OBLIGATIONS and CONTRACTS

Case Doctrines
Dean Cynthia Del Castillo
Ateneo Law School

Nature of Obligations

Spouses Estrada v PH Rabbit (2017; Breach by Culpa)

Moral damages cannot be awarded in case of breach of contract of carriage, except (1) when mishap results to death
of passenger and (2) in case carrier guilty of BF or fraud. Fraud is an inducement through insidious machination,
where the other party was induced to give consent that would not otherwise have been given. Bad faith does not
simply connote bad judgment or negligence; it imports a dishonest purpose or some moral obliquity and conscious
doing of a wrong, a breach of a known duty through some motive or interest or ill will that partakes of the nature
of fraud.

PEZA v Pilhino (2016; Failure to comply with prestation)

Rescission on account of breach of reciprocal obligations is provided for in Article 1191: “The power to rescind
obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent
upon him. The injured party may choose between the fulfillment and the rescission of the obligation, with the
payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter
should become impossible.” Article 1911 results in mutual restitution. However, this is no license for the negation
of contractually stipulated liquidated damages.

Buenviaje v Sps Salonga (2016; Failure to comply with prestation)

Specific performance and resolution are alternative remedies available to a party who is aggrieved by breach of a
reciprocal obligation. Resolution 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 (mutual restitution). Resolution 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 agreement.
Injured party may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible.
No mutual restitution for specific performance.

Kinds of Obligations

Sps Lam v Kodak (2016; Necessity of Court Approval in Reciprocal Obligations)

The breach committed by petitioners was the nonperformance of a reciprocal obligation (sale), 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. When rescission is sought under Article 119, it need not be
judicially invoked because the power to resolve is implied in reciprocal obligations; allows an injured party to
minimize the damages he or she may suffer on account of the other party’s failure to perform what is incumbent
upon him or her; when a party fails to comply with his or her obligation, the other party’s right to resolve the
contract is triggered; resolution immediately produces legal effects if the non-performing party does not question
the resolution. Court intervention only becomes necessary when the party who allegedly failed to comply disputes
the resolution of the contract. Since both parties in this case have exercised their right to resolve under Article 1191,
there is no need for a judicial decree before the resolution produces effects.

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 **Nissan v Lica (2016; Necessity of Court Approval in Reciprocal Obligations)

It is true that NCLP1 and LMI’s Contract of Lease does not contain a provision expressly authorizing extrajudicial
rescission. LMI can nevertheless rescind/resolve the contract, without prior court approval. Art. 1191 provides that
the power to rescind is implied in reciprocal obligations, in cases where one of the obligors should fail to comply
with what is incumbent upon him. Rationale: (UP v Delos Angeles)

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

The act of a party in treating a contract as resolved must be made known to the other and is always provisional,
being ever subject to by the court. If the other party denies that rescission is justified, it is free to resort to judicial
action. Then, should the court, after due hearing, decide that the resolution of the contract was not warranted, the
responsible party will be sentenced to damages; in the contrary case, the resolution will be affirmed, and the
consequent indemnity awarded to the party prejudiced.

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

The only practical effect of a contractual stipulation allowing extrajudicial rescission is merely to transfer to the
defaulter the initiative of instituting suit, instead of the rescinder. In fact, the rule is the same even if the parties’
contract expressly allows extrajudicial rescission. The other party denying the rescission may still seek judicial
intervention to determine whether or not the rescission was proper.

Sps. Domingo v Sps Manzano (2016; Suspensive Condition)

In a contract to sell, payment of the price is a positive suspensive condition, failure of which is not a breach
warranting rescission but rather just an event that prevents the prospective buyer from compelling the prospective
seller to convey title. In other words, the non-fulfillment of the condition of full payment renders the contract to
sell without force and effect. Since failure to pay the price in full in a contract to sell renders the same ineffective
and without force and effect, then there is no sale to speak of. Even petitioners’ posture that their annotation of an
adverse claim on TCT No. 160752 is equivalent to registration or claim of ownership necessarily fails, on account
of the fact that there was never a sale in their favor - and without a sale in their favor, they could not register or
claim ownership.

Sagun v ANZ Global (2016; Suspensive Condition)

In this case, there was already a perfected contract of employment when petitioner signed ANZ's employment offer
and agreed to the terms/conditions therein. Nonetheless, the ANZ’s offer of employment contained several
conditions before he may be deemed an employee. Among those was the “satisfactory completion of any checks
(e.g. background, bankruptcy, sanctions and reference checks) that may be required by ANZ.” Accordingly,
petitioner's employment with ANZ depended on the outcome of his background check, which partakes of the nature
of a suspensive condition, and hence, renders the obligation of the would-be employer conditional.

A condition is every future and uncertain event upon which an obligation or provision is made to depend. It is a
future and uncertain event upon which the acquisition or resolution of rights is made to depend by those who
execute the juridical act Jurisprudence states that when a contract is subject to a suspensive condition, its effectivity
shall take place only if and when the event which constitutes the condition happens or is fulfilled.

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 Danan v Sps Serrano (2016; Suspensive Condition)

In a contract of sale, the title to the property passes to the vendee upon the delivery of the thing sold whereas in a
contract to sell, the ownership is, by agreement, retained by the vendor and is not to pass to the vendee until full
payment of the purchase price. In a contract of sale, the vendee’s non-payment of the price is a negative resolutory
condition, while in a contract to sell, the vendee’s full payment of the price is a positive suspensive condition to the
coming into effect of the agreement. In the first case, the vendor has lost and cannot recover the ownership of the
property unless he takes action to set aside the contract of sale. In the second case, the title simply remains in the
vendor if the vendee does not comply with the condition precedent of making payment at the time specified in the
contract. Verily, in a contract to sell, the prospective vendor binds himself to sell the property subject of the
agreement exclusively to the prospective vendee upon fulfilment of the condition agreed upon which is the full
payment of the purchase price but reserving to himself the ownership of the subject property despite delivery thereof
to the prospective buyer.

A cursory reading of the “Agreement in Receipt Form” would readily reveal that the same is a contract to sell and
not a contract of sale. As expressly stipulated therein, the parties “agreed that in June 1978, upon the completion of
the full payment of the agreed price, the herein vendor will deliver to the vendee a title corresponding to the lot or
portion sold.” Clearly, the title to the property was to remain with the Spouses Serrano, to pass only to Bonifacio
until his full payment of the purchase price.

Sps Ibanez v Harper (2017; Solidary v Joint)

The Amended Compromise Agreement clearly refers to the spouses Ibañez as plaintiffs and Francisco, Consuela
and Ma. Consuela as the defendants they covenanted to pay. There is nothing which shows a declaration that the
obligation created was solidary.

Solidary obligations cannot be inferred lightly. They must be positively and clearly expressed. There is a solidary
liability only when the obligation expressly so states, or when the law or the nature of the obligation requires
solidarity. If from the law, or the nature or the wording of the obligations to which the preceding article refers the
contrary does not appear, the credit or debt shall be presumed to be divided into as many equal shares as there arc
creditors or debtors, the credits or debts being considered distinct from one another. In this case, given that solidarity
could not be inferred from the agreement, the presumption under the law applies—the obligation is joint.

As defined in Article 1208, a joint obligation is one where each of the creditors has a right to demand, and each of
the debtors is bound to render compliance with his proportionate part of the prestation. This means that Francisco,
Ma. Consuelo and Consuelo are each entitled to equal shares in the P3,000,000 agreed upon in the Amended
Compromise Agreement and that payment to Consuelo and Ma. Consuelo will not have the effect of discharging
the obligation with respect to Francisco.

Carodan v China Banking (2016; Solidary)

A contract of suretyship has been juxtaposed against a contract of guaranty as follows:

A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of the debtor. A suretyship is
an undertaking that the debt shall be paid; a guaranty, an undertaking that the debtor shall pay. Stated differently,
a surety promises to pay the principal’s debt if the principal will not pay, while a guarantor agrees that the creditor,
after proceeding against the principal, may proceed against the guarantor if the principal is unable to pay. A surety
binds himself to perform if the principal does not, without regard to his ability to do so. A guarantor, on the other
hand, does not contract that the principal will pay, but simply that he is able to do so. In other words, a surety
undertakes directly for the payment and is so responsible at once if the principal debtor makes default, while a
guarantor contracts to pay if, by the use of due diligence, the debt cannot be made out of the principal debtor.

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 While a guarantor may bind himself solidarity with the principal debtor, the liability of a guarantor is different from
that of a solidary debtor. A guarantor who binds himself in solidum with the principal debtor does not become a
solidary co-debtor to all intents and purposes. There is a difference between a solidary co-debtor, and a fiador in
solidum (surety). The latter, outside of the liability he assumes to pay the debt before the property of the principal
debtor has been exhausted, retains all the other rights, actions and benefits which pertain to him by reason of the
fiansa; while a solidary co-debtor has no other rights than those bestowed upon him by Civil Code.

Under Art. 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 a
solidarity liability only when the obligation expressly so states, when the law so provides or when the nature of the
obligation so requires.

AFP v Sanvictores (2016; Solidary)

In Spouses Berot v. Siapno, the Court defined solidary obligation as one in which each of the debtors is liable for
the entire obligation, and each of the creditors is entitled to demand the satisfaction of the whole obligation from
any or all of the debtors. On the other hand, a joint obligation is one in which each debtor is liable only for a
proportionate part of the debt, and the creditor is entitled to demand only a proportionate part of the credit from
each debtor. The well-entrenched rule is that solidary obligations cannot be inferred lightly. They must be positively
and clearly expressed. A liability is solidary “only when the obligation expressly so states, when the law so provides
or when the nature of the obligation so requires.”

Here, there is no doubt that the nature of the obligation of PEPI and AFPRSBS under the subject contract to sell
was solidary. In the said contract, PEPI and AFPRSBS were expressly referred to as the “SELLER” while
Sanvictores was referred to as the “BUYER.” Indeed, the contract to sell did not state “SELLERS” but “SELLER.”
This could only mean that PEPI and AFPRSBS were considered as one seller in the contract. There was no
delineation as to their rights and obligations.

Buenaventura v Metrobank (2016; Penal Clause)

As to the penalty charge, the same was warranted for being expressly stipulated in the promissory notes, to wit:

I/we further agree to pay the Bank, in addition to the agreed interest rate, a penalty charge of 18% per annum based
on any unpaid principal to be computed from date of default until full payment of the obligation.

Verily, a penal clause is an accessory undertaking attached to a principal obligation. It has for its purposes: (1) to
provide for liquidated damages; and (2) to strengthen the coercive force of the obligation by the threat of greater
responsibility in the event of breach of obligation. A penal clause is a substitute indemnity for damages and the
payment of interests in case of noncompliance, unless there is a stipulation to the contrary.

Penalty on delinquent loans may take different forms. The New Civil Code permits an agreement upon a penalty
apart from the monetary interest. If the parties stipulate this kind of agreement, the penalty does not include the
monetary interest, and as such the two are different and distinct from each other and may be demanded separately.
“If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for
damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and the absence
of stipulation, the legal interest, which is six per cent per annum.”
The penalty charge of two percent (2%) per month in the case at bar began to accrue from the time of default by
the petitioner. There is no doubt that the petitioner is liable for both the stipulated monetary interest and the
stipulated penalty charge. The penalty charge is also called penalty or compensatory interest.

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Extinguishment of Obligations

Figuera v Ang (2016; Payment by 3rd Person; Legal Subrogation)

Figuera argues that her payment of the utility bills subrogated her to the rights of Ang’s creditors against Ang.

Article 1291 provides that the subrogation of a third person to the rights of the creditor is one of the means to
modify obligations. It transfers to the person subrogated the credit, with all the rights appertaining thereto, either
against the debtor or against third persons. Subrogation of a third person in the rights of a creditor may either be
legal or conventional. There is legal subrogation when: (a) a creditor pays another preferred creditor, even without
the debtor's knowledge; (b) a third person who is not interested in the obligation pays with the express or tacit
approval of the debtor; and (c) a person interested in the fulfilment of the obligation pays, even without the
knowledge of the debtor.

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

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

The, consent or approval of the debtor is required only if a third person who is not interested in the fulfilment of
the obligation pays such.

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

**Security Bank v Sps Mercado (2018; Interest)

Here, the spouses Mercado supposedly: (1) agreed to pay an annual interest based on a “floating rate of interest;”
(2) to be determined solely by Security Bank; (3) on the basis of Security Bank's own prevailing lending rate; (4)
which shall not exceed the total monthly prevailing rate as computed by Security Bank; and (5) without need of
additional confirmation to the interests stipulated as computed by Security Bank.

Above violates principle of mutuality.

The principle of mutuality states that contracts must bind both contracting parties, and its validity or compliance
cannot be left to the will of one of them. As such, any contract which appears to be heavily weighed in favor of one
of the parties so as to lead to an unconscionable result is void. Likewise, any stipulation regarding the validity or
compliance of the contract that is potestative or is left solely to the will of one of the parties is invalid. This holds
true not only as to the original terms of the contract but also to its modifications. Consequently, any change in a
contract must be made with the consent of the contracting parties, and must be mutually agreed upon.

Stipulations as to the payment of interest are subject to the principle of mutuality of contracts. Interest rates are
only allowed if agreed upon by express stipulation of the parties, and only when reduced into writing. Any change
to it must be mutually agreed upon, or it produces no binding effect.

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 Thus, in several cases, we declared void stipulations that allowed for the unilateral modification of interest rates.
In PNB v CA we disallowed the creditor-bank from increasing the stipulated interest rate at will for being violative
of the principle of mutuality of contracts.

The same treatment is given to stipulations that give one party the unbridled discretion, without the conformity of
the other, to increase the rate of interest notwithstanding the inclusion of a similar discretion to decrease it
(Escalation Clause invalid if not with conformity of other party).

BSP allows banks and borrowers to agree on a floating rate of interest, provided that it must be based on market-
based reference rates (not the bank’s own prevailing lending rate). This BSP requirement is consistent with the
principle that the determination of interest rates cannot be left solely to the will of one party. It further emphasizes
that the reference rate must be stated in writing, and must be agreed upon by the parties.

Frilou v Aegis (2016; Interest)

Lastly, we agree with the appellate court's imposition of legal interest of twelve percent (12%) from the date of
extra-judicial demand, the unpaid deliveries being a forbearance of money and there being no stipulation between
the parties on the payment of interest. However, we divide the applicable legal interest into two periods: (1) where
the prevailing rate of interest on 11 April 2005 to 30 June 2013 is twelve percent (12%) per annum before the
advent of Bangko Sentral ng Pilipinas Circular No. 799, Series of 2013 and (2) the reduced rate of interest of six
percent (6%) per annum from 1 July 2013 to date when this Decision becomes final and executory.

Sps Tan v China Banking (2016; Application of Payment)

Obligations are extinguished, among others, by payment or performance. Payment means not only the delivery of
money but also the performance, in any other manner, of an obligation. “A debt shall not be understood to have
been paid unless the thing or service in which the obligation consists has been completely delivered or rendered, as
the case may be.” In contracts of loan, the debtor is expected to deliver the sum of money due the creditor.

Application of payment: “He who has various debts of the same kind in favor of one and the same creditor, may
declare at the time of making the payment, to which of them the same must be applied. Unless the parties so
stipulate, or when the application of payment is made by the party for whose benefit the term has been constituted,
application shall not be made as to debts which are not yet due.”

The right of the debtor to apply payment is merely directory in nature and must be promptly exercised, lest, such
right passes to the creditor. In other words, waivable.

In the event that the debtor failed to exercise the right to elect the creditor may choose to which among the debts
the payment is applied as in the case at bar. After the sale of the foreclosed properties at the public auction, Lorenze
Realty failed to manifest its preference as to which among the obligations that were all due the proceeds of the sale
should be applied. Its silence can be construed as acquiescence to China Bank’s application of the payment first to
the interest and penalties and the remainder to the principal which is sanctioned by Civil Code: “If the debt produces
interest, payment of the principal shall not be deemed to have been made until the interests have been covered.”

PNB v Chan (2017; Consignation)

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. It generally requires a prior tender of payment. Under Article 1256 of the Civil
Code, consignation alone is sufficient even without a prior tender of payment a) when the creditor is absent or
unknown or does not appear at the place of payment; b) when he is incapacitated to receive the payment at the time
it is due; c) when, without just cause, he refuses to give a receipt; d) when two or more persons claim the same right
to collect; and e) when the title of the obligation has been lost.

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 For consignation to be valid, the debtor must comply with the following requirements under the law:
1. there was a debt due;
2. valid prior tender of payment, unless the consignation was made because of some legal cause provided in
Article 1256;
3. previous notice of the consignation has been given to the persons interested in the performance of the
obligation;
4. the amount or thing due was placed at the disposal of the court; and,
5. after the consignation had been made, the persons interested were notified thereof

Failure in any of the requirements is enough ground to render a consignation ineffective.

In the present case, the records show that: first, PNB had the obligation to pay respondent a monthly rental of
₱l16,788.44, amounting to ₱l,348,643.92, from January 16, 2005 to March 23, 2006; second, PNB had the option
to pay the monthly rentals to respondent or to apply the same as payment for respondent's loan with the bank, but
PNB did neither; third, PNB instead opened a non-drawing savings account at its Paco Branch under Account No.
202- 565327-3, where it deposited the subject monthly rentals, due to the claim of Chua of the same right to collect
the rent; and fourth, PNB consigned the amount of Pl,348,643.92 with the Office of the Clerk of Court of the MeTC
of Manila on May 31, 2006.

Note that PNB's deposit of the subject monthly rentals in a non-drawing savings account is not the consignation
contemplated by law, precisely because it does not place the same at the disposal of the court. Consignation is
necessarily judicial; it is not allowed in venues other than the courts. Consequently, PNB's obligation to pay rent
for the period of January 16, 2005 up to March 23, 2006 remained subsisting, as the deposit of the rentals cannot
be considered to have the effect of payment.

California v Advanced Technology System (2017; Legal Compensation)

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

(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of
the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind,
and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third persons and
communicated in due time to the debtor.

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

CMCI has not presented any credible proof, or even just an exact computation, of the supposed debt of PPPC. It
claims that the mobilization fund that it had advanced to PPPC was in the amount of ₱4 million. Yet, Felicisima's
proposal to conduct offsetting in her letter dated 30 July 2001 pertained to a ₱3.2 million debt of PPPC to CMCI.
Meanwhile, in its Answer to ATSI's complaint, CMCI sought to set off its unpaid rentals against the alleged ₱10
million debt of PPPC. The uncertainty in the supposed debt of PPPC to CMCI negates the latter's invocation of
legal compensation as justification for its non-payment of the rentals for the subject Prodopak machine.

Marphil v Allied Bank (2016; Legal Compensation)

In the case of Associated Bank v. Tan, we upheld the right of a collecting bank to debit a client's account for the
value of a dishonored check it previously credited by virtue of the principle of legal compensation. Since the
relationship between banks and depositors has been held to be that of creditor and debtor in a simple loan, legal
compensation may take place when the conditions in Article 1279 of the Civil Code are present: (1) that each one

M.Q. Tuazon
 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; and
(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 this case, when Allied Bank credited the amount of P1,913,763.45 to Marphil's account, it became the debtor of
Marphil. However, once Nanyang Bank dishonored the export documents and draft for L/C No. 21970, Marphil
became the debtor of Allied Bank for the amount by virtue of its obligation to reimburse the bank under the Letter
Agreement. This obligation consisting of sum of money became demandable upon notice of the dishonor by
Nanyang Bank. Thus, legal compensation may take place between the two debts.

In Associated Bank, we nevertheless emphasized that while the bank has the right to set off, the exercise of such
right must be consistent with the required degree of diligence from banks, i.e., highest degree of care. Thus, the
question that needs to be resolved now is whether Allied Bank properly exercised its right to set off.

We rule that Allied Bank properly exercised its right to set off. Firstly, having signed the Letter Agreement, Marphil
expressly undertook that in case of dishonor of the draft for the letter of the credit, it will refund to Allied Bank
whatever the latter has credited in its favor. This places Marphil on its guard that the dishonor will create an
obligation to refund the amount credited. Secondly, prior to debiting the amount, Allied Bank informed Marphil
twice of Nanyang Bank's refusal to honor the tender of documents on L/C No. 21970. Thirdly, it immediately
informed Marphil that it was debiting the amount of the dishonored draft from the credit line.

Most importantly, the debiting of the account was not the proximate cause of the loss to Marphil brought about by
the reshipment of goods back to Manila. The proximate cause of the loss is the subsequent dishonor of the
documents by Nanyang Bank, which came before the debiting of the account. The P1,913,763.45 subject of the
debit memo was already the costs incurred in relation to the financing and shipping of the goods to Hong Kong,
and do not refer to the loss incurred when the goods were shipped back to Manila. Thus, the debiting of Marphil's
account did not result in additional losses for Marphil.

Paradigm v BPI (2017; Novation)

No novation took place in this case. 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. It “consists in substituting a new debtor in the place of the original one, [which] may be made
even without the knowledge or against the will of the latter, but not without the consent of the creditor.” However,
while the consent of the creditor need not be expressed but may be inferred from the creditor's clear and
unmistakable acts, to change the person of the debtor, the former debtor must be expressly released from the
obligation, and the third person or new debtor must assume the former's place in the contractual relation.

The well-settled rule is that novation is never presumed. Novation will not be allowed unless it is clearly shown by
express agreement, or by acts of equal import. Thus, to effect an objective novation it is imperative that the new
obligation expressly declare that the old obligation is thereby extinguished, or that the new obligation be on every
point incompatible with the new one. 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. There is no novation without such release as the third person who has
assumed the debtor's obligation becomes merely a co-debtor or surety.

In the present case, PDCP failed to prove by preponderance of evidence that Sengkon was already expressly
released from the obligation and that STI assumed the former’s obligation. Again, as correctly pointed out by the
CA, the Deed of Assumption which was supposed to embody STI's assumption of all the obligations of Sengkon
under the line, including but not necessarily limited to the repayment of all the outstanding availments thereon, as
well as all applicable interests and other charges, was not signed by the parties.

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 Based on the fact that the non-execution of the Deed of Assumption by Sengkon, STI and FEBTC rendered the
existence of novation doubtful because of lack of clear proof that Sengkon is being expressly released from its
obligation; that STI was already assuming Sengkon's former place in the contractual relation; and that FEBTC is
giving its conformity to this arrangement. While FEBTC indeed approved Sengkon’s request for the “change in
account name” from Sengkon to STI, such mere change in account name alone does not meet the required degree
of certainty to establish novation absent any other circumstance to bolster said conclusion.

Contracts

Quesada v Bonanza (2016; Mutuality)

A contracting party cannot unilaterally terminate a contract unless otherwise stipulated beforehand. A contract
binds both contracting parties; its validity cannot be left to the will of one of them.

Bonanza’s argues that by constructing concrete structures on the property without Bonanza’s permission, Efren
effectively forestalled the sale of the property, constructively fulfilling the resolutory condition of the lease.
However, this argument is without basis. There is no logical connection between the construction of concrete
structures on the property and Bonanza’s inability to sell it. Moreover, the lease contract itself specifically
recognized the lessee’s right to construct on the property. Furthermore, Efren’s statutory obligations as a lessee: To
use the thing leased as a diligent father of a family, devoting it to the use stipulated; and in the absence of stipulation,
to that which may be inferred from the nature of the thing leased, according to the custom of the place. Bonanza
failed to show how any of Efren’s constructions go against the permissible use of the property based on its nature.
Accordingly, Bonanza had no basis to unilaterally terminate the lease without offending the mutuality of contracts.

ALSO: The period of the lease had not yet expired.

There is also no merit in Bonanza’s contention that the contract which was “effective July 1, 2003 and until such
time that it is replaced or amended by another resolution” had expired because the Board of Directors had already
issued a board resolution terminating the lease. Bonanza interprets the term “resolution” to mean a board resolution
from Bonanza. This erroneous interpretation is offensive to the mutuality and obligatory force of contracts.

The contract actually states: “This agreement shall be effective July 1, 2003 and until such time that it is replaced
or amended by another resolution agreement.” Bonanza has conveniently omitted the word “agreement” whenever
it cited the effectivity of the contract. A lease contract is onerous in character containing reciprocal obligations; any
ambiguities in its terms are interpreted in favor of the greatest reciprocity of interests.

Sps Limso v PNB (2016; Mutuality)

There is no mutuality of contract when the interest rate in a loan agreement is set at the sole discretion of one party.
Nor is there any mutuality when there is no reasonable means by which the other party can determine the applicable
interest rate. These types of interest rates stipulated in the loan agreement are null and void. However, the nullity
of the stipulated interest rate does not automatically nullify the provision requiring payment of interest. Certainly,
it does not nullify the obligation to pay the principal loan obligation.

PNOC v Keppel (2016; Option contract)

An option contract must be supported by a separate consideration that is either clearly specified as such in the
contract or duly proven by the offeree/promisee.

OPTION CONTRACT: An accepted promise to buy or to sell a determinate thing for a price certain is binding
upon the promissor if the promise is supported by a consideration distinct from the price. An option contract is a

M.Q. Tuazon
 contract where one person (the offeror/promissor) grants to another person (the offeree/promisee) the right or
privilege to buy (or to sell) a determinate thing at a fixed price, if he or she chooses to do so within an agreed period.

As a contract, it must necessarily have the essential elements of a contract. Although an option contract is deemed
a preparatory contract to the principal contract of sale, it is separate and distinct therefrom.

In an option contract, the subject matter is the right or privilege to buy/sell a determinate thing for a price certain,
while in a sales contract, the subject matter is the determinate thing itself. The consent in an option contract is the
acceptance by the offeree of the offerer’s promise to sell/buy the determinate thing, i.e., the offeree agrees to hold
the right or privilege to buy/sell within a specified period. This acceptance is different from the acceptance of the
offer itself whereby the offeree asserts his or her right or privilege to buy, which constitutes as his or her consent
to the sales contract. Consideration in option contract does not need to be monetary and may be anything of value.

In the present case, PNOC claims the option contract is void for want of consideration distinct from the purchase
price for the land. Keppel counters that a separate consideration is not necessary to support its option to buy because
the option is one of the stipulations of the lease contract. It claims that a separate consideration is required only
when an option to buy is embodied in an independent contract. Keppel is incorrect.

The mere inclusion of an option contract in a reciprocal lease contract does not automatically provide it with the
requisite separate consideration for its validity. The reciprocal contract should be closely scrutinized and assessed
whether it contains additional concessions that the parties intended to constitute as a consideration separate from
the purchase price.

In the present case, paragraph 5 of the agreement provided that should Keppel exercise its option to buy, Lusteveco
could opt to convert the purchase price into equity in Keppel. Is this sufficient consideration? NO. As earlier
mentioned, the consideration for an option contract does not need to be monetary and may be anything of value.
However, when the consideration is not monetary, the consideration must be clearly specified as such in the option
contract or clause. When the written agreement itself does not state the consideration for the option contract, the
offeree or promisee bears the burden of proving the existence of a separate consideration for the option.

In the present case, none of the above rules were observed. We find nothing in paragraph 5 of the Agreement
indicating that the grant to Lusteveco of the option to convert the purchase price for Keppel shares was intended
by the parties as the consideration for Keppel’s option to buy the land; Keppel itself as the offeree presented no
evidence to support this finding.

An option, though unsupported by a separate consideration, remains an offer that, if duly accepted, generates into
a contract to sell where the parties’ respective obligations become reciprocally demandable.

The absence of a consideration supporting the option contract, however, does not invalidate an offer to buy (or to
sell). An option unsupported by a separate consideration stands as an unaccepted offer to buy (or to sell) which,
when properly accepted, ripens into a contract to sell.

Thus, when an offer is supported by a separate consideration, a valid option contract exists, i.e., there is a contracted
offer which the offerer cannot withdraw from without incurring liability in damages. On the other hand, when the
offer is not supported by a separate consideration, the offer stands but, in the absence of a binding contract, the
offeror may withdraw it any time. In either case, once the acceptance of the offer is duly communicated before the
withdrawal of the offer, a bilateral contract to buy and sell is generated which, in accordance with the first paragraph
of Article 1479 of the Civil Code, becomes reciprocally demandable (Sanchez v Rigos).

Paradigm v BPI (2017; Voidable Contracts)

Under Article 1344 of the Civil Code, the fraud must be serious to annul or avoid a contract and render it voidable.
This fraud or deception must be so material that had it not been present, the defrauded party would not have entered
into the contract.

M.Q. Tuazon
 In the present case, even if FEBTC represented that it will not register one of the REMs, PDCP cannot disown the
REMs it executed after FEBTC reneged on its alleged promise. As earlier stated, with or without the registration
of the REMs, as between the parties thereto, the same is valid and PDCP is already bound thereby. The signature
of PDCP’s President coupled with its act of surrendering the titles to the four properties to FEBTC is proof that no
fraud existed in the execution of the contract. Arguably at most, FEBTC's act of registering the mortgage only
amounted to dolo incidente which is not the kind of fraud that avoids a contract

Univ. of Mindanao v BSP (2016; Unauthorized Contracts)

Contracts entered into in another's name without authority or valid legal representation are generally unenforceable
unless ratified. The unenforceable status of contracts entered into by an unauthorized person on behalf of another
is based on the basic principle that contracts must be consented to by both parties. There is no contract without
meeting of the minds as to the subject matter and cause of the obligations created under the contract. Consent of a
person cannot be presumed from representations of another, especially if obligations will be incurred as a result.
Thus, authority is required to make actions made on his or her behalf binding on a person. Contracts entered into
by persons without authority from the corporation shall generally be considered ultra vires and unenforceable
against the corporation.

Not having the proper board resolution to authorize Saturnino Petalcorin to execute the mortgage contracts for
petitioner, the contracts he executed are unenforceable against petitioner. They cannot bind petitioner.

Ratification is a voluntary and deliberate confirmation or adoption of a previous unauthorized act. No act by
petitioner can be interpreted as anything close to ratification. It was not shown that it issued a resolution ratifying
the execution of the mortgage contracts. It was not shown that it received proceeds of the loans secured by the
mortgage contracts. There was also no showing that it received any consideration for the execution of the mortgage
contracts. It even appears that petitioner was unaware of the mortgage contracts until respondent notified it of its
desire to foreclose the mortgaged properties. Ratification must be knowingly and voluntarily done.

Heirs of Natividad v Trinidad (2016; Statute of Frauds)

In relation to petitioners’ contention that the subject verbal agreement actually existed, they reiterate their
contention that the conveyance of the subject properties in their favor is not covered by the Statute of Frauds because
they claim that respondents’ execution of the Extrajudicial Settlement Among Heirs constitutes partial execution
of their alleged agreement. Court does NOT agree.

Suffice it to say that there is no partial execution of any contract, whatsoever, because petitioners failed to prove,
in the first place, that there was a verbal agreement that was entered into. Even granting that such an agreement
existed, the CA did not commit any error in ruling that the assignment of the shares of Sergio in the subject
properties in petitioners’ favor as payment of Sergio's obligation cannot be enforced if there is no written contract
to such effect. Under the Statute of Frauds, an agreement to convey real properties shall be unenforceable by action
in the absence of a written note or memorandum thereof and subscribed by the party charged or by his agent.

The pieces of evidence presented by petitioners, consisting of respondents’ acknowledgment of Sergio's loan
obligations with DBP as embodied in the Extrajudicial Settlement Among Heirs, as well as the cash voucher which
allegedly represents payment for taxes and transfer of title in petitioners’ name do not serve as written notes or
memoranda of the alleged verbal agreement.

Fullido v Grilli (2016; In pari delicto)

In Pari Delicto Doctrine is not applicable in this case.

GR: Neither courts of law nor equity will interpose to grant relief to the parties, when an illegal agreement has been
made, and both parties stand in pari delicto.

M.Q. Tuazon
 EXC: The application of the doctrine of in pari delicto is not always rigid. An accepted exception arises when its
application contravenes well-established public policy. Thus, whenever public policy is advanced by either party,
they may be allowed to sue for relief against the transaction.

In the present case, both Grilli and Fullido were undoubtedly parties to a void contract. Fullido, however, was not
barred from filing the present petition before the Court because the matters at hand involved an issue of public
policy, specifically the Constitutional prohibition against land ownership by aliens. The said constitutional
provision would be defeated and its continued violation sanctioned if the lands continue to remain in the hands of
a foreigner. Thus, the doctrine of in pari delicto shall not be applicable in this case.

Ranara v Delos Angeles (2016; In pari delicto)

Under the in pari delicto doctrine, the parties to a controversy are equally culpable or guilty, they shall have no
action against each other, and it shall leave the parties where it finds them.

Article 1411. When the nullity proceeds from the illegality of the cause or object of the contract, and the act
constitutes a criminal offense, both parties being in pari delicto, they shall have no action against each other, and
both shall be prosecuted.

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

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

The case at bench does not speak of an illegal cause of contract constituting a criminal offense. Neither can it be
said that Article 1412 finds application although such provision, as well as contracts which are null and void ab
initio for violating the mandatory provision of the law on legitimes.

Article 1412 speaks of the rights and obligations of the parties to the contract with an illegal cause or object which
does not constitute a criminal offense. It applies to contracts which are void for illegality of subject matter and not
to contracts rendered void for being simulated, or those in which the parties do not really intend to be bound thereby.
Specifically, in pari delicto situations involve the parties in one contract who are both at fault, such that neither can
recover nor have any action against each other.

Here, there is neither an illegal cause nor unlawful cause which would necessitate the application of Articles 1411
and 1412 of the Civil Code. The petitioner is mistaken in the application of the doctrine of in pari delicto.

M.Q. Tuazon