OBLIGATIONS

Nature and Effects of Obligations

Conditional Obligations

ROLANDO T. CATUNGAL, JOSE T. CATUNGAL, JR.,

CAROLYN T. CATUNGAL AND ERLINDA CATUNGAL-
WESSEL, PETITIONERS, VS. ANGEL S.
RODRIGUEZ, RESPONDENT.
Facts:
Spouses Catungal entered into a Conditional Deed of
Sale wherein Rodriguez agreed to buy the lot
conditioned on the payment of a certain price but the
obligation to pay the balance of the purchase price
would only arise if Rodriguez would successfully
negotiate and secure access road or road right of
way.
Spouses Catungal requested for an advance of 5M on
the purchase price but Rodriguez objected stating
that in view of the terms of the Conditional Deed he
would only pay balance of the purchase price if he
would obtain the access road or road right of way
and he was given sufficient time to do so and he was
given the right to rescind the contract.
But spouses Catungal rescinded the contract.
Rodriguez contends that the spouses unilateral
rescission was unjustified while the spouses Catungal
contend that the terms of the Conditional Deed of
Sale violated the principle of mutuality under Art.
1308 of the Civil Code stating the contract was a
potestative condition because it was dependent on
the sole will of the debtor (Rodriguez).

Issue: Whether or not the stipulations of their

Conditional Deed of Sale constitute a potestative
condition?

Held: No.
As contemplated in Article 1308 the stipulation
wherein Rodriguez shall pay the balance of the
purchase price when he has successfully negotiated
and secured a road right of way is not a condition on
the perfection of the contract nor on the validity of the
entire contract or its compliance.
It is a condition imposed only on respondents
obligation to pay the remainder of the purchase price.
Applying Article 1182, such a condition is not purely

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potestative as petitioners contend. It is not dependent
on the sole will of the debtor but also on the will of the
third persons who own the adjacent land and from
whom the road right of way shall be negotiated. Such a
condition is likewise dependent on chance as there is
no guarantee that respondent and the 3 rd party
landowners would come to an agreement regarding the
road right of way. This type of mixed condition is
expressly allowed under Art 1182.

Article 1182: When the fulfillment of the condition

depends upon the sole will of the debtor, the
conditional obligation shall be void. If it depends upon
chance or upon the will of a third person, the obligation
shall take effect in conformity with the provisions of
this code.

In other words, the obligation to pay the balance is

conditioned upon the acquisition of the road right of
way. Therefore, spouses Catungal cannot rescind the
contract nor demand the fulfillment of Rodriguez
obligation to pay the balance. In the event the condition
is not fulfilled, Rodriguez can either proceed with the
sale and demand return of his down payment or to
waive the condition and still pay the purchase price
despite the lack of road access.

When carnapping or robbery considered a fortituous

event

ROBERTO C. SICAM and AGENCIA de R.C. SICAM,

INC. vs. SPOUSES JORGE

Facts:
On different dates, Lulu Jorge pawned several pieces of
jewelry with Agencia de R. C. Sicam located in
Paraaque to secure a loan. On October 19, 1987, two
armed men entered the pawnshop and took away
whatever cash and jewelry were found inside the
pawnshop vault. On the same date, Sicam sent Lulu a
letter informing her of the loss of her jewelry due to the
robbery incident in the pawnshop. Respondent Lulu
then wrote back expressing disbelief, then requested
Sicam to prepare the pawned jewelry for withdrawal on
November 6, but Sicam failed to return the jewelry.

Lulu, joined by her husband Cesar, filed a complaint

against Sicam with the RTC of Makati seeking

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indemnification for the loss of pawned jewelry and
payment of actual, moral and exemplary damages as
well as attorney's fees. The RTC rendered its Decision
dismissing respondents complaint as well as
petitioners counterclaim. Respondents appealed the
RTC Decision to the CA which reversed the RTC,
ordering the appellees to pay appellants the actual
value of the lost jewelry and AF. Petitioners MR denied,
hence the instant petition for review on Certiorari.

Issue: Whether or not the petitioners are liable for the

loss of the pawned articles in their possession?

Held: Yes. Fortuitous event by definition are

extraordinary events not foreseeable or avoidable.

It is therefore, not enough that the event should not

have been foreseen or anticipated, as is commonly
believed but it must be one impossible to foresee or to
avoid. The mere difficulty to foresee the happening is
not impossibility to foresee the same. To constitute a
fortuitous event, the following elements must concur:
(a) the cause of the unforeseen and unexpected
occurrence or of the failure of the debtor to comply with
obligations must be independent of human will; (b) it
must be impossible to foresee the event that
constitutes the caso fortuito or, if it can be foreseen, it
must be impossible to avoid;
(c) the occurrence must be such as to render it
impossible for the debtor to fulfill obligations in a
normal manner; and,
(d) the obligor must be free from any participation in
the aggravation of the injury or loss. The burden of
proving that the loss was due to a fortuitous event rests
on him who invokes it. And, in order for a fortuitous
event to exempt one from liability, it is necessary that
one has committed no negligence or misconduct that
may have occasioned the loss.

Sicam had testified that there was a security guard in

their pawnshop at the time of the robbery. He likewise
testified that when he started the pawnshop business in
1983, he thought of opening a vault with the nearby
bank for the purpose of safekeeping the valuables but
was discouraged by the Central Bank since pawned
articles should only be stored in a vault inside the
pawnshop. The very measures which petitioners had
allegedly adopted show that to them the possibility of

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robbery was not only foreseeable, but actually foreseen
and anticipated. Sicams testimony, in effect,
contradicts petitioners defense of fortuitous event.
Moreover, petitioners failed to show that they were free
from any negligence by which the loss of the pawned
jewelry may have been occasioned. Robbery per se,
just like carnapping, is not a fortuitous event. It does
not foreclose the possibility of negligence on the part of
herein petitioners.

On the contrary, by the very evidence of petitioners,

the CA did not err in finding that petitioners are guilty
of concurrent or contributory negligence as provided in
Article 1170 of the Civil Code.

Furthermore, petitioner Sicams admission that the

vault was open at the time of robbery is clearly a proof
of petitioners failure to observe the care, precaution
and vigilance that the circumstances justly demanded.
The robbery in this case happened in petitioners
pawnshop and they were negligent in not exercising the
precautions justly demanded of a pawnshop.

Fortuitous event coupled with negligence- there is a

liability

NPC vs CA
161 SCRA 334
FACTS: The plaintiff Engineering Construction, Inc.
(ECI), executed a contract with National Waterworks
and Sewerage Authority (NAWASA) for a project
involving two phases: a tunnel work and outworks at
both ends of the tunnel. On November 4, 1967, strong
winds, along with heavy rains, struck the project area
caused by typhoon Welming. Due to the continuous
heavy downpour, the water in the reservoir of the Angat
Dams reached its danger height of 212 meters above
sea level. This triggered National Power Corporation to
open the spillway gates. This resulted to the large
volume of water to hit the installations and construction
works of ECI which was washed away, lost or destroyed.

ISSUE: Whether or not NPC is liable for the damages

incurred by ECI?

HELD: Yes, NPC, being negligent, is liable for the

damages incurred.

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The Court stated that the happening of a fortuitous
event or an act of God, there concurs a corresponding
fraud, negligence, delay or violation or contravention in
any manner of the tenor of the obligation as provided
for in Article 1170 of the Civil Code, which results in loss
or damage, the obligor cannot escape liability.

Hence, in the case at bar, NPC was undoubtedly

negligent because it opened the spillway gates of the
Angat Dam only at the height of typhoon "Welming"
when it knew very well that it was safer to have opened
the same gradually and earlier, as it was also
undeniable that NPC knew of the coming typhoon at
least four days before it actually struck. And even
though the typhoon was an act of God or what we may
call force majeure, NPC cannot escape liability because
its negligence was the proximate cause of the loss and
damage.

Requisites of a fortuitous event

Vasquez vs CA (138 SCRA 553)

FACTS: On May 15, 1966, MV Pioneer Cebu left the

port of Manila bound for Cebu. However, the vessel
encountered typhoon Klaring and struck a reef and
subsequently sunk. Some of the passengers were
unheard from since then. The family of the said
passengers seek the recovery of damages due to the
loss of Alfonso Vasquez, Filipinas Bagaipo and Mario
Marlon Vasquez during the said voyage.

ISSUE: Whether or not Filipinas Pioneer Lines,

Inc., is not liable for the damages due to fortuitous
event.

HELD: No. Filipinas Pinoeer Lines, Inc., is liable for

the damages for they failed to overcome the
presumption of fault or negligence that arises in cases
of death or injuries to passengers.

The court provided for the requisites to constitute a

fortuitous event: (1) the event must be independent of
the human will; (2) the occurrence must render it
impossible for the debtor to fulfill the obligation in a
normal manner; and that (3) the obligor must be free of

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participation in, or aggravating of the injury to the
creditor.

Under the circumstances, typhoon was considered as

an inevitable occurrence however, having been kept
posted on the course of the typhoon, the captain and
the crew were well aware of the risk they were taking
as they sailed. In doing so, they failed to observe that
extraordinary diligence required of them explicitly by
law for the safety of the passengers transported by
them with the due regard for all circumstances and
unnecessarily exposed the vessel and passengers to
the tragic mishap.

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Overspeeding an act of negligence

Juntilla vs Fontanar
136 SCRA 624

FACTS: The plaintiff was a passenger of the public

utility jeepney driven by defendant Berfol Camoro. It
was registered under the franchise of defendant
Clemente Fontanar. When the jeepney reached
Mandaue City, the right tire exploded causing the
vehicle to turn turtle. Due the accident, the plaintiff who
was sitting at the front seat was thrown out of the
vehicle resulting to lacerated wound on his right palm,
injuries on his left arm, right thig and on his back and
the loss of his Omega wrist watch.

ISSUE: Whether or not the defendants are liable

for the injuries and damages incurred by the plaintiff.

HELD: Yes, the defendants are liable for the injuries

and damages incurred.

The court held the respondents to be negligent and

declared the accident to be not a fortuitous event. The
record shows that the jeepney was running at a very
fast speed before the accident and that it was
overloaded at the time of the accident. The sudden
blowing-up could have been due to the too much air
pressure injected into the tire coupled by the
overspeeding of the jeepney at the time of the
accident.

Furthermore, there was no evidence presented to show

that the accident was due to the adverse road
conditions or that precautions were taken by the
jeepney driver to compensate for any conditions liable
to cause accidents.

Potestative condition effect

NAGA TELEPHONE CO., INC. (NATELCO) AND

LUCIANO M. MAGGAY vs. THE COURT OF APPEALS
AND CAMARINES SUR II ELECTRIC COOPERATIVE,
INC. (CASURECO II)

Facts: The parties entered into a contract for the use

by petitioners Naga Telephone Co., Inc. (NATELCO) in

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the operation of its telephone service the electric light
posts of private respondent Camarines Sur II Electric
Cooperative, Inc. (CASURECO II) in Naga City. In
consideration therefor, petitioners agreed to install, free
of charge, ten (10) telephone connections for the use
by private respondent.

Said contract also provided:

(a) That the term or period of this contract shall be

as long as the party of the first part has need for
the electric light posts of the party of the second
part it being understood that this contract shall
terminate when for any reason whatsoever, the
party of the second part is forced to stop,
abandoned [sic] its operation as a public service
and it becomes necessary to remove the electric
lightpost; (sic)

Issue: Is the period of contract, as long as the party of

the first part has need for electric light posts
potestative?

Ruling: Yes. The said provision is invalid for being

purely potestative on the part of appellant as it leaves
the continued effectivity of the aforesaid agreement to
the latter's sole and exclusive will as long as plaintiff is
in operation

There is no mutuality and equality between them under

the afore-quoted provision thereof since the life and
continuity of said agreement is made to depend as long
as appellant needs plaintiff's electric posts. And this is
precisely why, since 1977 when said agreement was
executed and up to 1989 when this case was finally
filed by plaintiff, it could do nothing to be released from
or terminate said agreement notwithstanding that its
continued effectivity has become very disadvantageous
and inequitous to it due to the expansion and increase
of appellant's telephone services within Naga City and
even outside the same, without a corresponding
increase in the ten (10) telephone units being used by
plaintiff free of charge, as well as the bad and
inefficient service of said telephones to the prejudice
and inconvenience of plaintiff and its customers.

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Basis in the exercise of the right of recission

EDS MANUFACTURING INC v HEALTHCHECK INTL

INC (G.R. NO: 162802)
FACTS: Healthcheck Inc. Is a Health Maintenance
Organization (HMO) that provides prepaid health and
medical insurance coverage to its clients. It entered
into a one-year contract with DLSUMC in which HCI was
to provide the employees of EMI and their dependents
as host of medical services and benefits

After two months , HCI notified EMI that its accreditation

with DLSUMC was suspended and advised it to avail of
the services of nearby accredited institutions.
However, although HCI had yet to settle its accounts
with it, DLSUMC resumed services.

What went in the way of the rescission of the contract

was the failure of EMI to collect all the HMO cards of the
employees and surrender them to HCI as stipulated in
the Agreement. HCI had to tell EMI on that its
employees were still utilizing the cards even beyond
the pretermination date set by EMI. It asked for the
surrender of the cards so that it could process the
pretermination of the contract and finalize the
reconciliation of accounts.

Without responding to this reminder, EMI sent HCI two

letters demanding for the payment of P5, 884,205 as
the 2/3 portion of the premium that remained unutilized
after the Agreement was rescinded in the previous
September.

ISSUE: Whether or not there was a valid rescission of

the agreement of the parties.

RULING: No. In the present case, it is apparent that HCI

violated its contract with EMI to provide medical service
to its employees in a substantial way. As aptly found by
the CA, the various reports made by the EMI employees
from July to August 1998 are living testaments to the
gross denial of services to them at a time when the
delivery was crucial to their health and lives.

However, although a ground exists to validly rescind

the contract between the parties, it appears that EMI
failed to judicially rescind the same.

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It is evident that EMI had not rescinded the contract at
all. As observed by the CA, despite EMI s
pronouncement, it failed to surrender the HMO cards of
its employees although this was required by the
Agreement, and allowed them to continue using them
beyond the date of the rescission. The in-patient and
the outpatient utilization reports submitted by HCI
shows entries as late as March 1999, signifying that EMI
employees 1 were availing of the services until the
contract period were almost over. The continued use by
them of their privileges under the contract, with the
apparent consent of EMI, belies any intention to cancel
or rescind it, even as they felt that they ought to have
received more than what they got.

SPOUSES FAUSTINO AND JOSEFINA GARCIA, SPOUSES

MELITON GALVEZ AND HELEN GALVEZ, and CONSTANCIA
ARCAIRA vs.
COURT OF APPEALS, EMERLITA DE LA CRUZ, and
DIOGENES G. BARTOLOME

G.R. No. 172036 April 23, 2010

Facts: Plaintiffs and defendant Emerlita dela Cruz entered into

a Contract to Sell wherein the latter agreed to sell to the former
five (5) parcels of land.

The pertinent provisions of the contract between the parties

read:

Failure on the part of the vendees to comply with the herein

stipulation as to the terms of payment shall cause the
rescission of this contract and the payments made shall be
returned to the vendees subject however, to forfeiture in favor
of the Vendor equivalent to 1/2% of the total amount paid.

Plaintiffs failed to pay the last installment on its due date. Later
on, plaintiffs offered to pay the unpaid balance, which had
already been delayed by one and a half year. Dela Cruz did not
want to accept petitioners offer of payment and did not want to
execute a document of transfer in petitioners favor. On
September 23, 1995, defendant sold the same parcels of land
to intervenor Diogenes G. Bartolome

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Petitioners justify the delay in payment by stating that they had
notice that Dela Cruz is not the owner of the subject land, and
that they took pains to rectify the alleged defect in Dela Cruzs
title.

Issue: Whether or not there was a valid rescission of the

agreement of the parties.

Ruling: Yes. The validity of the stipulation in the contract

providing for automatic rescission upon non-payment cannot be
doubted. It is in the nature of an agreement granting a party the
right to rescind a contract unilaterally in case of breach without
need of going to court. Thus, rescission under Article 1191 was
inevitable due to petitioners failure to pay the stipulated price
within the original period fixed in the agreement.

Dela Cruz did not conceal from petitioners that the title to Lot
Nos. 2776, 2767 and 2769 still remained under Abelidas name,
and the Contract to Sell even provided that petitioners should
shoulder the attendant expenses for the transfer of ownership
from Abelida to Dela Cruz.

It is undeniable that petitioners failed to pay the balance of the

purchase price on the stipulated date of the Contract to Sell.
Thus, Dela Cruz is within her rights to sell the subject lands to
Bartolome. Neither Dela Cruz nor Bartolome can be said to be
in bad faith.

Effect of slight breach

LEGARDA HERMANOS vs. SALDANA

L-26578, January 08, 1974
FACTS:
Respondent contracted with petitioner to pay in
instalment two parcels of subdivision lots with the
amount of Php1, 500.00 each. The payment was
divided into 120 equal monthly instalments payable for
10 years with interest.
Respondent faithfully paid the monthly instalments
for 8 years after which nothing followed, there by owing
petitioner the sum of Php1, 317.72 as balance when
complaint was filed.
Years passed, the respondent wrote a letter to the
petitioner stating that they wanted to build a house in
the said lots but was prevented due to the failure of the

11
petitioner to introduce improvements on the subdivision
such as roads leading to the lots.
The Petitioner then replied that the cancellation of
the contracts is confirmed pursuant to the provisions of
both contracts. All the amounts paid in accordance with
the agreement together with the improvements on the
premises have been considered as rents paid and as
payment for damages suffered by your failure.
ISSUE:
Whether the Petitioners action to rescind the
contract due to Respondents default in payment is
valid
RULING:
No. The action to rescind the contract due to
respondents default in payment is not valid. The Court
decided the case by applying the broad principles of
equity and Justice. According to the SC, the respondent
paid an amount equating to more than the price of one
of the subdivision lots. The only balance due on both
lots was P1, 317.72, which was even less than the value
of one lot. The SC believes that awarding the
respondent one of the two lots in the subdivision
despite the slight breach in the contract is a decision
that is fair and just because it was a decision made in
favour of equity and justice.
The petitioners insist on their right of cancellation
under the "plainly valid written agreements which
constitute the law between the parties" as against "the
broad principles of equity and justice" applied by the
appellate court.
We find that plaintiff herein has not been
denied substantial justice, for, according to Art. 1234 of
said Code: '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,'" and "that in the
interest of justice and equity, the decision appealed
from may be upheld upon the authority of Article 1234
of the Civil Code."

OBLIGATIONS WITH A PERIOD

When time is of the essence

LORENZO SHIPPING CORP. vs. BJ MARTHEL

INTERNATIONAL, INC.
443 SCRA 163 (2004)

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FACTS:
Petitioner Lorenzo Shipping Corporation is a
domestic corporation engaged in coastwise shipping
Respondent BJ Marthel International, Inc. is a business
entity engaged in trading, marketing, and selling of
various industrial commodities. It is also an importer
and distributor of different brands of engines and spare
parts.
Respondent supplied petitioner with spare parts
for the latters marine engines. Sometime in 1989,
petitioner asked respondent for a quotation for various
machine parts. Acceding to this request, respondent
furnished petitioner with a formal quotation. The
quotation also stated that delivery will be made 2
months after receipt of form order and there must be
payment of 25% upon delivery, balance payable in 5 bi-
monthly equal Instalment[s] not to exceed 90 days.
Petitioner issued purchase order No. 13839 and
14011 respectively for the procurement of the
cylinders. Both purchase order did not state the date of
the cylinder liners delivery. Petitioner issued post dated
checked as payment. Respondent deposited petitioners
check, however, the same was dishonored by the
drawee bank due to insufficiency of funds. The
remaining nine postdated checks were eventually
returned by respondent to petitioner. Respondent
thereafter placed the order for the two cylinder liners
with its principal in Japan, Daiei Sangyo Co. Ltd., by
opening a letter of credit on February 1990 under its
own name with the First Interstate Bank of Tokyo. On
April 1990 repondents sales manager, delivered the
two cylinder liners at petitioners warehouse.
Respondent thereafter demanded for full payment
the two cylinder liners by sending a Statement of
Account and a demand letter to petitioner. In reply,
petitioner sent respondent a letter offering to pay only
P150,000 for the cylinder liners. In said letter, petitioner
claimed that as the cylinder liners were delivered late
and due to the scrapping of the M/V Dadiangas Express,
it would have to sell the cylinder liners in Singapore and
pay the balance from the proceeds of said sale.
Respondent then sent another demand letter stating
the same conditions stated above plus payment for
damages.
The two parties were not able to settle their
dispute hence the respondents filed a case in court. In
its complaint, respondent alleged that despite its

13
repeated oral and written demands, petitioner
obstinately refused to settle its obligations. Petitioner
afterwards filed its Answer alleging therein that time
was of the essence in the delivery of the cylinder liners
and that the delivery on April 1990 of said items was
late as respondent committed to deliver said items
within two (2) months after receipt of firm order from
petitioner.
ISSUE:
Whether time is of the essence in the contract
between petitioner and respondent

RULING:
In determining whether time is of the essence in a
contract, the ultimate criterion is the actual or apparent
intention of the parties and before time may be so
regarded by a court, there must be a sufficient
manifestation, either in the contract itself or the
surrounding circumstances of that intention. Petitioner
insists that although its purchase orders did not specify
the dates when the cylinder liners were supposed to be
delivered, nevertheless, respondent should abide by the
term of delivery appearing on the quotation it
submitted to petitioner. Petitioner theorizes that the
quotation embodied the offer from respondent while the
purchase order represented its (petitioners) acceptance
of the proposed terms of the contract of sale. Thus,
petitioner is of the view that these two documents
cannot be taken separately as if there were two distinct
contracts. We do not agree.
It is a cardinal rule in interpretation of contracts
that if the terms thereof are clear and leave no doubt as
to the intention of the contracting parties, the literal
meaning shall control. However, in order to ascertain
the intention of the parties, their contemporaneous and
subsequent acts should be considered. While this Court
recognizes the principle that contracts are respected as
the law between the contracting parties, this principle is
tempered by the rule that the intention of the parties is
primordial and once the intention of the parties has
been ascertained, that element is deemed as an
integral part of the contract as though it has been
originally expressed in unequivocal terms.

Effect is there is an extension to pay without a fixed

period

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Pacific Banking Corp vs. CA
173 SCRA 102 (1989)
FACTS:
Joseph and Eleanor Hart, herein private
respondents, organized Insular Farms, Inc. (IFI), a
business in line with cultivation of fish and saltmaking.
In need for financial assistance, sps Hart approached
John Clarkin. Joseph and John signed a Memorandum of
Agreement. One of the stipulations in the memorandum
was the division of shares outstanding, Clarkin has 510
shares and 490 shares for the Harts.
Insular Farms Inc., because of financial difficulties,
borrowed P 250,000.00 from Pacific Banking
Corporation sometime in July of 1956. On July 1956
Insular Farms Inc. executed a Promissory Note of P
250,000.00 to the bank payable in five equal annual
installments, the first installment payable on or before
July 1957. Said note provided that upon default in the
payment of any installment when due, all other
installments shall become due and payable.
This loan was effected without any security except
for the Continuing Guaranty of Clarkin. The business
floundered but PBC did not demand payment for the
initial July 1957 installment nor the entire obligation.
The business further deteriorated so Hart pledged all IFI
shares of stocks to PBC in lieu of additional collateral
and to insure an extension of the periods to pay the July
1957 installment. This was executed on February 1958.
On March 3, 1958, Pacific Farms Inc. (PFI) was
created and was engage in the same business as IFI.
The next day, PBC, wrote IFI that the entire obligation is
due in 48 hours. Subsequently, Hart received a notice
that the shares of stocks would be sold at a public
auction. On March 21, the 1,000 shares of stocks of IFI
were sold to PFI.
Hart filed a case. His contention was that there
was an indefinite extension of time to pay their
obligation under the PN and there was no demand
made by the bank, therefore the sale of the shares was
void. The trial court decided against the private
respondents but had a favorable judgment on appeal.

ISSUE: Whether or not the CA erred in committing

grave error in finding that petitioner bank agreed to an
indefinite extension.

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RULING:
We also note that the rule which states that there
can be no valid extension of time by oral agreement
unless the extension is for a definite time, is not
absolute but admits of qualifications and exceptions.
The general rule is that an agreement to extend
the time of payment, in order to be valid, must be for a
definite time, although it seems that no precise date be
fixed, it being sufficient that the time can be readily
determined. In case the period of extension is not
precise, the provisions of Article 1197 of the Civil Code
should apply. In this case, there was an agreement to
extend the payment of the loan, including the first
installment thereon which was due on or before July
1957.

JOINT AND SOLIDARY OBLIGATIONS

Several creditors or debtors in one obligation no
presumption

14. CEMBRANO VS. CITY OF BUTUAN (502 SCRA

494)
FACTS:
The City of Butuan issued a Purchase Order for 757
timber piles to CVC or Gil Cembrano. Petitioner, along
with Gener Cembrano, secured a loan as evidenced by
a promissory note. CVC was able to make two deliveries
within the 60-day period, which respondent accepted
and paid for. Petitioner received payment for the
deliveries as evidenced by disbursement vouchers.
The 60-day period for CVC to make the deliveries
expired. CVC offered to deliver the remaining timber
piles, but respondent refused. CVC, through the
petitioner, requested for an extension to complete the
delivery. The City Engineer denied its request and
recommended to hold a re-bidding regarding the
unexecuted portion of the contract. It was held with the
approval of former City Mayor Sanchez but without
notice to CVC.
An investigation was conducted regarding the
cancellation of the contract and the re-bidding. CVC and
Cembrano, through Go, filed a complaint for breach of
contract and damages against respondent. In its
Answer, respondent admitted the allegations in the
complaint. Cembrano appealed the decision to the CA.
The CA reversed the decision of the TC and ordered
respondent to pay its liability to Cembrano and CVC.

16
ISSUE: Whether or not respondent is still bound to its
obligation to CVC.

HELD: Respondent City, as judgment debtor, is

burdened to prove with legal certainty that its
obligation under the CA decision in CA-G.R. CV No.
55049 has been discharged by payment, which under
Article 1240 of the Civil Code, is a mode of
extinguishing an obligation. It provides that 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.

Payment made by the debtor to the person of the

creditor or to one authorized by him or by the law to
receive it extinguishes the obligation. When payment is
made to the wrong party, however, 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.

In general, a payment in order to be effective to

discharge an obligation must be made to the proper
person. Thus, payment must be made to the obligee
himself or to an agent having authority, express or
implied, to receive the particular payment.

No presumption of solidary liability of two persons

15. MANLAR RICE MILL VS. DEYTO (715 SCRA 81)

FACTS: Ang entered into a rice supply contract with

Manlar, with the former purchasing rice from the latter
and the transaction was covered by nine postdated
checks issued by Ang from her personal bank/checking
account. The first two checks were dishonored for
having been drawn against insufficient funds; the
remaining seven checks were dishonored for being
drawn against a closed account. Manlar made oral and
written demands upon both Deyto and Ang, which went
unheeded. During the time demand was being made
upon Deyto, she informed Manlar, through its Sales
Manager Pua, that Ang could not be located.

17
Manlar filed a Complaint for sum of money against
Deyto and Ang before the RTC of Quezon City seeking
to hold Deyto and Ang solidarily liable on the rice
supply contract. TC ruled that both defendants should
be held solidarily liable for the unpaid and outstanding
Manlar account.
Upon appeal, the CA concluded that there is no legal
basis to hold Deyto solidarily liable with Ang for what
the latter may owe Manlar. The evidence failed to
indicate that Deyto had any participation in the
supposed transactions between her daughter and
Manlar. Petitioner filed a Petition for Review on
Certiorari to the Supreme Court.

ISSUE: Whether or not the CA is correct in concluding

that there is no legal basis to hold Deyto solidarily liable
with Ang for what the latter may owe Manlar?

HELD: Yes. The evidence does not support Manlars

view that both Deyto and Ang contracted with Manlar
for the delivery of rice on credit. Preponderance of
evidence indicates that it was Ang alone who entered
into the rice supply agreement with Manlar. The
documentary evidence shows that the subject checks
were issued from a bank account in China bank del
Monte branch belonging to Ang alone.

As a general rule, a contract affects only the parties to

it, and cannot be enforced by or against a person who
is not a party thereto. It is a basic principle in law that
contracts can bind only the parties who had entered
into it; it cannot favor or prejudice a third person.

Under Article 1311 of the civil code, contracts take

effect only between the parties, their assigns and heirs.
Thus, Manlar may sue Ang, but not Deyto, who the
court finds to be not a party to the rice supply contract.

Iniquitous Penalty

HL CARLOS VS. MARINA PROPERTIES CORP. (421

SCRA 428)

FACTS: MPC entered into a contract5 with Petitioner HLC

to construct Phase III of a condominium complex within
a period of 365 days from receipt of Notice to Proceed.
The original completion date of the project was May 16,

18
1989, but it was extended to October 31, 1989 with a
grace period until November 30, 1989.

HLC instituted this case for sum of money against not

only MPC but also against the latters alleged president,
seeking the payment of various sums with an
aggregate amount of P14 million pesos. Respondents
filed separate answers, whereby the two individual
respondents alleged that they are not parties to the
Construction Contract and Amendatory Contract and
are therefore not liable to HLC. MPC alleged that the
petitioner has no cause of action against it and that it
(HLC) is not entitled to its various claims. The trial court
dismissed the case for lack of evidence.

On appeal, the CA held that respondents were not liable

for escalations in the cost of labor and construction
materials. Furthermore, the CA ruled that petitioner was
liable for actual and liquidated damages. The latter had
abandoned the project prior to its completion. In
addition, the Construction Contract had stipulated
payment of liquidated damages in an amount
equivalent to 1/1000 of the contract price for each
calendar day of delay. Hence, this Petition.

ISSUE: Whether or not petitioner should be exonerated

from the counterclaims for actual and liquidated
damages
HELD: No. petitioner did not fulfill its contractual
obligations. It could not totally pass the blame to MPC
for hiring a second contractor, because the latter was
allowed to terminate the services of the contractor.
Petitioner accomplished only approximately 80 percent
of the project. In other words, it was already in delay at
the time.

The amount agreed upon answers for damages suffered

by the owner due to delays in the completion of the
project. Under Philippine laws, these damages take the
nature of penalties. A penal clause is an accessory
undertaking to assume greater liability in case of a
breach. It is attached to an obligation in order to ensure
performance.

19
SSS vs. Moonwalk Development and Housing
Corporation

FACTS: Plaintiff SSS approved the application of

Defendant Moonwalk for an interim loan in the amount
of THIRTY MILLION PESOS (P30,000,000.00) for the
purpose of developing and constructing a housing
project in the provinces of Rizal and Cavite. Out of the
approved loan of THIRTY MILLION PESOS
(P30,000,000.00), the sum of P9,595,000.00 was
released to defendant Moonwalk as of November 28,
1973

A third Amendment Deed of Mortgage was executed for

the payment of the amount of P9,595,000. Defendants
Rosita U. Alberto and Rosita U. Alberto, mother and
daughter respectively, under paragraph 5 of the
aforesaid Third Amended Deed of First Mortgage
substituted Associated Construction and Surveys
Corporation, Philippine Model Homes Development
Corporation, Mariano Z. Velarde and Eusebio T. Ramos,
as solidary obligors. Moonwalk made a total payment of
P23,657,901.84 to SSS for the loan principal of
P12,254,700.
After settlement of the account, SSS issued to
Moonwalk the release of Mortgage for Moonwalks
Mortgaged properties. In letter to Moonwalk, SSS
alleged that it committed an honest mistake in
releasing defendant. That Moonwalk has still 12%
penalty for failure to pay on time the amortization
which is in the penal clause of the contract.
Moonwalks counsel told SSS that it had completely
paid its obligation to SSS and therefore there is no
recovery of any penalty.

The trial court issued an order dismissing the

complaint on the ground that the obligation was
already extinguished by the payment by Moonwalk of
its indebtedness to SSS and by the latter's act of
cancelling the real estate mortgages executed in its
favor by defendant Moonwalk. The Supreme Court
likewise dismissed the Motion for Reconsideration
filed by SSS with the trial court.

ISSUE: Whether or not penalty is demandable even

after the extinguishment of the principal obligation.

20
HELD: No. There has been a waiver of the penal clause
as it was not demanded before the full obligation was
fully paid and extinguished.

Default begins from the moment the creditor demands

the performance of the obligation. In this case, although
there were late amortizations there was no demand
made by SSS for the payment of the penalty.

Hence, Moonwalk is not in delay in the payment of the

penalty. No delay occurred and there was no occasion
when the penalty became demandable and
enforceable.

Since there was no default in the performance of the

main obligation-payment of the loan- SSS was never
entitled to recover any penalty.

If the demand for the payment of the penalty was made

prior to the extinguishment of the obligation which are:
1. The principal obligation 2. The interest of 12% on the
principal obligation 3.The penalty of 12% for late
payment for after demand, Moonwalk would be in delay
and therefore liable for the penalty.

To support its claim, SSS cited the case of United

Christian Missionary Society v. Social Security
Commission.

It was found out that it is not applicable to the present

case as it dealt not with the right of the SSS to collect
penalties which were provided for in contracts which it
entered into but with its right to collect premiums and
its duty to collect the penalty for delayed payment or
non-payment of premiums.

The Supreme Court, in that case, stated:

"No discretion or alternative is granted respondent

Commission in the enforcement of the law's mandate
that the employer who fails to comply with his legal
obligation to remit the premiums to the System within
the prescribed period shall pay a penalty of three (3%)
per month. The prescribed penalty is evidently of a
punitive character, provided by the legislature to assure
that employers do not take lightly the State's exercise
of the police power in the implementation of the
Republic's declared policy "to develop, establish

21
gradually and perfect a social security system which
shall be suitable to the needs of the people throughout
the Philippines and (to) provide protection to employers
against the hazards of disability, sickness, old age and
death . . ."

The case at bar does not refer to any penalty provided

for by law nor does it refer to the non remittance of
premium. The case at bar refers to a contract of loan
entered into between plaintiff and defendant Moonwalk
Development and Housing Corporation. Note, therefore,
that no provision of law is involved in this case, nor is
there any penalty imposed by law nor a case about
non-remittance of premium required by law. The
present case refers to a contract of loan payable in
instalments not provided for by law but by agreement
of the parties. Therefore, the ratio decidendi of the case
of United Christian Missionary Society vs. Social
Security Commission which plaintiff-appellant relies is
not applicable in this case; clearly, the Social Security
Commission, which is a creature of the Social Security
Act cannot condone a mandatory provision of law
providing for the payment of premiums and for
penalties for non remittance. The life of the Social
Security Act is in the premiums because these are the
funds from which the Social Security Act gets the
money for its purposes and the non-remittance of the
premiums is penalized not by the Social Security
Commission but by law.

The petition is DISMISSED and the decision of the

respondent court is AFFIRMED.

Filinvest Land, Inc. vs CA

Facts: Filinvest engaged in the development and sale of

residential subdivisions, awarded to Pacific Equipment
the development of its residential subdivisions
consisting of two (2) parcels of land. The terms and
conditions of which are contained in an Agreement. To
guarantee its faithful compliance and pursuant to the
agreement, Pacific posted two (2) Surety Bonds in favor
of Filinvest which were issued by defendant Philippine
American General Insurance.

After three extensions granted by Filinvest to Pacific the

latter failed to finish the contracted works. Filinvest

22
wrote Pacific advising the latter of its intention to take
over the project and to hold said defendant liable for all
damages which it had incurred and will incur to finish
the project. Filinvest submitted its claim against
PHILAMGEN but PHILAMGEN refused because its
principal, Pacific, refused to acknowledge liability.

Pacific claims that its failure was due to inclement

weather and the refusal of Filinvest to accept and pay
for several items of finished work and change orders.
The failure of Filinvest to pay its progressing bills estops
it from demanding fulfilment of what is incumbent upon
Pacific. The granting of three extensions for the work to
be completed is a waiver of Filinvest's rights to claim
any damages.

The unilateral and voluntary action of Filinvest to

prevent Pacific from completing the work has
extinguished the obligation.- PHILAMGEN claims that
the amendments made to the principal contract without
its written consent have released it from any or all
liability. The parties agreed to appoint a commissioner
to assist the court in resolving the issue.

The Court received architects findings based on the

construction documents. Based of billings of Pacific and
payments made by Filinvest, the work accomplished by
Pacific amounted to P11,788,282.40, with the exception
of the last billing which Filinvest refused to pay in the
amount of P844,396.42. The total amount of work left
to be accomplished by Filinvest was amounted at
P681,717.58.(P12,470,000, original contract, minus
work accomplished by Pacific). The alleged repairs
made by Filinvest for construction deficiencies had no
basis. Pacific had additional work done amounting to
P477,000.00.-
The trial court held that the findings of the
commissioner should be conclusive, final and binding
among the parties. The unpaid balance of work done by
Pacific (P1,939,191.67) added to the additional work
done (P475,000.00), and from this total, to deduct the
cost to repair the deficiency or defect in the work done
by Pacific(P532,324.01). Filinvest owes Pacific
P1,881,867.66.- The trial court, however, took note that
Pacific was in delay since April 1979. The third
extension agreement of September 1979 was clear that
they should complete all unfinished works by October
15, 1979, otherwise, Pacific will be liable to pay the

23
penalty up to the time all contracted works shall have
been actually finished, in addition to other damages.
Pacific became liable for delay when it did not finish the
project on October 15, 1979.

The court finds the claim of P3,990,000.00

penalty(P15,000 per day from April 25, 1979 to January
15, 1980) to be excessive and held that a forfeiture of
the amount due to Pacific from Filinvest is a reasonable
penalty considering the amount of work already
performed by Pacific.
The Court of Appeals affirmed this decision.

ISSUE: Whether or not Pacific Corp is liable for the

penalty for the delay they have incurred when it did not
finish the project on the date agreed upon.

Held: Filinvest argues that the penalty in its entirety

should be respected as it was a product of mutual
agreement and it represents only 32% of the
12,470,000 contract price. The penalty was fixed to
provide for actual or anticipated liquidated damages
and not simply to ensure compliance with the terms of
the contract. The penalty of 15,000 per day of delay
was mutually agreed upon by the parties and that the
same is sanctioned by law. A penal clause is an
accessory undertaking to assume greater liability in
case of breach. It is attached to the obligation in order
to insure performance and has a double function: 1. to
provide for liquidated damages 2. strengthen the
coercive force of the obligation by the threat of greater
responsibility in the event of breach.

In obligations with a penal clause, the penalty shall

substitute the indemnity for damages and the payment
of interests in case of noncompliance, if there is no
stipulation to the contrary. Nevertheless, damages shall
be paid if the obligor refuses to pay the penalty or is
guilty of fraud in the fulfilment of the obligation. The
penalty may be enforced only when it is demandable in
accordance with the provisions of this Code.

As a general rule, Courts are not at liberty to ignore the

freedom of the parties to agree on such terms and
conditions, as they see it as long as they are not
contrary o law, morals, good customs, public order or
public policy. Nevertheless, courts may equitably
reduce a stipulated penalty in the contract in two

24
instances; 1. If the principal obligation has been partly
or irregularly complied; 2. Even if there has been no
compliance if the penalty is iniquitous or
unconscionable in accordance with Article 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.
Unfortunately for Filinvest, the above-quoted doctrine is
inapplicable to herein case. That a distinction between
a penalty clause imposed essentially as a penalty in
case of breach and a penalty clause imposed as
indemnity for damages should be made in cases where
there has been neither partial nor irregular compliance
with the terms of the contract.

In cases where there has been partial or irregular

compliance, there will be no substantial difference
between a penalty and liquidated damages insofar as
legal results are concerned. Liquidated damages are
those agreed upon by the parties to a contract to be
paid in case of breach thereof. Liquidated damages,
whether intended as an indemnity or a penalty, shall be
equitably reduced if they are iniquitous or
unconscionable. In the case herein there has been
substantial compliance in good faith on the part of
Pacific which renders unconscionable the application of
the full force of the penalty. Nothing in the records
suggests that Pacific's delay in the performance of
5.47% of the contract was due to it having acted
negligently or in bad faith. Thus, Pacific is not liable for
the penalty for the delay in the project

CHECK DOES NOT CONSTITUTE PAYMENT

TIBAJIA JR., et. al V. COURT OF APPEALS

223 SCRA 163 (1993)

FACTS:
A suit for collection of a sum of money was filed by
private respondent against the petitioner spouses. The
court ruled in favor of Tan and thereon a writ of
attachment was issued by the trial court.

25
Petitioner spouses then delivered to the Deputy Sheriff
the total money judgment in check. However, private
respondent refused to accept the payment and instead
insisted that the garnished funds deposited be
withdrawn to satisfy the judgment obligation.

ISSUE: Whether or not the Cashiers Check tendered by

Petitioners for payment of the judgment is considered
as a legal tender

HELD:
NO. A check, whether it is a managers check or an
ordinary check, is not considered as a legal tender.

Article 1249 of the Civil Code provides that the delivery

of promissory notes payable to order, or bills of
exchange or other mercantile documents shall produce
the effect of payment only when they have been
cashed, or when through the fault of the creditor they
have been impaired.

Provided further in Sec. 63 of Republic Act No. 265 that

Checks representing deposit money do not have legal
tender power and their acceptance in the payment of
debts, both public and private, is at the option of the
creditor: Provided, however, that a check which has
been cleared and credited to the account of the creditor
shall be equivalent to a delivery to the creditor of cash
in an amount equal to the amount credited to his
account.

Thus, an offer of a check in payment of a debt is not a

valid tender of payment and may be refused by the
creditor.

The Supreme Court stressed that, We are not, by this

decision, sanctioning the use of a check for the
payment of obligations over the objection of the
creditor.

ROMAN CATHOLIC BISHOP OF MALOLOS, INC. V.

IAC
191 SCRA 411 (1990)

26
FACTS:
Petitioner and private respondent entered into a
contact where the former sells a piece of land. The
stipulation provides for a down payment of P23, 930
and the balance of P100, 000 plus 12% interest per
annum to be paid within 4 years from the execution of
the contract.

After the expiration of the stipulated period for

payment, private respondent wrote the petitioner a
formal request that her company be allowed to pay the
principal amount of P100, 000.00 in three (3) equal
installments. The petitioner however denied the same
but granted the latter a grace period of five (5) days
from the receipt of the denial to pay the total balance.

Consequently, the private respondents president wrote

a letter to the petitioner, protesting the alleged refusal
of the latter to accept tender of payment (a check)
purportedly made by the former on August 5, 1975, the
last day of the grace period.

ISSUE: Whether or not an offer of a check is a valid

tender of payment of an obligation under a contract
which stipulates that the consideration of the sale is in
Philippine Currency.

HELD:
No. The offer of a check is not a valid tender of
payment of an obligation under a contract which
stipulates that the consideration of the sale is in
Philippine Currency.

In the case of Philippine Airlines v. Court of Appeals, it

has been held that, since a negotiable instrument is
only a substitute for money and not money, the
delivery of such an instrument does not, by itself,
operate as payment. A check, whether a managers
check or ordinary check, is not legal tender, and an
offer of a check in payment of a debt is not a valid
tender of payment and may be refused receipt by the
obligee or creditor. The tender of payment by the
private respondent was not valid for failure to comply
with the requisite payment in legal tender or currency
stipulated within the grace period.

27
FORTUNADO V. COURT OF APPEALS
196 SCRA 269 (1991)

FACTS:
The Regional Trial Court rendered a judgment in a civil
case ordering respondent to pay damages to the
plaintiff. Pursuant to the said judgment, respondent
levied two parcels of land. The latter lot had already
been purchased by respondent National Steel
Corporation as of August 17, 1983, but had not yet
been registered in its name.

After due notice, the lots were sold at a public auction

to the petitioners as the only bidder. In 1985, NSC gave
notice to the sheriff of its intention to redeem the lot.
Pursuant thereto, the sheriff acknowledged receipt of
the check given by respondents as redemption money
for the two parcels of land.

In 1985, Bautista wrote the sheriff that he would no

longer effect the redemption because there was
nothing to redeem, the auction sale being null and void.

Thereafter, the sheriff wired the petitioners counsel,

notifying him of the deposit of the PNB check. The said
counsel told the sheriff that he was rejecting the check
because it was not legal tender and was not intended
for payment but merely for deposit

ISSUE: Whether or not the check constitutes a valid

tender of payment

HELD:
YES. In this case, the tender of check is sufficient to
compel redemption but is not in itself a payment.

The court held that a check may be used for the

exercise of the right of redemption, the same being a
right and not an obligation. The tender of a check is
sufficient to compel redemption but is not in itself a
payment that relieves the redemptioner from his
liability to pay the redemption price.

In other words, while the court held that private

respondents properly exercised their right of

28
redemption, they remain liable for the payment of the
redemption price.

FILIPINO PIPE V. NATIONAL WATERWORKS AND

SEWAGE AUTHORITY
161 SCRA 32 (1988)

FACTS:
Private respondent entered into a contract with
petitioner for the latter to supply iron pressure pipes
worth P270,187.50 to be used in the construction of the
Anonoy Waterworks. Respondent paid in installments
which left a balance of P133,507.50 excluding interest.

Petitioner then demanded payment from respondent for

the unpaid balance with interest in accordance with the
terms of their contract. However, respondent failed to
pay which prompted petitioner to file a collection suit.

RTC rendered judgment ordering respondent to pay the

unpaid balance. Thereafter, petitioner filed another
complaint seeking an adjustment of the unpaid balance
in accordance with the value of the Philippine Peso
alleging that a spiraling inflation has marked the
progress of the country from 1962 up to the present.
The price index of commodities, which is the usual
evidence of the value of the currency has been rising.

ISSUE: Whether or not there exists an extraordinary

inflation of the currency justifying an adjustment of
NAWASAs unpaid judgment obligation to petitioner.

HELD:
NO. There is no extraordinary inflation of the currency
that would justify an adjustment of NAWASAs unpaid
judgment obligation to petitioner.

Extraordinary inflation exists "when there is a decrease

or increase in the purchasing power of the Philippine
currency which is unusual or beyond the common
fluctuation in the value said currency, and such
decrease or increase could not have reasonably
foreseen or was manifestly beyond contemplation the
the parties at the time of the establishment of the

29
obligation. (Tolentino Commentaries and Jurisprudence
on the Civil Code Vol. IV, p. 284.)

Although petitioners voluminous records and statistics

proved that there has been indeed a decline in the
purchasing power of the Philippine peso, this downward
fall of the currency cannot be considered
"extraordinary." It is simply a universal trend that has
not spared the country.

HAHN V. COURT OF APPEALS

173 SCRA 675

FACTS:
Respondent received two diamond rings in 1996 from
petitioner. In lieu of such, she issued separate receipts
in which she acknowledged that they had been
delivered to her for sale on commission and that they
would be returned upon demand if unsold. The said
rings were left unsold neither were they returned upon
demand by petitioner.

Hahn sued for recovery of the rings or their value. The

trial court rendered a decision ordering respondent to
return the two rings or pay the plaintiff their value,
which was increased to P65,000.00. The increase on
the original value of the rings was based on Article
1250 of the Civil Code calling for an adjustment of the
payment due in case of extraordinary inflation or
deflation. The moral and exemplary damages were
imposed because of the defendant's "seeming lack of
scruples and conscientiousness."

ISSUE: Whether or not Article 1250 of the Civil Code is

applicable in this case

HELD:
NO. Article 1250 of the Civil Code provides that in case
an extraordinary inflation or deflation of the currency
stipulated should supervene, the value of the currency
at the time of the establishment of the obligation
should be the basis of payment, unless there is an
agreement to the contrary.

By extraordinary inflation or deflation of currency is

understood to be any uncommon decrease or increase
in the purchasing power of currency which the parties

30
could not have reasonably foreseen and which has been
due to war and the effects thereof, or any unusual force
majeure or fortuitous event. (Civil Code of the
Philippines, Dean Capistrano, Vol. III, p. 186.)

In this case, there is no extraordinary inflation within

the meaning of the afore-quoted provision.

What could have been imposed was interest on the

interest due on the principal amount of P47,000.00,
conformably to Article 2212. The interest due started to
earn interest from the date it was judicially demanded
with the filing of the complaint on January 6,1967.

TOLOMEO LIGUTAN and LEONIDAS DE LA LLANA

vs. HON. COURT OF APPEALS & SECURITY BANK &
TRUST COMPANY

G.R. No. 138677. February 12, 2002

Facts:
Petitioners Tolomeo Ligutan and Leonidas dela Llana obt
ained a loan in the amount of P120,000.00 from
respondent Security Bank and Trust
Company. Petitioners executed a promissory note
binding themselves, jointly and severally, with an
interest of 15.189% per annum upon maturity and to
pay a penalty of 5% every month on the outstanding
principal and interest in case of default and also a 10%
attorneys fees if the matter were indorsed to a lawyer
for collection.

The obligation matured, the petitioners were not

able to settle the obligation; The bank gave an
extension, still the same happened. Since the
petitioners still defaulted, the former filed a complaint
for recovery of the due amount.

Issue: Whether the interest and penalty charge

imposed by private respondent bank on petitioners
loan are manifestly exorbitant, iniquitous and
unconscionable?

31
Ruling: Although a court may not at liberty ignore the
freedom of the parties to agree on such terms and
conditions as they see fit that contravene neither law
nor morals, good customs, public order or public policy,
a stipulated penalty, nevertheless, may be equitably
reduced by the courts if it is iniquitous or
unconscionable or if the principal obligation has been
partly or irregularly complied with.

The question of whether a penalty is reasonable or

iniquitous can be partly subjective and partly
objective. Its resolution would depend on such factors
as, but not necessarily confined to, the type, extent and
purpose of the penalty, the nature of the obligation, the
mode of breach and its consequences, the supervening
realities, the standing and relationship of the parties,
and the like, the application of which, by and large, is
addressed to the sound discretion of the court.

The CA exercised good judgment in reducing the

stipulated penalty interest from 5% to 3% a month. It
was also been held that the 15.189% per annum
stipulated interest and the 10% attorneys is reasonable
and not excessive. The interest prescribed in loan
financing arrangements is a fundamental part of the
banking business and the core of a bank's existence.

ESTRELLA PALMARES vs. CA and M.B. LENDING

CORPORATION

G.R. No. 126490 March 31, 1998

Facts: Private respondent M.B. Lending Corporation

extended a loan to the spouses Osmea and Merlyn
Azarraga, together with petitioner Estrella Palmares, in
the amount of P30,000.00 payable on or before May 12,
1990, with compounded interest at the rate of 6% per
annum to be computed every 30 days from the date
thereof. Petitioner and the Azarraga spouses were able
to pay a total of P16,300.00, thereby leaving a balance
of P13,700.00. No payments were made after the last
payment on September 26, 1991.

32
For being solidarily liable under the promissory note,
respondent corporation filed a complaint against
petitioner Palmares as the lone party-defendant,
allegedly by reason principal debtors insolvency

Issue: Whether or not the penalty is inequitable and

unreasonable.

Ruling: Yes. The penalty charge of 3% per month and

attorney's fees equivalent to 25% of the total amount
due are highly inequitable and unreasonable.

From the principal loan of P30,000.00, the amount of

P16,300.00 had already been paid even before the filing
of the present case. Article 1229 of the Civil Code
provides that the court shall equitably reduce the
penalty when the debtor has partly or irregularly
complied with the principal obligation. And, even if
there has been no performance, the penalty may also
be reduced if it is iniquitous or leonine.

The penalty interest of 3% per month being

imposed on petitioner should be eliminated for being
iniquitous and unconscionable.

The grant of attorney's fees equivalent to 25% of the

total amount due is, in our opinion, unreasonable and
immoderate, considering the minimal unpaid amount
involved and the extent of the work involved in this
simple action for collection of a sum of money. The
amount of P10,000.00 as and for attorney's fee would
be sufficient in this case.

24. SINGSON VS. CALTEX (324 SCRA 91)

33
FACTS: Petitioner and respondent entered into a
contract of lease over a parcel of land in Quezon City
that was to be used by respondent as a gasoline service
station. Five years before the expiration of the lease
contract, petitioner asked respondent to adjust or
increase the amount of rentals citing that the country
was experiencing extraordinary inflation. In a letter,
respondent refused petitioner's request and declared
that the terms of the lease contract are clear as to the
rental amounts.

Petitioner instituted a complaint before the RTC praying

for the payment by respondent of adjusted rentals
based on the value of the Philippine peso at the time
the contract of lease was executed. The RTC dismissed
the complaint for lack of merit. On appeal, the CA
affirmed the RTCs decision. The Court of Appeals and
the RTC found that the terms of rental in the contract of
lease are clear and unequivocal as to the specific
amount of the rental rates. Petitioner's motion for
reconsideration was denied by the CA. Hence, this
petition.

ISSUE: whether or not there existed an extraordinary

inflation during the period 1968 to 1983.

HELD: No. There is no legal or factual basis to support

petitioner's allegation of the existence of extraordinary
inflation during this period, or for the entire time frame
of 1968 to 1983, to merit the adjustment of the rentals
in the lease contract dated July 16, 1968. Extraordinary
inflation exists when there is a decrease or increase in
the purchasing power of the Philippine currency which
is unusual or beyond the common fluctuation in the
value of said currency, and such increase or decrease
could not have been reasonably foreseen or was
manifestly beyond the contemplation of the parties at
the time of the establishment of the obligation.

34
Although by petitioner's evidence there was a decided
decline in the purchasing power of the Philippine peso
throughout this period, we are hard put to treat this as
an "extraordinary inflation" within the meaning and
intent of Article 1250. Rather, we adopt with approval
the following observations of the Court of Appeals on
petitioner's evidence, especially the NEDA certification
of inflation rates based on consumer price index.

24. HIUBONHOA VS. CA (320 SCRA 625)

FACTS: Florencia entered into a memorandum of

agreement with her siblings stipulating that she would
lease from them (Gojoccos) 3 adjacent commercial lots
at Binondo, Manila. Pursuant to the memorandum of
agreement, the parties inked a contract of lease of the
same three lots for a period of 15 years and renewable
upon agreement of the parties. The lessee undertook to
complete construction of the building within eight
months from the date of the execution of the contract
of lease.

During the construction of the building, former Senator

Benigno Aquino, Jr. was assassinated. The incident
must have affected the countrys political and economic
stability. The consequent hoarding of construction
materials and increase in interest rates allegedly
affected adversely the construction of the building such
that Huibonhoa failed to complete the same within the
stipulated eight-month period from July 1,
1983. Projected to be finished on February 29, 1984,
the construction was completed seven months later.
Huibonhoa was supposed to start paying rental in
March 1984 but she failed to do so. The Gojoccos made
several verbal demands upon Huibonhoa for the
payment of rental arrearages and for her to vacate the
leased premises. The lessors then sent lessee a final
letter of demand to pay the rental arrearages and to
vacate the leased premises. The former also notified
the latter of their intention to terminate the contract of

35
lease. However, petitioner brought an action for
reformation of contract before the RTC Makati. The RTC
ruled that Huibonhoa had not presented clear and
convincing evidence to justify the reformation of the
lease contract.

ISSUE: Whether or not the inflation, which happened

during the assassination of Benigno Aquino, can justify
the adjustment of the terms of the contract of lease.

HELD: No. The Court finds no merit in petitioners

contention that the assassination of the late Senator
Benigno Aquino, Jr., was a fortuitous event that justified
a modification of the terms of the lease contract.

The assassination of Senator Aquino may indeed be

considered a fortuitous event. However, said incident
could not have caused the delay in the construction of
the building. What might have caused the delay was
the resulting escalation of prices of commodities
including construction materials. But there is no merit
in Huibonhoa's argument that the inflation borne by the
Filipinos in 1983 justified the delayed accrual of
monthly rental, the reduction of its amount and the
extension of the lease by three years. Huibonhoa has
no valid ground to ask this Court to intervene and
modify the lease agreement to suit her purpose. As it is,
Huibonhoa even failed to prove by evidence that there
was an extraordinary inflation from July 1983 to
February 1984. An extraordinary inflation cannot be
assumed.

24. SERRA VS. CA (229 SCRA 60)

FACTS: Petitioner is the owner of a 374 square meter

parcel of land located at Masbate. It was agreed that
Serra would lease to RCBC his land from the year 1975
to 2000. It was also agreed that within 10 years from
1975, RCBC would exercise an option whether or not to
buy the said lot at a price not exceeding P210.00 per
square meter. However, no option money was provided
for in the contract hence, RCBC did not pay any option
money for the exercise of such option to buy. What was

36
provided, however, was a clause which stated that in
case RCBC fails to exercise such option to buy, it would
forfeit all improvements it made (or will make) on said
land in favor of Serra.
In 1984, RCBC communicated to Serra that it now wants
to buy the said land. Serra however refused. RCBC sued
Serra. Serra now contends that the option to buy
was ineffective because it was not supported by any
consideration distinct from the price hence, it is not
binding upon him.

ISSUE: Was there a valid contract of lease with option to buy

between the parties? Was there a consideration distinct from
the price to support the option given to RCBC?

HELD: Yes. The Supreme Court affirmed the appellate courts

decision. A contract of adhesion is one wherein a party,
usually a corporation, prepares the stipulations in the
contract, while the other party merely affixes his signature or
his "adhesion" thereto. These types of contracts are as binding
as ordinary contracts because in reality, the party who
adheres to the contract is free to reject it entirely.

In the case at bar, the Supreme Court did not find the
situation to be inequitable because petitioner is a highly
educated man, who, at the time of the trial was already a
CPA-Lawyer, and when he entered into the contract, was
already a CPA, holding a respectable position with the
Metropolitan Manila Commission. It is evident that a man of
his stature should have been more cautious in transactions he
enters into, particularly where it concerns valuable
properties. Also, in the present case, the consideration is even
more onerous on the part of the lessee since it entails
transferring of the building and/or improvements on the
property to petitioner, should respondent bank fail to exercise
its option within the period stipulated.

Legaspi v CA

37
Bernardo B. Legaspi is the owner of two parcels of land
which he sold to his son-in-law, Leonardo B. Salcedo, for
of P25,000.00 with the right to repurchase the same
within five years from the execution of the deed of sale.
It was then alleged by Legaspi that he offered and
tendered to Salcedo the sum of P25,000.00 for the
repurchase of the two parcels of land; that the tender of
payment was refused by Salcedo without justifiable or
legal cause; that Salcedo refused to convey the
properties to Legaspi as requested by the latter;
Legaspi deposited in the Office of the Clerk of Court of
First Instance the amount of P25,125.00 as evidenced
by Official Receipt; that despite earnest efforts towards
a compromise after consignation of the repurchase
money had been made, Salcedo refused to reconvey
the properties in question.

However, Salcedo averred that he denies that Legaspi

ever offered and tendered to him the sum of
P25,000.00 or requested the execution of the
corresponding deed of reconveyance; that what
actually transpired was that Legaspi asked for an
extension of one year within which to repurchase the
two parcels of land bringing with him a document
entitled Extension Period to Repurchase" which Salcedo
declined to sign. By way of special defense, Salcedo
claimed that Legaspi was no longer entitled to
repurchase the properties in question for failure to
exercise his right within the stipulated period. The RTC,
then favored Legaspi. The CA on the other hand
reversed the decision of the trial court and held that
herein petitioner has no right to repurchase. Hence, this
petition.

Issue: Whether or not the act of the petitioners act

tendering the payment and consigning the same was
proper.

Held: Yes, the Court said that Tender of payment is the

manifestation made by the debtor to the creditor of his
desire to comply with his obligation, with the offer of
immediate performance.. Generally, it is an act

38
preparatory to consignation as an attempt to make a
private settlement before proceeding to the solemnities
of consignation. Consignation is the act of depositing
the thing due with the court or judicial authorities
whenever the creditor cannot accept or refuses to
accept payment and it generally requires a prior tender
of payment. In instances where no debt is due and
owing, consignation is not proper

Since the case at bar involves the exercise of the right

to repurchase, a showing that petitioner made a valid
tender of payment is sufficient. It is enough that a
sincere or genuine tender of payment and not a mock
or deceptive one was made. The fact that he deposited
the amount of the repurchase money with the Clerk of
Court was simply an additional security for the
petitioner. It was not an essential act that had to be
performed after tender of payment was refused by the
private respondent although it may serve to indicate
the veracity of the desire to comply with the obligation.

As to the tender of payment in the manner described

by the petitioner resulted in the exercise of the right to
repurchase, the Court ruled that it was erroneous on
the part of the respondent court to reverse the factual
finding of the trial court that a valid tender of payment
was made seasonably. The records show that the right
of repurchase was seasonably exercised. The records
clearly manifest that the petitioner was able to make a
valid tender of payment on the 14th of October 1970 by
offering personally the amount of P25,000.00 to the
private respondent who refused to accept it claiming
that the money was devalued. Thereafter, the petitioner
informed the private respondent that he would be
depositing the same amount with the proper court. The
trial court correctly ruled that there was proper exercise
of the right to repurchase within the five-year period
not for the reason that the deposit of the repurchase
money amounted to a tender of payment but for what
the evidence submitted before it proved.

39
LUISA F. MCLAUGHLIN,
vs.
THE COURT OF APPEALS AND RAMON FLORES,

Luisa F. McLaughlin and private respondent Ramon

Flores entered into a contract of conditional sale of real
property. Paragraph one of the deed of conditional sale
fixed the total purchase price of P140,000.00 payable
as follows: a) P26,550.00 upon the execution of the
deed; and b) the balance of P113,450.00 to be paid not
later than May 31, 1977. The parties also agreed that
the balance shall bear interest at the rate of 1% per
month to commence from December 1, 1976, until the
full purchase price was paid. On June 19, 1979,
petitioner filed a complaint in the then Court of First for
the rescission of the deed of conditional sale due to the
failure of private respondent to pay the balance due on
May 31, 1977.

The parties submitted a Compromise Agreement on the

basis of which the court rendered a decision on January
22, 1980. In said compromise agreement, private
respondent acknowledged his indebtedness to
petitioner under the deed of conditional sale in the
amount of P119,050.71, and the parties agreed that
said amount would be payable as follows: a)
P50,000.00 upon signing of the agreement; and b) the
balance of P69,059.71 in two equal installments on June
30, 1980 and December 31, 1980. As agreed upon,
private respondent paid P50,000.00 upon the signing of
the agreement and in addition he also paid an
"escalation cost" of P25,000.00.

Subsequently, the petitioner wrote to private

respondent demanding that the latter pay the balance
and the installments thereof. However, the respondent
sent a letter to petitioner signifying his willingness and
intention to pay the full balance.

Consequently, herein respondent states that he

tendered payment to petitioner but this was refused
acceptance by petitioner. But the petitioner insisted
that the respondent failed to pay the installments and
the monthly rentals and that the deed of conditional

40
sale be rescinded. The trial Court favored herein
petitioner. The CA reversed the decision of the trial
court by favoring to the respondent.

Issue: Whether or not there the respondent is free from

his liabilities to the petitioner.

Held: No, the Court said that the tender made by

private respondent of a certified bank manager's check
payable to petitioner was a valid tender of payment.
The certified check covered not only the balance of the
purchase price but also the arrears in the rental.

However, although private respondent had made a

valid tender of payment which preserved his rights as a
vendee in the contract of conditional sale of real
property, he did not follow it with a consignation or
deposit of the sum due with the court. According to
Article 1256 of the Civil Code, 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, and that consignation alone shall produce the
same effect in the five cases enumerated therein;
Article 1257 provides that in order that the consignation
of the thing (or sum) due may release the obligor, it
must first be announced to the persons interested in
the fulfillment of the obligation; and Article 1258
provides that consignation shall be made by depositing
the thing (or sum) due at the disposal of the judicial
authority and that the interested parties shall also be
notified thereof.

As the Court held in the case of Soco vs.

Militante, promulgated on June 28, 1983, after
examining the above-cited provisions of the law and the
jurisprudence on the matter:

Tender of payment must be distinguished

from consignation. Tender is the antecedent
of consignation, that is, an act preparatory to
the consignation, which is the principal, and
from which are derived the immediate
consequences which the debtor desires or

41
 seeks to obtain. Tender of payment may be
extrajudicial, while consignation is
necessarily judicial, and the priority of the
first is the attempt to make a private
settlement before proceeding to the
solemnities of consignation.

In the case at bar, although as above stated private

respondent had preserved his rights as a vendee in the
contract of conditional sale of real property by a timely
valid tender of payment of the balance of his obligation
which was not accepted by petitioner, he remains liable
for the payment of his obligation because of his failure
to deposit the amount due with the court.

MAVEST (U.S.A.) INC., and MAVEST Manila Liaison Office,

Petitioners,

vs
SAMPAGUITA GARMENT CORPORATION,

MAVEST (U.S.A.), Inc is an american corporation

but registered with the Philippine Board of Investments,
and MAVEST Manila Liaison Office is MAVEST U.S.A.s
representative in the Philippines. On the other hand,
respondent Sampaguita Garment Corporation is a
domestic corporation engaged in the business of
manufacturing and exporting garments.

Mavest U.S.A. and Mavest Manila Liaison Office

entered into a series of transactions with Sampaguita
Garment Corporation, whereby the former would furnish
from abroad raw materials to be manufactured by the
latter into finished products, for shipment to foreign
buyers, Sears Roebuck and JC Penney. The orders
of Sears Roebuck were duly paid in full by way of letter
of credit. Despite shipment and receipt by JC Penney of
said orders, no payment was made, thus prompting
respondent to send demand letters which remained
unheeded. Thus, Sampaguita Garment filed a complaint
collection of a sum of money. However, herein
petitioners countered that Sampaguita Garment
Corporation has already been paid by virtue of legal

42
compensation, and that it is plaintiff which owes
defendants US5, 799.57 due to the damages and losses
it incurred as a result of the breaches committed in the
previous shipments to Sears Roebuck.

Issue: Whether or not the contetion of the

Petitioner as to its payment of legal compensation is
tenable.

Held: No, the Court said that the Civil Code lists
compensation as one of the modes of extinguishing the
obligations of persons who, in their own right, are
creditors and debtors of each other. Compensation may
be legal or conventional. Legal compensation takes
place ipso jure when all the requisites of law are
present, as opposed to conventional or voluntary
compensation which occurs when the parties agree to
the mutual extinguishment of their credits or to
compensate their mutual obligations even in the
absence of some of the legal requisites.

For compensation to validly take place, the

governing Civil Code provisions require the concurrence
of well-defined conditions. At its minimum,
compensation presupposes two persons who, in their
own right and as principals, are mutually indebted to
each other respecting equally demandable and
liquidated obligations over any of which no retention or
controversy commenced and communicated in due
time to the debtor exists. But while compensation, be it
legal or conventional, requires the confluence in the
parties of the characters of mutual debtors and
creditors, their rights as such creditors, or their
obligations as such debtors, need not spring from one
and the same contract or transaction.

Lastly, in the case at bar legal compensation could

not have occurred. Noteworthy in this case is the fact
that it was only the petitioners debt to the respondent
that had been rightfully established. The petitioners
failed to establish respondents purported liability to

43
them which would have then set the automatic
operation of legal compensation in motion.

Union Bank v DBP

Foodmasters, Inc. had outstanding loan obligations to

both Union Banks predecessor-in-interest, Bancom
Development Corporation (Bancom), and to DBP.
Subsequently, FI and DBP, entered into a Deed of
Cession of Property In Payment of Debt (dacion en
pago) whereby the former ceded in favor of the latter
certain properties in consideration of the following: (a)
the full and complete satisfaction of FIs loan
obligations to DBP; and (b) the direct assumption by
DBP of FIs obligations to Bancom in the amount
of P17,000,000.00.On the same day, DBP, as the new
owner of the processing plant, leased back for 20 years
the said property to FI (Lease Agreement) which was, in
turn, obliged to pay monthly rentals to be shared by
DBP and Bancom.

DBP also entered into a separate agreement with

Bancom (Assumption Agreement) whereby the former:
(a) confirmed its assumption of FIs obligations to
Bancom; and (b) undertook to remit up to 30% of any
and all rentals due from FI to Bancom (subject rentals)
which would serve as payment of the assumed
obligations, to be paid in monthly installments. The
pertinent portions of the Assumption Agreement reads
as follows:

Meanwhile, FI assigned its leasehold rights under the

Lease Agreement to Foodmasters Worldwide, Inc.
(FW) while, Bancom conveyed all its receivables,
including, among others, DBPs assumed obligations, to
Union Bank. Claiming that the subject rentals have not
been duly remitted despite its repeated demands,
Union Bank filed a collection case against DBP before
the RTC. However, DBP countered that the obligations it
assumed were payable only out of the rental payments
made by FI. Thus, since FI had yet to pay the same,

44
DBPs obligation to Union Bank had not arisen. In
addition, DBP sought to implead FW as third party-
defendant in its capacity as FIs assignee and, thus,
should be held liable to Union Bank. The RTC ruled in
favor of the Union Bank. But, CA ruled that DBP did not
default in its obligations to remit the subject rentals to
Union Bank precisely because it had yet to receive the
rental payments of FW; that the legal compensation
being alleged by the Union bank is denied. Hence, this
petition.

Issue: Whether or not the CA correctly upheld the denial

of Union Banks motion to affirm legal compensation.

Held: The Court said that Compensation is defined as a

mode of extinguishing obligations whereby two persons
in their capacity as principals are mutual debtors and
creditors of each other with respect to equally
liquidated and demandable obligations to which no
retention or controversy has been timely commenced
and communicated by third parties. The requisites
thereof are provided under Article 1279 of the Civil
Code which reads as follows:

Art. 1279. In order that compensation may be proper, it

is necessary:
(1) That each one of the obligors be bound principally,
and that he be at the same time a principal creditor of
the other;
(2) That both debts consist in a sum of money, or if the
things due are consumable, they be of the same kind,
and also of the same quality if the latter has been
stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or
controversy, commenced by third persons and
communicated in due time to the debtor.
The rule on legal compensation is stated in Article 1290
of the Civil Code which provides that "[w]hen all the
requisites mentioned in Article 1279 are present,
compensation takes effect by operation of law, and
extinguishes both debts to the concurrent amount,
even though the creditors and debtors are not aware of
the compensation."

45
In this case, Union Bank filed a motion to seek
affirmation that legal compensation had taken place in
order to effectively offset (a) its own obligation to return
the funds it previously received from DBP as directed
under the September 6, 2005 Writ of Execution with (b)
DBPs assumed obligations under the Assumption
Agreement. However, legal compensation could not
have taken place between these debts for the apparent
reason that requisites 3 and 4 under Article 1279 of the
Civil Code are not present.

Naga tel et.al v CA

Petitioner Naga Telephone Co., Inc. (NATELCO) is a
telephone company rendering local as well as long
distance telephone service in Naga City, while
respondent Camarines Sur II Electric Cooperative, Inc.
(CASURECO II) is a private corporation established for
the purpose of operating an electric power service in
the same city.

The parties entered into a contract for the use by

petitioners in the operation of its telephone service the
electric light posts of private respondent in Naga City. In
consideration thereof, petitioners agreed to install, free
of charge, ten (10) telephone connections for the use
by private respondent in some place

After the contract had been enforced for over ten (10)
years, private respondent filed against petitioners for
reformation of the contract with damages, on the
ground that it is too one-sided in favor of petitioners;
that justice and equity demand that the contract be
reformed to abolish the inequities thereon. As second
cause of action, private respondent alleged that
starting with the year 1981, petitioners have used 319
posts in the towns of Pili, Canaman, Magarao and
Milaor, Camarines Sur, all outside Naga City, without
any contract with it, and that petitioners had refused to
pay private respondent said amount despite demands.
And as third cause of action, private respondent

46
complained about the poor servicing by petitioners of
the ten (10) telephone units which had caused it great
inconvenience and damages to the tune of not less
than P100,000.00

However, the petitioners averred that the complaint

should be dismissed, petitioners claimed that private
respondent had asked for telephone lines in areas
outside Naga City for which its posts were used by
them; and that if petitioners had refused to comply with
private respondent's demands for payment for the use
of the posts outside Naga City, it was probably because
what is due to them from private respondent is more
than its claim against them.

Disagreeing with the foregoing judgment, petitioners

appealed to respondent Court of Appeals. In the
decision, respondent court affirmed the decision of the
trial court, but based on different grounds to wit: (1)
that Article 1267 of the New Civil Code is applicable and
(2) that the contract was subject to a potestative
condition which rendered said condition void. Hence,
the present petition.

Issue: Whether or not Article 1267 of the family Code

applies in the case at bar.

Held: Yes, The Court said that Article 1267 of the New
Civil Code speaks of "service" which has become so
difficult. Taking into consideration the rationale behind
this provision, 9 the term "service" should be
understood as referring to the "performance" of the
obligation. In the present case, the obligation of private
respondent consists in allowing petitioners to use its
posts in Naga City, which is the service contemplated in
said article. Furthermore, a bare reading of this article
reveals that it is not a requirement thereunder that the
contract be for future service with future unusual
change.

Therefore, the parties are realsed from their correlative

obligations under the contract. The Court has to take
into account the possible consequences of merely
releasing the parties therefrom: petitioners will remove

47
the telephone wires/cables in the posts of private
respondent, resulting in disruption of their service to
the public; while private respondent, in consonance
with the contract will return all the telephone units to
petitioners, causing prejudice to its business. We shall
not allow such eventuality. Rather, we require, as
ordered by the trial court: 1) petitioners to pay private
respondent for the use of its posts in Naga City and in
the towns of Milaor, Canaman, Magarao and Pili,
Camarines Sur and in other places where petitioners
use private respondent's posts, the sum of ten (P10.00)
pesos per post, per month, beginning January, 1989;
and 2) private respondent to pay petitioner the monthly
dues of all its telephones at the same rate being paid
by the public beginning January, 1989.

G.R. No. 190755 November 24, 2010

LAND BANK OF THE PHILIPPINES vs. ALFREDO ONG

Facts : On March 18, 1996, spouses Johnson and

Evangeline Sy secured a loan from Land Bank Legazpi
City in the amount of 16 million. The loan was secured
by three (3) residential lots, five (5) cargo trucks, and a
warehouse.

Under the loan agreement, 6 million of the loan would

be short-term and would mature on February 28, 1997,
while the balance of 10 million would be payable in seven
(7) years.

The Spouses Sy could no longer pay their loan which

resulted to the sale of three (3) of their mortgaged parcels
of land for PhP 150,000 to Angelina Gloria Ong,
Evangelines mother, under a Deed of Sale with
Assumption of Mortgage.

48
 Petitioner Alfredo Ong, Evangelines father, later went
to Land Bank to inform them about the sale and
assumption of mortgage. Land Bank Branch Head told
Alfredo that there was nothing wrong with agreement
with the Spouses Sy and provided him requirements for
the assumption of mortgage. Alfredo later found out that
his application for assumption of mortgage was not
approved by Land Bank.

On December 12, 1997, Alfredo initiated an action for

recovery of sum of money with damages against Land
Bank, as Alfredos payment was
not returned by Land Bank. Alfredo said that Land
Banks foreclosure without informing him of the denial of
his assumption of the mortgage
was done in bad faith and that he was made to believed
that P750,000 would cause Land Bank to approve his
assumption to the mortgage.

Alfredo to file a case with RTC against Land Bank.

RTC held that the contract approving the assumption of
mortgage was not perfected as a result of the credit
investigation conducted on Alfredo where he was
disapproved. As such, it ruled that it would be incorrect
to consider Alfredo a third person with no interest in the
fulfillment of the obligation under Article1236 of the Civil
Code.
Although Land Bank was not bound by the Deed
between Alfredo and the Spouses Sy, the appellate court
found that Alfredo and Land Banks active preparations
for Alfredos assumption of mortgage essentially novated
the agreement.

Issues :
1) Whether or not the Court of Appeals erred in holding
that Art. 1236 of the Civil Code does not apply and in
finding that there is novation.
Ruling :
Yes, Art. 1236 should be applied in this case. Land
Bank contends that Art.1236 of the Civil Code backs

49
their claim that Alfredo should have sought recourse
against the Spouses Sy instead of Land Bank. The court
agreed with Land Bank on the point mentioned as to the
first part of paragraph 1 of Art. 1236. However, Alfredo
made a conditional payment so that the properties
subject of the Deed of Sale with Assumption of Mortgage
which Land Bank required from him would be approved.
Thus, he made payment not as a debtor but as a
prospective mortgagor. Furthermore, the contract
between Alfredo and LandBank was not perfected nor
consummated because of the adverse disapproval of the
proposed assumption.
The Supreme Court did not agree with the Court of
Appeals that there was novation in the contract between
the parties because not all elements of novation were
present. The court further stresses that the instant case
would not have been litigated had Land Bank been more
circumspect in dealing with Alfredo.
The bank chose to accept payment from Alfredo even
before a credit investigation was underway and also failed
to inform him of the disapproval. The court found that
there was negligence to a certain degree on the part of
Land Bank in handling the transaction with Alfredo. A
bank as a business entity should observe a higher
standard of diligence when dealing with the public which
Land Bank neglect to observe in this case.

Subic Bay Legends Resorts and Casinos Inc. Vs.

Fernandez

Facts: On July 1, 1997, Bernard Fernandez, a brother of

Ludwig and Deoven, filed a complaint for recovery of
sum of money and damages against the company.
According to him, he went to the casino on June 13,
1997; he handed to his brothers $6,000.00 worth of
chips belonging to him, for use at the casino. Thereat,
the company personnel accosted his brothers and
confiscated his casino chips worth $5,900.00 and failed
to return the same to him despite demand. Brothers
Deoven and Ludwig Fernandez wad accused of stealing

50
casino chips from Subic Bay Legend Resorts and Casino
Inc. They were made to confess that the chips were
supplies by a casino employee, Michael Cabrera.

Issue: WON Bernard is the lawful professor of the casino

chips entitling him to collect from the casino and award
of damages.

Ruling: There is no basis to suppose that the casino

chips found in Ludwin and Deovens possession were
stolen; petitioner acted arbitrarily in confiscating the
same without basis. If it cannot be proved, in the first
place, that Cabrera stole the chips, then there is no
more reason to suppose that Ludwin and Deoven were
dealing in or possessed stolen goods; unless the
independent fact that Cabrera stole the chips can be
proved, it cannot be said that they must be confiscated
when found to be in Ludwin and Deovens possession.

Though casino chips do not constitute legal tender,

there is no law which prohibits their use or trade
outside of the casino which issues them. Since casino
chips are considered to have been exchanged with their
corresponding representative value - it is with more
reason that the Court should require the casini to prove
convincingly and persuasively that the chips it
confiscated from Ludwin and Deoven were indeed
stolen from it. If Subic Bay Legend cannot prove its loss,
then Article 599 cannot apply; that the presumptions
that the chips were exchanged for value remains.

ELSA B. REYES, vs. COURT OF APPEALS,

SECRETARY OF JUSTICE,
AFP-MUTUAL BENEFIT ASSOCIATION, INC., and
GRACIELA ELEAZAR

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G.R. No. 120817 November 4, 1996

FACTS: The case involves Elsa Reyes,the president of

EUROTRUST, a domestic corporation engaged in credit
financing. Graciela Eleazar, private respondent, is the
president of BERMIC, a domestic enterprise engaged in
real estate development. The other respondent, Armed
Forces of the Philippines Mutual Benefit Asso., Inc. (AFP-
MBAI), is a corporation duly organized primarily to
perform welfare services for the Armed Forces of
the Philippines.

Reyes alleges that Eurotrust and Bermic entered into a

loan agreement. Pursuant to the said contract,
Eurotrust extended to Bermic P216,053,126.80 to
finance its project. In turn, Bermic issued 21 postdated
checks to cover payments of the loan packages.
However, when those checks were presented for
payment, the same were dishonored by RCBC, due to
stop payment order made by Eleazar. Despite
Eurotrusts notices and repeated demands to pay,
Eleazar failed to make good the dishonored checks,
prompting Reyes to file against her several criminal
complaints for violation of B.P.22 and estafa.
Meanwhile, respondent AFP-MBAI which invested its
funds with Eurotrust, by buying from it government
securities, conducted its own investigation and found
that after Eurotrust delivered to AFP-MBAI the securities
it purchased, the former borrowed the same securities
but failed to return the and that the amounts paid by
AFP-MBAI to Eurotrust for those securities were in turn
lent by Elsa Reyes to Bermic and others.

When Eleazar came to know that the funds originally

loaned by Eurotrust to Bermic belonged to AFP-MBAI
agreed that Bermic would directly settle its obligations
with the real owners of the fund-AFP-MBAI and DECS-
IMC. Bermic paid AFP-MBAI P31,711.11 and a check
of P1-million.

However, Eleazar later learned that Elsa Reyes

continued to collect on the postdated checks issued

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contrary to their agreement. So, Bermic wrote to
Eurotrust to hold the amounts in constructive trust for
the real owners. But Reyes continued to collect on the
other postdated checks. Upon her counsels advise,
Eleazar had the payment stopped. Hence, her checks
issued in favor of Eurotrust were dishonored.

After investigation, the Provincial Prosecutor of Rizal

dismissed the complaints file by Reyes against Eleazar
stating that when the latter assume the obligation of
Reyes to AFP-MABAI, it constituted novation,
extinguishing any criminal liability on the part of
Eleazar.

Petitioner allege that she could not be held criminally

liable for the crime charged because the contract of
sale of securities between her and respondent AFP-
MBAI was novated by substitution of debtor. She claims
that private respondent Eleazer, instead of fulfilling her
obligation under the contract to pay petitioner the
amounts of debt, assumed petitioners obligation to
make payments to AFP-MBAI.

ISSUE: Whether or not there was novation of contracts

RULING: No, there was no novation. The following are

the requisites for novation. First, there must be a
previous valid obligation. Second, there must be an
agreement of the parties concerned to a new contract.
Third, there must be the extinguishment of the old
contract, and lastly there must be the validity of the
new contract.

Gleaned from the facts of this case, there is no doubt

that the last three essential requisites of novation are
absent in the instant case. No new agreement for
substitution of creditor was forged among the parties
concerned which would take the place of the preceding
contract.

The consent of the creditor to a novation by change of

debtor is as indispensable as the creditors consent in
conventional subrogation in order that a novation shall

53
legally take place. The mere circumstance of AFP-MBAI
receiving payments from respondent Eleazar who
assume the obligation of petitioner under the contract
of sale of securities, when there is clearly no agreement
to release petitioner from her responsibility, does not
constitute novation, but it only creates a juridical
relation of co-debtorship or suretyship on the part of
respondent Eleazar to the contractual obligation of
petitioner to AFP-MBAI and the latter can still enforce
the obligation against the petitioner.

The fact that respondent Eleazar made payments to

AFP-MBAI and the latter accepted them does not result
in novation. There must be an express intention to
novate. Novation is never presumed.

RUBEN REYNA and LLOYD SORIA, vs.

COMMISSION ON AUDIT
G.R. No. 167219 February 8, 2011

FACTS: The Land Bank of the Philippines was engaged

in a cattle-financing program wherein loans were
granted to various cooperatives. Cooperatives who wish
to avail of a loan under the program must fill up a
Credit Facility Proposal (CFP) which will be reviewed by
the Ipil Branch, Zamboanga. One of the conditions
stipulated in the CFP is that prior to the release of the
loan, a Memorandum of Agreement (MOA) between the
supplier of the cattle, Remad Livestock Corporation
(REMAD), and the cooperative, shall have been signed
providing the level of inventory of stocks to be
delivered.The Ipil Branch approved the applications of
four cooperatives.
In post audit, the Land Bank Auditor disallowed the
amount of P3,115,000.00 under CSB No. 95-005 dated
December 27, 1996 and Notices of Disallowance Nos.
96-014 to 96-019 in view of the non-delivery of the
cattle. Also made as the basis of the disallowance was
the fact that advanced payment was made in violation
of bank policies and COA rules and regulations.
The petitioners in the case are the officers of the Ipil
Branch. As alleged by petitioners, the terms of the CFP
allowed for pre-payments or advancement of the
payments prior to the delivery of the cattle by the
supplier REMAD. However, as stated in the post audit of

54
the Land Bank Auditor, the contract entered into by the
cooperatives and REMAD, or the Cattle-Breeding and
Buy-Back Marketing Agreement did not contain a
provision authorizing prepayment.
In connection, the same employees including
petitioners, were also made respondents in a Complaint
filed by the COA Regional Office No. IX, Zamboanga
City, before the Office of the Ombudsman for Gross
Negligence and in violation of of Section 3(e) of
Republic Act (R.A.) No. 3019, otherwise known as
the Anti-Graft and Corrupt Practices Act.

On August 10, 1999, petitioners sent a letter to COA

Regional Office No. IX, seeking to have the booking of
the disallowance set aside, on the grounds that they
were absolved by the Ombudsman in a February 23,
1999 Resolution, and that the Bangko Sentral ng
Pilipinas had approved the writing off of the subject
loans.

ISSUE: Whether or not the obligation is extinguished

upon writing off the subject loans

RULING: The Court answered in the negative. A write-

off is a financial accounting concept that allows for the
reduction in value of an asset or earnings by the
amount of an expense or loss. It is a means of removing
bad debts from the financial records of the business.
The Court ruled that writing-off a loan does not equate
to a condonation or release of a debt by the creditor.
Write-off is not one of the legal grounds for
extinguishing an obligation under the Civil Code. It is
not a compromise of liability. Neither is it a
condonation, since in condonation gratuity on the part
of the obligee and acceptance by the obligor are
required. In making the write-off, only the creditor takes
action by removing the uncollectible account from its
books even without the approval or participation of the
debtor. Furthermore, write-off cannot be likened to a
novation, since the obligations of both parties have not
been modified. When a write-off occurs, the actual
worth of the asset is reflected in the books of accounts
of the creditor, but the legal relationship between the
creditor and the debtor still remains the same the
debtor continues to be liable to the creditor for the full
extent of the unpaid debt.

55
The Land Bank Auditor were correct in pointing that the
contract does not contain a stipulation authorizing a
pre-payment scheme; and holding the petitioners
among others, clearly violated the procedure of
releasing loans contained in the Bank's Manual on Field
Office Guidelines on Lending Operations. Nowhere in
the records of the petition can one find a document
which embodies such a stipulation.
In addition, the Court noted on reliance of the terms of
the petitioners to CFP, allowing prepayments or
advancement of the payments prior to the delivery of
the cattle by the supplier REMAD. It appears, however,
that a CFP, even if admittedly a pro forma contract and
emanating from the Land Bank main office, is merely a
facility proposal and not the contract of loan between
Land Bank and the cooperatives. It is in the loan
contract that the parties embody the terms and
conditions of a transaction. If there is any agreement to
release the loan in advance to REMAD as a form of
prepayment scheme, such a stipulation should exist in
the loan contract. There is, nevertheless, no proof of
such stipulation as petitioners had failed to attach the
CFPs or the loan contracts relating to the present
petition.

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