Parubrub, Cherry A.

1st Year | Universidad de Manila

Obligations and Contracts
ALLIED BANKING CORPORATION, petitioner, vs. COURT OF APPEALS, HON. JOSE C.
DE GUZMAN, OSCAR D. TAN-QUECO, LUCIA D. TANQUECO-MATIAS, RUBEN D.
TANQUECO and NESTOR D. TANQUECO, respondents.
G.R. No. 124290 | January 16, 1998
J. BELLOSILLO

FACTS:
Allied Banking Corporation entered into a lease agreement with Spouses Filemon Tanqueco
and Lucia Domingo–Tanqueco with a term of lease of 14 years commencing from April 1, 1978
and may be renewed for a like term at the option of the lessee which is specifically stated at
Provision No. 1 in the contract of lease.
Later on, a year before the expiration, Tanquecos informed the petitioner that they are no
longer interested in renewing the lease. The contract of lease expired, and the Tanquecos
demanded that Allied vacate the premises but Allied Banking Corporation insisted that they
were exercising its option to renew the lease.
The Tanquecos filed action for ejectment case against Allied Banking Corporation, and the
lower court granted that Provision No. 1 of the lease contract as void.
The MeTC, RTC, and CA ruled in favor of the Tanquecos.
ISSUE:
Whether or not the validity of the provision in the contract of lease to the effect of the option to
renew the lease is void.
RULING:
NO.
The Supreme Court agreed with the petitioner, that Provision No. 1 of the lease contract was
mutually agreed upon therefore valid and binding on both parties, and the exercise by the
petitioner of its option to renew the contract was part of their agreement and in the fulfillment
thereof.
Article 1308 of the Civil Code expresses what is known in law as the principle of mutuality of
contracts. It provides that "the contract must bind both the contracting parties; its validity or
compliance cannot be left to the will of one of them."
The fact that such option is binding only on the lessor and can be exercised only by the lessee
does not render it void for lack of mutuality. After all, the lessor is free to give or not to give the
option to the lessee. And while the lessee has a right to elect whether to continue with the
lease or not, once he exercises his option to continue and the lessor accepts, both parties are
thereafter bound by the new lease agreement. Their rights and obligations become mutually
fixed, and the lessee is entitled to retain possession of the property for the duration of the new
lease, and the lessor may hold him liable for the rent therefor. The lessee cannot thereafter
escape liability even if he should subsequently decide to abandon the premises. Mutuality
obtains in such a contract and equality exists between the lessor and the lessee since they
remain with the same faculties in respect to fulfillment.
Parubrub, Cherry A.
1st Year | Universidad de Manila
Obligations and Contracts
H. C. LIEBENOW, Plaintiff-Appellant, vs. THE PHILIPPINE VEGETABLE OIL COMPANY,
Defendant-Appellee.
G.R. No. L-13463 | November 9, 1918
STREET, J.
FACTS:
The plaintiff filed for an action to recover a sum of money to which he considers himself entitled
by way of a bonus in addition to the salary earned by him while in the employment of the
defendant company as superintendent of its factory. The basis of his claim was a letter from
the president of the defendant company promising to pay him, in addition to his salary, “such
further amount as the Board of Directors may see fit to grant.”
After the termination of his contract of service, the defendant still delivered money in
installments with a total of P4,500 but Liebenow claimed that this payment was not in
satisfaction of the stipulated bonus and demanded a larger bonus based on the increased
profits of the company during his employment.
ISSUE:
Whether or not the Liebenow is entitled to a bonus?
RULING:
NO.
The Supreme Court sees no reason to doubt that a promise of this character creates a legal
obligation binding upon the promisor, although in its actual results, it may not infrequently
prove to be illusory. Such a promise is not, in our opinion, nugatory, under article 1115 of the
Civil Code, as embodying a condition dependent exclusively upon the will of the obligor. Nor
can it be held invalid under Article 1256 of the same Code, which declares that the validity and
performance of a contract cannot be left to the will of one of the contracting parties. The
uncertainty of the amount to be paid by way of bonus is also no obstacle to the validity of the
contract (article 1273, Civil Code); since the contract itself specifies the manner in which the
amount payable is to be determined, namely, by the exercise of the judgment and discretion
of the employer.
The validity of the promise being conceded, the question which arises next is: What is
necessary to satisfy it? Upon this point, it must be obvious that the obligation can only be
satisfied when something has been paid as a bonus by or with the approval of the board of
directors. In the case before us, the promise to pay a bonus is absolute and unconditional.
The payment is not conditioned upon satisfactory service, nor upon the duration of the service,
nor upon the profits which may accrue to the employer from the efficiency of the employee. All
these elements might and naturally would operate upon the minds and discretion of the
directors in fixing the amount of the bonus, but they are wholly unconnected with the legal
right of the plaintiff to receive something as a bonus. The amount of the bonus, it will be
observed, is left by the contract to the discretion of the board of directors. Now, when that
discretion has once been exercised and a bonus has been paid by the directors or by the
officers of the company, with the approval, express or implied, of the directors, can that
discretion be judicially reviewed? We are of the opinion that it cannot. The parties stipulate
that the discretion to be exercised was the discretion of the directors, and there would be a
very manifest infringement of the contract if we were to substitute in place of the discretion of
the directors the discretion of any other person or body whomsoever.
Parubrub, Cherry A.
1st Year | Universidad de Manila
Obligations and Contracts
PHILIPPINE NATIONAL BANK, petitioner, vs. COURT OF APPEALS, REMEDIOS
JAYME-FERNANDEZ, and AMADO FERNANDEZ, respondents. Vidad, Corpus &
Associates for petitioner. Remedios Jayme-Fernandez for private respondents
G.R. No. 107569 | November 8, 1994
PUNO, J.
FACTS:
The case involves a dispute between the Philippine National Bank (PNB) and private
respondents Remedios Jayme-Fernandez and Amado Fernandez. The private respondents
obtained a loan under the Cottage Industry Guaranty Loan Fund (CIGLF) from PNB in 1982.
The loan is to be amortized over three years with a 12% interest rate annually
In February 1983, they were granted an additional loan of P50,000, with the same terms and
conditions as the previous loan. In August 1984, PNB informed the private respondents that
the interest rate on their loan was increased to 25% per annum, and subsequently increased
to 30% and 42% in October 1984.
The private respondents sought to have PNB re-apply the 12% interest rate and condone the
present interest and penalties due, but their efforts were unsuccessful. They then filed a suit
for specific performance against PNB and the National Cottage Industry Development
Authority (NACIDA), seeking the release of mortgage, pecuniary consequential damages,
moral and exemplary damages, and other relief.
The trial court dismissed the private respondents' complaint, but on appeal, the Court of
Appeals reversed the dismissal concerning PNB and disallowed the increases in interest rates.
PNB filed a petition for review with the Supreme Court, arguing that the increases in interest
rates were authorized and that the credit agreement and promissory notes were binding
between the parties.
ISSUE:
Whether or not a creditor may raise the rate of interest based solely on a certain clause in the
contract and without the consent of the debtor as to the amount and rate of such increase.
RULING:
NO.
The Supreme Court held that the unilateral increases in interest rates made by PNB were
unauthorized and violated the principle of mutuality in contracts.
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 efficiency than if it had been done under duress or by a
person of unsound mind.
Similarly, contract charges 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. That
Parubrub, Cherry A.
1st Year | Universidad de Manila
Obligations and Contracts
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. In
Philippine National Bank v. Court of Appeals, et al., 196 SCRA 536, 544- 545 (1991) we held
". . .
The unilateral action of the PNB in increasing the interest rate on the private respondent's loan
violated the mutuality of contracts ordained in 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.'
In order that obligations arising from contracts may have the force or law between the parties,
there must be mutuality between the parties based on their essential equality. A contract
containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled
will of one of the contracting parties, is void . . . Hence, even assuming that the . . . loan
agreement between the PNB and the private respondent gave the PNB a license (although in
fact there was none) to increase the interest rate at will during the term of the loan, that license
would have been null and void for being violative of the principle of mutuality essential in
contracts. It would have invested the loan agreement with the character of a contract of
adhesion, where the parties do not bargain on equal footing, the weaker party's (the debtor)
participation being reduced to the alternative 'to take it or leave it' . . . Such a contract is a
veritable trap for the weaker party whom the courts of justice must protect against abuse and
imposition
Parubrub, Cherry A.
1st Year | Universidad de Manila
Obligations and Contracts
BERNARDO DIZON, substituted by his heirs, DOMININA ALVENDIA VDA. DE DIZON,
BUENAVENTURANZA DIZON-AMIO, Sister MARIA FLORENCIA (MARIA DIZON),
MARIANO DIZON, VICTOR DIZON, ARACELI DIZON-GOMEZ, ESTELA
DIZONLACSAMANA, MARITA DIZON, JOSEFA DIZON-ASIDO, EUGENIA DIZON-DEL
BARRIO and GLORIA DIZON, petitioners, vs. AMBROSIO MAGSAYSAY and NICANOR
PADILLA, respondents.
Pompeyo Diaz for petitioners. Oben & Oben for respondents.
G.R. No. L-23399 | May 31, 1974
MAKALINTAL, C.J.

FACTS:
The respondent registered owner of a 1,171.70 sq.m. parcel of land located in Sampaloc,
Manila, and the late Bernardo M. Dizon executed a written contract of lease on April 1, 1949,
over a portion of the above-mentioned parcel of land which the latter had been occupying as
lessee since 1937 and on which he had constructed a residential house as well as a six-lane
bowling alley.
The lease contract included a preferential right-to-purchase clause. The lease contract expired
on April 1, 1951, but Dizon continued to occupy the premises and pay the same monthly rent.
In March 1953, Magsaysay informed Dizon that the lease was terminated and negotiations for
the sale of the property to Nicanor Padilla were already underway.
On March 7, 1953, a deed of sale was executed between Magsaysay and Padilla, and a new
certificate of title was issued to Padilla. Dizon invoked his preferential right to purchase the
property and filed a lawsuit against Magsaysay and Padilla, seeking to nullify the sale and
order them to sell the property to him.
ISSUE:
Whether or not Dizon can nullify the sale of the property to Padilla?

RULING:
NO.
The Supreme Court affirmed with the decision of the Court of Appeals dismissing Dizon’s
complaint. Art 1311 provides that contracts take effect only between the parties, their assigns
and heirs, except in cases where the rights and obligations arising from the contract are not
transmissible by their nature, or by stipulation or by provision of law. Hence, he cannot seek
to nullify the sale of the aforesaid property.
Parubrub, Cherry A.
1st Year | Universidad de Manila
Obligations and Contracts
MIGUEL FLORENTINO, ROSARIO ENCARNACION de FLORENTINO, MANUEL ARCE,
JOSE FLORENTINO, VICTORINO FLORENTINO, ANTONIO FLORENTINO, REMEDION
ENCARNACION and SEVERINA ENCARNACION, petitioners-appellants, vs.
SALVADOR ENCARNACION, SR., SALVADOR ENCARNACION, JR., and ANGEL
ENCARNACION, oppositors to encumbrance-petitioners-appelles. Jose F. Singson
and Miguel Florentino for appellants. Pedro Singson for appellees.
G.R. No. L-27696 | September 30, 1977
GUERRERO, C.J
FACTS:
On May 22, 1964, the petitioners-appellants Miguel Florentino, Remedios Encarnacion de
Florentino, Manuel Arce, Jose Florentino, Victorino Florentino, Antonio Florentino, Remedion,
Encarnacion and Severina Encarnacion, and the Petitioners-appellees Salvador Encarnacion,
Sr., Salvador Encarnacion, Jr. and Angel Encarnacion filed with the Court of First Instance of
Ilocos Sur an application for the registration under Act 496 of a parcel of agricultural land
located at Barrio Lubong Dacquel Cabugao Ilocos Sur.
Applicants are the common and pro-indiviso owners of the said land with the improvements
existing thereon. There is no mortgage, lien or encumbrance of any kind whatever affecting
said land, nor any other person having any estate or interest thereon, legal, or equitable,
remainder, reservation or in expectancy. Applicants had acquired the aforesaid land thru and
by inheritance from their aunt who died in Vigan, Ilocos Sur in 1941. Said land was adjudicated
to them by virtue of the deed of extrajudicial partition. Applicants Salvador Encarnacion, Jr.
and Angel Encarnacion acquired their respective shares of the land thru purchase from the
original heirs.
The crucial point in controversy is the deed of extrajudicial partition which states that the fruits
of the parcel of land should be used to defray the expenses of the Church during the
celebration of the Seven Last Words. Applicant Miguel Florentino asked the court to include
the same as an encumbrance on the land sought to be registered, and cause the entry of the
same on the face of the title that will finally be issued.
Opposing its entry on the title as an encumbrance, petitioners Salvador Encarnacion, Sr.,
Salvador Encarnacion, Jr. and Angel Encarnacion filed a manifestation seeking to withdraw
their application on their respective shares of the land sought to be registered. The withdrawal
was opposed by the petitioners appellants.
Lower Court ruled "that the contention of the proponents of encumbrance is without merit"
because the selfimposed arrangement in favor of the Church as a pure and simple donation
is void for the that the donee here has not accepted the donation, and in the case of Salvador
Encarnacion, Jr. and Angel Encarnacion, they had made no oral or written grant at all as in
fact they are even opposed to it The Motion for Reconsideration and of New Trial was denied.
Hence, this petition.

ISSUE:
Whether or not the stipulation in the extrajudicial partition agreement revocable at the
unilateral option of the co-owners?
Parubrub, Cherry A.
1st Year | Universidad de Manila
Obligations and Contracts
RULING:
NO.
The stipulation is not revocable at the unilateral option of the co-owners and is binding on all
parties to the agreement. The co-owners cannot now revoke the stipulation marked since the
Church has already demonstrated its implied acceptance of the stipulation pour autrui before
its revocation by enjoying the benefits of the said stipulation.
Parubrub, Cherry A.
1st Year | Universidad de Manila
Obligations and Contracts
MELECIO COQUIA, MARIA ESPANUEVA and MANILA YELLOW TAXICAB CO., INC.,
plaintiffs-appellees, vs. FIELDMEN'S INSURANCE CO., INC., defendant-appellant.
Antonio de Venecia for plaintiffs-appellees. Rufino Javier for defendant-appellant.
G.R. No. L-23276 | November 29, 1968
CONCEPCION, C.J.:
FACTS:
The case of Coquia v. Fieldmen's Insurance Co., Inc. involves a dispute between the heirs of
a deceased driver and an insurance company. The insurance policy in question contains
stipulations that the company will indemnify any authorized driver of the insured's motor
vehicle and will also indemnify the personal representatives of the driver in the event of his
death. The policy further states that the company may make indemnity payable directly to the
claimants or heirs of claimants.
The Coquias, who are the sole heirs of the deceased driver, filed a complaint against the
insurance company to collect the proceeds of the policy after the company offered a lower
amount as a compromise.
The insurance company argues that the Coquias have no cause of action because they
have no contractual relation with the company and that the insured had not complied with
the provisions of the policy concerning arbitration.

ISSUE:
Whether or not the heirs of a deceased driver have a cause of action against an insurance
company?

RULING:
YES.
The court rules in favor of the heirs of a deceased driver, stating that they have a cause of
action against the insurance company based on the stipulations in the policy and that the
arbitration provision was waived by the parties' actions. The Coquias, as the sole heirs of the
deceased driver, have a direct cause of action against the insurance company.
In general, only parties to a contract may bring an action based thereon, this rule is subject to
exceptions, one of which is found in the second paragraph of Article 1311 of the Civil Code of
the Philippines, reading:
“If a contract should contain some stipulation in favor of a third person, he may demand its
fulfillment provided he communicated his acceptance to the obligor before its revocation. A
mere incidental benefit or interest of a person is not sufficient. The contracting parties must
have clearly and deliberately conferred a favor upon a third person.”
Parubrub, Cherry A.
1st Year | Universidad de Manila
Obligations and Contracts
PASTOR B. CONSTANTINO, plaintiff-appellant, vs. HERMINIA ESPIRITU, defendant-
appellee. David Guevara for plaintiff-appellant.
G.R. No. L-22404 | May 31, 1971
DIZON, J.

FACTS:
Pastor B. Constantino completed a fictitious deed of sale of a two-story house and four
subdivision lots in favor of his mistress on October 30, 1953, Hermina Espiritu, who at that
time was pregnant, with the understanding that the latter shall hold the properties in trust for
their unborn illegitimate child. 1953. The property was covered by Transfer Certificate of Title
No. 20174 issued in Constantino's name.
Espiritu mortgaged the properties twice to a bank, and subsequently, she tried to sell them.
Constantino then brought an action against her praying for the issuance of a writ of preliminary
injunction restraining her from further alienating or disposing of the properties and for judgment
ordering her to convey the properties to their illegitimate child who by that time was already
five years old.
The lower court, however, dismissed the case. The plaintiff raised the case by direct appeal
to the Supreme Court.

ISSUE:
Whether or not there is a valid cause of action in the instant case.
RULING:
YES.
The Supreme Court ruled in favor of Constantino. The Court held that the contract between
Constantino and Espiritu was a stipulation pour autrui, meaning it was entered into for the
benefit of a third person, their unborn child. The Court stated that the third person for whose
benefit the contract was made could demand its fulfillment if they had communicated their
acceptance before the stipulation in their favor was revoked.
Upon the facts alleged in the complaint, the contract between appellant and appellee was a
contract pour autrui, although couched in the form of an absolute deed of sale, and that
appellant’s action was, in effect, one for specific performance. That one of the parties to a
contract is entitled to bring an action for its enforcement or to prevent its breach is too clear to
need any extensive discussion.

Upon the other hand, that the contract involved contained a stipulation pour autrui amplifies
this settled rule only in the sense that the third person for whose benefit the contract was
entered into may also demand its fulfillment provided he had communicated his acceptance
thereof to the obligor before the stipulation in his favor is revoked. It appearing that the
amended complaint submitted by appellant to the lower court impleaded the beneficiary under
the contract as a party co-plaintiff, it seems clear that the three parties concerned therewith
would, as a result, be before the court and the latter’s adjudication would be complete and
binding upon them.
Parubrub, Cherry A.
1st Year | Universidad de Manila
Obligations and Contracts
HEIRS OF SEVERINA SAN MIGUEL, namely: MAGNO LAPINA, PACENCIA LAPINA,
MARCELO LAPINA, SEVERINO LAPINA, ROSARIO LAPINA, FRANCISCO LAPINA,
CELIA LAPINA assisted by husband RODOLFO TOLEDO, petitioners, vs. THE
HONORABLE COURT OF APPEALS, DOMINADOR SAN MIGUEL, GUILLERMO F. SAN
MIGUEL, PACIENCIA F. SAN MIGUEL, CELESTINO, assisted by husband, ANTERO
CELESTINO, represented by their Attorney-in-Fact ENRICO CELESTINO, AUGUSTO
SAN MIGUEL, ANTONIO SAN MIGUEL, RODOLFO SAN MIGUEL, CONRADO SAN
MIGUEL and LUCITA SAN MIGUEL, respondents.
Bayani L. Bernardo Law Office for petitioners.
De Leon and De Leon Law Office for private respondents.

G.R. No. 136054 | September 5, 2001.

PARDO, J.
FACTS:
The case involves a dispute over the ownership and transfer of a parcel of land in Panapan,
Bacoor, Cavite. The land was originally claimed by Severina San Miguel.
Without Severina's knowledge, Dominador San Miguel (private respondent) managed to
cause the subdivision of the land into three (3) lots. Respondent Dominador registered two of
the three lots to the Land Registration Commission (LRC) in which the latter issued a title over
his favor.
Severina filed a petition for review of the Land Registration Commission's order directing the
issuance of the Original Certificate of Title No. 0-1816 in the names of Dominador San Miguel
and others. Severina alleged that the land registration proceedings were fraudulently
concealed from her.
The trial court ruled in favor of Severina's heirs and issued a writ of possession and demolition
in their favor. Severina's heirs decided not to pursue the writs and entered into a compromise
with Dominador and others.
As per the compromise, petitioners were to sell the subject lots to private respondents for one
and a half million pesos (P1.5 M). The delivery of the certificate of title was conditioned upon
the purchase of another untitled lot for an additional sum of three hundred thousand pesos.
Petitioners and private respondents then executed a deed of sale over the lots.
Dominador and others filed a motion requesting the delivery of the certificate of title. Severina's
heirs opposed it, stating that the payment of three hundred thousand pesos had not been
made. And admitted nonpayment since petitioners have not presented any proof of ownership
over one of the two parcels of land. Petitioners argued that the respondents recognized the
petitioners’ ownership over the parcel of lands under the compromise.
Therefore, there is no need for them to produce actual proof of ownership.
ISSUE:
Whether the non-payment of three hundred thousand pesos is a valid justification for
refusing to deliver the certificate of title.
Parubrub, Cherry A.
1st Year | Universidad de Manila
Obligations and Contracts

RULING:
NO.
The Supreme Court resolve the issue in the negative, and found the petition without merit.

The heirs of the petitioners anchor their claim on the kasunduan, stressing on their freedom
to stipulate and the binding effect of contracts. This argument is misplaced. The Civil Code
provides: ARTICLE 1306. The contracting parties 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.

Under the Civil Code provides, in contracts of sale, the vendor need not possess title to the
thing sold at the perfection of the contract. However, the vendor must possess title and must
be able to transfer title at the time of delivery. In a contract of sale, title only passes to the
vendee upon full payment of the stipulated consideration, or upon delivery of the thing sold.
In this case, petitioners are not in a position to transfer title.Without passing on the question
of who actually owned the questioned parcel of land, the court noted that there is no proof of
ownership in favor of the petitioners. Under those circumstances, the delivery of the title,
supposing that the payment was complied, is impossible. As emphasized under Article 1183
of the Civil Code, impossible conditions of a contract cannot be honored and shall annul the
obligation that depends upon them.