate the premises. It opined that Ismael and
Teresita had occupied the lots, not by virtue of a verbal lease agreement, but by tolerance of Vicente and Rosario As
their stay was by mere tolerance, petitioners were necessarily bound by an implied promise to vacate the lots upon
demand. The MTCC dismissed their contention that one lot had been allotted as an advance inheritance, on the
ground that successional rights were inchoate. Moreover, it disbelieved petitioners allegation that the other parcel
had been given as payment for construction materials.
On appeal, the regional trial court (RTC) upheld the findings of the MTCC. However, the RTC allowed respondents
to appropriate the building and other improvements introduced by petitioners, after payment of the indemnity
provided for by Article 448 in relation to Articles 546 and 548 of the Civil Code. It added that respondents could
oblige petitioners to purchase the land, unless its value was considerably more than the building. In the latter
situation, petitioners should pay rent if respondents would not choose to appropriate the building.
Upon denial of their individual Motions for Reconsideration, the parties filed with the CA separate Petitions for
Review, which were later consolidated.
The CA sustained the finding of the two lower courts that Ismael and Teresita had been occupying the subject lots
only by the tolerance of Vicente and Rosario. Thus, possession of the subject lots by petitioners became illegal upon
their receipt of respondents letter to vacate it

Issue:

WON there are valid grounds for the ejectment of the children
WON the court can fix a fixed period if it is not mentioned in the contract
Held/Ratio:

Right to Use the Lots Terminated

That Ismael and Teresita had a right to occupy the lots is therefore clear. The issue is the duration of possession. In
the absence of a stipulation on this point, Article 1197 of the Civil Code allows the courts to fix the duration or the
period.

Article 1197. If the obligation does not fix a period, but from its nature and the circumstances it can be inferred that
a period was intended, the courts may fix the duration thereof.
The courts shall also fix the duration of the period when it depends upon the will of the debtor.

In every case the courts shall determine such period as may under the circumstances have been probably
contemplated by the parties. Once fixed by the courts, the period cannot be changed by them.
Article 1197, however, applies to a situation in which the parties intended a period. Such qualification cannot
be inferred from the facts of the present case.

To repeat, when Vicente and Rosario invited their children to use the lots, they did so out of parental love and a
desire for solidarity expected from Filipino parents. No period was intended by the parties. Their mere failure to fix
the duration of their agreement does not necessarily justify or authorize the courts to do so.
Based on respondents reasons for gratuitously allowing petitioners to use the lots, it can be safely concluded that the
agreement subsisted as long as the parents and the children mutually benefited from the arrangement. Effectively,
there is a resolutory condition in such an agreement. Thus, when a change in the condition existing between the
parties occurs -- like a change of ownership, necessity, death of either party or unresolved conflict or animosity --
the agreement may be deemed terminated. Having been based on parental love, the agreement would end upon the
dissipation of the affection.
When persistent conflict and animosity overtook the love and solidarity between the parents and the children, the
purpose of the agreement ceased. Thus, petitioners no longer had any cause for continued possession of the lots.
Their right to use the properties became untenable. It ceased upon their receipt of the notice to vacate. And because
they refused to heed the demand, ejectment was the proper remedy against them. Their possession, which was
originally lawful, became unlawful when the reason therefor -- love and solidarity -- ceased to exist between them.

Alipio vs. CA
by Bautista, Paolo

Doctrine:

If from the law or the nature or the wording of the obligation the contrary does not appear, an obligation is presumed
to be only joint.

Recit-ready:

The spouses Alipio and the spouses Manuel subleased a fishpond from Jaring. The rent of 485,600 was payable in
two installments of 300,000 and 185,600. The spouses were unable to fully pay the second installment. Jaring then
sued the spouses Alipio and Manuel for the unpaid amount. Purita Alipio moved to dismiss the case against her on
the ground that her husband had passed away. The RTC and CA dismissed her appeal saying that she can still be
held liable as a party to the contract despite the death of her husband. The CA also added that her liability is solidary.
SC held that the obligation entered into by spouses Alipio is chargeable against their conjugal partnership. When the
spouses are sued for the enforcement of an obligation entered into by them, they are being impleaded in their
capacity as representatives of the conjugal partnership and not as independent debtors such that the concept of joint
or solidary liability, as between them, does not apply. But even assuming the contrary to be true, the nature of the
obligation involved in this case, as will be discussed later, is not solidary but rather merely joint.
If from the law or the nature or the wording of the obligation the contrary does not appear, an obligation is presumed
to be only joint
Art. 1207 of the Civil Code provides:
The concurrence of two or more creditors or of two or more debtors in one and the same obligation does not imply
that each one of the former has a right to demand, or that each one of the latter is bound to render, entire compliance
with the prestations. There is a solidary liability only when the obligation expressly so estates, or when the law or
the nature of the obligation requires solidarity.
Facts:
Respondent Romeo Jaring was the lessee of a 14.5 hectare fishpond in Barito, Mabuco, Hermosa, Bataan. The
[1]

lease was for a period of five years ending on September 12, 1990. On June 19, 1987, he subleased the fishpond, for
the remaining period of his lease, to the spouses Placido and Purita Alipio and the spouses Bienvenido and
Remedios Manuel. The stipulated amount of rent was P485,600.00, payable in two installments of P300,000.00 and
P185,600.00, with the second installment falling due on June 30, 1989.Each of the four sublessees signed the
contract.
The first installment was duly paid, but of the second installment, the sublessees only satisfied a portion
thereof, leaving an unpaid balance of P50,600.00. Despite due demand, the sublessees failed to comply with their
obligation, so that, on October 13, 1989, private respondent sued the Alipio and Manuel spouses for the collection of
the said amount
Petitioner Purita Alipio moved to dismiss the case on the ground that her husband, Placido Alipio, had passed away.
The trial court denied petitioner's motion on the ground that since petitioner was herself a party to the sublease
contract, she could be independently impleaded in the suit together with the Manuel spouses and that the death of
her husband merely resulted in his exclusion from the case
The CA dismissed her appeal saying that their obligation is solidary and the surviving defendants cannot avoid
action by claiming that the death of one of the parties to the contract has totally extinguished their obligation.

Issue:

Can Jaring claim payment from Alipio despite the death of her husband?
What is the nature of the obligation? (joint/solidary)

Held/Ratio:

We hold that a creditor cannot sue the surviving spouse of a decedent in an ordinary proceeding for the
collection of a sum of money chargeable against the conjugal partnership and that the proper remedy is for him to
file a claim in the settlement of estate of the decedent.
The cases relied upon by the Court of Appeals in support of its ruling, namely, Climaco v. Siy Uy and [15]

Imperial Insurance, Inc. v. David, are based on different sets of facts. In Climaco, the defendants, Carlos Siy Uy
[16]

and Manuel Co, were sued for damages for malicious prosecution. Thus, apart from the fact the claim was not
against any conjugal partnership, it was one which does not survive the death of defendant Uy, which merely
resulted in the dismissal of the case as to him but not as to the remaining defendant Manuel Co.
With regard to the case of Imperial, the spouses therein jointly and severally executed an indemnity agreement
which became the basis of a collection suit filed against the wife after her husband had died. For this reason, the
Court ruled that since the spouses' liability was solidary, the surviving spouse could be independently sued in an
ordinary action for the enforcement of the entire obligation.
It must be noted that for marriages governed by the rules of conjugal partnership of gains, an obligation
entered into by the husband and wife is chargeable against their conjugal partnership and it is the partnership which
is primarily bound for its repayment. Thus, when the spouses are sued for the enforcement of an obligation entered
[17]

into by them, they are being impleaded in their capacity as representatives of the conjugal partnership and not as
independent debtors such that the concept of joint or solidary liability, as between them, does not apply. But even
assuming the contrary to be true, the nature of the obligation involved in this case, as will be discussed later, is not
solidary but rather merely joint, making Imperial still inapplicable to this case.
 The trial court ordered petitioner and the Manuel spouses to pay private respondent the unpaid balance of the
agreed rent in the amount of P50,600.00 without specifying whether the amount is to be paid by them jointly or
solidarily. In connection with this, Art. 1207 of the Civil Code provides:
The concurrence of two or more creditors or of two or more debtors in one and the same obligation does not imply
that each one of the former has a right to demand, or that each one of the latter is bound to render, entire compliance
with the prestations. There is a solidary liability only when the obligation expressly so estates, or when the law or
the nature of the obligation requires solidarity.
Indeed, if from the law or the nature or the wording of the obligation the contrary does not appear, an obligation is
presumed to be only joint, i.e., the debt is divided into as many equal shares as there are debtors, each debt being
considered distinct from one another.
Clearly, the liability of the sublessees is merely joint. Since the obligation of the Manuel and Alipio spouses is
chargeable against their respective conjugal partnerships, the unpaid balance of P50,600.00 should be divided into
two so that each couple is liable to pay the amount of P25,300.00.
WHEREFORE, the petition is GRANTED. Bienvenido Manuel and Remedios Manuel are ordered to pay the
amount of P25,300.00, the attorney's fees in the amount of P10,000.00 and the costs of the suit. The complaint
against petitioner is dismissed without prejudice to the filing of a claim by private respondent in the proceedings for
the settlement of estate of Placido Alipio for the collection of the share of the Alipio spouses in the unpaid balance of
the rent in the amount of P25,300.00.

Inchausti & Co. vs Yulo

By Santiago, Monch

Doctrine: Article 1148 of the Civil Code. "The solidary debtor may utilize against the claims of the creditor of
the defenses arising from the nature of the obligation and those which are personal to him. Those personally
pertaining to the others may be employed by him only with regard to the share of the debt for which the latter may
be liable."

Recit-ready: This suit is brought for the recovery of a certain sum of money, the balance of a current account
opened by the firm of Inchausti & Company with Teodor Yulo and after his death continued by Gregorio Yulo as
principal representative of his children. On Aug.12, 1909, Gregorio Yulo, in representation of his 3 siblings,
executed a notarial instrument, ratifying all the contents of the prior document of Jan.26, 1908, severally and joint
acknowledged their indebtedness for P253,445.42, 10 % per annum, 5 installments. Plaintiff brought an action
againsta Gregorio for the payment of the said balance due. But on May 12, 1911, 3 siblings executed another
instrument in recognition of the debt, reduced to P225,000, interest reduced to 6% per annum, installments increased
to 8.

Held:
The contract of May 12, 1911 does not constitute a novation of the former one of Aug.12, 1909, with respect to the
other debtors who executed this contract. First, in order that an obligation may be extinguished by another which
substitutes it, it is necessary that it should be so expressly declared or that the old and the new be incompatible in all
points(art. 1292). It is always necessary to state that it is the intentionof the contracting parties to extinguish the
former obligation by the new one. The obligation to pay a sum of money is not novated in a new instrument
wherein the old is ratified, by changing only the term of payment and adding other obligations not incompatible with
the old one.

The obligation being solidary, the remission of any part of the debt made by a creditor in favor of one or more of the
solidary debtors necessarily benefits the others, and therefore there can be no doubt that, in accordance with the
provision of Art. 1215, 1222, the defendant has the right to enjoy the benefits of the partial remission. At present
judgment can be rendered only as to P112,500.
Facts:
Suit is for recovery balance of a current account opened Inchausti & Company with Teodoro Yulo and after his death
continued with his widow and children, whose principal representative is Gregorio Yulo.
TEODORO YULO: property owner of Iloilo, for exploitation of haciendas in Occidental Negros, had been
borrowing money from Inchausti & Company under specific conditions.
Died and appointed widow and SONS as administrators including GREGORIO YULO.
i. Held conjugal property in common
ii. At the death of widow, Gregoria Regalado, children preserved the same relations
under the name of HIJOS DE T. YULO
1. Continued current account with Inchausti & Company until balance amounted to P200,000. In for the payment
of the disbursements of money which until that time it had been making in favor of its debtors, the Yulos.
Children are: Pedro, Francisco, Teodoro, Manuel, Gregorio, Mariano, Carmen, Concepcion, and Jose Yulo y
Regalado.
i. Concepcion and Jose were minors
ii. Teodoro was mentally incompetent.
1908, GREGORIO YULO (representing his brothers Pedro, Manuel and Carme, executed notarial document
whereby all admitted their indebtedness to Inchausti & Company in the sum of P203,221.27.
i. To secure with 10% interest per annum, they mortgaged an undivided 6/9th of their
38 rural properties, remaining urban properties, lorchas, and family credits which were listed
1. Obligated themselves to make a formal inventory and to describe all properties, and to cure all defects which
might prevent the inscription of the said contract in the registry of property and to extend by the necessary
formalities the aforesaid mortgage over the remaining 3/9th of all the property and rights belonging to their other
brothers, the incompetent Teodoro, and the minors Concepcion and Jose.

1909, GREGPRIO YULO, REPRESENTING HIJOS DE YULO ANSWERED LETTER OF INCHAUSTI IN

THESE TERMS:
i. "With your favor of the 2d inst. we have received an abstract of our current account
with your important firm, closed on the 31st of last December, with which we desire to express our entire
conformity as also with the balance in your favor of P271,863.12.
ii. INCHAUSTI informed Hijos de T. Yulo of the reduction of balance to P253,445.42.
1. HIJOS T. YULO expressed its conformity by means of a letter, proving that mortgage credit was formalized.

1909, GREGORIO YULO, FOR HIMSELF AND REPRESENTING MANUEL and PEDRO, FRANCISCO,
CARMEN AND CONCEPCION in their OWN BEHALF (now of legal age) executed affidavit ratifying their
admission on their indebtedness to INCHAUSTI:
i. P253,445.42 with 10% interest per annum
ii. To be paid in 5 installments at the rate of P50,000, except last being P53,445.42
iii. Payment beginning June 30, 1910, continuing successively on the 30th of each June
until the last payment on June 30, 1914.
iv. Among other clauses, they expressly stipulated the following:
1. Default in payment of any of the installments or the noncompliance of any of the other obligations will result in
the maturity of all the said installments
2. INCHAUSTI may exercise at once all the rights and actions to obtain the immediate and total payment of debt,
in same manner that they would have so done at the maturity of the said installments.
3. All the obligations will be understood as having been contradicted in solidum by all of us, the Yulos, brothers and
sisters.
4. Agreed that this instrument shall be confirmed and ratified in all its parts, within the present week, by our
brother Don Mariano Yulo y Regalado who resides in Bacolod, otherwise it will not be binding on INCHAUSTI
who can make use of their rights to demand and obtain immediate payment of their credit without any further
extension or delay, in accordance with what we have agreed.
5. This instrument was neither ratified nor confirmed by Mariano Yulo.

YULOS did not pay the first installment of the obligation.

INCHAUSTI brought an ordinary action against Gregorio Yulo for the payment of P253,445.42 with 10% interest
per annum on that date aggregating P42,944.76.
1911, FRANCISCO, MANUEL, and CARMEN Yulo executed another affidavit in recognition of the debt and
obligation of payment in the following terms:
Debt is reduce for them to P225,000
Interest is reduced 6% per annum from March 15, 1911
Installments are increase to eight, 1st of P20,000, beginning on June 30, 1911, and the rest of P30,000 each on the
same date of each successive year until the total obligation shall be finally and satisfactorily paid on June 30, 1919
If any of the partial payments specified in the foregoing clause be not paid at its maturity, the amount of the said
partial payment together with its interest shall bear 15% interest per annum from the date of said maturity, without
the necessity of demand until its complete payment
If during 2 consecutive years the partial payments agreed upon be not made, they shall lose the right to make use of
the period granted to them for the payment of the debt or the part thereof which remains unpaid, and INCHAUSTI
may consider the total obligation due and demandable, and proceed to collect the same together with the interest for
the delay above stipulated through all legal means.
ADDITION STIPULATION: Inchausti & Co. should include in their suit brought in the CFI of Iloilo against
Gregorio Yulo, his brother and joint co-obligee, Pedro Yulo:
i. FRANCISCO, MANUEL AND CARMEN will procure by all legal means and in
the least time possible a judgment in their favor against the said Don Gregorio and Don Pedro, sentencing the later
to pay the total amount of the obligation acknowledged by them in August 12, 1909 affidavit
ii. If they should deem it convenient for their interests, Don Francisco, Don Manuel,
and Doa Carmen Yulo may appoint an attorney to cooperate with the lawyers of Inchausti & Company in the
proceedings of the said case.

GREGORIO YULO ASNWERED THE COMPLAINT:

An accumulation of interest had taken place and that compound interest was asked for the Philippine currency at par
with Mexican
IN August 21, 1909 affidavit, 2 conditions were agreed (one approved by Court of First Instance) and the other
ratified and confirmed by the other brother Mariano Yulo, neither of which was complied with
With regard to the same debt claims were presented before the commissioners in the special proceedings over the
inheritances of Teodoro Yulo and Gregoria Regalado, though later they were dismissed, pending the present suit
August 12, 1909 affidavit, was novated by that of May 12, 1911, executed by Manuel, Francisco and Carmen Yulo.
COURT DECIDED IN FAVOR OF GREGORIO/MARIANO YULO. INCHAUSTI pay with costs.

Issue:WON INCHAUSTI can sue Gregorio alone, here being other obligors

Held/Ratio:GREGORIO YULO TO PAY INCHAUSTI P112, 500 WITH INTEREST STIPULATD IN MAY 12
1911 AFFIDAVIT, FROM MARCH 15 1911 AND THE LEGL INTEREST ON THIS INTEREST DUE,
JUDGMENT APPEALED FROM IS REVERSED. NO SPECIAL FINDING AS TO COST.
WON INCHAUSTI CAN SUE GREGORIO ALONE? YES.
Debtors having obligated themselves in solidum, creditor can bring action to any one of them.
i. When the obligation is constituted as a conjoint and solidary obligation, each one of
debtors is bound to perform in full the undertaking which is the subject matter of the obligation.

Lafarge Cement vs. CCC

By Mordeno, Gia

Doctrine:

Obligations are generally considered joint except when otherwise expressly stated or when the law or the nature of
the obligation requires solidarity. Obligations arising from tort are always solidary.

Article 1222 of the Civil Code: A solidary debtor may, in actions filed by the creditor, avail itself of all defenses
which are derived from the nature of the obligation and of those which are personal to him, or pertain to his own
share. With respect to those which personally belong to the others, he may avail himself thereof only as regards that
part of the debt for which the latter are responsible.
Recit-ready:
Facts
A letter of intent was executed by both parties. Petitioners agreed to purchase the cement business of
respondent. They entered into a Sales and Purchase Agreement.
CCC had a pending case with SC entitled Asset Privatization Trust (APT) v. Court of Appeals and
Continental Cement Corporation. In case the judgment of such case would be against CCC, parties to the
SPA agreed to retain from the purchase price a portion of the contract price. Petitioners refused to apply the
sum to the payment to APT case.
CCC filed a complaint before the RTC fearing the nonpayment to APT case would result to the foreclosure
of its properties including that of the SPA. Petitioners filed their answers and counterclaims against CCC,
its president and corporate secretary.
RTC dismissed petitioners counterclaims.
Issue
Whether or not the RTC gravely erred in refusing to rule that CCC has no personality to move to dismiss
petitioners compulsory counterclaims on Lim and Marianos behalf
Held
CCC, Lim, and Mariano have solidary liability.
Obligations may be joint or solidary. As a general rule, obligations are joint except when expressly stated or
the nature of the obligation requires solidarity. Obligations arising from tort are always solidary.
The liability sought against CCC and that of individual repsondents does not negate the solidary nature of
their liability.
The act of CCC as a solidary debtor of filing a motion to dismiss the counterclaim on grounds that pertain
only to its individual co-debtors is allowed. However, it cannot file the same Motion on the behalf for the
simple reason that it lacks the requisite authority to do so. A corporation has legal personality entirely
separate and distinct from that of its officers and cannot act for and on their behalf without being so
authorized.

Facts:

A Letter of Intent was executed by both parties. Petitioners Lafarge Cement Philippines, Inc. agreed to
purchase the cement business of Respondent Continental Cement Corporation. They entered into a Sales
and Purchase Agreement.
Petitioners also knew that at that time, CCC had a pending case with the Supreme Court entitled Asset
Privatization Trust (APT) v. Court of Appeals and Continental Cement Corporation. In anticipation of a
judgment against CCC, the parties of the SPA agreed to retain from the purchase price a portion of the
contract price. This will be deposited in an interest-bearing account in the First National City Bank of New
York for payment to APT, the petitioner in the pending SC case of CCC. Petitioners refused to apply the
sum to the payment to ATP.
CCC filed a complaint before the RTC fearing that the nonpayment to APT would result in the foreclosure
of the properties covered by the SPA with Lafarge and other properties. Petitioners moved to dismiss the
Complaint as it violated the prohibition on forum shopping.
Petitioners filed their answer and compulsory counterclaims ad cautelam. In their answer, they denied the
allegations in the Complaint. They prayed, by way of counterclaims against CCC, its majority stockholder
and president Gregory Lim, and corporate secretary Anthony Mariano for damages.
The RTC dismissed petitioners counterclaims for the following reasons: (a) the counterclaims against Lim
and Mariano were not compulsory, (b) the ruling in Sapugay is not applicable, (c) petitioners Answer with
Counterclaims violated procedural rules on the proper joinder of causes of action

Issue:

Whether or not the RTC gravely erred in ruling that

 o (1) petitioners counterclaims are not compulsory
o (2) Sapugay v. Court of Appeals is inapplicable here
o (3) petitioners violated the rule on joinder of causes of action
Whether or not the RTC gravely erred in refusing to rule that CCC has no personality to move to dismiss
petitioners compulsory counterclaims on Lim and Marianos behalf

Held/Ratio:

Whether or not the RTC gravely erred in ruling that (1) petitioners counterclaims are not compulsory. YES
Counterclaims are claims, which a defending part may have against an opposing party. They are allowed in
order to avoid a multiplicity of suits and to facilitate the disposition of the whole controversy in a single
action. The only limitations to such are (1) that the court should have jurisdiction over the subject matter of
the counterclaim, and (2) that it could acquire jurisdiction over third parties whose presence is essential for
its adjudication.
Counterclaims may either be permissive or compulsory
o Permissive it does not arise out of or is not necessarily connected with the opposing partys
claim. It may be filed separately in another case.
o Compulsory it arises out of or is necessarily connected with opposing partys claim and does not
require for its adjudication the presence of third parties of whom the court cannot acquire
jurisdiction. It should be filed together with the case.
o Test to determine if the counterclaim is compulsory or not
Are issues of fact and law raised by the same claim and by the counterclaim largely the
same?
Would res judicata bar a subsequent suit on defendants claim, absent the compulsory
counterclaim rulel?
Will substantially the same evidence support or refute plaintiffs claim as well as
defendants counterclaim?
Is there any logical relation between the claim and the counterclaim?
A positive answer to all four questions would indicate that the counterclaim is
compulsory. In this case, the petitioners counterclaim answer positively to all questions.
Petitioners base their counterclaim on the actions of Mariano and Lim of filing the Complaint and securing
the Writ of Attachment in bad faith. The recovery of petitioners counterclaims is contingent upon the case
filed by the respondents. The counterclaim is compulsory.
Whether or not the RTC gravely erred in ruling that (2) Sapugay v. Court of Appeals is inapplicable here.
YES
In Sapugay v. CA, the court ruled that counterclaims can bring into action any claim against persons other
than the plaintiff when the presence of such persons are required in the granting of complete relief in the
determination of a counterclaim or cross claim if jurisdiction can be obtained over them.
Respondents claim that new parties cannot be included in the counterclaim. Lim and Mariano are not
necessary to obtain complete relief from CCC. CCC as a corporation with a separate legal personality has
the juridical capacity to indemnify petitioners even without Lim and Mariano.
Inclusion of corporate officers is not based on the assumption that corporation does not have financial
ability to answer for damages. Rather it rests on the allegations of fraud and bad faith on the part of the
corporate officer or stockholder.
Whether or not the RTC gravely erred in ruling that (3) petitioners violated the rule on joinder of causes of
action. NO.
Rules on permissive joinder of causes of action or parties are not applicable in this case. Respondents Lim
and Mariano are real parties in interest to the counterclaim. In joining the compulsory counterclaim,
petitioners are consistent with the solidary nature of the liability.
Sec. 6 of Rule 3 fo the Rules of Civil Procedure provide that
o All persons in whom or against whom any right to relief in respect to or arising out of the same
transaction or series of transactions is alleged to exist whether jointly, severally, or in the
 alternative, may, except as otherwise provided in these Rules, join as plaintiffs or be joined as
defendants in one complaint, where any question of law or fact common to all such plaintiffs or to
all such defendants may arise in the action; but the court may make such orders as may be just to
prevent any plaintiff or defendant from being embarrassed or put to expense in connection with
any proceedings in which he may have no interest.
Whether or not the RTC gravely erred in refusing to rule that CCC has no personality to move to dismiss
petitioners compulsory counterclaims on Lim and Marianos behalf. YES.
Respondents liability is solidary, contrary to what petitioners claim that is solidary and joint.
Obligations are generally considered joint except when otherwise expressly stated or when the law or the
nature of the obligation requires solidarity. Obligations arising from tort are always solidary.
The liability sought against the CCC is for specific performance and tort, while that sought against the
individual respondents is based on tort. Such does not negate the solidary nature of their liability for
tortious acts alleged in the counterclaims.
A solidary debtor may invoke defenses arising from the nature of the obligation, from circumstance
personal to it, or even from those personal to its co-debtors. Article 1222 of the Civil Code provides that A
solidary debtor may, in actions filed by the creditor, avail itself of all defenses which are derived from the
nature of the obligation and of those which are personal to him, or pertain to his own share. With respect to
those which personally belong to the others, he may avail himself thereof only as regards that part of the
debt for which the latter are responsible.
The act of CCC as a solidary debtor of filing a motion to dismiss the counterclaim on grounds that pertain
only to its individual co-debtors is allowed. However, it cannot file the same Motion on the behalf for the
simple reason that it lacks the requisite authority to do so. A corporation has legal personality entirely
separate and distinct from that of its officers and cannot act for and on their behalf without being so
authorized.

Inciong vs. CA
By Yarra, Johan

Doctrine (Solidary or Joint and Several Obligation): A solidary or JOINT and SEVERAL obligation is one in
which each debtor is liable for the entire obligation, and each creditor is entitled to demand the whole obligation.

Recit-ready: Petitioner, Pantanosa and Naybe were solidary obligors on a promissory note (50K loan) they signed
in favor of Philippine Bank of Communications. The expiration of the loan has passed without them having paid the
sum of money despite repeated demands from the bank, until the latter filed a complaint for collection of sum of
50K. The loan was for the support operation of a logs business venture. The summons was only served to herein
petitioner because the respondent bank itself dismissed the case against Pantonasas while Naybe had gone to Saudi
Arabia. The petitioner alleged that his consent to sign the promissory note was induced by fraud (hence null and
void) or misrepresentation by Campos (the person who induced him to be part of the logs business). He indicated
that he affixed his signature with the understanding that he would only be a co-maker for the loan of P5,000. He
failed to convince the trial court, as well as the CA and the Supreme Court because of the lack of clear and
convincing evidence to support his allegations.
The issue related to the topic is whether or not he should be held liable for the unpaid obligation even though he
claims that he must be released from such due to the dismissal of the case against Naybe (principal debtor) and
Pantonasas (co-maker in the obligation).
The petition is unavailing since the nature of petitioners liability is that of a solidary debtor/obligor/co-maker. His
contention that he as well must be released from obligation only applies to guarantors pursuant to Article 2080 of the
Civil Code, but NOT to solidary debtors.What applies to solidary debtors are the rights bestowed upon them in Sec.
4, Chap. 3, Title 1, Book IV of the Civil Code which states the law on JOINT and SEVERAL obligations. Under
Article 1207 thereof, when there are two or more debtors in one and the same obligation, there is solidary liability
only when the obligation expressly so states, when the law so provides or when the nature of the obligation requires.
Otherwise, the presumption is joint (each of the debtors is liable only for a proportionate part of the debt).In the case
at bar, because the promissory note expressly states that the three signatories therein are JOINTLY and
SEVERALLY (it is SOLIDARY) liable, any one, some or all of them may be proceeded against for the entire
obligation. The choice to determine against whom to enforce collection is left to the solidary creditor. Hence, the
dismissal of the case against Pantonasas may not be deemed as having discharged petitioner from liability as well.
As for Naybe, suffice it to say that the court never acquired jurisdiction over him. Petition denied CA affirmed.

Facts: The petitioner, along with Pantanosa and Naybe, signed a promissory note for a loan of 50K to Philippine
Bank of Communications (herein respondent bank) due on May 1983. Said due date expired without the promisors
having paid their obligation despite repeated demands from the bank, until the latter filed a complaint for collection
of sum of 50K against the obligors.
Since Naybe had gone to Saudi Arabia and that the private respondent bank dismissed the case against Pantanosas,
the summons was served only to herein petitioner. In his answer, he alleged that the signing of the promissory note
started when he was approached by his friend Campos (a partner of Pio Tio, branch manager of herein respondent
bank) to have business talks regarding a potential venture in the falcata logs operation business with them (Campos
and Pio Tio). Petitioner acceded but with the understanding that he would only be a co-maker for the loan of P5,000.
He alleged that he affixed his signature to a copy of the promissory note his supposed obligation in the amount of
5,000. He claims that it was by trickery, fraud and misrepresentation caused by Campos that he was made liable for
the amount of P50,000.
His testimony did not convince the trial court as it ruled in favor of the respondent bank (dispositive portion is not
provided in the case). The lower court noted that the typewritten figure 50,000 clearly appears directly below the
admitted signature of the petitioner in the promissory note, and that it was also rather odd for petitioner to have
indicated in a copy and not in the original, of the promissory note, his supposed obligation of 5k only. He appealed
the decision to the CA but the latter affirmed the assailed decision (no discussion here).

Issue: Hence this petition to the Supreme Court. The issue: (related to the syllabus) whether or not petitioner should
be held liable for the unpaid promissory note. What is the nature of his liability?

Held/Ratio: Since he is a solidary co-maker or debtor, he is bound to pay for the unpaid loan.

According to the petitioner the CA should have declared the promissory note null and void. He annexed in his
petition an affidavit by Pantonasas (a co-maker in the promissory note) which supports his contention that they were
induced to sign the promissory note on the belief that it was only for 5K. However the SC reminded the petitioner
that it is not a trier of facts. Having lost the chance to fully ventilate his factual claims below, he may no longer be
accorded the same opportunity in the absence of grave abuse of discretion on the part of the court below. In the end,
petitioner failed to prove fraud as it is required that such act must be established by clear and convincing evidence,
mere preponderance of evidence not being adequate. The attempt to prove fraud failed as it was only evidenced by
the petitioners own uncorroborated and self-serving testimony.
Lastly (the only related part), petitioner argues that the dismissal complaint against Naybe, the principal debtor, and
against Pantonasas (co-maker) constituted a release of his obligation, especially because the dismissal of the case
against Pantonasas was upon the motion of private respondent bank itself. His basis was Article 2080 of the Civil
Code (The guarantors, even though they be solidary, are released from their obligation whenever by some act of the
creditor, they cannot be subrogated to the rights, mortgages and preferences of the latter.). However, this provision
does not apply to the petitioner since he signed the petitioner as a solidary co-maker and NOT as a guarantor. This is
clearly seen from the first sentence of the note ( I/we JOINTLY and SEVERAL promise to pay). A solidary
or JOINT and SEVERAL obligation is one in which each debtor is liable for the entire obligation, and each creditor
is entitled to demand the whole obligation.
It was also discussed that there are certain rights, actions and benefits (like the one mentioned in the two preceding
paragraphs) for guarantors which do not apply to solidary co-makers. The latter has no other rights than those
bestowed upon him in Sec. 4, Chap. 3, Title 1, Book IV of the Civil Code which states the law on joint and several
obligations. Under Article 1207 thereof, when there are two or more debtors in one and the same obligation, the
presumption is that the obligation is joint so that each of the debtors is liable only for a proportionate part of the
debt. There is solidary liability only when the obligation expressly so states, when the law so provides or when the
nature of the obligation requires.
Because the promissory note in this case expressly states that the three signatories therein are JOINTLY and
SEVERALLY liable, any one, some or all of them may be proceeded against for the entire obligation. The choice to
determine against whom to enforce collection is left to the solidary creditor. Hence, the dismissal of the case against
Pantonasas may not be deemed as having discharged petitioner from liability as well. As for Naybe, suffice it to say
that the court never acquired jurisdiction over him. Petitioner, therefore, may only have recourse against his co-
makers, as provided by law. Petition denied and CA decision affirmed.

Quiombing vs. CA
By Dalumpines, Mikey

Doctrine: One solidary creditor may act alone without the other creditors; other creditor not indispensable party in
filing a case, and therefore not a grounds for dismissal.

Recit-ready: - Petitioner Nicencio Quiombing and his partner Dante Biscocho agreed to build a house for
respondents sps. Francisco and Manuelita Saligo for ~138k.
The house was completed and was to be paid in the manner described in a 2nd agreement between
Quiombing and Manuelita only, and later on a promissory note was issued for their remaining
payment balance of ~125k payable in Dec. 1984 to Quiombing (ONLY).
They failed to pay, so Quiombing filed for recovery against the spouses with the trial court.
However, respondents moved t o dismiss the claim, citing Biscocho was an indispensable party to a
recovery claim. Trial Court ruled in favor of the spouses.
Instead of amending the recovery claim, Quiombing appealed to the CA, arguing that he could act
by himself as a solidary creditor and that the recovery could be payable solely to him as specified in
the most recent agreement. CA ruled against him, stating that not only were they solidary creditors,
they were also solidary debtors, so in case of breach of agreement, the case could not move forward
without Biscocho as his rights would be affected. Furthermore, they ruled that the current agreement
is just an extension of the original (so the recovery being payable only to him is irrelevant/incorrect).
Petitioner raised matter to SC. SC ruled that who would sue for recovery is a personal matter
between the solidary creditors as either way, payment to one or the either would extinguish the entire
obligation. Biscocho was therefore not an indispensable party. According to Art. 1212, any of the
solidary creditors may act or do whatever is useful to the others, but not do anything prejudicial to
the others. There was nothing prejudicial in petitioner claiming the recovery and demanding
payment alone. Biscocho could always just demand his share from him a matter outside the
involvement of the respondents. SC agreed with CA that the current agreement is just an extension of
the original, but it doesnt matter because the rule on solidary creditors still stands. Wherefore,
petition is GRANTED.

Facts: - Petitioner Nicencio Quiombing and his partner Dante Biscocho entered into a Construction and
Service Agreement with respondents sps. Francisco and Manuelita Saligo for the construction of the latters
house for Php 137,940.00 in Aug. 1983.
On Oct. 1984, petitioner and Manuelita entered into a 2nd agreement in which the house was
acknowledged completed and that payment was to be done. A promissory note was issued for their
remaining payment balance of Php125,360.50 payable in Dec. 1984 to Quiombing.
They failed to pay, so Quiombing filed for recovery against the spouses with the trial court in 1986.
However, respondents moved to dismiss the claim in 1987, citing Biscocho was an indispensable party
to a recovery claim. Trial Court ruled in favor of the spouses, without prejudice to petitioner filing an
amended claim including Biscocho as a co-plaintiff.
Instead of amending the recovery claim, Quiombing appealed to the CA, arguing that he could act
by himself as a solidary creditor and that the recovery could be payable solely to him as specified in
the most recent agreement. CA ruled against him, stating that not only were they solidary creditors,
they were also solidary debtors, so in case of breach of agreement, the case could not move forward
without Biscocho as his rights would be affected. Furthermore, they ruled that the current agreement
is just an extension of the original (so the recovery being payable only to him is irrelevant/incorrect).
Petitioner raised matter to SC. SC ruled that who would sue for recovery is a personal matter
between the solidary creditors as either way, payment to one or the either would extinguish the entire
obligation. Biscocho was therefore not an indispensable party. According to Art. 1212, any of the
solidary creditors may act or do whatever is useful to the others, but not do anything prejudicial to
the others. There was nothing prejudicial in petitioner claiming the recovery and demanding
 payment alone. Biscocho could always just demand his share from him a matter outside the
involvement of the respondents. SC agreed with CA that the current agreement is just an extension of
the original, but it doesnt matter because the rule on solidary creditors still stands. Wherefore,
petition is GRANTED.

Issue: WON Quiombing as only 1 of 2 solidary creditors may file for recovery WON Biscocho as the other
creditor is an indispensable party whose non-joinder is grounds for dismissal of the recovery

Held/Ratio: YES, Quiombing as just one of the creditors may file for recovery due to nature/definition of
solidary obligations in Art. 1212 (paying only him in full will extinguish obligation to Biscocho regardless).
NO, Biscocho is not an indispensable party. In solidary obligations, its a matter between the creditors who
files for recovery even if recovery is paid to just 1 of them, the other can claim his share in a separate action.

JAPRL Dev. Corp vs. Security Bank

By Rosales, Andrew

Doctrine: Creditor may demand payment from any of the debtors who are solidarily liable including sureties even if
undergoing corporate rehabilitation

Recit-ready:
JAPRL is a local company engaged in steel fabrication who applied for a credit facility worth Php 50
Million for Security Bank. Petitioners financial adviser convened its outstanding creditors for loan
restructuring. Financial statements were given to the creditors wherein SBC found inconsistencies which
lead them to conclude that JAPRL committed misrepresentation. Stated in the contract that any
misrepresentation shall constitute as a default and subsequently they sent a formal demand for the
outstanding Php 43 Million to JAPRL and its sureties. Petitioner were unable to comply hence the recourse
in the RTC of Makati for a sum of money. Petitioner's counsel manifested a Stay Order from the RTC of
QC wherein it had a pending petition for Corporate Rehabilitation.
WON sureties can be held solidarily liable to a company undergoing corporate rehabilitation
YES. SC held that Interim Rules on Corporate Rehabilitation do not apply to sureties who are solidarily
liable with the debtor. It was documented in the contract that sureties were SOLIDARILY liable hence Art.
1216 was applicable wherein the creditor may demand from any of debtors who are solidarily liable. In this
case the sureties were solidarily liable hence the creditor may demand payment even if the company was
undergoing corporate rehabilitation.

Facts:
JAPRL is a local company engaged in steel fabrication and manufacturing applied for a credit facility to the
sum of Php 50 million from Security Bank Corporation
JAPRLs financial adviser MRM Management convened with their clients creditors for a restructuring of
outstanding loan obligations.
Copies of JAPRLs financial statements from 1998 to 2001 were given for the creditors to study.
SBC discovered inconsistencies in the final statements which lead them to conclude that JAPRL made
misrepresentations
Par. 10 (c) of the contract stated that any misrepresentations will constitute as a default upon JAPRL and its
sureties.
SBC sent a formal demand to JAPRL and its sureties Limson and Arollado for the outstanding Php 43
million.
Petitioners failed to comply hence the complaint for sum of money to the RTC of Makati
Petitioner's counsel manifested a stay order from the RTC of Quezon City wherein it had a pending petition
for corporate rehabilitation

Issue:
 WON sureties can be held solidarily liable to a company undergoing corporate rehabilitation

Held/Ratio:
YES. Supreme Court held that Interim Rules on Corporate Rehabilitation do not apply to sureties who are
solidarily liable with the debtor.
In Limson and Arollados case, their solidary liability with JAPRL is documented in the contract
o Liability of the Surety - The liability of the surety is solidary
Limson and Arrolado as sureties who are solidarily liable cannot claim protection from the rehabilitation
court.
ART. 1216. The creditor may proceed against any one of the solidary debtors or some or all of them
simultaneously. The demand made against any one of them shall not be an obstacle to those which may
subsequently be directed against the others, so long as the debt has not been fully collected.
Petition DENIED

Makati Dev. vs. Empire Insurance

By Santos, Patrick

Doctrine: Courts may mitigate the sanctions of contracts by virtue of Article 1229, as the penalties provided by
penal clauses are substitutes to damages when it comes to breaches of contract, the courts may mitigate them all the
same.

Recit-ready:
FACTS
Petitioner sold a lot in Urdaneta Village, Makati, Rizal to Rodolfo Andal.
o The Contract had a special condition which stated that the buyer should construct a house and
complete at least 50% within two years from the date of purchase. If the buyer failed to do so, the
seller shall have a claim of around 12k.

Andal did not build the house but instead sold it to Juan Carlos and by the 2 year mark, the house still was
not built. Makati Dev took the matter to court asking for the money.

In the end of the trial, the court ordered Andals insurance company to give Makati Dev P1,500
plus 12% interest and the same to Andal with regard to his insurance company.

Makati Dev filed the matter to the Supreme Court stating that the SC had no power to mitigate the P12,000
agreed upon.

ISSUE
Can the court mitigate the penal clause or the special condition?

RULING: YES

Article 1229 of the Civil code provides that The judge shall equitably reduce the penalty when the
principal obligation has been partly or irregularly complied with by the debtor. Even if there has been
no performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable.

In this case, the court noticed that the new buyer already made significant preparations to constructing
the house the day the 2 year period finished.
o Another thing is that roughly a month after the 2 month period, more than 50% was already done
with the house.
 In view of the facts, the court, by virtue of Article 1229, mitigated the damages as the intent of the contract,
to encourage home building among the lot owners was already partially and substantially complied with.

Facts:
On March 31, 1959, petitioner Makati Dev. sold to Rodolfo Andal a lot with an area of 1,589 square meters
in Urdaneta Village, Makati, Rizal for P55,615.

This contract had a special condition which provided that the buyer shall construct a house and complete
at least 50% of it within two years from the date of purchase.
o If the buyer was to fail to do so, a bond is given to the seller in the sum of P11,123

The problem was Andal did not build a house, and even sold the lot to Juan Carlos on January 18, 1960.
o Since the two did not build a house on the lot, petitioner sent a claim on Andal by virtue of the
penal clause in the contract.

Makati Dev took the case to court and filed a complaint to the CFI.
o Andals insurance company, the respondent in this case filed a cross-claim saying that if petitioner
was to win the case, respondent will have a claim for reimbursement from Andal as they will be
the ones paying for him in the meantime.

Andal filed his answer saying that the penal clause in the deed of sale was contrary to law, morals and
public policy
o and Juan Carlos, the person he sold the lot to, was already beginning construction of his house.

The CFI of Rizal held that respondent should pay petitioner P1,500 plus interest of 12% from the time of
the filing of the complaint and that Andal should also pay the same to respondent by virtue of respondents
cross-claim.

Petitioner in this case appealed to the SC as the lower court mitigated the damage from P12,000 as stated in
the penal clause, to a measly P1,500 plus interest.

Issue:
ISSUE: Whether or not the trial court made a mistake in reducing the amount in damages already stated in the penal
clause?

Held/Ratio:
No.

In the court decision, it stated that even though the house was still not finished, much less constructed after
the 2 year period, it does not matter.
o The court took notice of the fact that the lot was already fenced off and that there are building
materials surrounding the lot
o This meant to the court that there was a clear indication that the owner wanted to construct the
house in the least possible delay.
o By the end of April 1961, he had already finished more that 50% of the house.
 On petitioners allegation that the courts have no power to reduce penal clauses in contracts, the court
answered that a penal sanction is in reality also an obligation.
o It was made to secure the performance of the obligation - in a way it is a substitute for the
damages.

Article 1229 of the Civil Code provides that The judge shall equitably reduce the penalty when the
principal obligation has been partly or irregularly complied with by the debtor. Even if there has been
no performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable.

By April 1961, Juan Carlos had already finished more than 50% of the house, there was already partial
performance of the obligation within the meaning and intent of Article 1229.

The court took notice of what the intent of the contract was.
o Which was to encourage home building among lot owners in the village.
o The court further stated that the penal clause in this case was inserted not to indemnify the Makati
Dev but to compel performance of the special condition which was to construct a house.

(Read the orig, this is a tricky case)

Tan vs. CA
By Serpa Juan, Dustine

Doctrine:
In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of
interests in case of non-compliance, if there is no stipulation to the contrary. Nevertheless, damages shall be paid if
the obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the obligation. The penalty may be
enforced only when it is demandable in accordance with the provisions of Art. 1226, 1229.

Recit-ready:
Antonio Tan obtained 2 loans from CCP, each in the principal amount of 2 Million Oesis or in the total
principal amount of 4 million pesos, evidenced by 2 promissory notes with maturity dates on May 14, 1979
and July 6, 1979. Tan defaulted but after few partial payments he had loans restructured by CCP. Tan failed
to pay any installment on the said restructured loan .In a letter, Tan requested and proposed to respondent
CCP a mode of paying the restructured loan. Tan requested for a moratorium on his loan obligation until the
following year allegedly due to a substantial deduction in the volume of his business and on account of the
peso devaluation. CCP did not agree and filed a complaint for the collection of money against Tan. Tan in
his defense said that he obtained the loan from CCP to help his friend, Wilson Lucmen. However, he has
not been able to locate Lucmen. While the case is in the RTC, Tan filed a Manifestation wherein he
proposed to settle his indebtedness to CCP by downpayment of P140,000.00 and to issue 12 checks every
beginning of the year to cover installment payments for one year, and every year thereafter until the balance
is fully paid. However, CCP did not agree with his proposal.
The Trial Court ordered Tan to pay CCP with the corresponding stipulated interest and charges thereof,
until fully paid, plus attorneys fees in an amount equivalent to 25% of said outstanding account, plus
P50,000.00, as exemplary damages, plus costs. The petitioner appealed this decision and asked for the
reduction of the penalties and charges for his loan obligations.
The CA affirmed the decision of the RTC however, it deleted the award for exemplary damages and
reduced the amount of awarded attorneys fees to 5%
Petitioner claims that there is no basis in law for the charging of interest on the surcharges for the reason
that the New Civil Code is devoid of any provision allowing the imposition of interest on surcharges.
The issue here is W/N there are contractual and legal bases for the imposition of penalty interest on the
penalty and attorneys fees
The Court held YES Art. 1226 of the Civil Code provides: In obligations with a penal clause, the penalty
shall substitute the indemnity for damages and the payment of interests in case of non-compliance, if there
 is no stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the
penalty or is guilty of fraud in the fulfillment of the obligation. The penalty may be enforced only when it is
demandable in accordance with the provisions of this Code. In this case, the promissory note expressly
provides for the imposition of both interest and penalties in case of default on the part of the plaintiff in the
payment of the subject restructured loan/
Facts:
Antonio Tan obtained 2 loans from CCP, each in the principal amount of 2 Million Oesis or in the total
principal amount of 4 million pesos, evidenced by 2 promissory notes with maturity dates on May 14, 1979
and July 6, 1979. Tan defaulted but after few partial payments he had loans restructured by CCP. Tan failed
to pay any installment on the said restructured loan.
In a letter, Tan requested and proposed to respondent CCP a mode of paying the restructured loan
o 20% of the principal amount of the loan upon the respondent giving its conformity to his proposal
o Balance on the principal obligation payable 36 monthly installments until fully paid.
Tan requested for a moratorium on his loan obligation until the following year allegedly due to a substantial
deduction in the volume of his business and on account of the peso devaluation.
o No favorable response was made to said letters.
o CCP demanded full payment, within ten (10) days from receipt of said letter P6,088,735.03.
CCP filed complaint for the collection of a sum of money. Tan interposed the defense that he
accommodated a friend, Wilson Lucmen, who asked for help to obtain a loan from CCP. However, he
claimed that he cannot find the friend.
While the case was in the RTC, Tan filed a Manifestation wherein he proposed to settle his indebtedness to
CCP by downpayment of P140,000.00 and to issue 12 checks every beginning of the year to cover
installment payments for one year, and every year thereafter until the balance is fully paid.
However, CCP did not agree to the petitioners proposals and so the trial of the case ensued.
The Trial Court ordered Tan to pay CCP 7,996,314.67, representing defendants outstanding account as of
August 28, 1986, with the corresponding stipulated interest and charges thereof, until fully paid, plus
attorneys fees in an amount equivalent to 25% of said outstanding account, plus P50,000.00, as exemplary
damages, plus costs.
o Reason of loan for accommodation of friend was not credible.
o Assuming, arguendo, that the Tan did not personally benefit from loan, he should have filed a 3rd-
party complaint against Wilson Lucmen
o 3 times the petitioner offered to settle his loan obligation with CCP.
o Tan may not avoid his liability to pay his obligation under the promissory note which he must
comply with in good faith.
Tan appealed to the CA, asking for the reduction of the penalties and charges on his loan obligation.
Judgment appealed from is hereby Affirmed.
o No alleged partial or irregular performance.
o However, the appellate court modified the decision of the trial court by deleting exemplary
damages because not proportionate to actual damage caused by the non-performance of the
contract
Petitioner claims that there is no basis in law for the charging of interest on the surcharges for the reason
that the New Civil Code is devoid of any provision allowing the imposition of interest on surcharges.
Issue: Whether there are contractual and legal bases for the imposition of penalty interest on the penalty and
attorneys fees - YES
Held/Ratio:
Yes. Art. 1226 of the Civil Code provides: In obligations with a penal clause, the penalty shall substitute
the indemnity for damages and the payment of interests in case of non-compliance, if there is no stipulation
to the contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is guilty of
fraud in the fulfillment of the obligation. The penalty may be enforced only when it is demandable in
accordance with the provisions of this Code.
In this case, the promissory note expressly provides for the imposition of both interest and penalties in case
of default on the part of the plaintiff in the payment of the subject restructured loan. The stipulated 14% per
annum interest charge until full payment of the loan constitutes the monetary interest on the note and is
allowed under Article 1956 of the New Civil Code.
 On the other hand, the stipulated 2% per month penalty is in the form of penalty charge which is separate
and distinct from the monetary interest on the principal of the loan.
Second, there appears to be a justification for a reduction of the penalty charge but not necessarily to ten
percent (10%) of the unpaid balance of the loan as suggested by petitioner. In as much as petitioner has
made partial payments which showed his good faith, a reduction of the penalty charge from 2% on the total
amount due, compounded monthly, until paid can indeed be justified under the said provision of Article
1229 of the New Civil Code.
The continued monthly accrual of the 2% penalty charge on the total amount due to be unconscionable in as
much as the same appeared to have been compounded monthly. Considering petitioners several partial
payments and the fact he is liable under the note for the 2% penalty charge per month on the total amount
due, compounded monthly, for 21years since his default in 1980, we find it fair and equitable to reduce the
penalty charge to a straight 12% per annum on the total amount due starting August 28, 1986, the date of
the last Statement of Account.
We also took into consideration the offers of the petitioner to enter into a compromise for the settlement of
his debt by presenting proposed payment schemes to respondent CCP. The said offers at compromise also
showed his good faith despite difficulty in complying with his loan obligation due to his financial
problems. However, we are not unmindful of the respondents long overdue deprivation of the use of its
money collectible from the petitioner.

Country Bankers Vs. CA

By Fellone, Mich

Doctrine: As a general rule, in obligations with a penal clause, the penalty shall substitute the indemnity for damages and the
payment of interests in case of non-compliance.

A penal clause is an accessory obligation which the parties attach to a principal obligation for the purpose of insuring the
performance thereof by imposing on the debtor a special prestation (generally consisting in the payment of a sum of money) in case
the obligation is not fulfilled or is irregularly or inadequately fulfilled.

Recit-ready:

Facts:
Oscar Ventanilla Enterprises Corporation (OVEC), as lessor, and the petitioner Enrique F. Sy, as lessee,
entered into a (6 years) lease agreement over the Avenue, Broadway and Capitol Theaters and the land on
which they are situated in Cabanatuan City, including their air-conditioning systems, projectors and
accessories needed for showing the films or motion pictures. After more than two (2) years of operation, the
lessor OVEC made demands for the repossession of the said leased properties in view of the Sy's arrears in
monthly rentals and non-payment of amusement taxes.
By reason of Sy's request for reconsideration of OVECs demand for repossession of the three (3) theaters,
the former was allowed to continue operating the leased premises upon his conformity to certain conditions
imposed by the latter in a supplemental agreement dated August 13, 1979. In pursuance of their latter
agreement, Sy's arrears in rental was reduced.
However, the accrued amusement tax liability of the three (3) theaters to the City Government of
Cabanatuan City had accumulated to P84,000.00 despite the fact that Sy had been deducting the amount of
P4,000.00 from his monthly rental with the obligation to remit the said deductions to the city government.
Hence, letters of demand dated January 7, 1980 and February 3, 1980 were sent to Sy demanding payment
of the arrears in rentals and amusement tax delinquency.
SY failed to pay the abovementioned amounts in full Consequently, OVEC padlocked the gates of the three
theaters under lease and took possession thereof in the morning of February 11, 1980.
Sy, filed the present action for reformation of the lease agreement, damages and injunction and by virtue of
a restraining order dated February 12, 1980 followed by an order directing the issuance of a writ of
preliminary injunction issued in said case, Sy regained possession and operation of the Avenue, Broadway
and Capital theaters.
 The trial court arrived at the conclusions that Sy is not entitled to the reformation of the lease agreement;
that the repossession of the leased premises by OVEC after the cancellation and termination of the lease
was in accordance with the stipulation of the parties in the said agreement and the law applicable thereto
and that the consequent forfeiture of Sy's cash deposit in favor of OVEC was clearly agreed upon by them
in the lease agreement. The trial court further concluded that Sy was not entitled to the writ of preliminary
injunction issued in his favor after the commencement of the action and that the injunction bond filed by Sy
is liable for whatever damages OVEC may have suffered by reason of the injunction.
RTC RULING: Sy and (CBISCO) appealed the decision in toto while OVEC appealed insofar as the
decision failed to hold the injunction bond liable for damages awarded by the trial court.

COURT OF APPEALS RULING: held that the cancellation or termination of the agreement prior to its
expiration period is justified as it was brought about by Sy's own default in his compliance with the terms
of the agreement and not "motivated by fraud or greed." It also affirmed the award to OVEC of the amount
of P100,000.00 chargeable against the injunction bond posted by CBISCO which was soundly and amply
justified by the trial court.

The respondent Court likewise found no merit in OVECS appeal and held that the trial court did not err in
not charging and holding the injunction bond posted by Sy liable for all the awards as the undertaking of
CBISCO under the bond referred only to damages, which OVEC may suffer as a result of the injunction.
Hence, the present petition

ISSUE

W/N the Court of Appeals erred in holding CBISCOs bond liable

HELD/RATIO

No.
A provision which calls for the forfeiture of the remaining deposit still in the possession of the lessor,
without prejudice to any other obligation still owing, in the event of the termination or cancellation of the
agreement by reason of the lessee's violation of any of the terms and conditions of the agreement is a penal
clause that may be validly entered into.
A penal clause is an accessory obligation, which the parties attach to a principal obligation for the purpose
of insuring the performance thereof by imposing on the debtor a special presentation (generally consisting
in the payment of a sum of money) in case the obligation is not fulfilled or is irregularly or inadequately
fulfilled
As a general rule, in obligations with a penal clause, the penalty shall substitute the indemnity for damages
and the payment of interests in case of non-compliance. In such case, proof of actual damages suffered by
the creditor is not necessary in order that the penalty may be demanded (Article 1228, New Civil Code).
However, there are exceptions to the rule that the penalty shall substitute the indemnity for damages and
the payment of interests in case of non-compliance with the principal obligation. They are first, when there
is a stipulation to the contrary; second, when the obligor is sued for refusal to pay the agreed penalty; and
third, when the obligor is guilty of fraud (Article 1226, par. 1, New Civil Code)
It is evident that in all said cases, the purpose of the penalty is to punish the obligor. Therefore, the obligee
can recover from the obligor not only the penalty but also the damages resulting from the non-fulfillment or
defective performance of the principal obligation.
In the case at bar, inasmuch as the forfeiture clause provides that the deposit shall be deemed forfeited,
without prejudice to any other obligation still owing by the lessee to the lessor, the penalty cannot substitute
for the P100,000.00 supposed damage resulting from the issuance of the injunction against the P290,000.00
remaining cash deposit. This supposed damage suffered by OVEC was the alleged P10,000.00 a month
increase in rental from P50,000.00 to P60,000,00), which OVEC failed to realize for ten months from
February to November, 1980 in the total sum of P100,000.00
This opportunity cost which was duly proven before the trial court, was correctly made chargeable by the
said court against the injunction bond posted by CBISCO.
 There is likewise no merit to the claim of petitioners that respondent Court committed serious error of law
and grave abuse of discretion in not dismissing private respondent's counterclaim for failure to pay the
necessary docket fee, which is an issue raised for the first time in this petition. Thus, We allowed the
amendment of the complaint by specifying the amount of damages within a nonextendible period of five
(5) days from notice and the reassessment of the filing fees.
ACCORDINGLY, finding no merit in the grounds relied upon by petitioners in their petition, the same is hereby
DENIED and the decision dated June 15, 1988 and the resolution dated September 21, 1988, both of the
respondent Court of Appeals are AFFIRMED.

CHAPTER 4
International Hotel Corp. Vs. Joaquin
by Erbon, Roni

Doctrine: IHC has no intention of preventing Joaquin from fulfilling its obligation of securing a foreign loan for the
construction of a hotel therefore it is not liable under Article 1187.

Recit-ready: Respondent Fransisco Joaquin submitted a proposal to the board of IHC to render technical assistance
in securing a foreign loan for the construction of a hotel. Board approved the proposal and earmarked P2M for the
project. IHC also acquired a foreign loan guaranty with the DBP subject to several conditions. Joaquin presented
two potential foreign financier: Roger Dunn & Company and Materials Handling Corporation. He recommended
Materials Handling Corporation based on beneficial terms it had offered. Negotiations between MHC and, later on,
with its principal, Barnes International, ensued. Joaquin and Jose Valero entertained another financier which is the
Weston Financial Corporation. When Barnes failed to deliver the needed loan, IHC informed DBP that it would
submit Weston for DBPs consideration. As a result, DBP cancelled its previous guaranty through a letter. IHC
entered into an agreement with Weston, and communicated this development to DBP. However, DBP denied the
application for guaranty for failure to comply with the conditions set before. Due to Joaquins failure to secure the
needed loan, IHC, through its President Bautista, canceled the 17,000 shares of stock previously issued to Joaquin
and Suarez as payment for their services. Joaquin and Suarez commenced this action for specific performance,
annulment, damages and injunction by a complaint with the RTC Manila

W/N IHC is liable to pay Joaquin and Suarez damages

No. , IHC only relied on the opinion of its consultant in deciding to transact with Materials Handling and, later on,
with Barnes. In negotiating with Barnes, IHC had no intention, willful or otherwise, to prevent Joaquin and Suarez
from meeting their undertaking. Such absence of any intention negated the basis for the CAs reliance on Article
1186 of the Civil Code.

Facts: respondent Francisco B. Joaquin, Jr. submitted a proposal to the Board of Directors of the International Hotel
Corporation (IHC) for him to render technical assistance in securing a foreign loan for the construction of a hotel, to
be guaranteed by the Development Bank of the Philippines.

IHC Board of Directors approved phase one to phase six of the proposal and earmarked P2 000 000 for the project.
Anent the financing, IHC applied with DBP for a foreign loan guaranty. DBP processed the application and
approved it subject to several conditions.

Joaquin wrote to IHC to request the payment of his fees in the amount of P500,000.00 for the services that he had
provided and would be providing to IHC. Stockholders of IHC granted Joaquins request.

Joaquin presented to the IHC Board of Directors the results of his negotiations with potential foreign financiers. He
narrowed the financiers to Roger Dunn & Company and Materials Handling Corporation. He recommended that the
Board of Directors consider Materials Handling Corporation based on the more beneficial terms it had offered. His
recommendation was then accepted.

Negotiations with Materials Handling Corporation and, later on, with its principal, Barnes International (Barnes),
ensued. While the negotiations with Barnes were ongoing, Joaquin and Jose Valero, the Executive Director of IHC,
met with another financier, the Weston International Corporation (Weston), to explore possible financing. When
Barnes failed to deliver the needed loan, IHC informed DBP that it would submit Weston for DBPs consideration.
As a result, DBP cancelled its previous guaranty through a letter

IHC entered into an agreement with Weston, and communicated this development to DBP. However, DBP denied the
application for guaranty for failure to comply with the conditions set before.
Due to Joaquins failure to secure the needed loan, IHC, through its President Bautista, canceled the 17,000 shares of
stock previously issued to Joaquin and Suarez as payment for their services

Joaquin and Suarez commenced this action for specific performance, annulment, damages and injunction by a
complaint with the RTC Manila

RTC ordered IHC to pay Joaquin 200 000 and Suarez 50 000 and for attorneys fees of 20 000

CA affirmed RTC holding IHC liable to pay 700 000 to Joaquin and 200 000 to Suarez and for attorneys fees of 20
000 under Article 1186 of the Civil Code.

Issue: W/N IHC is liable to pay damages to Joaquin and Suarez under Article 1186 of the Civil Code

Held/Ratio: Article 1186. The condition shall be deemed fulfilled when the obligor voluntarily prevents its
fulfillment.

This provision refers to the constructive fulfillment of a suspensive condition, whose application calls for two
equisites, namely: (a) the intent of the obligor to prevent the fulfillment of the condition, and (b) the actual
prevention of the fulfillment. Mere intention of the debtor to prevent the happening of the condition, or to place
ineffective obstacles to its compliance, without actually preventing the fulfillment, is insufficient.

The error lies in the CAs failure to determine IHCs intent to preempt Joaquin from meeting his obligations.
Minutes of IHCs special board meeting discloses that Joaquin impressed upon the members of the Board that
Materials Handling was offering more favorable terms for IHC.

After explaining the advantages and disadvantages to IHC of the two (2) offers specifically with regard to the terms
and repayment of the loan and the rate of interest requested by them, Joaquin concluded that the offer made by the
Materials Handling Corporation is much more advantageous because the terms and conditions of payment as well as
the rate of interest are much more reasonable and would be much less onerous to our corporation.

Evidently, IHC only relied on the opinion of its consultant in deciding to transact with Materials Handling and, later
on, with Barnes. In negotiating with Barnes, IHC had no intention, willful or otherwise, to prevent Joaquin and
Suarez from meeting their undertaking. Such absence of any intention negated the basis for the CAs reliance on
Article 1186 of the Civil Code.

Filinvest vs. Philippine

by Ignacio, Quina

Doctrine: There is no dacion en pago when the object is merely returned/delivered without the express or implied
intention of the parties. In dacion en pago, as a special mode of payment, the debtor offers another thing to the
creditor who accepts it as equivalent of payment of an outstanding debt (Art 1245). In such cases, common consent
is essential, be it sale or innovation, in order to extinguish the obligation.

Recit-ready:
PETITIONER- Filinvest
RESPONDENT- Philippine Acetylene Co
Philippine Acetylene Co. bought a Chevrolet vehicle from one Alexander Lim, to be paid by 34 monthly installment,
all stipulated in a promissory note. PCo executed a chattel mortgage over the same vehicle in favor of Lim, while
Lim assigned all his rights, title and interests in the promissory note to Filinvest. PCo defaulted in nine consecutive
payments, to which Filinvest demanded full payment plus interest or return the mortgaged vehicle. PCo then opted
to return the vehicle, along with the document Voluntary Surrender with Special Power of Attorney to Sell, which
was received and verified by Filinvests vice-president. Filinvest was unable to sell the vehicle for it had unpaid
taxes of 70k, and asked that PCo to update its account by paying the installments in arrears and accruing interest of
4k; this went unnoticed and so Filinvest offered to return the car, however PCo refused to accept it, causing Filinvest
to file for collection of sum of money with damages. PCo asserts that its obligation had ended when it returned the
vehicle, and surmised further that assuming otherwise, Filinvest is not entitled to recover due to the breach of
warranty committed by Lim.

ISSUE: W/N The voluntary surrender of the vehicle extinguished the obligation of PCo to Filinvest -- NO, Filinvest
never consented/accepted it as an equivalent payment. The mere return of the vehicle does not constitute the
dacion en pago, in the absence of the express or implied true intention of both parties. In fact, it only
constitutes a transfer in possession, not ownership. It also appears from the Voluntary Surrender document
that PCo had merely intended to transfer possession not ownership, so that it could be sold by Filinvest on its
behalf, and use the proceeds from the sale to pay off the debt.

** Baka lang itanong, eto pa. With regard to the question of who shall shoulder the payment of taxes-- since
ownership did not transfer, PCo has to shoulder it. It was also stipulated in the Deed of Sale that such sale is
free from encumbrances and liens. Also Filinvest was merely assigned rights, title and interest.

Facts:
Oct 30 1971: Purchase of Chevrolet 1969 model for PHP 55,247.80 by Philippine Acetylene Co. from
Alexander Lim. Vehicle sold for 55k-- 20k downpayment, 35k payable thru installments of 1k per month.
12% per annum interest -- THIS IS ALL IN THE PROMISSORY NOTE
To secure the payment for the promissory note, Philippine Acetylene Co. executed chattel mortgage on the
vehicle in favor of Lim.
Lim assigned rights, title and interest to Filinvest of the promissory note and the chattel mortgage by virtue
of a Deed of Assignment
Philippine Acetylene Co. defaulted in nine consecutive payments
Filinvest demanded full payment and interest, or return of the mortgaged vehicle
March 1973: PCo returned said mortgaged vehicle with document Voluntary Surrender with Special
Power of Attorney to Sell
Filinvest was unable to sell because of unpaid taxes on the vehicle amounting to PHP 70,122.00. Filinvest
requested that PCo update its account by paying installments in arrears and accruing interest of PHP
4,232.21

Issue: W/N the voluntary surrender of the property extinguishes the obligation

Held/Ratio: No, it must be shown that it was accepted as an equivalent payment in order for the obligation to be
extinguished.

The mere return of the mortgaged motor vehicle by the mortgagor to the mortgagee does not constitute dation in
payment or dacion en pago in the absence, express or implied of the true intention of the parties.

Dacion en pago, according to Manresa, is the transmission of the ownership of a thing by the debtor to the creditor
as an accepted equivalent of the performance of obligation. In dacion en pago, as a special mode of payment, the
debtor offers another thing to the creditor who accepts it as equivalent of payment of an outstanding debt.

The undertaking really partakes in one sense of the nature of sale, that is, the creditor is really buying the thing or
property of the debtor, payment for which is to be charged against the debtor's debt. As such, the essential elements
of a contract of sale, namely, consent, object certain, and cause or consideration must be present. In its modern
concept, what actually takes place in dacion en pago is an objective novation of the obligation where the thing
offered as an accepted equivalent of the performance of an obligation is considered as the object of the contract of
sale, while the debt is considered as the purchase price. In any case, common consent is an essential prerequisite, be
it sale or innovation to have the effect of totally extinguishing the debt or obligation.
The fact that the mortgaged motor vehicle was delivered to him does not necessarily mean that ownership thereof,
as juridically contemplated by dacion en pago, was transferred from appellant to appellee. In the absence of clear
consent of appellee to the proferred special mode of payment, there can be no transfer of ownership of the
mortgaged motor vehicle from appellant to appellee. If at all, only transfer of possession of the mortgaged motor
vehicle took place, for it is quite possible that appellee, as mortgagee, merely wanted to secure possession to
forestall the loss, destruction, fraudulent transfer of the vehicle to third persons, or its being rendered valueless if left
in the hands of the appellant.

Spouses Pen vs. Spouses Julian (January 11, 2016)

by Panaligan, Celina

Doctrine: Dacion en pago (Dation in payment, Art. 1245), which is a special mode of payment where the debtor
offers another thing to the creditor, who accepts it as an equivalent of the payment of an outstanding debt, is legal
and completely different from pactum commissorium, wherein the creditor automatically appropriates the things
given by way of pledge or mortgage, or disposes of them, which is void and contrary to law.

Recit-ready: Petitioners Pen are assailing before the SC the RTC and CA rulings invalidating the Deed of Sale of
land between them and respondents Spouses Julian for being void and nonexistent due to lack of prior agreement
and for being pactum commissorium, respectively. The land in question had been mortgaged by respondents to
secure a debt in favor of petitioners. Upon default, petitioners commenced foreclosure proceedings, but respondents
offered the land as payment in kind instead, hence the Deed of Sale. After some time, they offered to repurchase it,
but unbeknownst to respondents, said Deed of Sale had been unwittingly used by petitioners to transfer the title of
the land to petitioners name. Before such discovery, respondents had already made several payments in an attempt
to repurchase their land. The Supreme Court found the sale to be prohibited pactum commissorium which is contrary
to law and hence, invalid.

Facts: Petitioner spouses Roberto and Adelaida Pen are assailing before the SC the RTC and CA rulings that
rendered the Deed of Sale of land between them and respondents Spouses Santos and Linda Julian void and
nonexistent for being pactum commissorium.

The land in question had been recently mortgaged by respondents Julian as a pledge for an outstanding debt they
owed the petitioners in April 1986 in the amount of 60,000. In May of the same year, they contracted two more
loans in the amount of 50,000 and 10,000 with corresponding interests. Thereafter respondents Julian issued 2
promissory notes to evidence the foregoing loans, and for security, executed a Real Estate Mortgage of their
property (TCT No. 327733) registered under Santos Julian.

When the debts became due and demandable, spouses Julian were unable to pay, prompting petitioner Adelaida Pen
to commence foreclosure proceedings of the mortgaged property. However, respondent Linda Julian convinced her
not to push through with it and instead offered their mortgaged property as payment in kind. After an ocular and
determination of the propertys value at 70,000, Linda Julian executed a Deed of Sale signed by her.

In July 1989, petitioners Pen alleged that respondents Julian offered to repurchase their property at purchase price of
436,115. After several attempts, respondents failed to repurchase. However, the payment of 100,000 later on paid by
respondents was deemed deducted from their outstanding debt which now only amounted to 319,065.

Respondents Julian allege on the other hand that petitioner Adelaida Pen made them sign an Absolute Deed of Sale
when the mortgage was being executed on their property, which was undated, unfilled, and unnotarized.
Simultaneously, respondents were making payments in the amount of 115,400 to satisfy their debt and repurchase
their property. Another payment of 150,000 was being made by respondents but petitioners refused this time,
demanding 250,000 from them. In return respondents demanded they be shown the land title they had recently
conveyed to petitioners, which petitioners refused. Only then did respondents discover that their mortgaged property
in question had already been registered in petitioner Adelaidas name under TCT No. 364880. Due to their discovery
respondents filed a suit for Cancellation of Sale, Cancellation of Title issued to the appellants, Recovery of
Possession, and Damages with Prayer for Preliminary Injunction before the RTC, alleging among others that
petitioner Adelaida in bad faith, maliciously typed and unilaterally filled up the Deed of Sale earlier signed by
Julian.

The RTC ruled in favor of respondents, declaring the Deed of Sale void and inexistent for lacking the essential
requisites of a valid contract and that no prior agreement had been made with regard to the consideration for the sale
at the time they had signed said Deed of Sale. Upon appeal to the CA, the CA also ruled in favor of respondents, but
this time ruling that the sale had been a prohibited pactum commissorium (see doctrine)

Issue: W/N the Deed of Sale was invalid and if it was, on what grounds

Held/Ratio: The Deed of Sale was invalid for being pactum commissorium. All the elements of pactum
commissorium were found present in this case:

a) that there should be a pledge or mortgage wherein property is pledged or mortgaged by way of security for the
payment of the principal obligation

b) that there should be a stipulation for an automatic appropriation by the creditor of the thing pledged or
mortgaged in the event of nonpayment of the principal obligation within the stipulated period

The authorization for Adelaida to appropriate the property subject of the mortgage upon Lindas default was implied
from Lindas having signed the blank deed of sale simultaneously with her signing of the real estate mortgage.

Furthermore, had the transaction been a dacion en pago (see doctrine) the sale would have been valid. What
differentiates a dacion en pago from a pactum commissorium is that in the former, the property is alienated in favor
of the creditor in satisfaction of a debt in money. In this case, the Deed of Sale was executed not in satisfaction of
respondents debt since at the time they signed said Deed of Sale, they were also simultaneously paying petitioners
money in order to prevent the foreclosure of their property.

Papa vs. AU Valencia

by Alejandro, Ritz

Doctrine: Delivery of a check produces the effect of payment only when it is cashed, pursuant to Art. 1249 of the
Civil Code, but the rule is otherwise if the debtor is prejudiced by the creditors unreasonable delay in presentment.

Recit-ready: Myron Papa, administrator of the estate of Angela Butte, sold a portion of said estate to Felix Pearroyo
through A.U. Valencia and Co., Inc. Pearroyo gave Papa P5,000.00 plus a check worth P40,000.00. Papa never
delivered the certificate of title to Pearroyo. A case was filed 10 years after demanding specific performance. Papa
argued that the sale between him and Pearroyo was never consummated because he did not encash the P40,000.00
check and that the P5,000.00 cash was merely earnest money.

The issue is W/N the sale was indeed consummated.

The court held that it was consummated because after more than ten (10) years from the payment in part by cash and
in part by check, the presumption is that the check had been encashed. Granting that Papa had never encashed the
check, his failure to do so for more than ten (10) years undoubtedly resulted in the impairment of the check through
his unreasonable and unexplained delay. While it is true that the delivery of a check produces the effect of payment
only when it is cashed, pursuant to Article 1249 of the Civil Code, the rule is otherwise if the debtor (Pearroyo) is
prejudiced by the creditors (Papas) unreasonable delay in presentment. The acceptance of a check implies an
undertaking of due diligence in presenting it for payment, and if he from whom it is received sustains loss by want
of such diligence, it will be held to operate as actual payment of the debt or obligation for which it was given.
Facts:
In June 1982, a complaint for specific performance was filed by Valencia and Pearroyo in RTC against Papa, in his
capacity as administrator of the Testate Estate of Butte.

Complaint alleged the ff:

1. June 15, 1973 - Papa, acting as attorney-in-fact of Butte, sold to Pearroyo, through Valencia a parcel of
land covered by TCT No. 28993 located at corner Retiro and Cadiz Streets, La Loma, Quezon City.
2. Pearroyo gave Papa P5,000.00 plus a check worth P40,000.00.
3. Prior to this sale, the said property, together with several other parcels of land owned by Butte had been
mortgaged by her to the Associated Banking Corporation.
4. Before the title was released, Butte died. :(
5. The bank refused to release the property unless and until all the mortgaged properties of Butte were all
redeemed.
6. 4 years after the sale, respondents discovered that the mortgage rights of the bank had been assigned to one
Tomas L. Parpana (now deceased), as special administrator of the Estate of Ramon Papa, Jr. Petitioner had been
collecting rentals (P800/month) from the tenants, despite the property being sold since June 1973.
7. Prays that Papa be ordered : 1) to deliver the title 2) to turn over to the latter the sum of P72,000.00 as
accrued rentals as of April 1982 and the monthly rental of P800.00 until the property is delivered 3) to pay
respondents the sum of P20,000.00 as attorneys fees; and to pay the costs of the suit.

Papas Response
1. admitted that the lot had been mortgaged to the Associated Banking Corporation
2. contended that the complaint did not state a cause of action because the real property in interest was the
Testate Estate of Angela M. Butte, which should have been joined as a party defendant
3. claimed that:
he could not recall in detail the transaction which allegedly occurred in 1973
he did not have TCT No. 28993 in his possession

Motion to intervene: Repondent/Intervenor Delfin Jao was allowed to intervene in the case, having a common cause
with the respondents because he alleges that the lot sold was in turn sold to him in Aug. 1973 thus, he prayed for
judgment in favor of the respondents and that after deliver of title, it would be ordered to execute in his favor the
deed of conveyance and turn over the rentals to him.

Papa filed a 3rd party complaint against spouses Arsenio B. Reyes and Amanda Santos
due to non-payment of real estate taxes by Butte on the said properties, she sold them at the public auction
by the City Treasurer of QC to respondent Reyes spouses on Jan 21, 1980 for P14,000
one-year period of redemption had expired
petitioner was willing to reimburse respondent Reyes spouses whatever amount they might have paid for
taxes and other charges, since the subject property was still registered in the name of the late Angela M. Butte
prays that the sale be canceled, the property be restored to him upon payment of P14,000 and ordering
Valencia and Pearroyo to pay him at least P55,000.00 plus everything they might have to pay the Reyes
spouses in recovering the property.
Reyes defense: prescription of right to redeem property

Trial Court Decision:

1. Allowed Papa to redeem from Reyes and ordering the latter to allow such redemption of property by paying
the sum of P14,000 plus legal interest of 12% thereon from January 21, 1980
2. Ordered Papa to execute a Deed of Absolute Sale in Favor of Pearroyo covering the property in question
and to deliver peaceful possession and enjoyment of the said property. If not possible Papas ordered to pay to
plaintiff Felix Pearroyo the sum of P45,000.00 plus legal interest of 12% from June 15, 1973
3. Ordering Pearroyo to execute and deliver to intervenor a deed of absolute sale over the same property,
upon the latters payment to the former of the balance of the purchase price of P71,500.00. If not possible,
Pearroyo is ordered to pay intervenor the sum of P5,000.00 plus legal interest of 12% from August 23, 1973;
and

Papas Appeal
Sale was never consummated as he did not encash the check (in the amount of P40,000.00) given by respondents
Valencia and Pearroyo in payment of the full purchase price of the subject lot. He maintained that what said
respondents had actually paid was only the amount of P5,000.00 (in cash) as earnest money.

CA Decision
- 2nd paragraph modified by ordering the Papa to deliver to Pearroyo, the owners duplicate of TCT No. 28993 of
Butte and the peaceful possession and enjoyment of the lot in question or, if the owners duplicate certificate cannot
be produced, to authorize the Register of Deeds to cancel it and issue a certificate of title in the name of Felix
Pearroyo.
there was no evidence at all that petitioner did not, in fact, encash said check
Respondent Pearroyo testified in court that petitioner Papa had received the amount of P45,000.00 and
issued receipts therefor.
presumption is that the check was encashed, especially since the payment by check was not denied by
defendant-appellant (herein petitioner) who, in his Answer, merely alleged that he can no longer recall
the transaction which is supposed to have happened 10 years ago.

Papas argument:
Court of Appeals erred in concluding that the alleged sale of the subject property had been consummated.
He contends that such a conclusion is based on the erroneous presumption that the check (in the amount of
P40,000.00) had been cashed, citing Art. 1249 of the Civil Code, which provides, in part, that:
Payment by checks shall produce the effect of payment only when they have been cashed or when through
the fault of the creditor they have been impaired.
insists that he never cashed said check; and, such being the case, its delivery never produced the effect of
payment
while admitting that he had issued receipts for the payments, asserts that said receipts, particularly the
receipt of PCIB Check No. 761025 in the amount of P40,000.00, do not prove payment.
avers that there must be a showing that said check had been encashed.
finally avers that, in fact, the consideration for the sale was still in the hands of respondents Valencia and
Pearroyo, as evidenced by a letter addressed to him Please be informed that I had been authorized by Dr.
Ramon Papa, Jr., heir of Mrs. Angela M. Butte to pay you the aforementioned amount of P75,000.00 for the
release and cancellation of subject propertys mortgage. The money is with me and if it is alright with you, I
would like to tender the payment as soon as possible.

Papa filed a motion for reconsideration > denied > Hence, this petition

Issue: W/N the sale was really consummated.

Held/Ratio:Yes. Court finds no merit in the petition.

Undisputed facts: Valencia and Pearroyo gave the following amounts:

Five Thousand Pesos (P5,000.00) in cash on 24 May 1973
Forty Thousand Pesos (P40,000.00) in check on 15 June 1973
Papa admits having received said amounts and issuing receipts therefor.

Petitioners assertion that he never encashed the aforesaid check is not substantiated and is at odds with his
statement in his answer that he can no longer recall the transaction which is supposed to have happened 10 years
ago.After more than ten (10) years from the payment in part by cash and in part by check, the presumption is that
the check had been encashed.

Granting that petitioner had never encashed the check, his failure to do so for more than ten (10) years undoubtedly
resulted in the impairment of the check through his unreasonable and unexplained delay.

Delivery of a check produces the effect of payment only when it is cashed, pursuant to Art. 1249 of the Civil Code,
but the rule is otherwise if the debtor is prejudiced by the creditors unreasonable delay in presentment.

The acceptance of a check implies an undertaking of due diligence in presenting it for payment, and if he from
whom it is received sustains loss by want of such diligence, it will be held to operate as actual payment of the debt
or obligation for which it was given.
If no presentment is made at all, the drawer cannot be held liable irrespective of loss or injury unless presentment is
otherwise excused.

This is in harmony with Article 1249 of the Civil Code under which payment by way of check or other negotiable
instrument is conditioned on its being cashed, except when through the fault of the creditor, the instrument is
impaired

In this case, Valencia and Penarroyo delivered payment, thus, they have the right to compel petitioner to deliver to
them the owners duplicate of TCT and peaceful possession and enjoyment of questioned lot.

WHEREFORE, the petition for review is hereby DENIED and the Decision of the Court of Appeals, dated 27
January 1992 is AFFIRMED.

PAL vs. CA
by Hermoso, JJ

Doctrine:

Recit-ready: Amelia Tan filed a complaint for damages against PAL to which after favorable judgment, she filed for
a writ of execution. However, when the execution remained unsatisfied, she filed for an alias writ of execution. It
was contended by PAL and deemed premature by the CA. In a hearing by the same court, it was learned that the
executing sheriff of the writ, Reyes, had absconded or disappeared. When Tan filed another alias writ again, it was
granted but PAL contested as no return was yet made by Reyes to whom they paid.

Issue: W/N the payment to the sheriff who disappeared satisfied the judgment?

Facts:
Amelia Tan filed a complaint for damages against the Philippine Airlines in the Court of First Instance.
The CFI rendered its judgment in favor of Tan which was affirmed with modifications by the Court of
Appeals. Thereafter, Tan filed for a writ of execution against PAL as to the judgment rendered. It was
granted and deputized the sheriff, Reyes, for the execution.
However, four months later, Tan filed for an alias writ of execution as it remained unsatisfied. PAL
opposed the motion maintaining that it has paid its full obligation. The CA likewise denied such for being
premature.
In a hearing, when the CA summoned those involved, it was found that Reyes had absconded or
disappeared.
When Tan again filed for an alias writ of execution, it was granted. PAL filed a motion to quash it as no
return of the previous writ of execution has yet been made by the prior executing sheriff, Reyes, who had
absconded or disappeared.
Issue: W/N the payment to the sheriff who disappeared satisfied the judgment?

Held/Ratio:
Under the circumstances, the payment to the sheriff did not operate as a satisfaction of the judgment debt. In
general, a payment, in order to be effective to discharge an obligation, must be made to the proper person. Article
1240 provides that the payment must be made to the obligee himself or to an agent having authority, express or
implied, to receive the particular payment.The receipt of money due on a judgment by an officer authorized by law
to accept it will, therefore, satisfy the debt).
There are circumstances in this case, however, which compel a different conclusion.
Here, The payment made by the petitioner to the absconding sheriff was not in cash or legal tender but in checks.
The checks were not payable to Amelia Tan or Able Printing Press but to the absconding sheriff. Article 1249
provides that payment in money shall be made in currency stipulated, or of the legal tender of the Philippines, unless
the parties agreed another. PAL made payments in checks and not in cash. Even the, payments through cash carry
with it some cautions thus it is encouraged to make payments in cheques. However, here, naming cheques to another
is unordinary thus naming such to the sheriff made possible the misappropriation. Execution cannot be equated with
satisfaction of judgment. Execution carries into effect the judgment and satisfaction of judgment is the payment of
the amount equal to the due. Moreover, execution is for the sheriff to accomplish while satisfaction is for the creditor
to achieve. Thus, implementation by the sheriff does not stop but continues until the delivery of the payment to the
creditor. Here, because of the circumstances caused by PAL, it is liable for the lost cheques and interests.

Tibajia vs. CA
by Cabochan, Jonas

Doctrine: A check is not legal tender and a creditor may validly refuse payment by such.

Recit-ready: Eden Tan filed a suit for collection against the Tibajia spouses, wherein judgment was granted in her
favor. Upon motion for execution, the petitioners delivered 135,733.70 in cash and 262,750.00 in Cashiers Check.
Eden Tan refused such payment and insisted that the garnished funds in the RTC be withdrawn to satisfy judgment,
since cashiers checks are not legal tender. The issue is whether or not a cashiers check can be considered legal
tender. No it is not. Article 1249 of the Civil Code provides: The delivery of promissory notes payable to order, or
bills of exchange or other mercantile documents shall produce the effect of payment only when they have been
cashed, or when through the fault of the creditor they have been impaired. Judgment obligation has yet to be
satisfied.

Facts: Eden Tan (Defendant) filed a suit for collection of a sum of money against the Tibajia spouses. RTC of
Kalookan awarded P442,750.00, but on appeal, the CA reduced it to excess of 300K, reducing moral and exemplary
damages.
After the decision became final, Eden filed for a motion for execution and the garnished funds, which by
then were on deposit with the cashier of the Regional Trial Court of Pasig, Metro Manila, were levied upon.
The Tibajia spouses delivered to Deputy Sheriff Eduardo Bolima:
262,750.00 (Cashiers Check) and
135,733.70 in Cash
For a total of 398,483.70.
Eden Tan refused and insisted the garnished funds in the RTC be withdrawn to satisfy judgment obligation.
Petitioners filed motion to lift the writ of execution since the judgment debt had been paid, but was denied by the TC
since payment in cashiers check is NOT LEGAL TENDER as required in RA529.

Issue: WON a Cashiers Check can be considered Legal Tender?

Held/Ratio: NO.
Art. 1249 of the Civil Code provides: "The payment of debts in money shall be made in the currency stipulated, and
if it is not possible to deliver such currency, then in the currency which is legal tender in the Philippines.
 The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall
produce the effect of payment only when they have been cashed, or when through the fault of the creditor they have
been impaired.
In the meantime, the action derived from the original obligation shall be held in abeyance."
Section 1 of RA529: Every provision contained in, or made with respect to, any obligation which purports
to give the obligee the right to require payment in gold or in any particular kind of coin or currency other than
Philippine currency or in an amount of money of the Philippines measured thereby, shall be as it is hereby declared
against public policy null and void.
Section 63 of RA265: Checks representing deposit money do not have legal tender power and their
acceptance in the payment of debts, both public and private, is at the option of the creditor.
Clearly the petition must fail, that a check is not legal tender and that a creditor may validly refuse payment
by check, whether it be a manager's, cashier's, or personal check. As such, judgment obligation has not been satisfied
yet.

WHEREFORE, the petition is DENIED. The appealed decision is hereby AFFIRMED, with costs against the
petitioners.

Reparations Comm. vs. Universal Deep-Sea

By Domasig, Rein

Doctrine: Application of Payments

The rules contained in Articles 1252 to 1254 of judgment, Civil Code apply to a person owing several debts of judgment,
same kind to a single creditor. They cannot be made applicable to a person whose obligation as a mere surety is both
contingent and singular.

Recit-ready:
The reparations Commission awarded 6 trawl boats to the universal deep see fishing corporation which were delivered two at a
time, each delivery being covered by a contract of conditional purchase and sale providing identical schedules of payments, the
first instalment representing 10% of the total cost that must be paid 24 months after delivery and the balance to be paid in 10
equal yearly installments, the 1st of which is due 1 yr after the 1st installment.

When the reparations commission sued Universal and its surety to recover amounts of money due under the contracts, they
claimed that the amounts were not yet due and demandable. Universal alleged that there was obscurity in the terms of the
contracts. Amounts and due dates of the first instalments should have first been fixed before the creditor could demand its
payment from the debtor.

The principal issue is whether or not the first instalments under the 3 contracts of conditional purchase is due and demandable.
Yes, they are. Tehe terms of the contract is clear and left no doubt as to the intent of the parties that the first instalment due 24
months after delivery was different from the 1st ten equal yearly installments of the balance of the purchase price.

Facts:
Appeal of defendant Universal Deep-Sea Fishing Corporation from the decision of CFI. (asking it to pay Reparations)
It is not disputed that the Universal Deep-Sea Fishing Corporation, referred to as UNIVERSAL, was awarded six (6)
trawl boats by the. Reparations Commission as end-user of reparations goods. M/S UNIFISH 1-6 were delivered to
universal 2 at a time, F.O.B. japanese port.
note: fob means that seller pays for the transpo of goods
NOV. 20, 1958 = M/S UNIFISH 1 &2 with a purchase price of P536k were delivered to UNIVERSAL. 1st installment
representing 10% (P53k) shall be paid within 24 months from the date of complete delivery. 3% per annum, 10 yearly
installments
To guarantee the faithful compliance with the obligations under said contract, a performance bond in the amount of
P53k with UNIVERSAL as principal and the Manila Surety & Fidelity Co., Inc., as surety, was executed in favor of the
Reparations Commission. A Corresponding indemnity agreement was executed to indemnify the surety company for
any damage, loss charges, etc., which it may sustain or incur as a consequence of having become a surety upon the
performance bond.
 APRIL 20, 1959= M/S UNIFISH 3 & 4 with a purchase price of P687k were delivered to UNIVERSAL. 1st installment
representing 10% (P68k) shall be paid within 24 months from the date of complete delivery (same terms with M/S
1&2). Manila surety also issued a performance bond.
FEB. 12, 1960= M/S UNIFISH 5 & 6 (10% = P54k) Performance bond was also issued by Manila Surety
AUG. 10, 1962= Reparations Commission instituted present action against UNIVERSAL and surety company to
recover various amounts of money due under these contracts. In answer, UNIVERSAL claimed that judgment, amounts
of money sought to be collected are not yet due and demandable. The surety company also contended that action is
premature.

Issue:
W/N first installments under judgment, three (3) contracts of conditional purchase and sale of reparations goods were
already due and demandable when judgment, complaint was filed. (YES)
W/N Universal is liable for payment of premium in bonds executed by manila surety (YES)
W/N the P10k downpayment made to Reparations can be applied to the 1st installments of the balance of purchase
price (NO)

Held/Ratio:
UNIVERSAL contends that there is an obscurity in judgment, terms of judgment, contracts in question which were
caused by the plaintiff as to judgment, amounts and due dates of judgment, first installments which should have been
first fixed before a creditor can demand its payment from judgment, debtor. first installment on judgment M/S
UNIFISH 1 and M/S UNIFISH 2 of judgment, amount of P53,642.84 was due on May 8, 1961
First installments on judgment, M/S UNIFISH 3 and M/S UNIFISH 4, and judgment, M/S UNIFISH 5 and M/S
UNIFISH 6 in judgment, amounts of P68,777.77 and P54,500.00 were due on July 31, 1961 and October 17, 1961,
respectively.
Obligation of UNIVERSAL to pay judgment, first installments on the purchase price of judgment, six (6) reparations
vessels was already due and demandable when the present action was commenced on August 10, 1962.
The claim of judgment, surety company to the effect that the trial court erred in not awarding it the amount of
P7,251.42, as premium is the performance bonds, is well taken. The payment of premiums on the bonds to the surety
company had been expressly undertaken by UNIVERSAL in the indemnity agreements executed by it in favor of
judgment, surety company.
The major premise in appellants' process of reasoning is that the first installments due on April 25, 1963, and May 26,
1963, are first installments. although they are not so designated in judgment, schedule appended to each of judgment,
contracts between judgment, parties. There is a list of ten (10) equal yearly installments, it is clear that the latter do not
include the one designated as 'first' installment. (separate yung 1st installment sa 10 yearly installments)

The terms of the contracts for the purchase and sale of the reparations vessels, however, are very clear and leave no
doubt as to the intent of the contracting parties. Thus, in the contract concerning the M/S UNIFISH 1 and M/S
UNIFISH 2, the parties expressly agreed that the first installment representing 10% of the purchase price or P53,642.84
shall be paid within 24 months from the date of complete delivery of the vessel or on May 8, 1961, and the balance to
be paid in ten (10) equal yearly installments.
Finally, We find no merit in judgment, claim of judgment, third-party defendant Pablo S. Sarmiento that he is not
personally liable having merely executed judgment, indemnity agreements in his capacity as acting general manager of
UNIVERSAL. Pablo S. Sarmiento appears to have signed the indemnity agreement twice. The first, in this capacity as
acting general manager of UNIVERSAL, and the second, in his individual capacity.

Paculdo vs. Regalado

by Consolacion, Ray

Doctrine:
Right to specify which among his various obligations to the same creditor is to be satisfied
first rests with the debtor.
No payment is to be made to a debt that is not yet due and the payment should be applied
first to the debt most onerous to the debtor

Recit-ready:
Paculdo and Bonifacio entered into a contract of lease over a parcel of land in Quezon City. Petitioner Paculdo also
leased from respondent Bonifacio 11 other properties along Fairview Compound. Petitioner then was said to fail to pay
 the rentals for the months of June and July In the case filed before the SC, petitioner argues that the respondent made an
erroneous application of his payment which was supposed to be for the leased properties and not on the heavy
equipments. Respondent countered that he sent a letter informing petitioner that the his payments would be applied also
to the leased heavy equipment, petitioners failure to reply to the letter was considered a consent to the application of
the payments. The issue was whether the petitioners failure to reply to the letter was a consent to the application of the
payments. The SC ruled that the NO, the power to decide the application of the payments is vested with the debtor and
that in this case petitioners wish as to the application of the payment is crucial because it should be noted that if his
earlier payment was applied to his lease over the property then no foreclosure proceedings would have been instituted
against him.
Facts:
Nereo Paculdo (Petitioner) and Bonifacio entered in a contract of lease over a 16,478 square meter parcel
of land with a wet market building located at Fairview Park, Quezon City. The contract was for twenty five
(25) years, commencing on January 1, 1991 and ending on December 31, 2015. For the first five (5) years
of the contract beginning December 27, 1990, Nereo would pay a monthly rental of P450,000.00, payable
within the first five (5) days of each month at Bonifacios office, with a 2% penalty for every month of late
payment.

Petitioner also leased 11 other properties from respondent, 10 of which were located within the Fairview
compound, while the eleventh was located along Quirino Highway, Quezon City. Petitioner also purchased
from respondent eight (8) units of heavy equipment and vehicles in the aggregate amount of
P1,020,000.00

Because of petitioners failure to pay P361,895.55 (rental for May 1992) and monthly rental of P450,000 for
months of June and July 1992. Respondent sent a demand letter asking for payment of the back rentals
and should there be no reply within 15 days from receipt of letter, the lease contract would be cancelled.
Another demand letter was sent on July 17, 1992

Petitioner filed with the RTC an action for injunction and damages seeking to stop respondent from
disturbing his possession of the property subject of the lease contract. On the same day, respondent filed
with the Metropolitan Trial Court an ejectment suit against petitioner but was later withdrawn for some
minor computation.

Metropolitan Trial Court rendered a decision in favor of respondent, plaintiff is ordered to vacate the
premises.

The petitioner Nereo appealed to the RTC but the court still ruled in favor of respondent

Petitioner filed a petition for review with the Court of Appeals. He argued that he paid the amount of
P11,478,121.85 for security deposit and rentals on the wet market building, but respondent, without his
consent, applied portions of the payment to his other obligations. The vouchers and receipts indicated that
the payments made were for rentals. Thus, at the time of payment petitioner had declared as to which
obligation the payment must be applied.

Court of Appeals held that petitioner impliedly consented to respondents application of payment to his
other obligations and, thus, dismissed the petition for lack of merit.

If the payment which respondent applied to petitioners other obligations is set aside, and that the amount
petitioner paid be applied purely to the rentals on the Fairview wet market building, there would be an
excess payment of P1,049,447.18 as of July 2, 1992.

In an earlier letter, dated July 15, 1991, respondent informed petitioner that the payment was to be
applied not only to petitioners accounts under both the subject land and the Quirino lot but also to heavy
equipment bought by the latter from respondent. Petitioner claimed that the amount applied as payment
 for the heavy equipment was critical because it was equivalent to more than two (2) months rental of the
subject property, which was the basis for the ejectment case in the Metropolitan Trial Court.

The controversy stemmed from the fact that unlike the November 19, 1991 letter, which bore a conformity
portion with petitioners signature, the July 15, 1991 letter did not contain the signature of petitioner.

Issue:
Whether petitioners failure to object to the letter of July 15, 1991 and its proposed
application of payments amount to consent to such application?

Held/Ratio:
NO, the right to specify which among his various obligations to the same creditor is to be satisfied first
rests with the debtor by virtue of Art. 1252. When petitioner made the payments, he made it clear to
respondent that they are rental payments on the Fairview wet market property. Though he entered into
various contracts and obligations with respondent, including a lease contract over eleven (11) property in
Quezon City and sale of eight (8) heavy equipment, all the payments made, about P11, 000,000.00, were
to be applied to rental and security deposit on the Fairview wet market property.

There was no clear assent by petitioner as to the change in the manner of application of payment.
Petitioners silence as regards the application of payment by respondent cannot mean that he consented
thereto. No meeting of the minds.

However, assuming that petitioner did not choose the obligation to be satisfied first. Respondent may
exercise the the right to apply the payments to the other obligations of petitioner but subject to the
condition that petitioner must give his consent (Under the law, if the debtor did not declare at the
time he made the payment to which of his debts with the creditor the payment is to be
applied, the law provided the guideline--no payment is to be made to a debt that is not yet
due and the payment has to be applied first to the debt most onerous to the debtor).

In the instant case, the purchase price of the 8 heavy equipment was not yet due at the time
payment was made, there was no date set for such payment. Neither was there a demand by
the creditor to make the obligation to pay the purchase price due and demandable. Hence, the
application made by respondent is contrary to the provisions of the law.

The lease over the Fairview wet market property is the most onerous among all the obligations
of petitioner to respondent. It was established that the wet market is a going-concern and that
petitioner has invested about P35,000,000.00, in the form of improvements, on the property.
Hence, petitioner would stand to lose more if the lease would be rescinded, than if the
contract of sale of heavy equipment would not proceed

Soco Vs. Militante

by Anonas, Aiyla

Doctrine:

Recit-ready:
The plaintiff-appellee-Soco (lessor) and the defendant-appellant-Francisco (lessee) entered into a contract of lease
on for commercial building and lot for a monthly rental of P800.00 for a period of 10 years renewable for another 10
years at the option of the lessee. One time, Francisco noticed that Soco did not anymore send her collector for the
payment of rentals and at times there were payments made but no receipts were issued. Soon after Soco learned that
Francisco sub-leased a portion of the building to NACIDA, at a monthly rental of more than P3,000.00 which is
definitely very much higher than what Francisco was paying to Soco under the Contract of Lease, the latter felt that
she was on the losing end of the lease agreement so she tried to look for ways and means to terminate the contract.
Taking into account the factual background setting of this case, the Court holds that there was in fact a tender of
payment of the rentals made by Francisco to Soco through Comtrust and since these payments were not accepted by
Soco evidently because of her intention to evict Francisco, by all means, Francisco was impelled to deposit the
rentals with the Clerk of Court of the City Court of Cebu, Soco was notified of this deposit. She was further notified
of these payments by consignation. The City Court declared the payments of rentals valid and effective.

ISSUE: Whether or not the consignation was valid and effective.

HELD: In order that consignation may be effective, the debtor must first comply with certain requirements
prescribed by law. The debtor must show (1) that there was a debt due; (2) that the consignation of the obligation
had been made because the creditor to whom tender payment was made refused to accept it, or because he was
absent or incapacitated, or because several persons claimed to be entitled to receive the amount due (Art. 1176, Civil
Code); (3) that previous notice of the consignation had been given to the person interested in the performance of the
obligation (Art. 1177, Civil Code); (4) that the amount due was placed at the disposal of the court (Art. 1178, Civil
Code); and (5) that after the consignation had been made the person interested was notified thereof (Art. 1178, Civil
Code). Failure in any of these requirements is enough ground to render a consignation ineffective. SC ruled that the
essential requisites of a valid consignation must be complied with fully and strictly in accordance with the law.
Substantial compliance is not enough for that would render only a directory construction to the law.

Facts:
Soco leased her commercial building and lot situated at Manalili Street, Cebu City, to Francisco for a
monthly rental of P800.00 for a period of 10 years renewable for another 10 years at the option of the
lessee.
Sometime before Soco this instant case of Illegal Detainer Francisco noticed that Soco did not anymore
send her collector for the payment of rentals and at times there were payments made but no receipts were
issued.
This situation prompted Francisco to write Soco the letter which the latter received. After writing this letter,
Francisco sent his payment for rentals by checks issued by the Commercial Bank and Trust Company.
o The factual background setting of this case clearly indicates that soon after Soco learned that
Francisco subleased a portion of the building to NACIDA, at a monthly rental of more than
P3,000.00 which is definitely very much higher than what Francisco was paying to Soco under the
Contract of Lease, the latter felt that she was on the losing end of the lease agreement so she tried
to look for ways and means to terminate the contract
In view of this alleged nonpayment of rental of the leased premises beginning May, 1977, Soco through her
lawyer sent a letter to Francisco serving notice to the latter to vacate the premises leased.
In answer to this letter, Francisco through his lawyer informed Soco and her lawyer that all payments of
rental due her were in fact paid by Commercial Bank and Trust Company through the Clerk of Court of the
City Court of Cebu.
Despite this explanation, Soco filed this instant case of Illegal Detainer filled in the City Court of Cebu
Francisco was impelled to deposit the rentals with the Clerk of Court of the City Court of Cebu.
City Court of Cebu: holds that there was in fact a tender of payment of the rentals made by Francisco to
Soco through Comtrust and since these payments were not accepted by Soco evidently because of her
intention to evict Francisco, by all means, culminating in the filing of Civil Case R16261,
Court of First Instance:
a. there was substantial compliance with the requisites of consignation and so ruled in favor of private
respondent, Regino Francisco, Jr., lessee of the building owned by petitioner lessor.
b. Soledad Soco, in the case for illegal detainer originally filed in the City Court of Cebu City, declaring the
payments of the rentals valid and effective, dismissed the complaint and ordered the lessor to pay the lessee
moral and exemplary damages in the amount of P10,000.00 and the further sum of P3,000.00 as attorneys
fees.
c. Soco was notified of this deposit by virtue of the letter of Atty. Pampio Abarientos and the letter of Atty.
Pampio Abarientos as well as in the answer of Francisco in Civil Case R16261
d. She was further notified of these payments by consignation in the letter of Atty. Menchavez
e. There was therefore substantial compliance of the requisites of
consignation, hence his payments were valid and effective. Consequently,
 Francisco cannot be ejected from the leased premises for nonpayment of
rentals.

Issue: WON the substantial compliance of Francisco of the essential requisites of a valid consignation is a valid
consignation?

Held/Ratio: NO

Essential requisites of a valid consignation must be complied with fully and strictly in accordance with the
law, Articles 1256 to 1261, New Civil Code. That these Articles must be accorded a mandatory construction
is clearly evident and plain from the very language of the codal provisions themselves which require
absolute compliance with the essential requisites therein provided.
Substantial compliance is not enough for that would render only a directory construction to the law. The use
of the words shall and must which are imperative, operating to impose a duty which may be enforced,
positively indicate that all the essential requisites of a valid consignation must be complied with. The Civil
Code Articles expressly and explicitly direct what must be essentially done in order that consignation shall
be valid and effectual.
Consignation is the act of depositing the thing due with the court or judicial authorities whenever the
creditor cannot accept or refuses to accept payment and it generally requires a prior tender of payment
In order that consignation may be effective, the debtor must first comply with certain requirements
prescribed by law. The debtor must show
1. that there was a debt due;
2. that the consignation of the obligation had been made because the creditor to whom tender of
payment was made refused to accept it, or because he was absent or incapacitated, or because several
persons claimed to be entitled to receive the amount due (Art. 1176, Civil Code);
3. that previous notice of the consignation had been given to the person interested in the performance
of the obligation (Art. 1177, Civil Code);
4. that the amount due was placed at the disposal of the court (Art. 1178, Civil Code); and
5. that after the consignation had been made the person interested was notified thereof (Art. 1178,
Civil Code).
Tender of payment must be distinguished from consignation. Tender is the antecedent of consignation, that
is, an act preparatory to the consignation, which is the principal, and from which are derived the immediate
consequences which the debtor desires or seeks to obtain. Tender of payment may be extrajudicial, while
consignation is necessarily judicial, and the priority of the first is the attempt to make a private settlement
before proceeding to the solemnities of consignation
There was only substantial compliance of the REQUISITES FOR VALID CONSIGNATION:

1st: The lessee must make a tender of payment of every monthly rented. tender of payment of the
monthly rentals to the lessor except that indicated in the June 9, 1977 the original records of the case, We
note that the certification of Filemon Soon, messenger of the FAR Corporation, certifying that the letter for
Soledad Soco sent last May 10 by Commercial Bank and Trust Co. was marked RTS (return to sender) for
the reason that the addressee refused to receive it, was rejected by the court for being immaterial, irrelevant
and impertinent per its Order dated November 20, 1980

2nd: the lessee must give prior notice of consignation for each monthly rental respondent lessee also
failed to prove the first notice to the lessor prior to. In this connection, the purpose of the notice is in order
to give the creditor an opportunity to reconsider his unjustified refusal and to accept payment thereby
avoiding consignation and the subsequent litigation. This previous notice is essential to the validity of the
consignation and its lack invalidates the same
o lower court erred in finding that the lessee tendered his monthly rentals thru the bank there being
no proof that the lessee sent someone to collect the current check monthly.There is no factual
basis for the lower courts finding that the lessee had tendered payment of the monthly rentals,
thru his bank, citing the lessees letter requesting the bank to issue checks in favor of Soco in the
amount of P840.00 every 10th of each month and to deduct the full amount and service fee from
 his current account, as well letter of the Vice President agreeing with the request. But
scrutinizing carefully Exhibit 4, this is what the lessee also wrote: Please immediately notify us
everytime you have the check ready so we may send somebody over to get it. And this is exactly
what the bank agreed: Please be advised that we are in conformity to the above arrangement with
the understanding that you shall send somebody over to pick up the cashiers check from us.
Evidently, from this arrangement, it was the lessees duty to send someone to get the cashier s
check from the bank and logically, the lessee has the obligation to make and tender the check to
the lessor. This the lessee failed to do, which is fatal to his defense.

3rd The lessee should give a notice of consignation of each deposit made in court of every
monthly rental. respondent lessee likewise failed to prove the second notice, that is after
consignation has been made, to the lessor
a. There is no clear proof that the bank sent notice to the landlord that the checks will be
deposited in court there being no instruction given by the lessee. Recapitulating the above
testimony of the Bank Comptroller, it is clear that the bank did not send notice to Soco that the
checks will be deposited in consignation with the Clerk of Court (the first notice) and also, the
bank did not send notice to Soco that the checks were in fact deposited (the second notice) because
no instructions were given by its depositor, the lessee, to this effect, and this lack of notices started
from September, 1977 to the time of the trial, that is, June 3, 1980.

4th There is no proof of actual deposit of rentals in court. not a single copy of the official
receipts issued by the Clerk of Court was presented at the trial of the case to prove the actual
deposit or consignation. The tenant deposited the rentals due in court only after the lapse of two
years and after the complaint for ejectment had been filed

Meat Packing vs. SB

by Carlos, Von

Doctrine: Consignation is the act of depositing the thing due with the court or
judicial authorities whenever the creditor cannot accept or refuses to accept
payment. Before the deposit to the courts, a prior tender of payment to the
creditor must be made. Consignation produces the effect of payment and
extinguishes the obligation.

Recit-ready: On 1975, GSIS-MPCP leased its properties (3 parcels of land and the
meat processing and meat packing plant) to PIMECO. Under the agreement, the
agreement will be cancelled if the default amounted to a cumulative sum of 3
annual installments. The cancellation would be automatic and no judicial
intervention shall be required. On January 1986, the management and properties
of PIMECO was sequestered by the PCGG. PIMECO was worried that the PCGG
management team might not make proper payments for the lease, making them in
default. So, they filed for declaratory relief. In the meantime, the PCGG gave 5M in
check to MCPC. However, the MCPC declined the payment because the arrears in
payment cumulated to more than the sum of 3 annual installments. The PCGG
consigned with the Sandiganbayan the 5M. The Sandiganbayan rejected the
motion for reconsideration filed by the MCPC. The issue of this case is the validity
of the consignment. The MCPC assails the consignment because it is in its view
that the contract was automatically cancelled due to the arrears in payment. The
Sandiganbayan found that the arrears did not amount to that specified by the
agreement, therefore, the agreement still subsist. This finding was upheld by the
Supreme Court. Consignation is the act of depositing the actual payment to the
court or judicial authorities if the creditor refused to accept the tender of
payment. In the case at hand, there was a prior tender of payment by the PCGG to
the MCPC. The MCPC refused such payment. Then it was deposited to the
Sandiganbayan. Since the elements are present, it is a proper consignation.

Facts: (Supplementary)
Characters: Philippine Integrated Meat Corporation (PIMECO), Government
Service Insurance System (GSIS), Meat Packing Corporation of the Philippines
(MPCP), Presidential Commission on Good Governance (PCGG)
MCPC is owned by GSIS
Annual rate for lease P1,375,563.92 for 28 years = P38,515,798.87
Lease: November 3, 1975
Sequestration by PCGG: Jan 1986
MCPC alleged that the contract was rescinded as early November 19, 1986

Issue: WN the consignation was proper. YES

Held/Ratio:
The lease-payment agreement subsists because it was not proven that the
arrears exceeded that of the limit
From January 29, 1986 to January 30, 1990, A sum of P15,921,205.83 was paid
by PIMECO to the GSIS-MCPC, which means that the agreement subsists because
the GSIS/MCPC still accepted payment
Consignation is the act of depositing the thing due with the court or judicial
authorities whenever the creditor cannot accept or refuses to accept payment, and
it generally requires a prior tender of payment
PCGG gave 5M in checks to GSIS/MCPC (Prior payment), GSIS/MCPC did not
accept because the agreement was allegedly rescinded (refusal), PCGG deposited
the checks to the Sandiganbayan (deposit to a judicial authority)

Pabugais vs. Dave P. Sahijwani

by Damasco Ty,
Don

Doctrine:

In general, a managers check [or an ordinary check] is not legal tender, the creditor has the option of
refusing or accepting it. Payment in check by the debtor may be acceptable as valid, if no prompt objection to said
payment is made

A creditor who indicated in his prayer that the amount consigned be awarded to him is equivalent to an
acceptance of the consignation.

Recit-ready:
 Pabugais agreed to sell to Sahjiwani a lot in Forbes Park in the amount of P 15.5m. Sahjiwani paid the
reservation fee of 600,000. Pabugais failed to deliver the required documents and was bound to return the
reservation fee with interest pursuant to their agreement.

Sahjiwani refused to accept the payment, in the form of managers check, because he claims that the
computation for the payment was insufficient.

Instead of paying directly to Sahjiwani, Pabugais consigned the amount to the RTC of Makati. It held that
the consignation was invalid because there was no proof that Sahjiwani refused the payment.

Pabugais and his counsel wanted to withdraw the consigned money but the CA, on a motion for
reconsideration, held that it was in fact, a valid consignation and therefore, can no longer be withdrawn pursuant to
Art 1260.

Issue: W/N consignation was valid?

The SC held that it was a valid consignation. Generally, checks are not legal tender but it can be considered
as valid if the creditor does not object to it. In the case at bar, Sahjiwani refused to accept payment because of
insufficiency of amount, and not because it was in the form of check. Therefore, there was a valid legal tender and
thus, a valid consignation.

Issue: W/N the consigned amount can be withdrawn?

The SC held that the amount can no longer be withdrawn. Art 1260 provides that before the creditor accepts
the consignation, the debtor may withdraw the thing or sum deposited. The SC considered that the creditor has
already accepted the payment since it was indicated in the creditor-respondents (Sahjiwani) prayer that the amount
be awarded to him. Therefore, The debtor can no longer withdraw the amount since there is an acceptance on the
part of the creditor.

Facts:
Teddy Pabugais (Petitioner) and Dave Sahijwani (respondent) entered into an agreement to sell a lot located
in Forbes Park, Makati for P 15,487,500.
Respondent paid P 600,000 as reservation fee. The remaining balance shall be paid 60 days from the
execution of the contract.
The contract stipulates that if respondent fails to pay remaining balance, the P 600,000 reservation fee shall
be forfeited; and if petitioner fails to deliver the documents, he shall return the P600,000 with interest at
18% per annum.
Petitioner failed to deliver the required documents and returned the reservation fee using a Far East Bank &
Trust Company Check. This check was dishonored.
Petitioner claims that he has already tried to pay P 672,900 (with interest already) in the form of a letter
attached with a Managers Check but was refused twice (first via messenger; second via DHL). Because of
this, he wrote a letter to respondent saying that he is consigning the amount with the RTC of Makati, and
accordingly filed a complaint for consignation.
Respondent claims that they received the letter but that there was no check. Respondent also claims that the
amount to be tendered is insufficient because there was also a verbal agreement to pay 3% monthly interest
and 25% attorneys fees on top of the 18% per annum.
RTC declared the consignation to be invalid because there there was no proof to show that petitioner
tendered payment to respondent and that the respondent refused to receive the same. It also held that a
managers check is not legal tender, hence, no valid tender of payment.
Petitioner appealed to the CA. Meanwhile, petitioners counsel died, and substituted by Atty De Guzman
who was promised part of the consigned amount as attorneys fees.
Petitioner filed an Ex Parte Motion to Withdraw Consigned Money. This motion and their appeal were
denied by the CA.
 On a motion for reconsideration, the CA held that the consignation was valid after all and thus extinguished
petitioners obligation. Hence, petitioner can no longer withdraw the consigned money.
Issue:
W/N there was a valid consignation? - Yes
W/N petitioner can withdraw the consigned money? - No

Held/Ratio:
First issue: In order that consignation may be effective, the debtor must show that:
o there was a debt due;
o the creditor to whom tender of payment was made refused to accept it; or he was absent or
incapacitated; or because several persons claimed to be entitled to receive the amount due; or
because the title to the obligation has been lost;
o previous notice of the consignation had been given to the person interested in the performance of
the obligation;
o the amount due was placed at the disposal of the court;
o after the consignation had been made the person interested was notified thereof.
In general, a manager's check is not legal tender, but the creditor has the option of refusing or accepting it.
Payment in check by the debtor may be acceptable as valid, if no prompt objection to said payment is
made.
o Respondents reason for not accepting the check was not because the petitioner was paying in
check; rather, it was because respondent claims that there was no check appended to the letter and
the amount to be paid was insufficient.
o Hence, there is actually no prompt objection to the payment in check. Therefore, tender of
payment in the form of managers check is valid.
Regarding the sufficiency of payment, the Agreement and Undertaking only specified the 18% per annum
interest. Thus, P 672,900 is sufficient payment. There being a valid tender of payment in an amount
sufficient to extinguish the obligation, the consignation is valid.
Second Issue: Art. 1260. Once the consignation has been duly made, the debtor may ask the judge to order
the cancellation of the obligation.

Before the creditor has accepted the consignation, or before a judicial confirmation that the consignation
has been properly made, the debtor may withdraw the thing or the sum deposited, allowing the obligation
to remain in force.
o The amount consigned with the trial court can no longer be withdrawn by petitioner because
respondents prayer in his answer that the amount consigned be awarded to him is
equivalent to an acceptance of the consignation, which has the effect of extinguishing
petitioners obligation.

Spouses Poon vs. Prime Savings Bank

by Fulache, Dece

Doctrine:
Requisites for the application of Article 1267:
1. The event or change in circumstance could not have been foreseen at the time of the execution of the contract
2. It makes the performance of the contract extremely difficult but not impossible.
3. It must not be due to the act of any of the parties
4. The contract is for a future prestation
Recit-ready:

Spouses Poon and PSB entered into a 10-year lease contract for the latters use as its branch office. They have
agreed to pay P 60,000 monthly with an advance payment of the rentals for the first 100 months amounting to P 6M.
Howev PSB was placed under the receivership of the Philippine Deposit Insurance Corporation. It vacated the place
 and issued a demand letter for the return of the unused advance rental on the ground that the lease agreement had
become inoperative, as the closure was a force majeure. It also invoked the principle of res sibus stantibus as
alternative legal basis. However, the Court ruled that the closure of the business was not a fortuitous event. Also, the
principle of res sibus stantibus cannot be invoked as there were lacking requisites. The requirements for the said
principle to apply are: (1) The event or change in circumstance could not have been foreseen at the time of the
execution of the contract; (2) It makes the performance of the contract extremely difficult but not impossible; (3) It
must not be due to the act of any of the parties; and (4) The contract is for a future prestation. The 2nd and 4th
requisites are present. However, the 1 and 3 requisites are lacking. The parties had actually considered the
st rd

possibility of deterioration or loss of PSBs business within the 10-year contract period (based on the cross
examination). Also, PSB was partly accountable for the closure of its banking business. Hence, it cannot be said that
the closure of the business was independent of its will.

Facts:

Petitioner: Jaime and Matilde Poon

Respondent: Prime Savings Bank (PSB)
- Spouses poon owned a commercial building in Naga City, which they used for their bakery business.
- On Nov. 3, 2006, Matilde and PSB executed a 10-year Lease Contract for the latters use as its branch office.
- Agreement: To fix a monthly rental of P 60,000 with an advance payment of the rentals for the first 100 months
amounting to P6M. The advance payment was to be applied immediately while the remaining balance will be
paid on a monthly basis.
Paragraph 24 of the Contract provides:
Should the lease[d] premises be closed, deserted or vacated by the LESSEE, the LESSOR shall have the right to
terminate the lease without the necessity of serving a court order and to immediately repossess the leased premises.
Thereafter the LESSOR shall open and enter the leased premises in the presence of a representative of the LESSEE
(or of the proper authorities) for the purpose of taking a complete inventory of all furniture, fixtures, equipment
and/or other materials or property found within the leased premises.
The LESSOR shall thereupon have the right to enter into a new contract with another party. All advanced rentals
shall be forfeited in favor of the LESSOR.
- Three years later, BSP placed PSB under the receivership of the Philippine Deposit Insurance Corporation.
- On May 2000, PSB vacated the leased building and surrendered them to Poon. After, the PDIC issued Poon a
demand letter for the return of the unused advance rental (P 3,480,000) on the ground that the lease agreement
had become inoperative, as the closure was a force majeure. PDIC also invoked the principle of rebus sic
stantibus as alternative legal basis for demanding the refund.

RTC Ruling
- Partial rescission of the lease agreement
- Second clause in paragraph 24 was penal in nature; clause was a valid contractual agreement.
- Limited the forfeiture to of the amount to answer for the unpaid utility bills and E-VAT
CA Ruling
- Affirmed the decision of RTC
- Different rationale Closure of PSB was not a fortuitous event
- PSB was found to have committed fraudulent acts and transactions

Issue:
W/N PSB may be released from its contractual obligations to petitioners on grounds of fortuitous event under Article
1174 of the Civil Code and unforeseen event under Article 1267 of the Civil Code.

Held/Ratio:
The closure of respondents business was neither a fortuitous nor an unforeseen event that rendered the lease
agreement functus officio.
Respondent posits that it should be released from its contract with petitioners, because the closure of its business
upon the BSPs order constituted a fortuitous event as the Court held in Provident Saving Bank (cited case).
The period during which the bank cannot do business due to insolvency is not a fortuitous event, unless it is shown
that the government's action to place a bank under receivership or liquidation proceedings is tainted with
arbitrariness, or that the regulatory body has acted without jurisdiction.
As an alternative justification for its premature termination of the Contract, respondent lessee invokes the doctrine of
unforeseen event under Article 1267 of the Civil Code, which provides:
Art. 1267. When the service has become so difficult as to be manifestly beyond the contemplation of the
parties, the obligor may also be released therefrom, in whole or in part.
The theory of rebus sic stantibus in public international law is often cited as the basis of the above article. Under this
theory, the parties stipulate in light of certain prevailing conditions, and the theory can be made to apply when these
conditions cease to exist. The Court, however, has once cautioned that Article 1267 is not an absolute
application of the principle of rebus sic stantibus, otherwise, it would endanger the security of contractual
relations. After all, parties to a contract are presumed to have assumed the risks of unfavorable developments. It is
only in absolutely exceptional changes of circumstance, therefore, that equity demands assistance for the debtor.
Requisites for the application of Article 1267:
1. The event or change in circumstance could not have been foreseen at the time of the execution of the
contract
2. It makes the performance of the contract extremely difficult but not impossible.
3. It must not be due to the act of any of the parties
4. The contract is for a future prestation
The difficulty of performance should be such that the party seeking to be released from a contractual obligation
would be placed at a disadvantage by the unforeseen event. Mere inconvenience, unexpected impediments,
increased expenses, or even pecuniary inability to fulfil an engagement, will not relieve the obligor from an
undertaking that it has knowingly and freely contracted.
The law speaks of service (obligation to do). Present case is a reciprocal contract, one obligation was to pay the
agreed rents for the whole contract period. It is hard to complete the lease term since it was already out of the
business only three and a half years into the 10-year contract period. Hence, the 2 and 4 requisites mentioned
nd th

above are present in this case.

The 1 and 3 requisites are lacking. The parties had actually considered the possibility of deterioration or loss of
st rd

PSBs business within the 10-year contract period (based on the cross examination). Also, PSB was partly
accountable for the closure of its banking business. Hence, it cannot be said that the closure of the business was
independent of its will.

Ocecena vs. Jabson

by Chung, Lyn

Doctrine:
a positive right is created in favor of the obligor to be released from the performance of an obligation in full or in
part when its performance 'has become so difficult as to be manifestly beyond the contemplation of the parties.

Recit-ready:
Tropical Homes Inc. agreed to develop a subdivision on the land owned by Jesus and Efigenia Occea, wherein
Tropical Homes would be paid only 40% of the sale of the subdivision lots. Tropical Homes seeks revision of the
contract on the Basis of Art 1267 of the Civil Code (CC). They are asking for modification of the terms and
conditions of the subdivision contract, due to increase in costs. Art. 1267 CC: 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.

Issue:
Is the obligation deemed extinguished because he service has become so difficult as to be manifestly beyond the
contemplation of the parties? Is the court allowed to change the terms and conditions of the contract using Art 1267
of the Civil Code?

Held:
The CC authorizes the release of an obligor when the service has become so difficult as to be manifestly beyond the
contemplation of the parties but does not authorize the Courts to modify or revise the subdivision contract between
the parties or to fix a different sharing ratio from that contractually stipulated with the force of law. Tropical Homes
complaint for modification of the contract has no basis in law and must be dismissed.

Facts:
Tropical Homes Inc. agreed to develop a subdivision on the land owned by Jesus and Efigenia Occea, wherein
Tropical Homes would be paid only 40% of the sale of the subdivision lots.
Tropical Homes seeks revision of the contract on the Basis of Art 1267 of the Civil Code (CC).
WHY??? That further performance by the plaintiff under the contract will result in situation where defendants
would be unjustly enriched at the expense of the plaintiff; will cause an iniquitous distribution of proceeds from the
sales of subdivided lots in manifest actually result in the unjust and intolerable exposure of plaintiff to implacable
losses, all such situations resulting in an unconscionable, unjust and immoral situation contrary to and in violation of
the primordial concepts of good faith, fairness and equity which should pervade all human relations
o That due to the increase in price of oil and its derivatives and the concomitant worldwide spiraling of prices,
which are not within the control of plaintiff, of all commodities including basis raw materials required for such
development work, the cost of development has risen to levels which are unanticipated, unimagined and not within
the remotest contemplation of the parties at the time said agreement was entered into and to such a degree that the
conditions and factors which formed the original basis of said contract, have been totally changed; 'That further
performance by the plaintiff under the contract.

Issue:

Is the obligation deemed extinguished because he service has become so difficult as to be manifestly beyond the
contemplation of the parties? Is the court allowed to change the terms and conditions of the contract using Art 1267
of the Civil Code?

Held/Ratio:

yes, the obligation is extinguished.

ART. 1267. When the service has become so difficult as to be manifestly beyond the contemplation of the parties,
the obligor may also be released therefrom, in whole or in part.
... a positive right is created in favor of the obligor to be released from the performance of an obligation in full or
in part when its performance 'has become so difficult as to be manifestly beyond the contemplation of the parties.
The cited article does not grant the courts this 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.

Naga Telephone vs. CA

by Tolentino, Hazel

Doctrine:

Art. 1267 - doctrine of unforeseen events. 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.

Essentially, contracts are created in light of certain conditions. If these conditions no longer exist, then the contract
shall also cease to exist.
Recit-ready:

NATELCO entered a contract with CASURECO which stipulated that the former may install 10 telephone lines on
the latters light posts in Naga City free of charge. Ten years later, CASURECO filed for reformation of the contract
on the ground that NATELCO was unjustly enriched. This is because NATELCOs subscribers grew in number,
which led it to install more telephone lines still at no cost.

The Court held that the contract cannot be reformed but instead cancelled on the basis of Art. 1267 of the Civil
Code. The provision states that if the conditions that initially brought about a contract no longer exist, then the
contract must also cease to exist. This is applicable to the case at bar. The conditions which brought about the
contract between NATELCO and CASURECO no longer exist because while NATELCOs subscribers increased,
the number of poles CASURECO has did not change. Hence, the contract must cease to exist.

Facts:

NATELCO may install 10 telephone connections on CASURECOs electric light posts in Naga City free of charge if
in exchange CASURECO can use the telephone service. The contract shall be in effect as long as NATELCO needs
the light posts and shall only be terminated if CASURECO is forced to stop its operation or if the light posts need to
be removed.

On 1989. CASURECO filed for reformation of the contract with damages on the ground that NATELCO was
unjustly enriched from it. Due to NATELCOs increasing number of subscribers, they set up more telephone lines
inside and outside Naga City free of charge. This burdened and damaged the light posts greatly.

RTC held that while the contract initially appeared fair, it became disadvantageous for CASURECO since
NATELCOs subscribers steadily increased while the number of their electric light posts did not (and NATELCO
still didnt need to pay). It further said that reformation of the contract should be allowed and NATELCO should be
charged rent for its continued use of the light posts.
CA affirmed RTCs decision but based on different grounds. Instead, it held that according to Art. 1267 of the New
Civil Code which states that

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

the contract should cease to exist because the conditions that brought it about no longer existed.

Hence, NATELCOs petition to SC.

Issue:

WON Art. 1267 is applicable to the case at bar.

Held/Ratio:

Yes, Art. 1267 is applicable.

The term service, as used in the article, should be understood as referring to the performance of an
obligation. In this case, the obligation of CASURECO was to allow NATELCO to use its light posts. Since it has
been difficult for CASURECO to perform its obligation due to the rise of NATELCOs subscribers, the court held
that the condition which allowed for the contract (and consequently, the obligation) to arise was no longer present.
Hence, the contract should cease to exist.
 Yam & Yek Sun Lent vs. CA
by De Jesus, Mark

Doctrine: Condonation must conform with the forms of donation

Recit-ready: Petitioners entered into a Loan Agreement with Assumption of Solidary Liability. One with
P500,000 loan, and the 2nd IGLF being a P300,000 loan. The first IGLF was paid in full in APR 2, 1985.
Petitioners made a partial payment of P50,000 for the 2nd loan. Afterwards, petitioners wrote a letter to the
private respondents proposing to settle their obligations, which the private respondents counter-offered that it
would reduce the penalty charges upto P140,000 provided that the petitioners pay their obligatins on or
before July 30, 1986. Petitioners sent a check amounting only to P410,854.47 with a notation at the back
stating full payment of IGLF Loan. Private respondents sent demand letters seeking payment of the
balance of P266,146.88.

Petitioners defense that sometime after receiving the counter-offer, they met with Carlos Sobrepenas,
president of the Private respondents corporation, whom they agreed with to waive the penalties and other
charges.

The Court held that there was no valid condonation as any condonation of movable properties amounting
more than P5,000 shall comply with the form of donation, which means in writing. Sobrepenas, even as the
president of the Private Respondents corporation, has no authority to condone any debt when the company
was under receivership by the Central Bank.

Facts: - May 10, 1979: The parties (petitioner and private respondent) entered into a Loan Agreement
with Assumption of Solidary Liabilitythe first Industrial Guarantee and Loan Fund (IGLF) between the
two.
o P500,000.00 loan
o 12% annual interest
o 2% monthly penalty
o 1 % monthly service charge
o 10% attorneys fees
o Secured by a chattel mortgage on the printing machinery in petitioners establishment.
- Second IGLF (basically the same as the first one, except):
o P300,000.00 loan
o 14% annual interest
o 1% per annum service charge
- April 2, 1985: petitioners had paid their first loan (P500,000.00)
- November 4, 1985: PR was placed under receivership by the Central Bank:
o Ricardo Lirioreceiver
o Cristina Destajoin-house examiner
- May 17, 1986: Pet made a partial payment of P50,000.00 on the second loan.
- June 18, 1986: Pet wrote a letter to PR proposing to settle their obligations, which was answered by the PR
on July 2 with a counter-offer that it would reduce the penalty charges (up to P140,000.00) provided
petitioners pay their obligations on or before July 30, 1986.
- July 31, 1986: Pet total liability amounted to P727,001.35.
o However, Pet sent a check to PR amounting only to P410,854.47 (Pilipinas Bank Check), with
a notation at the back stating full payment of IGLF Loan
o P410,854.47 = principal + (interest-P50,000.00 partial payment)
- Because of this, PR sent demand letters seeking payment of the balance of P266,146.88.
o Pet did not answer, so PR then filed a case in the RTC Manila for the collection of the sum
plus interests, penalties and service charges or, in the alternative, the foreclosure of the
machineries.
- Pet defense: sometime after receiving the counter-offer letter, Petitioner Yam (and wife ) met with Carlos
Sobrepenas, president of the PR corporation.
o The latter allegedly agreed to waive the penalties and service charges provided pet paid the
principal and interest (less the P50,000.00 partial payment). This was then the reason why
there was such notation at the back of the check.
- April 30, 1990: RTC decision: in favor of PRpet ordered to pay the loan balance of P266,146.88 plus other
charges, failing in which the said machineries shall be foreclosed.
- Court of Appeals: affirmed in toto the decision of the Lower Court.

Issue: WON there was condonation on the penalties of the petitioner's loan

Held/Ratio: Negative. Art. 1270, par.2 of the Civil COde provides that condonation must comply with the
forms of donation. Art 748, par. 3 provides that the donation and acceptance of a movable, the value of which
exceeds P5,000, must be made in writing, otherwise the same shall be void. In this connection, under Art. 417,
par. 1, referring to credits are considered movable property. In the case at bar, it is undisputed that the
alleged agreement to condone P266, 146.88 of the second IGLF loan was not reduced in writing.

Petitioners contention that the notation at the back is an evidence of the oral agreement is untenable. The
notation merely states the petitioners intention in making the payment, in no way it binding upon the private
respondents. However, had the private respondents issued a receipt, the same would have been an admission
against interest. Petitioners should have asked for a certificate of full payment from the private respondents,
as what they did on the first IGLF.

Destajos countersign is not a compelling evidence either. Such countersigning only signifies
acknowledgement of receipt of the payment. In November 4, 1985, private respondents was placed under
receivership by the Central bank, appointment of receiver operates to suspend the authority of a corporation
over its property and effects. Thus Sobrepenas had no authority to condone the debt.

BPI vs. CA
by Olivarez, Shannin

Doctrine:
Principle of Legal Compensation

Recit-ready:
The case revolves around the issue of the joint account between Reyes and his grandmother, and his grandmothers
pension. When Reyes created a joint account with his grandmother, he made sure that his grandmothers pension
shall be deposited under the said account. When Reyes grandmother died, Reyes still kept the pension under their
joint account. However, after a couple of months, Reyes decided to close that joint account and transferred the
money to the savings account that he had with his wife. When the next pension came, it was dishonoured because
the U.S. Treasury Department suddenly had knowledge about the death of Reyes grandmother. The Treasury
Department then asked for a refund, and that was the first time that BPI knew of his grandmothers death. Reyes
along with his lawyer then went to the BPI branch and filed a case against BPI because he was not able to withdraw
money, causing him to be under debt.

The ruling in this case is that BPI does have the legal right to apply the deposit of respondent Reyes to his
outstanding obligation to BPI brought about by the return of the U.S. Treasury warrant he earlier deposited
under the principle of legal compensation.

Compensation shall take place when two persons, in their own right, are creditors and debtors of each other. Article
1290 of the Civil Code provides that when all the requisites mentioned in Article 1279 are present, compensation
takes effect by operation of law, and extinguishes both debts to the concurrent amount, even though the creditors and
debtors are not aware of the compensation. Legal compensation operates even against the will of the interested
parties and even without the consent of them. Since this compensation takes place ipso jure, its effects arise on the
very day on which all its requisites concur. When used as a defense, it retroacts to the date when its requisites are
fulfilled.
Article 1279 states that in order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the
other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and
also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third persons and communicated
in due time to the debtor.

The elements of legal compensation are all present in the case at bar. The obligors bound principally are at the same
time creditors of each other. Petitioner bank stands as a debtor of the private respondent, a depositor. At the same
time, said bank is the creditor of the private respondent with respect to the dishonored U.S. Treasury Warrant which
the latter illegally transferred to his joint account. The debts involved consist of a sum of money. They are due,
liquidated, and demandable. They are not claimed by a third person.

Facts:
September 25, 1985, respondent Edvin F. Reyes opened Savings Account at petitioner BPI Cubao, Shopping Center
Branch. It was a joint account with his wife, Sonia S. Reyes.
Edvin Reyes also held a joint account with his grandmother, Emeteria M. Fernandez, which he opened on February
11, 1986 at the same BPI branch. Reyes regularly deposited in this account the U.S. Treasury Warrants payable to
the order of Emeteria M. Fernandez as her monthly pension.
Fernandez died on December 28, 1989, without the knowledge of the U.S. Treasury Department. She was still sent a
U.S. Treasury Warrant that was dated January 1, 1990 in the amount of $377.
On January 4, 1990, Reyes deposited the said U.S. treasury check of Fernandez in their joint savings account.
Two months after or on March 8, 1990, Reyes closed the savings account between him and his grandmother, and
transferred its funds amount to P13, 112.91 to the joint savings account that he had with his wife.
On January 16, 1991, a U.S. Treasury Warrant was dishonoured as it was discovered that Fernandez died three (3)
days prior to its issuance. The U.S. Department of Treasury then requested BPI for a refund. For the first time BPI
came to know the death of Fernandez.
On February 19, 1991, Reyes with his lawyer visited BPI and the refund documents were shown to them.
Surprisingly, Reyes demanded from BPI bank restitution of the debited amount. He claimed that because of the
debit, he failed to withdraw his money when he needed them. Reyes then filed a suit for Damages against BPI
before the RTC of Quezon City, Branch 79.

BPI contested the complaint and counter-claimed for moral and exemplary damages. By way of Special and
Affirmative Defense, they averred that Reyes gave them his express verbal authorization to debit the questioned
amount. They also claimed that Reyes later refused to execute a written authority.
In the RTC decision dated January 20, 1993, it dismissed the complaint of Reyes for lack of cause of action.
Reyes appealed to the Court of Appeals. On August 16, 1994, the 16 Division CA reversed the decision.
th

Hence this petition.

Issue:
Whether or not Respondent Court of Appeals gravely erred in not holding that petitioner bank has legal right to
apply the deposit of respondent Reyes to his outstanding obligation to BPI brought about by the return of the U.S.
Treasury warrant he earlier deposited under the principle of legal compensation

Held/Ratio:
Yes. The Court of Appeals erred when it failed to rule that legal compensation is proper.
Compensation shall take place when two persons, in their own right, are creditors and debtors of each other. Article
1290 of the Civil Code provides that when all the requisites mentioned in Article 1279 are present, compensation
takes effect by operation of law, and extinguishes both debts to the concurrent amount, even though the creditors and
debtors are not aware of the compensation. Legal compensation operates even against the will of the interested
parties and even without the consent of them. Since this compensation takes place ipso jure, its effects arise on the
very day on which all its requisites concur. When used as a defense, it retroacts to the date when its requisites are
fulfilled.
Article 1279 states that in order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the
other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and
also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third persons and communicated
in due time to the debtor.
The elements of legal compensation are all present in the case at bar. The obligors bound principally are at the same
time creditors of each other. Petitioner bank stands as a debtor of the private respondent, a depositor. At the same
time, said bank is the creditor of the private respondent with respect to the dishonored U.S. Treasury Warrant which
the latter illegally transferred to his joint account. The debts involved consist of a sum of money. They are due,
liquidated, and demandable. They are not claimed by a third person.

Dispositive:
IN VIEW HEREOF, the Decision of respondent Court of Appeals in CA-G.R. CV No. 41543 dated August 16,1994
is ANNULLED and SET ASIDE and the Decision of the trial court in Civil Case No. Q-91-8451 dated January 20,
1993 is REINSTATED. Costs against private respondent.

PNB vs. CA
by Bundalian, Albert

Doctrine:

Recit-ready:

Facts:

Issue:

Held/Ratio:

Mirasol vs. CA
by Angeles, Hannah

Doctrine: Requisites of Legal Compensation:

(1) That each one of the obligors be bound principally, and that he be at the
same time a principal creditor of the other;

(2) That both debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same quality if the
latter has been stated;
 (3) That the two debts are due;

(4) That they be liquidated and demandable;

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

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

Recit-ready: The Mirasols are sugar landowners and planters. PNB financed their sugar
production through a crop loan-financing scheme. The PNB, through a mortgage, was able to
sell the Mirasols crops and used the proceeds as payment for the obligation. Then President
Marcos issued PD 579, authorizing PNB to finance Philexs purchases foreign sales profits
to be directed to the national governments special fund. PNB demanded the Mirasols to
settle their obligation; however, they werent able to pay which resulted in the foreclosure of
the mortgaged properties, leaving a P12M deficiency. The Mirasols claim that by virtue of
legal compensation the loans are fully paid since the debt was offset by the unliquidated
amounts owed to them by PNB. Court held that there is no legal compensation since the
parties are not mutually creditors and debtors of each other. The proceeds of the crops PNB
sold were remitted to the government; thus, PNB wasnt able to retain said proceeds. Also,
there is no legal compensation when a claim is still in litigation, since it is not yet considered
liquidated.

Facts:
The Mirasols are sugarland owners and planters. Private respondent, Philippine National Bank (PNB), financed the
Mirasols sugar production venture for crop years, 1973-1974, and 1974-1975 under a crop loan-financing scheme.
o Crop loan-financing scheme Mirasols signed Credit Agreements, a Chattel Mortgage on Standing
Crops, and a Real Estate Mortgage in favor of PNB.
o Chattel Mortgage on Standing Crops empowered PNB as the petitioners attorney-in-fact to
negotiaite and to sell the latters sugar in both domestic and export markets and to apply the
proceeds to the payment of their obligations to it.
During Martial Law, former president Ferdinand Marcos issued Presidential Decree No. 579[2] in November 1974.
The said decree authorized:
o Philippine Exchange Co., Inc. (PHILEX) to purchase sugar allocated for export to the United States
and to other foreign markets
o PNB to finance PHILEXs purchases
o PHILEX profit from sales of sugar abroad was to be remitted to a special fund to the national
government, after commissions, overheard expenses, and liabilities had been deducted.
PNB continued to finance the sugar production of the Mirasols for crop years 1975-1976. And 1976-1977. Said crop
loands and similar obligations were secured by real estate mortgages over several properties of the Mirasols and
chattel mortgages over standing crops
PNB ignored the Mirasols request for accounting proceeds since the petitioners believe that the proceeds of their
sugar sales to PNB were more than enough to pay for their obligations if properly accounted for.
The Mirasols continued to avail of other loans from PNB and make unfunded withdrawals from their current accounts
with the said bank
PNB demanded that the petitioners should settle their accounts.
August 4, 1977 as a result of these demands for payment, petitioners conveyed to PNB real properties valued at
P1,410,466.00 by way of dacion en pago, leaving an unpaid overdrawn account of P1,513,347.78.
o Dacion en pago giving back of the property mortgaged to the lender in exchange for the discharge
of a mortgaged debt
On August 10, 1982, the balance of outstanding sugar crop and other loans owed by petitioners to PNB stood at
P15,964,252.93. Despite demands, the Mirasols failed to settle said due and demandable accounts. PNB then
proceeded to extrajudicially foreclose the mortgaged properties. After applying the proceeds of the auction sale of
the mortgaged realties, PNB still had a deficiency claim of P12,551,252.93.
 Petitioners continued to ask PNB to account for the proceeds of the sale of their export sugar for crop years 1973-
1974 and 1974-1975, insisting that said proceeds, if properly liquidated, could offset their outstanding obligations
with the bank.
PNB remained adamant in its stance that under P.D. No. 579, there was nothing to account since under said law, all
earnings from the export sales of sugar pertained to the National Government and were subject to the disposition of
the President of the Philippines for public purposes.

Issue: Whether the petitioners debts are offset by virtue of the legal compensation

Held/Ratio: NO. The Mirasols claim has no legal basis.

The Mirasols argument has no legal basis since legal compensation will only take place if the requirements set forth
in Articles 1278 and 1279 of the New Civil Code have been complied with.
o Art. 1278. Compensation shall take place when two persons, in their own right, are creditors and
debtors of each other.
o Art. 1279. In order that compensation may be proper, it is necessary:

(1) That each one of the obligors be bound principally, and that he be at the same time a principal
creditor of the other;

(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same
kind, and also of the same quality if the latter has been stated;

(3) That the two debts are due;

(4) That they be liquidated and demandable;

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

In the present case, set-off or compensation cannot take place between the parties because:
o First, neither of the parties are mutually creditors and debtors of each other.:

SECTION 7. x x x After deducting its commission of two and one-half (2-1/2%) percent of gross sales,
the balance of the proceeds of sugar trading operations for every crop year shall be set aside by the
Philippine Exchange Company, Inc,. as profits which shall be paid to a special fund of the
National Government subject to the disposition of the President for public purposes.

Thus, as correctly found by the Court of Appeals, "there was nothing with which PNB was
supposed to have off-set Mirasols' admitted indebtedness."
o Second, compensation cannot take place where one claim, as in the instant case, is still the subject
of litigation, as the same cannot be deemed liquidated.

Montemayor vs. Millora

by Reyes, Megan

Doctrine:

Recit-ready:
Facts:

Issue:

Held/Ratio:

Garcia vs. Llamas

by Bernas, Claud

Doctrine: Novation is never presumed. There must be an express declaration from the parties.

Recit-ready:
Garcia, together with de Jesus, borrowed P400,000 from Llamas. They were unable to pay so Llamas filed against
them. Garcia contends that he was only an accommodation party in the promissory note. He further insists that he
has no liability since a novation of obligation took place through the acts of de Jesus. Court ruled that there was no
novation of obligation and that de Jesus and Garcia are still solidarily liable.

Facts:
On December 23, 1996 Eduardo Garcia (petitioner) and Eduardo de Jesus borrowed P400,000 from
Dionisio Llamas (respondent)
They made a promissory note and bound themselves jointly and severally to pay the loan
Terms: 5% interest per month to be paid before January 23, 1997
They were not able to pay the loan and so Llamas filed a case against them. Garcia contends that he has no
liability anymore since he signed the promissory note merely as an accommodation party
Furthermore, he contends that novation took place through the acts of de Jesus and thus relieves him from
liability, these acts specifically being:
1. Issuance by de Jesus of a check in payment of the full amount of the loan of P400,000.00 in favor of
Respondent Llamas, although the check subsequently bounced
2. Acceptance of the check by the respondent which resulted in the substitution by de Jesus or the superseding
of the promissory note;
3. de Jesus having paid interests on the loan in the total amount of P120,000.00;
4. The fact that Respondent Llamas agreed to the proposal of de Jesus that due to financial difficulties, he be
given an extension of time to pay his loan obligation and that his retirement benefits from the Philippine
National Police will answer for said obligation.

Issue:
Whether or not there was novation of obligation thus relieving Garcia from his
liability in the loan

Held/Ratio:
NO

Petitioner seeks to extricate himself from his obligation as joint and solidary debtor by insisting that novation took
place, either through the substitution of De Jesus as sole debtor or the replacement of the promissory note by the
check. Alternatively, the former argues that the original obligation was extinguished when the latter, who was his
co-obligor, paid the loan with the check. The fallacy of the second (alternative) argument is all too apparent. The
check could not have extinguished the obligation, because it bounced upon presentment. By law, the delivery of a
check produces the effect of payment only when it is encashed.
Novation is a mode of extinguishing an obligation by changing its objects or principal obligations, by
substituting a new debtor in place of the old one, or by subrogating a third person to the rights of
the creditor
In general, there are two modes of substituting the person of the debtor: (1) expromision and (2) delegacion. In
expromision, the initiative for the change does not come from and may even be made without the knowledge of the
debtor, since it consists of a third persons assumption of the obligation. As such, it logically requires the consent of
the third person and the creditor. In delegacion, the debtor offers, and the creditor accepts, a third person who
consents to the substitution and assumes the obligation; thus, the consent of these three persons are necessary. Both
modes of substitution by the debtor require the consent of the creditor.
Novation may also be extinctive or modificatory. It is extinctive when an old obligation is terminated by the creation
of a new one that takes the place of the former. It is merely modificatory when the old obligation subsists to the
extent that it remains compatible with the amendatory agreement. Whether extinctive or modificatory, novation is
made either by changing the object or the principal conditions, referred to as objective or real novation; or by
substituting the person of the debtor or subrogating a third person to the rights of the creditor, an act known as
subjective or personal novation.
For novation to take place, the following requisites must concur:
1) There must be a previous valid obligation.
2) The parties concerned must agree to a new contract.
3) The old contract must be extinguished.
4) There must be a valid new contract.

Novation may also be express or implied. It is express when the new obligation declares in unequivocal terms that
the old obligation is extinguished. It is implied when the new obligation is incompatible with the old one on every
point. The test of incompatibility is whether the two obligations can stand together, each one with its own
independent existence.
Applying the foregoing to the instant case, we hold that no novation took place.
The parties did not unequivocally declare that the old obligation had been extinguished by the issuance and the
acceptance of the check, or that the check would take the place of the note. There is no incompatibility between the
promissory note and the check. As the CA correctly observed, the check had been issued precisely to answer for the
obligation. On the one hand, the note evidences the loan obligation; and on the other, the check answers for it.
Verily, the two can stand together.
Also unmeritorious is petitioners argument that the obligation was novated by the substitution of debtors. In order
to change the person of the debtor, the old one must be expressly released from the obligation, and the third person
or new debtor must assume the formers place in the relation. Well
settled is the rule that novation is never presumed
In the present case, petitioner has not shown that he was expressly released from the obligation, that a third
person was substituted in his place, or that the joint and solidary obligation was cancelled and substituted by
the solitary undertaking of De Jesus.
Moreover, it must be noted that for novation to be valid and legal, the law requires that the creditor expressly
consent to the substitution of a new debtor. Since novation implies a waiver of the right the creditor had before
the novation, such waiver must be express. It cannot be supposed, without clear proof, that the present respondent
has done away with his right to exact fulfillment from either of the solidary debtors.
More important, De Jesus was not a third person to the obligation. From the beginning, he was a joint and solidary
obligor of the P400,000 loan; thus, he can be released from it only upon its extinguishment. Respondents acceptance
of his check did not change the person of the debtor, because a joint and solidary obligor is required to pay the
entirety of the obligation.

Quinto vs. People

by Galang, Maan

Doctrine:
In expromision and delegacion the consent of the creditor is an indispensable requirement. It is thus easy to see why
Cariagas acceptance of Ramos and Camachos payment on installment basis cannot be construed as a case of either
expromision or delegacion sufficient to justify the attendance of extinctive novation.
Recit-ready:
Aurelia Cariaga gave Leonida Quinto pieces of jewelry worth P36,000 to show prospective buyers under the
condition that if the latter could not sell it within 5 days, it would be returned to the former. Quinto did not return the
jewelry so Cariaga filed a case for estafa. Quinto, in her defense, alleged that she was engaged in the buying and
selling of jewelry and in the course of her business, she sold jewelry to Mrs. Camacho and Mrs. Ramos. When both
her clients were unable to exact payment, she presented such clients to Cariaga who allowed them to pay in
installment. The issue to be resolved is whether there was an effective novation between Quinto and Cariaga. The
Court held that there was no effective novation because in cases of expromision or delegacion, consent of the
creditor is an indispensable requirement. Mere acceptance of payment in installment is not sufficient to justify the
attendance of novation.

Facts:
According to the prosecution, Leonida Quinto asked Aurelia Cariaga to allow her to have some pieces of
jewelry that she could show to prospective buyers. Cariaga accepted and handed P36,000 worth of jewelries,
as evidenced by a receipt.
o Quinto requested for additional time to vend the items when the 5-day period given to her lapsed.
She failed to conclude any sale and 6 months later, Cariaga asked Quinto to return the jewelry through
demand letters.
o Quinto failed to return the jewelries which prompted Cariaga to file a case for estafa against her.
The defense, in its version of the story, sought to prove that Quinto was engaged in the buying and selling
of jewelry:
o Quinto and Cariaga started to transact business which included a solo ring worth P40,000 sold to
Mrs. Camacho who paid P20,000 in check and P20,000 in installment later paid directly to Cariaga
o Quinto again transacted with Mrs. Camacho selling a marques worth P16,000 and a ring worth
P4,000. Mrs. Camacho was unable to pay the amount in full and had a balance of P13,000. Quinto
brought Mrs. Camacho to Cariaga who agreed to allow Mrs. Camacho to pay the balance in installments
o Quinto also sold a ring worth P17,000 to Mrs. Ramos who was unable to pay the whole amount.
She brought Mrs. Ramos to Cariaga and talked about the terms of payment. Mrs. Ramos gave Quinto a
ring valued at P3000; the next payment the former gave the latter P5000. Lastly, Leonida herself paid
P2000.
RTC found Quinto guilty beyond reasonable doubt of the crime of estafa.
Quinto appealed to the CA but the RTC judgment was affirmed.

Issue:
Whether or not the agreement between Quinto and Cariaga was effectively novated when the latter consented to
receive the payment on installments directly from Mrs. Camacho and Mrs Ramos

Held/Ratio:
No. The petition is bereft of merit.

Novation is never presumed, and the animus novandi, whether totally or partially, must appear by express
agreement of the parties, or by their acts that are too clear and unequivocal to be mistaken.
The extinguishment of the old obligation by the new one is a necessary element of novation which may be
effected either expressly or impliedly.
There are two ways which could indicate, in fine, the presence of novation and thereby produce the effect
of extinguishing an obligation by another which substitutes the same.
o The first is when novation has been explicitly stated and declared in unequivocal terms.
o The second is when the old and the new obligations are incompatible on every point. The test of
incompatibility is whether or not the two obligations can stand together, each one having its independent
existence. If they cannot, they are incompatible and the latter obligation novates the first.
 The changes alluded to by petitioner consists only in the manner of payment. There was really no
substitution of debtors since private complainant merely acquiesced to the payment but did not give her
consent to enter into a new contract.
There are two forms of novation by substituting the person of the debtor, depending on whose initiative it
comes from, to wit: expromision and delegacion.
o In expromision, the initiative or the change does not come from the debtor and may even be made
without his knowledge. Since a third person would substitute for the original debtor and assume the
obligation, his consent and that of the creditor would be required.
o In delegacion, the debtor offers, and the creditor accepts, a third person who consents to the
substitution and assumes the obligation, thereby releasing the original debtor from the obligation; here,
the intervention and the consent of all parties thereto would perforce be necessary.
o In either of these two modes of substitution, the consent of the creditor, such as can be seen, is an
indispensable requirement.
It is thus easy to see why Cariagas acceptance of Ramos and Camachos payment on installment basis
cannot be construed as a case of either expromision or delegacion sufficient to justify the attendance of
extinctive novation.
Not too uncommon is when a stranger to a contract agrees to assume an obligation; and while this may
have the effect of adding to the number of persons liable, it does not necessarily imply the extinguishment of
the liability of the first debtor. Neither would the fact alone that the creditor receives guaranty or accepts
payments from a third person who has agreed to assume the obligation, constitute an extinctive novation
absent an agreement that the first debtor shall be released from responsibility.

Cochingyan vs R&B Surety

by Sebastian, Lui

Doctrine:
If the old debtor is not released, no novation occurs and the third person who has assumed the debtors obligation
becomes merely a co-debtor/surety/co-surety.
Recit-ready:
PAGRICO and R&B Surety were jointly and severally bound to comply with the terms and conditions of a Surety
Bond. Identical agreements were also entered into by R&B Surety with CCM, PAGRICO and PACOCO which
made the latter three jointly and severally bound to R&B Surety until the Surety Bond is cancelled or discharged.
R&B Surety demanded reimbursement from the parties for having paid PNB due to PAGRICOs failure to comply
with the Principal Obligation. The said parties failed to heed its demands so R&B Surety resorted to court action;
they argued that the obligation was extinguished by novation from the change of debtor. The Court ruled that the
Surety Bond was not novated by the Trust Agreement. The Trust Agreement merely furnished to PNB another party
obligor to the Principal Obligation.
Facts:
Pacific Agricultural Suppliers, Inc. (PAGRICO; principal obligor) was granted an increase in its line of credit
from P400K-P800K (Principal Obligation) with PNB by giving a P400K bond. The bond represented the said
increment, to secure compliance with the terms& conditions.
To comply with this requirement, PAGRICO submitted Surety Bond No. 4765 issued by R&B Surety.
PAGRICO and R&B Surety were jointly and severally bound to comply with the terms and conditions. The latters
liability includes accrued interest, etc. aside from the principal obligation.
2 identical indemnity agreements were entered into with R&B Surety: (a) agreement executed by Catholic
Church Mart (CCM) and by petitioner Cochingyan, Jr.; (b) agreement by PAGRICO & its Manager Villanueva and
PACOCO & its Pres. Liu Tua Beh.
They are jointly and severally bound to R&B Surety to pay an annual premium and for the faithful compliance
of the Surety Bonds T&Cs until the same is CANCELLED and/or DISCHARGED.
 Upon PAGRICOs failure to comply with its Principal Obligation, the bank demanded payment from R&B
Surety. R&B Surety paid a total of 70k; in turn, it sent formal demand letters to Cochingyan, Jr. and Villanueva for
reimbursement.
It filed a suit against the petitioners when the latter failed to heed its demands.
The CFI of Manila rendered a decision in favor of R&B Surety. It ordered defendants to pay the P400K+interest
(6% per annum) and unpaid premiums for Surety Bond No. 4765 with legal interest. The CA certified the case to the
SC.

Issue:
WON the Trust Agreement had extinguished, by novation, the obligation of R&B Surety to the PNB under the
Surety Bond which also extinguished the petitioners obligations under the Indemnity Agreements

Held/Ratio: NO
The Surety Bond has not been cancelled/fully discharged by payment of the Principal Obligation. Unless
extinguished by other means, the Surety Bond and the Indemnity Agreements must still subsist. They were not
extinguished by novation due to the subsequent execution of the Trust Agreement.
Novation - extinguishment of an obligation by the substitution or change of the obligation by a subsequent one
which terminates it, either by changing its object or principal conditions, or by substituting a new debtor in place of
the old one, or by subrogating a third person to the rights of the creditor.
- Objective (or real) novation through a change of the object or principal conditions of an existing obligation
- Subjective (or personal) novation the change of either the person of the debtor or of the creditor
- Both objective & subjective at the same time mixed
In both objective and subjective novation, a dual purpose is achievedan obligation is extinguished and a new
one is created.
Novation is never presumed: it must be established either by the discharge of the old debt by the express terms
of the new agreement, or by the acts of the parties whose intention to dissolve the old obligation as a consideration
of the emergence of the new one must be clearly discernible.
For subjective novation to occur, its not enough that the juridical relation bet. the parties to the original contract
is extended to a third person.
The old debtor must be released from the obligation and be replaced by the 3 person/new debtor. Otherwise,
rd

the 3 person becomes merely a codebtor/surety/co-surety.

rd

The Trust Agreement does not expressly terminate R&B Suretys obligation under the Surety Bond. It expressly
provides for the continuing subsistence of that obligation by stipulating that it shall not in any manner release R & B
Surety from its obligation under the Surety Bond.
There can be no implied novation absent an unequivocal declaration of extinguishment of a preexisting
obligation.
What the trust agreement did was merely to bring in other persons (the Trustor) to assume the same obligation
that R&B Surety was bound to perform. The precise legal effect is the increase of the number of persons liable to the
obligee, not the extinguishment of the first debtors liability.
The Trustor (CCM) was already previously bound to R&B Surety under its Indemnity Agreement; it became
directly liable to the PNB. Under the Trust Agreement, there would now be three obligors directly and solidarily
bound in favor of the PNB: PAGRICO, R&B Surety and the Trustor.
PNB never intended to release, and never did release, R&B Surety. Thus, R&B Surety, which was not a
party to the Trust Agreement, could not have intended to release any of its own indemnitors simply because the
Trustor became also directly liable to the PNB.

Doctrine:

Recit-ready:

Facts:

Issue:
Held/Ratio:

Magdalena Estates vs. Rodriguez

by Castigador, Niqui

Doctrine:
The mere fact that the creditor receives a guaranty or accepts payments from a third person who has agreed
to assume the obligation, when there is no agreement that the first debtor shall be released from responsibility does
not constitute a novation.

Recit-ready:
Defendants bought a parcel of land from the petitioners and executed a promissory note stating that they
will pay the unpaid balance of 5,000 with interest. They executed a surety bond with Luzon Surety Co, Inc for said
payment of the principal obligation of 5,000. Later, Luzon Surety paid to the petitioners the unpaid balance.
Petitioners demanded that defendants pay the accumulated interest due of 655.89 but defendants refused claiming
that when petitioners accepted the 5,000 from Luzon Surety without reservations, or without applying the interests
due, it shows that they already waived or condoned said interests.
The Court does not agree. The liability of Luzon Surety to pay the 5,000 cannot be extended beyond its
contract. It is for the same reason that the principal obligation of 5,000 cannot be applied to the payment of due
interests. Since petitioners accepted payment from Luzon Surety, a third party, but there was no agreement that the
defendants, or the original debtors, shall be released from responsibility arising from their promissory note, the
petitioners can still enforce obligation against the original debtors.

Facts:
Defendants bought from petitioner a parcel of land in Quezon City. Defendants executed in a promissory note that
they will pay petitioners the unpaid balance of 5,000 with interest.
Defendants and Luzon Surety Co, Inc also executed a surety bond for the payment of the balance. When the
obligation became due and demandable, Luzon Surety Co Inc paid to the petitioners the amount of 5,000
Petitioners demanded from the defendants the payment of P655.89 corresponding to the accumulated interests on
the principal obligation but defendants refused. Petitioners filed a case in the MTC where the court ruled in favor of
the petitioners enforcing the collection of the unpaid interests
Defendants claim that there was no demand made by the defendants for the payment of accrued interest. They
claim that when the petitioners accepted the principal obligation of 5,000 from Luzon Surety Co, Inc without
applying a portion of the 655.89 to the principal payment, they have already waived or condoned the interests due.

Issue: WON the petitioners waived or condoned the said interests when they accepted the payment of the
principal obligation from Luzon Surety Co, Inc.

Held/Ratio: NO
In the promissory note the principal obligation is the balance of the purchase price as compared to the contract
with Luzon Surety Inc, Co stating the amount of 5,000. Petitioners did not protest when it accepted the payment
of 5,000 from Luzon Surety because it knew that that was the complete amount appearing in the contract. The
liability of a surety cannot be extended by implication.
It is for the same reason that the petitioners cannot apply a part of the 5,000 as payment for the accrued interest.
Inasmuch as the petitioners cannot protest for nonpayment of the interest when it accepted the amount of P5,000.00
from the Luzon Surety Co., Inc., nor apply a part of that amount as payment for the interest, we cannot now say that
there was a waiver or condonation on the interest due.
Novation of the obligation by presumption is never favored. To be sustained, it needs to be established that the old
and new contracts are incompatible or the will to novate was expressly agreed upon by the parties
The mere fact that the creditor receives a guaranty or accepts payments from a third person who has agreed to
assume the obligation, when there is no agreement that the first debtor shall be released from responsibility does not
constitute a novation, and the creditor can still enforce the obligation against the original debtor.
Reyes vs. CA
by Cassi Polinar

Doctrine: There must be an express intention to novate - animus novandi. Novation is never presumed. Article 1300
of the Civil Code provides inter alia that conventional subrogation must be clearly established in order that it may
take effect. The absence of a new contract extinguishing the old one destroys any possibility of novation by
conventional subrogation.

Recit-ready: There were two resolutions involved in this case.

The first one involves Reyes (president of Eurotrust), Eleazar, and Bermic.
Elsa Reyes alleges that Eurotrust and Bermic entered into a loan agreement. Eurotrust extended to Bermic
the payment for construction, as a loan. Bermic issued 21 post dated checks as payments. However, the payments
were dishonored by the bank. It was found that the checks issued by the Eurotrust were the amounts paid by AFP-
MBAI (another party na wag maguluhan) to Erotrust. Upon knowing that the funds belonged to AFP-MBAI, Bermic
and Eurotrust agreed that Bermic would settle its obligation directly to AFP-MBAI. However, Eleazar learned that
Reyes continued to collect the post dated checks (traydor).

The second resolution involves Reyes and AFP-MBAI

AFP-MBAI were buying govt securities (including treasury notes) from Eurotrust. However, the Eurotrust
borrowed all the treasury notes for their verification with the Central Bank
However, despite demands made by the AFP-MBAI, Eurotrust failed to return the treasury notes. So they filed a
separate complaint for estafa and violation of BP 22. She claims that it is already the responsibility of Eleazar to pay
for the obligation.

ISSUE: Whether or not there was a novation in the 1st and 2nd Resolution
RULING: NO
REQUSITES OF NOVATION:
1. there must be a previous valid obligation,
2. there must be an agreement of the parties concerned to a new contract,
3. there must be the extinguishment of the old contract, and
4. there must be the validity of the new contract.
The last 3 essential requisites of novation are wanting in the instant case. No new agreement for
substitution of creditor was forged among the parties concerned which would take the place of the preceding
contract. The absence of a new contract extinguishing the old one destroys any possibility of novation by
conventional subrogation.
Nowhere in the letters agreed between Eleazar and BERMIC that would evince that AFP-MBAI agreed to
substitute for the petitioner as the new creditor of Eleazar in the contract of loan.
For the 2nd resolution:
A thorough examination of the records shows that no hard evidence was presented which would expressly
and unequivocably demonstrate the intention of respondent AFP-MBAI to release petitioner from her obligation to
pay under the contract of sale of securities.
Novation which consists in substituting a new debtor in the place of the original one, may be made even without or
against the will of the latter, but not without the consent of the creditor.

Facts:
Elsa Reyes is the president of Eurotrust Capital Corporation (EUROTRUST), a domestic corporation engaged
in credit financing.
Graciela Eleazar, private respondent, is the president of B.E. Ritz Mansion International Corporation
(BERMIC), a domestic enterprise engaged in real estate development.
The other respondent, Armed Forces of the Philippines Mutual Benefit Asso., Inc. (AFP-MBAI), is a
corporation duly organized primarily to perform welfare services for the Armed Forces of the Philippines.
1 Resolution (Jan. 1992):
st

Elsa Reyes alleges that Eurotrust and Bermic entered into a loan agreement.
o Eurotrust extended to Bermic P216,053,126.80 to finance the construction of the latters Ritz Condominium and
Gold Business Park.
o The loan was without collateral but with higher interest rates than those allowed by the banks.
o Bermic issued 21 postdated checks to cover payments of the loan packages.
o However, when those checks were presented for payment, the same were dishonored by the drawee bank, Rizal
Commercial Banking Corporation (RCBC), due to stop payment order made by Graciela Eleazar.
o Despite Eurotrusts notices and repeated demands to pay, Eleazar failed to make good the dishonored checks,
prompting Reyes to file against her several criminal complaints for violation of B.P. 22 and estafa under Article 315,
4th paragraph, No. 2 (d) of the Revised Penal Code.
Elsa Reyes was investigated by the Senate Blue Ribbon Committee.
o She was involved in a large scale scam amounting to millions of pesos belonging to Instructional Material
Corporation (IMC), an agency under the Department of Education, Culture and Sports.
o respondent AFP-MBAI which invested its funds with Eurotrust, conducted its own investigation and found that
after Eurotrust delivered to AFP-MBAI the securities it purchased, the former borrowed the same securities but
failed to return them to AFP-MBAI;
o that the amounts paid by AFP-MBAI to Eurotrust for those securities were in turn lent by Elsa Reyes to Bermic
and others.
Upon knowing that the funds loaned were belonged to AFP-MBAI, the Bermic and Eurotrust agreed that
Bermic would directly settle its obligations with the real owners of the fund (AFP-MBAI and DECS-IMC).
o Bermic made paymets to AFP-MBAI and DECS-IMC
However, Eleazar later learned that Reyes continued to collect on the post-dated checks issued by her contrary
to their agreement.
o Upon her counsels advise, Eleazar had the payment stopped. Hence, her checks issued in favor of Eurotrust were
dishonored.
Office of the Provincial Prosecutor: dismissed the complaints filed by Reyes against Eleazar
Secretary of Justice: dismissed the petition holding that the novation of the loan agreement prevents the rise of any
incipient criminal liability since the novation had the effect of canceling the checks and rendering without effect the
subsequent dishonor of the already cancelled checks.

Regarding the 2 Resolution (Jan. 1993):

nd

The AFP-MBAI filed a separate complaint for estafa and a violation of BP 22 against Elsa Reyes
Based on the investigation, it was found that the Eurotrust offered to sell to AFP-MBAI various marketable
securities, including govt securities, such as treasury notes, treasury bills, Land Bank of the Philippines Bonds, etc.
o Eurotrust delivered to AFP-MBAI the treasury notes. However, Eurotrust fraudulently
borrowed all those treasury notes for the purposes of verification with the Central Bank. Despite the
demands of AFP-MBAI, Eurotrust failed to return the said treasury notes. Instead it delivered 21 postdated
checks in favour of AFP-MBAI which were dishonoured upon payment.
o Because of this, AFP-MBAI filed with the Office of the City Prosecutor a complaint for
violation of BP 22 and estafa against Elsa Reyes.
Reyes defended that there was a novation.

Issue: Whether or not there was a novation in the 1 and 2 Resolution

st nd

Held/Ratio:

January 1992 Resolution

The principle of novation by substitution of creditor was erroneously applied in the 1 questioned resolution
st

involving contract of loan between Reyes and Eleazar

REQUSITES OF NOVATION:
1. there must be a previous valid obligation,
2. there must be an agreement of the parties concerned to a new contract,
3. there must be the extinguishment of the old contract, and
4. there must be the validity of the new contract.
The last 3 essential requisites of novation are wanting in the instant case. No new agreement for substitution of
creditor was forged among the parties concerned which would take the place of the preceding contract. The absence
of a new contract extinguishing the old one destroys any possibility of novation by conventional subrogation.
Thnowhere in the letters agreed between Eleazar and BERMIC that would evince that AFP-MBAI agreed to
substitute for the petitioner as the new creditor of Eleazat in the contract of loan.
The letters only shown that Eleazar was given the authority to directly settle the obligation to AFP-MBAI and
DECS-IMC. It is essentially an agreement between petitioner and respondent Eleazar only.
Well settled is the rule that novation by substitution of creditor requires an agreement among the three parties
concerned - the original creditor, the debtor and the new creditor. It is a new contractual relation based on the mutual
agreement among all the necessary parties. Hence, there is no novation if no new contract was executed by the
parties
Conventional subrogation of a third person requires the consent of the original parties and of the third person.
There must be an express intention to novate - animus novandi. Novation is never presumed. Article 1300 of the
Civil Code provides inter alia that conventional subrogation must be clearly established in order that it may take
effect.
January 1993 Resolution
A thorough examination of the records shows that no hard evidence was presented which would expressly and
unequivocably demonstrate the intention of respondent AFP-MBAI to release petitioner from her obligation to pay
under the contract of sale of securities
It is a rule that novation by substitution of debtor must always be made with the consent of the creditor
Novation which consists in substituting a new debtor in the place of the original one, may be made even without
or against the will of the latter, but not without the consent of the creditor.
In the same vein, to effect a subjective novation by a change in the person of the debtor, it is necessary that the
old debtor be released expressly from the obligation, and the third person or new debtor assumes his place in the
relation.
Novation is never presumed.

Broadway Centrum vs. Tropical Hut

by Aragon, Jyn

Doctrine:

Novation is never presumed; it must be established either by the discharge of the old debt by precise terms of the
new agreement or by the acts of the parties whose intention to dissolve the old obligation as a consideration of the
emergence of the new one must be clearly manifested.

Recit-ready:

Petitioner and respondent Tropical executed a contract of lease.

*Tropical insistently requested petitioner to lower the rental cost
*Reason: Low sales were caused by the temporary closure of Doa Juana Rodriguez Avenue, the street where the
store was facing.
Broadway granted Tropicals requests by lowering the rental costs and stating that this agreement shall not be an
amendment of the original lease contract
Reopening of the street:
o Broadway informed Tropical that it will gradually return the rental costs to the prices stipulated in the lease
contract
o Tropical resisted, still contending that their sales have not improved, and that they will not pay the original costs
and still insists to be given lower costs until sales have picked up.
o Broadway informed that they will nonetheless impose the original costs, and it will no longer be negotiable.
o Tropical filed suit against petitioner, contending that the subsequent letter-agreement novated the lease contract.
The lower court decided in favor of Tropical, the appellate court affirmed the decision, hence this petition for review
on certiorari.
Issue: Whether or not the letter-agreement novated the contract of lease.
Held: There is no novation of contract
The letter-agreement did not extinguish or alter the obligations of respondent Tropical and the rights of petitioner
Broadway under their lease contract
The letter agreement is a " provisional and temporary agreement to a reduction of [Tropical's] monthly rental.
The agreement was not to be construed as alteration or waiver of any; of the terms of the Lease Contract itself
The letter-agreement was not to persist, for the rest of the life of the Contract of Lease
Novation is never presumed. It must be expressed in the terms of the new agreement.

Facts:

Petitioner Broadway Centrum Condominium Corporation (Broadway) and private respondent Tropical Hut Food
Market, Inc (Tropical) executed last 28 November 1980 a contract of lease.
Broadway agreed to lease 3,042.19 square meter of the Broadway Commercial Complex for 10 years (Feb 1981
to Feb 1991).
Stipulated in the contract of lease:
o Basic monthly rental: Php 120,000/month during the first three years (Feb 1, 1981 to Feb 1, 1984)
o Basic rental increase: 140,000/month for the next three years thereafter (Feb 1, 1984 to Feb 1, 1987)
o Final increase: 165,000/month during the last four years (Feb 1, 1987 to Feb 1, 1991)
During the 1 year of the contract: no problem.
st

February 5, 1982: Proposed that the monthly rental be reduced to Php 50,000 or 2.0% of their monthly sales,
whichever is higher up to the end of 3 year, after which it shall be again subject to negotiations. Reasons for this are
rd

the following:
Rental is 7.31% of Tropicals Actual Sales
Tropicals Gross profit is only 10%
Tropicals sales projection: Php 120,000/day
Tropical sales projection for 1982: only 23,000,000 (rental rate of 6.08%)
March 4, 1982: Broadway offered 6 suggestions, which if implemented should result in increased sales by 15%
Counter-proposal of broadway conditional reduction of rental by Php 20,000 for a limited period of 4 months,
qualifying that, any reduction in rental extended is merely a temporary suspension of the original rate of rental
stipulated in our contract of lease and not an amendment thereto.
April 20, 1982: Due to temporary closure of Doa Juana Rodriguez Avenue, which caused low sales for Tropical,
Broadway formalized the provisional and temporary agreement, by making an even more generous offer: Php
60,000 or 2% of gross receipt, with a qualification, Provisional arrangement should not be interpreted as
amendment to the lease contract entered into between us.
The Doa Juana Rodriguez road was completed. Broadway increased the rental from Php 60,000 per month to Php
100,000, gradually.
Php 80,000 effective January 1983
Php 100,000 effective April 1983
While the rental rate above fixed by Broadway was higher than that set out in the provisional and temporary
agreement of the parties of 20 April 1982, the rates so fixed were nonetheless lower than that stipulated in their
contract of 28 November 1980.
Tropical refused after pleading several times, Tropical's present rentals of P60,000.00 monthly or 2% of gross
receipts, whichever is higher, "would at least stay until we have somehow recovered," to which Tropical proposed,
however, to add 20% of its income from concessionaires.
Broadway refused also, saying that they have already incurred a loss of Php 620,000 by reducing the rental of
Tropical to Php 60,000/month. Tropical refused again by saying that, Our position is that you cannot arbitrarily
and unilaterally increase the rentals. This is a matter which should be mutually agreed upon by us and as stated, we
are not in a financial position to agree to such an increase.
Broadway then implemented the original contract and demanded Php 100,000 back accounts, exclusive of penalty
charges.
 Tropical filed for a restraining order to prevent Broadway from invoking Section 5 of their Lease of
Contract and and asking the court to decree that the, rental provided for in the letter-agreement of 20 April 1982
"should subsist while the low volume of sales [of Tropical] still continues." Trial court granted the preliminary
injunction upon filing of Tropical of a Php 100,000 bond.
While trial before RTC, Broadway increased the rental to Php 140,000/month from Feb 1, 1984 to Feb 1,
1987 (Par. 3 of the original lease of contract)
Tropical reacted by filing a supplemental complaint with the trial court raising for the first time the issue of whether
or not the letter-agreement dated 20 April 1982 had novated the Lease Contract of 28 November 1980.
Broadway denied the novation
March 4, 1985, RTC ruled in favor of Tropical
o Writ of preliminary injuction became permanent
o Mode of payment:
Feb 1 1981 to Feb 1 1984 Php 101,609.00
Feb 1, 1984 to Feb 1, 1987 Php 118,530.00
Feb 1, 1987 to Feb 1991 Php 139, 702
o Court of Appeals affirmed the decision with slight modification to the amounts.
Issue:

Whether or not there was novation of Contract of Lease of November 28, 1980.

Held/Ratio:

There was no novation of contract.

Novation is the extinguishment of an obligation by the substitution of that obligation with a subsequent
one, which terminates it, either by changing its object or principal conditions or by substituting a now debtor in
place of the old one, or by subrogating a third person to the rights of the creditor.
Novation is never presumed; it must be established either by the discharge of use old debt by the express
terms of the new agreement, or by the acts of the parties whose intention to dissolve the old obligation as a
consideration of the emergence of the new one must be clearly manifested.
The letter-agreement of 20 April 1982 was, by its own terms, a " provisional and temporary agreement to a
reduction of [Tropical's] monthly rental ." The letter-agreement, as noted earlier, also contained the following
sentence: This provisional agreement should not be interpreted as amendment to the contract entered into by us. T
o The course of negotiations between Broadway and Tropical before the execution of their letter-agreement of 20
April 1982, quite clearly indicated that what they were negotiating was a temporary and provisional reduction of
rentals.

California Bus vs. State Investment

by Bernardo, Ivy

Doctrine:

Recit-ready:

Facts:

Issue:

Held/Ratio:

Sime Darby Philippines vs. Good Year Philippines

by Reyes, Phoebe

Doctrine:

Recit-ready:

Facts:

Issue:

Held/Ratio:

Licaros vs. Gatmaitan

by Lu, Kyle

Licaros v. Gatmaitan (Subrogation of the Person of the Creditor, Article 1300)

GR 142838
August 9, 2001
Doctrine: Conventional Subrogation requires an agreement between the three parties concerned the original
creditor, the debtor, and the new creditor. It is a new contractual relation based on the mutual agreement among all
the necessary parties.
Recit Ready Digest:
The Anglo-Asean Bank and Trust Limited is a private bank registered and organized to do business under the laws
of the Republic of Vanatu but not of the Philippines. Their business is receiving fund placement from investors and
invest the money in money market funds in HK, Europe, and the US.
Attracted by the prospective business, Filipino Businessman Abelardo Licaros made a fund placement with Anglo-
Asean. However, because of the difficulty in collecting his investment, Licaros entered into a deal with investment
banker Antonio Gatmaitan who offered to pay Anglo-Aseans indebtedness to Licaros subject certain conditions.
In a Memorandum of Agreement, Gatmaitan undertakes to pay Licaros 150,000 dollars on or before July 15, 1993
while Licaros executes a non negotiable promissory note. When Licaros executed the promissory note in favor of
Gatmaitan, Gatmaitan indicated in the agreement to pay assign, cede, and transfer 70% of Gatmaitans cash
dividends as a registered stock owner of Prudential Life.
Gatmaitan was not able to collect the money claims he had against Anglo-Asean leading him not to fulfill his
obligation with Licaros. However, Licaros pursued the enforcement of the obligation but despite repeated demands,
Licaros did not accede to the obligation. Due to this, Licaros filed a civil case against Gatmaitan demanding for the
principal obligation of 3.5 M pesos with legal interest and attorneys fees.
The RTC ruled in favor of Licaros making Gatmaitan liable in paying the former 3.150 M pesos plus 12% interest
per annum and attorneys fees of 200 k pesos. It reasoned that the MOA was an assignment of credit. The CA
reversed the RTCs ruling by holding that Gatmaitan was never at any point liable in paying the amount in the
promissory note because the agreement is a conventional subrogation requiring the consent of all parties. Hence this
petition.
The issue is whether the Memorandum of Agreement between petitioner and respondent is one of assignment of
credit or one of conventional subrogation. Conventional Subrogation.
The Court held that the MOA between the parties is a conventional subrogation based on 1) the whereas clauses of
the parties and 2) the type-written words in the signature portion with the conforme where Anglo-Asean Bank and
Limited Trust was written. Absent the consent of Anglo-Asean Bank and Limited Trust, the MOA which is a
conventional subrogation cannot be deemed to have existed. Hence, Gatmaitan was never at any point liable in
paying the promissory note.
Facts
The Anglo-Asean Bank and Trust Limited is a private bank registered and organized to do business under the
laws of the Republic of Vanatu but not of the Philippines. Their business is receiving fund placement from investors
and invest the money in money market funds in HK, Europe, and the US.
 Attracted by the prospective business, Filipino Businessman Abelardo Licaros made a fund placement with
Anglo-Asean. However, because of the difficulty in collecting his investment, Licaros entered into a deal with
investment banker Antonio Gatmaitan who offered to pay Anglo-Aseans indebtedness to Licaros subject certain
conditions.
In a Memorandum of Agreement, Gatmaitan undertakes to pay Licaros 150,000 dollars on or before July 15,
1993 while Licaros executes a non negotiable promissory note. When Licaros executed the promissory note in favor
of Gatmaitan, Gatmaitan indicated in the agreement to pay assign, cede, and transfer 70% of Gatmaitans cash
dividends as a registered stock owner of Prudential Life.
Gatmaitan was not able to collect the money claims he had against Anglo-Asean leading him not to fulfill his
obligation with Licaros. However, Licaros pursued the enforcement of the obligation but despite repeated demands,
Licaros did not accede to the obligation. Due to this, Licaros filed a civil case against Gatmaitan demanding for the
principal obligation of 3.5 M pesos with legal interest and attorneys fees.
The RTC ruled in favor of Licaros making Gatmaitan liable in paying the former 3.150 M pesos plus 12%
interest per annum and attorneys fees of 200 k pesos. It reasoned that the MOA was an assignment of credit. The
CA reversed the RTCs ruling by holding that Gatmaitan was never at any point liable in paying the amount in the
promissory note because the agreement is a conventional subrogation requiring the consent of all parties. Hence this
petition.
Issue
Whether the Memorandum of Agreement between petitioner and respondent is one of assignment of credit or one
of conventional subrogation. Conventional Subrogation.
Ruling
The Court held that the MOA between the parties is a conventional subrogation based on 1) the whereas clauses
of the parties and 2) the type-written words in the signature portion with the conforme where Anglo-Asean Bank
and Limited Trust was written. Absent the consent of Anglo-Asean Bank and Limited Trust, the MOA which is a
conventional subrogation cannot be deemed to have existed. Hence, Gatmaitan was never at any point liable in
paying the promissory note.
An assignment of credit has been defined as the process of transferring the right of the assignor to the assignee
who would then have the right to proceed against the debtor. The assignment may be done gratuitously or onerously,
in which case, the assignment has an effect similar to that of a sale. On the other hand, subrogation has been defined
as the transfer of all the rights of the creditor to a third person, who substitutes him in all his rights. It may either be
legal or conventional. Legal subrogation is that which takes place without agreement but by operation of law
because of certain acts. Conventional subrogation is that which takes place by agreement of parties.
For our purposes, the crucial distinction deals with the necessity of the consent of the debtor in the original
transaction. In an assignment of credit, the consent of the debtor is not necessary in order that the assignment may
fully produce legal effects. What the law requires in an assignment of credit is not the consent of the debtor but
merely notice to him as the assignment takes effect only from the time he has knowledge thereof. A creditor may,
therefore, validly assign his credit and its accessories without the debtors consent. On the other hand, conventional
subrogation requires an agreement among the three parties concernedthe original creditor, the debtor, and the new
creditor. It is a new contractual relation based on the mutual agreement among all the necessary parties. Thus,
Article 1301 of the Civil Code explicitly states that (C)onventional subrogation of a third person requires the
consent of the original parties and of the third person.

Astro Electronics vs. Phil. Export by

Perez, Paolo

Doctrine:

Recit-ready:

Facts:
The Philippine Trust Company (Philtrust) granted Astro several loans which amounted to P3M with interest
and secured through three promissory notes: two dated December 1981 and one dated August 1981
 Private Petitioner Roxas signed each promissory note twice: as president of Astro and in his individual
capacity. He also signed a Continuing Suretyship Agreement in favor of Philtrust Bank, again as president
of Astro and as surety in case of default.
Philippine Export and Foreign Loan Guarantee (Philguarantee)

Issue:

Held/Ratio: