CONTRACTS - ObliCon

SANTOALLA, STEPHANIE M.
MANLAPIG, ENA ELOISA B. COMPILED CASE DIGESTS (Articles 1262-1304 and Contracts)
ARTICLES 1262-1304
LOSS IN OBLIGATIONS, IMPOSSIBILITY, DIFFICULTY OF PERFORMANCE
GAISANO CAGAYAN, INC. vs. INSURANCE COMPANY OF NORTH AMERICA

G.R. No. 147839, June 8, 2006
FACTS:
Intercapitol Marketing Corporation (IMC) is the maker of Wrangler Blue Jeans. Levi Strauss
(Phils.) Inc. (LSPI) is the local distributor of products bearing trademarks owned by Levi Strauss &
Co.. IMC and LSPI separately obtained from respondent fire insurance policies with book debt
endorsements. The insurance policies provide for coverage on "book debts in connection with
ready-made clothing materials which have been sold or delivered to various customers and dealers
of the Insured anywhere in the Philippines." The policies defined book debts as the "unpaid account
still appearing in the Book of Account of the Insured 45 days after the time of the loss covered
under this Policy." Petitioner is a customer and dealer of the products of IMC and LSPI. On February
25, 1991, the Gaisano Superstore Complex in Cagayan de Oro City, owned by petitioner, was
consumed by fire. Included in the items lost or destroyed in the fire were stocks of ready-made
clothing materials sold and delivered by IMC and LSPI.
ISSUE:
Whether or not the insurance in the instant case was one over credit hence recovery is not
allowed in case of fire loss.
HELD:
Indeed, when the terms of the agreement are clear and explicit that they do not justify an
attempt to read into it any alleged intention of the parties, the terms are to be understood literally
just as they appear on the face of the contract. Thus, what were insured against were the accounts
of IMC and LSPI with petitioner which remained unpaid 45 days after the loss through fire, and not
the loss or destruction of the goods delivered. Accordingly, petitioner's obligation is for the
payment of money. As correctly stated by the CA, where the obligation consists in the payment of
money, the failure of the debtor to make the payment even by reason of a fortuitous event shall not
relieve him of his liability. The rationale for this is that the rule that an obligor should be held
exempt from liability when the loss occurs thru a fortuitous event only holds true when the
obligation consists in the delivery of a determinate thing and there is no stipulation holding him
liable even in case of fortuitous event. It does not apply when the obligation is pecuniary in nature.
Under Article 1263 of the Civil Code, "[i]n an obligation to deliver a generic thing, the loss or
destruction of anything of the same kind does not extinguish the obligation." This rule is based on
the principle that the genus of a thing can never perish. Genus nunquan perit. An obligation to pay
money is generic; therefore, it is not excused by fortuitous loss of any specific property of the
debtor.
Page 1 of 84
JESUS V. OCCENA and EFIGENIA C. OCCENA, vs. HON. RAMON V. JABSON, Presiding Judge of
the Court Of First Instance of Rizal, Branch XXVI; COURT OF APPEALS and TROPICAL HOMES,
INC.,
G.R. No. L- 44349 October 29, 1976
FACTS:
The court reverses the Court of Appeals appealed resolution. The Civil Code 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 fix a different sharing ratio from that contractually stipulated with
the force of law between the parties. Private respondent’s complaint for modification of the
contract manifestly has no basis in law and must therefore be dismissed for failure to state a cause
of action.
On February 25, 1975 private respondent Tropical Homes, Inc. filed a complaint for
modification of the terms and conditions of its subdivision contract with petitioners, making the
following allegations: “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…”.
Petitioners moved to dismiss the complaint principally for lack of cause of action. Respondent court
in its questioned resolution of June 28, 1976 set aside the preliminary injunction previously issued
by it and dismissed petition on the ground that under 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.”
ISSUE:
Whether or not the court is right in reversing its decision?
HELD:
Yes, for failure to state a sufficient cause of action.
NAGA TELEPHONE CO., INC. (NATELCO) AND LUCIANO M. MAGGAY, vs. THE COURT OF
APPEALS AND CAMARINES SUR II ELECTRIC COOPERATIVE, INC. (CASURECO II),
G.R. No. 107112, February 24, 1994
FACTS:
Petitioner Naga Telephone Co., Inc. (NATELCO) is a telephone company rendering local as
well as long distance service in Naga City while private respondent Camarines Sur II Electric
Cooperative, Inc. (CASURECO II) is a private corporation established for the purpose of operating an
electric power service in the same city.
Page 2 of 84
On November 1, 1977, the parties entered into a contract for the use by petitioners in the
operation of its telephone service the electric light posts of private respondent in Naga City. In
consideration therefor, petitioners agreed to install, free of charge, ten (10) telephone connections
for the use by private respondent. After the contract had been enforced for over ten (10) years,
private respondent filed with the Regional Trial Court against petitioners for reformation of the
contract with damages, on the ground that it is too one-sided in favor of petitioners; that it is not in
conformity with the guidelines of the National Electrification Administration (NEA); that after
eleven (11) years of petitioners' use of the posts, the telephone cables strung by them thereon have
become much heavier with the increase in the volume of their subscribers; that a post now costs as
much as P2,630.00; so that justice and equity demand that the contract be reformed to abolish the
inequities thereon.
As second cause of action, private respondent alleged that starting with the year 1981,
petitioners have used 319 posts outside Naga City, without any contract with it; that at the rate of
P10.00 per post, petitioners should pay private respondent for the use thereof the total amount of
P267,960.00 from 1981 up to the filing of its complaint; and that petitioners had refused to pay
private respondent said amount despite demands. And as third cause of action, private respondent
complained about the poor servicing by petitioners.
The trial court ruled, as regards private respondent’s first cause of action, that the contract
should be reformed by ordering petitioners to pay private respondent compensation for the use of
their posts in Naga City, while private respondent should also be ordered to pay the monthly bills
for the use of the telephones also in Naga City. And taking into consideration the guidelines of the
NEA on the rental of posts by telephone companies and the increase in the costs of such posts, the
trial court opined that a monthly rental of P10.00 for each post of private respondent used by
petitioners is reasonable, which rental it should pay from the filing of the complaint in this case on
January 2, 1989. And in like manner, private respondent should pay petitioners from the same date
its monthly bills for the use and transfers of its telephones in Naga City at the same rate that the
public are paying.
On private respondent's second cause of action, the trial court found that the contract does
not mention anything about the use by petitioners of private respondent's posts outside Naga City.
Therefore, the trial court held that for reason of equity, the contract should be reformed by
including therein the provision that for the use of private respondent's posts outside Naga City,
petitioners should pay a monthly rental of P10.00 per post, the payment to start on the date this
case was filed, or on January 2, 1989, and private respondent should also pay petitioners the
monthly dues on its telephone connections located outside Naga City beginning January, 1989. And
with respect to private respondent's third cause of action, the trial court found the claim not
sufficiently proved.
The Court of Appeals affirmed the decision of the trial court, but based on different grounds
to wit: (1) that Article 1267 of the New Civil Code is applicable and (2) that the contract was subject
to a potestative condition which rendered said condition void.
ISSUE:
Is Article 1267 applicable?
Page 3 of 84
HELD:
Yes. ARTICLE 1267, EVEN THOUGH NEVER RAISED BEFORE, IS APPLICABLE. ARTICLE
1267. The allegations in private respondent's complaint and the evidence it has presented
sufficiently made out a cause of action under Article 1267. The Court, therefore, release the parties
from their correlative obligations under the contract. However, the disposition of the present
controversy does not end here. The Court has to take into account the possible consequences of
merely releasing the parties therefrom: petitioners will remove the telephone wires/cables in the
posts of private respondent, resulting in disruption of their essential service to the public; while
private respondent, in consonance with the contract will return all the telephone units to
petitioners, causing prejudice to its business.
PHILIPPINE NATIONAL CONSTRUCTION CORPORATION vs. COURT OF APPEALS, MA. TERESA

S. RAYMUNDO-ABARRA, JOSE S. RAYMUNDO, ANTONIO S. RAYMUNDO, RENE S. RAYMUNDO,
and AMADOR S. RAYMUNDO
G.R. No. 116896. May 5, 1997
FACTS:
Petitioner (lessee) and respondents (lessor) executed alease contract on Nov 18 1985 on a
parcel of land ownedby respondents. Provisions of contract:
 Lease period of 5 years, commencing on the dateof the issuance of the industrial clearance
by theMinistry of Human Settlements (MHS)
 Monthly rate: P20,000, to be increased yearly by5%, as follows: P21,000 starting on the 2 nd
yr, P22,000 on the 3rd yr, P23,000 on the 4thyr, P24,00 on the 5th yr
 Rent to be paid yearly in advance. First annualrent of P240,000 due and payable upon
executionof the agreement. Succeeding annual rentspayable every 12 months thereafter.
 Leased property shall be used by the lessee asthe site of a rock crushing plant and filed
office,sleeping quarters and canteen/mess hall. Lesseehas the right to erect
structures/improvements necessary or incidental to the latter’s purposes
 Termination of lease: by mutual agreement.Lessee shall vacate the leased property at
itsexpense upon termination/expiration of theperiod of lease without renewalJanuary
7 1986 - petitioner obtained from the MHS aTemporary Use Permit (TPU) for the rock
crushing project,valid for 2 yrs.Respondents requested payment of the first annualpayment
from the petitioners, said to be due upon theexecution of the contract. Petitioners replied
that underthe contract, payment would commence on the date ofthe issuance of industrial
clearance, not the date of thesigning of the contract. It expressed intention to terminate
contract due to “financial, technical difficulties” leading to the cancellation of the rock
crushing project.Respondents refused, insisted on performance/payment.Petitioners
argued that they are only obligated to payP20,000, from Jan 7 (issuance of TPU) until Feb 7
1986(service of Notice of Termination of Contract upon therespondents)Respondents filed
an action for specific performance withdamages against the petitioners. RTC decided in
favor ofrespondents, ordering petitioners to pay P492,000 (two years’ rent) with legal
interest from January 7 1986 until fully paid, P20,000 atty’s fees, costs. CA affirmed.
ISSUE:
Page 4 of 84
Whether or not Article 1266 is applicable.
HELD:
No. Art. 1266 NCC ("The debtor in obligations to do shall also be released when the
prestation becomes legally or physically impossible without the fault of the obligor.") is not
applicable in this case, as it is only applicable to obligations “to do”. The obligation to pay rentals/
deliver the thing in a contract of lease falls within the prestation “to give”, hence, not covered. Also,
the unforeseen event and causes mentioned by petitioner are not the legal or physical
impossibilities contemplated in said article. The principle of rebus sic stantibus is also not
applicable in this case. It is of judicial notice that before PNC Centered into contract with
respondents on Nov 18, 1985, the country experienced political upheavals, turmoils, mass
demonstrations, inflation, et al after the assassination of Senator Aquino. Despite this, PNC
Centered into contract with the respondents. Mere pecuniary inability to fulfill an engagement does
not discharge a contractual obligation, nor does it constitute a defense to an action for specific
performance. The non-materialization of petitioner’s purpose in entering into the contract will also
not invalidate the contract as the motive or particular purpose of a party in entering into a contract
does not affect the validity of its existence - the essential purpose of a contract of lease is the use
or enjoyment of a thing.
VICTOR YAM & YEK SUN LENT vs CA

G.R. NO. 104726
FACTS:
Petitioners Victor Yam and Yek Sun obtained an IGLF loan from respondent Manphil Invest
Corporation in the amount of Php 300,000 with interest. It was secured by chattel mortgage. On
April 2, 1985, respondent was placed under receivership of Central Bank. Petitioners paid on July
31, 1986 which was received by Central Bank. It contained a notation on the voucher that there was
already a full payment of IGLF loan. However, respondent filed a collection case against petitioner
after it failed to pay the remaining balance. Petitioner contended that through respondent’s
president, Carlos Sobrepeñ as, it was agreed to condone or waive the penalties and service charges
as well as a voucher showing the full payment of the petitioners. The trial court rendered a decision
in favor of respondents which was sustained by CA.
ISSUE:
Whether or not there was condonation on petitioner’s loan
HELD: NO.
The appointment of a receiver operates to suspend the authority of a corporation and of its
directors and officers over its property and effects, such authority being reposed in the receiver.
Sobrepeñ as has no authority to condone the debt. The notation on the voucher covering the check
payment that a “full payment of IGLF loan” was made does not bind respondent. It would have been
different if the notated appeared in the receipt issued by the corporation through its receiver,
which would be an admission against interest. Express condonation must comply the forms of
donation. Where the value exceeds Php 5,000, the donation and acceptance must be made in
writing; otherwise, void.
Page 5 of 84
LEGAL COMPENSATION
GAN TION V. COURT OF APPEALS
28 SCRA 235 (1969)
FACTS:
Ong Wan Sieng was a tenant in certain premises owned by Gan Tion. In 1961 the latter filed an
ejectment case against the former, alleging non-payment of rents for August and September of that
year, at P180 a month, or P360 altogether. The defendant denied the allegation and said that the
agreed monthly rental was only P160, which he had offered to but was refused by the plaintiff. The
plaintiff obtained a favorable judgment in the municipal court (of Manila), but upon appeal the
CFI:Reversed the judgment and dismissed the complaint, and ordered the plaintiff to pay the
defendant the sum of P500 as attorney's fees. On October 10, 1963 Gan Tion served notice on Ong
Wan Sieng that he was increasing the rent to P180 a month, effective November 1st, and at the same
time demanded the rents in arrears at the old rate in the aggregate amount of P4,320.00,
corresponding to a period from August 1961 to October 1963.
ISSUE:
The sole issue here is whether or not there has been legal compensation between petitioner
Gan Tion and respondent Ong Wan Sieng.
HELD:
No. the requisites of legal compensation, namely, that the parties must be creditors and
debtors of each other in their own right (Art. 1278, Civil Code) and that each one of them must be
bound principally and at the same time be a principal creditor of the other (Art. 1279), are not
present in the instant case, since the real creditor with respect to the sum of P500 was the
defendant's counsel. It is the litigant, not his counsel, who is the judgment creditor and who may
enforce the judgment by execution. Such credit, therefore, may properly be the subject of legal
compensation. Quite obviously it would be unjust to compel petitioner to pay his debt for P500
when admittedly his creditor is indebted to him for more than P4,000
BANK OF THE PHILIPPINE ISLANDS V. REYES

255 SCRA 571
FACTS:
Private respondent opened a Savings Account at petitioner Bank of the Philippine Islands
(BPI) Cubao, Shopping Center Branch – It is (1) account with his wife. He also held a Savings
Account (2) with his grandmother. He regularly deposited in this account the U.S. Treasury
Warrants payable to the order of her grandmother as her monthly pension. Her grandmother died
on December 28, 1989 without the knowledge of the U.S. Treasury Department. She was still sent
U.S. Treasury Warrant dated January 1, 1990. On January 4, 1990, private respondent deposited the
said U.S. treasury check of Fernandez in Savings Account No. 3 185-0128-82. The. U.S. Veterans
Administration Office in Manila conditionally cleared the check. The check was then sent to the
United States for further clearing. Two months after, private respondent closed the Savings Account
with her grandmother and transferred its funds amounting to P13,1112.91 to the Savings Account
with his wife. The U.S. treasury Warrant was dishonored as it was discovered that Fernandez died
three (3) days prior to its issuance. The U.S. department of Treasury requested petitioner bank for a
Page 6 of 84
refund. For the first time petitioner bank came to know of the death of Fernandez. Private
respondent received a telegram from petitioner bank requesting him to contact the manager or
assistant manager of the bank. When he called up the bank, he was informed that the treasury
check was the subject of a claim by Citibank, correspondent of petitioner bank. He verbally
authorized them to debit from his other joint account of P10,556.00 from private respondents
Savings Account with his wife. Private respondent with his lawyer visited the petitioner bank and
the refund documents were shown to them. Surprisingly, private respondent demanded from
petitioner bank restitution of the debited amount. He claimed that because of the debit, he failed to
withdraw his money when he needed them.
ISSUE:
Whether or not there was legal compensation in the present case.
HELD:
No. The respondent court erred when it f ailed to rule that legal compensation is proper.
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 join account. The debts involved consist of a sum of money. They are due,
liquidated, and demandable. They are not claimed by a third person.
PHILIPPINE NATIONAL BANK V. SAPPHIRE SHIPPING

259 SCRA 174
FACTS:
A local bank, while acting as local correspondent bank, intercepted funds being coursed
through it by its foreign counterpart for transmittal and deposit to the account of an individual with
another local bank, applied the said funds to certain obligations owed to it by the said individual.
PNB appropriated the amounts of $2,627.11 and P 34,340.38 from remittances of Ramon Lapez’s
principals abroad. There were two instances in the past, one in November 1980 and the other in
January 1981 when Lapez’s account was doubly credited with the equivalents of $5, 679.23 and $5,
885. 38, respectively, which amounted to an aggregate amount of P 87, 380.44. PNB claims,
however, that plaintiff’s claim has prescribed. PNB made a demand upon Lapez for refund of the
double or duplicated credits erroneously made on his account. The deduction of P34,340.38 was
made by the PNB with the knowledge and consent of Lapez, who was issued a receipt dated
February 18, 1987. There is no question that the two erroneous double payments made to Lapez’s
accounts in 1980 and 1981 created an extra-contractual obligation on the part of Lapez in favor of
the PNB, under the principle of solution indebti.
ISSUE:
Page 7 of 84
Whether or not PNB was legally justified in making the compensation of set-off against the
two remittances coursed through it in favor of private respondent to recover on the double or
duplicated credits.
HELD:
Yes. the Court believes that insofar as the amount of P34,340.38 is concerned, all the
requirements of Art. 1279 of the Civil Code are present, and the said amount may properly be the
subject of compensation or set-off. And since all the requisites of Art. 1279 of the Civil Code are
present (insofar as the amount of P34,392.38 is concerned), compensation takes place by operation
of law (Art. 1286, Ibid.), albeit only partial with respect to plaintiff's indebtedness of P7,380.44
CKH Industrial Development v. Court of Appeals

272 SCRA 333
FACTS:
Cheng Kim Heng (Cheng), an immigrant of Chinese descent, was the owner of CKH, a
corporation established under Philippine law. CKH corporation owns two parce of land located in
Karuhatan, Valenzuela, and covered by TCT Nos, 8710 and 8711 in Caloocan City. Cheng Kim Heng
was married to Wah, and they had three children Kei, Choi, and Yam. After Cheng immigrated to the
Philippines he married Rubi Saw. Cheng brought his first family to the Philippines and they became
Filipino Citizens. Heng died in 1984. Upon Cheng’s death, control over the corporation CKH was
transferred to Rubi Saw, Cheng’s second wife. On may 9, 1988 Rubi Saw executed a Deed of
Abosolute Sale wherevy Rubi Saw, representing CKH corporation agreed to sell the subject
properties to Century- Well, a corporation owned in part by Lourdes Chong( the wife of Cheng’s son
Kei), Kei, and Choi. Both vendor and vendee agreed that payment would be in a form of manager’s
check. Nevertheless, a certain Uy Chi Kim, representing the vendees managed to persuade Rubi to
sign the Deed of Absolute Sale in consideration of a personal check and P 20,000 cash. He assured
Rubi that there was no cause for her to worry as he was certain he would have the entire amount
ready by the next day when the banks would be open. Rubi in turn surrendered the TCTs to Chong.
The pertinent portions of the Deed of Sale are hereby reproduced:
Uy Chi Kim, on the other hand, answered on his behalf, that his only participation in the transaction
was as a mediator, he being one of the closest friends of Cheng Kim Heng
After trial, the RTC rendered its Decision finding that the annulment of the Deed of Absolute Sale
was merited, as there was no payment of the stipulated consideration for the sale of the real
properties.
Court of Appeals reversed the findings and pronouncements of the trial court and found that there
was indeed payment of the purchase price, partially in cash for P100,000.00 and partially by
compensation by off-setting the debt of Cheng Kim Heng to his sons Choi and Kei for P500,000.00
and P200,000.00 respectively, against the remainder of the stipulated price. Such mode of payment
is recognized under Article 1249 of the Civil Code.
ISSUES:
Page 8 of 84
Whether or not there is a valid compensation.
HELD:
In the instant case, there can be no valid compensation of the purchase price with the
obligations of Cheng Kim Heng reflected in the promissory notes, for the reason that CKH and
Century-Well the principal contracting parties, are not mutually bound as creditors and debtors in
their own name. A close scrutiny of the promissory notes does not indicate the late Cheng, as then
president of CKH, acknowledging any indebtedness to Century-Well. As worded, the promissory
notes reveal CKH’s indebtedness to Choi and Kei.
MIRASOL V. COURT OF APPEALS

351 SCRA 44
FACTS:
The Mirasols are sugarland owners and planters. Philippine National Bank (PNB) financed
the Mirasols' sugar production venture FROM 1973-1975 under a crop loan financing scheme. The
Mirasols signed Credit Agreements, a Chattel Mortgage on Standing Crops, and a Real Estate
Mortgage in favor of PNB. The Chattel Mortgage empowered PNB to negotiate and sell the latter's
sugar and to apply the proceeds to the payment of their obligations to it.
President Marcos issued PD 579 in November, 1974 authorizing Philippine Exchange Co., Inc.
(PHILEX) to purchase sugar allocated for export and authorized PNB to finance PHILEX's
purchases. The decree directed that whatever profit PHILEX might realize was to be remitted to the
government. Believing that the proceeds were more than enough to pay their obligations,
petitioners asked PNB for an accounting of the proceeds which it ignored. Petitioners continued to
avail of other loans from PNB and to make unfunded withdrawals from their accounts with said
bank. PNB asked petitioners to settle their due and demandable accounts. As a result, petitioners,
conveyed to PNB real properties by way of dacion en pago still leaving an unpaid amount. PNB
proceeded to extrajudicially foreclose the mortgaged properties. Petitioners continued to ask PNB
to account for the proceeds, insisting that said proceeds, if properly liquidated, could offset their
outstanding obligations. PNB remained adamant in its stance that under P.D. No. 579, there was
nothing to account since under said law, all earnings from the export sales of sugar pertained to the
National Government.
On August 9, 1979, the Mirasols filed a suit for accounting, specific performance, and damages
against PNB.
ISSUE:
Whether or not compensation shall take place.
HELD:
Page 9 of 84
No. Petitioners' argument has no basis in law. For legal compensation to take place, the
requirements set forth in Articles 1278 and 1279 of the Civil Code must be present. In the present
case, set-off or compensation cannot take place between the parties because: First, neither of the
parties are mutually creditors and debtors of each other. Under P.D. No. 579, neither PNB nor
PHILEX could retain any difference claimed by the Mirasols in the price of sugar sold by the two
firms. 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.
ASSOCIATED BANK V. TAN

446 SCRA 282
FACTS:
Respondent Tan is businessman and a regular depositor-creditor of the petitioner,
Associated Bank. Sometime in September 1990, he deposited a postdated check with the petitioner
in the amount of P101,000 issued to him by a certain Willy Cheng from Tarlac. The check was duly
entered in his bank record. Allegedly, upon advice and instruction of petitioner that the P101,000
check was already cleared and backed up by sufficient funds, respondent, on the same date,
withdrew the sum of P240,000 from his account leaving a balance of P57, 793.45 because he has
issued several checks to his business partners. However, his suppliers and business partners went
back to him alleging that the checks he issued bounced for insufficiency of funds. Thereafter,
respondent informed petitioner to take positive steps regarding the matter for he has adequate and
sufficient funds to pay the amount of the subject checks. Nonetheless, petitioner did not bother nor
offer any apology regarding the incident. Respondent Tan filed a complaint for damages on
December 19, 1990, with the RTC against petitioner. The trial court rendered a decision in favor of
respondent and ordered petitioner to pay damages and attorney’s fees.
ISSUE:
Whether or not the petitioner, which is acting as a collecting bank, has the right to debit the
account of its client for a check deposit which was dishonored by the drawee bank
HELD:
No. petitioner failed to show that it had immediately and duly informed respondent of the
debiting of his account. Nonetheless, it argues that the giving of notice was discernible from his act
of depositing P50,000 on October 2, 1990, to augment his account and allow the debiting. This
argument deserves short shrift. First, notice was proper and ought to be expected. By the bank
manager’s account, respondent was considered a "valued client" whose checks had always been
sufficiently funded from 1987 to 1990, until the October imbroglio. Thus, he deserved nothing less
than an official notice of the precarious condition of his account. Second, under the provisions of the
Negotiable Instruments Law regarding the liability of a general endorser and the procedure for a
notice of dishonor, it was incumbent on the bank to give proper notice to respondent. Third,
regarding the deposit of P50,000 made by respondent on October 2, 1990, we fully subscribe to the
CA’s observations that it was not unusual for a well-reputed businessman like him, who "ordinarily
takes note of the amount of money he takes and releases," to immediately deposit money in his
current account to answer for the postdated checks he had issued.
Page 10 of 84
PEREZ V. COURT OF APPEALS

127 SCRA 636
FACTS:
Congeneric Development & Finance Corporation is, or was, a company engaged in “money
market” operations. On May 8, 1974, CONGENERIC issued what was in effect a promissory note in
the amount of P111,973.58 in favor of bearer No. 049, later identified as Ramon Mojica, or an entity
owned by him. That promissory note, denominated hereinafter as Bill 1298, was to mature on
August 6, 1974. On May 15, 1974, CONGENERIC issued another bearer promissory note for the sum
of P208, 666.67, also in favor of Mojica or an entity owned by him. The note, denominated
hereinafter as Bill 1419, was to mature on August 13, 1974. On June 5, 1974, MEVER films, Inc. the
private respondent herein, borrowed P500,000.00 from CONGENERIC, the former issuing in favor
of the latter a negotiable promissory note to mature on August 5, 1974. That note shall hereinafter
be referred to as NCI-0352. What may be stated in connection with the note is that it had no
provision for interest, except that, if not paid on due date, it would be subject to interest at 14% per
annum.
ISSUE:
Whether or not legal compensation was made by respondent.
HELD:
NO. Contracts; Obligations; No legal compensation can take place where the loan instruments
to be set-off are not yet due and demandable.—Since, on the respective dates of maturity, specifically,
August 6, 1974and August 13, 1974, respectively, Ramon C. Mojica was still the holder of those bills, it
can be safely assumed that it was he who had asked for the roll-overs on the said dates. MEVER was
bound by the roll-overs since the assignment to it was made only on September 9, 1974. The
inevitable result of the roll-overs of the principals was that Bill No. 1298 and Bill No. 1419 were not
yet due and demandable as of the date of their assignment by MOJICA to MEVER on September 9,
1974, nor as of October 3, 1974 when MEVER surrendered said Bills to CONGENERIC. As a
consequence, no legal compensation could have taken place because, for it to exist, the two debts,
among other requisites, must be due and demandable.
SILAHIS MARKETING CORP. V. INTERMEDIATE APPELLATE COURT

180 SCRA 21
FACTS:
On various dates in October, November and December, 1975, Gregorio de Leon doing
business under the name and style of Mark Industrial Sales sold and delivered to Silahis Marketing
Page 11 of 84
Corporation, and its president Jose Taylo various items of merchandise covered by several invoices
in the aggregate amount of P22,213.75 payable within thirty (30) days from date of the covering
invoices. Allegedly due to Silahis’ failure to pay its account upon maturity despite repeated
demands, de Leon filed a complaint for the collection of the said accounts including accrued interest
thereon in the amount of P661.03 and attorney’s fees of P5,000.00 plus costs of litigation. The
answer admitted the allegations of the complaint insofar as the invoices were concerned but
presented as affirmative defenses; [a] a debit memo for P22,200.00 as unrealized profit for a
supposed commission that Silahis should have received from de Leon for the sale of sprockets in
the amount of P111,000.00 made directly to Dole Philippines, Incorporated by the latter sometime
in August 1975; and [b] Silahis’ claim that it is entitled to return the stainless steel screen which
was found defective by its client, Borden International, Davao City, and to have the corresponding
amount cancelled from its account with de Leon.
ISSUE:
Whether or not the commissions be regarded as a valid compensation.
HELD:
It must be remembered that compensation takes place when two persons, in their own
right, are creditors and debtors to each other. Article 1279 of the Civil Code provides 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.”
Undoubtedly, petitioner admits the validity of its outstanding accounts with private
respondent in the amount of P22,213.75 as contained in its answer. But whether the private
respondent is liable to pay the petitioner a 20% margin or commission on the subject sale to Dole
Philippines, Inc. is vigorously disputed. This circumstance prevents legal compensation from taking
place. The Court agrees with respondent appellate court that there is no evidence on record from
which it can be inferred that there was an agreement between the petitioner and private
respondent prohibiting the latter from selling directly to Dole Philippines, Incorporated. Definitely,
it cannot be asserted that the debit memo was a contract binding between the parties considering
that the same, as correctly found by the appellate court, was not signed by private respondent nor
was there any mention therein of any commitment by the latter to pay any commission to the
former involving the sale of sprockets to Dole Philippines, Inc. in the amount of P111,000.00.
Indeed, such document can be taken as self-serving with no probative value absent a showing or at
the very least an inference, that the party sought to be bound assented to its contents or showed
conformity thereto.
United Planters Sugar Milling Co., Inc. vs. CA, Philippine National Bank,
583 SCRA 63
FACTS:
Page 12 of 84
Petitioner United Planters Sugar Milling Co. (UPSUMCO) was engaged in the business of
milling sugar. In 1974, as UPSUMCO commenced operations, it obtained a set of loans from
respondent Philippine National Bank (PNB). These loans, referred herein as the "takeoff loans,"
were intended to finance the construction of a sugar milling plant and―operational loans‖ were
oriented towards financing the operations of the Company. The loans are covered by various real
and chattel mortgages. These were soon sold at P450M. As a condition to the loans, UPSUMCO
agreed to "open and/or maintain a deposit account with the [PNB] and the bank is authorized at its
option to apply to the payment of any unpaid obligations of the client any/and all monies, securities
which may be in its hands on deposit.
On 27 February 1987, through a Deed of Transfer, PNB assigned to the Government its
"rights, titles and interests" over UPSUMCO, among several other assets. The Deed of Transfer
acknowledged that said assignment was being undertaken "in compliance with Presidential
Proclamation No. 50." The Government subsequently transferred these "rights, titles and interests"
over UPSUMCO to the respondent Asset and Privatization Trust (APT). Thereafter, APT and
UPSUMCO entered into talks concerning the disposal of UPSUMCO‘s mortgaged assets. The parties
then agreed to an "uncontested or ‗friendly foreclosure‘ of these mortgaged assets, in exchange for
UPSUMCO‘s waiver of its right of redemption." Soon, a Petition for Extrajudicial Foreclosure Sale
dated 28 July 1987 was filed with the Ex-Officio Regional Sheriff, with PNB identified therein as
"Mortgagee" and APT as "Assignee and Transferee of PNB‘s rights, titles and interests." PNB and
APT manifested in the petition their intent to foreclose on the real estate and chattel mortgages
which notably were executed to secure the take-off loans. The foreclosure sale was conducted on 27
August 1987, whereby APT purchased the auctioned properties for P450 Million.
Seven (7) days after the foreclosure sale, or on 3 September 1987, UPSUMCO executed a
Deed of Assignment wherein it assigned to APT its right to redeem the foreclosed properties, in
exchange for or in consideration of APT "condoning any deficiency amount it may be entitled to
recover from the Corporation under the Credit Agreement. On even date, the Board of Directors of
UPSUMCO agreed to a Board Resolution authorizing Joaquin Montenegro, its President, to enter
into the said Deed of Assignment.
ISSUES:
1. W/N the loans condoned include the operational loans.
2. W/N the Deed of Assignment has retroactive effect on date of foreclosure.
3. W/N APT can use compensation even if it‘s not a PRINCIPAL party (it is not PNB were
United Planters has deposits.
HELD:
1. No. Only the takeoff loans because it is what is indicated in the Board Resolution.
2. No. Not explicitly indicated. (parol evidence)
3. Yes. We recognize the concept of conventional compensation, defined as occurring "when
the parties agree to compensate their mutual obligations even if some requisite is lacking, such as
that provided in Article 1282." It is intended to eliminate or overcome obstacles which prevent ipso
jure extinguishment of their obligations. Legal compensation takes place by operation of law when
all the requisites are present, as opposed to conventional compensation which takes place when the
parties agree to compensate their mutual obligations even in the absence of some requisites. The
only requisites of conventional compensation are (1) that each of the parties can dispose of the
credit he seeks to compensate, and (2) that they agree to the mutual extinguishment of their
Page 13 of 84
credits. The right of PNB to set-off payments from UPSUMCO arose out of conventional
compensation rather than legal compensation, even though all of the requisites for legal
compensation were present as between those two parties. The determinative factor is the mutual
agreement between PNB and UPSUMCO to set-off payments. Even without an express agreement
stipulating compensation, PNB and UPSUMCO would have been entitled to set-off of payments, as
the legal requisites for compensation under Article 1279 were present.
LEGAL COMPENSATION:
FUA V. YAP
G.R. NO. L-48797, JULY 30, 1943
FACTS:
The plaintiff-appellee, Fua Cam Lu, obtained in civil case No. 42125 of the Court of First
Instance of Manila a judgement sentencing the defendants-appellants, Yap Fauco and Yap Singco to
pay P1,538.04 with legal interest and costs. By virtue of a writ of execution, a certain parcel of land
belonging to the appellants, assessed at P3,550 and situated in Donsol, Sorsogon was levied upon
the provincial sheriff of Sorsogon who, on November 15, 1933, and made a notice, duly posted in
three conspicuous places in the municipalities of Donsol and Sorsogon and said land would be sold
at public auction on December 12, 1933. Appellants executed a mortgage in favor of the appellee,
wherein it was stipulated that heir obligation under the judgement in civil case was reduced and
was made payable in four installments during the period commencing on February 8, 1934 and
ending on August 8,1935 to secure the payment. As a result of the agreement thus reached by the
parties, the sale of the land did not take place. However, pursuant to an alias writ of execution
issued, the provincial sheriff, without publishing a new notice, sold said land at public auction, to
the appellee. The appellee instituted the present action against the appellants in view of their
refusal to recognize appellee’s title and to vacate the land. The appellants relied on the legal
defenses that their obligation under the judgement was novated by the mortgage executed by them
in favor of the appellee and that the sheriff’s sale was void for lack of necessary publication.
ISSUE:
Whether or not appellants liability has been extinguished
HELD:
Yes. Although said mortgage did not expressly cancel the old obligation, this was impliedly
novated by reason of incompatibility. The appellee however argues that the later agreement merely
extended the time of payment and did not take away his concurrent right to have the judgement
executed. Said judgement cannot be said to have been settled, unless it was extinguished.
MILLAR V. COURT OF APPEALS

38 SCRA 642
Page 14 of 84
FACTS:
Millar obtained a favorable condemning Antonio P. Gabriel to pay him the sum of P1,746.98
with interest at 12% per annum from the date of the filing of the complaint, the sum of P400 as
attorney's fees, and the costs of suit. The lower court issued the writ of execution on the basis of
which the sheriff seized the respondent's Willy's Ford jeep. The respondent, however, pleaded with
the petitioner to release the jeep under an arrangement whereby the respondent, to secure the
payment of the judgment debt, agreed to mortgage the vehicle in favor of the petitioner. The
petitioner agreed to the arrangement; thus, the parties executed a chattel mortgage on the jeep.
Resolution of the controversy posed by the petition at bar hinges entirely on a determination of
whether or not the subsequent agreement of the parties as embodied in the deed of chattel
mortgage impliedly novated the judgment obligation.
ISSUE:
Whether or not there is implied novation
HELD:
No substantial incompatibility between the mortgage obligation and the judgment liability
of the respondent sufficient to justify a conclusion of implied novation. The stipulation for the
payment of the obligation under the terms of the deed of chattel mortgage serves only to provide an
express and specific method for its extinguishment — payment in two equal installments. The
chattel mortgage simply gave the respondent a method and more time to enable him to fully satisfy
the judgment indebtedness. The chattel mortgage agreement in no manner introduced any
substantial modification or alteration of the judgment. Instead of extinguishing the obligation of the
respondent arising from the judgment, the deed of chattel mortgage expressly ratified and
confirmed the existence of the same, amplifying only the mode and period for compliance by the
respondent.
The defense of implied novation requires clear and convincing proof of complete incompatibility
between the two obligations. The law requires no specific form for an effective novation by
implication. The test is whether the two obligations can stand together. If they cannot,
incompatibility arises, and the second obligation novates the first. If they can stand together, no
incompatibility results and novation does not take place.
DORMITORIO V. FERNANDEZ
72 SCRA 388
FACTS:
The Municipality of Victorias is the owner of several parcels of lands in Victorias, Negros
Occidental. In 1948, it sold lot No.1 Block 16 with an area of 230 sq. m. at 1 peso per sq. meter to
Serafin Lazalita. Payment for said lot was completed in 1958. Lazalita had been in full and peaceful
possession of the said land for eight continuos years and he introduced permanent and invaluable
improvements thereon such as fruite trees, a house of strong materials, etc. In 1955, Agustin and
Page 15 of 84
Leoncia Dormitorio also purchased a land from the Municipality of Victorias. They bought Lot No. 2,
Block 16 having an area of 343 sq. meters at 1 peso per sq. meter. They, however, have not taken
actual possession of the land. In 1958- Dormitorios filed a suit for ejectment against Lazalita. The
Municipal Mayor and Council tried to settle the matter between the parties. A private surveyor was
hired and it was found out that the lot sold by the Municipality to Lazalita was converted to the
Municipal Road known as Jover Street and the lot presently occupied by him is supposed to be Lot.
No. 2 bought by the Dormitorios. 1961- CFI rendered judgment in favor of the Dormitorios,
ordering Lazalita to vacate the land and to pay a monthly rental to the former at a rate of 20 pesos a
month. Lazalita, with the Dormitorios, then filed a case against the Municipality of Victorias because
the value of the improvement he made on the land have far exceeded the purchase price. The
Municipality of Victorias, is willing to amicably settle the case, by giving the plaintiff another lot, if
they could open their newly proposed subdivision, or pay back Lazalita the amount necessary and
just for him to acquire another lot for his residence and for the expenses of transferring his present
residential house thereto. 1965- The parties agreed and submitted an "Agreed Stipulation of Facts"
before the court. Accordingly, judgment was rendered based on the same. Thereafter, the
Dormitorios filed a writ of execution for the enforcement of the earlier judgment by the Court
ordering Lazalita to pay 20 pesos monthly rental and to vacate said property. The petition was
granted. However, Judge Fernandez set aside said writ of execution on the ground that it was
obtained by means of fraud, misrepresentation and concealment of the true facts of the case by
making it appear that the case was still enforceable (even if it had already been novated by a
subsequent agreement by the parties). It found out that the said order was granted based on a
decision of the Court on Sept. 5, 1961 (prior to the Agreed Stipulation of Facts submitted by both
parties on Feb. 12, 1965)
ISSUE:
Whether or not the judgment of the court had been novated and thus can no longer be
enforced?
HELD:
Yes. The agreement filed by the parties created between them new rights and obligation
which naturally superseded the prior judgment. It is proper to show that there is animus novandi
between the parties for novation to properly take effect. In the case at bar, the presence of animus
novandi is undeniable. Secondly, the decision resulting from a compromise had the effect of res
judicata. The parties therefore are bound by it. The judge therefore committed no error in setting
aside the order of execution as the same had only set maters right.
MAGDALENA ESTATE V. RODRIGUEZ

18 SCRA 967
FACTS:
Spouses Rodriguez bought form the petitioner a parcel of land in Quezon City. There was an
unpaid balance of P5,000.00 on account of the price of the lot which was covered by the promissory
Page 16 of 84
note issued by respondents. On the same date, Respondents and Luzon Surety Co., Inc. executed a
bond in favor of petitioner, the latter being the surety of the respondents. When the promissory
note becomes due and demandable, Luzon Surety Com., Inc. paid the amount to petitioner.
Subsequently, petitioner demanded payment from respondents herein on the alleged accumulated
interests on the principal amount. Respondents refuse to pay. Respondents alleged that petitioner
waived or condoned the interests due upon its unqualified acceptance of the principal payment
knowing its incompleteness and without exercising its rights to apply a portion thereof to the
interest as provided in the Articles 1235 and 1253 of the Civil Code. They claimed that there was a
novation and/or modification of the obligation of the appellants in favor of the appellee because the
appellee accepted without reservation the subsequent agreement set forth in the surety bond
despite its failure to provide that it also guaranteed payment of accruing interest.
ISSUE:
Whether or not there was a waiver, novation and/or modification of the obligation?
HELD:
The rule is settled that novation by presumption has never been favored. To be sustained, it
needs to be established that the old and new contracts are incompatible in all points, or that the will
to novate appears by express agreement of the parties or in acts of similar import. 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.
COCHINGYAN V. RB SURETY AND INSURANCE

151 SCRA 339
FACTS:
In November 1963, Pacific Agricultural Suppliers, Inc. (PAGRICO) was granted an increase in its line
of credit from P400,000.00 to P800,000.00 (the “Principal Obligation”), with the Philippine National
Bank (PNB). PAGRICO submitted Surety Bond No. 4765, issued by respondent R&B Surety and
Insurance Co., (R&B Surety) in the amount of P400,000.00 in favor of the PNB. In consideration of R
& B Surety's issuance of the Surety Bond, two identical indemnity agreements were entered into
with R & B Surety executed by the Catholic Church Mart (CCM) and by petitioner Joseph
Cochingyan, Jr, and (b) another agreement dated 24 December 1963 was executed by PAGRICO.
Under both indemnity agreements, the indemnitors bound themselves jointly and severally to R & B
Surety to pay an annual premium of P5,103.05 and "for the faithful compliance of the terms and
conditions set forth in said SURETY BOND for a period beginning ... until the same is CANCELLED
and/or DISCHARGED."When PAGRICO failed to comply with its Principal Obligation to the PNB, the
PNB demanded payment from R & B Surety of the sum of P400,000.00, the full amount of the
Principal Obligation. R & B Surety made a series of payments to PNB by virtue of that demand
totalling P70,000.00 evidenced by detailed vouchers and receipts. R & B Surety in turn sent formal
demand letters to petitioners Joseph Cochingyan, Jr. and Jose K. Villanueva for reimbursement of
the payments made by it to the PNB and for a discharge of its liability to the PNB under the Surety
Bond. When petitioners failed to heed its demands, R & B Surety brought suit against Joseph
Cochingyan, Jr., Jose K. Villanueva and Liu Tua Ben. The lower court rendered a decision in favor of
Page 17 of 84
R & B Surety, ordering the Cochingyan and Villanueva to pay the plaintiff, jointly and severally, the
total amount of their liability on Surety Bond No. 4765, at the interest rate of 6% per annum.
ISSUE:
Whether or not the Trust Agreement had extinguished, by novation, the obligation of R & B
Surety to the PNB under the Surety Bond which, in turn, extinguished the obligations of the
petitioners under the Indemnity Agreements
Held:
NO. It is at once evident that the Trust Agreement does not expressly terminate the
obligation of R & B Surety under the Surety Bond. On the contrary, the Trust Agreement expressly
provides for the continuing subsistence of that obligation by stipulating that "[the Trust
Agreement] shall not in any manner release" R & B Surety from its obligation under the Surety
Bond. Neither can the petitioners anchor their defense on implied novation. Absent an unequivocal
declaration of extinguishment of a pre-existing obligation, a showing of complete incompatibility
between the old and the new obligation (and nothing else) would sustain a finding of novation by
implication. But where, as in this case, the parties to the new obligation expressly recognize the
continuing existence and validity of the old one, where, in other words, the parties expressly
negated the lapsing of the old obligation, there can be no novation. The issue of implied novation is
not reached at all.
BROADWAY CENTRUM CONDOMINIUM CORPORATION V. TROPICAL HUT
FACTS:
Broadway agreed to lease a 3,042.19 sqm portion of the Broadway Centrum Commercial Complex
to Tropical Hut for a period of 10 years with rental rates as follows:
1st 3 years (Feb 1 1981 to Feb 1 1984) : Php120,000
2nd 3 years (Feb 1 1984 to Feb 1 1987) : Php140,000
Last 4 years (Feb 1 1987 to Feb 1 1991) : Php165,000
There were no problems during the first year of lease, but on 1982 Tropical Hut requested for a
rental rate reduction due to financial difficulties. Tropical Hut is paying a rental rate of 6.08% of
sales "which is too high for Tropical Hut-Broadway considering that the present rental rates of
other Tropical branches are even below the normal rate of 1.5% on sales." Negotiations between
Broadway Centrum and Tropical Hut representatives were made. Tropical's officers recounted the
low sales volume is a result of the temporary closure of Doñ a Juana Rodriguez Avenue. This Avenue
is a major thoroughfare adjacent to the Broadway Centrum and was then closed to vehicular traffic
because of the road expansion project of the Government.
Broadway agreed on 20 April 1982 to a "provisional and temporary agreement" wherein Tropical
will pay a monthly rental on the basis of 2% of gross receipts or P60,000.00, whichever is higher.
Tropical also committed to return 466.56 square meters of their leased premises to Broadway
management. After a few months, Broadway sent Tropical a letter returning the old rental rates.
Tropical requested that the reduced rental scheme be maintained but Broadway did not agree and
sought to enforce the original contract details.Tropical Hut filed for a writ of prohibition against
Broadway. TC and CA ruled in favor of Tropical Hut.
Page 18 of 84
ISSUE:
Whether or not the agreement dated 20 April 1982 novated the Contract of Lease
HELD:
No. If objective novation is to take place, it is essential that the new obligation expressly
declare that the old obligation to be extinguished, or that now obligation be on every point
incompatible with the old one. 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.
In the case at hand:

(1) 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 non-specification by
Broadway of the period of time during which the reduced rentals would remain in effect,
only meant that Broadway retained for itself the discretionary right to return to the original
contractual rates of rental whenever Broadway felt it appropriate to do so.
(2) The formal notarized Lease Contract made it clear that a temporary and provisional
concessional reduction of rentals which Broadway might grant to Tropical was not to be
construed as alteration or waiver of any of the terms of the Lease Contract itself.
(3) The course of negotiations between Broadway and Tropical clearly indicated that what they
were negotiating was a temporary and provisional reduction of rentals only and was not to
persist for the rest of the life of the ten (10)-year Contract of Lease.
Moreover, the surrender of 466.56 square meters of leased space by Tropical to Broadway did not
amount to novation of the original Contract of Lease. The rentals were reduced by Broadway by
50% (from P120,000.00 to P60,000.00 per month) and the floor space was reduced by slightly over
15% only. No substantial relationship existed between the amount of the reduction of rental and
the area of the space returned by Tropical. Hence, no reasonable presumption can be indulged that
the return of part of the leased space constituted consideration for the reduction of rental rates. In
the Contract of Lease the rentals were stipulated for a specified portion of the Broadway Centrum
having a total floor area of 3,042.19 square meters; the rental rate was not specified on a per square
meter basis.
MOLINO V. SECURITY DINERS INTERNATIONAL

363 SCRA 358
FACTS:
Danilo Alto is a credit card owner of SDIC. He signed a Surety Undertaking with petitioner to
ensure payment of his credit card debts with SDIC. Under the Undertaking, petitioner bound
herself jointly ad severally with Alto to pay SDIC all obligations and charges in the use of the Diners
Club Card and that any change or novation in the Agreement or any extension of the time granted
by SDIC to pay such obligation shall not release her from the Surety Undertaking. Alto upgraded his
card and became Diamond card holder. However, he incurred debts of P166, 408.31 in credit card
advances which he failed to pay. SDIC sued Alto and petitioner as his surety to collect said amount.
ISSUE:
Whether or not the upgrading was a novation of the original agreement.
Page 19 of 84
HELD:
Yes. The upgrading was a novation of the original agreement covering the 1 st credit card
issued to Alto, basically since it was committed with the intent of canceling and replacing the said
card. But the novation did not serve to release petitioner from her surety obligations because in the
Surety Undertaking she expressly waived discharged in case of change/ novation in the agreement
governing the use of the 1 st credit card. The extent of a surety’s liability is determined by the
language of the surety ship contract/ bond itself. Also, the Surety Undertaking expressly provides
that petitioner’s liability is solidary. Although the contract of surety is in essence secondary only to
a valid principal obligation, his liability to the creditor is direct, primary and absolute; he becomes
liable for the debt and duty of another although he possesses no direct or personal interest over the
obligations nor does he receive any benefit there from. Petitioner had the option to withdraw her
suretyship when Alto upgraded his card to one that permitted unlimited purchases, but instead she
approved the upgrading. Hence, her liability subsists.
GARCIA V. LLAMAS
417 SCRA 292
FACTS:
Petitioner and Eduardo De Jesus borrowed P400,000.00 from respondent. Both executed a
promissory note wherein they bound themselves jointly and severally to pay the loan on or before
23 January 1997 with a 5% interest per month. The loan has long been over due and, despite
repeated demands, both have failed and refused to pay it. Hence, a complaint was filed against both.
Resisting the complaint, Garcia averred that he assumed no liability because he signed merely as an
accommodation party for De Jesus; and that he is relieved from any liability arising from the note
inasmuch as the loan had been paid by De Jesus by means of a check dated 17 April 1997; and that,
in any event, the issuance of the check and respondent’s acceptance thereof novated or superseded
the note.
ISSUE:
Whether or not petitioner is free from liability on the promissory note as an accommodation party
HELD:
No. The note was made payable to a specific person rather than to bearer or to order — a
requisite for negotiability under the Negotiable Instruments Law (NIL). Hence, petitioner cannot
avail himself of the NIL’s provisions on the liabilities and defenses of an accommodation party. Even
granting arguendo that the NIL was applicable, still, petitioner would be liable for the promissory
note. Under Article 29 of the NIL, an accommodation party is liable for the instrument to a holder
for value even if, at the time of its taking, the latter knew the former to be only an accommodation
party. The relation between an accommodation party and the party accommodated is, in effect, one
of principal and surety — the accommodation party being the surety. It is a settled rule that a
surety is bound equally and absolutely with the principal and is deemed an original promissor and
debtor from the beginning.
REYES V. SECRETARY OF JUSTICE

264 SCRA 35
Page 20 of 84
FACTS:
Reyes is the president of EUROTRUST, a domestic corporation engaged in credit finance,

entered into a contract of loan with Eleazar the president of BERMIC, a domestic enterprise
engaged in real estate development. Based on their contract EUROTRUST extended financial
support for the construction of BERMIC’s Condominium and Business Park. The loan was without
collateral but with higher interest rate. BERMIC issued 21 post-dated checks to cover the payments
of the loan; however, the said checks were dishonored by the drawee bank, due to stop payment
order by Eleazar. Despite notice and repeated demands Eleazar still failed to pay. Subsequently,
Reyes was investigated in the Blue Ribbon Committee and found out that she was involved in large
scale scam belonging to IMC, an agency under the department of education, culture and sports. AFP-
MBAI invested to EUROTRUST for government securities, conducted its own investigation and
found out that after the securities were delivered to AFP-MBAI the said securities were borrowed
by EUROTRUST to AFP-MBAI but failed to return the same. And the securities were in turn lent by
Reyes to BERMIC. EUROTRUST and BERMIC agreed that BERMIC will settle its obligation to the real
owners of the fund which are the AFP-MBAI and DECS-IMC, this was formalized by two letters.
BERMIC the negotiated with AFP-MBAI and DECS-IMC.
ISSUE:
Whether or not there was a novation by substitution of creditor.
HELD:
The Supreme Court ruled that there was no novation by substitution of creditor. In the case
according to it, formalized petitioners and respondent Eleazars agreement that BERMIC would
directly settle its obligation with the real owners of the funds – the AFP MBAI and DECS IMC. Be
that as it may, a cursory reading of these letters, however, clearly and unmistakably shows that
there was nothing therein that would evince that respondent AFP-MBAI agreed to substitute for the
petitioner as the new creditor of respondent Eleazar in the contract of loan. It is evident that the
two letters merely gave respondent Eleazar an authority to directly settle the obligation of
petitioner to AFP-MBAI and DECS-IMC. It is essentially an agreement between petitioner and
respondent Eleazar only. There was no mention whatsoever of AFP-MBAI’s consent to the new
agreement between petitioner and respondent Eleazar much less an indication of AFP-MBAI’s
intention to be the substitute creditor in the loan contract. 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.
CALIFORNIA BUS LINES V. STATE INVESTMENT

418 SCRA 297
FACTS:
Delta Motors Corporation (DELTA) was granted financial assistance by respondent State
Investment House Inc. (SIHI) up to a credit line of P 25M. Delta discounted some of its receivables
from the sale of its vehicles in favor of SIHI. Eventually, Delta became indebted to SIHI for more
than P 24M. Petitioner California Bus Lines (CALIFORNIA) purchased 35 buses from Delta and
Page 21 of 84
issued sixteen (16) promissory notes in favor of Delta to secure the payment of such. California
promised to pay Delta P 2.3 M in 60 monthly installments with interest at 14%/ annum. California
likewise executed chattel mortgages over the 35 buses in favor of Delta. When California defaulted,
it entered into a restructuring agreement with Delta which provided for a new schedule of
payments, extension of period to pay, daily instead of monthly remittances, interest rate of
16%/annum; and “management takeover clause”, i.e., in case of California’s default, Delta would
have the authority to take over California’s operations ad management. Since California continued
defaulting, Delta was prompted to enforce the “management takeover clause.” Pre-empting such,
California filed in 1982 a complaint for injunction. Delta applied for the issuance of a writ of
preliminary mandatory injunction to enforce the “management takeover clause” and a writ of
preliminary attachment over California’s buses; which the trial court granted. Pursuant to a
Memorandum of Agreement between Delta and SIHI, Delta executed a Deed of Sale assigning SIHI 5
out of the 16 promissory notes from California, totaling to a value of more than P16M inclusive of
interest at 14%/annum. Consequently, SIHI demanded payment of such promissory notes from
California. But California refused to do so on the ground that there is the pending complaint for
injunction and the management and operation of California was taken over by Delta. Delta and
California entered into a compromise agreement regarding the compliant for injunction filed by the
latter to which California agreed that Delta would exercise the right to extrajudicially foreclose the
chattel mortgages over the 35 buses. Thereafter, California vehemently refused to pay the value
stipulated in the five (5) promissory notes to SIHI, arguing that the compromise agreement it
entered into with Delta had the effect of extinguishing all its obligations under the promissory
notes.
ISSUE:
Whether or not the RESTRUCTURING AGREEMENT between Delta and California novated
the 5 promissory notes which were assigned by Delta to SIHI.
HELD:
NO. Restructuring Agreement did not expressly nor impliedly novate the promissory notes.
Absent an unequivocal declaration of extinguishment of the pre-existing obligation, only a showing
of a complete incompatibility between the old and the new obligation would sustain a finding of
novation by implication. The terms of the old agreement are not incompatible with the
restructuring agreement because: 1) there was no change in the object of the prior obligations; 2) it
merely provided for a new schedule of payments; and 3) it merely provided for additional
securities. Clearly, Delta and California recognized the continuing existence and validity of the old
one; hence, no novation. Finally, a change in the incidental elements of, or an addition of such
element to, an obligation, unless otherwise expressed by the parties will not result in its
extinguishment. Consequently, the restructuring agreement can stand together with the
promissory notes.
BABST V. COURT OF APPEALS

350 SCRA 341
FACTS:
On 8 June 1973, ELISCON obtained from Commercial Bank and Trust Company (CBTC) a
loan in the amount of P8,015,900.84, with interest at the rate of 14% per annum, evidenced by a
Page 22 of 84
promissory note. Elizalde Steel Consolidated, Inc. (ELISCON) defaulted in its payments, leaving an
outstanding indebtedness in the amount of P2,795,240.67 as of 31 October 1982. The letters of
credit, on the other hand, were opened for ELISCON by CBTC using the credit facilities of Pacific
Multi-Commercial Corporation (MULTI) with the said bank, pursuant to the Resolution of the Board
of Directors of MULTI adopted on 31 August 1977. Subsequently, on 26 September 1978, Antonio
Roxas Chua and Chester G. Babst executed a Continuing Suretyship, whereby they bound
themselves jointly and severally liable to pay any existing indebtedness of MULTI to CBTC to the
extent of P8,000,000.00 each. Sometime in October 1978, CBTC opened for ELISCON in favor of
National Steel Corporation (NSC) 3 domestic letters of credit in the amounts of P1,946,805.73,
P1,702,869.32 and P200,307.72, respectively, which ELISCON used to purchase tin black plates
from NSC. ELISCON defaulted in its obligation to pay the amounts of the letters of credit, leaving an
outstanding account, as of 31 October 1982, in the total amount of P3,963,372.08.
ISSUE:
Whether or not there was a valid novation
HELD:
Yes. There was no indication that the principal debtor will default in payment. In fact, DBP,
which had stepped into the shoes of ELISCON, was capable of payment. Its authorized capital stock
was increased by the government. More importantly, the National Development Company took over
the business of ELISCON and undertook to pay ELISCON's creditors, and earmarked for that
purpose the amount of P4,015,534.54 for payment to BPI. Notwithstanding the fact that a reliable
institution backed by government funds was offering to pay ELISCON's debts, not as mere surety
but as substitute principal debtor, BPI, for reasons known only to itself, insisted in going after the
sureties. BPI's conduct evinced a clear and unmistakable consent to the substitution of DBP for
ELISCON as debtor. Hence, there was a valid novation which resulted in the release of ELISCON
from its obligation to BPI, whose cause of action should be directed against DBP as the new debtor.
VALENZUELA V. KALAYAAN DEVELOPMENT & INDUSTRIAL CORP.

590 SCRA 380
FACTS:
Kalayaan Development & Industrial Corporation discovered that Spouses Jose and Gloria
Valenzuela had occupied and built a house on a parcel of land it owned, and demanded that they
vacate said property. Upon negotiation, however, petitioners and Kalayaan entered a Contract to
Sell wherein the petitioners would purchase 236 square meters of the subject property for
P1,416,000 in twelve equal monthly installments. The contract further stated that upon failure to
pay any of said installments, petitioners would be liable for liquidated penalty at 3% a month
compounded monthly until fully paid. Kalayaan would also execute the deed of absolute
sale only upon full payment. Petitioners were only able to pay monthly installments amounting to a
total of P208, 000.00. They then requested Kalayaan to issue a deed of sale for 118 square meters of
the lot where their house stood, arguing that since they had paid half the purchase price, or a total
of P708,000.00 representing 118 square meters of the property. Kalayaan, on the other hand, sent
two demand letters asking petitioners to pay their outstanding obligation including agreed
penalties. Gloria Valenzuela’s sister, Juliet Giron, assumed the remaining balance for the 118
square meters of the subject property at P10,000.00 per month to Kalayaan, which the latter
accepted for and in behalf of Gloria. Thereafter, Kalayaan demanded that petitioners pay their
Page 23 of 84
outstanding obligation, but were unheeded. Kalyaan then filed a Complaint fot the Rescission of
Contract and Damages against petitioners. The RTC of Caloocan rendered a Decision in favor of
Kalayaan, rescinding the contract between the parties and ordering petitioners to vacate the
premises. Petitioners sought recourse from the CA. They aver that the CA failed to see that the
original contract between petitioners and Kalayaan was altered, changed, modified and restricted
as a consequence of the change in the person of the principal debtor (Sps. Valenzuela to Juliet).
When Kalayaan agreed to a monthly amortization of P10,000.00 per month the original contract
was changed, and that the same recognized Juliet’s capacity to pay and her designation as the new
debtor. Nevertheless, the CA affirmed the RTC ruling.
ISSUE:
If the original contract was novated and the principal obligation to pay for the remaining
half of the subject property was transferred from petitioners to Juliet.
HELD:
No. Novation is never presumed. Novation is the extinguishment of an obligation by the
substitution or change of the obligation by a subsequent one which extinguishes or modifies the
first, either by changing the object or principal conditions, or by substituting another in place of the
debtor, or by subrogating a third person in the rights of the creditor. Parties to a contract must
expressly agree that they are abrogating their old contract in favor of a new one. In absence of an
express agreement, novation takes place only when the old and new obligations are incompatible
on every point.
FOUNDATION SPECIALISTS, INC. V. BETONVAL READY CONCRETE, INC
FACTS:
FSI failed to pay its contractual obligations to Betonval. Betonval thereafter filed an action
for sum of money and damages. It also applied for the issuance of a writ of preliminary attachment
alleging that FSI employed fraud when it contracted with Betonval and that it was disposing of its
assets in fraud of its creditors. The RTC granted writ of preliminary attachment. Ultimately, the RTC
ruled for Betonval. However, it awarded P200,000 compensatory damages to FSI on the ground
that the attachment of its properties was improper. The CA affirmed but reduced the award to FSI
compensatory damages. Thus, this appeal by FSI. The SC held that the attachment was indeed
improper but denied the petition because FSI failed to pay the docket fees.
ISSUE:
WON the properties of FSI were properly attached?
HELD:
No. There was Improper Attachment of FSI’s Properties. Betonval’s application for the
issuance of the writ of preliminary attachment was based on Section 1(d) and (e), Rule 57 of the
Rules of Court. However, the CA affirmed the RTC’s factual findings that there was improper
attachment of FSI’s properties.In debunking FSI’s claim for actual damages, Betonval insist that the
attachment was proper and that Betonval was able to sufficiently prove the existence of the
grounds for attachment. However, these are factual matters that have been duly passed upon by the
RTC and the CA and which are inappropriate in a petition for review.Moreover, we agree with the
RTC and the CA that FSI’s properties were improperly attached. Betonval was not able to
Page 24 of 84
sufficiently show the factual circumstances of the alleged fraud because fraudulent intent cannot be
inferred from FSI’s mere nonpayment of the debt or failure to comply with its obligation.
MARIA TOMIMBANG V. ATTY. JOSE TOMIMBANG

GR No. 165116; August 4, 2009
FACTS:
Petitioner and respondent are siblings. Their parents donated to petitioner an eight-door
apartment located at 149 Santolan Road, Murphy, Quezon City. Petitioner failed to obtain a loan
from PAG-IBIG Fund, hence, respondent offered to extend a credit line to petitioner on the following
conditions: (1) petitioner shall keep a record of all the advances; (2) petitioner shall start paying
the loan upon the completion of the renovation; (3) upon completion of the renovation, a loan and
mortgage agreement based on the amount of the advances made shall be executed by petitioner
and respondent; and (4) the loan agreement shall contain comfortable terms and conditions which
petitioner could have obtained from PAG-IBIG.
A conflict between the siblings ensued leading to a new agreement whereby petitioner was
to start making monthly payments on her loan. Upon respondent's demand, petitioner turned over
to respondent all the records of the cash advances for the renovations. Subsequently, or from June
to October of 1997, petitioner made monthly payments of P18, 700.00, or a total ofP93, 500.00.
Petitioner never denied the fact that she started making such monthly payments. Thereafter, the
petitioner can no longer be found and also stopped making the monthly payments. Thus, a
complaint was filed against the petitioner demanding payment of the loan plus interest. Petitioner
contended that the loan is not yet due and demandable as the renovation of the apartment is not yet
completed.
ISSUE:
Whether or not the loan is already due and demandable.
RULING:
The loan is already due and demandable due to the subsequent agreement entered in to by
the parties. Article 1291 of the Civil Code provides, thus:
Art. 1291. Obligations may be modified by:
(1) Changing their object or principal conditions;
(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the creditor.
The petitioner admitted that she started to comply with the demand of the respondent to
pay on a monthly basis. Her partial performance of her obligation is unmistakable proof that indeed
the original agreement between her and respondent had been novated by the deletion of the
condition that payments shall be made only after completion of renovations. Hence, by her very
Page 25 of 84
own admission and partial performance of her obligation, there can be no other conclusion but that
under the novated agreement, petitioner's obligation is already due and demandable.
GARCIA V. LLAMAS
417 SCRA 292 (2003)
FACTS:
A complaint for sum of money was filed by respondent Dionisio Llamas against Petitioner
Romeo Garcia and Eduardo de Jesus alleging that the two borrowed Php 400, 000 from him. They
bound themselves jointly and severally to pay the loan on or before January 23, 1997 with a 15%
interest per month. The loan remained unpaid despite repeated demands by respondent. Petitioner
resisted the complaint alleging that he signed the promissory note merely as an accommodation
party for de Jesus and the latter had already paid the loan by means of a check and that the issuance
of the check and acceptance thereof novated or superseded the note. The trial court rendered a
judgment on the pleadings in favor of the respondent and directed petitioner to pay jointly and
severally respondent the amounts of Php 400, 000 representing the principal amount plus interest
at 15% per month from January 23, 1997 until the same shall have been fully paid, less the amount
of Php 120,000 representing interests already paid. The Court of Appeals ruled that no novation,
express or implied, had taken place when respondent accepted the check from de Jesus. According
to the CA, the check was issued precisely to pay for the loan that was covered by the promissory
note jointly and severally undertaken by petitioner and de Jesus. Respondent’s acceptance of the
check did not serve to make de Jesus the sole debtor because first, the obligation incurred by him
and petitioner was joint and several; and second, the check which had been intended to extinguish
the obligation bounced upon its presentment.
ISSUE:
Whether or not the defense that petitioner was only an accommodation party had any basis.
HELD:
By its terms, the note was made payable to a specific person rather than bearer to or order
—a requisite for negotiability. Hence, petitioner cannot avail himself of the NIL’s provisions on the
liabilities and defenses of an accommodation party. Besides, a non-negotiable note is merely a
simple contract in writing and evidence of such intangible rights as may have been created by the
assent of the parties. The promissory note is thus covered by the general provisions of the Civil
Code, not by the NIL. Even granting that the NIL was applicable, still petitioner would be liable for
the note. An accommodation party is liable for the instrument to a holder for value even if, at the
time of its taking, the latter knew the former to be only an accommodation party. The relation
between an accommodation party and the party accommodated is, in effect, one of principal and
surety. It is a settled rule that a surety is bound equally and absolutely with the principal and is
deemed an original promissory debtor from the beginning. The liability is immediate and direct.
QUINTO V. PEOPLE
305 SCRA 709
Page 26 of 84
FACTS:
Quinto was convicted of the crime estafa, the case started when Quinto asked Cariaga to
allow her to have the jewelries for some prospective buyer. They made an agreement that after 5
days if Quinto have not sell the jewelries it will be return to the owner. After 5 days Quinto failed to
deliver back the jewelries and asked for extension that results for almost six months. After Cariaga
send demand letters to Quinto for the return of the jewelries in which Cariaga failed to do again the
former then filed a case of estafa against the latter.In the Quinto’s defense she narrated that the solo
ring was sold by certain Mrs. Camacho, the buyer paid in check on half amount only and the
remaining half was paid by installments directly to Cariaga. Quinto also transacted with Mrs.
Camacho the marques and the ring, Mrs. Camacho then failed to pay the full amount. Quinto
brought Cariaga to Mrs. Camacho and both of them agreed that the payment will be in installments.
Quinto was also able to sell the diamond ring to Mrs. Ramos, unfortunately she was unable to pay
the whole amount again Quinto brought Cariago to Mrs. Ramos and they talked about the terms of
payment. In the first payment Mrs. Ramos gave Quinto a ring, in the next payment was P5,000.
Quinto herself paid the P2,000.
ISSUE:
Whether or not there was a novation when the private complainant consented to receive
payment on installments directly to the buyer.
HELD:
The extinguishment of the old obligation by the new one is a necessary element of novation
which may be effected either expressly or impliedly. The term “expressly” means that the
contracting parties incontrovertibly disclose that their object in executing the new contract is to
extinguish the old one. Upon the other hand, no specific form is required for an implied novation,
and all that is prescribed by law would be an incompatibility between the two contracts. While
there is really no hard and fast rule to determine what might constitute to be a sufficient change
that can bring about novation, the touchstone for contrariety, however, would be an irreconcilable
incompatibility between the old and the new obligations.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.
It is thus easy to see why Cariaga’s acceptance of Ramos and Camacho’s 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.
LICAROS V. GATMAITAN, (2001)
Page 27 of 84
FACTS:
Abelardo Licaros, a Fil. Businessman thought that it would be good to make a fund
placement with the Anglo-Asean Bank and Trust Limited (Anglo-Asean) which is a private bank
that works under the laws of the Republic of Vanuatu. Its main business is in receiving fund
placements from investors around the world and thereafter investing such deposits in money
market placements and potentially profitable capital ventures in H.K, Europe and the U.S. for
maximization of returns. Eventually, Licaros’ investment didn’t turn out well as he had difficulties
in retrieving not only his profits but also his investments. Thus, he sought the counsel of Antonio
Gatmaitan, a reputable banker and investment manager to help get back his investments.
Gatmaitan voluntarily offered to assume the payment of Anglo-Asean’s indebtedness to Licaros
subject to terms and conditions. They made it formal and effective through a MEMORANDUM OF
AGREEMENT (MOA) on July 29, 1988. In line w/ this agreement, Gatmaitan executed a NON-
NEGOTIABLE PROMISSORY NOTE WITH ASSIGNMENT OF CASH DIVIDENDS in favor of Licaros.
Here, it’s stated that: Gatmatian promises to pay Licaros P3,150,000 w/o interest as material
consideration for the full settlement of his money claims from Anglo-Asean. Also, 70% of all cash
dividends from his shares of stock in the Prudential Life Realty Inc. to the extent of his
shareholding in Prudential Life Plan, Inc. (holding company of Prudential Realty) was assigned as a
security for the payment of the promissory note. Nothing happened when Gatmaitan tried to claim
the S150, 000 from Anglo-Asean. Thus, he didn’t bother to fulfil his promise to pay Licaros the
amount states in the promissory note. However, Licaros felt that he had a right to collect on the
basis of the promissory note regardless of the outcome of Gatmaitan's recovery efforts. Thus, in July
1996, Licaros, thru counsel, addressed successive demand letters to Gatmaitan, demanding
payment of the latter’s obligations under the promissory note. Gatmaitan, however, did not accede
to these demands. Licaros then filed a complaint to the RTC where he won. But CA reversed it
saying that the MOA is of a conventional subrogation which needs the consent of Anglo-Asean for
its validity.
ISSUE:
Whether or not the MOA is one of assignment of credit or one of conventional subrogation?
HELD:
Yes. MOA is a conventional subrogation. The intent for it to be one of conventional
subrogation is clear in its stipulations. If the intent was just to make Gatmaitan the “assignee” of
Licaros’ credit, it woud’ve been senseless to stipulate in the MOA that same is conditioned on the
“express conformity” of Anglo-Asean Bank.
ASTRO ELECTRONICS CORP. V. PHILIPPINE EXPORT AND FOREIGN LOAN GUARANTEE

CORPORATION
FACTS:
Astro was granted several loans by the Philippine Trust Company (Philtrust) amounting
P3M w/ interest and secured by 3 promissory notes: December 14, 1981: P600,000.00, December
14, 1981: P400,000.00, and August 27, 1981: P2,000,000.00.
Petitioner Roxas signed twice, as President of Astro and in his personal capacity. Roxas also signed
a Continuing Surety ship Agreement in favor of Philtrust Bank, as President of Astro and as surety.
Thereafter, Philguarantee, with the consent of Astro, guaranteed in favor of Philtrust the payment
Page 28 of 84
of 70% of Astros loan, subject to the condition that upon payment by Philguanrantee of said
amount, it shall be proportionally subrogated to the rights of Philtrust against Astro. As a result of
Astros failure to pay its loan obligations, despite demands, Philguarantee paid 70% of the
guaranteed loan to Philtrust. Subsequently, Philguarantee filed against Astro and Roxas a complaint
for sum of money with the RTC of Makati. Roxas disclaims any liability on the instruments, alleging,
inter alia, that he merely signed the same in blank and the phrases in his personal capacity and in
his official capacity were fraudulently inserted without his knowledge.
ISSUE:
Whether or not Roxas should be jointly and severally liable with Astro.
HELD:
Astros loan with Philtrust Bank is secured by three promissory notes. These promissory
notes are valid and binding against Astro and Roxas. As it appears on the notes, Roxas signed twice:
first, as president of Astro and second, in his personal capacity. In signing his name aside from
being the President of Asro, Roxas became a co-maker of the promissory notes and cannot escape
any liability arising from it. Under the Negotiable Instruments Law, persons who write their names
on the face of promissory notes are makers, promising that they will pay to the order of the payee
or any holder according to its tenor. Thus, even without the phrase personal capacity, Roxas will
still be primarily liable as a joint and several debtor under the notes considering that his intention
to be liable as such is manifested by the fact that he affixed his signature on each of the promissory
notes twice which necessarily would imply that he is undertaking the obligation in two different
capacities, official and personal. Philguarantee has all the right to proceed against petitioner, it is
subrogated to the rights of Philtrust to demand for and collect payment from both Roxas and Astro
since it already paid the value of 70% of roxas and Astro Electronics Corp.s loan obligation. In
compliance with its contract of Guarantee in favor of Philtrust. Affirming the decision of the
Regional Trial Court (Branch 147) of Makati, then Metro Manila, whereby petitioners Peter Roxas
and Astro Electronics Corp. (Astro for brevity) were ordered to pay respondent Philippine Export
and Foreign Loan Guarantee Corporation (Philguarantee), jointly and severally, the amount of
P3,621,187.52 with interests and costs.
CONTRACTS
OBLIGATORY FORCE OF CONTRACTS

ESGUERRA V. CA
267 SCRA 380
FACTS:
Julieta Esguerra filed a complaint for administration of conjugal partnership or separation
of property against her husband Vicente Esguerra Jr. before the trial court. Said complaint was later
amended impleading V. Esguerra Construction Co. Inc. (VECCI) and other family corporations as
defendants. The parties entered into a compromise agreement. The compromise agreement
provided that VECCI shall sell/alienate/transfer or dispose of in any lawful and convenient manner,
and under the terms and conditions in the resolutions of its Board of Directors and stockholders the
following properties: (a) two (2) real estate and buildings in Makati, (b) two (2) real estate and
improvements located in Antipolo, Rizal, (c) real estate and improvements located in Cainta, Rizal,
and (d) real estate and improvements in San Mateo, Rizal. After said properties have been sold or
Page 29 of 84
disposed of and after all the financial obligations of VECCI are completely paid, VECCI shall pay to
Julieta the sum equivalent to fifty percent (50%) of the net resulting balance of such funds. When
Makati building II was sold to Sureste Properties Inc., Julieta filed a motion for nullification of the
sale before the trial court on the ground that VECCI is not the absolute owner of the property and
that VECCI violated the condition in the compromise agreement requiring that the sale be made
under the terms and conditions in the enabling resolutions of its Board of Directors and
stockholders. The trial court resolved in favor of Julieta but on appeal, the Court of Appeals
reversed the lower court’s decision. Hence, this appeal.
ISSUE:
Was the sale of Makati building II a valid exercise of corporate power?
HELD:
Yes. The trial courts partial decision dated January 11, 1990 approving the compromise
agreement clearly showed that the enabling resolutions of its (VECCIs) board of directors and
stockholders referred to were those then already existing; to wit: (1) the resolution of the
stockholders of VECCI dated November 9, 1989, (where) the stockholders authorized VECCI to sell
and/or disposed all or substantially all its property and assets upon such terms and conditions and
for such consideration as the board of directors may deem expedient. (2) the resolution dated 9
November 1989, (where) the board of directors of VECCI authorized VECCI to sell and/or dispose
all or substantially all the property and assets of the corporation, at the highest available price/s
they could be sold or disposed of in cash, and in such manner as may be held convenient under the
circumstances, and authorized the President Vicente B. Esguerra, Jr. to negotiate, contract, execute
and sign such sale for and in behalf of the corporation. VECCIs sale of all the properties mentioned
in the judicially-approved compromise agreement was done on the basis of its Corporate
Secretary’s Certification of these two resolutions. The partial decision did not require any further
board or stockholder resolutions to make VECCIs sale of these properties valid. Being regular on its
face, the Secretary’s Certification was sufficient for private respondent Sureste Properties, Inc. to
rely on. It did not have to investigate the truth of the facts contained in such certification.
Otherwise, business transactions of corporations would become tortuously slow and unnecessarily
hampered. Ineluctably, VECCIs sale of Esguerra Building II to private respondent was not ultra vires
but a valid execution of the trial courts partial decision. Based on the foregoing, the sale is also
deemed to have satisfied the requirements of Section 40 of the Corporation Code.
AUTONOMY OF CONTRACTS:
ORTIGAS & CO., LTD. VS. COURT OF APPEALS

346 SCRA 748
FACTS:
Ortigas & Co. sold to Emilia Hermoso a parcel of land located in Greenhills Subdivision, San
Juan with several restrictions in the contract of sale that said lot be used exclusively for residential
purposes, among others, until December 31, 2025. Later, a zoning ordinance was issued by MMC
(now MMDA) reclassifying the area as commercial. Private respondent (Ismael Mathay III) leased
the subject lot from Hermoso and built a single storey building for Greenhills Autohaus, Inc., a car
sales company. Ortigas & Co. filed a petition a complaint which sought the demolition of the
Page 30 of 84
constructed car sales company to against Hermoso as it violated the terms and conditions of the
Deed of Sale. Trial court ruled in favor of Ortigas & Co. Mathay raised the issue to the Court of
Appeals from which he sought favorable ruling. Hence, the instant petition.
ISSUE:
Whether or not the zoning ordinance may impair contracts entered prior to its effectivity.
HELD:
Yes. The zoning ordinance, as a valid exercise of police power may be given effect over any
standing contract. Hence, petition is denied. A law enacted in the exercise of police power to
regulate or govern certain activities or transactions could be given retroactive effect and may
reasonably impair vested rights or contracts. Police power legislation is applicable not only to
future contracts, but equally to those already in existence. Non-impairment of contracts or vested
rights clauses will have to yield to the superior and legitimate exercise by the State of police power
to promote the health, morals, peace, education, good order, safety, and general welfare of the
people. Moreover, statutes in exercise of valid police power must be read into every contract.
Noteworthy, in Sangalang vs. Intermediate Appellate Court, the Supreme Court already upheld
subject ordinance as a legitimate police power measure.
FIRST PHILIPPINE INTERNATIONAL BANK VS. COURT OF APPEALS

252 SCRA 259
FACTS:
Producer Bank of the Philippines acquired 6 parcels of land at Laguna. The property used to
be owned by BYME Investment and Development Corporation which had them mortgaged with the
bank as collateral for a loan. Demetrio Demetria and Jose O. Janolo wanted to purchase the property
and thus initiated negotiations for that purpose. In August 1987, Demetria and Janolo met with
Mercurio Rivera, Manager of the Property Management Department of the Bank to discuss their
plan to buy the property. Thereafter, they had a series of letters where parties accepted the offer of
Demetria and Janolo. Later in October, the conservator of the bank (which has been placed under
conservatorship by the Central Bank since 1984) was replaced; and subsequently the proposal of
Demetria and Janolo to buy the properties was under study pursuant to the new conservator’s
mandate. After which, a series of demands ensued.
ISSUE:
Whether or not the conservator may revoke a perfected and enforceable contract.
HELD:
No. While admittedly, the Central Bank law gives vast and far-reaching powers to the
conservator of a bank, it must be pointed out that such powers must be related to the
"(preservation of) the assets of the bank, (the reorganization of) the management thereof and (the
restoration of) its viability." Such powers, enormous and extensive as they are, cannot extend to
the post-facto repudiation of perfected transactions, otherwise they would infringe against the non-
Page 31 of 84
impairment clause of the Constitution. Section 28-A merely gives the conservator power to revoke
contracts that are, under existing law, deemed to be defective. Hence, the conservator merely takes
the place of a bank's board of directors, so what the board cannot do; the conservator cannot do
either. His power is however, not unilateral as he cannot simply repudiate valid obligations of the
Bank. His authority would be only to bring court actions to assail such contracts. In the case, it is not
disputed that the bank was under a conservator placed by the Central Bank of the Philippines
during the time that the negotiation and perfection of the contract of sale took place. Moreover,
there was absolutely no evidence that the Conservator, at the time the contract was perfected,
actually repudiated or overruled said contract of sale. The bank never objected to the sale, what it
unilaterally repudiated was—not the contract —but the authority of Rivera to make a binding offer
—and which unarguably came months after the perfection of the contract.
The conservator’s authority would be only to bring court actions to assail such contracts —as he
has already done so in the instant case. A contrary understanding of the law would simply not be
permitted by the Constitution. Neither by common sense. To rule otherwise would be to enable a
failing bank to become solvent, at the expense of third parties, by simply getting the conservator to
unilaterally revoke all previous dealings which had one way or another or come to be considered
unfavorable to the Bank, yielding nothing to perfected contractual rights nor vested interests of the
third parties who had dealt with the Bank.
FERRAZZINI VS. GSELL

34 PHIL. 697
FACTS:
The issue started when defendant was alleged to wrongfully discharge the plaintiff who had
been employed by the defendant for an indefinite time, admitting that he discharged the plaintiff
without written advice, however, asserting that such discharge is lawful on account of absence and
disobedience of the plaintiff. The previous judgment was in favor of the plaintiff, hence, the
defendant now seeks an appeal. The defendant asserts that in their contract, the petitioner cannot
enter into an employment within five years after the termination of their agreement. However, it is
discovered that the plaintiff has contracted another employment, hence, violating their agreement.
ISSUE:
Whether or not the right of the plaintiff to enter into contract can be restrained and such
agreement is against public policy?
HELD:
No. The Court ruled that it is the policy of the law that the freedom of persons to enter into
contracts shall not be lightly interfered with, as long as it does not conflict with the morals of the
times or contravenes the interest of the society. Defining public policy, is the law of persons the
public, of social and legal interest, that which is permanent and essential of the institutions, cannot
be left to his own will. The doctrine that a contract in restraint of trade is void as against public
policy is based on two principal grounds: 1.) the injury to the public by being deprived of the
restricted party’s industry; and 2.) the injury to the party himself by being precluded from pursuing
his occupation, preventing him from supporting his family and/or himself. Moreover, stressing a
rule in Gibbs v. CGCB, the court held that public welfare is first considered. Therefore, the contract
between the plaintiff and defendant is clearly one that is against public policy because it deprives
the former in obtaining a livelihood.
Page 32 of 84
OLLENDORFF VS. ABRAHAMSON

38 PHIL. 585
FACTS:
Herein plaintiff Ollendorf and defendant Abrahamson made and entered into Contract of
Agreement. The first part hereby agrees to employ the defendant and the party of the second
obliges himself to work for the plaintiff within the period of two years. Defendant obligates and
binds himself to devote his entire time, attention, energies and industry on the promotion of the
furtherance of the business and interest of the party. Failure on the said duty shall entitle the
plaintiff to discharge and dismiss the defendant. The second part of the contract further binds the
party that he will not enter whether directly or indirectly to engage in a similar or competitive
business. Under the term of this agreement, the plaintiff left the employment due to illness and
went to U.S. After his departure, the defendant returns to Manila as the Manager of the Philippine
Underwear Company. Defendant admits that both firms turn out the same class of goods and those
they are exported to the same market. However, he alleged that the said contract with the plaintiff
was void for it violates the right for free trade.
ISSUE:
Whether or not the contract is void due to the violation of the rights of trade.
HELD:
No, the contract was not void as constituting an unreasonable restraint of trade. The rule is
that the obligations created by contracts have the force of law between the contracting parties and
must be enforce in accordance with their tenor. The only limitation upon the freedom of contractual
agreement is that the facts established shall not contrary to law, morals or public order. The
industry of counsel failed to discover direct expression of the legislative which will prohibits such.
PCIBank vs. CA
255 SCRA 299
FACTS:
This case involves defendant Ford who drew and issued a Citibank check in the amount of
4,746,114.41 in favor of the Commission of Internal Revenue as payment of their percentage or
manufacturer’s sales taxes for the third quarter of 1977. The checks were then deposited to IBAA
(now PCI Bank) and were subsequently cleared at the Central Bank. Upon presentment with
Citibank, the proceeds of the check were paid to IBAA as collecting bank. However, the proceeds of
the check were never paid to CIR. The plaintiff was prompted by the CIR to make a second payment
of its manufacturer’s sales taxes for 1977. Ford together with the check and the Revenue Tax
Receipt was deposited with defendant IBAA and later accepted the check and sent to the Central
Clearing House. After presentment of the check for payment to Citibank, the latter paid for the face
Page 33 of 84
value and was debited to defendant’s account with Citibank. Plaintiff then discovered that the
amount was not paid to CIR which prompted Ford to notify the latter that in case it will be re-
assessed by the BIR for payment of the taxes covered by the said checks, plaintiff shall hold the
defendants liable for reimbursement for the value of the check. Both IBAA and Citibank denied
liability and refused to pay—even after BIR notified the parties. IBAA was then merged with PCI
Bank. Upon investigation of the NBI, Godofredo Rivera, the General Ledger Accountant of Ford
recalled the check since there was an error with the computation. With Rivera’s instruction, PCI
Bank replaced the check with two of its own Manager’s check. Subsequently, alleged members of a
syndicate later deposited the two MCs with Pacific Banking Corporation. Ford then filed a third-part
complaint before the trial court imploding Pacific Banking Corporation and Godofredo Rivera. The
RTC favored Ford and asked Citibank and PCI Bank liable. Upon appeal, CA modified the judgment
making IBAA solely liable. Hence, this petition.
The same syndicate apparently embezzled the proceeds of the check to settle Ford’s percentage
taxes for 1978-1979. The RTC rendered Citibank liable to reimburse Ford at total of 12,163,298.10
PHP.
ISSUE:
Whether or not petitioner Ford the right to recover from the collecting bank (PCIBank) the
drawee bank the value of the checks intended as payment to the Commission of Internal Revenue
or is he already prescribed.
HELD:
Yes, Ford can recover from PCI Bank along with Citibank. The checks were drawn against
the drawee bank but the title of the person negotiating the same was allegedly defective because
the instrument was obtained by fraud and unlawful means, and the proceeds of the checks were not
remitted to the payee. It was established that instead paying the
Commissioner, the checks were diverted and encashed for the eventual distribution among
members of the syndicate. Pursuant to this, it is vital to show that the negotiation is made by the
perpetrator in breach of faith amounting to fraud. The person negotiating the checks must have
gone beyond the authority given by his principal. If the principal could prove that there was no
negligence in the performance of his duties, he may set up the personal defense to escape
liability and recover from other parties who, through their own negligence, allowed the
commission of the crime. It should be resolved if Ford is guilty of the imputed contributory
negligence that would defeat its claim for reimbursement, bearing in mind that its employees were
among the members of the syndicate. It appears although the employees of Ford initiated the
transactions attributable to the organized syndicate, their actions were not the proximate
cause of encashing the checks payable to CIR. The degree of Ford’s negligence
couldn’t be characterized as theproximate cause of the injury to parties. The mere fact that
the forgery was committed by a drawer-payor’s confidential employee or agent, who by virtue of
his position had unusual facilities for perpetrating the fraud and imposing the forged paper upon
the bank, doesn’t entitle the bank to shift the loss to the drawer-payor, in the absence of some
circumstance raising estoppel against the drawer.
TIU VS. PLATINUM PLANS PHIL., INC.

G.R. NO. 163512, FEB. 28, 2007
Page 34 of 84
FACTS:
The petitioner was employed as Division Marketing Director of the respondent, a pre-need
company. In 1995, she stopped working and became the Vice President for Sales of Professional
Pension Plans, Inc., another pre-need company. She was sued for damages for violating her contract
with respondent which prohibited her in a business of the same nature within two (2) years
separation, whether voluntary or involuntary. The RTC and the CA held her liable. Before the SC, the
petitioner contended that the non-involvement clause is offensive to public policy since the
restraint imposed is much greater than what is necessary to afford respondent a fair and
reasonable protection. She added that since the products sold in the pre-need industry are more or
less the same, the transfer to a rival company is acceptable. She likewise argued that a strict
application of the non-involvement clause would deprive her of the right to engage in the only work
she knows.
ISSUE:
Whether or not the non-involvement clause is valid.
HELD:
In this case what makes the non-involvement clause valid is that, she had been privy to
confidential and highly sensitive marketing strategies of respondent’s business. To allow her to
engage in a rival business soon after she leaves would make respondent’s trade secrets vulnerable
especially in a highly competitive marketing environment. In sum, the non-involvement clause is
not contrary to public welfare and not greater than is necessary to afford a fair and reasonable
protection to respondent. In any event, Article 1306 of the Civil Code provides that parties to a
contract may establish such stipulations, clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals, good customs, public order, or public
policy.
LAND BANK VS. HEIRS OF SPOUSES SORIANO

G.R. NO. 178312, JAN. 30, 2012
FACTS:
Petitioner filed petition for review on certiorari, seeking reversal of decision of CA affirming
earlier judgment of RTC (sitting as Special Agrarian Court), in which Land Bank was ordered to pay
respondents (landowners) just compensation of P1,227,571.10 for 2 parcels of land plus 6% per
annum legal interest from date of taking, pursuant to RA 6657. The properties owned by
respondents (Marivel Carandang and Joseph Soriano) became subject to Operation Land Transfer
(OLT) and were valued by petitioner and Department of Agrarian Reform (DAR) at
P10,000.00/hectare. Petitioners this too low as compared to existing valuations of agricultural
lands, hence the action for just compensation. Considering the cavans yielded by the irrigated lands,
they asked that the properties be pegged at P1,800,000.00, as per AO 61 and RA 6657. Land Bank,
in disagreement, insisted PD 27 and EO 228 should govern the fixing of just compensation for the
properties. During pendency of petition for review on certiorari, the parties entered into an
agreement re-evaluating the cost of the parcels of land which was submitted to inform High Court
of the Joint Motion to Approve filed with their agreement.
Page 35 of 84
ISSUE:
Whether or not the appeal pending in the Supreme Court should be dismissed.
HELD:
Yes. The said agreement was found to have complied with Art. 2028 of the Civil Code, thus
was deemed to be a judicial compromise clearly exhibited in the intentions of both parties to end
their pending litigation by settling their dispute. Moreover, as per provision, had the objective
been to avoid litigation, such would be deemed extrajudicial.
MUTUALITY OF CONTRACTS
PNB v. Court of Appeals
196 SCRA 536
FACTS:
Private respondents, who are owners of a NACIDA-registered enterprise, obtained from

petitioner PNB a loan initially pegged at 12% per annum interest. The contract agreement includes,
among others, a clause which allows PNB to raise the rate of interest depending on the bank's
future policies. During the term of the agreement, PNB on several occasions imposed subsequent
raises to the applicable rate ranging from the original 12% up to 42%, imposing also a 6% penalty
per annum.
ISSUE:
Can a creditor raise the rate of interest based solely on a certain clause in the contract and without
consent from the debtor as to the amount and rate of increase?
HELD: No.
It is basic that there can be no contract in the true sense in the absence of the element of
agreement, or of mutual assent of the parties. If this assent is wanting on the part of the one who
contracts, his act has no more efficacy than if it had been done under duress or by a person of
unsound mind. Similarly, contract changes must be made with the consent of the contracting
parties. The minds of all the parties must meet as to the proposed modification, especially when it
affects an important aspect of the agreement. In the case of loan contracts, it cannot be gainsaid that
the rate of interest is always a vital component, for it can make or break a capital venture. Thus, any
change must be mutually agreed upon, otherwise, it is bereft of any binding effect. The Court cannot
countenance petitioner bank's posturing that the escalation clause at bench gives it unbridled right
to unilaterally upwardly adjust the interest on private respondents' loan. That would completely
take away from private respondents the right to assent to an important modification in their
agreement and would negate the element of mutuality in contracts.
Private respondents are not also estopped from assailing the unilateral increases in interest
rate made by petitioner bank the circumstances do not show that private respondents implicitly
agreed to the proposed increases in interest rate which by any standard were too sudden and too
stiff.
Page 36 of 84
LAO LIM vs. COURT OF APPEALS

191 SCRA 150
FACTS:
Records show that Francisco Lim, entered into a contract of lease with Benito Dy for a
period of 3 years, from 1976 to 1979. After the stipulated term expired the respondent refused to
leave the premises, so Francisco Lim filed an ejectment suit against Benito Dy. This case was then
taken over by a judicially approved compromise agreement which provides an automatic increase
in rent of 20% every 3 years. On 1985 Dy, informed Lim of his intention to renew the lease up to
1988, Lim did not agree to the renewal.
In 1987 another ejectment suit was filed by Lim after the failure of Dy to vacate the
premises. It was dismissed by the RTC and later affirmed by the CA for the following reasons: (1)
the stipulation in the compromise agreement which allows the lessee (Benito Dy) to stay on the
premises as long as he needs it and can pay rents is valid, being a resolutory condition, and
therefore beyond the ambit of art 1308 of the NCC; and (2) the compromise agreement has the
effect of res judicata.
ISSUE:
Was the stipulation in the compromise agreement which allows the lessee to stay on the premises
as long as he needs it and can pay rents is valid?
HELD: No.
Since the stipulation “for as long as the defendant needed the premises and can meet and
pay said increases” is a purely potestative condition because it leaves the effectivity and enjoyment
of leasehold rights to the sole and exclusive will of the lessee. The continuance, effectivity, and
fulfillment of a contract of lease cannot be made to depend exclusively upon the free and
uncontrolled choice of the lessee between continuing payment of the rentals or not, completely
depriving the owner of any say in the matter. Mutuality does not obtain in such a contract of lease
and no equality exists between the lessor and the lessee.
The decision of the Court of Appeals is REVERSED AND SET ASIDE. Benito Dy is ordered to
immediately vacate and return the possession of the premises and pay the monthly rentals due
thereon in accordance with the compromise agreement until he shall have actually vacated the
same. This Judgment is immediately executory.
Philippine National Bank vs Spouses Agustin and Pilar Rocamora

238 SCRA 20
FACTS:
Page 37 of 84
On September 25, 1981, the spouses Rocamora obtained a loan from PNB in the aggregate
amount of P100,000 under the Cottage Industry Guarantee and Loan Fund (CIGLF). The loan was
payable in five years, under the following terms: o P35,000 payable semi-annually and P65,000
payable annually. In addition to the principal amount, the spouses Rocamora agreed to pay interest
at the rate of 12% per annum, plus a penalty fee of 5% per annum in case of delayed payments. o
The spouses Rocamora signed two promissory notes evidencing the loan.
To secure their loan obligations, the spouses Rocamora executed two mortgages: a real
estate mortgage over a property covered by TCT in the amount of P10,000, and a chattel mortgage
over various machineries in the amount of P25,000. Payment of the remaining P65,000 was under
the CIGLF guarantee, with the spouses Rocamora paying the required guarantee fee. Both the
promissory note and the real estate mortgage deed contained an escalation clause that allowed PNB
to increase the 12% interest rate at anytime without notice, within the limits allowed by law. It also
contains de-escalation clause. The PNB claimed that the outstanding principal balance as of
foreclosure date (September 19, 1990) was P79,484.65, plus interest and penalties, for a total due
and demandable obligation of P250,812. Allegedly, after deducting the P75,500 proceeds of the
foreclosure sale, the spouses Rocamora still owed the bank P206,297. The spouses Rocamora
refused to pay the amount claimed as deficiency. They alleged that the PNB ―practically created the
deficiency by:
(a) increasing the interest rates from 12% to 42% per annum, and
(b) failing to immediately foreclose the mortgage pursuant to Presidential Decree No. 385 (PD 385
or the Mandatory Foreclosure Law) to prevent the interest and penalty charges from accruing.
RTC, CA and SC decided against PNB.
ISSUE/S:
1. W/N PNB can escalate the interest rate anytime without the consent of Spouses Ricamora?
2. W/N PNB failed to sufficiently and satisfactorily prove the amount of P250,812?
3. W/N PNB failed to comply with the immediate and mandatory foreclosure required under
PD 385?
HELD:
1. No. Any increase in the rate of interest made pursuant to an escalation clause must be the
result of an agreement between the parties. The minds of all the parties must meet on the
proposed modification as this modification affects an important aspect of the agreement.
There can be no contract in the true sense in the absence of the element of an agreement,
i.e., the parties‘ mutual consent.
Thus, any change must be mutually agreed upon, otherwise, the change carries no binding
effect. o Even with a de-escalation clause, no matter how elaborately worded, an
unconsented increase in interest rates is ineffective if it transgresses the principle of
mutuality of contracts.
2. Yes. Both the RTC and the CA found that PNB failed to prove the claimed deficiency; its own
testimonial and documentary evidence in fact contradicted one another. The PNB alleged
Page 38 of 84
that the spouses Rocamora‘s obligation at the time of foreclosure (September 19, 1990)
amounted to P250,812.10, yet its own documentary evidence showed that, as of that date,
the total obligation was only P206,664; the PNB‘s own witness, Mr. Reynaldo Caso, testified
that the amount due from the spouses Rocamora was only P206,664.
3. Yes. Under PD 385, government financial institutions – which was PNB‘s status prior to its
full privatization in 1996 – are mandated to immediately foreclose the securities given for
any loan when the arrearages amount to at least 20% of the total outstanding obligation.
PNB foreclosed only after 3 years of default by the spouses.
PHILIPPINE COMMERCIAL INTERNATIONAL BANK vs. COURT OF APPEALS and RORY W. LIM
255 SCRA 299
FACTS:
Private respondent Rory Lim delivered to his cousin Lim Ong Tian PCIB Check in the
amount of P200,000.00 for the purpose of obtaining a telegraphic transfer from petitioner PCIB in
the same amount.
The money was to be transferred to Equitable Banking Corporation, and credited to private
respondents account at the said bank. Upon purchase of the telegraphic transfer, petitioner issued
the corresponding receipt which contained the assailed provision that in case of fund transfer, the
undersigned hereby will be made without any responsibility on the part of the BANK, or its
correspondents, for any loss occasioned by errors, or delays in the transmission of message by
telegraph or cable companies or by the correspondents or agencies, necessarily employed by this
BANK in the transfer of this money, all risks for which are assumed by the undersigned. Subsequent
to the purchase of the telegraphic transfer, petitioner in turn issued and delivered eight (8)
Equitable Bank checks to his suppliers as payment for the merchandise. When the checks were
presented for payment, five of them bounced for insufficiency of funds, while the remaining three
were held overnight for lack of funds upon presentment. Such happening came to private
respondents’ attention only when Equitable Bank notified him of the penalty charges and after
receiving letters from his suppliers that his credit was being cut-off due to the dishonor of the
checks he issued.
Aggrieved, private respondent demanded from petitioner PCIB that he be compensated for
the resulting damage that he suffered due to petitioners failure to make the timely transfer of funds
which led to the dishonor of his checks. Petitioner refused to heed private respondents demand
prompting the latter to file a complaint for damages with the Regional Trial Court of Gingoog City.
Petitioner denied any liability to private respondent and interposed alleged the lack of privity
between it and private respondent as it was not private respondent himself who purchased the
telegraphic transfer from petitioner.
Page 39 of 84
Additionally, petitioner pointed out that private respondent is nevertheless bound by the
stipulation in the telegraphic transfer application/form receipt. The Regional Trial Court held
petitioner liable for breach of contract. The provision amounted to a contract of adhesion wherein
the objectionable portion was unilaterally inserted by petitioner in all its application forms without
giving any opportunity to the applicants to question the same and express their conformity thereto.
The Court of Appeals affirmed with modifications the judgment of the trial court.
ISSUE:
Whether or not petitioner is exempt from liability in the loss resulting from errors or delays in the
transfer of funds.
RULING: No.
A contract of adhesion is defined as one in which one of the parties imposes a ready-made
form of contract, which the other party may accept or reject, but which the latter cannot modify.
One party prepares the stipulation in the contract, while the other party merely affixes his
signature or his adhesion thereto, giving no room for negotiation and depriving the latter of the
opportunity to bargain on equal footing. Nevertheless, these types of contracts have been declared
as binding as ordinary contracts, the reason being that the party who adheres to the contract is free
to reject it entirely.
It has been declared that a contract of adhesion may be struck down as void and
unenforceable, for being subversive to public policy, only when the weaker party is imposed upon
in dealing with the dominant bargaining party and is reduced to the alternative of taking it or
leaving it, completely deprived of the opportunity to bargain on equal footing. Having established
that petitioner acted fraudulently and in bad faith, we find it implausible to absolve petitioner from
its wrongful acts on account of the assailed provision exempting it from any liability.
In Geraldez vs. Court of Appeals, it was unequivocally declared that notwithstanding the
enforceability of a contractual limitation, responsibility arising from a fraudulent act cannot be
exculpated because the same is contrary to public policy. Freedom of contract is subject to the
limitation that the agreement must not be against public policy and any agreement or contract
made in violation of this rule is not binding and will not be enforced. Undoubtedly, the services
being offered by a banking institution like petitioner are imbued with public interest. The use of
telegraphic transfers have now become commonplace among businessmen because it facilitates
commercial transactions. Any attempt to completely exempt one of the contracting parties from any
liability in case of loss notwithstanding its bad faith, fault or negligence, as in the instant case,
cannot be sanctioned for being inimical to public interest and therefore contrary to public policy.
ERMITAÑO VS. COURT OF APPEALS

306 SCRA 218
FACTS:
Page 40 of 84
Petitioner Luis Ermitañ o applied for a credit card from private respondent BPI Express Card
Corp. (BECC) on October 8, 1986 with his wife, Manuelita, as extension card holder. The spouses
were given credit limit of P10, 000.00. They often exceeded this credit limit without protest from
BCC.
On August 9, 1989, Manuelita’s bag was snatched from her as she was shopping at the
greenbelt mall in Makati. Among the items inside the bag was her BECC credit card. That same night
she informed, by telephone, BECC of the loss. The call was received by BECC offices through a
certain Gina Banzon. This was followed by a letter dated August 30, 1989. She also surrendered
Luis’ credit card and requested for replacement cards. In her letter, Manuelita stated that she “shall
not be responsible for any and all charges incurred [through the use of the lost card] after August
29, 1989.
However, when Luis received his monthly billing statement from BECC dated September 20,
1989, the charges included amounts for purchases were made, one amounting to P2,350.05 and the
other, P607.50. Manuelita received a billing statement dated October 20,1989 which required her
to immediately pay the total amount of P3,197.70 covering the same (unauthorized) purchases.
Manuelita wrote again BECC disclaiming responsibility for those charges, which were made after
she had served BECC with notice of loss of her card.
However, BECC, in a letter dated July 13, 1990, pointed to Luis the stipulation in their
contract. However, Luis stressed that the contract BECC was referring to was a contract of adhesion
and warned that if BECC insisted on charging him and his wife for the unauthorized purchases, they
will sue BECC continued to bill the spouses for said purchases.
ISSUE:
Whether or not the Court of Appeals gravely erred in relying on the case of Serra v. Court of
appeals, 229 SCRA 60, because unlike that case, petitioners have no chance at all to contest the
stipulations appearing in the credit card application that was drafted entirely by private
respondent, thus, a clear contract of adhesion.
RULING:
The contract between the parties in this case is indeed a contract of adhesion, so-called
because its terms are prepared by only one party while the other party merely affixes his signature
signifying his adhesion thereto. Such contracts are not void in themselves. They are as binding as
ordinary contracts. Parties who enter in to such contracts are free to reject the stipulations entirely.
In this case, the cardholder, Manuelita, has complied with what was required of her under
the contract with BECC, She immediately notified BECC of loss of her card on the same day it was
lost and, the following day, she sent a written notice of the loss to BECC.
Clearly, what happened in this case was that BECC failed to notify promptly the
establishment in which the unauthorized purchases were made with the use of Manuelita’s lost
card.
Page 41 of 84
PSBank vs. CASTILLO

649 SCRA 527
FACTS:
Respondents obtained a loan with face value of P2,500,000.00 and 17% interest rate per
annum from petitioner with real estate mortgage over lots they owned in Tondo, Manila. From the
release of the loan, the highest interest was 29% and the lowest was 15.5% per annum.
Respondents were notified in writing. They neither gave their confirmation thereto nor did they
formally question the changes. However, respondent Castillo sent several letters to petitioner
requesting for the reduction of the rates.
Respondents defaulted due to financial constraints. Thus, petitioner initiated an

extrajudicial foreclosure sale of the mortgaged properties which were auctioned. A certificate of
sale was then issued and submitted to the Clerk of Court and to the Ex-Officio Sheriff of Manila. The
same, sansthe approval of the Executive Judge of the RTC, was registered with the Registry of
Deeds.
Respondents failed to redeem the property.
Respondents filed a case before the RTC. After trial, the RTC decided that the questioned
increases of the interest were unreasonable, excessive, and arbitrary; that Petitioner should refund
Respondents of the amount of interest collected in excess of 17% per annum; that the Extrajudicial
Foreclosure conducted by the defendants are voidab initio; that the Register of Deeds is ordered to
cancel the corresponding annotations at the back of TCTs; that defendant is to pay plaintiffs moral
and exemplary damages, and attorney’s fees.
Petitioner filed an MR. The RTC partially granted the motion by modifying the interest rate
from 17% to 24% per annum.
The case was appealed to the CA which modified the decision of the RTC ordering PSB to
refund to the plaintiffs the amount of interest collected in excess of 17% per annum; declaring the
Extrajudicial Foreclosure conducted by the defendants as valid; and modifying the damages
awarded to plaintiff.
ISSUE:
Did the CA err in (1) declaring that the modifications in the interest rates are unreasonable; and (2)
sustaining the award of damages and attorney’s fees?
HELD:
Here, the increase or decrease of interest rates hinge solely on the discretion of petitioner,
violated the principle of mutuality of contracts, and is unconscionable; therefore void.Any
Page 42 of 84
stipulation regarding the validity or compliance of the contract left solely to the will of one of the
parties is likewise invalid.
Petitioner cannot claim that respondent recognized the legality of the changes. Respondents
exhibits readily shows that the conformity letter signed by them pertain only to the amendment of
the interest rate review period from 90 days to 30 days. This is separate from the modification of
the interest rate itself. Moreover, respondents’ assent cannot be implied from their lack of response
to the memos sent by petitioner. No one receiving a proposal to change a contract is obliged to
answer the proposal; assent is therefore not implied.
Likewise, it cannot be said that respondents recognized the rates legality when it requested
for a reduction its reduction. This does not translate into consent. Further, the letters were actually
questioning the propriety of the interest rates.
***
Here, we are not sufficiently convinced that fraud, bad faith, or wanton disregard of
contractual obligations can be imputed to petitioner simply because it unilaterally imposed the
changes in interest rates. Thus, the award of moral and exemplary damages is unwarranted. In the
same vein, respondents cannot recover attorney’s fees and litigation expenses. As regards the
award for refund to respondents of their interest payments in excess of 17% per annum, the same
should include legal interest.
We have held that when an obligation is breached, and it consists in the payment of a sum of
money, the interest on the amount of damages shall be at the rate of 12%per annum, reckoned from
the time of the filing of the complaint.
PHILIPPINE NATIONAL BANK v. THE HON. COURT OF APPEALS and

AMBROSIO PADILLA
196 SCRA 537
FACTS:
Ambrosio Padilla, private respondents, was granted by petitioner Philippine National Bank,
a credit line, secured by a real estate mortgage, for a term of 2 years, with 18% interest per annum.
Private respondent executed in favor of the PNB a Credit Agreement, 2 promissory notes in the
amount of P900,000.00 each, and a Real Estate Mortgage Contract. Stipulations in the PN authorizes
PNB to increase the stipulated 18% interest per annum "within the limits allowed by law at any
time depending on whatever policy it [PNB] may adopt in the future; Provided, that, the interest
rate on this note shall be correspondingly decreased in the event that the applicable maximum
interest rate is reduced by law or by the Monetary Board." Padilla requested to the increase in the
rate of interest from 18% be fixed at 21% or 24% but was denied by PNB.
ISSUE:
Whether PNB, within the term of the loan which it granted to the private respondent, may
unilaterally change or increase the interest rate stipulated therein at will and as often as it pleased.
Page 43 of 84
HELD: No.
Central Bank Circular No. 905, Series of 1982 removed the Usury law ceiling on interest
rates,
however, it did not authorize the PNB, or any bank for that matter, to unilaterally and successively
increase the agreed interest rates from 18% to 48% within a span of four (4) months, in violation
of P.D. 116 which limits such changes to "once every twelve months."
SPOUSES MARIANO and GILDA FLORENDO vs. COURT OF APPEALS and

LAND BANK OF THE PHILIPPINES
G.R. No. 101771 | 1996-12-17
FACTS:
Gilda Florendo was an employee of Land Bank from May 17, 1976 until August 16, 1984
when
she voluntarily resigned. However, before her resignation, she applied for a housing loan payable
within 25 years from Land Bank’s Provident Fund on July 20, 1983; On March 19, 1985, Land Bank
increased the interest rate on Florendo’s loan from 9% per annum to 17%, the said increase to take
effect on March 19, 1985. The details of the increase are embodied in Landbank's ManCom
Resolution No. 85-08 and in a Provident Fund Memorandum Circular. Land Bank kept on
demanding that Florendo pay the increased interest, or the new monthly installments based on the
increased interest rate, but Florendo just as vehemently maintained that the said increase is
unlawful and unjustifiable.
ISSUE:
Whether or not Land Bank has a valid and legal basis to impose an increased interest rate on the
petitioners' housing loan?
HELD: No.
The court held that there proactive enforcement of the ManCom Resolution as against
petitioner- employee is invalid since in the case at bar, there is in fact no Central Bank rule,
regulation or other issuance which would have triggered an application of the escalation clause as
to petitioner’s factual situation. The loan was perfected on July 20, 1983. PD No. 116 became
effective on January 29, 1973. CB Circular No. 416 was issued on July 29, 1974. CB Circ. 504 was
issued February 6, 1976. CB Circ. 706 was issued December 1, 1979. CB Circ. 905, lifting any
interest rate ceiling prescribed under or pursuant to the Usury Law, as amended, was promulgated
in 1982.
These and other relevant CB issuances had already come into existence prior to the
perfection of the housing loan agreement and mortgage contract, and thus it may be said that these
regulations had been taken into consideration by the contracting parties when they first entered
into their loan contract. ManCom Resolution No. 85-08, which is neither a rule nor a resolution of
the Monetary Board, cannot be used as basis for the escalation in lieu of CB issuances, since
paragraph (f) of the mortgage contract very categorically specifies that any interest rate increase be
Page 44 of 84
in accordance with “prevailing rules, regulations and circulars of the Central Bank . . . as the
Provident Fund Board . . may prescribe.”
SPS. IGNACIO F. JUICO AND ALICE P. JUICO v. CHINA BANKING CORPORATION,

GR No. 187678, 2013-04-10
FACTS:
Spouses Ignacio F. Juico and Alice P. Juico (petitioners) obtained a loan from China Banking
Corporation (respondent) as evidenced by two Promissory Notes... for... the sums of P6,216,000 and
P4,139,000, respectively. The loan was secured by a Real Estate Mortgage (REM) over petitioners'
property located at 49 Greensville St., White Plains, Quezon City. When petitioners failed to pay the
monthly amortizations due, respondent demanded the full payment of the outstanding balance with
accrued monthly interests. The amount due on the two promissory notes totaled P19,201,776.63
representing the principal, interests, penalties and attorney's fees. On the same day, the mortgaged
property was sold at public auction, with respondent as highest bidder for the amount of
P10,300,000. Petitioners received a demand letter dated May 2, 2001 from respondent for the
payment of P8,901,776.63, the amount of deficiency after applying the proceeds of the foreclosure
sale to the mortgage debt.
Respondent filed a collection suit in the trial court.
In their Answer, petitioners admitted the existence of the debt but interposed, by way of
special and affirmative defense, that the complaint states no cause of action considering that the
principal of the loan was already paid when the mortgaged property was extrajudicially foreclosed
and sold for P10,300,000. By way of counterclaim, petitioners prayed that respondent be ordered
to pay P100,000 in attorney's fees and costs of suit. As of the date of the public auction, petitioners'
outstanding balance was P19,201,776.63
On cross-examination, Ms. Yu reiterated that the interest rate changes every month based
on the prevailing market rate and she notified petitioners of the prevailing rate by calling them
monthly before their account becomes past due. When asked if there was any written authority
from petitioners for respondent to increase the interest rate unilaterally, she answered that
petitioners signed a promissory note indicating that they agreed to pay interest at the prevailing
rate.
Petitioner Ignacio F. Juico testified that prior to the release of the loan, he was required to
sign a blank promissory note and was informed that the interest rate on the loan will be based on
prevailing market rates. The RTC ruled in favor of respondent while trial court agreed with
respondent. It ruled that the amount realized at the auction sale was applied to the interest,
conformably with Article 1253 of the Civil Code which provides that if the debt produces interest,
payment of the principal shall not be deemed to have been made until the interests have been
covered. The trial court further held that Ignacio's claim that he signed the promissory notes in
blank cannot negate or mitigate his liability since he admitted reading the promissory notes before
signing them.
Page 45 of 84
When the case was elevated to the CA, the latter affirmed the trial court's decision.
ISSUE:
Whether the interest rates imposed upon them by respondent are valid.
RULING:
They insist that the interest rates were unilaterally imposed by the bank and thus violate
the principle of mutuality of contracts. They argue that the escalation clause in the promissory
notes does not give respondent the unbridled authority to increase the interest rate unilaterally.
Any change must be mutually agreed upon. The appeal is partly meritorious. The provision in the
promissory note authorizing respondent bank to increase, decrease or otherwise change from time
to time the rate of interest and/or bank charges "without advance notice" to petitioner, "in the
event of change in the interest rate... prescribed by law or the Monetary Board of the Central Bank
of the Philippines," does not give respondent bank unrestrained freedom to charge any rate other
than that which was agreed upon.
Here, the monthly upward/downward adjustment of interest rate is left to the will of...
respondent bank alone. It violates the essence of mutuality of the contract. Although interest rates
are no longer subject to a ceiling, the lender still does not have an unbridled license to impose
increased interest rates. The lender and the borrower should agree on the imposed rate, and such
imposed rate should be in writing. In this case, the trial and appellate courts, in upholding the
validity of the escalation clause, underscored the fact that there was actually no fixed rate of
interest stipulated in the promissory notes as this was made dependent on prevailing rates in the
market.
In interpreting a contract, its provisions should not be read in isolation but in relation to
each other and in their entirety to render them effective. Here, the escalation clause in the
promissory notes authorizing the respondent to adjust the rate of interest on the basis of a law or
regulation issued by the Central Bank of the Philippines, should be read together with the
statement after the first paragraph where no rate of... interest was fixed as it would be based on
prevailing market rates.
Evidently, the parties intended the interest on... petitioners' loan, including any upward or
downward adjustment, to be determined by the prevailing market rates and not dictated by
respondent's policy. There is no indication that petitioners were coerced into agreeing with the
foregoing provisions of the promissory notes... we hold that the escalation clause is still void
because it grants respondent the power to impose an increased rate of interest without a written
notice to petitioners and their written consent.
SPOUSES EDUARDO AND LYDIA SILOS VS. PHILIPPINE NATIONAL BANK

G.R. No. 181045, July 02, 2014
FACTS:
Page 46 of 84
Spouses Silos have been in business for about two decades of operating a department store
and buying and selling ready-to-wear apparel. Spouses Silos then secured a revolving credit line
with Philippine National Bank (PNB) through a real estate mortgage as a security. After two years,
their credit line increased. They then signed a Credit Agreement, which was also amended 2 years
later, and several Promissory Notes (PN) as regards their Credit Agreements with PNB.
The said loan was initially subjected to a 19.5% interest rate per annum. In the Credit
Agreements, Spouses Silos bound themselves to the power of PNB to modify the interest rate
depending on whatever policy that PNB may adopt in the future without need of notice upon them.
Thus, the said interest rates played from 16% to as high as 32% per annum.
Spouses Silos acceded to the policy by pre-signing a total of 26 PNs leaving the individual
applicable interest rates at hand blank since it would be subject to modification by PNB. They
regularly renewed and made good on their PNs, religiously paid the interests without objection or
fail. However, during the 1997 Asian Financial Crisis, Spouses Silos faltered when the interest rates
soared. The 26th PN became past due and despite repeated demands by PNB, they failed to make
good on the note. Thus, PNB foreclosed and auctioned the involved security for the mortgage.
Spouses Silos instituted an action to annul the foreclosure sale on the ground that the
succeeding interest rates used in their loan agreements was left to the sole will of PNB, the same
fixed by the latter without their prior consent and thus, void. The RTC ruled that such stipulation
authorizing both the increase and decrease of interest rates as may be applicable is valid.
The CA affirmed the RTC decision.
ISSUE:
Whether or not PNB, on its own, modify the interest rate in a loan agreement without violating the
mutuality of contracts.
HELD: NO.
PNB cannot modify the interest rate in a loan agreement on its own. However, contrary to
the stubborn insistence of petitioner bank, the said law and circular did not authorize either party
to unilaterally raise the interest rate without the other's consent. It is basic that there can be no
contract in the true sense in the absence of the element of agreement, or of mutual assent of the
parties. If this assent is wanting on the part of the one who contracts, his act has no more efficacy
than if it had been done under duress or by a person of unsound mind.
Similarly, contract changes must be made with the consent of the contracting parties. The
minds of all the parties must meet as to the proposed modification, especially when it affects an
important aspect of the agreement. In the case of loan contracts, it cannot be gainsaid that the rate
of interest is always a vital component, for it can make or break a capital venture. Thus, any change
must be mutually agreed upon, otherwise, it is bereft of any binding effect.
We cannot countenance petitioner bank's posturing that the escalation clause at bench
gives it unbridled right to unilaterally upwardly adjust the interest on private respondents' loan.
Page 47 of 84
That would completely take away from private respondents the right to assent to an important
modification in their agreement and would negate the element of mutuality in contracts.
RATIO:
Article 1308 of the Civil Code: Art. 1308. The contract must bind both contracting parties; its
validity or compliance cannot be left to the will of one of them.
RELATIVITY OF CONTRACTS:
DKC Holdings v. CA
G.R. No. 118248. April 5, 2000
FACTS:
On March 16, 1998, petitioner DKC Holdings Corporation (DKC) entered into a Contract of
Lease with Option to Buy with Encarnacion Bartolome, decedent herein, whereby petitioner was
given the option to lease or lease with purchase the subject land.
Encarnacion died. Thereafter, petitioner coursed its payment to private respondent Victor
Bartolome, being the sole heir of Encarnacion. Victor, however, refused to accept these payments.
On March 14, 1990, petitioner served upon Victor, via registered mail, notice that it was exercising
its option to lease the property, tendering the amount of P15,000.00 as rent. Again, Victor refused
to accept the tendered rental fee and to surrender possession of the property to petitioner.
On April 23, 1990, petitioner filed a complaint for specific performance and damages
against Victor and the Register of Deeds
ISSUE:
Whether or not the rights under a Contact of Lease with Option to Buy were transmissible.
HELD: YES.
The general rule, therefore, is that heirs are bound by contracts entered into by their
predecessors-in-interest except when the rights and obligations arising therefrom are not
transmissible by (1) their nature, (2) stipulation or (3) provision of law. The Court held that there is
neither contractual stipulation nor legal provision making the rights and obligations under the
lease contract intransmissible. More importantly, the nature of the rights and obligations therein
are, by their nature, transmissible.
In the case at bar, the subject matter of the contract is a lease, which is a property right. The
death of a party does not excuse nonperformance of a contract which involves a property right, and
the rights and obligations thereunder pass to the personal representatives of the deceased.
Similarly, nonperformance is not excused by the death of the party when the other party has a
property interest in the subject matter of the contract. Therefore, Victor is bound by the subject
Contract of Lease with Option to Buy.
Page 48 of 84
YOUNG vs Court of Appeals

169 SCRA 213
FACTS:
Defendant Philippine Holding, Inc. is the former owner of a piece of land located at Soler St., Sta.
Cruz, Manila, and a two storey building erected thereon, consisting of six units; Unit 1350 which is
vacant, Unit 1352 occupied by Antonio Young, Unit 1354 by Rebecca C. Young, Unit 1356 by Chui
Wan and Felisa Tan Yu, Unit 1358 by Fong Yook Lu and Ellen Yee Fong and Unit 1360 by the Guan
Heng Hardware.
The owner Philippine Holding, Inc. secured an order from the City Engineer of Manila to demolish
the building. Antonio Young, then a tenant of said Unit 1352, filed an action to annul the City
Engineer's demolition Order (Civil Case No. 123883) entitled Antonio S. Young vs. Philippine
Holding, Inc. before the then Court of First Instance of Manila, Branch XXX. As an incident in said
case, the parties submitted a Compromise Agreement to the Court on September 24, 1981.
Paragraph 3 of said agreement provides that plaintiff (Antonio S. Young) and Rebecca Young and all
persons claiming rights under them bind themselves to voluntarily and peacefully vacate the
premises which they were occupying as lessees (Units 1352 and 1354, respectively) which are the
subject of the condemnation and demolition order and to surrender possession thereof to the
defendant Philippine Holding, Inc. within sixty (60) days from written notice, subject to the proviso
that should defendant decided to sell the subject property or portion thereof, "plaintiff and Rebecca
C. Young have the right
Hence this petition, which was brought to this Court only by Rebecca Young, assisted by her
husband Antonio Go.
Petitioner raised the following assignments of error:
1. The lower court erred in holding that Rebecca C. Young cannot enforce the stipulation in her
favor in the compromise agreement as she is not party therein; 2. The lower court erred in holding
that even if par. 3 of the compromise agreement is construed as a stipulation pour autrui Rebecca
Young cannot enforce it because she did not communicate her acceptance thereof to the obligor.
The petition is devoid of merit.
ISSUE:
Whether or not petitioner can enforce a compromise agreement to which she was not a party.
HELD: NO.
The pertinent portion of the Compromise Agreement reads:
Page 49 of 84
Plaintiff Antonio T.S. Young and the Defendant HOLDING hereby agree to implead
in this action as necessary party- plaintiff, plaintiff's daughter Rebecca C. Young
who is the recognized lawful lessee of the premises known and identified as 1354
Soller St., Sta. Cruz, Manila and whose written conformity appears hereunder.
From the terms of this agreement, the conditions are very clear, such as: (1) that Rebecca C. Young
shall be impleaded in the action and (2) that she shall signify her written conformity thereto. For
unknown reasons, the above conditions were not complied with. The parties did not make any
move to implead Rebecca as necessary party in the case. Neither did her written conformity appear
in said agreement. While there is the printed name of Rebecca C. Young appearing at the end of the
joint motion for approval of the Compromise Agreement, she did not affix her signature above her
printed name, nor on the left margin of each and every page thereof.
In fact, on cross-examination, she admitted that she was not a party to the case and that she did not
sign the aforesaid joint motion because it was not presented to her. More than that, by the aforesaid
actuations of the parties and petitioner's apparent lack of interest, the intention is evident, not to
include the latter either in the onerous, or in the beneficient provisions of said agreement.
Petitioner further argued that the stipulation giving her the right of first refusal is a stipulation pour
autrui or a stipulation in favor of a third person under Article 1311 of the Civil Code.
The requisites of a stipulation pour autrui or a stipulation in favor of a third person are the
following:
(1) there must be a stipulation in favor of a third person.

(2) the stipulation must be a part, not the whole of the contract.
(3) the contracting parties must have clearly and deliberately conferred a favor upon a third
person, not a mere incidental benefit or interest.
(4) the third person must have communicated his acceptance to the obligor before its
revocation.
(5) neither of the contracting parties bears the legal representation or authorization of the
third party. (Florentino v. Encarnacion, Sr., 79 SCRA 193 [1977]).
Assuming that petitioner is correct in claiming that this is a stipulation pour autrui it is
unrebutted that she did not communicate her acceptance whether expressly or impliedly. She
insists however, that the stipulation has not yet been revoked, so that her present claim or demand
is still timely. As correctly observed by the Court of Appeals, the above argument is pointless,
considering that the sale of subject property to some other person or entity constitutes in effect a
revocation of the grant of the right of first refusal to Rebecca C. Young.
FLORENTINO V. ENCARNACION
79 SCRA 193, 30 September 1977
FACTS:
Page 50 of 84
On May 22, 1964, the petitioners-appellants and the petitioner-appellee filed with CFI an
application for the registration under Act 496 of a parcel of agricultural land located at Cabugao,
Ilocos Sur. The application alleged among other things 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 the knowledge and belief; there is no mortgage, hen or encumbrance of any kind whatsoever
affecting said land, nor any other person having any estate or interest thereon, legal or equitable,
remainder, reservation at in expectancy; that said applicants had acquired the aforesaid land thru
and by inheritance from their predecessors in interest, their aunt, Doñ a Encarnacion Florentino,
and Angel Encarnacion acquire their respective shares of the land thru purchase from the original
heirs, Jesus, Caridad, Lourdes and Dolores, all surnamed Singson, on one hand and from Asuncion
Florentino on the other. After due notice and publication, the Court set the application for hearing.
Only the Director of Lands filed an opposition but was later withdrawn so an order of general
default was issued. Upon application of the applicants, the Clerk of Court was commissioned and
authorized to receive the evidence of the applicants and ordered to submit the same for the Court’s
proper resolution. Exhibit O-1 embodied in the deed of extrajudicial partition (Exhibit O), which
states that with respect to the land situated in Barrio Lubong, Dacquel, Cabugao, Ilocos Sur, the
fruits thereof shall serve to defray the religious expenses, was the source of contention in this case
(Spanish text). Florentino wanted to include ExhibitO-1 on the title but the Encarnacion supposed
and subsequently withdrawn their application on their shares, which was opposed by the former.
The Court after hearing the motion for withdrawal and the opposition issued an order and
for the purpose of ascertaining and implifying that the products of the land made subject matter of
this land registration case had been used in answering for the payment of expenses for the religious
functions specified in the Deed of Extrajudicial Partition which was no registered in the office of the
Register of Deeds from time immemorial; and that the applicants knew of thisarrangement and the
Deed of Extrajudicial Partition of August 24,1947, was not signed by Angel Encarnacion or Salvador
Encarnacion, Jr.-CFI: The self-imposed arrangement in favor of the Church is a simple donation, but
is void since the done has not accepted the donation and Salvador Encarnacion, Jr. and Angel
Encarnacion had not made any oral or written grant at all so the court allowed the religious
expenses to be made and entered on the undivided shares, interests and participations of all the
applicants in this case, except that of Salvador Encarnacion, Sr., Salvador Encarnacion, Jr. and Angel
Encarnacion.”-the. Petitioners-appellants filed their Reply to the Opposition reiterating their
previous arguments, and also attacking the jurisdiction of the registration court to pass upon the
validity or invalidity of the agreement Exhibit O-1, alleging that such is litigable only in an ordinary
action and not proper in a land registration proceeding. The Motion for Reconsideration and of New
Trial was denied for lack of merit, but the court modified in highlighting that the donee Church has
not showed its clear acceptance of the donation, and is the real party of this case, not the
petitioners-appellants.
ISSUE:
Whether or Not the court erred in concluding that the stipulation is just an arrangement stipulation.
RULING: YES.
Page 51 of 84
The court erred in concluding that the stipulation is just an arrangement stipulation. It
cannot be revoked unilaterally. The contract must bind both parties, based on the principles (1)
that obligation wising from contracts has the force of law between the contracting parties; and (2)
that they must be mutuality between the parties band on their essential equality, to which is
repugnant to have one party bound by the contract leaving the other free therefrom. The
stipulation (Exhibit O-1) is part of an extrajudicial partition (Exh. O) 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. The said stipulation is a Stipulation pour autrui. A
stipulation pour autrui is a stipulation in favor of a third person conferring a clear and deliberate
favor upon him, and which stipulation is merely a part of a contract entered into by the parties,
neither of whom acted as agent of the third person, and such third person may demand its
fulfillment provided that he communicates his acceptance to the obligor before it is revoked.
Mandarin Villa, Inc. vs. CA and Clodualdo de Jesus

257 SCRA 538, 20 June 1996.
FACTS:
In the evening of 19 Oct 1989, private respondent de Jesus hosted a dinner for his friends at
the peririoner’s restaurant, the Mandarin Villa Seafoods Village in Mandaluyong City. After dinner,
the waiter handed to de Jesus the bill amounting to P2,658.50. De Jesus offered his BANKARD credit
card to the waiter for payment. Minutes later, the waiter returned and audibly informed that said
credit card had expired. De Jesus demonstrated that the card had yet to expire on Sept 1990, as
embossed on its face. De Jesus approached the cashier who again dishonored such card. De Jesus
offered his BPI express credit card instead and this was accepted, honored and verified. The trial
court and CA held petitioner to be negligent.
ISSUE:
WON petitioner was negligent; If negligent, WON such negligence was the proximate cause of
private respondent’s damage.
HELD:
Petition dismissed.
The test for determining the existence of negligence in a case may be stated as follows: did
the defendant in doing the alleged negligent act use the reasonable care and caution which an
ordinary prudent person would have used in the same situation? If not, then he is guilty of
negligence. In the case at bar, the Point of Sale Guidelines which outlined the steps that petitioner
must follow under the circumstances reveals that whenever the words CARD EXPIRED flashes on
screen, petitioner should check card’s expiry date as embossed in the card itself. If unexpired,
petitioner should honor the card. Clearly, it has not yet expired in 19 Oct 1989 when the same was
dishonored by petitioner. Hence, petitioner did not use the reasonable care and caution which an
ordinary prudent person would have used in the same situation and as such, petitioner is guilty of
negligence.
Page 52 of 84
The humiliation and embarrassment of private respondent was brought about by the fact of
dishonor by petitioner of private respondent’s valid BANKARD. Hence, petitioner’s negligence is the
proximate cause of private respondent’s damage.
SO PING BUN vs CA
G.R. No. 120554, September 21, 1999
FACTS:
In 1963, Tek Hua Trading Co, through its managing partner, So Pek Giok, entered into lease
agreements with lessor Dee C. Chuan & Sons Inc. (DCCSI). Subjects of four (4) lease contracts. Tek
Hua used the areas to store its textiles. The contracts each had a one-year term. They provided that
should the lessee continue to occupy the premises after the term, the lease shall be on a month-to-
month basis. When the contracts expired, the parties did not renew the contracts, but Tek Hua
continued to occupy the premises. In 1976, Tek Hua Trading Co. was dissolved. Later, the original
members of Tek Hua Trading Co. including Manuel C. Tiong, formed Tek Hua Enterprising Corp.,
herein respondent corporation. So Pek Giok, managing partner of Tek Hua Trading, died in 1986. So
Pek Giok's grandson, petitioner So Ping Bun, occupied the warehouse for his own textile business,
Trendsetter Marketing.
Manuel Tiong, president of Tek Hua Enterprising Corp. demanded So Ping Bun to vacate the
premises because it will use it for its own business (being the rightful lessee). Petitioner refused to
vacate. On March 4, 1992, petitioner requested formal contracts of lease with DCCSI in favor
Trendsetter Marketing. So Ping Bun claimed that after the death of his grandfather, So Pek Giok, he
had been occupying the premises for his textile business and religiously paid rent. DCCSI acceded to
petitioner's request. The lease contracts in favor of Trendsetter were executed.
ISSUES:
1. W/N So Ping Bun is guilty of tortuous interference.
2. W/N the award of attorney‘s fees against petitioner is valid despite the lack of malice.
HELD:
1. YES. Petitioner's Trendsetter Marketing asked DCCSI to execute lease contracts in its favor,
and as a result petitioner deprived respondent corporation of the latter's property right. Clearly,
and as correctly viewed by the appellate court, the three elements of tort interference above-
mentioned are present in the instant case.
2. Yes. NO DAMAGE TO BE AWARDED. While we do not encourage tort interferers seeking

their economic interest to intrude into existing contracts at the expense of others, however, we find
that the conduct herein complained of did not transcend the limits forbidding an obligatory award
for damages in the absence of any malice. The business desire is there to make some gain to the
detriment of the contracting parties. Lack of malice, however, precludes damages. But it does not
relieve petitioner of the legal liability for entering into contracts and causing breach of existing
ones.
Page 53 of 84
The respondent appellate court correctly confirmed the permanent injunction and nullification
of the lease contracts between DCCSI and Trendsetter Marketing, without awarding damages. The
injunction saved the respondents from further damage or injury caused by petitioner's
interference.
ESSENTIAL ELEMENTS OF CONTRACT:
a. CONSENT
Perez v. CA
323 SCRA 613 (2000)
FACTS:
Primitivo Perez had been insured with the BF Lifeman Insurance Corporation since 1980
for P20,000.00. In October 1987, an agent of Lifeman, Rodolfo Lalog, visited Perez in Quezon and
convinced him to apply for additional insurance coverage of P50,000.00, to avail of the ongoing
promotional discount of P400.00 if the premium were paid annually. Primitivo B. Perez
accomplished an application form for the additional insurance coverage. Virginia A. Perez, his wife,
paid P2,075.00 to Lalog. The receipt issued by Lalog indicated the amount received was a "deposit."
Unfortunately, Lalog lost the application form accomplished by Perez and so on October 28, 1987,
he asked the latter to fill up another application form. On November 1, 1987, Perez was made to
undergo the required medical examination, which he passed.
Lalog forwarded the application for additional insurance of Perez, together with all its
supporting papers, to the office of BF Lifeman Insurance Corporationn in Quezon which office was
supposed to forward the papers to the Manila office. On November 25, 1987, Perez died while he
was riding a banca which capsized during a storm. At the time of his death, his application papers
for the additional insurance were still with the Quezon office. Lalog testified that when he went to
follow up the papers, he found them still in the Quezon office and so he personally brought the
papers to the Manila office of BF Lifeman Insurance Corporation. It was only on November 27, 1987
that said papers were received in Manila. Without knowing that Perez died on November 25, 1987,
BF Lifeman Insurance Corporation approved the application and issued the corresponding policy
for the P50,000.00 on December 2, 1987
Virginia went to Manila to claim the benefits under the insurance policies of the deceased.
She was paid P40,000.00 under the first insurance policy for P20,000.00 (double indemnity in case
of accident) but the insurance company refused to pay the claim under the additional policy
coverage of P50,000.00, the proceeds of which amount to P150,000.00 in view of a triple indemnity
rider on the insurance policy.
In its letter of January 29, 1988 to Virginia A. Perez, the insurance company maintained that
the insurance for P50,000.00 had not been perfected at the time of the death of Primitivo Perez.
Consequently, the insurance company refunded the amount of P2,075.00 which Virginia Perez had
paid Lifeman filed for the rescission and the declaration of nullity. Perez, on the other hand,
Page 54 of 84
averred that the deceased had fulfilled all his prestations under the contract and all the elements of
a valid contract are present.
RTC ruled in favor of Perez. CA reversed.
ISSUE:
Whether or not there was a perfected additional insurance contract.
HELD:
The contract was not perfected. Insurance is a contract whereby, for a stipulated
consideration, one party undertakes to compensate the other for loss on a specified subject by
specified perils. A contract, on the other hand, is a meeting of the minds between two persons
whereby one binds himself, with respect to the other to give something or to render some service.
Consent must be manifested by the meeting of the offer and the acceptance upon the thing and the
cause which are to constitute the contract. The offer must be certain and the acceptance absolute.
When Primitivo filed an application for insurance, paid P2,075.00 and submitted the results
of his medical examination, his application was subject to the acceptance of private respondent BF
Lifeman Insurance Corporation. The perfection of the contract of insurance between the deceased
and respondent corporation was further conditioned upon compliance with the following requisites
stated in the application form:
"there shall be no contract of insurance unless and until a policy is issued on this
application and that the said policy shall not take effect until the premium has been paid
and the policy delivered to and accepted by me/us in person while I/We, am/are in good
health."
The assent of private respondent BF Lifeman Insurance Corporation therefore was not given
when it merely received the application form and all the requisite supporting papers of the
applicant. Its assent was given when it issues a corresponding policy to the applicant. Under the
abovementioned provision, it is only when the applicant pays the premium and receives and
accepts the policy while he is in good health that the contract of insurance is deemed to have been
perfected.
It is not disputed, however, that when Primitivo died on November 25, 1987, his application
papers for additional insurance coverage were still with the branch office of respondent
corporation in Gumaca and it was only two days later, or on November 27, 1987, when Lalog
personally delivered the application papers to the head office in Manila. Consequently, there was
absolutely no way the acceptance of the application could have been communicated to the applicant
for the latter to accept inasmuch as the applicant at the time was already dead.
SALONGA v. FARRALES
GR No. L-47088, 1981-07-10
FACTS:
Page 55 of 84
The records disclose that on January 2, 1973, the appellant, Consolacion Duque Salonga
assisted by her husband, filed a complaint against Julita B. Farrales and the Sheriff of Olongapo City
with the Court of First Instance of Zambales and Olongapo City, Third Judicial District, Branch III,
Olongapo City, seeking the following relief: The records disclose that on January 2, 1973, the
appellant, Consolacion Duque Salonga assisted by her husband, filed a complaint against Julita B.
Farrales and the Sheriff of Olongapo City with the Court of First Instance of Zambales and Olongapo
City, Third Judicial District, Branch III, Olongapo City, seeking the following relief:
a. Ordering defendant Julita Farrales to sell to plaintiff the parcel of land containing an area of
156 Square Meters, more or less, where the house of strong materials of plaintiff exists.
b. Ordering the defendants not to disturb nor interfere in the peaceful possession or
occupation of the land by plaintiff, until a final decision is rendered in this case.
c. Ordering defendants jointly and severally to pay costs; and,
d. Granting plaintiff such other relief conformable to law, justice and equity.
ISSUE:
W/N the court a quo erred in dismissing the complaint for specific performance or the ground that
there exists no legally enforceable compromise agreement upon which Farrales can be compelled
to sell the piece of land in question to plaintiff-appellant, Salonga.
HELD:
It is elementary that consent is an essential element for the existence of a contract, and
where it is wanting, the contract is non-existent. The essence of consent is the conformity of the
parties on the terms of the contract, the acceptance by one of the offer made by the other. The
contract to sell is a bilateral contract. Where there is merely an offer by one party, without the
acceptance of the other, there is no consent. No contract to sell exists where offer to sell property
was rejected by the offeree.
It appears in this case that the offeree Farrales not only did not accept, but rejected the offer
of plaintiffs-appellants, spouses Salonga to buy the land in question. There being no consent there
is, therefore, no contract to sell to speak of. The trial court found as a fact that no compromise
agreement to sell the land in question was ever perfected between the defendant-appellee as
vendor and the plaintiffs-appellants as vendees. It appears in this case that the offeree Farrales not
only did not accept, but rejected the offer of plaintiffs-appellants, spouses Salonga to buy the land in
question. There being no consent there is, therefore, no contract to sell to speak of. As to the
contention that Sec. 6, Article II of the New Constitution is applicable to the case at bar, it must be
remembered that social justice cannot be invoked to trample on the rights of property owners who
under our Constitution and laws are also entitled to protection. power of the Courts to grant.
Philippine National Bank vs Spouses Agustin and Pilar Rocamora

238 SCRA 20
FACTS:
Page 56 of 84
On September 25, 1981, the spouses Rocamora obtained a loan from PNB in the aggregate
amount of P100,000 under the Cottage Industry Guarantee and Loan Fund (CIGLF). The loan was
payable in five years, under the following terms: o P35,000 payable semi-annually and P65,000
payable annually. In addition to the principal amount, the spouses Rocamora agreed to pay interest
at the rate of 12% per annum, plus a penalty fee of 5% per annum in case of delayed payments. o
The spouses Rocamora signed two promissory notes evidencing the loan.
To secure their loan obligations, the spouses Rocamora executed two mortgages: a real
estate mortgage over a property covered by TCT in the amount of P10,000, and a chattel mortgage
over various machineries in the amount of P25,000. Payment of the remaining P65,000 was under
the CIGLF guarantee, with the spouses Rocamora paying the required guarantee fee. Both the
promissory note and the real estate mortgage deed contained an escalation clause that allowed PNB
to increase the 12% interest rate at anytime without notice, within the limits allowed by law. It also
contains de-escalation clause. The PNB claimed that the outstanding principal balance as of
foreclosure date (September 19, 1990) was P79,484.65, plus interest and penalties, for a total due
and demandable obligation of P250,812. Allegedly, after deducting the P75,500 proceeds of the
foreclosure sale, the spouses Rocamora still owed the bank P206,297. The spouses Rocamora
refused to pay the amount claimed as deficiency. They alleged that the PNB ―practically created the
deficiency by:
(a) increasing the interest rates from 12% to 42% per annum, and
(b) failing to immediately foreclose the mortgage pursuant to Presidential Decree No. 385 (PD 385
or the Mandatory Foreclosure Law) to prevent the interest and penalty charges from accruing.
RTC, CA and SC decided against PNB.
ISSUE:
W/N PNB can escalate the interest rate anytime without the consent of Spouses Ricamora?
HELD: No.
Any increase in the rate of interest made pursuant to an escalation clause must be the result
of an agreement between the parties. The minds of all the parties must meet on the proposed
modification as this modification affects an important aspect of the agreement. There can be no
contract in the true sense in the absence of the element of an agreement, i.e., the parties‘ mutual
consent.
Thus, any change must be mutually agreed upon, otherwise, the change carries no binding
effect. o Even with a de-escalation clause, no matter how elaborately worded, an unconsented
increase in interest rates is ineffective if it transgresses the principle of mutuality of contracts.
CW ROSENSTOCK (as admin of estate of HW ELSER) v EDWIN BURKE, THE COOPER COMPANY
46 phil 217
FACTS:
Page 57 of 84
Burke owned a yacht called Bronzewing purchased in Australia for sale. He mortgaged it for
a loan of 100k from Mr Avery (manager of Asia Banking Corp), which he was unable to pay. Elser
wanted to organize a yacht club and sell the yacht to members of the club for 120k . Elser would
keep 20k as commission and 100k would go to Burke.
Burke acquired a written option saying that Elser confirmed his verbal offer of 120k for the
yacht, with the offer open for 30 days from 12 Feb 1922. The latter proposed conducting a pleasure
cruise the south, with prominent businessmen aboard the yacht as a means to advertise the yacht.
To fix the yacht, Elser incurred expenses of 6k because Burke had no money. He attempted to loan
20k from Mr Avery but the latter refused, in view of the subsisting debt. Elser notified Burke that he
was now unwilling to purchase the yacht for more than 70k and that he should talk to Mr Avery.
Elser wrote a letter (3 April 1922) stating that he would pay 80k for the yacht, with 10k
downpayment and 5k monthly installments, and would use 80k worth of stocks from Pickering Inc
as security, signed by Burke, Elser, Avery. Current action is for Elser’s recovery of 6k used to fix the
yacht
ARGUMENTS
1. Burke
a. Agreement was that Burke would pay for repairs in exchange for gratuitous use of
the yacht
b. Cross-complaint: comply with letter stating sale, and give downpayment of 10k
TRIAL COURT
1. With respect to Burke: Pay 6k to Elser, pay 1k to Cooper Company for unpaid repairs
2. With respect to Elser: Purchase the yacht (appealed by Elser to SC)
ISSUE:
WON letter written on 3 April 1922 was a valid contract of sale binding on Elser
HELD:
1. No
a. A common man would use “I am willing to buy, I intend to purchase”
b. Elser was a prosperous merchant and so his specific words should be presumed to
have been chosen for specific effect. Thus his statement that “I am willing to
entertain the purchase” shows that he did not intend to buy the yacht, but merely
ENTERTAINED the idea
c. Elser never wanted to buy the yacht for himself, only sell it to members of a yacht
club
d. Elser only considered purchasing the yacht when he negotiated with Avery to obtain
a 20k loan to replace the engine. Since he had not yet acquired the 20k to replace
the engine, it can be assumed that he was not yet willing to purchase the yacht
e. 3 April 1922 letter was made by stenographer who supports Elser’s claim that Elser
refused to remove “entertained” even when Burke asked to remove it
Page 58 of 84
*Also reversed ruling on Burke paying for repairs – it was Elser who initiated and ordered repairs,
and it was Elser’s word against Burke in this situation, so follow logic: Whoever asked for repairs,
and got something in return (use of yacht) liable to pay for repairs.
EMILIO BUGATTI vs. COURT OF APPEALS

343 SCRA 335
FACTS
In the complaint, respondents alleged that they are the owners of a parcel of land situated in
Lagawa, Ifugao and that sometime in December, 1987, petitioner offered to lease their land.
According to respondents, they discussed the terms and conditions of the lease with petitioner. It
was agreed by petitioner and respondents that the aforesaid terms and conditions should be
included in a written contract of lease to be prepared by petitioner and presented to respondents
for their approval. However, even before preparing the contract of lease, petitioner occupied
respondents’ land and began construction on January 18, 1988. Immediately objecting to the
construction, respondent Maria Baguilat demanded that the contract of lease should first be signed.
Sometime in March, 1988, petitioner finally presented the lease contract to respondents but it did
not contain the terms and conditions previously agreed upon. Then petitioner revised the same,
presented to respondents, contained counter-proposals. Respondents refused to accede to such
counter-proposals. Despite the fact that no contract was signed by the parties, petitioner continued
to occupy respondents’ land.
ISSUE
W/N a contract of lease had been perfected.
HELD: NONE.
The court held that no contract of lease was perfected between the parties since the
element of consent was missing. The drafting of the contract - a task entrusted to petitioner - was
deemed by respondents as a condition precedent to the perfection of the lease contract and
consequently, to any construction activity upon their land. Although petitioner submitted two
drafts, they did not contain the terms and conditions spoken of by the parties during their
negotiations and were accordingly rejected by respondents. However, despite the absence of a
perfected contract and in total disregard of respondents’ repeated objections, petitioner occupied
respondents’ land and commenced construction thereon, making him a builder in bad faith.
LAUDICO vs. ARIAS
43 PHIL 270
FACTS:
 Vicente Arias, who owned 2 buildings in Carriedo, on his behalf and that of his co-owners, wrote
a letter to Mamerto Laudico, giving him an option to lease the building to a 3rd person, and
transmitting to him a tentative contract in writing containing the conditions upon which the
proposed lease should be made.
 Laudico presented Fred Harden as the party desiring to lease the building.
 Other conditions were added and counter-propositions were made.
Page 59 of 84
 These negotiations were carried on by correspondence and verbally at interviews held with
Vicente, no definite agreement having been arrived at until Laudico finally wrote a letter to
Arias on March 6, 1919, advising him that all his propositions, as amended and supplemented,
were accepted.
 It is admitted that this letter was received by Arias thru special delivery at 2:53 p.m. of that day.
 On that same day, at 11:25 a.m., Arias had, in turn, written a letter to Laudico, withdrawing the
offer to lease the building.
 Laudico prays that the defendants be compelled to execute the contract of lease of the building
in question.
RULING:
 Lower court – Rendered judgment in favor of Laudico.
 SC – Reversed the decision of the lower court and absolved the defendants from the complaint.
ISSUE: Whether a contract was created between the parties through the letter of acceptance sent by
Laudico?
HELD/RATIO: NO!
 In the Civil Code, an acceptance by letter does not have any effect until it comes to the
knowledge of the offeror. Therefore, before he learns of the acceptance, the offeror is not yet
bound by it and can still withdraw the offer.
 Consequently, when Arias wrote to Laudico, withdrawing the offer, he had the right to do so,
inasmuch as he had not yet receive notice of the acceptance. And when the notice of the
acceptance was received by Arias, it no longer had any effect, as the offer was not then in
existence, the same having already been withdrawn. There was no meeting of the minds,
through offer and acceptance, which is the essence of the contract. While there was an offer,
there was no acceptance, and when the latter was made and could have a binding effect, the
offer was then lacking. Though both the offer and the acceptance existed, they did not meet to
give birth to a contract.
 When Arias received the letter of acceptance, his letter of revocation had already been received.
The latter was sent through a messenger at 11:25 in the morning directly to the office of
Laudico and should have been received immediately on that same morning, or at least, before
Arias received the letter of acceptance. On this point, the SC do not give any credence to the
testimony of Laudico that he received this letter of revocation at 3:30 in the afternoon of that
day.
 An offer can be withdrawn and must be communicated to the offeree before the acceptance of
the offeree is received by the offeror.
CARCELLER V. CA
302 SCRA 718, February 10, 1999
FACTS:
Respondent State Investment Houses Inc. has a parcel of land in Cebu City leased to
petitioner Jose Ramon Carceller with an option to purchase valid until the expiration of the lease
contract. Three (3) weeks before the expiration of the contract, petitioner made a request to the
respondent for the extension of the lease contact so he can have an ample time to raise enough
Page 60 of 84
funds to avail of the option of sale. Respondent denied the request and a month after the expiration
of the contract, petitioner made known his intention to buy the property.
Respondent reiterated the provisions in the contract and asked the petitioner to leave the
property, which will now be offered to the general public for a higher price.
ISSUE:
WON can still exercise his option of sale even after the time to do such has already lapsed.
HELD:
The contract must be interpreted together with the intention of the parties. The letter of the
plaintiff to the respondent requesting for an extension is sufficient proof of his intent to avail of the
option of sale. In contractual relations, the law allows the parties reasonable leeway on the terms of
their agreement, which is the law between them. When petitioner made his intention to buy known
to the buyer one month after the expiration of contract is within a reasonable time- frame.
Petitioner may buy the property but not anymore to the price stated in the contract. As such,
respondent may increase the price of the land but only to a reasonable and fair market value.
An option is a preparatory contract in which one party grants to the other, for a fixed period
and under specified conditions, the power to decide, whether or not to enter into a principal
contract. It binds the party who has given the option, not to enter into the principal contract with
any other person during the period designated, and, within that period, to enter into such contract
with the one to whom the option was granted, if the latter should decide to use the option. It is a
separate agreement distinct from the contract which the parties may enter into upon the
consummation of the option.
SANCHEZ VS. RIGOS

45 SCRA 368, June 1972
FACTS:
In an instrument entitled "Option to Purchase," executed on April 3, 1961, defendant-

appellant Severina Rigos "agreed, promised and committed ... to sell" to plaintiff-appellee Nicolas
Sanchez for the sum of P1,510.00 within two (2) years from said date, a parcel of land situated in
the barrios of Abar and Sibot, San Jose, Nueva Ecija. It was agreed that said option shall be deemed
"terminated and elapsed," if “Sanchez shall fail to exercise his right to buy the property" within the
stipulated period. On March 12, 1963, Sanchez deposited the sum of Pl,510.00 with the CFI of Nueva
Ecija and filed an action for specific performance and damages against Rigos for the latter’s refusal
to accept several tenders of payment that Sanchez made to purchase the subject land.
Defendant Rigos contended that the contract between them was only “a unilateral promise
to sell, and the same being unsupported by any valuable consideration, by force of the New Civil
Code, is null and void." Plaintiff Sanchez, on the other hand, alleged in his compliant that, by virtue
of the option under consideration, "defendant agreed and committed to sell" and "the plaintiff
agreed and committed to buy" the land described in the option. The lower court rendered judgment
in favor of Sanchez and ordered Rigos to accept the sum Sanchez judicially consigned, and to
Page 61 of 84
execute in his favor the requisite deed of conveyance. The Court of Appeals certified the case at bar
to the Supreme Court for it involves a question purely of law.
ISSUE:
Was there a contract to buy and sell between the parties or only a unilateral promise to sell?
HELD:
The Supreme Court affirmed the lower court’s decision. The instrument executed in 1961 is
not a "contract to buy and sell," but merely granted plaintiff an "option" to buy, as indicated by its
own title "Option to Purchase." The option did not impose upon plaintiff Sanchez the obligation to
purchase defendant Rigos' property. Rigos "agreed, promised and committed" herself to sell the
land to Sanchez for P1,510.00, but there is nothing in the contract to indicate that her
aforementioned agreement, promise and undertaking is supported by a consideration "distinct
from the price" stipulated for the sale of the land. The lower court relied upon Article 1354 of the
Civil Code when it presumed the existence of said consideration, but the said Article only applies to
contracts in general.
However, it is not Article 1354 but the Article 1479 of the same Code which is controlling in
the case at bar because the latter’s 2nd paragraph refers to "sales" in particular, and, more
specifically, to "an accepted unilateral promise to buy or to sell." Since there may be no valid
contract without a cause or consideration, the promisor is not bound by his promise and may,
accordingly, withdraw it. Pending notice of its withdrawal, his accepted promise partakes, however,
of the nature of an offer to sell which, if accepted, results in a perfected contract of sale. Upon
mature deliberation, the Court reiterates the doctrine laid down in the Atkins case and deemed
abandoned or modified the view adhered to in the Southwestern Company case.
ADELFA PROPERTIES, INC. v. CA

240 SCRA 565; 25 January 1995
FACTS:
Private respondents and their brothers Jose and Dominador Jimenez were registered
owners of a parcel of land in Las Piñ as. Jose and Dominador sold their share (1/2 parcel of land)
pursuant to “Kasulatan sa Bilihan ng Lupa” to petitioner, Adelfa Properties. Eastern portion
belonged to them while western portion belonged to Rosario and Salud. Adelfa Properties (now
owners of eastern portion) expressed interest in buying the western portion by executing
“Exclusive Option to Purchase” with ₱50,000.00 as option money. Before petitioner could make
payment, it received summons that the nephews and nieces of private respondents filed an
annulment of deed of sale. As a result, petitioner withheld payment of full purchase price. Salud
attributed the suspension of payment to “lack of word of honor.” Francisca Jimenez was sent to see
the counsel of petitioner to inform him that they were cancelling the transactions. Subsequently, a
Deed of Conditional Sale was executed in favor of Emylene Chua. Private respondents’ counsel sent
₱25,000.00 refund of the option money. According to the RTC, agreement entered into was merely
an option contract and the suspension of payment by petitioner is a counter-offer which is
tantamount to a rejection of option. Thus, the sale to Chua was valid. CA ruled that failure of
Page 62 of 84
petitioner to pay the purchase price in the period agreed upon was tantamount to election not to
buy such land.
ISSUE:
Is the agreement between Adelfa Properties and private respondents strictly an option contract?
HELD:
The contract between the parties is a contract to sell and not an option contract nor a
contract of sale. Two features which convince that parties never intended to transfer ownership
except upon full payment of purchase price: (1) the exclusive option to purchase does not mention
that petitioner is obliged to return possession or ownership of property as consequence of non-
payment; and (2) no delivery, actual or constructive, was made to petitioner; option to purchase
was not included in a public instrument which would have effect of delivery. Neither did petitioner
take actual, physical possession of the property at any given time. With this regard, there was an
implied agreement that ownership shall not pass to the purchaser until he had fully paid the price.
Also, the alleged option money was actually earnest money since the amount was not distinct from
the cause or consideration for the sale of the property, but was itself a part thereof.
Bible Baptist and Pastor Reuben Belmonte vs CA and Spouses Elmer Medina
444 SCRA 399
FACTS:
On June 7, 1985, the Bible Baptist Church entered into a contract of lease with Mr. & Mrs.
Elmer Tito Medina Villanueva.
The latter are the registered owners of a property located at Leon Guinto St., Malate, Manila. The
pertinent stipulations in the lease contract were:
1. That the lease shall take effect on June 7, 1985 and shall be for the period of 15 years.
2. That LESSEE shall pay the LESSOR within five (5) days of each calendar month,
beginning Twelve (12) months from the date of this agreement, a monthly rental of
P10,000, plus 10% escalation clause per year starting on June 7, 1988.
3. That upon signing of the LEASE AGREEMENT, the LESSEE shall pay the sum of
P84,000. Said sum is to be paid directly to the Rural Bank, Valenzuela, Bulacan for the
purpose of redemption of said property which is mortgaged by the LESSOR.
4. That the LESSEE has the option to buy the leased premises during the 15 years of the
lease. If the LESSEE decides to purchase the premises the terms will be:
 A selling Price of One Million Eight Hundred Thousand Pesos (P1.8 million),
Philippine Currency.
 A down payment agreed upon by both parties.
 The balance of the selling price may be paid at the rate of One Hundred
Twenty Thousand Pesos (P120,000.00), Philippine Currency, per year.
When Bible Baptist decided to exercise ―the option, the spouses Villanueva did not sell.
Petitioners claim that the Baptist Church "agreed to advance the large amount needed for the
Page 63 of 84
rescue of the property but, in exchange, it asked the Villanuevas to grant it a long term lease and an
option to buy the property for P1.8 million." They argue that the consideration supporting the
option was their agreement to pay off the Villanueva's P84,000 loan with the bank, thereby freeing
the subject property from the mortgage encumbrance.
ISSUE:
1. W/N the option to buy given to the Baptist Church is founded upon a consideration.
2. W/N by the terms of the lease agreement, a price certain for the purchase of the land had
been fixed.
3. W/N the Baptist Church is entitled to an award for attorney's fees.
HELD:
1. No. The Baptist Church did not pay a separate and specific sum of money to cover the option
alone. This Court agrees with respondents that the amount of P84,000 has been fully exhausted and
utilized by their occupation of the premises and there is no separate consideration to speak of
which could support the option.
2. No. In view of this Court's finding that the option contract is not enforceable for being
without consideration, the
respondents Villanueva spouses' refusal to comply with it cannot be the basis of a claim for
attorney's fees.
MIGUELA VILLANUEVA VS. CA, CENTRAL BANK

244 SCRA 395
FACTS:
The disputed lots were originally owned by the spouses Celestino Villanueva and Miguela
Villanueva. Sometime in 1975, Miguela Villanueva sought the help of one Jose Viudez, the then
Officer-in-Charge of the PVB branch in Makati if she could obtain a loan from said bank. Jose Viudez
told Miguela Villanueva to surrender the titles of said lots as collaterals. And to further facilitate a
bigger loan, Viudez, in connivance with one Andres Sebastian, swayed Miguela Villanueva to
execute a deed of sale covering the two (2) disputed lots, which she did but without the signature of
her husband Celestino. Miguela Villanueva, however, never got the loan she was expecting.
Subsequent attempts to contact Jose Viudez proved futile, until Miguela Villanueva thereafter found
out that new titles over the two (2) lots were already issued in the name of the PVB. It appeared
upon inquiry from the Registry of Deeds that the original titles of these lots were canceled and new
ones were issued to Jose Viudez, which in turn were again canceled and new titles issued in favor of
Andres Sebastian, until finally new titles were issued in the name of PVB after the lots were
foreclosed for failure to pay the loan granted in the name of Andres Sebastian.
Miguela Villanueva sought to repurchase the lots from the PVB after being informed that the
lots were about to be sold at auction. The PVB told her that she can redeem the lots for the price of
P110,416.00. Negotiations for the repurchase of the lots nevertheless were stalled by the filing of
liquidation proceedings against the PVB on August of 1985.
Page 64 of 84
In October 1984, plaintiff-appellant offered to purchase two pieces of Land that had been
acquired by PVB through foreclosure. To back-up plaintiff-appellant's offer he deposited the sum of
P10,000.00. His offer was not yet accepted when the PVB became insolvent and went under
receivership.
ISSUE:
W/N Ong has a better title to the 2 parcels of disputed land.
HELD: No.
The Court of Appeals erred when it held that Ong had a better right than the petitioners to
the purchase of the disputed lots. The insolvency of a bank and the consequent appointment of a
receiver restrict the bank's capacity to act, especially in relation to its property, applying Article
1323 of the Civil Code, Ong's offer to purchase the subject lots became ineffective because the PVB
became insolvent before the bank's acceptance of the offer came to his knowledge.
Hence, the purported contract of sale between them did not reach the stage of perfection.
Corollarily, he cannot invoke the resolution of the bank approving his bid as basis for his alleged
right to buy the disputed properties.
ACCEPTANCE:
JARDINE DAVIES, INC. VS. CA

333 SCRA 684
FACTS:
In 1992, petitioner PUREFOODS decided to install two 1500 KW generators in its food
processing plant in San Roque, Marikina City. A bidding for the supply and installation of the
generators was held. Out of the 8 prospective bidders who attended the pre-bidding conference,
only 3 bidders, namely, respondent FAR EAST MILLS SUPPLY CORPORATION (FEMSCO), MONARK
and ADVANCE POWER submitted bid proposals and gave bid bonds.
In a letter dated 12 December 1992 addressed to FEMSCO President Alfonso Po,

PUREFOODS confirmed the award of the contract to FEMSCO. FEMSCO submitted the required
performance bond in the amount of P1,841,187.90 and contractor’s all-risk insurance policy in the
amount of P6,137,293.00 which PUREFOODS through its VP Benedicto G. Tope acknowledged in a
letter dated 18 December 1992.
However, in a letter dated 22 December 1992, PUREFOODS through its Senior VP Teodoro
L. Dimayuga unilaterally canceled the award as “significant factors were uncovered and brought to
their attention which dictate the cancellation and warrant a total review and re-bid of the project.
FEMSCO protested the cancellation of the award. Before the matter could be resolved, PUREFOODS
awarded the project and entered into a contract with JARDINE NELL, a division of Jardine Davies,
Inc. (JARDINE), which was not one of the bidders. FEMSCO sued PUREFOODS and JARDINE:
Page 65 of 84
PUREFOODS for reneging on its contract, and JARDINE for its unwarranted interference and
inducement.
RTC- Pasig, granted JARDINE’s Demurrer to Evidence. The RTC ordered PUREFOODS to
indemnify FEMSCO. FEMSCO and PUREFOODS appealed to CA. FEMSCO appealed the Resolution of
the trial court which granted the Demurrer to Evidence filed by JARDINE resulting in the dismissal
of the complaint against it. CA affirmed the Decision of the trial court. It also reversed the
Resolution of the lower court and ordered JARDINE to pay FEMSCO moral damages for inducing
PUREFOODS to violate the latter’s contract with FEMSCO. CA denied MR. Hence, these 2 petitions
for review.
ISSUE:
WON FEMSCO should be awarded with Moral Damages.
RULING: YES.
Contracts are perfected by mere consent, upon the acceptance by the offeree of the offer
made by the offeror. From that moment, the parties are bound not only to the fulfillment of what
has been expressly stipulated but also to all the consequences which, according to their nature, may
be in keeping with good faith, usage and law. The acceptance must not qualify the terms of the offer.
However, the acceptance may be express or implied. For a contract to arise, the acceptance must be
made known to the offeror. Acceptance can be withdrawn or revoked before it is made known to
the offeror.
In the instant case, since PUREFOODS started the process of entering into the contract by
conducting a bidding, Art. 1326 of the Civil Code, which provides that “advertisements for bidders
are simply invitations to make proposals,” applies. The 12 December 1992 letter of petitioner
PUREFOODS to FEMSCO constituted acceptance of respondent FEMSCO’s offer as contemplated by
law. The tenor of the letter, i.e., “This will confirm that Pure Foods has awarded to your firm
(FEMSCO) the project,” could not be more categorical. While the same letter enumerated certain
“basic terms and conditions,” these conditions were imposed on the performance of the obligation
rather than on the perfection of the contract. But even granting arguendo that the 12 December
1992 letter of petitioner PUREFOODS constituted a “conditional counter-offer,” respondent
FEMCO’s submission of the performance bond and contractor’s all-risk insurance was an implied
acceptance, if not a clear indication of its acquiescence to, the “conditional counter-offer,”
Petitioner PUREFOODS also argues that it was never in bad faith. But by the unilateral
cancellation of the contract, the defendant (petitioner PURE FOODS) has acted with bad faith and
this was further aggravated by the subsequent inking of a contract between defendant Purefoods
and erstwhile co-defendant Jardine. It is very evident that Purefoods thought that by the expedient
means of merely writing a letter would automatically cancel or nullify the existing contract entered
into by both parties after a process of bidding. This, to the Court’s mind, is a flagrant violation of the
express provisions of the law and is contrary to fair and just dealings to which every man is due.
This Court has awarded in the past moral damages to a corporation whose reputation has
been besmirched. In the instant case, respondent FEMSCO has sufficiently shown that its reputation
Page 66 of 84
was tarnished after it immediately ordered equipment from its suppliers on account of the urgency
of the project, only to be canceled later. We thus sustain respondent appellate court’s award of
moral damages. We however reduce the award from P2Mto P1M, as moral damages are never
intended to enrich the recipient. Likewise, the award of exemplary damages by way of example for
the public good is excessive and should be reduced to P100,000.00.
Petitioner JARDINE maintains on the other hand that respondent appellate court erred in
ordering it to pay moral damages to respondent FEMSCO as it supposedly induced PUREFOODS to
violate the contract with FEMSCO. We agree. While it may seem that petitioners PUREFOODS and
JARDINE connived to deceive respondent FEMSCO, we find no specific evidence on record to
support such perception. There is no showing whatsoever that petitioner JARDINE induced
petitioner PUREFOODS. The similarity in the design submitted to petitioner PUREFOODS by both
petitioner JARDINE and respondent FEMSCO, and the tender of a lower offer by petitioner JARDINE
are insufficient to show that petitioner JARDINE indeed induced petitioner PUREFOODS to violate
its contract with respondent FEMSCO.
CITY OF CEBU vs. HEIRS OF CANDIDO RUBI

306 SCRA 408
FACTS:
The Province of Cebu conveyed by way of donation to the City of Cebu 210 lots among
which was Lot 1141 leased to Candido Rubi. The City Council of Cebu then enacted Ordinance No.
522 authorizing the City Mayor to sell at public auction the 210 province-owned lots and among the
conditions set forth was that if the lot is leased, the lessee shall be given the right to equal the
highest bid on the date of the public bidding and if he so equals the highest bid, he shall be awarded
the sale. Exercising this option, the Committee on Award awarded Lot 1141-D to Candido Rubi. He
was then furnished a copy of the award and was instructed to make the necessary payment.
However, Rubi requested that he be given an extension of time within which to make the
said payment. When Candido Rubi died, his heirs tendered the amount to the City Treasurer of
Cebu City and filed an action for specific performance. The trial court dismissed the complaint
declaring the City of Cebu released of its obligation to sell the property to the plaintiffs stating that
the contract entered into between the parties was a mere contract to sell. As there was no absolute
acceptance on the part of Candido Rubi of the terms of the Award, the transaction between the
parties never ripened into a contract of sale.
ISSUE:
Whether or not a contract of sale is entered into by the parties.
HELD: Yes.
A contract of sale is a consensual contract and is perfected at the moment there is a meeting
of the minds upon the thing which is the object of the contract and upon the price. From that
moment, the parties may reciprocally demand performance subject to the provisions of the law
Page 67 of 84
governing the form of contracts. In the instant case, all three elements under Article 1458 for a valid
contract to be constituted are present in the transaction between the City of Cebu and Candido
Rubi. The assumption of both parties that the offer and acceptance was for a bid price in cash, taken
together with the fact that there was no expressed or apparent intent to reserve ownership over
the lot until full payment was made leads to no other conclusion that Rubi and the City entered into
a contract of sale.
WELDON CONSTRUCTION CORPORATION vs. COURT OF APPEALS

154 SCRA 618
FACTS:
The present controversy arose from the construction of the Gay Theater building on the
corner of Herran and Singalong Streets in Manila. Petitioner WELDON CONSTRUCTION
CORPORATION sued the private respondent Manuel Cancio in the then Court of First Instance of
Manila to recover P62,378.82 Pesos, which is ten per (10%) of the total cost of construction of the
building, as commission, and P23,788.32 Pesos as cost of additional works thereon.
The basis for the claim for commission is an alleged contract of supervision of construction
between the theater owner Manuel Cancio, herein private respondent, and the petitioner’s
predecessors-in-interest, Weldon Construction, which the petitioner seeks to enforce. The private
respondent refused to pay the amounts demanded on the ground that the Gay Theater building was
constructed by Weldon Construction for the stipulated price of P600,000.00 Pesos which has
already been fully paid. The irreconcilable positions taken by the parties brought the controversy
before the courts.
The then Court of First, instance of Manila ruled that the agreement between the parties is a
contract of supervision of construction found in Exhibit “A” and ordered the theater-owner Cancio
to pay the ten per cent (10%) supervision fee or commission provided for in said contract (Record
on Appeal, p. 91). On appeal by the defendant Cancio, the Court of Appeals reversed the lower
court’s Decision and dismissed the Complaint. The appellate court held that the transaction
between the parties is a construction contract for a stipulated price
Both parties moved for the reconsideration of the aforesaid Decision. Plaintiff-appellee
WELDON CONSTRUCTION CORPORATION assailed the Decision as a whole and reiterated its
claims. Defendant-appellant sought an increase in the amount of damages and attomey’s fees
awarded. In a Resolution dated February 7, 1972, the same division of the Court of Appeals denied
the two Motions for Reconsideration. Not satisfied with the Resolution of its Second Motion for
Reconsideration, plaintiff-appellee WELDON CONSTRUCTION CORPORATION elevated its case to
this Tribunal by certiorari under Rule 45 of the Rules of Court.
ISSUE:
Whether or not the petitioner Weldon Construction Corporation is entitled for the recovery of 10%
commission and cost of additional works from respondent Manuel Cancio
Page 68 of 84
HELD: No.
The right of the contractor to recover the cost of additional works must be governed by Article
1724 quoted as follows:
“ The who undertakes to build a structure or any other work for a stipulated price, in
conformity with plans and specifications agreed upon with the landowner can neither
withdraw from the contract nor demand an increase in the price on account of the higher
cost of labor or materials, save when there has been a change in the plans and
specifications, provided: (1) Such change has been authorized by the proprietor in
writing; and (2) The additional price to be paid to the contractor had been determined in
writing by both parties.
This article is a specific provision governing additional works, is a condition precedent to

recovery. The absence of one or the other bars the recovery of additional costs. Neither
the authority for the changes made nor the additional price to be paid therefore may be
proved by any other evidence for purposes of recovery.
In this instant case, the records do not yield any written authority for the changes made
on the plans and specifications of the Gay Theater Building. Neither can there be found
any written agreement on the additional price to be paid for said “extra works.”
In the absence of a written authority by the owner for the changes in the plans and
specifications of the building and of a written agreement between the parties on the additional
price to be paid to the contractor, as required by Article 1724, the claim for the cost of additional
works on the Gay Theater building must be denied.
LIMKETKAI SONS MILLING vs COURT OF APPEALS

255 SCRA 626
FACTS:
Philippine Remnants was the owner of a piece of land which it then entrusted to BPI. Pedro
Revilla was authorized by BPI to sell the lot for PHP1000/sqm. Revilla contacted Alfonso Lim who
agreed to buy the land. Alfonso Lim and Albino Limketkai went to BPI and were entertained by VP
Albano and Asst. VP Aromin. BPI set the price at 1,100 while Limketkai haggled to 900. They
subsequently agreed on Php1,000 on cash basis. Alfonso Lim asked if it was possible to pay on
terms and BPI officials said there was no harm in trying to ask for payment in terms but if
disapproved, the price would have to be paid in cash. Limketkai paid the initial 10% with the
remaining 90% to follow. Two or three days later, Alfonso Lim found out that their offer had been
frozen and then went to BPI to tender full payment of 33M to Albano but was refused by both
Albano & Bona.
ISSUE:
W/N there was a perfected contract of sale.
Page 69 of 84
HELD:
Perfection of the contract took place when Aromin and Albano, acting for BPI, agreed to sell
and Alfonso Lim & Albino Limketkai, agreed to buy the lot at Php1000/sqm. A consensual contract
is perfected upon mere meeting of the minds and although the deed of sale had yet to be notarized,
it does not mean that no contract was perfected.
In 1996 decision: Consent is manifested by the meeting of the offer and acceptance upon the
thing, and the cause which are to constitute the contract. The offer must be certain and acceptance
absolute. Limketkai’s acceptance was qualified and therefore, was actually a counter-offer.
ABS- CBN BROADCASTING CORPORATION vs. HONORABLE COURT OF APPEALS, REPUBLIC

BROADCASTING CORP, VIVA PRODUCTION, INC., and VICENTE DEL ROSARIO
301 SCRA 572, January 21, 1999
FACTS:
In 1990, ABSCBN and Viva executed a Film Exhibition Agreement whereby Viva gave
ABSCBN an exclusive right to exhibit some Viva films. One of the provisions of the agreement states
that ABSCBN shall have the right of first refusal to the next twenty-four Viva films for TV telecast
provided, however, that such right shall be exercised by ABSCBN from the actual offer in writing.
Viva, through defendant Del Rosario, offered ABSCBN, through its vice-president Charo Santos
Concio, a list of 3 film packages (36 title) from which ABSCBN may exercise its right of first refusal
under the aforesaid agreement. ABSCBN, however through Mrs. Concio, "can tick off only ten (10)
titles" (from the list) "we can purchase" and therefore did not accept said list. On February 27,
1992, defendant Del Rosario approached ABSCBN's Ms. Concio, with a list consisting of 52 original
movie titles (i.e. not yet aired on television) including the 14 titles subject of the present case, as
well as 104 reruns (previously aired on television) from which ABSCBN may choose another 52
titles. On April 2, 1992, defendant Del Rosario and ABSCBN general manager, Eugenio Lopez III, met
at the Tamarind Grill Restaurant in Quezon City to discuss the package proposal of Viva.
What transpired in that lunch meeting is the subject of conflicting versions. Mr. Lopez
testified that he and Mr. Del Rosario allegedly agreed that ABSCRN was granted exclusive film rights
to 14 films for a total consideration of P36 million; that he allegedly put this agreement as to the
price and number of films in a "napkin'' and signed it and gave it to Mr. Del Rosario. On the other
hand, Del Rosario denied having made any agreement with Lopez regarding the 14 Viva films;
Denied the existence of a napkin in which Lopez wrote something; and insisted that what he and
Lopez discussed at the lunch meeting was Viva's film package offer of 104 films for a total price of
P60 million. Mr. Lopez promising to make a counter proposal which came in the form of a proposal
contract.
On April 06, 1992, Del Rosario and Mr. Graciano Gozon of RBS Senior vice-president for
Finance discussed the terms and conditions of Viva's offer to sell the 104 films, after the rejection of
the same package by ABSCBN.
Page 70 of 84
On April 07, 1992, defendant Del Rosario received through his secretary, a handwritten
note from Ms. Concio – a draft of the counter proposal. The said counter proposal was however
rejected by Viva's Board of Directors in the evening of the same day.
On April 29, 1992, after the rejection of ABSCBN and following several negotiations and
meetings defendant Del Rosario and Viva's President Teresita Cruz, in consideration of P60 million,
signed a letter of agreement dated April 24, 1992. granting RBS the exclusive right to air 104 Viv
produced and/or acquired films including the 14 films subject of the present case.
RTC rendered a decision favoring respondents. According to the RTC, there was no meeting
of minds on the price and terms of the offer. The alleged agreement between Lopez III and Del
Rosario was subject to the approval of the VIVA Board of Directors, and said agreement was
disapproved during the meeting of the. Hence, there was no basis for ABSCBN's demand that VIVA
signed the 1992 Film Exhibition Agreement. Furthermore, the right of first refusal under the 1990
Film Exhibition Agreement had previously been exercised per Ms. Concio's letter to Del Rosario
ticking off ten titles acceptable to them, which would have made the 1992 agreement an entirely
new contract.
ISSUE:
Whether or not there is a perfected contract between ABSCBN and VIVA films
RULING:
A contract is a meeting of minds between two persons whereby one binds himself to give
something or to render some service to another for a consideration. There is no contract unless the
following requisites concur: (1) consent of the contracting parties; (2) object certain which is the
subject of the contract; and (3) cause of the obligation, which is established.
Once there is concurrence between the offer and the acceptance upon the subject matter,
consideration, and terms of payment a contract is produced. The offer must be certain. To convert
the offer into a contract, the acceptance must be absolute and must not qualify the terms of the
offer; it must be plain, unequivocal, unconditional, and without variance of any sort from the
proposal. A qualified acceptance, or one that involves a new proposal, constitutes a counteroffer
and is a rejection of the original offer.
ABSCBN, sent, through Ms. Concio, a counterproposal in the form of a draft contract
proposing exhibition of 53 films for a consideration of P35 million. This counterproposal could be
nothing less than the counteroffer of Mr. Lopez during his conference with Del Rosario at Tamarind
Grill Restaurant. Clearly, there was no acceptance of VIVA's offer, for it was met by a counteroffer
which substantially varied the terms of the offer.
In the case at bar, ABSCBN made no unqualified acceptance of VIVA's offer. Hence, they
underwent a period of bargaining. ABSCBN then formalized its counterproposals or counteroffer in
a draft contract, VIVA through its Board of Directors, rejected such counteroffer, Even if it be
conceded arguendo that Del Rosario had accepted the counteroffer, the acceptance did not bind
VIVA, as there was no proof whatsoever that Del Rosario had the specific authority to do so.
Page 71 of 84
Under Corporation Code, unless otherwise provided by said Code, corporate powers, such as the
power; to enter into contracts; are exercised by the Board of Directors. However, the Board may
delegate such powers to either an executive committee or officials or contracted managers. The
delegation, except for the executive committee, must be for specific purposes.
Del Rosario did not have the authority to accept ABSCBN's counteroffer was best evidenced
by his submission of the draft contract to VIVA's Board of Directors for the latter's approval. In any
event, there was between Del Rosario and Lopez III no meeting of minds.
ENRIQUEZ vs SUNLIFE ASSURANCE CO. OF CANADA

41 PHIL 269, November 29, 1920
FACTS:
September 24, 1917: Joaquin Herrer made application to the Sun Life Assurance Company
of Canada through its office in Manila for a life annuity 2 days later: he paid P6,000 to the manager
of the company's Manila office and was given a receipt according to the provisional receipt, 3 things
had to be accomplished by the insurance company before there was a contract:
(1) There had to be a medical examination of the applicant;
(2) there had to be approval of the application by the head office of the company; and
(3) this approval had in some way to be communicated by the company to the applicant.
 November 26, 1917: The head office at Montreal, Canada gave notice of acceptance by cable
to Manila but this was not mailed.
 December 4, 1917: policy was issued at Montreal.
 December 18, 1917: attorney Aurelio A. Torres wrote to the Manila office of the company
stating that Herrer desired to withdraw his application.
 December 19, 1917: local office replied to Mr. Torres, stating that the policy had been
issued, and called attention to the notification of November 26, 1917.
 December 21, 1917 morning: received by Mr. Torres.
 December 20, 1917: Mr. Herrer died
Rafael Enriquez, as administrator of the estate of the late Joaquin Ma. Herrer filed to recover
from Sun Life Assurance Company of Canada through its office in Manila for a life annuity
RTC: favored Sun Life Insurance
ISSUE:
W/N Mr. Herrera received notice of acceptance of his application thereby perfecting his life annuity.
HELD: NO.
Judgment is reversed, and the Enriquez shall have and recover from the Sun Life the sum of
P6,000 with legal interest from November 20, 1918, until paid, without special finding as to costs in
either instance. So ordered.
Page 72 of 84
VITIATION OF CONSENT
SPOUSES VICTOR and EUNA BINUA, Petitioners, vs. LUCIA P. ONG, Respondent.
G.R. No. 207176, June 18, 2014
FACTS:
Petitioner Edna (Euna Binua) was found guilty of estafa. She sought to avoid criminal
liability by settling her indebtedness through the execution of separate real estate mortgages over
petitioner
Victor’s properties. Thereafter, Edna filed a motion for new trial, which was granted by the RTC.
Consequently, the RTC-Branch 2 rendered a Decision, ordering petitioner to pay the respondent the
amount of ₱2,285,000.00 as actual damages, with ten percent (10%) interest, and other damages.
The RTC-Branch 2 ruled that the presentation of a promissory note dated March 4, 1997 novated
the original agreement between them into a civil obligation.
Petitioner Edna, however, failed to settle her obligation, forcing the respondent to foreclose
the mortgage on the properties, with the latter as the highest bidder during the public sale. The
petitioners then filed the case for the Declaration of Nullity of Mortgage Contracts, alleging that the
mortgage documents were "executed under duress, as the [petitioners] at the time of the execution
of said deeds were still suffering from the effect of the conviction of [petitioner] Edna, and could not
have been freely entered into said contracts."
ISSUE:
Whether or not consent was vitiated.
HELD: NO.
Article 1390(2) of the Civil Code provides that contracts where the consent is vitiated by
mistake, violence, intimidation, undue influence or fraud are voidable or annullable. Article 1335 of
the Civil Code, meanwhile, states that "[t]here is intimidation when one of the contracting parties is
compelled by a reasonable and well-grounded fear of an imminent and grave evil upon his person
or property, or upon the person or property of his spouse, descendants or ascendants, to give his
consent." The same article, however, further states that "[a] threat to enforce one’s claim through
competent authority, if the claim is just or legal, does not vitiate consent."
In cases involving mortgages, a preponderance of the evidence is essential to establish its invalidity,
and in order to show fraud, duress, or undue influence of a mortgage, clear and convincing proof is
necessary.
Based on the petitioners’ own allegations, what the respondent did was merely inform them
of petitioner Edna’s conviction in the criminal cases for estafa. It might have evoked a sense of fear
or dread on the petitioners’ part, but certainly there is nothing unjust, unlawful or evil in the
respondent's act. The petitioners also failed to show how such information was used by the
respondent in coercing them into signing the mortgages. The petitioners must remember that
petitioner Edna's conviction was a result of a valid judicial process and even without the
Page 73 of 84
respondent allegedly "ramming it into petitioner Victor's throat," petitioner Edna's imprisonment
would be a legal consequence of such conviction.
SPOUSES TONGSON VS EMERGENCY PAWNSHOP BULA

GR. NO. 167874, January 15, 2010
FACTS:
In may 1992, Napala offered to purchase from the spouses Tongson their 364-square meter
parcel of land, situated in Davao City for P3,000,000.00. The spouses found the offer acceptable and
executed with Napala a Memorandum of Agreement on May 8, 1992. Upong signing the Deed of
Absolute Sale, Napala paid the spouses P200,000.00 in cash and issued a post-dated check in the
amount of P2,800,000.00 representing the remaining balance of the purchase price of the subject
property. When presented for payment, the PNB check was dishonored for insufficient funds.
Despite the spouses Tongson’s repeated demands to either pay the full value of the check or to
return the land, Napala failed to do either. The spouses filed with the RTC of Davao City a Complaint
for Annulment of Contract and Damages with a Prayer for the Issuance of a Temporary Restraining
Order and a Writ of Preliminary Injunction.
The trial court found that the purchase price of the subject property has not been fully paid
and that Napala’s assurance to the Spouses Tongson that the PNB check would not bounce
constituted fraud that induced the Spouses Tongson to enter into the sale. Without such assurance,
the Spouses Tongson would not have agreed to the contract of sale. Accordingly, there was fraud
within the ambit of Article 1338 of the Civil Code, justifying the annulment of the contract of sale,
the award of damages and attorney’s fees, and payment of costs. Respondent appealed to the Court
of Appeals.
The Court of Appeals agreed with the trial court’s finding that Napala employed fraud when
he misrepresented to the Spouses Tongson that the PNB check in the amount of P2,800,000 would
be properly funded at its maturity. However, the Court of Appeals found that the issuance and
delivery of the PNB check and fraudulent representation made by Napala could not be considered
as the determining cause for the sale of the subject parcel of land. Hence, such fraud could not be
made the basis for annulling the contract of sale. Nevertheless, the fraud employed by Napala is a
proper and valid basis for the entitlement of the Spouses Tongson to the balance of the purchase
price in the amount of P2,800,000 plus interest at the legal rate of 6% per annum computed from
the date of filing of the complaint on 11 February 1993. The Spouses Tongson filed a partial motion
for reconsideration which was denied by the Court of Appeals in its Resolution dated 10 March
2005. Hence, this petition for review before the SC.
ISSUE:
Whether or not the contract of sale can be annulled based on the fraud employed by Napala.
HELD:
The petition has merit.
Page 74 of 84
A contract is a meeting of the minds between two persons, whereby one is bound to give
something or to render some service to the other. A valid contract requires the concurrence of the
following essential elements: (1) consent or meeting of the minds, that is, consent to transfer
ownership in exchange for the price; (2) determinate subject matter; and (3) price certain in money
or its equivalent.
Under Article 1338 of the Civil Code, there is fraud when, through insidious words or
machinations of one of the contracting parties, the other is induced to enter into a contract which,
without them, he would not have agreed to. In order that fraud may vitiate consent, it must be the
causal (dolo causante), not merely the incidental (dolo incidente), inducement to the making of the
contract. Additionally, the fraud must be serious.
We find no causal fraud in this case to justify the annulment of the contract of sale between
the parties. It is clear from the records that the Spouses Tongson agreed to sell their 364-square
meter Davao property to Napala who offered to pay P3,000,000 as purchase price therefor.
Contrary to the Spouses Tongson’s belief that the fraud employed by Napala was “already
operational at the time of the perfection of the contract of sale,” the misrepresentation by Napala
that the postdated PNB check would not bounce on its maturity hardly equates to dolo causante.
Napala’s assurance that the check he issued was fully funded was not the principal inducement for
the Spouses Tongson to sign the Deed of Absolute Sale. Even before Napala issued the check, the
parties had already consented and agreed to the sale transaction. The Spouses Tongson were never
tricked into selling their property to Napala. On the contrary, they willingly accepted Napala’s offer
to purchase the property at P3,000,000. In short, there was a meeting of the minds as to the object
of the sale as well as the consideration therefor.
Some of the instances where this Court found the existence of causal fraud include: (1)
when the seller, who had no intention to part with her property, was “tricked into believing” that
what she signed were papers pertinent to her application for the reconstitution of her burned
certificate of title, not a deed of sale; (2) when the signature of the authorized corporate officer was
forged; or (3) when the seller was seriously ill, and died a week after signing the deed of sale raising
doubts on whether the seller could have read, or fully understood, the contents of the documents he
signed or of the consequences of his act. Suffice it to state that nothing analogous to these badges of
causal fraud exists in this case.
While they did not file an action for the rescission of the sales contract, the Spouses
Tongson specifically prayed in their complaint for the annulment of the sales contract, for the
immediate execution of a deed of reconveyance, and for the return of the subject property to them.
The Spouses Tongson likewise prayed “for such other reliefs which may be deemed just and
equitable in the premises.” In view of such prayer and considering respondents’ substantial breach
of their obligation under the sales contract, the rescission of the sales contract is but proper and
justified. Accordingly, respondents must reconvey the subject property to the Spouses Tongson,
who in turn shall refund the initial payment of P200,000 less the costs of suit.
ECE Realty v. Mandap
G.R. No. 196182, 1 September 2014
Page 75 of 84
FACTS:
The petitioner is a corporation engaged in building condominium units. The petitioner

started its construction at Pasay City. However, in their advertisement it provides that it is situated
in Makati City. The respondent in belief that the condo unit was in Makati City agreed to buy a unit
by paying reservation fee, downpayment and monthly installments. In their Contract to Sell it
indicated therein that the condo unit was in Pasay City. More than two years after the execution of
the contract, respondent demanding the return of her payment on the ground that the unit was
built in Pasay not in Makati.
ISSUE:
Whether petitioner was guilty of fraud and if so, whether such fraud is sufficient ground to nullify
its contract with respondent.
RULING:
First, the fraud must be dolo causante or it must be fraud in obtaining the consent of the
party. This is referred to as causal fraud. The deceit must be serious. The fraud is serious when it is
sufficient to impress, or to lead an ordinarily prudent person into error; that which cannot deceive
a prudent person cannot be a ground for nullity. The circumstances of each case should be
considered, taking into account the personal conditions of the victim. Second, the fraud must be
proven by clear and convincing evidence and not merely by preponderance thereof.
In the present case, the Supreme Court finds that petitioner is guilty of false representation
of a fact. This is evidenced by its printed advertisements indicating that its subject condominium
project is located in Makati City when, in fact, it is in Pasay City. However, insofar as the present
case is concerned, the Court agrees with the Housing and Land Use Arbiter, the HLURB Board of
Commissioners, and the Office of the President, that the misrepresentation made by petitioner in its
advertisements does not constitute causal fraud which would have been a valid basis in annulling
the Contract to Sell between petitioner and respondent.
“Being a notarized document, it had in its favor the presumption of regularity, and to
overcome the same, there must be evidence that is clear, convincing and more than merely
preponderant; otherwise, the document should be upheld. Mandap failed to overcome this
presumption.
SIMULATION OF CONTRACTS
Heirs of Ureta v. Heirs of Ureta
Page 76 of 84
G.R. No. 165748, 14 September 2011
FACTS:
Alfonso Ureta was financially well-off and owned several properties. He begot fourteen
children, including herein petitioners and Policronio, father of respondents. For taxation purposes,
Alfonso sold, without monetary consideration, several parcels of land to four of his children,
including Policronio. Alfonso continued to own, possess and enjoy the lands and their produce.
Upon his death, Liberato acted as the administrator.
The Fernandez Family rented the portion transferred to Policronio. But even after the fact,
the tenants never turned over the produce of the lands to Policronio or any of his heirs, but to
Alfonso and, later, to the administrators of his estate. When Policronio died, except for a portion of
one of the parcels of land, neither Policronio nor his heirs ever took possession of the subject lands.
Alfonso’s heirs executed a Deed of Extra-Judicial Partition, 8which included all the lands that were
covered by the four (4) deeds of sale that were previously executed by Alfonso for taxation
purposes. Conrado, Policronio’s eldest son, representing the Heirs of Policronio, signed the Deed of
Extra-Judicial Partition in behalf of his co-heirs. Heirs of Policronio allegedly learned about the
Deed of Extra-Judicial Partition involving Alfonso’s estate when it was published in the July 19,
1995 issue of the Aklan Reporter. The Heirs of Policronio averred that the extra-judicial partition is
void because Conrado signed the same without written authority form his siblings.
ISSUE:
WON Conrado Ureta’s lack of capacity to give his co-heirs’ consent to the Extra-Judicial Partition
rendered the same voidable.
RULING: No.
Article 1390 is not applicable in this case. Article 1390 (1) contemplates the incapacity of a
party to give consent to a contract. What is involved in the case at bench though is not Conrado’s
incapacity to give consent to the contract, but rather his lack of authority to do so. Instead, Articles
1403 (1), 1404, and 1317 of the Civil Code find application to the circumstances prevailing in this
case. The Deed of Extrajudicial Partition and Sale is not a voidable or an annullable contract under
Article 1390 of the New Civil Code. Article 1390 renders a contract voidable if one of the parties is
incapable of giving consent to the contract or if the contracting party’s consent is vitiated by
mistake, violence, intimidation, undue influence or fraud.
Therefore, Conrado’s failure to obtain authority from his co-heirs to sign the Deed of Extra-
Judicial Partition in their behalf did not result in his incapacity to give consent so as to render the
contract voidable, but rather, it rendered the contract valid but unenforceable against Conrado’s co-
heirs for having been entered into without their authority.
AVELINA ABARIENTOS REBUSQUILLO and SALVADOR A. OROSCO vs. SPS. DOMINGO and
EMELINDA REBUSQUILLO GUALVEZ and the CITY ASSESSOR OF LEGAZPI CITY
Page 77 of 84
G.R. No. 204029, June 4, 2014
FACTS:
Petitioner Avelina was one of the children of Eulalio who died intestate. On his death,
Eulalio left behind an untitled parcel of land in Legazpi City. In 2001, Avelina was supposedly made
to sign two documents by her daughter Emelinda and her son-in-law Domingo, respondents in this
case, on the pretext that the documents were needed to facilitate the titling of the lot. It was only in
2003, so petitioners claim, that Avelina realized that what she signed was an Affidavit of Self-
Adjudication and a Deed of Absolute Sale in favor of respondents.
Petitioners filed a complaint for annulment and revocation of an Affidavit of Self-

Adjudication and a Deed of Absolute Sale. After trial, RTC held the annulment of the subject
documents. CA reversed RTC’s decision. CA held that the RTC erred in annulling the Affidavit of Self-
Adjudication simply on petitioners’ allegation of the existence of the heirs of Eulalio, considering
that issues on heirship must be made in administration or intestate proceedings, not in an ordinary
civil action. Further, the appellate court observed that the Deed of Absolute Sale cannot be nullified
as it is a notarized document that has in its favor the presumption of regularity and is entitled to full
faith and credit upon its face.
ISSUES:
1. Whether or not the issue on heirship in this case must be raised in a separate
administration or intestate proceedings.
2. Whether or not the Deed of Absolute Sale can be nullified.
HELD:
FIRST ISSUE: No.
The Court ruled that this case falls under the exception of the rule on separate intestate
proceedings. The general rule is that the declaration of heirship must be made in a special
proceeding, not in an independent civil action. However, the Court also ruled that recourse to
administration proceedings to determine who heirs are is sanctioned only if there is a good and
compelling reason for such recourse.
The Court had allowed exceptions to the rule requiring administration proceedings as when
the parties in the civil case already presented their evidence regarding the issue of heirship, and the
RTC had consequently rendered judgment upon the issues it defined during the pre-trial. Similar to
the case of Portugal v. Portugal-Beltran, in the present case, there appears to be only one parcel of
land being claimed by the contending parties as the inheritance from Eulalio. It would be more
practical, as Portugal teaches, to dispense with a separate special proceeding for the determination
of the status of petitioner Avelina as sole heir of Eulalio, especially in light of the fact that
respondents spouses Gualvez admitted in court that they knew for a fact that petitioner Avelina
was not the sole heir of Eulalio and that petitioner Salvador was one of the other living heirs with
rights over the subject land.
Page 78 of 84
Accordingly, the court a quo had properly rendered judgment on the validity of the Affidavit
of Self-Adjudication executed by Avelina. As pointed out by the trial court, an Affidavit of Self-
Adjudication is only proper when the affiant is the sole heir of the decedent.
SECOND ISSUE: Yes.
The Court held that it is apparent from the admissions of respondents and the records of
this case that Avelina had no intention to transfer the ownership, of whatever extent, over the
property to respondents. Hence, the Deed of Absolute Sale is nothing more than a simulated
contract.
Heirs of Policronio Ureta Sr. v. Heirs of Liberato Ureta: In absolute simulation, there is a
colorable contract but it has no substance as the parties have no intention to be bound by it. The
main characteristic of an absolute simulation is that the apparent contract is not really desired or
intended to produce legal effect or in any way alter the juridical situation of the parties. As a result,
an absolutely simulated or fictitious contract is void, and the parties may recover from each other
what they may have given under the contract.
In the present case, the true intention of the parties in the execution of the Deed of Absolute
Sale is simply to “facilitate the titling of the subject property,” not to transfer the ownership of the
lot to them. Furthermore, respondents concede that petitioner Salvador remains in possession of
the property and that there is no indication that respondents ever took possession of the subject
property after its supposed purchase. Such failure to take exclusive possession of the subject
property or, in the alternative, to collect rentals from its possessor, is contrary to the principle of
ownership and is a clear badge of simulation that renders the whole transaction void.
MANGAHAS VS. BROBIO

G.R. No. 183852 : October 20, 2010
FACTS:
On January 10, 2002, Pacifico S. Brobio died intestate, leaving three parcels of land. He was
survived by his wife, respondent Eufrocina A. Brobio, and four legitimate and three illegitimate
children; petitioner Carmela Brobio Mangahas is one of the illegitimate children.
On May 12, 2002, the heirs of the deceased executed a Deed of Extrajudicial Settlement of
Estate of the Late Pacifico Brobio with Waiver. In the Deed, petitioner and Pacificos other children,
in consideration of their love and affection for respondent and the sum of P150,000.00, waived and
ceded their respective shares over the three parcels of land in favor of respondent. According to
petitioner, respondent promised to give her an additional amount for her share in her fathers
estate. Thus, after the signing of the Deed, petitioner demanded from respondent the promised
additional amount, but respondent refused to pay, claiming that she had no more money.
A year later, while processing her tax obligations with the Bureau of Internal Revenue (BIR),
respondent was required to submit an original copy of the Deed. Left with no more original copy of
the Deed, respondent summoned petitioner to her office on May 31, 2003 and asked her to
Page 79 of 84
countersign a copy of the Deed. Petitioner refused to countersign the document, demanding that
respondent first give her the additional amount that she promised. Considering the value of the
three parcels of land (which she claimed to be worth P20M), petitioner asked for P1M, but
respondent begged her to lower the amount. Petitioner agreed to lower it to P600,000.00. Because
respondent did not have the money at that time and petitioner refused to countersign the Deed
without any assurance that the amount would be paid, respondent executed a promissory note.
Petitioner agreed to sign the Deed when respondent signed the promissory note.
When the promissory note fell due, respondent failed and refused to pay despite demand.
Petitioner made several more demands upon respondent but the latter kept on insisting that she
had no money. On January 28, 2004, petitioner filed a Complaint for Specific Performance with
damage saw against respondent.
The Regional Trial Court (RTC) rendered a decision in favor of petitioner. The CA reversed
the RTC decision and dismissed the complaint. Hence, this petition.
ISSUE:
The Honorable Court of Appeals erred in the appreciation of the facts of this case when it found that
intimidation attended the execution of the promissory note subject of this case.
RULING:
The Supreme Court ruled that contracts are voidable where consent thereto is given
through mistake, violence, intimidation, undue influence, or fraud. In determining whether consent
is vitiated by any of these circumstances, courts are given a wide latitude in weighing the facts or
circumstances in a given case and in deciding in favor of what they believe actually occurred,
considering the age, physical infirmity, intelligence, relationship, and conduct of the parties at the
time of the execution of the contract and subsequent thereto, irrespective of whether the contract is
in a public or private writing. It is alleged that mistake, violence, fraud, or intimidation attended the
execution of the promissory note. Still, respondent insists that she was "forced" into signing the
promissory note because petitioner would not sign the document required by the BIR. The fact that
respondent may have felt compelled, under the circumstances, to execute the promissory note will
not negate the voluntariness of the act. As rightly observed by the trial court, the execution of the
promissory note in the amount of P600,000.00 was, in fact, the product of a negotiation between
the parties. Respondent herself testified that she bargained with petitioner to lower the amount.
The remedy suggested by the CA is not the proper one under the circumstances. An action for
partition implies that the property is still owned in common. Considering that the heirs had already
executed a deed of extrajudicial settlement and waived their shares in favor of respondent, the
properties are no longer under a state of co-ownership; there is nothing more to be partitioned, as
ownership had already been merged in one person.
Wherefore, the decision of the CA is reversed and set aside and the decision of the RTC is
reinstated.
PENTACAPITAL INVESTMENT CORPORATION vs. MAHINAY

G.R. No. 171736, July 5, 2010 | J. NACHURA
Page 80 of 84
FACTS:
Petitioner filed a complaint for a sum of money against respondent Makilito Mahinay based
on two separate loans obtained by the latter, a total amount of P1,936,800.00. These loans were
evidenced by two promissory notes dated February 23, 1996. Despite repeated demands,
respondent failed to pay the loans, hence, the complaint. Respondent claimed that petitioner had no
cause of action because the promissory notes on which its complaint was based were subject to a
condition that did not occur. While admitting that he indeed signed the promissory notes, he
insisted that he never took out a loan and that the notes were not intended to be evidences of
indebtedness. By way of counterclaim, respondent prayed for the payment of moral and exemplary
damages plus attorney’s fees.
Respondent explained that he was the counsel of Ciudad Real Development Inc. (CRDI). In
1994, Pentacapital Realty Corporation offered to buy parcels of land known as the Molino
Properties, owned by CRDI. As the Molino Properties were the subject of a pending case,
Pentacapital Realty paid only the down payment amounting to P12,000,000.00. CRDI allegedly
instructed Pentacapital Realty to pay the former’s creditors, including respondent who thus
received a check worth P1,715,156.90. It was further agreed that the balance would be payable
upon the submission of an Entry of Judgment showing that the case involving the Molino Properties
had been decided in favor of CRDI.
Respondent, Pentacapital Realty and CRDI allegedly agreed that respondent had a charging
lien equivalent to 20% of the total consideration of the sale in the amount of P10,277,040.00.
Pending the submission of the Entry of Judgment and as a sign of good faith, respondent
purportedly returned the P1,715,156.90 check to Pentacapital Realty. However, the Molino
Properties continued to be haunted by the seemingly interminable court actions initiated by
different parties which thus prevented respondent from collecting his commission. Admittedly,
respondent earlier instituted an action for Specific Performance against Pentacapital Realty before
the RTC of Cebu City, Branch 57, praying for the payment of his commission on the sale of the
Molino Properties. In an Amended Complaint, respondent referred to the action he instituted as one
of Preliminary Mandatory Injunction instead of Specific Performance. Acting on Pentacapital
Realty’s Motion to Dismiss, the RTC dismissed the case for lack of cause of action. The dismissal
became final and executory.
With the dismissal of the aforesaid case, respondent filed a Motion to Permit Supplemental
Compulsory Counterclaim. In addition to the damages that respondent prayed for in his compulsory
counterclaim, he sought the payment of his commission amounting to P10,316,640.00, plus interest
at the rate of 16% per annum, as well as attorney’s fees equivalent to 12% of his principal claim.
Respondent claimed that Pentacapital Realty is a 100% subsidiary of petitioner. Thus, although
petitioner did not directly participate in the transaction between Pentacapital Realty, CRDI and
respondent, the latter’s claim against petitioner was based on the doctrine of piercing the veil of
corporate fiction. Simply stated, respondent alleged that petitioner and Pentacapital Realty are one
and the same entity belonging to the Pentacapital Group of Companies.
ISSUE:
Page 81 of 84
Whether respondent is bound by the promissory notes.
HELD: YES.
Under Article 1354 of the Civil Code, it is presumed that consideration exists and is lawful
unless the debtor proves the contrary. As it now appears, the promissory notes clearly stated that
respondent promised to pay petitioner P1,520,000.00 and P416,800.00, plus interests and penalty
charges, a year after their execution. Nowhere in the notes was it stated that they were subject to a
condition. As correctly observed by petitioner, respondent is not only a lawyer but a law professor
as well. Respondent’s liability is not negated by the fact that he has uncollected commissions from
the sale of the Molino properties. As the records of the case show, at the time of the execution of the
promissory notes, the Molino properties were subject of various court actions commenced by
different parties. Thus, the sale of the properties and, consequently, the payment of respondent’s
commissions were put on hold. The non-payment of his commissions could very well be the reason
why he obtained a loan from petitioner.
Aside from the payment of the principal obligation of P1,936,800.00, the parties agreed that
respondent pay interest at the rate of 25% from February 17, 1997 until fully paid. Such rate,
however, is excessive and thus, void. Since the stipulation on the interest rate is void, it is as if there
was no express contract thereon. To be sure, courts may reduce the interest rate as reason and
equity demand. In this case, 12% interest is reasonable.
The promissory notes likewise required the payment of a penalty charge of 3% per month
or 36% per annum. However, a penalty charge of 3% per month is unconscionable; hence, we
reduce it to 1% per month or 12% per annum.
Lastly, respondent promised to pay 25% of his outstanding obligations as attorney’s fees in
case of non-payment thereof. Attorney’s fees here are in the nature of liquidated damages. As long
as said stipulation does not contravene law, morals, or public order, it is strictly binding upon
respondent. Nonetheless, courts are empowered to reduce such rate if the same is iniquitous or
unconscionable pursuant to the above-quoted provision. This sentiment is echoed in Article 2227 of
the Civil Code, to wit: Art. 2227. Liquidated damages, whether intended as an indemnity or a
penalty, shall be equitably reduced if they are iniquitous or unconscionable. Hence, we reduce the
stipulated attorney’s fees from 25% to 10%.
HEIRS OF POLICRONIO M. URETA vs. HEIRS OF LIBERATO M. URETA

GR. NO. 165748, September 14, 2011
FACTS:
Alfonso was financially well-off during his lifetime. He has 14 children. He owned several
fishpens, a fishpond, a sari-sari store, a passenger jeep, and was engaged in the buying and selling of
copra. In order to reduce inheritance tax Alfonso made it appear that he sold some of his lands to
his children. Accordingly, Alfonso executed four (4) Deeds of Sale covering several parcels of land in
favor of Policronio, Liberato, Prudencia, and his common-law wife, Valeriana Dela Cruz. The Deed of
Page 82 of 84
Sale executed on October 25, 1969, in favor of Policronio, covered six parcels of land, which are the
properties in dispute in this case.
Since the sales were only made for taxation purposes and no monetary consideration was
given, Alfonso continued to own, possess and enjoy the lands and their produce. On April 19, 1989,
Alfonso's heirs executed a Deed of Extra-Judicial Partition, which included all the lands that were
covered by the four (4) deeds of sale that were previously executed by Alfonso for taxation
purposes. Conrado, Policronio's eldest son, representing the Heirs of Policronio, signed the Deed of
Extra-Judicial Partition in behalf of his co-heirs.
After their father's death, the Heirs of Policronio found tax declarations in his name
covering the six parcels of land. On June 15, 1995, they obtained a copy of the Deed of Sale executed
on October 25, 1969 by Alfonso in favor of Policronio. Believing that the six parcels of land
belonged to their late father, and as such, excluded from the Deed of Extra-Judicial Partition, the
Heirs of Policronio sought to amicably settle the matter with the Heirs of Alfonso. Earnest efforts
proving futile, the Heirs of Policronio filed a Complaint for Declaration of Ownership, Recovery of
Possession, Annulment of Documents, Partition, and Damages against the Heirs of Alfonso before
the RTC on November 17, 1995
ISSUE:
Whether or not the Deed of Sale was valid; 2. Whether or not the Deed of Extra-Judicial Partition
was valid
HELD:
The Deed of Sale was void because it is simulated as the parties did not intend to be legally
bound by it. As such, it produced no legal effects and did not alter the juridical situation of the
parties. It is only made to avoid tax purposes. The CA also noted that Alfonso continued to exercise
all the rights of an owner even after the execution of the Deed of Sale, as it was undisputed that he
remained in possession of the subject parcels of land and enjoyed their produce until his death.
Two veritable legal presumptions bear on the validity of the Deed of Sale: (1) that there was
sufficient consideration for the contract; and (2) that it was the result of a fair and regular private
transaction. If shown to hold, these presumptions infer prima facie the transaction's validity, except
that it must yield to the evidence adduced.
It has been held in several cases that partition among heirs is not legally deemed a
conveyance of real property resulting in change of ownership. It is not a transfer of property from
one to the other, but rather, it is a confirmation or ratification of title or right of property that an
heir is renouncing in favor of another heir who accepts and receives the inheritance. It is merely a
designation and segregation of that part which belongs to each heir. The Deed of Extra-Judicial
Partition cannot, therefore, be considered as an act of strict dominion. Hence, a special power of
attorney is not necessary. In fact, as between the parties, even an oral partition by the heirs is valid
if no creditors are affected. The requirement of a written memorandum under the statute of frauds
does not apply to partitions effected by the heirs where no creditors are involved considering that
Page 83 of 84
such transaction is not a conveyance of property resulting in change of ownership but merely a
designation and segregation of that part which belongs to each heir.
- END –
Page 84 of 84

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SANTOALLA, STEPHANIE M.

LOSS IN OBLIGATIONS, IMPOSSIBILITY, DIFFICULTY OF PERFORMANCE

GAISANO CAGAYAN, INC. vs. INSURANCE COMPANY OF NORTH AMERICA

PHILIPPINE NATIONAL CONSTRUCTION CORPORATION vs. COURT OF APPEALS, MA. TERESA

Whether or not Article 1266 is applicable.

VICTOR YAM & YEK SUN LENT vs CA

BANK OF THE PHILIPPINE ISLANDS V. REYES

PHILIPPINE NATIONAL BANK V. SAPPHIRE SHIPPING

CKH Industrial Development v. Court of Appeals

Whether or not there is a valid compensation.

MIRASOL V. COURT OF APPEALS

ASSOCIATED BANK V. TAN

PEREZ V. COURT OF APPEALS

SILAHIS MARKETING CORP. V. INTERMEDIATE APPELLATE COURT

G.R. NO. L-48797, JULY 30, 1943

MILLAR V. COURT OF APPEALS

MAGDALENA ESTATE V. RODRIGUEZ

COCHINGYAN V. RB SURETY AND INSURANCE

BROADWAY CENTRUM CONDOMINIUM CORPORATION V. TROPICAL HUT

In the case at hand:

MOLINO V. SECURITY DINERS INTERNATIONAL

REYES V. SECRETARY OF JUSTICE

Reyes is the president of EUROTRUST, a domestic corporation engaged in credit finance,

CALIFORNIA BUS LINES V. STATE INVESTMENT

BABST V. COURT OF APPEALS

VALENZUELA V. KALAYAAN DEVELOPMENT & INDUSTRIAL CORP.

FOUNDATION SPECIALISTS, INC. V. BETONVAL READY CONCRETE, INC

MARIA TOMIMBANG V. ATTY. JOSE TOMIMBANG

LICAROS V. GATMAITAN, (2001)

ASTRO ELECTRONICS CORP. V. PHILIPPINE EXPORT AND FOREIGN LOAN GUARANTEE

OBLIGATORY FORCE OF CONTRACTS

ORTIGAS & CO., LTD. VS. COURT OF APPEALS

FIRST PHILIPPINE INTERNATIONAL BANK VS. COURT OF APPEALS

FERRAZZINI VS. GSELL

OLLENDORFF VS. ABRAHAMSON

TIU VS. PLATINUM PLANS PHIL., INC.

LAND BANK VS. HEIRS OF SPOUSES SORIANO

Private respondents, who are owners of a NACIDA-registered enterprise, obtained from

LAO LIM vs. COURT OF APPEALS

Philippine National Bank vs Spouses Agustin and Pilar Rocamora

RTC, CA and SC decided against PNB.

ERMITAÑO VS. COURT OF APPEALS

PSBank vs. CASTILLO

Respondents defaulted due to financial constraints. Thus, petitioner initiated an

Respondents failed to redeem the property.

PHILIPPINE NATIONAL BANK v. THE HON. COURT OF APPEALS and

SPOUSES MARIANO and GILDA FLORENDO vs. COURT OF APPEALS and

SPS. IGNACIO F. JUICO AND ALICE P. JUICO v. CHINA BANKING CORPORATION,

Respondent filed a collection suit in the trial court.

SPOUSES EDUARDO AND LYDIA SILOS VS. PHILIPPINE NATIONAL BANK

The CA affirmed the RTC decision.

YOUNG vs Court of Appeals

Petitioner raised the following assignments of error:

The petition is devoid of merit.

The pertinent portion of the Compromise Agreement reads:

(1) there must be a stipulation in favor of a third person.

Mandarin Villa, Inc. vs. CA and Clodualdo de Jesus

2. Yes. NO DAMAGE TO BE AWARDED. While we do not encourage tort interferers seeking

ESSENTIAL ELEMENTS OF CONTRACT:

RTC ruled in favor of Perez. CA reversed.

Philippine National Bank vs Spouses Agustin and Pilar Rocamora

RTC, CA and SC decided against PNB.

EMILIO BUGATTI vs. COURT OF APPEALS