Lead’s Rough Digests and Notes ver.

3 It’s made for myself, so don’t

complain.
Legend: Note, what I use as labels change depending on my mood, but these are the ones I usually use .
GR = General Rule R = Rule S = Support F = Additional Fact
SR = Special/Specific Rule EXPT = Exemption A = Application C = Conclusion

A1174 Tanguilig v. CA In re: Fortuitous Event; A1169’s Rules for Delays in Reciprocal
Obligations
BASIC FACTS:
Tanguilig was under a contract to build a windmill for Herce Jr., for Ruling:
60K pesos with a one-year guarantee to account for the windmill 1.) The deep-well wasn’t part of the contract even though
after its delivery and acceptance. After the delivery of the deep-well and deep-well pumps were mentioned in the
windmill, Herce Jr. still had an outstanding balance of 15K pesos. contract, because, in their context, they were just used
Moreover, the windmill was destroyed after a “strong wind” descriptions for the specs of the windmill.
occurred (or a “typhoon” as alleged by Tanguilig). 2.) Herce Jr. should’ve paid to Tanguilig, and not Pili. The
deep-well was a separate agreement with Pili, not with
Herce Jr. said that he’s not obligated to pay the remaining 15K Tanguilig.
because it was supposed to be credited when he paid Pili to 3.) Tanguilig failed to prove that there was an actual typhoon.
construct a deep-well necessary for the windmill. Also, Herce 4.) Tanguilig is still liable for repairing the windmill because
should be made accountable for the broken windmill. the contract contained a 1-year guarantee. Thus, Herce Jr.
cannot be said to be in default according to the last
Tanguilig defended himself saying that it was not agreed upon in paragraph of A1169: “neither party incurs in delay if the
the contract that the deep-well was part of the 60K payment; and other does not comply or is not ready to comply.” In his
that the windmill broke because of a fortuitous event which case, Tanguilig still hasn’t complied with his obligation to
absolves him from liability after the windmill was already delivered take care of the windmill as stipulated in the one-year
(also stating that since Herce was in default, he should carry the guarantee.
liability of taking care of the windmill).
Doctrine: Elements of a Fortuitous Event
four (4) requisites must concur:
a) the cause of the breach of the obligation must be
independent of the will of the debtor;
b) the event must be either unforeseeable or unavoidable;
c) the event must be such as to render it impossible for the
debtor to fulfill his obligation in a normal manner; and
d) the debtor must be free from any participation in or
 aggravation of the injury to the creditor.

Note: In answering JSP’s tests prove the concurrence of each

element to prove a valid force majeure.

Nakpil v. CA In re: Fortuitous Event, Force Majeure and Aggravating

Negligence; A1723 Relation and Solidary Liability of Engineers and
Basic Story: United Construction Inc, and third-party Nakpil & Sons Architects to Contractors
who prepares the plans and specifications, constructed a building
in Manila for the Philippine Bar Association. After an earthquake in Ruling:
1968, the front columns of the buildings collapsed, leading the 1.) The totality of the inadequacies and deviations of the plan
building to tilt dangerously. The building was temporarily closed and specifications of the building go beyond are contrary
down. A second earthquake in 1970 eventually lead to the to general principles of engineering design for proper
voluntary demolition of the whole building. No other buildings in reinforcements. Not only did the defects tend to damage,
Manila were destroyed or damaged. After investigation, a list of but they even aggravated the damages.
defects in the building has been produced. 2.) A1723 make Nakpil & Sons solidary liable
3.) The payment of the entire building, and not just the
PBA now are seeking relief against United and Nakpil & Sons for damage caused by the first earthquake before its eventual
the payment of the entire building and lost profit, stating that the demolition, should be paid for by United and Nakpil &
building wouldn’t have incurred such damages if it were not for Sons.
the inadequacies and deviations of the plans and specifications of 4.) There is wanton recklessness resulting to bad faith from
the building. the negligence of United and Nakpil & Sons.

United and Nakpil defended themselves that there are no settled Doctrine:
practice in the field of engineering and architecture to determine It is not enough that an Act of God occurred. It must be shown
which plans and specifications could mitigate the eventuality of that the debtor must be free from any participation in or
earthquakes. The minor defects could not have been a proximate aggravation of the injury to the creditor.
cause of the damages.
See Also: Article 1723 Liability of Contractors, Engineers, and
Architects.

Ace-Agro v. CA In re: Fortuitous Event, Force Majeure merits either suspension of

the enforceable obligation or Termination of Contract; Effect of
Basic Facts: Cosmos Bottling Corporation entered a contract with Suspension is not Extension of Period to Deliver Prestation; A1231
Ace-Agro Development Corporation to clean soft drink bottles and Extinguishing of Obligations
repair wooden shells for the period of January 1, 1990 to
December 31, 1990. Ace-Agro had its operations based inside Ruling:
Cosmos’s plant. But on April 1990 a fire broke out in Ace-Agro’s 1.) Recognizing the attempts of Cosmos in allowing Ace-Agro
plant, destroying Ace-Agro’s place of work as well as the bottles to continue its service, the Court agrees with the CA that
and wooden shells to be worked on. the facts of the case did not merit a Termination of
Contract since there were still wood shells left to be
Alleging that the object of the prestation was essentially rendered repaired.
impossible to continue, Cosmos terminated its contract with Ace- 2.) What actually occurred is a suspension of the enforceable
Agro. obligation; and Cosmos didn’t have the obligation to
extend the period of their original contract beyond
Ace-Agro asked Cosmos to continue their contract. Since Cosmos December 31.
took much time before it could reply, Ace-Agro laid off its workers 3.) It was actually the fault of Ace-Agro that it incurred losses
in the meantime. Cosmos eventually agreed to continue their because of its insistent refusal to continue its obligation in
contract as previously stipulated, with the exemption that ace- the service contract.
Agro operate outside the plant. This was refuted by Ace-Agro
because basing their operations elsewhere would lead to Doctrine:
transportation costs that diminish their already minute profits. The stipulation that in the event of a fortuitous event or force
Finally, Cosmos agreed to continue their contract as previously majeure the contract shall be deemed suspended during the said
stipulated back in the plant. Still, Ace-Agro refused in hopes of period does not stop the running of the period the contract has
actually extending their contract beyond December 31, 1990. been agreed upon to run. It only relieves the parties from the
fulfillment of their respective obligations during that time.
Ace-Agro eventually brought this case against Cosmos for a breach
of contract when it illegally and arbitrarily terminated its service For Example: If during six of the thirty years fixed as the duration
contract – stating that the force majeure wasn’t enough to merit of a contract, one of the parties is prevented by force majeure to
the contract to be extinguished. Cosmos on the other hand, perform his obligation during those years, he cannot after the
defended that the termination of contract was valid because the expiration of the thirty-year period, be compelled to perform his
object of their agreement had already been lost and destroyed. obligation for six more years to make up for what he failed to
perform during the said six years, because it would in effect be all
extension of the term of the contract. The contract is stipulated to
run for thirty years, and the period expires on the thirtieth year;
the period of six years during which performance by one of the
parties is prevented by force majeure cannot be deducted from
the period stipulated.

See also: Art. 1231 – when Obligations are considered

Extinguished.
 (Note: You can argue, after a force majeure, for an automatic
extension of the fixed term of the contract if it’s from a TURNKEY
CONTRACT, wherein the prestation requires the COMPLETE
delivery and that such original length of the fixed period is the
least time necessary to complete it.)
Mondragon Leisure v. CA In re: Fortuitous Event, Force Majeure; You can stipulate a Waiver
of Exemption from Liability at times of Force Majeure; Risks is
Mondragon Leisure entered into an <Omnibus Loan and Security Inherent in Business Ventures; A1201 Effectivity of Alternative
Agreement> with respondent banks for the development of the Remedies from a Right of Choice is effective only upon
Mimosa Leisure Estate. Communication

The Omnibus Agreement stipulated that the respondent banks had Ruling:
Alternative Remedies in case of a default, which is defined by the 1.) Although A1201 states that the choice of alternative
agreement to be when payments of the borrower is “due at stated remedy shall produce no effect except from the time it has
maturity, by acceleration or otherwise, of any amount payable been communicated, facts of the case show that
under the loan documents.” respondent banks have already notified Mondragon
Leisure several times in writing its demand and declaring
One of such alternative remedies is to accelerate all payments Mondragon to be in default. As such, Mondragon is validly
payable under the loan agreement. in default, and respondent banks have a cause of action for
their complaint.
Later on, Mondragon Leisure stopped the payment of its monthly 2.) The Court finds that in the Omnibus Agreement, the
dues despite written demands by the respondent banks. As such, parties expressly agreed that any enactment, official
respondent banks filed for a complaint in court for the foreclosure action, act of war, act of nature or other force majeure or
of the leasehold rights against Mondragon Leisure. But Mondragon other similar circumstances shall in no way affect the
Leisure defended that respondent banks do not have a cause of obligation of the borrowers to make payments.
action because Mondragon has not been validly declared at a a. Moreover, force majeure has no relevance to
default yet due to the lack of notice to be given by the respondent Mondragon’s liability. The Omnibus Agreement was
banks according to A1201 of the New Civil Code. Moreover, entered into DURING the Asian Financial Crisis; and
Mondragon should be excused from liability due to the force Mondragon – being an established corporation –
majeure of the Asian Financial Crisis and the sudden closure of the should’ve already been aware of the financial
Mimosa Regency Casino. environment it was in. For the closure of the Casino,
such risks were not wholly unexpected since business
ventures inherently carries with it such risks of failure.

Doctrine:
Worthy of note, risk is an exception to the general rule on
fortuitous events. Under the law, these exceptions are:
(1) when the law expressly so specifies;
(2) when it is otherwise declared by the parties; and
(3) when the nature of the obligation requires the assumption
of risks.

See also: A1201 Effectivity of Alternative Remedies

Class Notes:

“But don’t let this case confuse you. The AFC should’ve met all the
elements of a fortuitous event. But the Court didn’t want that to
be a precedent (which would then be available to other parties).

Right to Terminate is not automatic in a Fortuitous Event, unless

the ground for which is explicitly stipulated in the contract.
(Separate Topic altogether)

Remember the case of Commodatum as an example of an

exception made by law to fortuitous event; For exceptions
granted by express stipulation in a contract, think insurance
policies;

Assumption of Risk: “the debtor created or engaged in an activity

that gave rise to the fortuitous event. Somehow created the
opportunity for the event to happen.” For example, the transport
of explosives business; if the truck suddenly exploded, the
company can’t claim fortuitous event. Because the truck wouldn’t
have exploded if it wasn’t transporting explosives.

Note that EXCEPTIONS is a different ground from NON-

FULFILLMENT of the ELEMENTS of a Fortuitous Event. Clarify your
ground when you make your arguments, but also use every
ground you can use in the “even-arguing-that” case.

Note also: “alternative remedies.”

1175 Class Notes:
The parties can still agree on a higher interest rate, the only limitation is that the SC may declare the rate to be “unconscionable “ (as
long as it’s below 3% per month based on jurisprudence). Interest due is at the time the parties agreed to in WRITING (otherwise it
would be void).
1176 Certain (Annullable) Presumptions:
If there is a payment of the principal, then it is assumed that the interests are fully paid as well
If the latest installment payment has been paid, then there’s a presumption that the latter installment payments were already made.

1179 Remember: Makati Stock Exchange – “An obligation is a juridical relation whereby a person (called the creditor) may demand from
and another (called the debtor) the observance of a determinative conduct (the giving, doing or not doing), and in case of breach, may
1181 demand satisfaction from the assets of the latter.”

Nielsen Case: (compare with Agro Case)

Should there be a fortuitous event preventing the parties from fulfilling their obligations during such event, the period of the contract
shall be extended to the same extent the fortuitous event happened.

1182 Catungal v. Rodriguez

BASIC FACTS:
Spouses Rodriguez entered into a Conditional Deed of Sale over
the lot of Spouses Catungal for the price of 25M. The contract
stipulated that Rodriguez would first pay 500K as down payment,
and would pay the remaining balance upon a successful
negotiation of Rodriguez over securing a right of way over the lots
of third parties; furthermore, if no negotiations would be
successful, even despite the reassessments with Catungcal,
Spouses Rodriguez would have the right to rescind or cancel the
Contract. If Rodriguez chooses to rescind, he shall give written
notice, and will be reimbursed of the 500K when the Catungcals
have sold the same property to another party.

1190 UP v. De Los Angeles

:
[In this case there was a stipulation granting the power to rescind extrajudicially] “(Usually to prevent abuse and further damage)
If there’s a stipulation for it, then a party can rescind the contract extrajudicially. But the extrajudicial resolution will remain
contestable and subject to judicial invalidation, unless attack thereon should become barred by acquiescence, estoppel or prescription.
The initiative of instituting a suit is thus transferred to the other party (to question the extrajudicial resolution)”

Tan v. CA
:
“You can’t rescind a contract extrajudicially unless there’s a stipulation for it, even though power to rescind is ‘implied in reciprocal
obligations.’” Also: “rescission will not be permitted for a slight or casual breach of the contract but only for such breaches as are so
substantial and fundamental as to defeat the object of the parties in making the agreement. (Also note that when it’s a time is of the
essence kind of obligation, a delay may merit recession). However, under the third paragraph of Article 1191 of the Civil Code, the Court
is given a discretionary power to allow a period within which a person in default may be permitted to perform his obligation [two things
in issue: payment of mortgage so that title can be transferred, and public land lots]”

Co v. CA
:
“An option is a contract granting a privilege to buy or sell within an agreed time and at a determined price. It is a separate and distinct
contract from which the parties may enter into upon the consummation of the option. It must be supported by consideration aka.
earnest money (see: A1479). Under Article 1482 of the Civil Code, earnest money given in a sale transaction is considered part of the
purchase price and proof of the perfection of the sale. In this case, the Co’s were of the mistaken belief that Custodio had lost her
"option" over the Beata property when she failed to pay the remaining balance of $70,000.00 pursuant to their August 8, 1986 letter. In
the absence of an express stipulation authorizing the sellers to extrajudicially rescind the contract of sale, the COS cannot
unilaterally and extrajudicially rescind the contract of sale. Under Article 1385 of the Civil Code, rescission creates the obligation to
return the things which were the object of the contract but such rescission can only be carried out when the one who demands
rescission can return whatever he may be obliged to restore.

Nissan v. Lica
:
“Art. 1191 provides that the power to rescind is implied in reciprocal obligations, in cases where one of the obligors should fail to
comply with what is incumbent upon him. Otherwise stated, an aggrieved party is not prevented from extrajudicially rescinding a
contract to protect its interests, even in the absence of any provision expressly providing for such right.

We are aware of this Court's previous rulings in Tan v. Court of Appeals , and EDS Manufacturing, Inc. v. Healthcheck International, Inc.
The seeming "conflict" between this and our previous rulings, however, is more apparent than real. Whether a contract provides for it
or not, the remedy of rescission is always available as a remedy against a defaulting party. When done without prior judicial
imprimatur , however, it may still be subject to a possible court review. This notwithstanding, jurisprudence still indicates that an
extrajudicial rescission based on grounds not specified in the contract would not preclude a party to treat the same as rescinded. The
rescinding party, however, by such course of action, subjects himself to the risk of being held liable for damages when the
extrajudicial rescission is questioned by the opposing party in court. This was made clear in the case of U.P. v. De los Angeles”

Lead’s Note
:
Whether or not you’re allowed to have an extrajudicial rescission even without providing for it in your contract depends on which
jurisprudence you use.
 Use Tan if you want to argue that you need a stipulation in your contract before extrajudicial demand may be allowed; then, use
Co to show the consequences of what could happen if you extrajudicially rescind without a stipulation for it (i.e. mutual default
might be cured after the other party suddenly become ready, willing, and able to comply while you were continuing to
erroneously argue that the contract has already been rescinded; you are now, at the end, then in delay haha).
 Use Nissan if you want to argue that you need a stipulation in your contract before extrajudicial demand may be allowed. The
benefit of doing this is that you’re shifting the burden of who initiates the judicial proceedings, and thus also shift the burden of
costs – which is usually extremely high when you deal with big contracts.

.
.

EDS v. Healthcheck
:
The general rule is that rescission of a contract will not be permitted for a slight or casual breach, but only for such substantial and
fundamental violations as would defeat the very object of the parties in making the agreement. It is it is apparent that HCI violated its
contract with EMI to provide medical service to its employees in a substantial way. However, although a ground exists to validly rescind
the contract between the parties, it appears that EMI failed to judicially rescind the same. The right to rescind is made available to the
injured party, but the obligation is not ipso facto erased by the failure of the other party to compl y with what is incumbent upon him.
The party entitled to rescind should, among other options, apply to the court for a decree of rescission. It is evident that EMI had not
rescinded the contract at all. Despite EMI's pronouncement, it failed to surrender the HMO cards of its employees, even though this
was required by the Agreement, and allowed them to continue using them beyond the date of the rescission.

Suria v. IAC
:
(Note the parties here had a Deed of Sale with Mortgage.) Art. 1191 on reciprocal obligations is not applicable under the facts of this
case.

What they originally had was a <Contract of Sale>. The Sellers have already parted with the title as evidenced by the transfer certificate
of title in the Buyer’s petitioners' name. The buyer, in turn, fulfilled his end of the bargain when he executed the deed of mortgage. The
payments on an installment basis secured by the execution of a mortgage took the place of a cash payment.

In other words, the relationship between the parties is no longer one of buyer and seller because the contract of sale has been
perfected and consummated. It is already one of a mortgagor and a mortgagee. In consideration of the petitioners' promise to pay on
installment basis the sum they owe the respondents, the latter have accepted the mortgage as security for the obligation. The
petitioners' breach of obligations is not with respect to the perfected contract of sale but in the obligations created by the mortgage
contract. The remedy of A1383-Resolution is not a principal action retaliatory in character but becomes a subsidiary one which by
law is available only in the absence of any other legal remedy. (Art. 1384, Civil Code).

In the rescission by reason of lesion or economic prejudice (NOT ON THE BREACH OF RECIPROCITY aka. breach of faith like in A1191),
the cause of action is subordinated to the existence of that prejudice, because it is the raison d 'etre as well as the measure of the right
to rescind. Hence, where the defendant makes good the damages caused, the action cannot be maintained or continued, as expressly
provided in Articles 1383 and 1384. But the operation of these two articles is limited to the cases of rescission for lesion enumerated in
Article 1381 of the Civil Code of the Philippines, and does not apply to cases under Article 1191.

Therefore, the subsidiary and equitable remedy of A1383-Resolution is NOT available in the presence of a remedy of foreclosure in
(or any other stipulated remedies) in the contract – taken under the light of the express provision of Article 1383 of the civil code that:
'the action for rescission is subsidiary; it cannot be instituted except when the party suffering damage has no other legal means to
obtain reparation for the same.

Chua v. Victorio In re: Not Rescinded by Operation of Law, But Merely treating the
Contract as Rescinded; Extrajudicial Resolution, Preparatory for
BASIC FACTS: Judicial Ejectment; Applicable only in Cases of Lessee-Lessor
Victorio leased one of his units to Chua. An earlier ejectment case Relationships; A1659 and A1673
lead to both parties having a compromise agreement. In the
compromise , the lessor has the right to increase the rent to no Ruling:
more 25% after proper survey every four months. Victorio Ordinarily, an obligee's remedies upon breach of an obligation are
increased the rent by 25% after conducting a rental survey. Chua judicial in nature. This is implicit in the third paragraph of Article
refused to pay rentals. Ejectment case was filed by Victorio against 1191, and in Article 1659 of the Civil Code. Thus, the mere failure
Chua. The CA ruled in favor of Victorio. A writ of execution was by the lessees to comply with the increased rental did not ipso
then secured to have Chua ejected. Chua moved to quash the writ jure (by operation of law) produce the rescission of the contract of
on the ground that Chua started paying his new rent even during lease.
the pendency of the case, to which Victorio accepts. The motion to  However, although the lessor did not resort to judicial
quash was then approved, and for a while the property of Victorio action to specifically avail of any of the three remedies in
remained with Chua. Article 1659, this does not mean that the compromise
 agreement continues in force. In certain exceptional
Later on, Victorio decided to increase the rent from 6.5K to 15K. cases, the law recognizes the availability of extrajudicial
Chua argued that this was against their compromise . Victorio said remedies, which exist in addition to the judicial remedies
that the compromise was already severed when Chua earlier given above ex. Article 1673 (not “judicial resolution”!
refused to pay. but rather “judicial EJECTMENT”) IN OTHER WORDS: For
lease agreements, preparatory for ejectment,
extrajudicial resolution is allowed!

Upon non-payment of rent by the lessee, the lessor may elect to

treat the contract as rescinded and thereby determine the right
of the lessee to continue in possession; and this right to recover
possession may be enforced in an action of unlawful detainer. It is
not necessary, in such situation, that an independent action for
the rescission of the lease should first be instituted (See A1659 in
rel A1673: Breach of Lease Agreements)

Rescission of lease contracts under Article 1659 of the Civil Code is

not one that requires an independent action, unlike resolution of
reciprocal obligations under Article 1191 of said Code”

Uy v. CA In re: A1318; Cancellation occurs when the cause of the contract is

lost; Cause versus Motive; Motive can be regarded as the Cause if
BASIC FACTS: it predetermined the purpose of the contract; Also: Relativity of
There was a contract of sale between NHA and the owner of a land Contracts – standing of an agent, and stipulation pour autrui
for 8 lots for a housing project. NHA only paid for 5 lots, because
the other 3 lands were prone to landslide. NHA tried to cancel the Ruling:
sale for the 3 parcels of land. Cause is the essential reason which moves the contracting parties
to enter into it. In other words, the cause is the immediate, direct
and proximate reason which justifies the creation of an obligation
through the will of the contracting parties. Cause, which is the
essential reason for the contract, should be distinguished from
motive, which is the particular reason of a contracting party which
does not affect the other party

In a contract of sale of a piece of land, such as in this case, the

cause of the vendor (petitioners' principals) in entering into the
contract is to obtain the price. For the vendee, NHA, it is the
acquisition of the land. The motive of the NHA, on the other hand,
is to use said lands for housing.

Ordinarily, a party's motives for entering into the contract do not

affect the contract. However, the motive may be regarded as
causa when it predetermines the purpose of the contract.

In this case, it is clear, and petitioners do not dispute, that NHA

would not have entered into the contract were the lands not
suitable for housing. In other words, the quality of the land was an
implied condition for the NHA to enter into the contract.
Accordingly, we hold that the NHA was justified in cancelling the
contract. The realization of the mistake as regards the quality of
the land resulted in the negation of the motive/cause thus
rendering the contract inexistent. Article 1318 of the Civil Code
states that:

There is no contract unless the following requisites concur: (1)

Consent of the contracting parties; (2) Object certain which is the
subject matter of the contract; and (3) Cause of the obligation
which is established.”

See Also: Relativity of Contracts, Standing of an Agent to Obtain

his Commission

An agent does not have such an interest in a contract as to entitle

him to maintain an action upon it because of the non-
performance of the contract, in order to obtain his commission or
recoup his advances where he does not appear to be a beneficiary
of a stipulation pour autrui.

TEST: To determine whether the interest of a third person in a

contract is a stipulation pour autrui or merely an incidental
interest is to rely upon the intention of the parties as disclosed by
 their contract.
o In applying this test, it matters not whether the stipulation
is in the nature of a gift or whether there is an obligation
owing from the promisee to the third person. That no such
obligation exists may in some degree assist in determining
whether the parties intended to benefit a third person.

Pryce v. PAGCOR In re: Termination versus Rescission; Consequences of

Termination may be Provided for by the Contract
BASIC FACTS: (Note we first saw A1659 in the case of Chua v. Victorio in holding
that this article allows extrajudicial rescission)
PPC made representations with PAGCOR for the establishment of a
casino in Pryce Plaza Hotel in Cagayan de Oro City. After PAGCOR Issue:
determined that there would not be an unsurmountable aversion MAIN ISSUE: Did the lower court commit grave and reversible
coming from the locals and LGU officials, they entered into a error by holding that Pryce was not entitled to future rentals or
Contract of Lease with PPC for 3 years. lease payments for the unexpired period of the Contract of Lease
between Pryce and PAGCOR?
The public was enraged and rallied against the casino. The
Sanguniang Panglungsod of CDO released two ordinances asserting 1. Were the provisions of Sections 20(a) and 20(c) of the
a policy against casinos, and providing for the cancellation of Contract of Lease relative to the right of PRYCE to
business permits for such with violations for non-compliance. The terminate the Contract for cause and to moreover collect
Supreme Court later found these ordinances to be rentals from PAGCOR corresponding to the remaining
unconstitutional. term of the lease valid and binding?
2. Did not Article 1659 of the Civil Code supersede Sections
Yet although PAGCOR still continued its operations for a while, 20(a) and 20(c) of the Contract, PRYCE having 'rescinded'
they eventually had to stop after the advice of the Office of the the Contract of Lease?
President and the continuing rallies against the casino. After PPC
sent PAGOCR on its intent to collect the full payment of rentals, Ruling:
PAGCOR replied on Sept 20 that PAGCOR was no longer The termination of a contract is not equivalent to its rescission.
amendable for the full payment of rentals after it had no other
alternative but to TERMINATE the lease agreement due to the 1. When an agreement is terminated, it is deemed valid at
vehement opposition to the casino – also they asked for a refund inception. Prior to termination, the contract binds the
on the reimbursable rental deposits and the permanent parties, who are thus obliged to observe its provisions.
improvement on the Hotel parking lots. (Think Valid until Declared Void)
(i) However, when it is rescinded, it is deemed
On Nov 25, PPC informed PAGCOR that PPC was terminating the inexistent, and the parties are returned to their
contract of lease due to PAGCOR's continuing breach of the status quo ante. Hence, there is mutual restitution
contract and further stated that it was exercising its rights under of benefits received, in order to bring back the
the contract of lease pursuant to Article 20 (a) and (c). (think: “no parties to their original situation prior to the
no no, you’re not quiting, I’m firing you” kind of situation) inception of the contract. (Think Void ab Initio)

2. The consequences of termination may be anticipated and

provided for by the contract. As long as the terms of the
contract are not contrary to law, morals, good customs,
public order or public policy, they shall be respected by
courts. The judiciary is not authorized to make or modify
contracts; neither may it rescue parties from
disadvantageous stipulations.
(ii) Courts, however, are empowered to reduce
iniquitous or unconscionable liquidated damages,
indemnities and penalties agreed upon by the
parties.

The term "rescission" is found in:

1.) Article 1191 of the Civil Code, the general provision on
rescission of reciprocal obligations;
2.) Article 1659, which authorizes rescission as an alternative
remedy, insofar as the rights and obligations of the lessor
and the lessee in contracts of lease are concerned; and
3.) Article 1380 with regard to the rescission of contracts.

The provisions of Sections 20(a) and 20(c) of the Contract of Lease

leave no doubt that the parties have covenanted:
1. to give PPC the right to terminate and cancel the Contract in
the event of a default or breach by the lessee; and
2. to make PAGCOR fully liable for rentals for the remaining
term of the lease, despite the exercise of such right to
terminate.
(Note: Application of A1159)
For sure, these stipulations are valid and are not contrary to law,
morals, good customs, public order or public policy.
Mutual restitution is required in a rescission (or resolution), in
order to bring back the parties to their original situation prior to
the inception of the contract. Applying this principle to this case,
it WOULD mean that PPC would re-acquire possession of the
leased premises, and PAGCOR would get back the rentals it paid
the former for the use of the hotel space. (But this case is not
rescission!)

In contrast, the parties in a case of termination are not restored to

their original situation; neither is the contract treated as if it never
existed. Prior to its termination, the parties are obliged to comply
with their contractual obligations. Only after the contract has
been cancelled will they be released from their obligations.

GENERAL RULE: Future rentals cannot be claimed as

compensation for the use or enjoyment of another's property
after the termination of a contract. In this case, by abrogating the
Contract in the present case, PPC released PAGCOR from the
latter's future obligations, which included the payment of rentals.
To grant that right to the former is to unjustly enrich it at the
latter's expense.
 EXEMPTION: A penal clause is "an accessory obligation
which the parties attach to a principal obligation for the
purpose of insuring the performance thereof by imposing
on the debtor a special prestation (generally consisting in
the payment of a sum of money) in case the obligation is
not fulfilled or is irregularly or inadequately fulfilled. This
clause functions to strengthen the coercive force of the
obligation. There is nothing immoral or illegal in such
indemnity/penalty clause, ABSENT ANY SHOWING that it
was forced upon or fraudulently foisted on the obligor

A. GENERAL RULE IN OBLIGATIONS WITH A PENAL CLAUSE:

the penalty serves as a substitute for the indemnity for
damages and the payment of interests in case of
noncompliance; that is, if there is no stipulation to the
 contrary, in which case proof of actual damages is not
necessary for the penalty to be demanded.
a. EXEMPTION: In some cases, the purpose of the
penalty is obviously to punish the obligor for the
breach. Hence, the obligee can recover from the
former not only the penalty, but also other damages
resulting from the nonfulfillment of the principal
obligation. Article 1226, Paragraph 1 of the CC
provides the exemptions to the general rule that
penalty shall substitute the indemnity for damages:
i.) when there is a stipulation to the contrary,
ii.) when the obligor is sued for refusal to pay
the agreed penalty, and
iii.) when the obligor is guilty of fraud.

B. EXPANDED RULE: In certain cases, a stipulated penalty may

nevertheless be equitably reduced by the courts.
i.) Art. 1229: “The judge shall equitably
reduce the penalty when the principal
obligation has been partly or irregularly
complied with by the debtor. Even if there
has been no performance, the penalty may
also be reduced by the courts if it is
iniquitous or unconscionable."
ii.) Art. 2227: “Liquidated damages, whether
intended as an indemnity or a penalty,
shall be equitably reduced if they are
iniquitous or unconscionable.”
a. The question of whether a penalty is reasonable or
iniquitous is addressed to the sound discretion of
the courts. These are some of the factors to be
considered:
i.) Type, Extent, and Purpose of the Penalty;
ii.) Nature of the Obligation;
iii.) Mode of Breach and its Consequences;
iv.) Supervening Realities; and
 v.) Standing and Relationship of the Parties

PENALTY RULES’ APPLICATION TO THE CASE: It appears that

Section XX (c) was intended to be a penalty clause. The first
exception applies because Article XX (c) provides that, aside from
the payment of the rentals corresponding to the remaining term
of the lease, the lessee shall also be liable "for any and all
damages, actual or consequential, resulting from such default and
termination of this contract." BUT SINCE PAGCOR's casino
operations had to be suspended for days on end since their start,
interruptions and stoppages meant that PAGCOR suffered a
tremendous loss of expected revenues, not to mention the fact
that it had fully operated under the Contract only for a limited
time. The Court considers the claim for future rentals to the tune
of P7,037,835.40 to be highly iniquitous. The amount should be
equitably reduced. Under the circumstances, the advanced rental
deposits in the sum of P687,289.50 should be sufficient penalty.

Class Note:
Pryce was smart for opting to go for Termination rather than
Resolution, because if they chose the latter, then their penal
clause would be void ab initio together with the whole contract.

Solid Homes v. Tan In re: Justice and Equity Jurisdiction as an Exemption to the
Mutual Restitution Principle in A1190
BASIC FACTS:
Main Issue: In the event respondents opt to rescind the contract,
Solid Homes sold a subdivision lot to Spouses Tan. But when should petitioner pay them merely the price they paid for the lot
Spouses Tan saw the land, there were a dire lack of basic utilities plus interest or the current market value thereof?
and there were nearby squatters. They went to HLURB to ask for
the specific performance to Solid Homes for the development of RULE: The Court says that ALTHOUGH Article 1190 should apply
the subject lot. But the Spouses Tan were given an option as well with a rescission in Article 1191, …
to have the Contract Resolved instead. If there was resolution,  EXEMPTION: … IT WILL NOT BE APPLIED WHEN it will
there would be mutual restitution. operate unjustly, lead to absurd results, or contradict the
evident meaning of the statute taken as a whole.
The contention is at what price should be used as the basis for the
mutual restitution – purchase price with interest, fair market APPLICATION: Were we to follow the letter of Article 1190, we will
value, or current market value. in effect be paving the way to an absurd situation whereby
subdivision developers who have reneged on their contractual
Spouses Tan was contesting that Article 1385 should be applied and legal obligation to provide utility systems and facilities for the
instead, rather than Article 1190 for Resolutions. If you follow use of subdivision lot owners may themselves profit from their
Article 1190, what’s supposed to be paid is the Purchase Price – in very own wrongs and shortcomings.
which case Spouses Tan would be “lugi”.
[Note: this jurisprudence makes an exemption to the mutual
restitution principle (A1190) when it comes to Resolution (A1191),
and thus limit the “void ab initio” effects to the same as A1385;
much like how penalties limit such as we’ve seen in the case of
Pryce v. PAGCOR]

See also Issue on Prescription for Specific Performance:

Article 1144 -- The following actions must be brought within ten
years from the time the right of action accrues:
1. (1)  Upon a written contract;
2. (2)  Upon an obligation created by law;
3. (3)  Upon a judgment (Emphasis supplied)

In law, a cause of action exists when the following requisites

concur, to wit:
1. ( 1 ) a right in favor of the plaintiff by whatever means and
under whatever law it arises or is created;
2. (2) an obligation on the part on the defendant to respect
such right; and
3. (3) an act or omission on the part of such defendant
violative of the right of the plaintiff
It is only upon the happening of the last element when it can be
said that a cause of action has arisen. Under Article 1169 of the
Code, a party who is under obligation to do something incurs
delay only from the time that the obligee demands, either
judicially or extrajudicially, for the fulfillment of the obligation.
Hence, absent any demand from the obligee, the obligor does
not incur delay. And so long as the obligor does not incur in delay,
he cannot be said to be guilty of some omission violative of the
 obligee's rights. Consequently, as long as the obligor is not guilty
of some omission violative of the obligee's rights, the latter has no
cause of action against the former. As a result, the prescriptive
period within which the obligee may bring an action against the
obligor does not commence to run until a demand is made.

Here, it was only on December 18, 1995 when respondents made

a written demand upon petitioner to construct subdivision roads,
put up utility facilities and rid the premises of squatters,
obligations which are unquestionably in the nature of an
obligation to do.

Class Notes:
The Court could’ve achieved the same fair ends without breaking
the rules of the Civil Code if they just awarded the proper amount
of Damages.

1197 Radiowealth v. Del Rosario In re: Acceleration Clause

BASIC FACTS: Issue: What is the

All you need to know is already discussed in the Ruling section. a. legal effect of the Demurrer to Evidence, and
b. the date when the obligation became due and
demandable.
Ruling:
A. In Re: Demurrer
a. defendants who present a demurrer to the plaintiff's
evidence retain the right to present their own
evidence, if the trial court disagrees with them;
b. if the court agrees with them, but on appeal, the
appellate court disagrees with both of them and
reverses the dismissal order, the defendants lose the
right to present their own evidence. The appellate
court shall, in addition, resolve the case and render
judgment on the merits, inasmuch as a demurrer aims
to discourage prolonged litigations.
 B. In Re: Date Demandable
Promissory Note says:
“[A] P11,579.00 payable for 12 consecutive months starting on
_____________ until the amount ofP11,579.00 is fully paid.
Each installment shall be due every ____ day of each month

[B] A late payment penalty charge of two and a half (2.5%)

percent per month shall be added to each unpaid installment

[C] … if default be made in the payment of any of the

installments or late payment charges thereon… shall at once
become due and payable without need of notice or demand..”

Respondents argue that theorize that the action for immediate

enforcement of their obligation is premature because its
fulfillment is dependent on the sole will of the debtor. Hence,
they consider that the proper court should first fix a period for
payment.

This contention is untenable. The act of leaving blank the due

date of the first installment did not necessarily mean that the
debtors were allowed to pay as and when they could. On the
contrary, the (A) Note expressly stipulated that the debt should
be amortized monthly in installments of P11,579 for twelve
consecutive months. While the specific date on which each
installment would be due was left blank, the Note clearly provided
that each installment should be payable each month.

Furthermore, it also provided for an (B) late payment penalty and

a (C) acceletration clause, both of which showed the intention of
the parties that the installments should be paid at a definite date.
Had they intended that the debtors could pay as and when they
could, there would have been no need for these two clauses.

Macasaet v. Macasaet In re: Illustrates the difference between a Condition and a Period
BASIC FACTS: A. Petitioners allege that they cannot be ejected from the lots,
Spouses Macasaet was letting their Children, through a verbal because respondents based their Complaint regarding the
agreement, use their lot for their residence and business. nonpayment of rentals on a verbal lease agreement, which
the latter failed to prove. Petitioners contend that the
lower courts erred in using another ground (tolerance of
possession) to eject them.
c. RULE: In actions for unlawful detainer, possession
that was originally lawful becomes unlawful upon
the expiration or termination of the defendant's
right to possess, arising from an express or
implied contract. To show a cause of action in an
unlawful detainer, an allegation that the defendant
is illegally withholding possession from the plaintiff
is sufficient.
A. The Petitioners dispute the lower courts' finding that they
occupied the subject lots on the basis of mere tolerance.
They argue that their occupation was not under such
condition, since respondents had invited, offered and
persuaded them to use those properties.
a. RULE: those who occupy the land of another at
the latter's tolerance or permission, without any
contract between them, are necessarily bound by
an implied promise that the occupants will vacate
the property upon demand. A summary action for
ejectment is the proper remedy to enforce this
implied obligation.
b. Toleration is defined as "the act or practice of
permitting or enduring something not wholly
approved of.” Even though this is continued for a
long time, no right will be acquired by prescription.
The question reduces itself to the existence or
non- existence of the permission
c. IN THIS CASE: We hold that the facts of the present
case RULE OUT the finding of possession by mere
tolerance. Petitioners were able to establish that
respondents had invited them to occupy the
 subject lots in order that they could all live near
one other and help in resolving family problems.
By occupying those lots, petitioners demonstrated
their acceptance of the invitation. Hence, there
was a meeting of minds, and an agreement
regarding possession of the lots impliedly arose
between the parties.
d. Thus, Ismael and Teresita had a right to occupy the
lots is therefore clear. The issue is the duration of
possession. Article 1197, however, applies to a
situation in which the parties intended a period.
Such qualification cannot be inferred from the
facts of the present case. To repeat, when Vicente
and Rosario invited their children to use the lots,
they did so out of parental love and a desire for
solidarity expected from Filipino parents. No
period was intended by the parties. Based on
respondents' reasons for gratuitously allowing
petitioners to use the lots, it can be safely
concluded that the agreement subsisted as long as
the parents and the children mutually benefited
from the arrangement. Effectively, there is a
resolutory condition in such an agreement.

Class Notes:
The Court said that the “lease” was based on the resolutory
condition of “parental love” (It’s not a Period because it’s not
certain whether the parents would lose their love for their
children).

The Children could’ve used the argument that the business was
just in its development phase, and the purpose of the lease was to
help them grow the business first. They could’ve asked the court
to fix a period as to what would be an appropriate time to have
their business properly grow.
 Also Class Notes:
For tests, always know the magic words: “the stipulation would be
a purely potestative condition dependent solely to the will of the
debtor”

In a case where there’s a JVA between A (to give land) and B (to
fund for development) to create a township. B’s failure to fund is
considered as substantial breach.
 In terms of what constitutes substantial breach in the
cases of Cannu (18% Threshold Obiter Dictum) and Reyes
(19% Threshold Ratio), you have to check if the payment
already made is either for:
(1) PRINCIPAL , or
(2) INTEREST
You have to compare the components of what has already been
paid: principal to paid-principal, and interest to paid-interest. Not
just the absolute numbers. Also check if there’s any violation of
any non-monetary terms.

Perfection of the contract is different from the consummation of

the Contract (which is the fulfillment of the prestation in the
contract).

1207 – Marsman Drysdale v. Philippine Geoanalytics In re: Relativity of Contracts; A1207 and A1208; Joint Liability
1222
BASIC FACTS: Under relativity of contracts, what governs this issues is NOT the
Marsman Drysdale entered into a joint venture with Gotesco. Joint Venture Agreement between Drysdale and Gotesco, but the
Marsman provides the property lot, while Gotesco pays for the Technical Service Contract entered by them jointly with Phil Geo.
cash contribution. The JV then employed Phil Geo under technical Thus, A1207 and A1208 says that absent any specifications, it is
service contract to perform geotechnical engineering (subsurface presumed in joint liability that the obligations are divided equally.
soil exploration drilling). But the drilling could not be completely
done because Drysdale didn’t clear out the debris from the site. See also: A1797 (Joint Venture; Partnership Liability in Loss)

Phil Geo demanded their payment, but the JV still refused.

Drysdale said that it was Gotesco who is responsible for the cash
contributions. Gotesco says that it was Drysdale’s fault that Phil
Geo couldn’t do its job properly.

Gonzales v. PCIB In re: Accommodation Party is Solidary Liable; A1207 Express

Stipulation of Solidary Liability
BASIC FACTS:
There are three loans here… 1.) An accommodation party is one who meets all the three
<Loan A>: Gonzales entered into a Credit-On-Hand Loan requisites, viz.:
Agreement (COHLA) with PCIB to acquire a credit line (issued via a. must be a party to the instrument, signing as
check), with Gonzales’ aggregate account with PCIB of USD8,000 maker, drawer, acceptor, or endorser;
was made to be the collateral. b. must not receive value therefor; and
c. must sign for the purpose of lending his name or
<Loan B.1>: Gonzales and his spouse entered into a loan with PCIB credit to some other person.
for P500,000 covered by a promissory note. The accommodation party is liable on the instrument to a holder
<Loan B.2>: Gonzales and Spouses Panlilo entered into a loan with for value even though the holder, at the time of taking the
PCIB for P100,000 and P300,000, covered by two promissory notes instrument, knew him or her to be merely an accommodation
party, as if the contract was not for accommodation.
The promissory notes wrote that Gonzales and Spouses Panlilo
were solidary liable. To cover for the 3 promissory notes (totaling The relation between an accommodation party and the
P1.8M), Gonzales and Spouses Panlilo used a Real Estate accommodated party is one of principal and surety — the
Mortgage. Only the Spouses Panlilo used the P1.8M. accommodation party being the surety. Although a contract of
suretyship is in essence accessory or collateral to a valid principal
Spouses Panlilo defaulted on their monthly interest in paying back obligation, the surety's liability to the creditor is immediate,
the loan. Gonzales was notified by PCIB. primary and absolute; he is directly and equally bound with the
principal.
Later on Gonzales used his credit line to pay Uson P250K. But his
check was dishonored because PCIB cancelled his credit line in
light of the fact that his loan with Spouses Panlilo were not paid. 2.) The solidary liability of Gonzales is clearly stipulated in the
This caused drama llama with Gonzales and Uson, with promissory notes which uniformly begin, "For value received, the
humiliation. undersigned (the "BORROWER") jointly and severally promise to
pay . . . ." Solidary liability cannot be presumed but must be
established by law or contract. Article 1207 of the Civil Code
pertinently states that "there is solidary liability only when the
obligation expressly so states, or when the obligation requires
solidarity."

3.) PCIB was negligent in dishonoring Gonzales’ check for P250K

 There was no proper notice to Gonzales of the default and
delinquency of the PhP1,800,000 loan. Verily, it is not enough to
be merely informed to pay over a hundred thousand without
being formally apprised of the exact aggregate amount and the
corresponding dues pertaining to specific loans and the dates they
became due. No proper written notice given by the bank. The
record is bereft of any document showing that, indeed, Gonzales
was formally informed by PCIB about the past due periodic
interests. In business, more so for banks, the amounts demanded
from the debtor or borrower have to be definite, clear, and
without ambiguity. It is not sufficient simply to be informed that
one must pay over a hundred thousand aggregate outstanding
interest dues without clear and certain figures.

Class Notes:
1. General Rule – Any act by a debtor or creditor, will only
affect the creditor or debtor privy to such act.
2. General Rule – Obligations are presumed to be indivisible.

Always make sure that you take note of the words used in the
agreement. For example, using “I”, “each”, or “individually” would
indicate solidary liability

Lafarge Cement v. Continental Cement In re: Obligations Arising from Tort; A1211

BASIC FACTS: Obligations may be classified as either joint or solidary. "Joint" or

Continental filed for writ of attachment based on groundless "jointly" or "conjoint" means mancum or mancomunada or pro
claims, which compelled Lafarge to file a counterclaim (thereby rata obligation; on the other hand, "solidary obligations" may be
spending money). Now Lafarge is seeking for damages. used interchangeably with "joint and several" or "several." Thus,
petitioners' usage of the term "joint and solidary" is confusing and
ambiguous.

Nevertheless, respondents' liability, if proven, is solidary. This

characterization finds basis in Article 1207 of the Civil Code, which
provides that obligations are generally considered joint, except
when otherwise expressly stated or when the law or the nature of
the obligation requires solidarity. However, obligations arising
from tort are, by their nature, always solidary. Each joint tort
feasor is not only individually liable for the tort in which he
participates, but is also jointly liable with his tort feasors

The general rule is that joint tort feasors are all the persons who
command, instigate, promote, encourage, advise, countenance,
cooperate in, aid or abet the commission of a tort, or who
approve of it after it is done, if done for their benefit. They are
each liable as principals, to the same extent and in the same
manner as if they had performed the wrongful act themselves.

Joint tort feasors are jointly and severally liable for the tort
which they commit. The persons injured may sue all of them or
any number less than all. Each is liable for the whole damages
caused by all, and all together are jointly liable for the whole
damage.

In a "joint" obligation, each obligor answers only for a part of the

whole liability; in a "solidary" or "joint and several" obligation, the
relationship between the active and the passive subjects is so
close that each of them must comply with or demand the
fulfillment of the whole obligation. The fact that the liability
sought against the CCC is for specific performance and tort, while
that sought against the individual respondents is based solely on
tort does not negate the solidary nature of their liability for
tortuous acts alleged in the counterclaims.

Class Notes:
1. Tort is always solidary because Bad Faith is difficult to
apportion the degrees of liability between different
parties.
2. The defense of one solidary debtor can be used by the
other solidary debtors.
Boston Equity Resources v. CA In re: Jurisdiction; A1216 – Death of one Solidary Debtor

BASIC FACTS: Ruling:

The contract between petitioner, and respondent and 1.) Motion to Dismiss was filed out of time. Lolita only filed
respondent's husband, states: FOR VALUE RECEIVED, I/We jointly such 6 years and 5 months after submitting her Answer.
and severally (in solemn) promise to pay BOSTON EQUITY Moreover, such motion was filed already after the
RESOURCES, INC. the sum of (P1,400,000.00). The provisions and presentation of evidence. Lastly, this was her second
stipulations of the contract were then followed by the respective motion to dismiss but on a different ground. In summary,
signatures of respondent as "MAKER" and her husband as "CO- she is conducting dilatory tactics
MAKER." 2.) Yet, Lolita was not estopped from questioning the
jurisdiction of the court.
Boston Equity filed a complaint for Sum of Money and Preliminary a. P: There are Four Aspects of Jurisdiction:
Attachment against Spouses Manuel and Lolita Toledo. At that (i) Jurisdiction over Subject Matter
time, Manuel Toledo was already dead. So, the RTC granted (ii) Jurisdiction over the Parties
Boston’s plea to substitute Manuel with his children as heirs of his (iii) Jurisdiction over the Issues of the Case
estate. Lolita, however, filed to dismiss the case on the ground (iv) Jurisdiction over the Thing subject of Litigation
that: b. R: Only issues of the (i) jurisdiction of subject matter
(1) petitioner failed to implead an indispensable party (Estate may be prone to estoppel.
of Manuel) c. A: In this case, what respondent was questioning in her
(2) the court did not acquire jurisdiction over Manuel motion to dismiss was that court's jurisdiction over the
(3) the court erred in substituting Manuel with his children person of defendant Manuel. The principles relating to
RTC and CA granted the motion to dismiss, stating that: “courts (ii) jurisdiction over the person of the parties are
acquire jurisdiction over the person of the defendant . . . only pertinent herein. Thus, she is not estopped.
when the latter voluntarily appeared or submitted to the court or 3.) Jurisdiction over the person of a defendant is acquired
by coercive process issued by the court to him” – in this case through a valid service of summons; trial court did not
Manuel was already dead by the time Boston filed its complaint; acquire jurisdiction over the person of Manuel Toledo,
Manuel’s Estate should’ve been the one impleaded, not just the since there was no valid service of summons upon him,
wife. Also, issues of jurisdiction can be raised at any time during precisely because he was already dead even before the
the proceedings. complaint against him and his wife was filed in the trial
court.
4.) R: An indispensable party is one who has such an interest
in the controversy or subject matter of a case that a final
adjudication cannot be made in his or her absence,
without injuring or affecting that interest.
a. C: The estate of Manuel is not an indispensable party
to the collection case, for the simple reason that the
 obligation of Manuel and his wife, respondent herein,
is solidary.
b. F: The contract between petitioner, and respondent
and respondent's husband, states:
(i) FOR VALUE RECEIVED, I/We jointly and
severally (in solemn) promise to pay BOSTON
EQUITY RESOURCES, INC. the sum of
(P1,400,000.00)
c. F: The provisions and stipulations of the contract were
then followed by the respective signatures of
respondent as "MAKER" and her husband as "CO-
MAKER."
d. LEGAL BASIS: Pursuant to Article 1216 of the Civil
Code, petitioner may collect the entire amount of the
obligation from respondent only.
(i) “The creditor may proceed against any one of
the solidary debtors or some or all of them
simultaneously. The demand made against one
of them shall not be an obstacle to those which
may subsequently be directed against the
others, so long as the debt has not been fully
collected."

DOCTRINE:
Article 1216 of the New Civil Code gives the creditor the right to
"proceed against anyone of the solidary debtors or some or all of
them simultaneously." The choice is undoubtedly left to the
solidary creditor to determine against whom he will enforce
collection. In case of the death of one of the solidary debtors, he
(the creditor) may, if he so chooses, proceed against the
surviving solidary debtors without necessity of filing a claim in
the estate of the deceased debtors. It is not mandatory for him to
have the case dismissed as against the surviving debtors and file
its claim against the estate of the deceased solidary debtor.

Class Notes:
 Under the Corporation Code, there’s solidary liability in grossly
neglectful, fraudulent, or countenanced an unlawful act by the
directors and officers.

Arco Pulp v. Lim In re: Novation; Solidary Liability in Piercing Corporate Veil

BASIC FACTS: Ruling:

Dan Lim, under Quality Paper and Plastic Products Enterprises, 1.) The obligation between the parties was an Alternative
delivered scrap papers worth P7.2 Million to Arco Pulp and Paper Obligation.
Company, Inc through its Chief Executive: Candida Santos. The a. LEGAL BASIS: The rule on alternative obligations is
agreement between them said that Arco Pulp would either: governed by Article 1199 of the Civil Code
(A) Pay Lim the value of the raw materials; or (i) “A person alternatively bound by different
(B) Deliver Lim the finished product of Arco Pulp of equivalent prestations shall completely perform one of
value them. The creditor cannot be compelled to
receive part of one and part of the other
Arco Pulp eventually issued a post-dated check worth P1.5 Million undertaking.”
to Lim as partial payment, assuring that it won’t bounce. The check (ii) Further, Article 1201 states that the right of
bounced. election is extinguished when the party who
may exercise that option categorically and
Later on, Arco Pulp entered into a MEMORANDUM OF unequivocally makes his or her choice known.
AGREEMENT with Eric Sy (Megapack Container Corporation) b. A: The facts show that Arco Pulp already made a
where: choice:
1.) Arco Pulp would deliver its 600 tons of Test Liners to Sy for (i) First, When petitioner Arco Pulp and Paper
P18.50 per kg. tendered a check to the scrap papers, they
2.) The Raw materials for the Test Liners would be supplied by exercised their option to pay the price.
Lim at P6.50 per kg. Respondent's receipt of the check and his
subsequent act of depositing it constituted his
But, Lim still sent a written demand to Arco Pulp for the payment notice of petitioner Arco Pulp and Paper's
of P7.2 Million. Arco Pulp refused saying that there was a Novation option to pay.
of the original obligation via the Memorandum Agreement, and (ii) Second, Arco Pulp extinguished the option to
thus made Eric Sy the new debtor for Dan Lim. deliver the finished products of equivalent
value to respondent, when it executed the
Lim filed for complaint for Sum of Money and Attachment, and the Memorandum of Agreement stating that such
Court of Appeals eventually: finished products would be delivered to Eric Sy
1. decided that the case showed an alternative obligation; for a price.
and 2.) The Memorandum of Agreement did not constitute a
2. to order Arco Pulp and Paper to jointly and severally pay Novation of the Original Contract.
Dan T. Lim the amount of PhP7,220,968.31 with interest at a. LEGAL BASIS [1]: Article 1291 of the Civil Code
12% per annum from the time of demand; moral damages; provides: “Obligations may be modified by…
exemplary damages; and attorney's fees. i. (1) Changing their object or principal conditions
ii. (2) Substituting the Person of the Debtor
iii. (3) Subrogating a Third Person in the Rights of
the Creditor.”
b. LEGAL BASIS [2]: Article 1292 further provides:
i. “In order that an obligation may be
extinguished by another which substitute the
same, it is imperative that it be so declared in
unequivocal terms, or that the old and the new
obligations be on every point incompatible
with each other.”
c. LEGAL BASIS [3]: Article 1293 further provides:
i. “Novation which consists in substituting a new
debtor in the place of the original one, may be
made even without the knowledge or against
the will of the latter, but not without the
consent of the creditor. Payment by the new
debtor gives him the rights mentioned in
Articles 1236 and 1237.”
d. A: The MoA merely shows that petitioner Arco Pulp
and Paper opted to deliver the finished products to a
third person instead. There is nothing that states:
i. that with its execution, the obligation of Arco
Pulp to Lim would be extinguished.
ii. that Sy substituted Arco Pulp as Lim's debtor.
e. C: Thus, novation did not take place. Arco Pulp's
obligation to Lim remains valid and existing.

3.) Arco Pulp is liable for Damages.

i. LB: Under Article 2220 of the Civil Code, moral
damages may be awarded in case of breach of
contract where the breach is due to fraud or bad
faith. But Breaches of contract become the basis of
 moral damages, not only under Article 2220, but
also under Articles 19 and 20 in relation to Article
1159.
ii. A: Here, the injury suffered by respondent is the
loss of PhP7,220,968.31 from his business. This has
remained unpaid since 2007 due to the incessant
refusal of Arco Pulp despite demand.

4.) Candida Santos is Solidarily Liable with Arco Pulp

i. General Rule: Directors, officers, or employees of
a corporation cannot be held personally liable for
obligations incurred by the corporation.
ii. Exemption [1]: This veil of corporate fiction may
be pierced if complainant is able to prove, as in
this case, that:
a. the officer is guilty of negligence or bad faith,
and
b. such negligence or bad faith was clearly and
convincingly proven.
iii. Application: Here, any obligation arising from these
acts would not, ordinarily, be petitioner Santos'
personal undertaking for which she would be
solidarily liable:
a. Santos entered into a contract with respondent
in her capacity as Chief Executive of Arco Pulp
b. Santos also issued the check in partial payment,
on the face of the check bearing the account
name, "Arco Pulp & Paper, Co., Inc.”
iv. Exemption [2]: The corporate existence may be
disregarded where the entity is formed or used for
non-legitimate purposes, such as to evade a just
and due obligation, or to justify a wrong, to shield
or perpetrate fraud or to carry out similar or
inequitable considerations, other unjustifiable
aims or intentions.
v. Application: Here, when petitioner Arco Pulp and
 Paper's obligation to respondent became due and
demandable, Santos:
i. issued an unfunded check
ii. also contracted with a third party in an
effort to shift Arco Pulp's liability
iii. unjustifiably refused to honor Arco Pulp's
obligations to Lim

5.) The rate of interest due on the obligation must be

modified from 12% per annum, to 6% per annum because
of the ruling in Nacar v. Gallery Frames.

Doctrine:
I. Novation is a mode of extinguishing an obligation by changing its
objects or principal obligations, by substituting a new debtor in
place of the old one, or by subrogating a third person to the rights
of the creditor.

In general, there are two modes of substituting the person of the

debtor:
(1) Expromision
i. “the initiative for the change does not come from
— and may even be made without the knowledge
of — the debtor, since it consists of a third person's
assumption of the obligation. As such, it logically
requires the consent of the third person and the
creditor”
(2) Delegacion
i. “the debtor offers, and the creditor accepts, a third
person who consents to the substitution and
assumes the obligation; thus, the consent of these
three persons are necessary.”
Both modes of substitution by the debtor require the consent of
the creditor.
Novation may also be:
(1) Extinctive
 i. “when an old obligation is terminated by the
creation of a new one that takes the place of the
former”
(2) Modificatory
i. “when the old obligation subsists to the extent that
it remains compatible with the amendatory
agreement.”

Novation may also be:

(1) Express
i. “when the new obligation declares in unequivocal
terms that the old obligation is extinguished”
(2) Implied
i. “when the new obligation is incompatible with the
old one on every point.”
Because novation requires that it be clear and unequivocal, it is
never presumed.

For Novation to take place, the following requisites must concur:

1) There must be a previous valid obligation.
2) The parties concerned must agree to a new contract.
3) The old contract must be extinguished.
4) There must be a valid new contract.

II. Breaches of contract become the basis of moral damages, not

only under Article 2220, but also under Articles 19 and 20 in
relation to Article 1159.

III. General Rule: Directors, officers, or employees of a corporation

cannot be held personally liable for obligations incurred by the
corporation.
Exemption [1]: This veil of corporate fiction may be pierced if
complainant is able to prove, as in this case, that:
a. the officer is guilty of negligence or bad faith, and
 b. such negligence or bad faith was clearly and convincingly
proven.
Exemption [2]: The corporate existence may be disregarded
where the entity is formed or used for non-legitimate purposes,
such as to evade a just and due obligation, or to justify a wrong, to
shield or perpetrate fraud or to carry out similar or inequitable
considerations, other unjustifiable aims or intentions.

1226- Filinvest Land v. CA In re: Penalty Clauses

1230
BASIC FACTS: Issue:
Filinvest entered into an agreement with Pacific Equipment W/N the liquidated damages agreed upon by the parties should
Corporation, to have the latter develop the former’s residential be reduced considering that:
subdivision consisting of two parcels of land. To ensure faithful a.) time is of the essence of the contract;
compliance, Pacific posted two Surety Bonds issued by Philippine b.) the liquidated damages was fixed by the parties to serve
American General Insurance. not only as penalty in case Pacific fails to fulfill its
obligation on time, but also as indemnity for actual and
Pacific failed to finish the contracted works despite being given anticipated damages which Filinvest may suffer by reason
three extensions. Filinvest wrote to Pacific that it intends to take of such failure; and
over the project itself, and that they will hold Pacific liable for c.) the total liquidated damages sought is only 32% of the
damages. total contract price (P12.47 Million) , and the same was
freely and voluntarily agreed upon by the parties.
Thus, Filinvest submitted its claim from Philamgen the bonds, but
the latter refused to acknowledge liability because Pacific still has Ruling:
not acknowledged liability therefore. 1. A penal clause is an accessory undertaking to assume greater
liability in case of breach. It has a double function:
Pacific claims that its failure to finish was: a. to provide for liquidated damages, and
1.) inclement weather b. to strengthen the coercive force of the obligation by
2.) refusal of Filinvest to accept and pay for some of the the threat of greater responsibility in the event of
finished works breach.
Further, Pacific alleged that Filinvest has already waived its right to 2. Article 1226 of the Civil Code provides for such.
claim damages when it gave extensions three times, and that it 3. General Rule: Courts are not at liberty to ignore the freedom
was estopped since they themselves didn’t want to pay the of the parties to agree on such terms and conditions as they
progressing bills. see fit as long as they are not contrary to law, morals, good
customs, public order or public policy.
After an ocular by an architect in the site, and review of the a. Exemption: Article 1229 of the Civil Code – courts
 construction documents, the court found that: may equitably reduce a stipulated penalty in the
1.) The work by Pacific, already paid by Filinvest, amounted to contract in two instances:
P11.8 Million (i) if the principal obligation has been partly or
2.) The work left unpaid amounted to P1.94 Million, plus irregularly complied; and
additional work done left unpaid amounted to P475K (total (ii) even if there has been no compliance if the
P2.4 Million) penalty is iniquitous or unconscionable
3.) The work left to be done (repairs too) amounts to P532K 4. Application: Reduction is warranted because…
Thus Net Dues to Pacific is: P1.88 Million a. The project was already 94.53% complete and
b. Filinvest did agree to extend the period three times for
Despite the dues, Pacific was still in delay. But the court however, completion of the project, which extensions Filinvest
finds the claim of P3,990,000.00 in the form of penalty by reason included in computing the amount of the penalty
of delay (P15,000.00/day from April 25, 1979 to Jan. 15, 1980) to 5. There are two types of Penalties in cases where there has
be excessive. been neither partial nor irregular compliance with the
terms of the contract.
Thus, the court, the forfeiture of the amount due defendant from a. Penalty in case of Breach (Up to Court Adjustment)
plaintiff appears to be already a reasonable penalty for the delay – b. Penalty imposed as Indemnity (Strict Enforcement of
considering: Stipulation)
1.) the amount of work already performed and 6. But…
2.) the fact that plaintiff consented to three prior extensions. Art. 2226. Liquidated damages are those agreed upon by
3.) P15,000 per day is an unconscionable penalty the parties to a contract to be paid in case of breach
thereof.
Art. 2227. Liquidated damages, whether intended as an
indemnity or a penalty, shall be equitably reduced if they
are iniquitous or unconscionable..

A1231- Go Cinco v. CA In re: Tender of Payment, and Consignment; Equivalents

1233;
A1244; BASIC FACTS: Issue: W/N the loan due the MTLC has already been extinguished
A1246-
1248; Manuel Cinco obtained a loan from Maasin Traders Lending Ruling:
A1251 Corporation in the amount of P700K, secured by a mortgage of the 1. Under Article 1232 of the Civil Code, payment means not
building and lot of the Spouses Go Cinco. The annual interest rate only the delivery of money but also the performance, in
was at 36%. Cinco’s outstanding balance eventually amounted to any other manner, of an obligation
P1.0 Million. 2. In contracts of loan, the debtor is expected to deliver the
sum of money due the creditor. Yet under A1235-36;
To pay off this loan, Spouses Cinco went to the Philippine National A1244; A1246-48, rules impliedly require acceptance by
Bank to obtain another loan of P1.3 Million, secured by the same the creditor of the payment in order to extinguish the
properties as with the mortgage with MTLC. PNB approved, with obligation
the condition that they will release the funds only upon the
cancellation of the mortgage in favor of MTLC. Esther’s refusal of payment was without basis.
There is nothing legally objectionable in a mortgagor's act of
Cinco authorized the president of MTLC to collect the proceeds taking a second or subsequent mortgage on a property already
from PNB through Special Power of Attorney. But as the latter mortgaged; a subsequent mortgage is recognized as valid by law
went to PNB to collect, she was outraged when she was asked to and by commercial practice, subject to the prior rights of
sign the release of the mortgage in favor of MTLC. previous mortgages.

Now PNB instituted foreclosure proceedings against Cinco, given --

that their loan was already due. But Cinco argues that the
assignment of the PNB proceeds to MTLC should’ve amounted to In other words, MTLC and Ester in fact prevented the spouses Go
payment of the MTLC loan – and therefore, the foreclosure Cinco from the exercise of their right to secure payment of their
should’ve been improper. loan. No reason exists under this legal situation why we cannot
compel MTLC and Ester:
1. (1) to release the mortgage to MTLC as a condition to the
release of the proceeds of the PNB loan, upon PNB's
acknowledgment that the proceeds of the loan are ready
and shall forthwith be released; and
2. (2) to accept the proceeds, sufficient to cover the total
amount of the loan to MTLC, as payment for Manuel's loan
with MTLC
Since payment was available and was unjustifiably refused, justice
and equity demand that the spouses Go Cinco befreed from the
obligation to pay interest on the outstanding amount from the
time the unjust refusal took place;

Doctrine: (There’s more but just wait for class)

Unjust Refusal Cannot be equated as Payment
ARTICLE 1256. If the creditor to whom tender of payment has
been made refuses without just cause to accept it, the debtor
shall be released from responsibility by the consignation of the
thing or sum due.

Refusal without just cause is not equivalent to payment; to have

 the effect of payment and the consequent extinguishment of the
obligation to pay, the law requires the companion acts of tender
of payment and consignation.

Tender of payment is the definitive act of offering the creditor

what is due him or her, together with the demand that the
creditor accept the same. When a creditor refuses the debtor's
tender of payment, the law allows the consignation of the thing or
the sum due.

(A sad twist in this case for Manuel was that he could not avail of
consignation to extinguish his obligation to MTLC, as PNB would
not release the proceeds of the loan unless and until Ester had
signed the deed of release/cancellation of mortgage, which she
unjustly refused to do. Hence, to compel Ester to accept the loan
proceeds and to prevent their mortgaged properties from being
foreclosed, the spouses Go Cinco found it necessary to institute
the present case for specific performance and damages.)

A1234- International Hotel Corporation v. Joaquin In re: Sources of Obligation to Pay Partial Fulfillment of Debtor’s
1235 Prestation; A1186, A1234, or Quantum Meruit?
BASIC FACTS:
Francisco Joaquin entered into an agreement with the IHC argues that it should not be held liable because:
International Hotel Corporation for him to render technical a. (a) it was Joaquin who had recommended Barnes; and
assistance in securing a foreign loan for the construction of a hotel, b. (b) IHC's negotiation with Barnes had been neither
to be guaranteed by the Development Bank of the Philippines. intentional nor willfully intended to prevent Joaquin from
complying with his obligations.
After DBP approved the IHC’s application, Joaquin asked the IHC
for a P500,000 payment for the services he had rendered and will Ruling/Doctrine:
render, or alternatively 17,000 shares of stocks. The latter option
was approved, with a P90K payment for the past services. Article 1186 and Article 1234 of the Civil Code cannot be the
source of IHC's obligation to pay respondents
Joaquin recommended Materials Handling Corp (principal Barnes
International) to the IHC as a foreign financer. While negotiations Article 1186. The condition shall be deemed fulfilled when the
ensued with Barnes, Joaquin and the Executive Director of IHC obligor voluntarily prevents its fulfillment.
negotiated with Weston International for financing as well.
Rule: Article 1186 talks about constructive fulfillment of a
But since Barnes failed to deliver the needed loan, IHC told DBP suspensive condition, whose application calls for two requisites,
would instead submit Weston. Thus, DBP cancelled its previous namely:
guarantee. a. (a) the intent of the obligor to prevent the fulfillment of
the condition, and
Due to Joaquin’s failure to secure Barnes, IHC opted to cancel the b. (b) the actual prevention of the fulfillment.
17,000 stock supposed to be in favor to Joaquin. Joaquin argues
that this is improper since he was unable to fulfill 70% (phases 1-5 Application: Evidently, IHC only relied on the opinion of its
of 6) of his obligations fully only because the IHC was intruding in consultant in deciding to transact with Materials Handling and,
the negotiations with Barnes; and that they opted to submit later on, with Barnes. In negotiating with Barnes, IHC had no
Barnes instead of Weston. intention, willful or otherwise, to prevent Joaquin and Suarez from
meeting their undertaking

Article 1234.If the obligation has been substantially performed in

good faith, the obligor may recover as though there had been a
strict and complete fulfillment, less damages suffered by the
obligee.

Rule: Article 1234 applies only when an obligor admits breaching

the contract after honestly and faithfully performing all the
material elements thereof except for some technical aspects
that cause no serious harm to the obligee. The provision refers
to an omission or deviation that is slight, or technical and
unimportant, and does not affect the real purpose of the
contract.

A contractual breach is material if it will adversely affect the

nature of the obligation that the obligor promised to deliver, the
benefits that the obligee expects to receive after full compliance,
and the extent that the non-performance defeated the purposes
of the contract.

Application: The primary objective of the parties in entering into

the services agreement was to obtain a foreign loan to finance the
construction of IHC's hotel project. Needless to say, finding the
foreign financier that DBP would guarantee was the essence of
the parties' contract, so that the failure to completely satisfy such
obligation could not be characterized as slight and unimportant as
to have resulted in Joaquin and Suarez's substantial performance
that consequentially benefitted IHC. Whatever benefits IHC
gained from their services could only be minimal.

Nevertheless, IHC is nonetheless liable to pay under the rule on

constructive fulfillment of a mixed conditional obligation.

Rule: The prevailing rule in conditional obligations is that the

acquisition of rights, as well as the extinguishment or loss of those
already acquired, shall depend upon the happening of the event
that constitutes the condition. But, the existing rule in a mixed
conditional obligation is that when the condition was not
fulfilled but the obligor did all in his power to comply with the
obligation, the condition should be deemed satisfied.

Application: Joaquin’s obligation was subject to the suspensive

condition of successfully securing a foreign loan guaranteed by
DBP, before the obligation of IHC to pay them arises.

To secure a DBP-guaranteed foreign loan did not solely depend on

the diligence or the sole will of the respondents because it
required the action and discretion of third persons — an able and
willing foreign financial institution to provide the needed funds,
and the DBP Board of Governors to guarantee the loan. Their
obligation is a mixed conditional obligation.

Considering that the respondents were able to secure an

agreement with Weston, and subsequently tried to reverse the
prior cancellation of the guaranty by DBP, we rule that they
thereby constructively fulfilled their obligation.

The source of IHC’s obligation to pay Joaquin is Quantum meruit,

in the absence of an express agreement on the fees
 The confusion on the amounts of compensation arose from the
parties' inability to agree on the fees that respondents should
receive. Considering the absence of an agreement, and in view of
respondents' constructive fulfillment of their obligation, the Court
has to apply the principle of quantum meruit in determining how
much was still due and owing to respondents.

Rule: Under the principle of quantum meruit, a contractor is

allowed to recover the reasonable value of the services rendered
despite the lack of a written contract. The measure of recovery
under the principle should relate to the reasonable value of the
services performed.

Application: P200,000 is sufficient for the payment.

MIAA v. Ding Velayo
Petitioner argues that the renewal of the Contract of Lease (par.
BASIC FACTS: Just check yer own notes 17) cannot be made to depend on the sole will of respondent for
the same would then be void for being a potestative condition.
i. 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.”
A. The Court does not agree.
B. RULE: An express agreement which gives the lessee the
sole option to renew the lease is frequent and subject to
statutory restrictions, valid and binding on the parties.
This option, which is provided in the same lease
agreement, is fundamentally part of the consideration in
the contract and is no different from any other provision
of the lease carrying an undertaking on the part of the
lessor to act conditioned on the performance by the
lessee. 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.
C. APP: Paragraph 17 of the Contract of Lease dated May 14,
1976 between petitioner and respondent solely granted to
respondent the option of renewing the lease of the subject
property, the only express requirement was for
respondent to notify petitioner of its decision to renew the
lease within 60 days prior to the expiration of the original
lease term.

Equally unmeritorious is the assertion of petitioner that paragraph

17 merely provides a procedural basis for a negotiation for
renewal of the lease and the terms thereof.
A. ANS: The exercise by respondent of its option to renew the
lease need no longer be subject to negotiations.
B. RULE: “[I]f we were to adopt the contrary theory that the
terms and conditions to be embodied in the renewed
contract were still subject to mutual agreement by and
between the parties, then the option — which is an
integral part of the consideration for the contract —
would be rendered worthless. For then, the lessor could
easily defeat the lessee's right of renewal by simply
imposing unreasonable and onerous conditions to prevent
the parties from reaching an agreement
C. RULE: “The rule is well-established that a general
covenant to renew or extend a lease which makes no
provision as to the terms of a renewal or extension
implies a renewal or extension upon the same terms as
provided in the original lease.”
D. APPLICATION: The phrase, i.e., "if desirous of continuing
his lease, may be simply restated, i.e., if he wants to go on
with his lease, considering the word 'CONTINUE' in its verb
 form ordinarily means — to go on in present state, or even
restated in another way — if desirous of extending his
lease, because the word 'continue' in its verb form also
means — extend uniformly. If we are to adopt the
interpretation of [petitioner] that the stipulation merely
established the procedural basis for a negotiation for
renewal then the aforequoted phrase would be rendered a
mere surplusage.
E. SUPPORT: This must be so because based on the context
of their agreements and bolstered by the testimony of Mr.
Mariano Nocom of Salem Investment and particularly
Rosila Mabanag, one of the signatory witness to the
contract and a retired employee of CAA's Legal Division the
parties really intended a renewal for the same term as it
was then the usual practice of CAA to have the term of
leases on lands where substantial amount will be involved
in the construction of the improvements to be undertaken
by the lessee to give a renewal.
F. CONCLUSION: In sum, the renewed contract of lease of the
subject property between petitioner and respondent shall
be based on the same terms and conditions as the original
contract of lease. The "original contract of lease" does not
pertain to the Contract of Lease dated May 14, 1976
between petitioner and respondent alone, but also to the
Contract of Lease dated February 15, 1967 between
petitioner (then still called CAA) and Salem, as well as the
Contract of Lease dated November 26, 1974 between
petitioner and Velayo Export — all three contracts being
inextricably connected. Since the Contract of Lease
between petitioner and Salem was for a term of 25 years,
then the renewed contract of lease of between petitioner
and respondent shall be for another term of 25 years.

We found no violations by the respondent of the Contract of

Lease.
1.) The prohibition on subleasing of the "premises," refers
only to the subject property – an idle piece of land with an
area of 8,481 square meters.
i. AND, being the builder of the improvements on the
subject property, said improvements are owned by
respondent until their turn-over to petitioner at the
end of the 25-year lease in 1992.
a. THUS, as respondent is not leasing the
improvements from petitioner, then it is not
subleasing the same to third parties.
2.) Article 1235 of the Civil Code states that "[w]hen the
obligee accepts the performance, knowing its
incompleteness or irregularity, and without expressing any
protest or objection, the obligation is deemed fully
complied with."
i. Petitioner did not register any protest or objection
to the alleged incompleteness of or irregularity in
the performance by respondent of its obligation to
build and develop improvements on the subject
property.
ii. In fact, upon the expiration of the original 25-year
lease period in February 1992, petitioner was
already ready and willing to accept and appropriate
as its own the improvements built
3.) The Lease rentals were based on either the rates fixed by
AO No. 4, series of 1970, or 1% of the monthly gross
income of respondent, whichever is higher.
i. After requested, respondent submitted to
petitioner its gross income statements, so
petitioner could very well compute the 1% royalty.
a. However, petitioner continued to charge
respondent only P2,205.25 monthly lease
rental, which the latter faithfully paid.
ii. Petitioner later demanded an increase in lease
rentals based on subsequent administrative
issuances raising the rates for the rental of its
 properties.
a. But the adverted administrative orders were
not published in full, thus, the same were
legally invalid.

Class Notes:
If you have an option that says, it is subject to negotiable terms
and conditions, then it’s not really a purely potestative stipulation.
The lessor cannot refuse the renewal of the term. The only thing
he can do is negotiate terms. But the exercise of option by the
lessor must follow the conditions to its exercise (ex. Periods to
exercise the right).

Rough Notes: Rough Notes:

Effect of joint liability: Prescriptions:

1. The demand by one creditor upon one debtor, produces “The following actions must be brought within ten (10) years from
the effects of default only with respect to the creditor who the time the right of action accrues:
demanded and the debtor on whom the demand was (1) Upon a written contract;
made, but not with respect to the others (2) Upon an obligation created by law;
(3) Upon a judgment.“ (Art. 1144.)
2. The interruption of prescription by the judicial demand of
one creditor upon a debtor, does not benefit the other “The following actions must be commenced within six (6) years:
creditors nor interrupt the prescription as to other creditor. (1) Upon an oral contract;
On the same principle, a partial payment or (2) Upon a quasi-contract.“ (Art. 1145.)
acknowledgment made by one of several joint debtors
does not stop the running of the statute of limitations as to “The following actions must be instituted within four (4) years: (1)
the others Upon an injury to the rights of the plaintiff;
(2) Upon a quasi-delict.’’ (Art. 1146.)
3. The vices of each obligation arising from the personal
defect of a particular debtor or creditor does not affect the The statute of limitations, however, may be superseded or
obligation or rights if the others modified by a contract between the parties.

4. The insolvency of a debtor does not increase the

responsibility of his co-debtors, nor does it authorize a
creditor to demand anything from his co-creditors
 5. In the joint divisible obligation, the defense of res judicata
is not extended from one debtor to another

A1236 Carandang v. De Guzman In re: Consequences of Failure to Inform or Get Consent of

– Debtor, In Terms of a Third Person Payer
A1243 BASIC FACTS:
Arcadio and Luisa Carandang (Spouses Carandang) and De Guzman Ruling:
are stockholders and corporate officers of Mabuhay Broadcasting 1.) The heirs expressly waived their right to substitute the
System, with 46% and 54% Equity respectively. dead, and embraced whatever judgment was to be
rendered in the proceedings they have not taken part in.
[A] When capital stock increased in December from 500K to 1.5M, 2.) The Petitioners erroneously interchange the terms "real
345K of this increase was subscribed to Spouses Carandang – 293K party in interest" and "indispensable party."
of which paid by Spouses De Guzman. i. A real party in interest is the party who stands
[B] When capital stock increased in December from 1.5m to 3M, to be benefited or injured by the judgment of
93K of this increase was subscribed to Spouses Carandang – 43K of the suit, or the party entitled to the avails of
which paid by Spouses De Guzman. the suit.
ii. An indispensable party is a party in interest
Thus, De Guzman sent a demand letter to Spouses Carandang for without whom no final determination can be
the total of 336K dues. But Spouses Carandang refused because had of an action.
they claim that they entered into an ORAL PRE-INCORPORATION iii. A necessary party, which is one who is not
AGREEMENT with De Guzman, whereby the latter would pay stock indispensable but who ought to be joined as a
subscriptions to the former in exchange for technical expertise and party if complete relief is to be accorded as to
assistance, and wherein it was agreed that Carandang would those already parties, or for a complete
always maintain his 46% equity participation in the corporation determination or settlement of the claim
even if the capital structures were increased, and that De Guzman subject of the action.
would personally pay the equity shares/stock subscriptions of a. The credits loaned during the time of the marriage
Carandang with no cost to the latter. are presumed to be conjugal property. As such,
assuming that the four checks created a debt for
De Guzman died before the RTC rendered its judgement in favor of which the Spouses Carandang are liable, such credits
him. are presumed to be conjugal property by Spouses De
Guzman. As such, Quirino de Guzman, being a co-
owner of specific partnership property, is certainly a
real party in interest. However, what dismissal on this
ground entails is an examination of whether the
 parties presently pleaded are interested in the
outcome of the litigation, and not whether all persons
interested in such outcome are actually pleaded. The
latter query is relevant in discussions concerning
indispensable and necessary parties, but not in
discussions concerning real parties in interest.
b. In sum, in suits to recover properties, all co-owners
are real parties in interest. However, pursuant to
Article 487 of the Civil Code and relevant
jurisprudence, any one of them may bring an action,
any kind of action, for the recovery of co-owned
properties. Therefore, only one of the co-owners,
namely the co-owner who filed the suit for the
recovery of the co-owned property, is an
indispensable party thereto. The other co-owners are
not indispensable parties. They are not even
necessary parties, for a complete relief can be
accorded in the suit even without their participation,
since the suit is presumed to have been filed for the
benefit of all co-owners.

3.) If indeed a Mr. "A" decides to pay for a Mr. "B's"

obligation, the presumption is that Mr. "B" is indebted to
Mr. "A" for such amount that has been paid.
I. Art. 1236. The creditor is not bound to accept
payment or performance by a third person who
has no interest in the fulfillment of the
obligation, unless there is a stipulation to the
contrary.
Whoever pays for another may demand from
the debtor what he has paid, except that if he
paid without the knowledge or against the will
of the debtor, he can recover only insofar as the
payment has been beneficial to the debtor.
II. Art. 1237. Whoever pays on behalf of the
debtor without the knowledge or against the
 will of the latter, cannot compel the creditor to
subrogate him in his rights, such as those
arising from a mortgage, guarantee, or penalty.
a. The only consequences for the failure to inform or get
the consent of the debtor are the following:
(1) the third person can recover only insofar as the
payment has been beneficial to the debtor; and
(2) the third person is not subrogated to the rights of
the creditor, such as those arising from a mortgage,
guarantee or penalty
b. But this is merely a presumption. By virtue of the
parties' freedom to contract, the parties could stipulate
otherwise and thus, as suggested by the spouses
Carandang, there is indeed a possibility that such
payment by Mr. "A" was purely out of generosity or
that there was a mutual agreement between them.
c. APPLICATION: The de Guzmans have successfully
proven their payment of the spouses Carandang's
stock subscriptions. These payments were, in fact,
admitted by the spouses Carandang. Consequently, it is
now up to the spouses Carandang to prove the
existence of the pre-incorporation agreement that was
their defense to the purported loan.

Note: the “loan” here is (1) Carandang was not able to pay
plaintiff the agreed amount of the lease for a number of months
forcing the plaintiff to terminate lease; and (2) payment of
Carandang’s shares [The plaintiff owned the franchise, the radio
transmitter, the antenna tower, the building containing the radio
transmitter and other equipment. Verily, he would be placed in a
great disadvantage if he would still have to personally pay for the
shares of defendant Arcadio M. Carandang.]

His testimony was contradictory and Arcadio’s testimony was not

admitted since he didn’t want to be put up for crossexamination
 Class Notes:
Before you can have a broadcasting station, you need a
congressional franchise.

Republic v. De Guzman In re: A1231 relation to A1240; Wrong Payment Does Not
Extinguish the Creditor’s Right to Receive the Payment
BASIC FACTS:
Basta may payment pero yung receipt naka-issue sa ibang Ruling:
company, and received by an unauthorized person named Cruz. The records will show that the petitioner had failed to establish its
case by a preponderance of evidence.

The petitioner admitted to the existence and validity of the

Contract of Agreement executed between the PNP and MGM. It
likewise admitted that respondent delivered the construction
materials subject of the Contract, not once, but several times
during the course of the proceedings.

The only matter petitioner assailed was respondent's allegation

that she had not yet been paid.

The RTC and the Court of Appeals correctly ruled that the
petitioner's obligation has not been extinguished. The petitioner's
obligation consists of payment of a sum of money. In order for
petitioner's payment to be effective in extinguishing its obligation,
it must be made to the proper person. When payment is made to
the wrong party, the obligation is not extinguished as to the
creditor who is without fault or negligence, even if the debtor
acted in utmost good faith and by mistake as to the person of
the creditor or through error induced by fraud of a third person.

Art. 1240. Payment shall be made to the person in whose favor

the obligation has been constituted, or his successor in interest, or
any person authorized to receive it.

The respondent was able to establish that the LBP check was not
received by her or by her authorized personnel. The PNP's own
 records show that it was claimed and signed for by Cruz.

Hence, absent any showing that the respondent agreed to the

payment of the contract price to another person, or that she
authorized Cruz to claim the check on her behalf, the payment, to
be effective must be made to her

Class Notes:
The lesson here is that the creditor has the option to go after
either the debtor for the payment, or the 3 rd party who received
the wrong payment

A1249 Tibajia v. Court of Appeals Issue:

W/N payment by means of check (even by cashier's check) is
BASIC FACTS: considered payment in legal tender as required by the Civil Code,
Republic Act No. 529, and the Central Bank Act
A suit for Collection of Sum of Money was rendered in favor of
Eden Tan against Spouses Tibajia for a total amount of Ratio:
P398,483.70, to which P442,750 was deposited as a bond with the
RTC (P300,000 of which was paid by Eden Tan). The latter then 1.) No. A check, whether a manager's check or ordinary
delivered to the Deputy Sheriff the total money via: check, is not legal tender, and an offer of a check in
1. P262,750 in cashier’s check of BPI, and payment of a debt is not a valid tender of payment and
2. P135,483.70 in cash. may be refused receipt by the obligee or creditor
a. LEGAL BASIS:
Eden Tan refused to accept the payment made by the Tibajia i. Article 1249.
spouses and instead insisted that the garnished funds deposited …The delivery of promissory notes payable to
with the cashier of the RTC be withdrawn to satisfy the judgment order, or bills of exchange or other mercantile
obligation. documents shall produce the effect of payment
only when they have been cashed, or when
Spouses Tibajia filed a motion to lift the writ of execution on the through the fault of the creditor they have been
ground that the judgment debt had already been paid. The motion impaired…
was denied by the trial court on the ground: ii. Section 1 of Republic Act No. 529
1. that payment in cashier's check is not payment in legal iii. Section 63 of Republic Act No. 265 (Central
tender, and Bank Act)
2. that payment was made by a third party other than the
defendant. Class Notes:
 New Pacific v. Señeris says that a certified manager’s check is legal
tender. These are conflicting jurisprudence. But see also R.A. No.
7653, Sec. 60, and BSP Circular No. 537 dated 18 July 2006
supporting the Tibajia Ruling

A1250 Citybank v. Sebiano Issue:

1.) W/N if a client obtains a loan from the foreign bank's
BASIC FACTS: Philippine branch, absolutely and automatically make the
client a debtor, not just of the Philippine branch, but also
Sebiano is a client of Citybank, having the following accounts: of the head office and all other branches of the foreign
1.) Savings Account with CB-Manila bank around the world – NO
2.) Money Market with FNCB Finance Ruling:
3.) Dollar Account with CB-Geneva 1.) No. the foreign and local branches of Citybank are not
taken to be under the same singular identity – only the
Despite repeated demands, Sebiano failed her outstanding loan local ones are treated as a singular unit. Thus, the
with CB-Manila in the principal amount of P1.92M when it was due promissory note and the stipulations of their contract that
and demandable since May 1979. So Citybank used Sebiano’s said that Citybank can withdraw any account that Sebainao
deposits to offset her dues: has with “Citybank, NA” – is limited only to local banks.
1.) Outstanding: P2.2M (cuz of interest as of October 1979) Thus, CB cannot be withdraw from CB-Geneva.
2.) Less: a. LB: Section 25 of the United States Federal Reserve Act
a. P31K from CB-Manila states that — Every national banking association
b. P1M from FNCB Finance operating foreign branches shall conduct the accounts
c. P1.1M from CB-Geneva of each foreign branch independently of the accounts
Citibank had already considered the loans paid or liquidated by of other foreign branches established by it…
October 1979 after it had fully effected compensation thereof 2.) ..
using respondents deposits and money market placements a. R1: Article 1250 of the Civil Code becomes applicable
only when there is extraordinary inflation or deflation
Sebiano instituted a complaint for <Accounting, Sum of Money, of the currency.
and Damages> to recover her deposits and money market i. There is inflation when there is an increase in
placements –saying that: the volume of money and credit, relative to
1.) She didn’t have an outstanding loan available goods resulting in a substantial and
2.) She wasn’t properly notified of the offsetting continuing rise in the general price level.
b. Extraordinary Inflation exists when:
RTC rendered a decision: i. (1) there is a decrease or increase in the
1.) Declaring Sebiano to be INDEBTED to CB-Manila for P1M purchasing power of the Philippine currency,
since September 1979, and ii. (2) which is unusual or beyond the common
 2.) Declaring the offsetting to be NULL and VOID fluctuation in the value of said currency, and
iii. (3) such increase or decrease could not have
CA rendered a decision: been reasonably foreseen or was manifestly
1.) Declaring that CB-Manila FAILED to establish the beyond the contemplation of the parties at the
indebtedness of Sebiano by competent evidence time of the establishment of the obligation.
2.) Declaring the offsetting to be NULL and VOID c. A: "Erosion" is an accurate description of the trend of
3.) Granting Moral and Exemplary Damages, and Atty Fees decline in the value of the peso in the past three to
four decades. Unfortunate as this trend may be, it is
SC rendered a decision: certainly distinct from the phenomenon contemplated
1.) Declaring Sebiano to be INDEBTED to CB-Manila for P1M by Article 1250
since September 1979, and d. R2: The burden of proving that there had been
2.) Declaring the remittance of US$149,632.99 from Sebiano’s extraordinary inflation or deflation of the currency is
account with CB-Geneva to be NULL and VOID. upon the party that alleges it.
a. CB is ORDERED to refund to respondent the said i. Such circumstance must be proven by
amount, or its equivalent in Philippine currency using competent evidence, and it cannot be merely
the exchange rate at the time of payment, plus the assumed
stipulated interest beginning October 1979 ii. The existence of extraordinary inflation must
be officially proclaimed by competent
Citybank beseech this Court to adjust the nominal values of: authorities, and the only competent authority
1. Sebiano’s dollar accounts, and/or so far recognized by this Court to make such
2. Sebiano’s overdue peso loans an official proclamation is the BSP
by using the values of the currencies stipulated at the time the e. R3: FUTHERMORE, Article 1250 of the Civil Code is
obligations were established in 1979, based on equitable considerations. Among the maxims
i. to address the alleged inequitable consequences of equity are:
resulting from the extreme and extraordinary i. (1) he who seeks equity must do equity, and
devaluation of the Philippine currency that occurred in ii. (2) he who comes into equity must come with
the course of the Asian crisis of 1997. clean hands.
f. A: Citybank cannot invoke A1250 because it does not
come with clean hands
i. The delay in the recovery by Sebiano of her
dollar accounts with Citibank-Geneva was due
to the unlawful act of Citibank in using the
same to liquidate respondent's loans.
ii. Citibank even attempted to justify the off-
setting or compensation of respondent's loans
using her dollar accounts with Citibank-Geneva
 by the presentation of a highly suspicious and
irregular, and even possibly forged,
Declaration of Pledge.
Citibank should refund to respondent the U.S. $149,632.99 taken
from her Citibank-Geneva accounts, or its equivalent in Philippine
currency using the exchange rate at the time of payment, plus the
stipulated interest for each of the fiduciary placements and
current accounts involved, beginning October 1979.
(Note: the obligation to REFUND began when Citybank considered
the loans paid.)

Class Notes:
In this case, legal compensation would’ve been allowed normally
but there was a special foreign law preventing such.

Equitable PCI Bank v. Ng Sheung Ngor Ruling:

1. PCI was not guilty of forumn shopping
BASIC FACTS: 2. RTC committed GADALEJ on dismissing the appeal/MR,
Ng Sheung Ngor (NSN) filed an action for <Annulment and/or enough to merit a certiorari
Reformation of Documents and Contracts> against Equitable PCI 3. PCI raised a pure question of law when it assailed the
Bank because: exorbitant amount for damages contrary to jurisprudence,
1. PCI induced them to avail of its peso and dollar credit enough to merit certiorari
facilities by offering low interest rates, 4. The Promissory Notes were valid.
i. so NSN accepted PCI’s proposal and signed the a. R: A contract of adhesion becomes void only when the
bank's pre-printed promissory notes on various dominant party takes advantage of the weakness of
dates beginning 1996 the other party, completely depriving the latter of the
2. NSN, however, were unaware that the documents opportunity to bargain on equal footing.
contained identical escalation clauses granting PCI b. A: If the terms and conditions offered by PCI had been
authority to increase interest rates without their consent truly prejudicial to NSN, they would have walked out
and negotiated with another bank at the first available
The payments became due on July 2001. instance. But they did not.
5. The RTC did not explain what its basis was for the
On the other hand, PCI asserted that: computation of damages. Since the SC is not a trier of
1. NSN knowingly accepted all the terms and conditions facts, it is ordered to be partially remanded.
contained in the promissory notes. 6. The Escalation Clause violated the Principle of Mutuality of
2. In fact, NSN continuously availed of and benefited from Contracts
 PCI's credit facilities for five years a. GR: Escalation clauses are not void per se
b. EXPT: However, one which grants the creditor an
The RTC rendered a decision: unbridled right to adjust the interest independently
1. Upholding the validity of the Promissory Notes and upwardly, completely depriving the debtor of the
2. Invalidating the Escalation Clause for violating the Principle right to assent to an important modification in the
of Mutuality of Contracts agreement is void. (A1308)
3. Took judicial notice of the Asian Financial Crisis and c. SR: a valid escalation clause provides:
Declared the existence of Extraordinary Deflation. i. That the rate of interest will only be increased if
i. Ordered the use of 1996 Dollar Exchange Rate in the applicable maximum rate of interest is
computing NSN’s dollar-denominated loans increased by law or by the Monetary Board;
(P26.50 per Dollar) and
4. Ordered PCI to pay damages worth P22.35M to NSN for ii. That the stipulated rate of interest will be
tainting its business reputation. reduced if the applicable maximum rate of
Judgement attained finality because PCI failed to show that it paid interest is reduced by law or by the Monetary
the appeal fees, and lack of merit. But it went up on certiorari to Board (de-escalation clause)
the CA. d. A: Equitable dictated the interest rates if the term (or
period for repayment) of the loan was extended.
A writ of execution was thereafter issued and three real Respondents had no choice but to accept them. This
properties of Equitable were levied upon. Notwithstanding the was a violation of Article 1308 of the Civil Code.
writ of injunction by the CA, the properties of Equitable previously 7. There was no Extraordinary Deflation
levied upon were sold in a public auction. NSN won the bid. a. R: For extraordinary inflation (or deflation) to affect an
obligation, the following requisites must be proven:
CA denied certiorari on the ground of forum shopping. i. (1) that there was an official declaration of
extraordinary inflation or deflation from the
BSP;
ii. (2) that the obligation was contractual in
nature; and
iii. (3) that the parties expressly agreed to consider
the effects of the extraordinary inflation or
deflation.
b. A: Despite the devaluation of the peso, the BSP never
declared a situation of extraordinary inflation.
Moreover, although the obligation in this instance
arose out of a contract, the parties did not agree to
recognize the effects of extraordinary inflation (or
deflation).
 c. C: NSN should pay their dollar- denominated loans at
the exchange rate fixed by the BSP on the date of
maturity. [Note: July 2001, NOT back in 1996]

A1245 Luzon Development Bank v. Enriquez; and In re: PD 957 Protection of Tenants and Subdivision Buyers;
Delta Development and Management Services, Inc v. Enriquez and Dacion en Pago;
Luzon Development Bank Issues:
1.) W/N the Mortgage Contract is Valid – NO.
BASIC FACTS: 2.) W/N the Contract to Sell Conveys Ownership – NO.
3.) W/N the dacion en pago extinguished the loan obligation,
Luzon Development Bank (BANK) is a domestic financial such that DELTA has no more obligations to the BANK
corporation that extends loans to subdivision developers/owners. 4.) W/N the BANK is entitled to damages

Delta Development and Management Services, Inc. (DELTA) is a Ruling:

domestic corporation engaged in the business of developing and 1.) The Mortgage Contract is VOID.
selling real estate properties in Delta Homes I in Cavite. a. DELTA violated Section 18 of PD 957 in mortgaging the
a. Ricardo De Leon (De Leon) is the owner of: properties in Delta Homes I (including Lot 4) to the
i. DELTA BANK without prior clearance from the HLURB.
ii. Lot 4 of Delta Homes I Because of the nullity of the mortgage…
i. Although indebtedness remained AT THAT
In 1995, Spouses De Leon obtained a P8M loan from BANK for the TIME, Neither DELTA nor the BANK could assert
purpose of developing Delta Homes I. any right arising therefrom.
a. To secure the loan, the Spouses De Leon executed in favor (i) The BANK's loan of P8 million to DELTA
of the BANK a real estate mortgage (REM) on several of has effectively become unsecured
their properties, including Lot 4. ii. Nevertheless, DELTA and BANK agreed to
settle this indebtedness through dation
instead of the mortgage. [Note: the issue now
After securing a <License to Sell> from the HLURB, in 1997, DELTA is whether this dation is valid given the earlier
executed a <Contract to Sell> with respondent Angeles Catherine execution of a contract to sell, which is now
Enriquez (Enriquez) over the house and Lot 4 for the purchase discussed in #2]
price of P614,950.00.
a. Enriquez made a down payment of P114,950.00. 2.) The Contract to Sell does not transfer ownership.
b. The Contract to Sell contained the following provisions: a. R: The full payment of the purchase price partakes of a
“for failure to pay three (3) successive monthly installment suspensive condition, the non-fulfillment of which
payments, the Owner may consider this Contract to Sell prevents the obligation to sell from arising.
null and void ab initio without further proceedings or b. A: Enriquez has not fully paid. Therefore, there’s no
 court action and all payments shall be forfeited in favor of transfer of ownership yet.
the Owner as liquidated damages and expenses”
3.) GR: Since the Contract to Sell did not transfer ownership of
When DELTA defaulted on its loan obligation, the BANK, instead of Lot 4 to Enriquez, said ownership remained with DELTA.
foreclosing the REM, agreed to a dation in payment. DELTA could then validly transfer such ownership (as it did)
<The Deed of Assignment in Payment of Debt> stated: to another person (the BANK).
a. that DELTA "assigns, transfers, and conveys and sets over a. EXPT: BUT the transferee BANK is bound by the
[to] the assignee that real estate with the building and Contract to Sell and has to respect Enriquez's rights
improvements existing thereon . . . in payment of the total protected by PD 957, which states that:
obligation owing to [the Bank] . . . .” i. buyers such as Enriquez have the right to have
b. Unknown to Enriquez, among the properties assigned to her Contract to Sell registered with the Register
the BANK was the house and lot of Lot 4 of Deeds in order to make it binding on third
parties.
To recover the P301,063.42 and seek damages, Enriquez filed a ii. The purpose of registration is:
complaint against DELTA and the BANK before the HLURB alleging (i) to protect the buyers from any future
that DELTA violated the terms of its <License to Sell> by: unscrupulous transactions involving the
1.) selling the house and lots for a price exceeding that object of the sale or contract to sell,
prescribed in BP220, and whether the purchase price therefor has
2.) failing to get a clearance for the mortgage from the HLURB been fully paid or not.
b. A: Despite the non-registration, the BANK cannot be
HLURB Arbiter rendered its decision: considered, under the circumstances, an innocent
1. Upholding the validity of the purchase price purchaser for value of Lot 4 when it accepted the
2. BUT ordered DELTA to accept payment of the balance of latter as payment for DELTA’s obligation.
P108,013.36 from Enriquez, and (upon such payment) to i. BANK knew that the loaned amounts were to
deliver to Enriquez the title to the house and lot free from be used for the development of DELTA's
liens and encumbrances. subdivision project (which are protected by PD
3. Ordered DELTA to pay damages to Enriquez 957).
(i) this was indicated in the corresponding
HLURB Board of Commissioners and the OP rendered its decision: promissory notes
1. Upheld the validity of the contract to sell between DELTA ii. As an entity engaged in the banking business,
and Enriquez despite the alleged violation of the price the BANK is required to observe more care and
ceilings in BP 220, and NOT the ownership of BANK over prudence when dealing with registered
the Lot 4. properties.
2. Deleted the order for damages given that Enriquez herself
was also at fault for failing to pay her monthly 4.) Dacion en pago extinguished the loan obligation
amortizations a. According to the BANK:
 i. the dation in payment extinguished the loan
only to the extent of the value of the thing
The BANK argued that DELTA can no longer deliver Lot 4 to delivered. Since Lot 4 would have no value to
Enriquez because: the BANK if it will be delivered to Enriquez,
1.) DELTA had sold the same to the BANK by virtue of the DELTA would remain indebted to that extent.
dacion en pago (dation). b. GR: The contractual intention determines whether
2.) As an alternative, should the CA find that DELTA retained the property subject of the dation will be considered
ownership over Lot 4 and could convey the same to as the full equivalent of the debt and will therefore
Enriquez, serve as full satisfaction for the debt.
i. the BANK prayed that its REM over Lot 4 be i. SR: The dation in payment extinguishes the
respected such that DELTA would have to redeem it obligation to the extent of the value of the
first before it could convey the same to Enriquez thing delivered, either as agreed upon by the
a. “Should the dacion en pago over Lot 4 be parties or as may be proved, unless the parties
invalidated and the property ordered to be by agreement, express or implied, or by their
delivered to Enriquez, silence, consider the thing as equivalent to the
(i) the BANK contends that DELTA should obligation, in which case the obligation is totally
pay the corresponding value of Lot 4 to extinguished.
the BANK. ii. A: the Dacion en Pago executed by DELTA and
b. It maintains that the loan obligation the BANK indicates a clear intention by the
extinguished by the dacion en pago only extends parties that the assigned properties would
to the value of the properties delivered; if Lot 4 serve as full payment for DELTA's entire
cannot be delivered to the BANK, then the loan obligation. It states:
obligation of DELTA remains to the extent of Lot (i) “THAT, the ASSIGNEE does hereby
4's value accept this ASSIGNMENT IN PAYMENT
OF THE TOTAL OBLIGATION owing to
3.) The <Contract to Sell> contained a condition that him by the ASSIGNOR”
ownership shall only be transferred to Enriquez upon the iii. FURTHER: the BANK, in accepting the assigned
latter's full payment of the purchase price to DELTA. properties as full payment of DELTA's "total
obligation," has assumed the risk that some of
CA rendered its decision: the assigned properties (such as Lot 4) are
1. Ruling against the validity of the dacion en pago executed covered by contracts to sell which it is bound to
in favor of the BANK on the ground that honor under PD 957.
i. DELTA had earlier relinquished its ownership over c. A dacion en pago is governed by the law of sales.
Lot 4 in favor of Enriquez via the Contract to Sell Contracts of sale come with warranties, either express
2. Upholding the indebtedness of DELTA to BANK given that (if explicitly stipulated by the parties) or implied (under
the dation is rendered invalid Article 1547).
 3. Ruling that BANK does not have a first lien on Lot 4 because i. A: The BANK does not even point to any breach
i. its real estate mortgage over the same had already of warranty by DELTA in connection with the
been extinguished by the dacion en pago. Dation in Payment.
(i) The Dation in Payment has no express
warranties relating to existing contracts
to sell over the assigned properties.
(ii) As to the implied warranty in case of
eviction, it is waivable and cannot be
invoked if the buyer knew of the risks or
danger of eviction and assumed its
consequences (in this case BANK did)
d. IN TERMS OF THE REAL EFFECTS OF THIS RULING:
a. For Enriquez:
i. She should pay the amount agreed upon in
the Contract to Sell.
b. For BANK:
i. Upon Enriquez's full payment of the balance
of the purchase price, the BANK is bound to
deliver the title over Lot 4 to her.

Note: Suwerte ni DELTA gago.

A1256- Far East Bank & Trust Company v. Diaz Realty, Inc. Issues:
A1261 1. W/N there was a valid tender of payment
BASIC FACTS: 2. W/N there is a significant effect from the transfer to FEBTC
[1973]: Diaz and Company got a loan from Pacific Banking of Diaz’s account with PaBC
Corporation in the amount of P720,000.00 – with interest at 12% 3. W/N the 20% interest rate should be applicable
per annum, later increased until 20%. 4. W/N the real estate mortgage should be cancelled
 This loan was secured by a real estate mortgage on two
parcels of land owned by Diaz Realty in Davao City. Ruling:
1.) YES, there was a valid tender of payment.
[1981]: Allied Banking Corp rented an office space in a building a. GR: Jurisprudence holds that, in general, a check does
situated over one of the mortgaged lots. not constitute legal tender, and that a creditor may
 The parties, including PaBC agreed to have the monthly validly refuse it.
rentals to be paid directly to PaBC for Diaz’s mortgage i. EXPT: But the creditor still has the option and
indebtedness (partially or fully) the discretion of refusing or accepting the
 check.
[1985, July]: The Central Bank closed PaBC, and placed it under b. A1: Although the petitioner argues that a check should
receivership. not be considered as a legal tender,
i. FEBTC nevertheless accepted it as a deposit,
[1986]: Far Eastern Bank and Trust Company purchased for P1.8M and
the credit of Diaz and Company in favor of PaBC ii. The check was subsequently cleared and
 BUT despite such purchase, honored by Interbank, as evidenced by a
PaBC Davao Branch continued to collect interests and certificate dated 1992.
penalty charges on the loan from 1987 to 1988 c. Doctrine Discussion:
i. Tender of payment is the definitive act of
[1988, March]: When the president of Diaz went to the office of offering the creditor what is due him or her,
PaBC, he was surprised to see that FEBTC has taken over, and he together with the demand that the creditor
was told that Diaz had an outstanding balance of P1,447,000.00. accept the same. (Note: practically speaking
this means that you already have the cash
[1988, December]: Diaz gave FEBTC the amount of P1,450,000.00 AND SHOW THE CASH)
through an Interbank check with the notation "Re: Full Payment (i) More important, there must be a fusion
of Pacific Bank Account now turn[ed] over to Far East Bank” of intent, ability and capability to make
 FEBTC did not accept it as payment. good such offer, which must be absolute
o Meanwhile, Diaz was asking if they could change the and must cover the amount due.
interest rate from 20% to 12% -- But there was no ii. Tender of payment presupposes not only that
reply the obligor is able, ready, and willing, but more
o Instead, Diaz was asked to deposit the amount with so, in the act of performing his obligation. In
the defendant's Davao City Branch Office, pending essence, “a proof that an act could have been
approval of the Central Bank Liquidator done is no proof that it was actually done.”
 Again, instead, FEBTC told Diaz to change the d. A2: That Diaz intended to settle the obligation is
P1,450,000.00 deposit into a Money Market evident
Placement – which Diaz did. i. (1) It issued a check to an amount covering the
debt, and even with the inscription saying “full
[1989]: There was still no news from FEBTC on whether it [would] payment”
accept Diaz’s tender of payment. ii. (2) It even filed a case to have the obligation be
 Thus, Diaz filed a case with the RTC to compel FEBTC to done
acknowledge the tender of payment, accept payment
and cancel the mortgage. e. Other contentions by FEBTC:
o The RTC rendered its judgement: 1. Diaz subsequently withdrew the money from FEBTC
1.) There was a valid tender of payment a. Court says: such withdrawal would not affect
2.) Computing the interest due on the P1.16M loan the efficacy or the legal ramifications of the
 from 1985, April to 1988, November at 12%p.a. tender of payment made on November, 1988.
3.) The result of the addition of the P1.67M principal i. The check was already accepted,
and the interests arrived at shall then be converted into money, and was kept by
compared with the P1,450,000.00 money market the FEBTC for several months
placement put up by the plaintiff with the 2. Tender of payment only extinguishes the obligation
defendant bank if the same is still existing or has after proper consignation
not yet matured. a. GR: For a consignation to be necessary, the
4.) FEBTC shall cancel the mortgage creditor must have refused, without just cause,
to accept the debtor's payment.
o The CA rendered its judgement: b. A: FEBTC accepted, so this rule doesn’t apply.
1.) There was a valid tender of payment By accepting the tendered check and converting
2.) The 20% interest stipulated should not apply, it into money, FEBTC is presumed to have
because the account transfer was without the accepted it as payment
knowledge and the consent of respondent-obligor
3.) FEBTC should not cancel the mortgage 2.) No novation by conventional subrogation took place.
a. The transfer of Diaz's credit from PaBC to FEBTC was an
[1992]: Interbank issued a certificate after clearing and honoring assignment of credit.
the check. i. An assignment of credit is an agreement by
virtue of which the owner of a credit (known as
the assignor), without the need of the debtor's
consent, transfers that credit and its accessory
rights to another (known as the assignee), who
acquires the power to enforce it, to the same
extent as the assignor could have enforced it
against the debtor.

b. FEBTC's acquisition of Diaz's credit did not involve any

changes in the original agreement between PaBC and
respondent; neither did it vary the rights and the
obligations of the parties.

3.) Petitioner bank, as assignee of respondent's credit, is

entitled to the interest rate of 20 percent in the
computation of the debt of private respondent
i. Interest should be 20 percent per annum until
 November 14, 1988, less interest payments given
to PaBC from December 1986 to July 8, 1988.
Thereafter, the interest shall be computed at 12
percent per annum until full payment.

4.) The real estate should subsist until full and final settlement
of such obligation pursuant to the guidelines set forth in
this Decision. Thereafter, the parties are free to negotiate
a renewal of either or both contracts, or to end any and all
of their contractual relations.

Class Note:
For a proper tender of payment, you should also (1) SHOW the
cash to (2) pay IMMEDIATELY.

State Investment House, Inc. v. CA In re: A2209; A1256; Monetary Interest runs until you properly
Consign
BASIC FACTS:
Issue:
Spouses RR Aquino are involved in three loans with State 1. W/N Spouses RR Aquino should pay the loan together
Investment House, Inc: with its interest, penalties, and other charges.
1.) Spouses RR Aquino, as an accommodation party, with
Spouses JM Aquino signed an Agreement (Account No. IF- Ruling:
82-1375-AA) with State Investment House for the purchase 1. It must be assumed that the lower court judge acted in
of Spouses JM Aquino of receivables amounting to accordance with the law. Thus:
P375,000.00. a. R1: A2209 of the Civil Code provides that the
2.) Spouses RR Aquino pledged shares to State Investment appropriate measure for damages in case of delay in
House to secure a loan of P120,000.00 (Account No. IF-82- discharging an obligation consisting of the payment of
0631-AA) a sum or money, is:
a. When it became due, Spouses RR Aquino paid the same i. the payment of penalty interest at the rate
partly with their own funds and partly from the agreed upon; and in the absence of a
proceeds of another loan which they obtained also stipulation of a particular rate of penalty
from petitioner State designated as Account No. IF-82- interest,
0904-AA. then the payment of additional interest at a
i. This new loan was secured by the same pledge rate equal to the regular monetary interest; and
agreement executed in relation to Account No. if no regular interest had been agreed upon,
 IF-82-0631-AA. ii. then payment of legal interest
ii. This new loan had three components: b. R2: A1256 of the Civil Code provides that where the
(i) (a) principal of the loan in the amount of creditor unjustly refuses to accept payment, the
P110,000.00; debtor desirous of being released from his obligation
(ii) (b) regular interest in the amount of 17% must comply with two conditions in order to effect
per annum; and payment:
(iii) (c) additional or penalty interest in case i. (a) tender of payment; and
of non-payment at maturity, at the rate ii. (b) consignation of the sum due.
of 2% per month or 24% per annum. c. A: The fact that the respondent Aquino spouses were
not in default DID NOT mean that they, as a matter of
When the Account No. IF-82-0904-AA matured, State demanded law, were relieved from the payment not only of
payment. penalty interest but also of monetary interest.
1.) Spouses RR Aquino expressed their willingness to pay, and i. The monetary interest continued to accrue
requested that upon payment, the pledged shares would under the terms of the relevant promissory
be released note until actual payment is effected.
a. State refused the request on the ground that Account
No. IF-82-1375-AA remains unpaid. While they are properly regarded as having made a
i. A notice was then sent to Spouses RR Aquino written tender of payment to petitioner State, failed
that their pledged shares would be sold at a to consign in court the amount due at the time of the
public auction. maturity.
(i) Thus, Spouses RR Aquino filed a case
with the court alleging that the For the respondent spouses to continue in possession
foreclosure sale is illegal because: of the principal of the loan amounting to P110,000.00
1. State unjustly refused their payment and to continue to use the same after maturity of the
when they were able and willing to loan without payment of regular or monetary interest,
pay would constitute unjust enrichment
2. The pledged shares do not cover
Account No. IF-82-1375-AA d. C: Since Spouses RR Aquino were held NOT TO BE IN
3. State should release the shares upon DELAY, then they are only liable for:
payment of the Account No. IF-82- i. (a) the principal of the loan or P110,000.00; and
0904-AA without any interest, ii. (b) regular or monetary interest in the amount
penalties or other charges, since of 17% per annum.
Spouses RR shouldn’t be said to have iii. They ARE NOT liable for penalty interest
been in delay

The lower courts rendered their decision affirming Spouses RR’s Class Note: Relate this to case about the mortgage thing na may
contentions. But there was an ambiguity on what charges must be special power of attorney that allows the creditor to get the
paid based on the judge’s dispositive portion saying: payment of the loan if they release the mortgage – that case kasi
1.) “Ordering defendants to immediately release the pledge was PECULIAR. They said there that interest does not run – for
on, and to deliver to plaintiffs, the shares of stocks… upon some reason.
payment of plaintiffs loan”

Note: No Consignment done by Aquino here.

Legaspi v. CA (1986) In re: Right to Repurchase; Consignation not needed in Right to
Repurchase
BASIC FACTS:
[1965] Legaspi sold two parcels of land in Cavite to his son-in-law Issue:
Salcedo for the price of P25,000.00 with the right to repurchase 1. W/N Legaspi validly exercised his right to repurchase the
the same within 5 years. properties within the five-year period – YES.

Before the end of the period, Legaspi offered P25,000.00 again to Ruling/Doctrine:
repurchase the lots. 1. YES, Legaspi properly exercised his right to repurchase.
 The tender of payment was refused by Salcedo saying a. R: Consignation is not required to preserve the right of
that he should be paid a higher amount because of the repurchase. A mere valid tender of payment is
devaluation of the currency. enough, if made on time, as a basis for an action to
compel the vendee to resell the property.
[1970] Legaspi consigned to the Court the sum of money on the b. A: The facts show that the right of repurchase was
last day of the period (October 15). Still, Salcedo refuses. seasonably exercised.
i. (1) Legaspi was able to make a valid tender of
payment during the redemption period by
offering personally the amount of P25,000.00
to the Legaspi who refused to accept it claiming
that the money was devalued.
ii. (2) Legaspi informed Salcedo that he will be
depositing the sum to the court

Hulganza v. CA In re: Right to Redeem; Tender of Payment not required if Right to

Redeem is exercised via Filing of Judicial Action (as prescribed by
BASIC FACTS: law) within the Period of Redemption
[April 21, 1971] Spouses Hulganza sold a parcel of land in Negros
Occidental to Gemarino for P10,000.00. The property has been Issues:
with Gemarino ever since. 1. W/N it is necessary that the formal offer to redeem the
 land in question be accompanied by a bona fide tender of
[April 13, 1972] Four days before the lapse of the redemption the redemption price, or the repurchase price be
period, Spouses Hulganza filed with the court a complaint for the consigned in Court, within the period of redemption even
repurchase of the lot under S119 of Public Land Act 141 (5 year if the right is exercised through the filing of a judicial
period). action – NO.
o Spouses Hulganza did not consign before filing this
complaint. Ruling:
o Gemarino defended saying that: 1. NO, formal offer to redeem WITH TENDER OF PAYMENT
1. The redemption period already lapsed (col. Consignment) is unnecessary.
2. Should the Court hold that the right of redemption a. R: Where the right to redeem is exercised through the
still exists, she should be paid the cost of filing of judicial action within the period of
improvements introduced on the land, estimated redemption prescribed by the law, the formal offer to
to be valued at P25,000.00. redeem, accompanied by a bona fide tender of the
The lower court held that: redemption price, might be proper, is only essential
o the act of merely filing the complaint on the part of the to preserve the right of redemption for future
plaintiffs-appellees without consignation of the proper enforcement for such period beyond redemption..
amount due within the period prescribed was an The filing of the action itself, within the period of
ineffective and incomplete redemption and to say redemption, is equivalent to a formal offer to redeem.
otherwise would in effect extend the period of redemption i. S: Holding otherwise, would be unfair on the
beyond that provided by law poor homesteaders who cannot be expected to
know the subtleties of the law, and would
Note: No tender of payment nor consignation. Also statute of defeat the evident purpose of the Public Land
limitation is 10 years. Law
__________________
Class Notes: You give value to the action to redeem, because
when you go to the court to file an action, you submit yourself to
the jurisdiction of the Court. Whatever the decision turns out to
be, the decision of the court will be binding to the parties. It
assumes that the parties will comply with whatever the decision
of the court would be.

Heirs of Bacus v. CA In re: Option to Buy; Reciprocal Obligations; Debt must be due,
before Consignment is required; Consignment not yet needed in
BASIC FACTS: an Option to Buy where the other party is not ready to deliver his
Bacus leased to Duray a parcel of a 3000 sqm. agricultural land in reciprocal obligation.
Cebu. The lease stipulated that:
 o The lease would last for six years Issue:
o The lessee had the right to purchase 2000 sqm. of the land 1. W/N there was a valid exercise of the option to buy the
within 5 years for P200 per sqm, adjusted to peso rate subject property – YES
against US Dollar.
Bacus died. Ruling:
1. YES
Before the expiration of the period, Duray informed Heirs of Bacus a. R: Given a reciprocal obligation, in an option to buy,
that they were willing and ready to purchase the property. the payment of the purchase price by the creditor is
o Heirs of Bacus first asked Duray to pay the purchase price contingent upon the execution and delivery of a deed
in full of P700,000.00 before they execute a deed of sale of sale by the debtor.
 But Duray did not deposit the money i. SR1: When the lessee opts to buy the
 Instead, Duray presented a <Bank Certification> property, his obligation is only to advise the
from the manager of Standard Chartered Bank – lessors of his decision and his readiness to pay
Cebu, showing that arrangements were already the price. Only upon the lessor's (now seller)
being made to borrow funds for the full actual execution and delivery of the deed of
purchase sale is the lessee (now buyer) required to pay.
 THUS, Heirs of Bacus refused, saying that it ii. SR2: Consequently, since the obligation was not
was not legal tender. yet due (given that it’s a reciprocal obligation),
consignation in court of the purchase price was
THUS, Duray filed a complaint with the court for <Specific not yet required, nor would the prospective
Performance> against Heirs of Bacus asking that he be allowed to buyer be in delay.
purchase the lot specifically referred to in the lease contract with b. A: Duray already communicated his willingness to
option to buy. exercise the option to buy, and he even evidenced his
o Later on, Duray presented to the Court a cashier’s check for readiness to buy by showing the bank certificate. But
P650,000.00 ready upon demand Heirs of Bacus did not want to execute a deed of sale
before they receive payment. Thus, Duray had a valid
The lower courts rendered a decision: exercise of the option, and Heirs of Bacus cannot
1. That Duray validly and effectively exercised the option to require consignment first.
buy the subject property. The readiness and preparedness
of Duray is manifested by his cautionary letters and the Class Notes: An option is a complete outstanding offer. (D1) Offer
prepared bank certification. i.e. Stipulation of the option in the contract, (D2) Notice to accept
the offer i.e. Notice to exercise the option, (D3) Execute Deed of
Sale

Also Note: An option is different from right to first refusal,

because the latter would NOT stipulate the price – just the
 property involved.
Dalton v. FGR Realty and Development Corp. In re: Prior and Subsequent Notice is Mandatory; Withdrawal by
Creditor with Reservations does NOT waive his claims
BASIC FACTS:
1. Dayrit leased her property in Cebu to Dalton and Sasam, et Issue:
al. to build up their houses. 1. W/N there was substantial compliance with the
2. Dayrit sold her property to FGR Realty and Development consignation even if there were no prior or subsequent
Corp. notice to the interested parties, given that the amounts
3. Dayrit and FGR stopped accepting rental payments because were withdrawn by the creditors anyway – NO
they wanted to terminate the lease agreements with
Dalton and Sasam et al. Ruling:
4. In a complaint, Dalton and FGR consigned their rental 1. NO, full and strict compliance with Art. 1256 to 1261 of the
payments with the court. Civil Code is required.
a. But they failed to notify Dayrit and FGR a. R: Art. 1256 to 1261 of the Civil Code are mandatory.
i. Still, Dayrit and FGR withdrew the rental Art. 1257 and 1258 specifically provides the necessity
payments, but reserved the right to question of prior and subsequent notice to the interested
the validity of the consignation. parties.
5. Except for Dalton, all the parties entered into a i. SR: When the creditor's acceptance of the
compromise agreement to abandon all claims they had money consigned is conditional and with
against each other. reservations, he is not deemed to have waived
6. The lower courts rendered the decision that: the claims he reserved against his debtor
a. There was no valid consignation by Dalton because she (i) SR2: BUT STILL, consignation is
failed to: completed at the time:
i. (1) Give prior notice to interested parties; and (1) If the creditor accepts the same
ii. (2) Give subsequent notice to interested parties without objections, or
7. Dalton retaliates saying that the lack of notice has already (2) if the creditor objects, at the time
been rendered moot because of the withdrawal by the the court declares that it has been
respondents of the amounts consigned validly made in accordance with
law.
b. A: No valid consignation was made by Dalton for she
did not give notice to Dayrit and FGR of her intention
to so consign her rental payments. Without any
announcement of the intention to resort to
consignation first having been made to persons
interested in the fulfillment of the obligation, the
consignation as a means of payment is void.
 i. S: Also, in withdrawing the amounts consigned,
Dayrit and FGR expressly reserved the right to
question the validity of the consignation.

Class Notes: If there are monthly rentals, do you need to make a

valid consignation for each one? Yes. The rule is mandatory
because of the burden imposed (A1259) upon the creditor in case
of a valid consignation.

The creditor is liable for the expense of the valid consignation

because he was given every chance to take the payment from
several points in the proceedings.

Also Note: The creditor takes the payment on the 2 nd notice, the
burden will be by agreement.

Also Note: The consignment retroacts to the ACTUAL

Consignment in Court; NOT upon filing of the action.

Also Note: You can’t stipulate that consignment can be waived. It

is mandatory.

A1262 Naga Telephone Co. v. CA In re: A1267, not creating a New Contract but merely Avoiding
– Unjust Enrichment; Doctrine of Unforeseen Events; A1144
A1269 BASIC FACTS: Prescription and Rise of Cause of Action; Potestative Condition;
1. Naga Telephone Co. – Unjust Enrichment
a telephone company rendering local as well as long
distance service in Naga City. Issues:
2. Camarines Sur II Electric Cooperative, Inc. – 1. W/N Article 1267 should apply – YES
a private corporation established for the purpose of 2. W/N the period to file a complaint has passed – NO
operating an electric power service in Naga City. 3. W/N the period of the contract is potestative – NO

NATELCO entered into a contract with CASURECO for the use of Ruling:
the latter’s electric light posts (back then only) in Naga City for the 1. Article 1267 should apply
former’s telephone service (think phone booths). a. [1] The term “service” in A1267 means the
o In exchange, NATELCO agreed to install, free of charge, ten performance of the obligation, not simply a personal
 (10) telephone connections for the use by CASURECO in prestation or rendition of service.
several areas. b. [2] A bare reading of the article shows that it is not a
o The contract also provided that: requirement that the contract be for future services.
(1) the term or period of this contract shall be as long c. [3] A1267 does not concern the modification of the
as the NATELCO has need for the electric light posts terms of the contract, but rather the extinguishment of
(2) contract shall terminate when for any reason the obligation
whatsoever, CASURECO is forced to stop, d. R: Article 1267 states in our law the doctrine of
abandoned its operation as a public service and it unforeseen events.
becomes necessary to remove the electric light post i. This is said to be based on the discredited
theory of rebus sic stantibus in public
After 11 years of enforcement, CASURECO filed a complaint international law; under this theory, the parties
against NATELCO for <Reformation of Contract, and Damages>, on stipulate in the light of certain prevailing
the ground that justice and equity demand that the contract be conditions, and once these conditions cease to
reformed to abolish the inequities by the fact that: exist the contract also ceases to exist.
(1) The contract is too one-sided to the benefit of NATELCO Considering practical needs and the demands of
(2) National Electrification Administration directs that the equity and good faith, the disappearance of the
reasonable compensation for the use of the post is P10 per basis of a contract gives rise to a right to relief
post per month in favor of the party prejudiced.
(3) The telephone cables have become heavier with the e. A: we agree with respondent court that the allegations
increase in the volume of their subscribers, in private respondent's complaint and the evidence it
a. worsened by the fact that their linemen bore holes has presented sufficiently made out a cause of action
through the posts, at which points those posts were under Article 1267. We, therefore, release the parties
broken during typhoons from their correlative obligations under the contract.
(4) A post now costs as much as P2,630.00 i. BUT, the disposition of the controversy does
(5) [2nd Cause of Action] NATELCO unduly extended its use to not end there.
319 posts outside of Naga City a. GIVEN THAT: There are possible adverse
(6) [3rd Cause of Action] The poor servicing by NATELCO of the consequences of merely releasing the
ten (10) telephone units which had caused it great parties from the contract:
inconvenience and damages to the tune of not less than (1) Removal of the telephone wires/cables
P100,000.00 in the posts of private respondent,
resulting in disruption of their essential
Several fucking witnesses testified to support the claims of service to the public; and
CASURECO that NATELCO is providing shitty service and that the (2) Return all the telephone units to
intent of the parties in drafting the contract was that the NATELCO, causing prejudice to its
operations of CASURECO would only be in Naga City – especially business.
given that the Board of Directors of CASURECO were b. THEN: We FURTHER require, as ordered by
inexperienced with the business – and that there were huge the trial court:
escalation of costs in the operations of CASURECO in maintaining (1) NATELCO to pay CASURECO for the use
the posts (which would now outweigh the benefits of the already of its posts in Naga City and in the
faulty phone services of NATELCO). towns where petitioners use
CASURECO’s posts;
The lower court held that the contract cannot be reconstituted, (i) and the sum of ten (P10.00)
but it is held to be void because: pesos per post, per month,
1. Article 1267 of the Civil Code applies beginning January, 1989 (filing of
2. That the contract is potestative the complaint); and
(2) CASURECO to pay NATELCO the
Still, NATELCO defended that: Article 1267 of the New Civil Code is monthly dues of all its telephones at
not applicable primarily because the contract does not involve the the same rate being paid by the public
rendition of service or a personal prestation and it is not for future beginning January, 1989 (filing of the
service with future unusual change. complaint)

In affirming said ruling, we are not making a

new contract for the parties herein, but we
find it necessary to do so in order not to disrupt
the basic and essential services being rendered
by both parties herein to the public and to
avoid unjust enrichment by appellant at the
expense of plaintiff

2. NO, the action has not yet prescribed.

a. R: Article 1144 of the New Civil Code provides, inter
alia, that an action upon a written contract must be
brought within ten (10) years from the time the right of
the action accrues.
i. SR: Clearly, the ten (10) year period is to be
reckoned from the time the right of action
accrues which is not necessarily the date of
execution of the contract.
b. A: As correctly ruled by respondent court, private
respondent's right of action arose "sometime during
the latter part of 1982 or in 1983 when according to
Atty. Luis General, he was asked by Board of Directors
 to study said contract as it already appeared
disadvantageous.

3. NO, the period is not potestative.

a. The contract is subject to mixed conditions, that is,
they depend partly on the will of the debtor (1 st part of
the provision) and partly on chance, hazard or the will
of a third person (2 nd part of the provision), which do
not invalidate the aforementioned provision.

Class Notes: You file for a Reformation of Contract to better

express the intent of the parties in the current contract. For a
Reformation of a Contract, you need to allege that (1) you entered
into a valid contract, but (2) the written instrument did not reflect
the true agreement of the parties, and (3) it was due to mistake,
fraud, inexcusable conduct.

Requisites of Doctrine of Unforeseen Events:

(1) The event could not have been foreseen at the execution
of the contract
(2) Performance is Extremely Difficult, but not Impossible
(otherwise it is a “fortuitous event” or A1266)
(3) Event is not the fault or aggravated by any party
(4) Contract is for a future prestation
The effect of the doctrine is: The Release of the Obligations

The problem with this doctrine is that it runs counter with the
concept that the parties have consented and properly took
account of possible future events during their negotiations.

JSP says A1267 shouldn’t be applied at all because it interferes

with the parties too much. A1267 has a better chance of being
upheld in case of Financial Crisis because it is transaction-specific
special in that case, NOT creating a precedent.

Philippine National Construction Corp. v. CA In re: A1266 and A1267; Ninoy Assassination, EDA Revolution;
 Snap Elections.
BASIC FACTS:
[Nov 1985] The Raymundo-Abarra Group executed a leases Issues:
contract with PNCC to have the latter lease a 30K sqm parcel of 1. W/N the <Temporary Use Permit> is equivalent to an
land, with the following conditions: Industrial Clearance. – YES
1. Good for 5 years starting on the date of issuance of the 2. W/N Art. 1266 is applicable – NO
industrial clearance by the Ministry of Human Settlements 3. W/N Art. 1267 is applicable – NO
2. P20K monthly rental fee with 5% interest p.a.
3. First annual rent shall be advanced for the amount of Ruling:
P240,000 1. YES, PNCC is estopped from arguing that the TUP is not an
4. The lease is only for the Rock Crushing Project industrial clearance, because it submitted several letters
5. The lease will be sooner terminated by mutual agreement during the pendency of the case terming such as an
of the parties industrial clearance which only obliged them to pay for the
periods between Jan 1986 to Feb 1896.
[Jan 1986] PNCC obtained from the Ministry of Human
Settlements a <Temporary Use Permit> valid for two years for its 2. NO, Art. 1266 is applicable only to obligations “to do”,
proposed Rock Crushing Project. and not obligations “to give”.
a. A: Payment of rentals is an obligation to give, thus
[Jan 1986] Raymundo demanded the P240K from PNCC and told A1266 doesn’t apply
them that they stopped entertaining other lease offers from third i. ASAR: the unforeseen event and causes
parties because of their existing contract, to which PNCC: mentioned by petitioner are not the legal or
1. objected saying that the period has not yet commenced; physical impossibilities contemplated in the
and said article. Besides, petitioner failed to state
2. expressed its intention to terminate the contract because it specifically the circumstances that brought
would no longer pursue its Rock Crushing Project due to prevailing uncertainties in government policies
“financial and technical difficulties” and the abrupt change on infrastructure projects.
in the political climate because of the EDSA revolution that
brought prevailing uncertainties in government policies on 3. NO, Article 1267 is not applicable.
infrastructure projects. a. R: The parties stipulate in the light of certain prevailing
conditions, and once these conditions cease to exist,
Raymundo refused to accede to PNCC’s request and insisted on the contract also ceases to exist
the payment of the P250K. PNCC rebutted saying that they only b. A: PNCC wants this Court to believe that the abrupt
owe P20K. Thus, Raymundo filed a complaint for <Specific change in the political climate of the country after the
Performance and Damages> against PNCC. EDSA Revolution and its poor financial condition
"rendered the performance of the lease contract
The lower courts rendered a decision in favor of Raymundo. impractical and inimical to the corporate survival of the
 petitioner.”
i. BUT: despite the Ninoy Assassination in 1983
and the Snap Elections in Nov 1985, PNCC still
decided to enter into a contract with Raymundo
ii. MOREOVER: mere pecuniary inability to fulfill
an engagement does not discharge the
contractual obligation.

Class Notes:
A1267 is a very weak ground. This should be your last resort.

A1278 Mondragon v. Sola In re: Application of Art 1257

–
A1290 BASIC FACTS: Issues:
[1993] Victoriano Sola’s wife had a <Franchise Distributorship 1. W/N Sola is a solidary debtor to his wife’s obligations to
Agreement> with Mondragon Personal Sales, Inc. Mondragon – YES
2. W/N Mondragon’s act of withholding Sola’s commission
[1994] Mondragon Personal Sales, Inc. entered into a <Contract of fees ,and thereafter applying them as partial payment to
Services> with Victoriano Sola: the obligation of Sola's wife with Mondragon was unlawful
1. for a period of 3 years (Oct 1994 – Oct 1997) – NO.
2. to have Sola provide a bodega cum office to Mondragon’s
products, employees, and customers in General Santos Ruling:
City. 1.) YES, a reading of the letter shows that Sola becomes a
3. Sola is entitled to a monthly commission fee solidary co-debtor of his wife's accountabilities with
Mondragon, as evidenced by:
[January 1995] Through a letter, Sola confirmed his wife’s (1) the last paragraph of his letter which states "I
indebtedness for P1.9M, and bound himself together with his wife fully understand and voluntarily agree to the
to pay the indebtedness on instalment basis. above undertaking with full knowledge of the
(i) “[W]e we undertake to pay… [the] balance [to] be consequences which may arise therefrom"; and
covered by postdated checks of not less than (2) the signature of Sola alone.
P100,000.00 per month starting February 28, 1995
and every end of the month thereafter… I fully 2.) NO, legal compensation was proper.
understand and voluntarily agree to the above a. RULE: Legal compensation requires the concurrence of
undertaking with full knowledge of the the conditions found in A1279. Compensation is a
consequences which may arise therefrom” mode of extinguishing to the concurrent amount the
obligations of persons who in their own right and as
Sola did not make any such payments. principals are reciprocally debtors and creditors of
1. Thus, Mondragon withheld the payment of Sola’s each other. Legal compensation takes place by
commission fees from February to April 1995, to cover as operation of law when all the requisites are present.
the partial payments of the Spouse Sola’s debts, stating:
a. [April 1995] Thus, Sola suspended the operation of his b. APPLICATION: We find the presence of all the
bodega cum office. requisites for legal compensation.
i. [May 1995] Then, Sola then filed with the RPC (1) Sola and Mondragon are both principal obligors
for an <Accounting and Rescission> against and creditors of each other.
Mondragon for: (2) Their debts to each other consist in a sum of
(a) withholding portions of his commission fee money.
amounting to (P222K) – leaving him to (3) Sola acknowledged and bound himself to pay
suspend his operations to minimize losses; petitioner the amount of P1,973,154.73 which was
and already due, while the service fees owing to Sola by
(b) that it was improper for Mondragon to Mondragon become due every month.
confuse Sola's transaction with that of his (4) Sola's debt is liquidated and demandable, and
wife as it was divergent in nature and terms Mondragon's payments of service fees are
liquidated and demandable every month as they
fall due.
(5) Finally, there is no retention or controversy
commenced by third persons over either of the
debts.

c. CONCLUSION: Thus, compensation is proper up to the

concurrent amount where petitioner owes respondent
P125,040.01 for service fees, while respondent owes
petitioner P1,973,154.73.
(a) ALSO: As legal compensation took place in
this case, there is no basis for respondent
to ask for rescission since he was the first to
breach their contract.

Insular Investment and Trust Corporation v. Capital One Equities In re: Application of A1278-79; Same Identity and Quality; Also,
Corp. and Planters Development Bank Interest Rates

BASIC FACTS: Issues:

[1994] Insular Investment and Trust Corporation purchased from 1. W/N IITC acted as a conduit in the transaction between
Capital One Equities Corp: COEC and PDB – NO
 For Treasury Bills worth P260M (the IITC T-Bills) 2. W/N COEC can set-off its obligation to IITC as against the
 IITC fully paid latter's obligation to it – YES
 But COEC only delivered P121M worth 3. W/N PDB has the obligation to deliver treasury bills to IITC
o Total: COEC owes IITC P139M worth of Treasury Bills – YES

[2nd May 1994] COEC purchased from IITC: Ruling:

 For Treasury Bills worth P186M (the COEC T-Bills) 1.) NO, IITC did not act as a conduit
 COECC fully paid, made payable to Planters a. MAIN RULING: There is nothing in the <Confirmations
Development Bank of Sale> or <Confirmation of Purchase> all clearly and
 But IITC did not deliver anything expressly indicate that IITC acted as a principal seller to
o Total: IITC owes COECC P186M worth of Treasury Bills COEC and as a principal buyer from PDB:
i. <Confirmation of Sale> IITC to COECC:
“As principal, we confirm having sold to ...”
[10th May 1994] COECC demanded IITC to deliver the COECC T-Bills.
ii. <Confirmation of Purchase> IITC to PDB:
a. [14th May 1994] So, in behalf of COECC, IITC demanded PDB
“As principal, we confirm having purchased
to deliver to the COECC T-Bills.
from you ...”
2.) YES, set-off is allowed.
[3rd June 1994] IITC demanded COECC to deliver the remainder of
a. R: Requisites of Legal Compensation are enumerated in
the IITC T-Bills.
Art. 1278 and Art. 1279 of the Civil Code; and the rule
a. [9th June 1995] COECC acknowledged the indebtedness, but
on effectivity of legal compensation by operation of
also demanded the remainder of the COECC T-Bills. Thus
law is stated in Art. 1290 of the same Code.
they recommended a set off of the two balances to have
b. A: The requisites are all present and thus legal
IITC owe COECC the amount of P47M worth of T-Bills.
compensation take effect by operation of law:
i. A1278 and A1279 (1) –
[1st July 1994] They entered into two special agreements:
IITC acted as a principal seller to COEC
1.) Tripartite Agreement
(a) See Ruling #1
i. PDB assigned to IITC Central Bank Bills worth
ii. A1279 (2) –
P50M
They are of the same kind and are capable of being
ii. IITC assigned to COEC the CB Bills worth P50M
subject to compensation
a. To have IITC waive its demand against PDB to deliver to
(a) The COEC T-Bills and the IITC T-Bills are
IITC – to the extent of P50M
both government securities which, while
b. To have COECC waive its demand against IITC to deliver
having differing interest rates and dates of
to it the COECC T-Bills to the extent of P50M
maturity, have each been assigned a
certain face value to determine their
2.) COECC-IITC Agreement
monetary equivalent.
i. COECC assigned to IITC CB Bills worth P20M
 a. To have IITC waive its demand against COECC to deliver (b) In their special agreements, the parties
to it the COECC T-Bills to the extent of P20M recognized the monetary value of the
treasury bills in question, and, in some
NEW TOTAL: instances, treated them as sums of money
(A) COECC owes (P139M – P20M =) P119M to IITC iii. A1279 (3 to 5) –
(B) IITC owes (P186M – P50M) P136M to COECC All of these are evident and not disputed.

FOR COMPENSATION BALANCE: 3.) YES, PDB has an obligation to deliver the treasury bills to
(P119M) – (P136M) = IITC.
a. A: COEC clarified that the manager's checks payable to
|(P17M)| by IITC in favor of COECC
PDB were issued by COEC upon the instructions of IITC
in payment for the COEC T-Bills. PDB's theory was
[1995] Yet despite repeated demands, PDB (in behalf of IITC) to negated by COEC itself as the issuer of the checks.
deliver the P136M T-Bills to COECC. Likewise, COECC would not Moreover, PDB already judicially admitted, through the
want to deliver to IITC the P119M T-Bills. Partial Stipulation, that the checks were given by COEC
o This prompted IITC to file against COECC to prompt the as payment for the COEC T-Bills
delivery of the T-Bills, with legal interest.
o COECC argued that there should be legal compensation, As per interest rates:
and thus it is only IITC that’s obligated to deliver P17M T- X. R: Eastern Shipping Lines v. CA
Bills o (1) When the obligation is breached, and it
o PDB argued that it is not obligated to the delivery of the consists in the payment of a sum of money,
said treasury bills because IITC did not remit payment to i.e., a loan or forbearance of money, the
PDB interest due should be that which may have
been stipulated in writing.
IITC said that set-off is not allowed because: o (2) When an obligation, not constituting a loan
1.) COEC did not become a creditor of IITC because COECC did or forbearance of money, is breached, an
not pay IITC for the purchased treasury bills. Rather, it was interest on the amount of damages awarded
PDB which received the proceeds of the payment from may be imposed at the discretion of the court
COEC. [i.e. IITC was merely a conduit] at the rate of 6% per annum.
2.) Their obligations do not consist of a sum or money. o (3) When the judgment of the court awarding
3.) Their obligations are not of the same kind, because: a sum of money becomes final and executory,
i. the obligations call for the delivery of specific the rate of legal interest, whether the case falls
determinate things — treasury bills, with… under paragraph 1 or paragraph 2, above, shall
(a) specific maturity dates, and be 12% per annum from such finality until its
(b) various interest rates satisfaction
XI. A: Because the obligation arose from a contract of sale
 and purchase of government securities, and not from a
loan or forbearance of money, the applicable interest
rate is 6% from June 10, 1994, when IITC received the
demand letter from COEC. After the judgment
becomes final and executory, the legal interest rate
increases to 12% until the obligation is satisfied.

Class Notes:

First United Constructors Corporation, and Blue Star Construction In re: Compensation; When Liquidated and Demandable;
Corporation v. Bayanihan Automotive Corporation Recoupment, A1599; Recoupment must arise from the same
transaction; An Unliquidated Claim Set-up as a Counterclaim by a
BASIC FACTS: Defendant can be Set Off Against the Plaintiff's Claim from the
FUCC and Blue Star were associate construction firms sharing Moment it is Liquidated by Judgment
financial and operational resources.
Issues:
[May to July 1992] FUCC and Blue Star ordered 6 dump trucks from 1. W/N Recoupment, as per A1599, would be proper – NO
Bayanihan, which were provided a warranty. 2. W/N Legal Compensation cannot be availed of because the
 One of the trucks delivered broke down, which prestations are not liquidated and demandable – LEGAL
Bayanihan refuses to fix as per their warranty. COMPENSATION IS PROPER

[Sept 1992] FUCC ordered from Bayanihan: Ruling:

A. Bayanihan made the deliveries. 1.) NO, FUCC cannot validly resort to Recoupment.
B. But, FUCC only partially paid in cash first, then made the a. R1: Recoupment (reconvencion) is the act of rebating
following post-dated checks for the remainder: or recouping a part of a claim upon which one is sued
1.) 1 unit of <Hino Prime Mover> for P360K by means of a legal or equitable right resulting from a
2.) 1 unit of <Isuzu Transit Mixer> for P375K counterclaim arising out of the same transaction.
Total Due: P735K i. It is the setting up of a demand arising from the
(a) But, these checks were stopped by FUCC because of same transaction as the plaintiff's claim, to
the dump truck that broke down last May 1992, abate or reduce that claim
a. justified due to Bayanihan’s breach b. R2: Article 1599 provides that where there is a breach
of warranty by refusing to repair or of warranty by the seller, the buyer may, at his
replace the defective dump truck election:
{as an exercise of their <Right of i. (1) Accept or keep the goods and set up against
Recoupment> under Article 1599 the seller, the breach of warranty by way of
 (1) of the Civil Code} recoupment in diminution or extinction of the
i. Thus, Bayanihan demanded for the full price;
payment of its dues (i) The “price” referred to here must
refer to the one from the same
{A} [This what the case listed down]: item or unit sold and not from:
“FUCC made a counter claim stating that Bayanihan: (a) a different transaction, or
1.) Return them the price of the defective dump truck worth (b) contract of sale
P830,000.00 c. A: Since they are from two different transactions, it
a. <minus> the amounts of their two checks worth was improper for FUCC to set up their claim for repair
P735,000.00, expenses and other spare parts of the dump truck
b. <plus> 12% per annum interest on the difference of against their remaining balance on the price of the
P90,000.00 from the date of purchase; Prime Mover and the Transit Mixer they owed to
2.) Reimburse them the sum of P247,950.00 as their expenses Bayanihan.
for the repair of the dump truck i. Col: Consequently, the breakdown of one of the
a. <plus> 12% per annum interest from the date of dump trucks did not grant to petitioners the
demand; right to stop and withhold payment of their
3.) Pay exemplary damages as determined to be just and remaining balance on the last two purchases.
reasonable but not less than P500,000
4.) Pay attorney's fees of P50,000 plus P1,000.00 per court 2.) Legal Compensation is permissible.
appearance and other litigation expenses.” a. R: Requisites of Legal Compensation are enumerated in
Art. 1278 and Art. 1279 of the Civil Code; and the rule
{B} [But this is what the case ACTUALLY discusses]: on effectivity of legal compensation by operation of
FUCC made a counter claim stating that Bayanihan: law is stated in Art. 1290 of the same Code.
1.) Reimburse the sum of P71K as their expenses for the b. R2: A debt is liquidated when its existence and amount
repair of the dump truck are determined.
c. <minus> the amounts of their two checks on the Prime i. Accordingly, an unliquidated claim set up as a
Mover and Transit Mixer worth P735,000.00 counterclaim by a defendant can be set off
against the plaintiff's claim from the moment
it is liquidated by judgment. (i.e. during the
proceedings)
c. A: With petitioners' expenses for the repair of the
dump truck being already established and determined
with certainty by the lower courts,
(i) it follows that legal compensation
could take place because all the
requirements were present
 i. Hence, the amount of P71,350.00 should be set
off against petitioners' unpaid obligation of
P735,000.00, leaving a balance of P663,650.00,
the amount petitioners still owed to respondent.

United Airlines, Inc. v. CIR In re: Exemption to Taxes cannot be subject of Legal
Compensation; Tax refunds and Tax deficiencies can Off-set Each
BASIC FACTS: Other; Also, Debt is different from Tax
1.) United Airlines stopped its Passenger Flights after its
cessation in 1998 Issues:
i. but continued its Cargo Flights until 2001. 1. W/N the Court of Appeal can make a valid finding of
2.) United Airlines filed a claim for an <Income Tax Refund> erroneous tax deductions, and on the basis thereof deny
amounting to P5M it erroneously paid in 1999 the grant of a tax refund – YES
i. for the income taxes it paid on Passenger Revenue a. In essence: W/N United Airlines is entitled to the P5M
from tickets sold in the Philippines, the uplifts of it paid erroneously as income tax on its passenger
which did NOT originate in the Philippines revenue in 1999 – NO
ii. BECAUSE:
a. R: Philippine tax authorities have jurisdiction to Ruling:
tax only the gross revenue derived from 1.) YES, under S72 of the NIRC, the Court of Appeal can make
outgoing traffic in the Philippines. a valid finding of erroneous tax deductions, and on the
b. A: United Airlines no longer operated passenger basis thereof deny the grant of a tax refund
flights originating from the Philippines beginning a. R1: S72 of the NIRC states that:
1998. “When an assessment is made in case of any list,
3.) The Court of Tax Appeals: statement or return, which in the opinion of the
i. AGREED that UA cannot be taxed on its 1999 Commissioner was false or fraudulent or contained
passenger revenue from flights originating outside any understatement or undervaluation, no tax
the Philippines; but collected under such assessment shall be recovered
ii. FOUND that UA had been underpaying its <Gross by any suit…”
Philippine Billings> from: b. R2: Taxes cannot be the subject of a legal
a. Erroneously deducting from its taxes on <Gross compensation because the government and taxpayer
Cargo Revenue> two items: are not creditors and debtors to each other.
(1) Commission worth P149M i. NOTE: There is a material distinction between a
(2) Incentives worth P1.98B tax and debt. A person cannot refuse to pay a
b. Erroneously still underpaid its taxes on <Gross tax on the ground that the government owes
Cargo Revenue> by P31M [which is “much him an amount equal to or greater than the tax
higher than the P5M it asked to be refunded”] being collected.
 TOTAL DEFECIENCY: P2.16B (1) Debts are due to the Government in its
4.) UA argued that: corporate capacity; while
i. R1: Internal Revenue Taxes cannot be the subject of (2) Taxes are due to the Government in its
a legal compensation sovereign capacity.
a. A: By denying the P5M refund from PASSENGER
REVENUE TAXES based on the higher tax ii. EXPT: Offsetting a tax refund with a tax
deficiency in the CARGO REVENUE TAXES, then deficiency is allowed.
the CTA was in effect setting off the claim for a (a) Explanation – The grant of a tax refund is
refund of its erroneously paid Tax Liability. founded on the assumption that the tax
ii. R2: S228, NIRC = “Taxpayer shall be informed in return is valid, that the facts stated therein
writing of the law and the facts on which the are true and correct.
assessment is made; otherwise, the assessment (i) A tax deficiency creates a doubt
shall be void.” against the truth and accuracy of
a. A: By using such cargo revenue tax deficiencies the facts stated in the tax return,
THAT were not subject of an investigation or which thus debases the validity of
valid assessment issued by the CTA, then CTA the tax refund.
violated UA’s right to due Process (b) Otherwise – There would be a multiplicity of
suits. After a subsequent deficiency
assessment that it has to uphold first, the
Government will still be forced to institute
anew a proceeding for the recovery of
erroneously refunded taxes.
c. A: Having underpaid the GPB tax due on its cargo
revenues for 1999, petitioner is not entitled to a refund
of its GPB tax on its passenger revenue, the amount of
the former being even much higher (P31.43 million)
than the tax refund sought (P5.2 million). The CTA
therefore correctly denied the claim for tax refund.

Lao and Manansala v. Special Plans, Inc. In re: Legal Compensation; Liquidated and Demandable

BASIC FACTS: Issues:

Lao and Manansala entered into a <Contract of Lease> with Special 1. W/N the P95K due rentals should be set off with the P545K
Plans, Inc., to have the former use SPI’s building for their karaoke- expenses on the structural repairs – NO
restaurant business from 1993 to 1995, which later on got
extended for 8 more months at P23K rentals per month. Ruling:
a. After the expiration, SPI demanded from Lao and 1.) NO, it may not be set off.
Manansala the full payment of rentals in arrears a. R1: Articles 1278 and 1279 of the Civil Code provide
amounting to P95K the requirements of legal compensation, one of which
i. BUT: Lao and Manansala refused because… is that the debts must be liquidated and demandable.
(1) SPI misrepresented itself to be the owner of the b. R2: A claim is liquidated when the amount and time of
property payment is fixed.
(2) Lao and Manansala were forced to incur i. [1] If acknowledged by the debtor, although
expenses for the repair of the structural defects not in writing, the claim must be treated as
of the dilapidated trusses, ceiling, and roof liquidated.
amounting to (as per quotation): ii. [2] When the defendant, who has an
(i) P125K for the actual structural repairs unliquidated claim, sets it up by way of
(ii) P420K for subcontractor Tamayo counterclaim, and a judgment is rendered
TOTAL EXPENSE: P545K liquidating such claim, it can be compensated
against the plaintiff's claim from the moment it
(a.) Lao and Manansala further averred that: is liquidated by judgment.
1. they were not able to view the c. R3: The duty of Lao and Manansala is two-fold:
premises before the signing of the (1) Establish the existence, amount and
contract because SPI did not have demandability of their claim; and
the keys yet (2) Show that these expenses were
2. it was stipulated in the contract incurred in the repair of structural
that the LESSOR was liable for the defects.
expenses on “repairs of structural d. A: The evidence presented by Lao and Manansala
defects” (but all other “necessary failed to establish by preponderant evidence that they
repairs” shall be borne by the have indeed spent the amounts they claim.
LESSEE) i. [1] they did not present receipts of payments
made to subcontractor Tamayo for the repairs
made on the building
ii. [2] they merely submitted their own testimony
of an estimated statement of account which did
not show that there were actual expenses
iii. [3] it is contrary to human experience that a
lessee would continually renew the lease
contract if the subject property were not in
good condition free from structural defects
iv. [4] they did not define the lessor's and the
lessees' understanding of the demarcation
 between "repairs of structural defects" and
"necessary repairs."
(a) NOTE: This particular ground would be
waived if:
(1) the lessor was informed of the said
structural repairs, and
(2) the lessor, implicitly or expressly,
consented and agreed to take
responsibility for the said expenses

Class Notes: Compare with FUCC Case. Take special note of the
two ways of determining the liquidated claims.

United Planters Sugar Milling, Co., Inc. v. In re: A1282; Conventional or Voluntary Compensation;
CA, Philippine National Bank, and Asset Privatization Trust
Issues:
BASIC FACTS: 1. W/N the Deed of Assignment retroacts to Aug 1987 – NO
[1974] With Restructure Agreement, UPSUMCO obtained <Takeoff 2. W/N the Deed of Assignment condoned both the
Loans> from PNB to finance the construction of a sugar milling Operational Loan and the Takeoff Loan – TAKEOFF ONLY
plant; and 3. W/N APT could effect the set-offs – YES
1. was secured by a mortgage over:
a. two parcels of land where the milling plant stood Ruling:
b. the machineries and equipment 1.) NO, the Deed of Assignment does not retroact.
ST
2. [1 Set-off Clause]  UPSUMCO agreed to "open and/or a. R: The <Parol Evidence Rule> states that generally,
maintain a deposit account with the [PNB], and the bank is when the terms of an agreement have been reduced
authorized at its option to apply to the payment of any into writing, it is considered as containing all the terms
unpaid obligations of the client [with] any/and all monies, agreed upon and there can be no evidence of such
securities which may be in its hands on deposit” (Lead’s terms other than the contents of the written
note: “Deposit” here indicates that PNB was the debtor of agreement.
UPSUMCO in terms of a deposit account; Thus, the b. A: As there is nothing in the text of Deed of
requirement that there should be two transactions is Assignment that clearly gives retroactive effect to the
fulfilled for compensation) condonation, the parol evidence rule generally bars
any other evidence of such terms other than the
[1984] UPSUMCO obtained <Operational Loans> from PNB to contents of the written agreement
finance the operations of the company; and
 1. [2ND Set-off Clause]  UPSUMCO assigned to PNB all its 2.) NO, the Deed of Assignment condoned only the take-off
sugar produce for PNB to sell and apply the proceeds to loans, and not the operational loans. As can be seen by a
satisfy the indebtedness arising from the operational loans plain reading of the contract itself. (See: Basic Facts, Sep
1987)
[Feb 1987] There were a series of credit transfers over UPSUMCO a. Col.: By virtue of the terms of the Operational Loans
through a <Deed of Transfer> and <Pres. Proc. No. 50>. agreement (See: Basic Facts, 1984, 2 ND Set-off Clause),
o FIRST, PNB transferred to the Government its "rights, titles for as long as there remained outstanding obligations
and interests" over UPSUMCO due to APT, then APT would be entitled to apply
o THEN, the Government transferred to APT its "rights, titles payments from the bank accounts of PNB, whether on
and interests" over UPSUMCO account of the take-off loans or the operational loan.
(i) AND Since UPSUMCO was released from its
A series of Special Agreements then followed: take-off loans only on 3 September 1987, as
indicated in the Deed of Assignment, then
[Aug 1987] UPSUMCO and APT agreed to an "uncontested or APT's application of payments before such
'friendly foreclosure' of the mortgaged assets, in exchange for date is perfectly legal.
UPSUMCO's waiver of its right of redemption. As such, the b. The facts show that, after the August 1987 foreclosure,
properties were foreclosed with P450M in favor of APT. there were at least two causes for the application of
payments from UPSUMCO's PNB accounts:
[In Between Aug to Sep 1987 dates]: APT withdrawals from (1) FIRST was for the repayment of the operational
UPSUMCO’s savings accounts with PNB for set-offs (See: Ruling, loans, which were never condoned.
2.b) (2) SECOND was for the repayment of the take-off
loans which APT could obtain until 3 September
[Sep 1987] UPSUMCO and APT agreed to have UPSUMCO execute 1987, the day the condonation took effect.
a <Deed of Assignment> to transfer its right of redemption to APT,
in exchange for APT "condoning any deficiency amount it may be 3.) YES, APT had a right to go after the bank deposits of
entitled to recover from the Corporation under the Credit UPSUMCO, in its capacity as the creditor of the latter.
Agreement dated 1974 and the Restructuring Agreement[s]” a. Although RTC claimed that by virtue of PNB's Deed of
Assignment, there took place conventional
[March 1989] Like a douchebag, UPSUMCO filed a complaint for subrogation under Novation in Art. 1291 of the Civil
<Sum of Money and Damages> against APT for Code, whereby APT as the subrogee was vested with
o In essence, making withdrawals from UPSUMCO’s all the rights of the PNB covered by the deed thereto.
savings accounts with PNB for set-offs after the Aug [Lead’s Note: Therefore, the Set-Off Clause (for both
1987 Foreclosure – arguing that the Deed of loans) would’ve been removed]
Assignment retroacted to that date i. THE COURT CLARIFIES THAT: No conventional
APT made a counterclaim seeking the recovery of UPSUMCO’s subrogation could have taken place herein
total debt worth P1.6B, less the P450M from the foreclosure – since such requires "the consent of the original
arguing that APT did not condone any debts by UPSUMCO. parties and of the third person"
(a) A: there is no evidence that the consent of
AT FIRST, the Supreme Court rendered a decision holding that: debtor UPSUMCO was secured when PNB
1. The Deed of Assignment retroacted to the date of assigned its rights to APT
foreclosure in Aug 1987 (b) MOREOVER: the assignment by PNB to APT
2. Both Operational Loans" and Take-off Loans had been arose by mandate of law and not the
condoned by the Deed of Assignment volition of the parties
ii. INSTEAD: There was a perfected assignment of
Now the case is under <Motion for Reconsideration> credit as between PNB and APT, under Article
1624 of the Civil Code.
(a) The assignment of a credit includes all the
accessory rights, such as a guaranty,
mortgage, pledge or preference.
(b) A: By virtue of the assignment of credit, APT
was entitled to pursue the rights and
remedies granted to the previous creditor,
PNB.

b. R: Under Article 1279 (1) of the Civil Code, it is

necessary for compensation that the obligors "be
bound principally, and that he be at the same time a
principal creditor of the other."
i. EXPT: Article 1282 [Conventional
Compensation] provides for compensation
when the parties agree to compensate their
mutual obligations even if some requisite is
lacking.
(a) The requisites are:
(i) [1] that each of the parties can
dispose of the credit he seeks to
compensate, and
(ii) [2] that they agree to the mutual
extinguishment of their credits.
(b) NOTE: Conventional Compensation takes
place upon the parties’ agreement
c. A: There is no mutual creditor-debtor relationship
 between APT and UPSUMCO (there’s only one
transaction). Because it is with PNB that UPSUMCO
set-up its bank accounts for the establishment of a
mutual creditor-debtor relationship. As soon as PNB
assigned its credit to APT, the mutual creditor-debtor
relation between PNB and UPSUMCO ceased to exist.
o [As per PNB’s Capacity to Set-off]
However, PNB and UPSUMCO had agreed to a
conventional compensation, a relationship
which does not require the presence of all the
requisites under Article 1279. There was a
mutual agreement between PNB and
UPSUMCO to set-off payments under their
Set-Off Clauses. Thus, even without an express
agreement stipulating compensation, PNB and
UPSUMCO would have been entitled to set-off
of payments.
o [As per APT’s Capacity to Set-Off]
PNB had assigned all its rights as creditor to
APT, including its rights under conventional
compensation.

Lead’s Note: Conventional Subrogation [is for Novation] is

different from Conventional Compensation [is for
Compensation]!!!

Corazon Perez v. CA and Mever Films, Inc. In re: Money Markets fall under A1285 par 1 (reservation), NOT
par 3 (assignment without knowledge)
BASIC FACTS:
1. [May 1974] CONGENERIC Development & Finance Corp. Issues:
issued two promissory notes payable to bearer: 1. W/N Legal Compensation is proper – NO
a. Bill 1298 with Ramon Mojica for P112K, maturity at 6 th
Aug 1974 Ruling:
th
b. Bill 1419 with Ramon Mojica for P208K, maturity at 13
 Aug 1974 1.) Basically, there were roll-overs of Bill No. 1298 and Bill No.
1419 that Mevers failed to read (dumbass).
2. [June 1974] Mever Films issued a negotiable promissory a. Thus, they were not yet due and demandable when
note: MEVER surrendered said Bills to CONGENERIC. As a
a. NCI-0352 with CONGENERIC for P500K consequence, no legal compensation could have taken
i. Maturity on 5th Aug 1974 place, because the two debts, among other requisites,
ii. No provision on interest must be due and demandable.
iii. Had provision that if not paid on due date, then
subject to 14% interest per annum Lead’s Note:

3. [July 1974] CONGENERIC, in exchange for P200K on a sale, 2.) PREMISE: Money Market is a market dealing in
transferred to Corazon Perez: standardized short-term credit instruments (involving large
a. P200K of the P500K of NCI-0352 by 5th Aug 1974 amounts) where lenders and borrowers do not deal
b. All of CONGENERIC’s interest in NCI-0352 directly with each other but through a middle man or
c. Right to sue Mever Films for payment of the full P500K dealer in the open market
Despite NCI-0352 not having any stipulated interest, a. The fundamental function is to quickly match and
CONGENERIC still paid Corazon at a rate of 19% interest bring together in a most impersonal manner both the
p.a. (P3K) "fund users" and the "fund suppliers."
b. The impersonal character of the money market device
4. [5th Aug 1974] The following transactions occurred: overlooks the individuals or entities concerned. The
a. Mever Films paid P100K to CONGENERIC issuer of a commercial paper in the money market
b. CONGENERIC paid P100K + P3K to Corazon necessarily knows in advance that it would be
expeditiously transacted and transferred to any
5. th
[6 Aug 1974] CONGENERIC paid Mojica the interest due investor/lender without need of notice to said issuer.
th
on Bill 1419, rolled over to mature at 4 Oct 1974 3.) THUS: It is not Art. 1285 (3) that applies, but rather Art.
1285 (1) that is applicable
6. [Sep 1974] Mojica assigned to Mever Films: i. “The debtor who has consented to the assignment
th
a. Bill 1298, maturity now at 11 Oct 1974 {case didn’t say of rights made by a creditor in favor of a third
when this shit roll-over happened} person, cannot set up against the assignee the
th
b. Bill 1419, maturity now at 4 Oct 1974 compensation which would pertain to him against
the assignor, unless the assignor was notified by
7. [3rd Oct 1974] Mever Films surrendered the two promissory the debtor at the time he gave his consent, that
notes to CONGENERIC, asking the latter to set-off the dues he reserved his right to the compensation”
Lead’s Note: Basically, the essential practice of Money Markets
8. [7th Oct 1974] Two events transpired: providing for quick and impersonal assignments of credit, is both
a. Mever Films was served with garnishment, over two tantamount to a:
 collection cases filed against CONGENERIC by two of its (1) Consent to the assignment of rights by a creditor to a third
creditors totaling: P185K person; and
b. CONGENERIC advised, via telephone, Mever Films that (2) Reservation to a right to the compensation for the
P200K out of the P500K debt of Mever Films was sold to assignee
a “third party” (not naming Corazon as such), confirmed
in writing at 8th Oct 1974.

9. [8th Oct 1974] CONGENERIC advised that it could not take

account of the assignment to Mever Films of the two
promissory notes

10. [11th Nov 1974] Court issued an order enjoining

CONGENERIC from making any payment to creditors.

11. [Nov 1974] Mever Films turned over to the Provincial

Sheriff the amount of P80K, which it computed to be the
remaining debt and which was subject of garnishment (See:
Basic Facts, 7th Oct 1974, a.)

12. [July 1975] Corazon filed a suit against Mever Films for the
recovery of the P100K remaining to be due, plus interest
and damages.

Mever Films argue in its defense that there was a Legal

Compensation under Art. 1279:
th
P500K (Original Debt, due 5 Aug)
Less P100K (Paid 5th Aug)
Less P112K (Bill 1298, alleged maturity at 6th Aug )
Less P208K (Bill 1419, alleged maturity at 13th Aug)
Total Less: P420K = (P100K + (P320K))
NET TOTAL: ~P80K as of Sep 1994 {In the case it’s P79.36K}

Surrender of the Promissory Notes: 3rd October

Order of Garnishment: 7th Oct [Alleged Involuntary Novation]
Telephone Notice: 7th Oct
Written Notice: 8th Oct
 Delivery to Sheriff: Nov [Alleged Extinguishment of Debt]

Lead’s Note: The date of notice of the assignment of credit (albeit

onerous) is important because the assignment is only effective
upon receipt by the debtor of the notice [NOT upon when it was
made by the creditor]. See: A1285.

A1291 William Kwong v. Atty. Gargantos, Sps. Santos, and Sps. Arceo In re: Application of A1292; Implied Novation; Conditional Sales v.
– Absolute Sale
A1304 BASIC FACTS:
[1ST VERSION] Kwong executed a <Deed of Conditional Sale> to sell Issues:
his 15 lots in Pampanga to Gargantos, Sps. Santos, and Sps. Arceo 1. W/N the Deed of Conditional Sale was novated by the
for $137K (P2.8M). The contract stipulated an installment plan: subsequent execution of the Deed of Absolute Sale – YES
1. $10K at the execution of the contract
2. $127K at Dec 1989 Ruling:
1.) YES, the Deed of Conditional Sale was novated.
On the date of execution, Gargantos et al paid the $10K, and then a. R: Under Article 1292 of the Civil Code, in order that
$20K. But failed to pay the $107K (worth P2.5M) an obligation may be extinguished by another which
substitutes the same, it is imperative that it be so
[2ND VERSION] So, it was agreed by the parties that it would be declared in unequivocal terms, or that the old and the
instead paid on a Staggered Basis starting Mar 1989: new obligations be on every point incompatible with
each other.
Gargantos still failed to pay. i. SR1: For Implied Novation, the test of
o THUS, Kwong sent demand letters against the debtors incompatibility between two obligations or
for them to pay their dues, else, the contract would be contracts is whether or not they can stand
rescinded. together, each one having an independent
existence. If they cannot, they are
RD
[3 VERSION] Several payments by Gargantos then ensued: incompatible, and the later obligation novates
(1) [May 1990] Payment for P1.77M the first (utter incompatibility is required)
(2) [May 1990] Kwong executed a <Deed of Absolute Sale> to ii. SR2: A <Deed of Conditional Sale> and a <Deed
Gargantos for (11/15) of the lots, in exchange for P500k. of Absolute Sale> cannot co-exist as these are
(3) [May 1990] Gargantos signed a Promissory Note for P373K, of different nature and provide for separate
on or before June 1990, for the remaining (4/15) lots and distinct obligations
(i) A Contract of Absolute Sale is…
Gargantos still failed to pay. (a) when there is no stipulation in the
o THUS, Kwong sent demand letters again. contract that title to the property
 Gargantos replied saying that Kwong did not remains with the seller until full
deliver the 11 lots before their own payment payment of the purchase price
(b) when there is no stipulation giving
Kwong filed for <Rescission of the Deed of Conditional Sale> and the vendor the right to cancel
the forfeiture of all the payments made by Gargantos et al. unilaterally the contract the
o Gargantos defended that there was no substantial moment the vendee fails to pay
breach to justify the rescission since the Deed of within a fixed period
Conditional Sale was novated by their subsequent (ii) A Contract of Conditional Sale is…
contract. (a) ownership remains with the
vendor and does not pass to the
vendee until full payment of the
purchase price
(b) full payment of the purchase price
partakes of a suspensive condition,
and non-fulfillment of the
condition prevents the obligation
to sell from arising
b. A1: The fact that the Deed of Absolute Sale of the 11
lots was executed even without respondents having
fully paid the purchase price for the entire 15 parcels
of land covered by the Deed of Conditional Sale
enforces the conclusion that the parties intended to
enter into a new agreement and discard the old one
i. OTHERWISE: Kwong could have enforced his
right to rescind the contract by filing a
complaint instead of dealing anew with
respondents and entering into the succeeding
agreements
ii. ALSO: Garagntos et al had already paid a
substantial amount for the subject lots. They
already paid $30K and P1.7M before the Deed
of Absolute Sale and Promissory Notes were
executed. Obviously, the Deed of Absolute
Sale was intended by the parties to close the
 transaction involving the 11 lots. What
remained for enforcement is the Promissory
Note, which covers the four remaining lots.
c. YET: apparently, the two subsequent agreements do
not show the true value of the subject lots. They only
totaled P873K (DoAS: P500K; PM: P373K)out of the
original total price of P2.8M.
i. R: if the terms of a contract are clear and leave
no doubt upon the intention of the contracting
parties, the literal meaning of its stipulations
shall control; moreover, the agreement of the
parties may be embodied in only one contract
or in two or more separate writings. In such
event, the writings of the parties should be read
and interpreted together.
ii. A: Basically, the P1.7M covered for the
deficiency in the remaining balance after the
P837K payments by the two subsequent
agreements.

Anamer Salazar v. J.Y. Brothers Marketing Corporation In re: Implied Novation; Change in Mode of Payment Does Not
Novate; Crossed Check is merely a change in mode of payment
BASIC FACTS:
As a freelance sales agent, Salazar accompanied two individuals to Issues:
J.Y. Bros for the purchase of 300 caravans of rice worth P214K. 1. W/N the issuance of the second crossed check caused the
a. Salazar endorsed to JY Bros a <Prudential Bank Check> novation of the original obligation – NO.
issued by Tamario worth P214K, with the assurance that it
is as good as cash. Ruling:
i. But the check bounced. 1.) NO, novation was not effected.
(a) So Salazar endorsed a replacement crossed a. R1: Section 119 of the Negotiable Instrument Law,
<Solid Bank Check> issued by Tamario worth provides…
P214K. i. A negotiable instrument is discharged… (c) by
(i) But the check bounced too. any other act which will discharge a simple
contract for the payment of money”
Salazar still failed to settle the balance despite the demand made
by JY Bros. b. R2: Under Article 1231 of the Civil Code, obligations are
 a. THUS, JY Bros charged Salazar for the crime of estafa. extinguished by novation. There are only two ways
i. The Court acquitted Salazar but upheld his which indicate the presence of novation:
indebtedness. i. First, novation must be explicitly stated and
(a) Salazar challenged the civil indebtedness stating declared inunequivocal terms as novation is
that he was not the payor, but rather Temario. never presumed.
ii. Secondly, the old and the new obligations
The RTC held that: must be incompatible on every point.
c. R3: The obligation to pay a sum of money is not
SINCE the Solid Bank check was a crossed check, novated by an instrument that expressly recognizes the
o which meant that such check was only for deposit in old, changes only the terms of payment, adds other
payee's account, obligations not incompatible with the old ones or the
 a condition that rendered such check non-negotiable, new contract merely supplements the old one
THEN substitution of a non- negotiable Solid Bank check for a
negotiable Prudential Bank check was an essential change which iii. A: [IS THE NOVATION EXPRESS?] JY Bros
had the effect of discharging from the obligation whoever may be acceptance of the Solid Bank check, which
the endorser of the negotiable check (i.e. Novation). replaced the dishonored Prudential Bank check,
did not result to novation as there was no
The CA held that: express agreement to establish that petitioner
was already discharged from his liability to pay
As per sections 63, 66, and 29 of the Negotiable Instruments Law, respondent the amount of P214,000.00 as
Salazar is considered an endorser of the checks paid to JY Bros, and payment for the 300 bags of rice
o considered her as an accommodation endorser, (a) when the Solid Bank check was delivered to
 who was liable on the instrument to a holder for value, JY Bros the same was also endorsed by
 notwithstanding that such holder at the time of Salazar which shows Salazar's recognition of
the taking of the instrument knew her only to be the existing obligation to respondent to pay
an accommodation party. P214,000.00 subject of the replaced
Prudential Bank check.
iv. [A: IS THE NOVATION IMPLIED?] JY Bros’s
acceptance of the Solid Bank check did not
result to any incompatibility, since the two
checks — Prudential and Solid Bank checks —
were precisely for the purpose of paying the
amount of P214,000.00
GIVEN THAT: The practice that a check with two
parallel lines in the upper left hand corner means that
it could only be deposited and could not be converted
 into cash.
(a) CORROLARILY: the effect of crossing a check
relates to the mode of payment, meaning
that the drawer had intended the check for
deposit only by the rightful person
(b) THEN: the such circumstances would still
fall under the rule that the change in the
mode of paying the obligation was not a
change in any of the objects or principal
condition of the contract for novation to
take place.

Philippine National Bank v. Soriano In Re: Sum of Money Mode of Payment; Novation does not
extinguish Criminal Liability; Implied Novation
BASIC FACTS:
PREMISE 1: [March 1997] PNB extended a credit facility via a Issues:
<Floor Stock Line> in the amount of P30M to LISAM Enterprises 1. W/N the restructuring of LISAM's loan secured by trust
Inc. Soriano is the president of LISAM – establishing an entruster- receipts extinguished Soriano's criminal liability therefor –
entrustee relationship. NO
o LISAM executed 52 <Trust Receipts> with their CLARIFICATION: Assuming that restructuring
corresponding promissory notes for the several occurred, did it extinguish the criminal
availments of the FSL it made worth P26.645M liability on the loan obligation secured by
 The TR’s read: trust receipts by extinguishing the
(1) “the trustee hereby agrees to hold the entruster-entrustee relationship and
[Honda] Motor Vehicles in storage as the substituting it with that of an ordinary
property of PNB, creditor-debtor relationship? Stated
(i) with the liberty to sell the same for differently, we examine whether the Floor
cash for the Trustee's account, and Stock Line is incompatible with the
(ii) to deliver the proceeds thereof to purported restructured Omnibus Line.
PNB, to be applied against its
acceptance on the Trustee's account.
(2) Under the terms of the Invoices and (sic) the Ruling:
Trustee further agrees to hold the said 1.) NO, the restructuring did not constitute a novation
vehicles and proceeds of the sale thereof in a. DOCTRINAL: In order for novation to take place, the
Trust for the payment of said acceptance concurrence of the following requisites is
and of any [of] its other indebtedness to indispensable:
 PNB i. (1) There must be a previous valid obligation;
(3) The Trustee hereby agrees and consents to ii. (2) There must be an agreement of the parties
allow and permit PNB or its representatives concerned to a new contract;
to inspect all of the Trustee's books, iii. (3) There must be the extinguishment of the
especially those pertaining to its disposition old contract; and
of the Motor Vehicles iv. (4) There must be the validity of the new
(4) Trustee's failure to account to PNB for the contract.
Motor Vehicles received in Trust and/or for
the proceeds of the sale thereof within b. RULE: Novation is never presumed, and the animus
thirty (30) days from demand made by PNB novandi, whether totally or partially, must appear by
shall constitute prima facie evidence that express agreement of the parties, or by their acts that
the Trustee has converted or are too clear and unmistakable
misappropriated said vehicles and/or i. [For Express Novation]: The contracting parties
proceeds thereof for its benefit must incontrovertibly disclose that their object
in executing the new contract is to extinguish
PREMISE 2: [Jan 1998] PNB conducted an actual physical inventory the old one.
of LISAM’s motor vehicles ii. [For Implied Novation] No specific form is
o PNB found that only 4 vehicles (covered by the TR’s required, and all that is prescribed by law
amounting to P158K) remained unsold. would be an incompatibility between the two
contracts.
NOTE FOR LATER: [Sept 1998] PNB granted the conversion of (a) SR: The test of incompatibility is whether
LISAM’s existing credit facilities at PNB, which includes the FSL, to the two obligations can stand together,
an <Omnibus Line> available by way of: each one having its independent existence.
(1) Revolving Credit Line (RCL), If they cannot, they are incompatible and
(2) Discounting Line Against Post-Dated Checks (DLAPC), and the latter obligation novates the first.
(3) Domestic Bills Purchased Line (DBPL) (i) COROLLARILY: changes that breed
And contained a FULL WAIVER of “penalty charges” on FSL. incompatibility must be essential in
And substituting in an ordinary creditor-debtor relationship nature and not merely accidental –
 BUT: This was never placed in writing, nor did such as its object, cause or principal
LISAM comply with the conditions set by PNB to conditions thereof;
put into effect the restructuring. o OTHERWISE: the change would be merely modificatory
in nature and thus insufficient to totally extinguish the
CONCLUSION: out of the P26,645,944 as the outstanding principal original obligation
balance of the total availments on the line covered by TR’s, (b) SR: With respect to obligations to pay a
o LISAM should have remitted to PNB the amount of sum of money, the obligation is not
P26,487,844 from the sale of the items it already sold novated by an instrument that expressly
 REMAINDER: P158K recognizes the old, changes only the terms
(note: this amt. doesn’t need to be remitted cuz, these of payment, adds other obligations not
are the cars left unsold, as per Jan 1998 inventory) incompatible with the old ones, or the new
contract merely supplements the old one
THUS: For Soriano’s failure to turn over the proceed, and by virtue
of the clauses in the TR’s (see: prem1, no. 4), PNB charged Soriano c. A1: [IS THE NOVATION EXPRESS?] There was no
with 52 counts of estafa. written contract stating in unequivocal terms that the
o BUT: DOJ rendered a decision finding that there is no parties were novating the original loan agreement.
prima facie case against Soriano, and thus withdraw the Thus, there was no express novation.
charge of estafa.
 BECAUSE: it held that the restructuring of d. A1: [IS THE NOVATION IMPLIED?]
LISAM's loan secured by trust receipts i. There is no incompatibility between the Floor
extinguished Soriano's criminal liability therefor Stock Line and the purported restructured
(see: note for later) Omnibus Line.
(a) FIRST OF ALL: LISAM failed to comply with
the conditions precedent imposed on the
Now, PNB is bringing the issue to the Court on certiorari, alleging restructured Omnibus Line for its
that the DOJ conducted a grave abuse of discretion; contending effectivity.
that, although it accepted the restructuring of the loans: (b) SECOND OF ALL: The waiver pertains to
(1) The actual restructuring of LISAM's account consisting of penalty charges on the Floor Stock Line.
several credit lines was never reduced into writing, and There is no showing that the waiver
thus it cannot be binding upon the parties extinguished Soriano's obligation to "sell
(2) ASAR that it was in writing: LISAM failed to comply with the [merchandise] for cash for [LISAM's]
the conditions precedent for its effectivity, specifically, the account and to deliver the proceeds
payment of interest and other charges, and the submission thereof to PNB to be applied against its
of the titles to the real properties in Tandang Sora, acceptance on [LISAM's] account."
Quezon City. (i) novation does not extinguish
criminal liability.
(c) MAIN REASON: The circumstance that
motivated the parties to enter into a
restructuring agreement was the failure of
petitioners to account for the goods
received in trust and/or deliver the
proceeds thereof. The parties will not be
relieved from their obligations as there was
absolutely no intention by the parties to
 supersede or abrogate the trust receipt
transactions. The intention of the new
agreement was precisely to revive the old
obligation after the original period expired
and the loan remained unpaid.

Cresencio Milla v. People of the Philippines and In re: Estafa; Novation does not extinguish criminal liability;
Market Pursuits, Inc., represented by Carlo Lopez Acceptance of Payment, without change in the original relation,
cannot produce novation
BASIC FACTS:
Issues:
Milla represented himself as a real estate developer from Ines 1. W/N the issuance of the two Equitable Bank checks before
Anderson Development Corporation to Lopez, the finance officer the institution of the criminal complaint, novated the
of MPI. Milla offered to sell MPI a property in Makati. For this obligation, and thus extinguish Milla’s criminal liability –
purpose, Milla showed: NO
1.) A copy of a TCT registered in the name of Sps. Handog
2.) Special power of attorney executed by Sps. Handog in favor Ruling:
of Milla 1.) NO, novation does not apply.
Since Lopez was convinced by Milla’s authority, MPI purchased the a. R: Mere payment of an obligation before the
property for P2M under a <Deed of Absolute Sale> – a check for institution of a criminal complaint does not, on its
P1.6M upon execution, and P400K upon the delivery of the new own, constitute novation that may prevent criminal
TCT. liability.
a. But, upon such delivery, MPI noticed that Milla failed to i. Novation is not one of the means recognized
furnish them with the receipts for the transfer taxes and by the Penal Code whereby criminal liability
other costs incurred. can be extinguished; hence, the role of
i. This prompted MPI to check with the Register of novation may only be to either:
Deeds, and there found out that (a) prevent the rise of criminal liability, or to
(1) There was no transfer of property to MPI (b) cast doubt on the true nature of the original
(2) The new TCT was registered in the name of a petition, whether or not it was such that its
Tolentino breach would not give rise to penal
responsibility
THUS, MPI demanded the return of the P2M. ii. The acceptance of (partial) payments, without
a. Milla issued two Equitable Bank checks worth P1M each further change in the original relation between
i. The checks bounced because of insufficient funds the complainant and the accused, cannot
(a) Thus, MPI sent another demand letter. produce novation.
(i) Milla ignored. b. R2: The gravamen of Estafa is the appropriation or
 conversion of money or property received to the
AS SUCH, MPI charged Milla for <Estafa through Falsification of prejudice of the owner. The criminal liability for Estafa
Public Document> already committed is then not affected by the
o Milla contends that when he issued the two Equitable subsequent novation of contract, for it is a public
Bank checks before the institution of the criminal offense which must be prosecuted and punished by the
complaint against him novated his obligation to MPI, State in its own conation.
thereby enabling him to avoid any incipient criminal c. A: The acceptance by MPI of the Equitable PCI checks
liability and converting his obligation into a purely civil tendered by Milla could not novate the original
one. transaction, as the checks were only intended to
secure the return of the P2 million the former had
already given him.
i. Even then, these checks bounced and were
thus unable to satisfy his liability.
ii. Moreover, the estafa involved here was not for
simple misappropriation or conversion, but was
committed through Milla's falsification of public
documents, the liability for which cannot be
extinguished by mere novation.

Licaros v. Gatmaitan In re: Conventional Subrogation versus Assignment of Credit;

Extinguishment of the Old Obligation is NOT a requisite for
BASIC FACTS: Conventional Subrogation
Licaros decided to make a fund placement with Anglo-Asean Bank
and Trust Limited, a money market business. Issues:
a. BUT: Licaros, after having invested in Anglo-Asean, 1. W/N the Memorandum of Agreement is one of assignment
encountered tremendous and unexplained difficulties in of credit or one of conventional subrogation. (i.e. w/n
retrieving, not only the interest or profits, but even the Gatmaitan became liable under the promissory note
very investments he had put in Anglo-Asean. dependent on the memorandum agreement)
i. SO: Licaros then decided to seek the counsel of
Gatmaitan, a reputable banker and investment Ruling:
manager. 1.) The Memorandum of Agreement is under Conventional
Gatmaitan and Licaros executed a <Memorandum of Agreement> Subrogation.
to have Gatmaitan assume the payment of Anglo-Asean's $150K a. R: There is a difference between Assignment of Credit
indebtedness to Licaros subject to certain terms and conditions. and Subrogation.
a. AS PER THE AGREEMENT: Gatmaitan executed in favor of i. [1] Assignment of Credit is the process of
Licaros a <Non-Negotiable Promissory Note With transferring the right of the assignor to the
 Assignment of Cash Dividends>, which states assignee who would then have the right to
i. “I promise to pay to Licaros the sum of P3.15M proceed against the debtor.
without interest as material consideration for the (a) The assignment may be done:
full settlement of his money claims from ANGLO- (1) Gratuitously, or
ASEAN BANK (2) Onerously, in which case, the
As security for the payment of this Promissory Note, assignment has an effect similar to that
I hereby ASSIGN, CEDE and TRANSFER, (70%) of ALL of a sale
CASH DIVIDENDS, that may be due or owing to me” ii. [2] Subrogation is the transfer of all the rights
of the creditor to a third person, who
THEREAFTER, Gatmaitan presented to Anglo-Asean the substitutes him in all his rights.
Memorandum of Agreement for the purpose of collecting the (a) It may either be legal or conventional.
Licaros's placement of $150K. (1) Legal subrogation is that which takes
a. BUT, Anglo-Asean has not acted on Gatmaitan's monetary place without agreement but by
claims. operation of law because of certain acts.
i. AS SUCH, because of his inability to collect from (2) Conventional subrogation is that which
Anglo-Asean, Gatmaitan did not bother anymore to takes place by agreement of parties
make good his promise to pay Licaros iii. The difference is that:
(a) HOWEVER, Licaros still thought that he (1) For Conventional Subrogation, consent
had a right to collect on the basis of the of every party is required – the debtor’s
promissory note regardless of the consent is necessary; (A1301)
outcome of Gatmaitan's recovery efforts. (i) In Assignment of Credit it is not
required, but merely notice to
THUS, Licaros sent several demands for Gatmaitan to pay his him as the assignment takes
obligation under the promissory note. effect only from the time he has
a. BUT Gatmaitan refused. knowledge thereof.
(2) Subrogation extinguishes the obligation
and gives rise to a new one;
(ii) assignment refers to the same
right which passes from one
person to another
(3) The nullity of an old obligation may be
cured by subrogation, such that a new
obligation will be perfectly valid;
(iii) but the nullity of an obligation is
not remedied by the assignment
of the creditor's right to another
b. A1: The Memorandum of Agreement was a
Conventional Subrogation, which requires the consent
of all parties.
i. That Gatmaitan and Licaros had intended to
treat their agreement as one of conventional
subrogation is plainly borne by:
(1) A preambulatory stipulation in their
Memorandum of Agreement, to wit:

“WHEREAS, the parties herein have come to

an agreement on the nature, form and
extent of their mutual prestations which
they now record herein with the express
conformity of the third parties concerned”

Had the intention been merely to confer on

appellant the status of a mere "assignee" of
appellee's credit, there is simply no sense
for them to have stipulated in their
agreement that the same is conditioned on
the "express conformity" thereto of Anglo-
Asean Bank

(2) The signed conformity of Anglo-Asean

Bank on the signature page there is,
typewritten, the words "WITH OUR
CONFORME." Under this notation, the
words "ANGLO-ASEAN BANK AND TRUST"
were written by hand.

Taken together with the preambulatory

clause leads to the conclusion that both
parties intended that Anglo-Asean Bank
should signify its agreement and conformity
to the contractual arrangement between
 petitioner and respondent

c. A2: The fact that Anglo-Asean Bank did not give such
consent rendered the agreement inoperative
considering that the consent of the debtor is needed.
Thus, the promissory notes are non-binding.

2. SIDE DISCUSSION:
a. R: Conventional Subrogation has the effect of
extinguishing the old obligation and giving rise to a
new one.
i. HOWEVER, the extinguishment of the old
obligation is not a requisite for a conventional
subrogation to be created.

Class Notes:
If it’s a change of creditor there are two ways: (1) conventional
subrogation – where all parties consent; (2) assignment of credit –
where the debtor does not need to consent.

The only viable reason why a different creditor would pay the
other credit

A1305 [On the Spot – Class Digests]; For later supplement In Re: Law Between the Parties
– DOH v. HTMC
A1307 Issues:
The DOH entered into a Consultancy Agreement with HTMC for 1.) Was the arbitration valid?
the construction of 4 hospitals in East Ave, where 7.5% of the price 2.)
of the hospitals would be the consultancy fee. The DOH wanted to
amend the contract, but there was no showing that there was an Ruling:
agreement to it by the parties. HTMC still wanted to get the
payment originally agreed upon. DOH does not want to comply. The arbitration was valid because it was provided in the contract.

Because of this dispute, a notice was given to the Secretary of

DOH, but HTMC did not get anything out of this. Then the parties Class Notes:
went to Arbitration stipulated under their contract. You opt to put an Arbitration clause because they’re less erratic
 than the Courts, and least costly. But there could also be a
stipulation for a preliminary step before the Arbitration is done (in
this case it was that the Secretary must first check the issue for
herself first).

If you were the DOH and you want to make this NEDA issuance to
amend the contracts of the parties, you can stipulate a provision
in the contract that “the contract will be subject to all
SUBSEQUENT government issuances relating to the contract, etc.”
Note that laws are deemed written in the contract

What argument could you have used if you were the HTMC
regarding the inaction of the secretary to the dispute (a
suspensive condition), and you wanted to go directly to the
arbitration? You can argue that there was (1) a constructive
fulfillment of the suspensive condition or (2) a purely potestative
condition.

Lead’s Note: “Simultaneous Reciprocal Obligation” BASICALLY

means any obligation or parts of it done at the same time with
another obligation or parts of it.

Class Notes: What can you do to make sure that the acceptance of
your first offer cannot immediately give rise to a contract?

Things that you can’t stipulate out of your contract:

1.) Future Fraud
2.) Consignment
3.) Nationality Rule for Ownership of Land
4.)
GF Equity v. Valenzona In Re: 1308

GF Equity hired Valenzona as a coach for their Alaska Basketball Issues:

Team under an Employment Contract for six years. Where it was 1.) W/N the special stipulation violated the principle of
also stipulated that GF Equity has the option to unilaterally Mutuality of Contracts
terminate the contract if under the sole opinion of GF Equity that
Valenzona is incompetent. After three years, the contract was Ruling:
terminated early. Because GF Equity had the sole prerogative to terminate the
contract, then it violated the principle of Mutuality of Contracts

Class Notes:
Note the reason given in this case on the basis of Mutuality
Note the latches issue in relation to prescription period.
Note also when there’s still be liability despite a valid termination
clause (a: abuse of rights) [Very Important, possible Test
Question]

Between A1308 and A1182, the difference is that A1308 strikes

down only the SPECIFIC PROVISION, but A1182 strikes down the
OBLIGATION dependent upon it. !!! The basis for A1182 is the
negation of the juridical tie; thus, even if it seems that it is
violative A1182, it can still be valid under A1308.

The problem with the clause in this case is that there’s no fixed
standard to limit the discretion of GF Equity.

Lead’s Note: The magic word is “it negated the juridical tie”

PNB v. Rocamora Class Notes: In re escalation clause

Also: In Loan Contracts, the default rule is that there is no interest

needed to be paid if there’s no stipulation stating that one is
needed. If there’s a stipulation saying that you need one, but
don’t stipulate what rate, then the civil code provides that it’s 6%
or otherwise.

Also: There can still be a contract as long as there’s consent given

by any means, but it affects its enforceability (ex. Verbal consent
only is not enforceable). But it can be ratified by latter putting it in
writing, which would then be enforceable, or if the person waives
his objection if it was raised in court by remaining silent. A written
 instrument can be anything (email, text, etc. as long as you can
see all 3 essential element of a contract) (a recording is NOT an “in
writing”). But the enforceability doesn’t retroact, it’s only upon
the moment it was made enforceable.

Also:

Solid Bank v. Permanent Homes Class Notes:

The standards of the escalation clause here was essentially the
same as PNB v. Rocamora’s escalation clause (they had the same
standard of approximated market rates). The difference is that in
Solid Bank there was an agreement for EACH change in the
interest rates (via prior notice and option for buyer to contest by
paying all the due amount at that point and thus ending the loan
agreement), but in PNB there was no such similar mechanics. This
mechanic addresses the issue with the Mutuality of Contracts.

JSP  but it’s not really a good remedy clause. It’s illusory, you
can’t keep up with the spikes in the interest even at any point you
may even choose to end it. You rate of income can’t be that fast
especially if you’re a real estate developer (it takes 2 years to
finish a development). A better cure could have been an
escalation clause with an actual formula for the computation of
the rates. For example:

Benchmark (provided by the PDS or some government

institutions) + Margin (reflects the credit worthiness of the
borrower and the risk) = New Interest Rate Applicable

Also: In Re: Freedom of Contract. It’s hard to prove that a contract

is not contrary to law, because there are many laws.

For a stipulation for an Extrajudicial Foreclosure to be valid, you

can’t be a foreigner. There must always be a stipulation.

In re: Pactum Commissorium are INVALID in loan contracts with

 mortgages; but you can work around it like stipulating: “In case of
default, lender shall have the option to buy the mortgaged
property at X price”

In re: absolute sale stipulating that the land “must be for

Residential Purposes Only” is valid, but it must be until a certain
period only – which may be extended. But you can just go to
municipal hall and ask them to issue an ordinance to have the
location be reclassified as commercial.

Tiu v. Platinum Plans In re: Non-Compete Clause;

Class Notes:
The policy behind the non-compete clause is that it limits the
person from his source of livelihood. So in invalidating such clause
you have to focus on the PROFESSION of the person. Certain
professions require hyper specializations that would be useless in
any other industry. BUT you can show that the employment
contract’s salary and benefits already compensate the period of
the clause – it was already foreseen by the parties.

Note the Philippine Competition Act, which you can rely on, which
prohibits firm behavior that unduly restricts market competition.

Although a non-compete clause must have limitations on time.

But the <Restriction of Confidentiality> part can be perpetual!!

Deed of Absolute Sale of property that stipulates that says “you

can’t resell this property to anyone but the original seller”  
INVALID because it’s a perpetual restriction on the enjoyment of
the property; SO you can stipulate a period, and during that
period you can stipulate an ABSOLUTE prohibition that you can’t
sell it to anyone    If you want to make it perpetual, create
a RIGHT OF FIRST REFUSAL: “If the buyer later on decides to resell
the property, then the seller must be the first person to be offered
the sale”
National Power Corporation v. Province of Quezon In re: Relativity of Contracts

NPC, a GOCC, entered into an Energy Conversion Agreement with Ruling:

Mirant, where the latter will build, operate, and transfer after 25 1.) There’s a difference between <Liabilities Arising From
years a thermal power plant. NPC on the other hand would Law> and <Contractual Liabilities>.
provide for the coal fuel, but they would only be the ones to which a. The latter is only binding upon the parties therein,
Mirant will serve. In their contract, NPC would be paying the real unless benefit is conferred upon a 3 rd party (stipulation
estate taxes and other assessments against Mirant. per autrui). In this case, there could be no benefit to
the municipality (duh it would mean that they would
The Municipality of Pagbilao rendered an assessment against only collect less or no taxes haha).
Mirant for Real Estate Taxes. NPC in response applied for tax
exemption (under its charter), or at least a discount on the taxes 2.) The one liable for real estate tax is demandable to the
(as per the LGC). NPC said that their contract with Mirant, that the party who has actual and beneficial use and possession of
former would be the one liable for taxes. the party. In this case, it is Mirant. NPC is not the actual
possessor because the transfer would be only after 25
years. They also cannot claim that they had effective
control of the property because it was being operated and
maintained by Mirant at that time.

Class Notes:

Tayag v. Lacson
Class Notes: The Tenants here were Agrarian Reform Beneficiaries
under CARP
Gilchrist v. Cuddy In re: A1314; Third Party Inducing to Violate a Contract; Also
A1308 Exemption to the Relativity of Contracts
Cuddy owned the film Zigomar. He had an agreement with
Gilchrist that the latter would have the right to show the film for a Ruling:
certain couple of weeks in his own theater for a certain price. They 1.) The 3rd Party induced Cuddy to violate the former’s
rd
had a valid contract. Then, a 3 party told Cuddy that the latter contract with Gilchrist.
should instead give him the right to show the film in exchange for a. There need not to be malice. The basis of the 3 rd
a higher price. Cuddy agreed. The 3 rd party knew of the earlier person’s liability is from Tort (could also be quasi-
contract of Cuddy, but not the identity of Gilchrist. Gilchrist filed a delict)
rd
complaint against the 3 party for the injunction of the
performance of the new contract, specific performance, Class Notes:
resolution, or damages (cuz it was a substantial breach).
Cuddy could not have sued the 3rd party for the substantial breach
because the latter was not a party to the contract (Relativity of
Contracts).

For Exams: “I must see the magic words in your answers!” -JSP
So Ping Bun v. CA In Re: Tortious Interference

Class Notes: Note here that the Tek became a corporation from
formerly being a partnership only.

So was a stranger to the original Tek-DC lease contract, but So was

asking for there to be a new lease contract so that he’ll be the
new lessee.

Elements of Tortious Interference

1) There must be an existing valid contract
2) The parties must be aware of the existing contract
3) There is no legal or justifiable excuse for the interference.

There was a departure from the Gilchrist Doctrine. In this case,

they said the pursuit of personal financial interest is sufficient to
constitute tortious interference.

Also Note: Tortious is different from Tortuous. The former is the

right one.

Also Note: Damages based on Bad Faith requires Malice. Actual

Damage
Inocencio v. Hospicio de San Jose
Class Notes: This case said that business motives does not under
unjustifiable excuse.
 Gilchrist should’ve been the one followed because it was en banc,
but more likely the court will follow the most recent case – JSP
But you should know which jurisprudence to side with depending
on who you are defending.

A justification can be either an exercise of a right,

financial/economic gain, threat of legal action, compliance with
the law (given that your legal opinion is correct in the first place),
or that you were unaware of the contract despite the exercise of
due diligence (more of a missing element of a tortious contract).

If you’re the one, as a 3rd party, being offered by one of the parties
of the contract, you could still “possibly” be under tortious
interference (the element being checked here is due diligence in
trying to see if there’s a prior valid contract).

Note that a <Pledge of Shares> will only bind 3 rd parties if its

Notarized. For Chattel, have it Registered (there’s no annotation
for this). For Land, have it Registered and Annotated. Check which
one came first, the registry or the claim of the 3rd party!

Lagon v. CA

Limitless Potentials, Inc. v. Hon. Quilala and Roman Catholic

Archbishop of Manila

BASIC FACTS:
1.) [October 1987] – Covered by a Contract of Lease, Roman
Catholic Archbishop of Manila (RCAM) leased certain parts
of its property in <Our Lady of Guadalupe Minor Seminary
Compound> and <San Carlos Seminary Compound> to
Limitless Potentials, Inc (LPI) for advertising purposes.
a. LPI bound itself to pay a monthly rental of 11K with a
10% increase every 2 years.
i. BUT because of ongoing disputes between
RCAM and Advertising Associates…
 (a) LPI was not able to take possession of the
premises.

2.) [November 1989] – THUS, RCAM and LPI instead executed

an <Amendment to an Agreement> fixing the new period
of lease from February 1990 to March 1997.
a. LPI bound itself to pay a monthly rental of 12K with a
10% increase every year.

IN THE MEAN TIME, RCAM referred ASTRO Advertising, Inc.

(ASTRO) to LPI for an application of putting up neon signs
or billboards in the leased premises.
a. SO, LPI wrote to RCAM that it would be executing the
corresponding contracts with ASTRO.
i. RCAM agreed on the condition that:
(a) Overlapping of signboards would be avoided
so that the area would not be rendered
unsightly
(b) Monthly rentals from ASTRO will go to the
church to enable it to earn more

b. In LPI and ASTRO’s <Sublease Agreement>, where

RCAM was a witness to:
i. [1] the property was sublet from February 1990
to February 1995.
ii. [2] ASTRO was to remit the rentals directly to
RCAM.

3.) [February 1990 to July 1993] – ASTRO paid a total of 832K

to RCAM for the rentals.
4.) [February 1990 to August 1993] – LPI paid its rentals to
RCAM
a. BUT LPI was not credited the rentals made by ASTRO

5.) [September 1993] – RCAM and LPI executed a

<Memorandum of Agreement> where:
 a. All prior agreements of the parties were expressly
cancelled.
b. RCAM leased to LPI the same properties for another
four years, from August 1993 to (now) July 1997.
c. LPI agreed to pay RCAM monthly rentals worth 60K,
payable within the first five days of the month with 10%
interest per annum.
i. If the lease were to be extended after the four-
year period, then the new rental would be 97K.

{Lead’s Note: This is a huge jump from the prior 12K of

the earlier agreement. This note is important later in
the ruling}

6.) [February 1995] – ASTRO’s lease expired.

a. BUT, RCAM did not turn-over to LPI the space leased
i. INSTEAD, RCAM leased it to a certain
Macgraphics Carranz International Corporation
(MCIC) for their own billboards.

7.) [October 1995] – RCAM wrote to LPI stating that the latter
violated the MOA:
a. LPI did not pay rentals since March 1995
b. LPI kept on constructing billboards outside the leased
area
c. LPI kept on leaving construction crap, which also
damaged the swimming pool

RCAM considered the MOA rescinded as of October 1995,

and demanded from LPI the alleged back rentals from
ASTRO, as well as the increments thereof from March to
October 1995.

8.) [October 1995] – LPI filed a complaint against RCAM for

consignation of 300K as to the amount of its own rentals
from March to October 1995, with a plea for injunction.
 a. LPI also argued that it was entitled to be credited of the
rentals made by ASTRO from February 1990 to February
1995 (See: Basic Facts 2.b.).

BUT, RCAM was unaware of the complaint, and so

continued to demand the payment of the back rentals

Lead’s Note: There were a bunch of other complaints being thrown

out left and right (Unlawful Detainer – Granted; Malicious Mischief
– DISMISSED; Injunction said above – DISMISSED). I can’t be
bothered to write them all. They’re not important anyway.
A1318 Spouses Pelayo v. Perez In re: Consent of the Spouse; Implied Consent; Sale to an Agent;
– Inadequate Consideration
A1324 BASIC FACTS:
1.) [January 1998] Mr. Pelayo sold two parcels of agricultural Issues:
land to Perez through a <Deed of Absolute Sale>. 1. W/N the Deed of Absolute Sale is null and void on the
a. One person and Ms. Pelayo witnessed the execution of following grounds:
the deed. a. Not complying with the Comprehensive Agrarian
rd
i. Ms. Pelayo, however, only signed on the 3 Reform Law;
Page b. Lack of Marital Consent;
(a) THUS, Perez’s application for registration of c. Violating Article 1492 (2) of the Civil Code; and/or
the deed was denied. d. Lack of Consideration.

2.) Perez asked Ms. Pelayo to sign the 1st and 2nd pages, but the Ruling:
later refused. 1.) The Comprehensive Agrarian Reform Law did not
a. SO, Perez instituted a complaint for specific invalidate the deed of sale as "the transaction over said
performance against the spouses. property is not proscribed.”
a. Rule 1: “…under R.A. No. 6657, the sale or transfer of a
3.) Spouses Pelayo countered saying that Perez has no cause private agricultural land is allowed only when said land
of action. They state: area constitutes or is a part of the landowner-seller
a. That Perez only had until September 1998 to register retained area and only when the total landholdings of
the deed to make it valid and enforceable under the the purchaser-transferee, including the property sold
Comprehensive Agrarian Reform Law, which states does not exceed five (5) hectares.”
that: b. Rule 2: “the failure of respondent to register the deed
i. “contracts executed prior thereto shall be valid was not of his own fault or negligence”
only when registered with the Register of Deeds
 within a period of three (3) months after the 2.) Ms. Pelayo, by affixing her signature to the Deed of Sale on
effectivity of this Act.” [The law took effect on the space provided for witnesses, is deemed to have given
June 1998] her implied consent to the contract of sale.
b. That the deed was only executed to make it appear that a. General Rule: Sale is a consensual contract that is
the lots were sold to him in order to scare the illegal perfected by mere consent, which may either be
occupants in the lot. express or implied.
c. That the deed did not have Ms. Pelayo’s consent b. Specific Rule: A wife's consent to the husband's
anyway, so Article 166 of the Civil Code provides that: disposition of conjugal property does not always have
i. “…the husband cannot alienate or encumber to be explicit or set forth in any particular document,
any real property of the conjugal partnership so long as it is shown by acts of the wife that such
without the wife's consent…” consent or approval was indeed given.
c. Application: The circumstances leading up to the
4.) Perez argued that the lots were given to him in execution of the deed points to the fact that Ms.
consideration of his services as his attorney-in-fact to make Pelayo was fully aware of the sale and consented
the necessary representation and negotiation with the thereto.
illegal occupants in the lot. i. (1) A wife would surely be aware of serious
problems such as threats to her husband's life
and the reasons for such threats. It is highly
improbable for Ms. Pelayo not to be aware of
what her husband was doing to remedy the
problems concerning the illegal occupants that
were already making death threats.
ii. (2) Ms. Pelayo was present during the
execution of the deed, and the spouses did not
deny that Ms. Pelayo did not have any
knowledge of the contents of the deed.
d. Second Rule: Under the rules of evidence, it is
presumed that a person takes ordinary care of his
concerns.
e. Application:
(1) No evidence was ever presented to show that
Lorenza was in any way lacking in her mental
faculties and, hence, could not have fully
understood the ramifications of signing the deed of
sale
(2) Neither did petitioners present any evidence that
 Lorenza had been defrauded, forced, intimidated
or threatened either by her own husband or by
respondent
(3) If Lorenza had any objections over the conveyance
of the disputed property, she could have totally
refrained from having any part in the execution of
the deed of sale. Instead, Lorenza even affixed her
signature thereto.
f. Third Rule: Under Article 173, in relation to Article 166,
both of the New Civil Code, the lack of marital consent
to the disposition of conjugal property does not make
the contract void ab initio but merely voidable.
i. “Art. 173. The wife may, during the marriage,
and within ten years from the transaction
questioned, ask the courts for the annulment of
any contract of the husband entered into
without her consent, when such consent is
required…”
g. Application: Ms. Pelayo did not a case for annulment of
deed, despite respondent's repeated demands for
Lorenza to affix her signature on all the pages of the
deed of sale.

3.) The prohibition against agents purchasing property in their

hands for sale or management is not absolute. It does not
apply if the principal consents to the sale.
a. Rule: “Art. 1491. The following persons cannot acquire
by purchase, even at a public or judicial auction, either
in person or through the mediation of another:… (2)
Agents, the property whose administration or sale may
have been entrusted to them, unless the consent of
the principal has been given;
b. Application: Petitioners, by signing the Deed of Sale in
favor of respondent, are also deemed to have given
their consent to the sale of the subject property in
favor of respondent, thereby making the transaction
 an exception to the general rule that agents are
prohibited from purchasing the property of their
principals.

4.) There was consideration.

a. In consideration of Perez’s representation services:
(1) they executed the subject deed of sale
(2) received in full the amount of Ten Thousand Pesos.
b. Although Spouses Pelayo argue that the consideration
was excessively inadequate, indicating that the deed
was merely simulated…
(a) Rule: There is no requirement that the price be
equal to the exact value of the subject matter of
sale. Courts cannot follow one every step of his life
and extricate him from bad bargains.

Villanueva v. Court of Appeals, Ong, and PVB

BASIC FACTS:
1.) Spouses Villanueva owned two parcels of land in
Muntinlupa
a. Ms. Villanueva asked help from Viudez (Officer-in-
Charge of the Philippine Veterans Bank, Makati Branch)
to secure a loan.
(1) Viudez, in connivance with Sebastian, swayed Ms.
Villanueva to execute a <Deed of Sale> over the two
lots.
(a) This was without the signature of her husband.

2.) Ms. Villanueva did not get the kind of loan she was
expecting
a. She eventually found out that the lots were already
issued in the name of PVB, after the lots were
foreclosed for failure to pay the loan granted in the
name of Sebastian.
(1) [June 1983] PVB told her that she can redeem the
 lots for P110,416.
(a) But negotiations for the repurchase were stalled
by the filing of liquidation proceedings against
PVB on Aug 1985.

3.) Idelfonso Ong, on the other hand, state the following facts:
a. [October 1984] he offered to acquire the two lots, and
deposited P10K to back it up
b. [November 1984] while Ong was abroad, approved his
offer. The purchase price was P110K (less the P10K).
Payable within 15 days from receipt of the approval.
c. [Mid-April 1985] when Ong returned to the Philippines,
he immediately verified the status of the offer, and was
informed that the same was approved.
(1) So, Ong informed the Central Bank of his desire to
pay. But CB never replied.
d. [May 1987] Ong’s payment were accepted by the CB
under <Official Receipt>

4.) Note that the PVB was:

a. Placed under Receivership on [April 3 1985]
b. Placed under Liquidation on [June 1985]

5.)

[Class Notes]:

An option is a complete offer. It has both the object (property) and

the consideration (price). If this comes with <option money> then
the grantor must allow the option to remain during the given
period. Whatever happens to the option money is based on
whatever the parties agree to in their contract.

Right of First Refusal, the Grantor just gives the Grantee the <right
to purchase first if the grantor decides to sell>. It will have an
object (property) but no cause. During the term of the contract,
the grantee will have the right to buy. If the grantor receives an
offer from a 3rd person, the grantor must notify the grantee. Then
they have negotiations. The right of first refusal is transmissible.
When the person dies, it goes to his estate, then eventually the
heirs.
[Lead’s Note: Take note of the remedies when the Grantor violates
the Right of First Refusal when he sells it to another person first!!!
In re: Purchaser in Good Faith]

Consent should be informed, free, and voluntary. Note that there’s

three ways to affect consent: (1) Incapacity, (2) vice of consent,
and (3) simulations. Note when the burden of proof shifts. (Lead’s
Question: Who has the burden of proof in showing incapacity?
Know how to shift it. Like in A1332, try to prove that you’re unable
to read {but this is hard to prove said JSP} or even better that you
can’t understand the language of the contract {How do you guard
against it? JSP said that when you’re making a contract, you should
put a translation of the contract to the native language of the
contracting parties. )

If you’re trying to defend against a person who’s alleging that his

client didn’t understand the contract, JSP said you counter it: The
best proof of consent is the Contract. A contract has this flow…
(1) Parties
(2) Terms
(3) Signature (You can use this section to call in the witnesses
to this contract to defend)
(4) Witnesses
(5) Durat (?) or Acknowledgement (the Notary Public is the
best defense because (1) you can call in the notary public
to testify since they have an incentive to say that the
parties appeared before him else there might be
administrative sanctions if the notary doesn’t attest to it,
 and (2) they’re given <Presumption of Regularity of
Discharge of Duties>)

To Counter the Acknowledgement of Notary Public, you can show

(1) stronger, you question the jurisdiction of the Notary Public
because they can’t notarize outside their jurisdiction, and (2)
weaker, that you could not Physically have appeared then.

What you have to look in the case of Paragas, in that case there
was terminal Liver Cirrhosis, in that sickness the victim will have
dementia. General Rule: When there is a vice of Consent, it will be
VOIDABLE only. But if the vice of consent is so extreme that it
totally nullifies consent, then it would be VOID. Note: a voidable
contract is impugnable 4 years from the cause of action. If it’s void,
it can be filed any time.

Mistake must be substantial or material mistake of fact without

which the parties would not have consented to the contract. It
should pertain to the Substance of the Object of the Contract
(including the Nature of the Contract), and Conditions that
principally move one of the parties, and the Identity and
Qualifications of the Party if it’s a principal consideration. IT MUST
BE STIPULATED IN THE CONTRACT. If the declarations of facts were
not acknowledged in the contract, then it is not actionable for
mistake because that fact/motive wouldn’t be legally considered
the cause or consideration of the contract. UNLESS THE MOTIVE
WAS THE DIRECT CAUSE OF THE CONTRACT (See NHA Case).
Actually, if you stipulate it in the contract that would also
tantamount to a SUBSTANTIAL BREACH of contract entitling you to
other reliefs. Remedy could be <Reformation of Contracts>.
[Doesn’t apply to Fraud????]

[This was an exam question concept!]: Mistake is inexcusable if the

parties could have known with the proper exercise of the
applicable diligence or if it’s blatantly obvious. Same rule is
applicable to Fraud (meaning even if they employ fraudulent
machinations) (note also that the position of the accused can
qualify if something is Fraud, ex. If you’re a jeweler, you should’ve
known that what you were selling was not what it was!) The
difference between Mistake and Fraud is that the latter has the
attempt to defraud.

Strictly speaking, Violence should be a vice of consent only if it’s

the determining cause. Threat is a moral compulsion (note the
elements in Tolentino + Codal haha).

In the case of DBP, that case just says that presence of financial
distress per se is not undue influence. In undue influence, the
determining factor is the RELATIONSHIP of the parties to each
other.

Fraud. In this section, this is Causal Fraud.

Be very careful in distinguishing the two kinds!

Causal Fraud : Voidable : The Cause
Incidental Fraud : Damages + Other Reliefs : The Performance

The following don’t count as Fraud:

1.) Usual Exaggerations in Trade A1340 [Note: JSP said that
when the representation is too specific, like the mileage of
car, it may be fraud.]

Elements of Fraudulent Professional Opinion

1.) The other party must know that it is wrong
2.) The professional must be GROSSLY WRONG
Lead’s Note: Even if the Professional Opinion was just used as an
initial basis for subsequent negotiations (think the Pawn Shop
example)

Note the Anti-Dummy Law in Simulations.

A1345 The Manila Banking Corporation v. Edmundo Silverio In Re: What May Be Subject of Attachment; Absolute Simulation
– versus Fraudulent Alienation; Most Protuberant Indication of
A1346 BASIC FACTS: Simulation is Absence to Assert One’s Right
1. [April 1979] Purification Ver sold two parcels of land in
Paranaque to Silverio, Sr. through an <Absolute Deed of Issues:
Sale> 1. W/N the properties of Silverio, Sr. can be attached – YES
a. BUT the deed of sale was never registered. a. W/N the sale between Silverio, Sr. and Edmundo is
(i) THUS, the lots actually just stayed with simulated – YES, Absolutely Simulated
Purification Ver. b. W/N TMBC should go after the properties Silverio, Sr.’s
2. [Feb 1990] The Manila Banking Corporation (TMBC) filed properties first
with the RTC a complaint against Silverio, Sr. for:
a. the collection of sum of money, with Ruling:
b. a writ of preliminary attachment 1. YES.
3. [July 1990] RTC ordered the inscription of <Writ of a. Rule: Only properties belonging to the debtor can be
Attachment> on the Paranaque lots of Silverio, Sr. (Lead’s attached, and an attachment and sale of properties
Note: Thinking that it was properly owned by Silverio) belonging to a third party are void.
4. [July 1993] During the pendency of the case, Silverio, Sr.’s
nephew, Edmundo requested the RTC: 2. YES, the sale was Absolutely Simulated
a. TO CANCEL the annotations inscribed on the properties a. R: Article 1346 of the Civil Code provides that an
(i) BECAUSE such properties were allegedly already Absolutely Simulated contract is VOID.
sold to him by Silverio, Sr. since [1989]. (i) EXPOUND: A simulation is characterized by the
(a) THUS, such properties cannot be made to fact that the apparent contract is not really
answer for the debt of Ricardo, Sr. as of desired or intended to produce legal effects or
[1990] in any way alter the juridical situation of the
5. [1995] RTC decided AGAINST Edmundo, saying: parties. Thus, what is lacking in a fictitious and
a. “the supposed deed of sale in favor of herein petitioner simulated contract is CONSENT, which is
is fictitious and simulated and thus void ab initio” essential to a valid and enforceable contract.
(i) what appears in the notarial register of the b. A: The circumstances of the case shows that the sale
notary public, albeit in loose form, is not a deed was absolutely simulated
of sale but a mere affidavit of a different person (i) NO PROOF that the said sale took place prior
is sufficient to prove that no effective, valid and to the date of the attachment.
legal sale of the properties in question was (a) F: The notarized deed of sale was only
executed between the Silverio uncle and brought up 3 years after TMBC caused the
nephew annotation of its lien on the titles of the
6. [1998] CA REVERSED the decision of the RTC., saying: property.
a. “the sale between Ricardo, Sr. and Edmundo was not (1) The RMAO did not have the deed of
void and that… sale!
(i) ASSUMING IT TO BE VOID, only the parties to (2) The RTC did not transmit any book of
the sale and/or their assigns can impugn or the notary public who allegedly
assail its validity. notarized the deed of sale. What the
(a) MOREOVER, assailing the validity of a sale Records Management of the Archives
for being in fraud of creditors is a remedy of Office (RMAO) was in possession of was
last resort (i.e., accion pauliana can be only a loose leaf entry form for an
availed of only after the creditor has had affidavit of a certain person (See: Basic
exhausted all the properties of the debtor Facts 5.a.i.).
not exempt from execution) (b) R: Under the <Procedures for Notarized
Documents>, RTC will transmit to the RMAO
copies in its possession of:
(1) the original documents notarized by a
notary public, together with
(2) the Notarial Registry Book.
(c) A: The fact that the assailed deed of sale is
not one of those submitted renders it
virtually worthless in the absence of
corroboration as to its due execution other
than petitioner’s self-serving statements.
(ii) EDMUNDO WAS VERY EVASIVE when
questioned regarding details of the alleged
sale.
(a) F: Edmundo cannot remember if he paid
directly to Silverio, Sr. the whooping price of
P3M, nor could he remember where
Silverio, Sr. was when he paid.
(iii) The most protuberant index of simulation is
the COMPLETE ABSENCE OF AN ATTEMPT in
any manner on the part of the ostensible
buyer TO ASSERT RIGHTS OF OWNERSHIP
OVER THE SUBJECT PROPERTIES
(a) The facts of the case show that:
(1) Edmundo did not attempt to have the
 1989 deed of sale registered until 1993.
(2) He was not in possession of the
properties
(3) He did not have a contract of lease with
the actual occupant of the properties
(4) In 1991, it was Silverio, Sr. claiming to
be the rightful owner of the properties
in connection with an ejectment case he
filed against third persons. (Lead’s Note:
Edmundo’s defense was that he asked
Silverio, Sr. to in his behalf)

3. NO, an action for Accion Pauliana is different from an

action to declare that a contract is simulated
a. R1: the remedy of accion pauliana is available when
the subject matter is a conveyance, otherwise valid,
undertaken in fraud of creditors. Such contract is
governed by the rules on rescission which prescribe,
under Art. 1383 of the Civil Code, that such action can
be instituted only when the party suffering damage has
no other legal means to obtain reparation for the
same.
b. R2: The contract of sale before us, albeit undertaken as
well in fraud of creditors, is not merely rescissible but
is void ab initio for lack of consent of the parties to be
bound thereby. A void or inexistent contract is one
which has no force and effect from the very beginning,
as if it had never been entered into; it produces no
effect whatsoever either against or in favor of anyone.
c. R2:Check out Tolentino daw. But ama put it here
anyway :p
Absolute Simulation Fraudulent Alienation
Implies that there is no there is a true and existing
existing contract, no real act transfer or contract
executed
can be attacked by any can be assailed only by the
 creditor, including one creditors before the alienation
subsequent to the contract
insolvency of the debtor action to rescind, or accion
making the simulated transfer pauliana, requires that the
is not a prerequisite to the creditor cannot recover in any
nullity of the contract other manner
action to declare a contract accion pauliana to rescind a
absolutely simulated does not fraudulent alienation
prescribe prescribes in four years

Heirs of Spouse Aurelio and Balite v. Rodrigo Lim In Re: Relative Simulation; Deed That Did Not Show Real Price is
Merely a Relative Simulation; What’s Binding is the REAL
BASIC FACTS: Agreement; Equitable Mortgage; Limitations on the Sale of Pro
1.) Spouses Aurelio and Balite were owners of a parcel of land Indiviso Shares
in Northern Samar
2.) When Aurelio died, his wife (Balite) and his kids inherited Issues:
the lands as co-owners the lots; and Balite with undivided 1. W/N the Deed of Absolute Sale is valid – YES
shares of 9.75K sqm. 2. W/N there is still any sum for which Rodrigo is liable –
3.) When Balite became ill and was in dire need of money for Bound by the REAL price
medical expenses, she (through her daughter Cristela)
offered to: Ruling:
a. sell to Rodrigo Lim her undivided share of 10K sqm for 1. YES, the Deed of Absolute Sale is still valid, albeit a Relative
P1M (Lead’s Note: Balite only had 9.75K to sell tho), Simulation.
and a. R: Article 1345 of the Civil Code provides that the
b. agreed to make it appear in the <Deed of Absolute simulation of a contract is either Absolute or Relative.
Sale> that it was sold only for P150K (i) Absolute Simulation:
4.) [April 1996] The <Deed of Absolute Sale> was executed there is a colorable contract but without any
together with a <Joint Affidavit>, which declared that the substance, because the parties have no
real price of the property was P1M payable to Balite by intention to be bound by it. An absolutely
installments simulated contract is void
a. Only Cristela and her brother, Antonio, knew about the (ii) Relative Simulation:
transaction if the parties state a false cause in the contract
5.) A <Sketch Plan> was signed by Rodrigo and Balite. to conceal their real agreement; here, the
a. Thereafter, Rodrigo took actual possession of the parties' real agreement binds them
property and introduced improvements thereon. b. A: In the present case, the parties intended to be
 b. He remitted to Balite and Cristeta partial payments for bound by the Contract, even if it did not reflect the
which he signed <Receipts> actual purchase price of the property. This can be
6.) [Aug 1996] The four other children finally learned of the shown by the facts that:
sale and wrote to the Register of Deeds to hold in abeyance (i) Balite’s signed letter to Rodrigo last October
any processual or approval of any application for 1996 (See: Basic Facts 7)
registration of title because they did not consent to such (ii) Children’s admission that there were already
sale. partial payments (See also: Basic Facts 5.b.)
7.) [Oct 1996] Just before dying, Balite signed a letter
addressed to Rodrigo informing him that the former’s 2. Since All the essential requisites prescribed by law for the
children did not consent to the sale, so she is withdrawing validity and perfection of contracts are present, the Deed
all her commitments until the validity of the sale is finally of Absolute Sale was merely Relatively Simulated, and it
resolved remains enforceable.
8.) [June 1997] The children filed with the RTC a complaint (i) The parties shall be bound by their REAL
against Rodrigo and caused the annotation of a <Notice of agreement for a consideration of P1M , NOT
Lis Pedens> on the title of the property. the P150K; and
a. SUBSEQUENTLY, Rodrigo secured a loan from the Rizal (ii) The government has the right to collect the
Commercial Banking Corporation in the amount of proper taxes based on the correct purchase
P2,000,000.00 and executed a <Real Estate Mortgage> price
over the [subject] property as security therefor a. The motives of the contracting parties for lowering the
price of the sale — in the present case, the reduction of
The RTC rendered its decision: capital gains tax liability — should not be confused with
a.) DISMISSING the complaint, and the consideration. Although illegal, the motives neither
b.) ORDERING the cancellation of the <Lis Pedens> annotation determine nor take the place of the consideration.
Because pursuant to Article 493 of the Civil Code, a co-owner has
the right to sell his/her undivided share. The sale made by a co- Also: Equitable Mortgages and Co-ownership
owner is not invalidated by the absence of the consent of the
other co-owners. Hence: 3. The Deed of Sale was NOT an Equitable Mortgage.
a.) the sale by Esperanza of the 10,000-square-meter portion a. R1: For Articles 1602 and 1604 to apply, two requisites
of the property was valid ; and must concur:
b.) the excess from her undivided share (0.25K sqm) should be (i) The parties entered into a contract
taken from the undivided shares of Cristela and Antonio, denominated as a contract of sale; and
who expressly agreed to and benefited from the sale. (ii) their intention was to secure an existing debt
by way of mortgage.
The Court of Appeals AFFIRMED the RTC and said that: The existence of ANY of the circumstances enumerated
a. It REJECTS the claim that the sale was void allegedly in Article 1602, NOT a concurrence or an overwhelming
because the actual purchase price of the property was not number thereof, suffices to give rise to the
 stated in the Deed of Absolute Sale presumption that a contract purporting to be an
(i) BECAUSE Applying Article 1353 of the Civil Code, the absolute sale is actually an equitable mortgage.
falsity of the price or consideration stated in the b. A1: In the present case, the Contract does not merely
Deed did not render it void. purport to be an absolute sale.
(a) The CA pointed out, however, that the State (i) The records and the documentary evidence
retained the right to recover the capital gains introduced by the parties indubitably show that
tax based on the true price of P1,000,000 the Contract is one of absolute sale, BUT here is
b. It REJECTS the contention that, because of the allegedly no clear and convincing evidence that the
unconscionably low and inadequate consideration parties agreed upon a mortgage of the subject
involved, the transaction covered by the Deed was an property.
equitable mortgage under Article 1602 of the Civil Code. c. A2: Also, We find no basis to conclude that the
(i) BECAUSE the petitioners were already proscribed purchase price of the property was grossly inadequate.
from making that claim at this point haha There was no evidence. A mortgage is a mere security
for a loan. There was no showing that the property was
the only security relied upon by the bank; or that the
borrowers had no credit worthiness, other than the
property offered as collateral

4. The appellate court was correct in affirming the validity of

the sale of the property insofar as the pro indiviso share of
Balite was concerned.
a. R: Article 493 of the Civil Code gives the owner of an
undivided interest in the property the right to freely
sell and dispose of such interest.
(i) BUT the co-owner has no right to sell or
alienate a specific or determinate part of the
thing owned in common, because such right
over the thing is represented by an aliquot or
ideal portion without any physical division.
(a) NONETHELESS, the mere fact that the deed
purports to transfer a concrete portion does
not per se render the sale void.
(1) The sale is VALID,
but only with respect to the aliquot
share of the selling co-owner.
(2) Furthermore, the sale is subject to the
 results of the partition upon the
termination of the co-ownership.

Brothers Cruz v. Bancom Finance Corporation In Re: Non-payment of the Consideration Stipulated is a Sign of an
Absolutely Simulated Contract; Mortgagee in Good Faith;
BASIC FACTS: Retroactive Effect of Lis Pendens Annotation
1.) Brothers Cruz were owners of an agricultural land in
Bulacan. Issues:
2.) Candelaria introduced Norma to Brothers Cruz, and the 1. W/N the Deed of Sale and Mortgage were valid – NO
former offered to purchase the land 2. W/N Bancom was a Good Faith Mortgagee – NO
a. Brothers Cruz asked for P700K, but Norma only had
P25K. Ruling:
3.) Cruz accepted the P25K as earnest money with the 1. NO, they were invalid.
agreement that the titles would be transferred to Norma a. R1: A contract of sale is null and void when:
only upon full payment. (1) the same is without cause or consideration, which
a. Norma failed to pay. should have been the motive thereof, or
(i) [1ST DEED] BUT Norma was able to convince Cruz (2) the purchase price which appears thereon as paid
to execute a <Deed of Sale>, instead, in favor of but which in fact has never been paid by the
Candelaria who can then use the land as purchaser to the vendor
collateral to secure a loan in Norma’s name. b. A1: Although the Deed of Sale between Cruz and
(a) [2ND DEED] On the same day, Candelaria Candelaria stipulated a consideration of P150,000,
executed a <Deed of Absolute Sale> to there was actually no exchange of money between
Norma them.
Both deeds indicated that the selling price were P150K c. R2: A telling sign of simulation is the complete absence
of any attempt on the part of the buyers to assert their
4.) Aside from the P150K, Candelaria was obligated to pay the alleged rights of ownership over the subject property.
plaintiffs the amount of P655K representing the balance of d. A2: In this case, the buyers are Candelaria and Norma.
the actual price of the land. This fact that they never asserted their rights was
a. In a <Special Agreement> Norma assumed Candelaria's confirmed by Bancom, who however tried to justify the
obligation, stipulating to pay the plaintiffs the said non-occupancy of the land because the two failed to
amount within six months pay the purchase price of the land, so the two could
(i) She did not pay and disappeared from her not force Cruz to vacate it.
residence. (i) Also: The fact that she was able to secure a
Certificate of Title to the subject property in her
5.) Unknown to Cruz, Norma managed to obtain a loan from name did not vest her with ownership over it. A
Bancom Finance Corporation in the amount of P569K simulated contract is not a recognized mode of
 secured by a mortgage over the land now titled in her acquiring ownership.
name.
2. NO, Bancom was not a mortgagee in good faith.
6.) Because of Norma’s failure, Cruz filed a complaint for a. GR: Under S39 of Act 496, every person dealing with
reconveyance of land, and interest over the title was then registered land may safely rely on the correctness of
annotated the certificate of title and is no longer required to look
a. In its answer, Bancom claimed: behind the certificate in order to determine the actual
(1) priority as mortgagee in good faith; and that owner.
(2) its contract of mortgage with Norma had been (i) EXPT: This rule is subject to the right of a
executed BEFORE the annotation of plaintiffs' person deprived of land through fraud to bring
interest in the title. an action for reconveyance
7.) Norma finally defaulted on her loan with Bancom, her (a) PROVIDED the rights of innocent purchasers
mortgage was foreclosed, and the bank was declared the for value and in good faith are not
highest bidder. prejudiced.
(1) An “innocent purchaser for value” or
The RTC rendered its decision, stating: any equivalent phrase includes an
a.) That the contract of sale between Cruz and Candelaria was innocent lessee, mortgagee or any other
Absolutely Simulated. Corollarily, the subsequent contract encumbrancer for value.
of sale between Candelaria and Norma had no effect. b. A: Bancom, however, is not an ordinary mortgagee; it
b.) Bancom was not a mortgagee in good faith; thus, it can’t is a mortgagee-bank. A banking institution is expected
claim priority of rights over Cruz’s property. to exercise due diligence before entering into a
mortgage contract. On this standard, evidence before
The CA decided to REVERSE the ruling, stating: us indicates that respondent bank was not a
a.) Cruz intended to be bound by the Contracts of Sale and mortgagee in good faith.
Mortgage, because they: (i) FIRST, at the time the property was mortgaged
(i) "did not seek to annul the same but instead to Bancom, they failed to do an ocular
executed a special agreement to enforce payment inspection of the premises, which would’ve
of the balance of the price in the amount of raised the suspicion that the price was too low
P665,000.00.” for such a piece of property.
(ii) SECOND, Bancom was already aware that there
was an adverse claim and notice of the <lis
pendens> annotated on the Certificate of Title
when it registered the mortgage
(a) R: Settled in this jurisdiction is the doctrine
that a prior registration of a lien creates a
preference.
 (1) Even a subsequent registration of the
prior mortgage will not diminish this
preference, which RETROACTS to the
date of the annotation of the notice of
lis pendens and the adverse claim.

A1350 E. Razon, Inc. v. Philippine Ports Authority In Re: What the fuck just happened.
–
A1355 BASIC FACTS: Issue:
1.) E. Razon, Inc. (ERI) was organized for the purpose of 1. W/N the PPA was right in unilaterally cancelling its
bidding for the contract of managing all ports at South contract with ERI – YES
Harbor, Manila.
2.) [1966] ERI was awarded a <Five-Year Contract> to operate Ruling:
the “arrastre” (loading/unloading of merch) in Piers 3 and 1. YES, PPA was correct.
5. a. R1: Under Section 5 of the Anti-Graft and Corrupt
a. Allegedly investing millions upon the assurance of the Practices Act (R.A. No. 3019) Romualdez, by reason of
government that their contract will be renewed without his relationship with the then President of the
public bidding Philippines, was prohibited from intervening, directly
3.) [1971] Bureau of Customs informed ERI of its decision or indirectly, in any transaction or business with the
calling for a new bidding for any and all piers in the harbor. government.
a. So, ERI immediately sought to enjoin the bidding and b. A1: The Management Contract, entered into by E.
tried to compel them to renew their contract Razon, Inc., ostensibly owned by petitioner Enrique
(i) But the Supreme Court ordered the holding of a Razon, but in fact controlled by Romualdez as 60%
public bidding for all the piers, conditioned that equity owner thereof, is null and void and of no effect,
no final award should be given until further being one expressly prohibited by law
orders from the court. (i) CONTENTION: ERI tried to say that the transfer
4.) Bidding thus still ensued, and ERI still won. of his 60% share was was obtained thru force
a. [1974] another <Five-Year Contract> was executed and duress and without any monetary
between ERI and the government, renewable for consideration whatsoever, and should thus be
another five years. voidable for lack of consent, or altogether void
(i) ERI then increased is capitalization from P2M to for being absolutely fictitious or simulated (See:
P20M Basic Facts 5)
5.) Buncha Marcos Crony shit happened, centering on Alfredo (1) COURT CLARIFIES: The invalidity springs not
Romualdez buying out Razon (who originally had 100% from vitiated consent nor absolute want of
equity stock, but was then allegedly forced to transfer his monetary consideration, but for its having
60%), but the latter was retained as a President for his had an unlawful cause — that of obtaining
 diskarte in the business a government contract in violation of law.
6.) [1978] ERI’s contract expired, and was then extended for (a) GR: the causa of the contract must not
eight years starting from [1980] be confused with the motives of the
[Feb 1986] After the ouster of the Marcos Regime, Razon parties
took over again, even regaining the lost 60% (b) EXPT: the motive may be regarded as
7.) [July 1986] truckers staged a demonstration at the main causa when it predetermines the
gate of South Harbor to complain about Razon's purpose of the contract
management of the arrastre operations. (c) A: Given the two parties…
a. So, the Philippine Ports Authority (PPA) sent ERI a letter A. On Romualdez, the motive was to be
asking them to explain and reply to the complaints from able to contract with the
shippers and-other. ERI was given by the Minister of government which he was then
Transportation and Communication only until Wed (July prohibited by law from doing, and
23, 1986) of the following week to respond. B. On Razon's part, to be able to renew
(i) [July 19, 1987] But because: his management contract. (Razon
(1) Time was too short would not have transferred said
(2) ERI had no staff, it being a week-end shares of stock to Romualdez
ERI sent a letter to PPA that they would submit without an assurance from the latter
their “reply early next week”. But PPA didn’t that he would be unduly favored
receive this because there was no one to receive with a renewal of the Management
it then Contract.)
8.) [July 19, 1987] On the same day ERI sent its letter ^, PPA By transferring 60% of the shares in his
informed ERI that it was cancelling the management company to Romualdez, petitioner
contract and was taking over, effective immediately. Enrique Razon was able to secure an
a. Thus, ERI sought to enjoin PPA eight-year contract with respondent
PPA and for six years before its
ERI contends that… cancellation benefit from the proceeds
MAIN POINT: They were denied their right to due process when thereof. (See: Basic Facts 6)
respondent PPA cancelled the Management Contract without prior
hearing and investigation. c. R2: Article 1422 of the Civil Code
o They argue that the Management Contract has become d. Special Rule Discussion: a party is a participant in the
in the nature of a Franchise or License, and thus should unlawful intention where…
confer PROPERTY RIGHTS (i) he knows and intends that the subject matter
 Which confer the right to be heard before it’s will be used for an illegal purpose,
taken away (ii) if he shares in the benefits of the violation of
law, or
PPA contends that… (iii) he intends to aid the other in the unlawful
MAIN POINT: The cancelled contract was previously awarded, not object.
to E. Razon, Inc., but to Metro Port Services, Inc. that President e. A2: The transfer of the control of petitioner E. Razon,
Marcos' brother-in-law, Alfredo Romualdez, controlled. Inc. from petitioner Enrique Razon to Alfredo "Bejo"
o COROLLARILY: Since the cancelled contract was the fruit Romualdez, which We have resolved to be null and
of corruption in the Marcos government, it is a nullity void, served as the direct link to petitioner company's
and petitioners cannot sue for its enforcement obtaining the Management Contract. Being the direct
consequence and result of a previous illegal contract,
the Management Contract itself is null and void

f. R3: Elementary in the law of contracts is the principle

that no judicial action is necessary for the annulment
of a void contract. Any such action would be merely
declaratory.

g. A3: Thus, it was well within the rights of respondent

PPA to unilaterally cancel and treat as avoided the
Management Contract and no arbitrariness may be
attached to its exercise of this right.
(i) ASAR: even if the Management Contract were
valid and subsisting, the violations of the
contract committed by its predecessor were
grave and serious to justify immediate
termination of the contract.

Copy-Paste Uy v. CA here again lol

Estate and Heirs of Pedro Gonzales v. Heirs of Marcos Perez

BASIC FACTS: