JOSE P. DIZON v. ALFREDO G.

GABORRO
G.R. No. L-36821 June 22, 1978
GUERRERO, J.:

DOCTRINE: Mistake is a ground for the reformation of an instrument which there having been a
meeting of the minds of the parties of a contract, their true intention is not expressed in the
instrument purporting to embody the agreement, and one of the parties may ask for such
reformation to the end that such true intention may be expressed. (Art. 1359, New Civil code).

When a mutual mistake of the parties causes the failure of the instrument to disclose their real
agreement, said instrument may be reformed. (Art. 1361, New Civil Code.)

FACTS: Three parcels of land were subject to a 1 st mortgage lien in favor of DBP to secure
payment of a loan obtained by petitioner Dizon in the original sum of P38,000.00 plus interest.
Later on, the mortgage has been assumed by respondent Gaborro by virtue of documents
entitled deed of sale with assumption of mortgage and option to purchase real estate. The
parcels of land was subject to a 2nd mortgage lien in favor of PNB to secure the payment of a
loan in the sum of P93,831.91 plus interest. Having defaulted of the payments in the 1 st
mortgage, DBP foreclosed in its favor the parcels of land. Subsequently, DBP and respondent
Gaborro executed a document entitled Conditional Sale over the same parcels of land. After the
execution of the deed of conditional sale, certain payments were made by respondent Gaborro
to DBP and PNB. Since the execution of the contracts, respondent Gaborro had been in the
actual possession of the three parcels of land in question and was actually cultivating the same
and the land taxes thereon have been paid by said respondent. Petitioner Dizon wrote a letter to
Gaborro informing him that he is formally offering to reimburse Gaborro of what he paid to the
banks but without, however, tendering any cash, and demanding an accounting of the income
and contending that the transaction they entered into was one of antichresis. Respondent did
not accede to the demands of the petitioner which prompted petitioner Dizon to file a complaint
in CFI of Pampanga. Petitioner alleged that the documents executed between the parties did
not express the true intention and agreement. The two deeds constitute in fact a single
transaction that their real agreement was not an absolute sale of the the land but merely an
equitable mortgage or conveyance by way of security for the reimbursement or refund by Dizon
to Gaborro of any and all sums which the latter may have paid on account of the mortgage
debts in favor of the DBP and the PNB. The trial court held that the true agreement between
petitioner and respondent is that the latter would assume and pay the indebtedness of the
plaintiff to DBP and PNB and in consideration therefor, the respondent was given the
possession and enjoyment of the properties in question.
Petitioner's motion for reconsideration and/or rehearing having been denied by the Court of
Appeals, hence the present petition for review on certiorari.

ISSUE: Whether the two instruments (deed of sale with assumption of mortgage and option to
purchase real estate) executed by petitioner and respondent constitute an absolute sale, an
equitable mortgage or conveyance

RULING: The documents executed between the parties cannot be legally considered a real
and unconditional sale of the parcels of land, firstly, because there was absolutely no money
consideration therefor, as admittedly stipulated the sum of P131,831.91 mentioned in the
document as the consideration "receipt of which was acknowledged" was not actually paid; and
secondly, because the properties had already been previously sold by the sheriff at the
foreclosure sale, thereby divesting the petitioner of his full right as owner thereof to dispose and
sell the lands.
In legal consequence, respondent Gaborro did not purchase or acquire the full title and
ownership of the properties by virtue of the Deed of Sale With Assumption of Mortgage earlier
executed between them. The only legal effect of this Option Deed is the grant to petitioner the
right to recover the properties upon reimbursing respondent Gaborro of the total sums of money
that the latter may have paid to DBP and PNB on account of the mortgage debts, the said right
to be exercised within the stipulated 5 years period.

The Court found that the agreement between petitioner Dizon and respondent Gaborro is one of
those inanimate contracts under Art. 1307 of the New Civil Code whereby petitioner and
respondent agreed "to give and to do" certain rights and obligations respecting the lands and
the mortgage debts of petitioner which would be acceptable to the bank but partaking of the
nature of the antichresis insofar as the principal parties, petitioner Dizon and respondent
Gaborro, are concerned.

Mistake is a ground for the reformation of an instrument which there having been a meeting of
the minds of the parties of a contract, their true intention is not expressed in the instrument
purporting to embody the agreement, and one of the parties may ask for such reformation to the
end that such true intention may be expressed. (Art. 1359, New Civil code). When a mutual
mistake of the parties causes the failure of the instrument to disclose their real agreement, said
instrument may be reformed. (Art. 1361, New Civil Code.) It was a mistake for the parties to
execute the Deed of Sale with Assumption of Mortgage and the Option to Purchase Real Estate
and stand on the literal meaning of the file and stipulations used therein.
 MIGUEL FLORENTINO v. SALVADOR ENCARNACION, SR.,
G.R. No. L-27696 September 30, 1977
GUERRERO, J.:

DOCTRINE: Art. 1311. Contracts take effect only between the parties, their assigns and
heirs, except in cases where the rights and obligations arising from the contract are not
transmissible by their nature, or by stipulation or by provision of law. The heir is not liable
beyond the value of the property he received from the decedent.
If a contract should contain a stipulation in favor of a third person, he may demand its
fulfillment provided he communicated his acceptance to the obligor before its revocation. A mere
incidental benefit or interest of a person is not sufficient. The contracting parties must have
clearly and deliberately conferred a favor upon a third person.

FACTS: Petitioners and respondents filed with the CFI of Ilocos Sur an application for the
registration under Act 496 of a parcel of agricultural land located at Barrio Lubong Dacquel
Cabugao Ilocos Sur. The application alleged that the applicants are the common and pro-
indiviso owners in fee simple of the said land with the improvements existing thereon; that to the
best of their knowledge and belief, there is no mortgage, lien or encumbrance of any kind
whatever affecting said land. They alleged that they had acquired the aforesaid land thru and by
inheritance from their predecessors in interest, lately from their aunt, Doa Encarnacion
Florentino who died in Vigan, Ilocos Sur in 1941, and for which the said land was adjudicated to
them by virtue of the deed of extrajudicial partition. After due notice and publication, the Court
set the application for hearing. During trial, the applicant Miguel Florentino asked the court to
include Stipulation O-1 of the deed of extrajudicial partition, which was in Spanish, but
translated stipulated that the products of the disputed land be used to fund various items
needed for the celebration of religious holidays, including carriages for the Lenten procession,
specifically the 3rd fall of Christ, the Child Jesus, the Seven Last Words, etc. Opposing its entry
on the title as an encumbrance were respondents who filed a manifestation seeking to withdraw
their application to which the court denied. The CFI then issued an order clarifying that the
products of the land had always been used to pay for the religious functions specified, though
this was never registered. Thus, the use of the products for the benefit of the church being a
simple donation, and this donation not having been accepted by the church, the stipulation was
not an encumbrance on the land. The decision was later modified to state that the stipulation
could not be an encumbrance because it could be revoked; in fact, it was a stipulation pour
autrui. The Church in whose favor it was made did not communicate its acceptance of the
stipulation before Encarnacion revoked it. Thus, it was void. Florentino filed for MR, but it was
denied. Hence, the appeal.

ISSUE: Whether the stipulation sought to be opposed is revocable at the option of the co-
owners.

RULING: The stipulation embodied on religious expenses is not revocable at the unilateral
option of the co-owners and neither is it binding to both parties The stipulation in part of an
extrajudicial partition duly agreed and signed by the parties, hence the same must bind the
contracting parties thereto and its validity or compliance cannot be left to the will of one of them
(Art. 1308, N.C.C.). Under Art 1311 of the New Civil Code, this stipulation takes effect between
the parties, their assign and heirs. The article provides:
Art. 1311. Contracts take effect only between the parties, their assigns and heirs,
except in cases where the rights and obligations arising from the contract are not
transmissible by their nature, or by stipulation or by provision of law. The heir is not liable
beyond the value of the property he received from the decedent.
 If a contract should contain a stipulation in favor of a third person, he may
demand its fulfillment provided he communicated his acceptance to the obligor before its
revocation. A mere incidental benefit or interest of a person is not sufficient. The
contracting parties must have clearly and deliberately conferred a favor upon a third
person.

In the case at bar, the determining point is whether the co-owners intended to benefit the
Church when in their extrajudicial partition of several parcels of land inherited by them from
Doa Encarnacion Florendo they agreed that with respect to the land, the fruits thereof shall
serve to defray the religious expenses. The evidence on record shows that the true intent of the
parties is to confer a direct and material benefit upon the Church. The fruits of the aforesaid land
were used thenceforth to defray the expenses of the Church in the preparation and celebration
of the Holy Week.

The court found the trial court erred in holding that the stipulation, arrangement or grant is
revocable at the option of the co-owners. While a stipulation in favor of a third person has no
binding effect in itself before its acceptance by the party favored, the law does not provide when
the third person must make his acceptance. As a rule, there is no time at such third person has
after the time until the stipulation is revoked. The Church accepted the stipulation in its favor
before it is sought to be revoked by some of the co-owners, namely the petitioners-appellants
herein. It is not disputed that from the time of the will of Doa Encarnacion Florentino in 1941,
as had always been the case since time immemorial up to a year before the filing of their
application in May 1964, the Church had been enjoying the benefits of the stipulation. The
enjoyment of benefits flowing therefrom for almost seventeen years without question from any
quarters can only be construed as an implied acceptance by the Church of the stipulation pour
autrui before its revocation. The acceptance does not have to be in any particular form, even
when the stipulation is for the third person an act of liberality or generosity on the part of the
promisor or promise. It need not be made expressly and formally. Notification of acceptance,
other than such as is involved in the making of demand, is unnecessary.

A trust constituted between two contracting parties for the benefit of a third person is not subject
to the rules governing donation of real property. The beneficiary of a trust may demand
performance of the obligation without having formally accepted the benefit of the this in a public
document, upon mere acquiescence in the formation of the trust and acceptance under the
second paragraph of Art. 1257 of the Civil Code.
 MELECIO COQUIA v. FIELDMEN'S INSURANCE CO., INC.,
G.R. No. L-23276 November 29, 1968
CONCEPCION, C.J.:

DOCTRINE: In general, only parties to a contract may bring an action based thereon, this rule is
subject to exceptions, one of which is found in the second paragraph of Article 1311 of the Civil
Code of the Philippines, reading:

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

FACTS: Fieldmens Insurance Company (the Company) issued Manila Yellow Taxicab Co.(the
Insured) a common carrier accident insurance policy, covering the period from Dec. 1, 1961 to
Dec. 1, 1962. While the policy was in force, a taxicab of the Insured, driven by Carlito Coquia,
met a vehicular accident at Mangaldan, Pangasinan, in consequence of which Carlito died. The
Insured filed therefor a claim for P5,000.00 to which the Company replied with an offer to pay
P2,000.00, by way of compromise. The Insured rejected the same and made a counter-offer for
P4,000.00, but the Company did not accept it. Hence, on September 18, 1962, the Insured and
Carlito's parents, namely, Melecio Coquia and Maria Espanueva the Coquias filed a
complaint against the Company to collect the proceeds of the aforementioned policy. In its
answer, the Company admitted the existence thereof, but pleaded lack of cause of action on the
part of the plaintiffs. The trial court rendered a decision sentencing the Company to pay to the
plaintiffs the sum of P4,000.00 and the costs. Fieldmen appealed, contended that plaintiffs have
no cause of action because: the Coquias have no contractual relation with the Company; and
the Insured has not complied with the provisions of the policy concerning arbitration.

ISSUE: Whether the parents of Carlito Coquia may institute an action against the Company
even though they are not a party to the contract.

RULING: Yes. Although, in general, only parties to a contract may bring an action based
thereon, this rule is subject to exceptions, one of which is found in the second paragraph of
Article 1311 of the Civil Code of the Philippines, reading: If a contract should contain some
stipulation in favor of a third person, he may demand its fulfillment provided he communicated
his acceptance to the obligor before its revocation. A mere incidental benefit or interest of a
person is not sufficient. The contracting parties must have clearly and deliberately conferred a
favor upon a third person.

In the stipulations, the Company "will indemnify any authorized Driver who is driving the Motor
Vehicle" of the Insured and, in the event of death of said driver, the Company shall, likewise,
"indemnify his personal representatives." In fact, the Company "may, at its option, make
indemnity payable directly to the claimants or heirs of claimants ... it being the true intention of
this Policy to protect ... the liabilities of the Insured towards the passengers of the Motor Vehicle
and the Public" in other words, third parties.
 PASTOR B. CONSTANTINO v. HERMINIA ESPIRITU
G.R. No. L-22404 May 31, 1971
DIZON, J.:

DOCTRINE: A third person for whose benefit the contract was entered into may also demand its
fulfillment provided he had communicated his acceptance thereof to the obligor before the
stipulation in his favor is revoked.

FACTS: Constantino had by a fictitious deed of absolute sale conveyed to Espiritu the two-
storey house and four subdivision lots with the understanding that Espiritu would hold the
properties in trust for their illegitimate son, Pastor Constantino, Jr., still unborn at the time of the
conveyance. Espiritu thereafter mortgaged said properties to the Republic Savings Bank of
Manila twice to secure payment of two loans after that she offered the properties for sale.
Constantino then prayed for the issuance of a writ of preliminary injunction to restrain Espiritu
and her representatives from further alienating or disposing of the properties, and for judgment
ordering her to execute a deed of absolute sale of said properties in favor of their son. As a
result of the conveyance, the TCT in Constantino's name was cancelled and a new one was
issued in Espiritu's name. Espiritu moved to dismiss the complaint on the ground that it stated
no cause of action because Pastor Constantino, Jr., the beneficiary of the alleged trust, was not
included as party-plaintiff, and on the further ground that cause of action was unenforceable
under the Statute of Frauds. Constantino argued that the Statute of Frauds does not apply to
trustee. The trial court dismissed the complaint.

ISSUE: Whether the contract of sale entered into by the parties was subject to the agreement
that Espiritu would hold the properties in trust for their unborn child

RULING: The court did not answer on the issue as the same involves a question of fact. Espiritu
may raise the same in her answer for the lower court to determine after trial. The contract
between Constantino and Espiritu was a contract pour autrui, although couched in the form of a
deed of absolute sale. Constantino's action was, in effect, one for specific performance. That
one of the parties to a contract is entitled to bring an action for its enforcement or to prevent its
breach is too clear to need any extensive discussion. The contract contained a stipulation pour
autrui amplifies this settled rule only in the sense that the third person for whose benefit the
contract was entered into may also demand its fulfillment provided he had communicated his
acceptance thereof to the obligor before the stipulation in his favor is revoked. The amended
complaint submitted by Constantino to the lower court impleaded the beneficiary under the
contract as a party co-plaintiff, thus it is clear that the three parties concerned therewith would,
as a result, be before the court and the latter's adjudication would be complete and binding
upon them.
 INTEGRATED PACKAGING CORP., v. COURT OF APPEALS & FIL-ANCHOR PAPER CO.,
INC.
G.R. No. 115117. June 8, 2000
QUISUMBING, J.:

DOCTRINE: The basic civil law principle of relativity of contracts provides that contracts can
only bind the parties who entered into it, and it cannot favor or prejudice third person, even if he
is aware of such contract and has acted with knowledge thereof.

FACTS: Petitioner and private respondent executed an order agreement whereby private
respondent bound itself to deliver to petitioner reams of printing paper, coated, two sides basis,
short grain in specified schedules. In accordance with the standard operating practice of the
parties, the materials were to be paid within a minimum of thirty days and maximum of ninety
days from delivery. Later, petitioner entered into a contract with Philippine Appliance Corporation
(Philacor) to print three volumes of "Philacor Cultural Books. Petitioner alleged it wrote private
respondent to immediately deliver the balance because further delay would greatly prejudice
petitioner. Private respondent delivered again to petitioner various quantities of printing paper
amounting to P766,101.70. However, petitioner encountered difficulties paying private
respondent said amount. Accordingly, private respondent made a formal demand upon
petitioner to settle the outstanding account. Meanwhile, petitioner entered into an additional
printing contract with Philacor. Unfortunately, petitioner failed to fully comply with its contract
with Philacor for the printing of books VIII, IX, X and XI. Philacor demanded compensation from
petitioner for the delay and damage it suffered on account of petitioners failure. The trial court
rendered judgment declaring that petitioner should pay private respondent the sum of
P763,101.70. On appeal, the respondent Court of Appeals reversed and set aside the judgment
of the trial court. Petitioner filed the instant petition contending that the appellate courts
judgment was based on erroneous conclusions of facts and law.

ISSUE: Whether private respondent is liable for petitioners breach of contract with Philacor.

RULING: The transaction between the parties is a contract of sale whereby private respondent
(seller) obligates itself to deliver printing paper to petitioner (buyer) which, in turn, binds itself to
pay therefore a sum of money or its equivalent (price). Clearly, petitioner did not fulfill its side of
the contract as its last payment in August 1981 could cover only materials covered by delivery
invoices dated September and October 1980. There is no dispute that the agreement provides
for the delivery of printing paper on different dates and a separate price has been agreed upon
for each delivery. As correctly held by the appellate court, private respondent cannot be held
liable under the contracts entered into by petitioner with Philacor. Private respondent is not a
party to said agreements. It is also not a contract pour autrui. Aforesaid contracts could not
affect third persons like private respondent because of the basic civil law principle of relativity of
contracts which provides that contracts can only bind the parties who entered into it, and it
cannot favor or prejudice a third person, even if he is aware of such contract and has acted with
knowledge thereof. Indeed, the order agreement entered into by petitioner and private
respondent has not been shown as having a direct bearing on the contracts of petitioner with
Philacor. As pointed out by private respondent and not refuted by petitioner, the paper specified
in the order agreement between petitioner and private respondent are markedly different from
the paper involved in the contracts of petitioner with Philacor.