TOPIC: CONTRACT OF SALE

Perfection, Absolute/Qualified Acceptance

BAR FORMAT
QUESTION

S entered into a contract with ABC Bank wherein he will sell together
with his shares of stock, the shares of the rest of the minority stockholders
of X Company subject to the following terms and conditions: (1) that prior
to its implementation, the shares of stocks shall first be surrendered to the
ABC Bank; (2) that written conformity to the arrangement be given by the
shareholders; and (3) that the transaction shall be implemented within
forty-five (45) days from the date of approval otherwise, the same shall be
deemed canceled.

Pursuant thereof, S and some of the minority stockholders indorsed

and delivered to ABC Bank their shares. When S demanded for payment,
ABC Bank refused arguing that no perfected contract of existed between
them due to the non-fulfillment of the terms and conditions agreed upon.
Is the argument of ABC Bank tenable?

SUGGESTED ANSWER

Yes, the contention of ABC Bank is tenable.

Article 1475 of the Civil Code provides that a contract of sale is

perfected the moment there is a meeting of the minds on the thing which is
the object of the contract and on the price. As held in a long line of cases
decided by the Supreme Court, meeting of the minds is produced when a
definite offer is accepted absolutely and unqualifiedly.

In the case at bar, the contract entered into by the parties was
subject to certain terms and conditions. It was not absolutely and
unconditionally accepted by ABC Bank. Such as when S failed to meet the
imposed conditions, a meeting of the minds is not reached. Therefore, it
cannot be said that a perfected contract of sale between the parties
existed.
 TOPIC: CONTRACT OF SALE

Delivery, Contract of Sale vs. Contract to Sell

QUESTION

Cebu Hardware agreed to supply a 10 MVA power transformer to

VECO, Inc. The terms and conditions of the purchase which was contained
in a proposal presented by Cebu Hardware was then conformed to by the
authorized signatories of VECO Inc.

Upon the instance of Mr. A, one of the authorized signatories of

VECO Inc., Cebu Hardware delivered the transformer without the required
down payment subject however to a 24% per annum interest payment.
When no payment has been made by VECO, Inc. several months after
delivery, Cebu Hardware sent a demand to collect the payment.
Subsequently, Cebu Hardware instituted a case for specific performance
and damages.

VECO Inc., on the other hand moved for the dismissal of the case
arguing that: (a) there is no perfected contract of sale but only a mere
contract to sale; and (b) that there exists no delivery that consummates
the contract.

Are the arguments of VECO, Inc. correct?

SUGGESTED ANSWER

a. No, VECO, Inc. is not correct.

As held in the case of David vs. Misamis Occidental II Electric

Cooperative, Inc. The elements of a contract of sale are, to wit: a) Consent
or meeting of the minds, that is, consent to transfer ownership in exchange
for the price; b) Determinate subject matter; and c) Price certain in money
or its equivalent. What distinguishes a contract of sale from that of a
contract to sell is the absence of the first element.

In the instant case, all the elements of a contract of sale are present.
The signed proposal is which contains the terms and conditions indicate
consent on the part of Cebu Hardware to transfer ownership thereby
complying the first requisite. The second and third element was also
complied with, the subject matter, which is a one (1) unit of 10 MVA Power
Transformer with corresponding KV Line accessories, is determinate and
purchase price agreed upon by the parties is a sum certain in money.

b. No, VECO, Inc. is not correct.

There was delivery that consummates the contract. Since the freight,
handling, insurance, custom duties, and incidental expenses are shouldered
by VECO, Inc., Article 1523 of the Civil Code which states that “Where, in
pursuance of a contract of sale, the seller is authorized or required to send
the goods to the buyer delivery of the goods to a carrier, whether named
by the buyer or not, for the purpose of transmission to the buyer is deemed
to be a delivery of the goods to the buyer, except in the cases provided for
in Article 1503, first, second and third paragraphs, or unless a contrary
intent appears.” applies in this case.

Since in this case, Cebu Hardware was authorized to send the power
transformer to the buyer pursuant to their agreement, it’s delivery as
evidenced by the Bill of Lading, was deemed to be a delivery to VECO, Inc.
There is therefore, a delivery which consummates the contract.

TOPIC: CONTRACT OF SALE

Double Sale

QUESTION
 On May 19, 1998, P1 purchased a parcel of land from S. Later on,
when P1 was about to register the sale on October 18, 1999, the
registration was refused by the Register of Deeds because P1 failed to
produce the Original Certificate of Title.

When P1 filed a petition for the issuance of owner’s duplicate

certificate of title, P2 opposed claiming that she was in possession of the
Original Certificate of Title having bought the property from S on January
27, 1999 without knowledge of the prior sale. Upon payment of the
purchase price, P2 immediately took possession of the property and
enjoyed its produce.
Who between P1 and P2 has a better right to the subject property?

SUGGESTED ANSWER

P2 has a better right to the property.

Art. 1544 of the Civil Code states that if the same thing should have
been sold to different vendees, the ownership shall be transferred to the
person who may have first taken possession thereof in good faith, if it
should be movable property.

Should it be immovable property, the ownership shall belong to the

person acquiring it who in good faith first recorded it in the Registry of
Property.

Should there be no inscription, the ownership shall pertain to the

person who in good faith was first in possession; and, in the absence
thereof, to the person who presents the oldest title, provided there is good
faith.

Admittedly, the two sales were not registered with the Registry of
Property. Since there was no inscription, the next question is who, between
P1 and P2, first took possession of the subject property in good faith. In this
case P2 immediately took possession of the parcel of land on January 1999
upon payment of the purchase price. Therefore, P2 has a better right to the
property
 TOPIC: CONTRACT OF SALE

Installment Sale of Real Property under R.A. 6552 (MACEDA Law)

QUESTION
X agreed to sell a parcel of land to Y. X received P20,000 as earnest
money. Thereafter 2 checks were issued by Y but X refused to accept the
check saying that the heirs as co-owners did not want to sell the property.
Was there a perfected contract between the parties? What is the nature of
contract between them?

SUGGESTED ANSWER:

A. There was a perfected contract between the parties since all the
essential requisites of a contract were present.

Article 1318 of the Civil Code declares that no contract exists unless
the following requisites concur: (1) consent of the contracting parties; (2)
object certain which is the subject matter of the contract; and (3) cause of
the obligation established.

That a thing is sold without the consent of all the co-owners does not
invalidate the sale or render it void. Article 493 of the Civil Code recognizes
the absolute right of a co-owner to freely dispose of his pro indiviso share
as well as the fruits and other benefits arising from that share,
independently of the other co-owners. Thus, when X agreed to sell to Y the
property , what she in fact sold was her undivided interest consisted of
one-half interest, representing her conjugal share, and one-sixth interest,
representing her hereditary share.

B. The parties entered into a nature of contract to sell.

Significantly, the Court has consistently held that the Maceda Law
covers not only sales on installments of real estate, but also financing of
such acquisition; its Section 3 is comprehensive enough to include both
contracts of sale and contracts to sell, provided that the terms on payment
of the price require at least two installments. The contract entered into by
the parties herein can very well fall under the Maceda Law.

The 2 checks issued Y of the installment payment due effectively

defeated the petitioners-heirs’ right to have the contract rescinded or
cancelled. Whether the parties’ agreement is characterized as one of sale
or to sell is not relevant in light of the respondents’ payment within the
grace period provided under Article 1592 of the Civil Code and Section 4 of
the Maceda Law. The petitioners-heirs’ obligation to accept the payment of
the price and to convey X conjugal and hereditary shares in the subject
properties subsists.

TOPIC: SALE

Rescission for Breach, Constructive Delivery & Execution of Public

Instrument

QUESTION
A entered into an agreement with B for the purchase and sale of two-
hectare parcel of land which was mortgaged in favor of XY Bank for a loan.
The said land was sold to B for P100, 000 per hectare totalling P200, 000. B
already paid P100,000 as payment to XY bank so that the certificate of title
can be released in favor of A and thereafter make another payment to C to
whom the land is also mortgaged. Moreover, the parties under their
contract of sale stipulated conditions that certificate of title be delivered to
B and thereafter execute a deed of sale so that he can use the title as
collateral for the application of loan as full payment for the balance of the
sale. However, B backed out from the sale due to the area which is not yet
fully cleared by encumbrances because C is not willing to vacate the land.
Consequently, the respondent filed a complaint in court for the rescission
of contract against A. Will the action prosper?
SUGGESTED ANSWER

The action will prosper.

Although Articles 1458, 1495 and 1498 of the NCC and case law do
not generally require the seller to deliver to the buyer the physical
possession of the property subject of a contract of sale and the certificate
of title covering the same, the agreement entered into by the petitioner
and the respondent provides otherwise. However, the terms of the
agreement cannot be considered as violative of law, morals, good customs,
public order, or public policy, hence, valid.
Article 1458 of the NCC obliges the seller to transfer the ownership of
and to deliver a determinate thing to the buyer, who shall in turn pay
therefor a price certain in money or its equivalent. In addition thereto,
Article 1495 of the NCC binds the seller to warrant the thing which is the
object of the sale. On the other hand, Article 1498 of the same code
provides that when the sale is made through a public instrument, the
execution thereof shall be equivalent to the delivery of the thing which is
the object of the contract, if from the deed, the contrary does not appear
or cannot clearly be inferred.
In the case at bar, the petitioner failed to deliver to the respondent
the possession of the subject property due to the continued presence and
occupation of Parangan and Lacaden. Thus, the petitioner failed in her
undertaking to deliver the subject property to the respondent.

TOPIC: SALE
 Right to Transfer Title, Right to Recover & Exception under Estoppel

QUESTION
A, a blind person, who has been in cement business for a decade
entered into a contract of sale with B who represented himself as radio
operator and confidential secretary of C, manager of ABC company. B
offered to sell to A a certain quantity of ABC’s cement. After
checking B’s identification card, A agreed to purchase ABC’s cement
without knowing that said cements were actually stolen since there was no
proper authority issued by ABC company to B for such sale. There were 5
deliveries made to A. However, upon demand of payment. A rejected the
same. Consequently, ABC company filed a complaint for sum of money and
damages against A. ABC company argued that A didn’t exercise the proper
diligence required of him when he transacted business with B. Rule on ABC
company’s contention.

SUGGESTED ANSWER

ABC’s contention is tenable.

Standard of conduct is the level of expected conduct that is required

by the nature of the obligation and corresponding to the circumstances of
the person, time and place.The most common standard of conduct is that
of a good father of a family or that of a reasonably prudent person. To
determine the diligence which must be required of all persons, we use as
basis the abstract average standard corresponding to a normal orderly
person.

However, one who is physically disabled is required to use the same

degree of care that a reasonably careful person who has the same physical
disability would use. Physical handicaps and infirmities, such as blindness or
deafness, are treated as part of the circumstances under which a
reasonable person must act. Thus, the standard of conduct for a blind
person becomes that of a reasonable person who is blind.

In the case at bar, A despite being blind, had been managing and
operating a cement business for 15 years and this was not a hindrance for
him to transact business until this time. In this instance, however, A failed
to exercise the standard of conduct expected of a reasonable person who is
blind. He merely relied on the identification card of B and didn’t investigate
whether the latter was authorized by ABC. A did not do any other
background check on the identity and authority of B which is an apparent
negligence on his part.

TOPIC: LEASE

Implied Lease or Tacita Reconduccion

QUESTION

XYZ Company entered into a contract with Inday for the lease of a
portion of lot. The lease contract was for a period of one (1) year, with a
monthly rental of P3,960.00. After the expiration of the lease contract on
December 31, 1997, the petitioner continued occupying the subject
premises without paying the rent. On August 5, 1998, XYZ Company sent a
letter to the petitioner demanding that she vacate the subject premises and
pay compensation for its use and occupancy. The petitioner, however,
refused to heed these demands. On November 18, 1998, XYZ Company
filed a complaint for unlawful detainer against the petitioner before the
Metropolitan Trial Court (MeTC) and prayed, among others, that the Inday
and those claiming rights under her be ordered to vacate the subject
premises, and to pay compensation for its use and occupancy.

1. Is tacita reconduccion present in this case? Why? Or Why not?

2. What are the requisites for tacita reconduccion?

SUGGESTED ANSWERS

1. Yes. Article 1670 provides that, If at the end of the contract the lessee
should continue enjoying the thing leased for fifteen days with the
acquiescence of the lessor, and unless a notice to the contrary by either
party has previously been given, it is understood that there is an implied
new lease, not for the period of the original contract, but for the time
established in Articles 1682 and 1687. The other terms of the original
contract shall be revived.

Since the rent was paid on a monthly basis, the period of lease is
considered to be from month to month, in accordance with Article 1687 of
the Civil Code. " Lease from month to month is considered to be one with a
definite period which expires at the end of each month upon a demand to
vacate by the lessor." When the respondent sent a notice to vacate to the
petitioner on August 5, 1998, the tacita reconduccion was aborted, and the
contract is deemed to have expired at the end of that month. " Notice to
vacate constitutes an express act on the part of the lessor that it no longer
consents to the continued occupation by the lessee of its property." After
such notice, the lessee’s right to continue in possession ceases and her
possession becomes one of detainer.

2. An implied new lease or tacita reconduccion will set in when the

following requisites are found to exist: a) the term of the original contract
of lease has expired; b) the lessor has not given the lessee a notice to
vacate; and c) the lessee continued enjoying the thing leased for fifteen
days with the acquiescence of the lessor." As earlier discussed, all these
requisites have been fulfilled in the present case.

TOPIC: LEASE

Right of Lessee as to Improvements

QUESTION

A lot owned by Candy and her co-heirs was leased on a month-to-month

basis to the Spouses XY who has constructed a residential house thereon.
After the death of X in 1995, heirs of X requested Candy and her co-heirs to
extend the lease and even volunteered to temporarily vacate the said
property after the expiration; Candy and her co-heirs agreed; nonetheless,
petitioners failed to comply with their commitment to temporarily vacate;
they continued to stay within the premises of the subject property and
refused to vacate the same notwithstanding repeated demands from Celia
and her co-heirs. As such, Candy filed a Complaint for Unlawful Detainer
against Heirs of X and prayed, among others, for the demolition of the
residential house constructed on the subject lot. The Heirs of X, contends
that their construction of a residential house on the subject property was
by virtue of a right granted under the said contract of lease and that they
were very much willing to vacate the disputed lot but only upon payment of
the value of all the improvements that they have legally introduced as
builders in good faith on the said lot. Can Candy and her co-heirs be
compelled by respondents to pay of the value of all the improvements that
they have introduced on the said lot?

SUGGESTED ANSWER

No, the Candy and her co-heirs cannot be compelled. Under Article
1678, the lessor has the option of paying one-half of the value of the
improvements that the lessee made in good faith, which are suitable to the
use for which the lease is intended, and which have not altered the form
and substance of the land. On the other hand, the lessee may remove the
improvements should the lessor refuse to reimburse.

It appears, nonetheless, that in her Complaint, Candy,et al., prayed

for the demolition of petitioners' residential house constructed on the
subject lot. It is, thus, clear that private respondent does not want to
appropriate the improvements. As such, petitioners cannot compel her to
reimburse to them one-half of the value of their house. The sole right of
petitioners under Article 1678 then is to remove the improvements without
causing any more damage upon the property leased than is necessary.

TOPIC: LEASE

Failure to Maintain Lessee in Peaceful Possession and Increase in Rental

QUESTION

X entered into a contract of lease with Y for an original rate of

P6,000.00 with a provision that “any subsequent amendment that will
effect an increase or decrease of the monthly rental or impose new and
additional fees and charges, including but not limited to government/MIAA
circulars, rules and regulation to this effect, shall be deemed incorporated
herein and shall automatically amend this Contract insofar as the monthly
rental is concerned”. A government circular was issued thereby increasing
the monthly rent to P10,000.00. Nonetheless, X continued to pay the
original rate which was duly received by Y without protest requiring X to
pay the new rate. Three years after, a bill was forwarded to X charging the
new rate of monthly lease and a recovery of the difference of the monthly
rents previously paid after the effectivity of the circular. Is X liable to pay
the difference sought by Y to recover?

SUGGESTED ANSWER
 No, Y is already stopped for seeking recovery of the amount claimed
for failing to make any protest or objection upon tender of payment by X.
No bill was made and forwarded to respondent on the basis of which it
could have given or withheld its conformity to the provision of the contract
of lease.

TOPIC: LEASE

Lease Term and Month-to-Month Basis

QUESTION
X mortgaged a parcel of land to Bank A. X leased said property Y, the
contract of lease not registered with the Registry of Properties.
Subsequently, X failed to settle their obligation which caused its foreclosure
and thereby transferred ownership to Bank A. A letter was sent to Y by
Bank A notifying its ownership thereby directing Y to come to the bank
within 30 days to execute a lease contract but was not acted upon.
Thereafter, Bank A offered the sale of said land which Y offered to purchase
but was nonetheless rejected due to insufficiency. W offered to purchase
said land which was acknowledged and accepted by Bank A thereby issued
a Deed of Sale upon full payment. Is the sale of said land to W valid
considering the right of first refusal contended by Y?

SUGGESTED ANSWER
Yes, the sale of said land to W was valid. Y does not have the right of
first refusal for there was no contract of lease between Y and Bank A. The
offer of Bank A to execute of a new lease contract was not acted by Y and
that there can be no implied contract because the previous lease between
X and Y was not registered with the Registry of Properties. As a rule, a
buyer in a foreclosure sale may terminate an unregistered lease except
when it knows of the existence of the lease.

TOPIC: PARTNERSHIP
 Existence of Partnership

QUESTION

A formed a partnership with B and C to engage in the trucking

business for the hauling and transport of lumber. Barely a year thereafter,
before the partnership contract was executed and before the partnership
was formally organized, A died and the partnership operation was
continued under the helm of A1 (A’s son) without any participation from
A’s other heirs.

A1 ran the affairs of the partnership wielding absolute control, power

and authority, without any intervention or opposition from the other heirs
of A, and all the properties were registered in his name, and he did not
receive wages or salaries but shares of the profits of the business.

Is A1 a PARTNER in the business? Why or why not?

SUGGESTED ANSWER

YES, A1 is a partner in the business. Article 1769 of the New Civil

Code provides that in determining whether a partnership exists, the receipt
by a person of a share of the profits of a business is a prima facie evidence
that he is a partner in the business, unless such profits were received as
payment of a debt by installment, wages to employee, rent to landlord,
annuity to a widow/representative of a deceased partner, interest on a
loan or as consideration for the sale of a goodwill of a business or other
property by installments.

Applying the legal provisions of Article 1769, circumstances tend to

prove that A1 was himself the partner of B and C, considering that he ran
the affairs of the partnership wielding absolute control, power and
authority, without any intervention or opposition from petitioners, and all
the properties were registered in his name, and he did not receive wages or
salaries but shares of the profits of the business.

TOPIC: PARTNERSHIP
 Joint Venture, Assignment of Share, Dissolution

QUESTION

J entered into a joint venture with F, a French national for the

operation of an ice manufacturing business. Their agreement was that J, as
industrial partner, will receive 40%, and F as capitalist partner will also
receive 40% of the net profit with the remaining 20% to be used as
payment of machineries.

After three years, F executed a Deed of Assignment in favor of

respondent E, transferring all his rights and interests in the business in
favor of the latter. F eventually left the country and E demanded from J an
accounting and inventory thereof as well as remittance of their portion of
the profits, to which:
a) By virtue of the Deed of Assigment executed by F, did E become a
partner to the business, dissolving the partnership between J & F?

b) What are the rights of E as assignee of F’s interest?

SUGGESTED ANSWER

a) No, E did not become a partner of the business. Article 1813 of

the Civil Code provides that a conveyance by a partner of his
whole interest in the partnership does not itself dissolve the
partnership or make the assignee a partner in the business.
Settled is the rule that partnerships are based on mutual agency
or delectus personae.

b) The rights of E as assignee is merely to receive in accordance with

his contracts the profits to which the assigning partner would
otherwise be entitled. During the continuance of the partnership,
he cannot interfere in the management or administration of
business affairs, or to require any information or account of
partnership transactions, or to inspect the partnership books.
However, in case of fraud in the management of the partnership,
 the assignee may avail himself of the usual remedies (Article
1813, Civil Code).

TOPIC: AGENCY
Doctrine of Apparent Authority, Agency by Estoppel

QUESTION

Spouses X and Y obtained a loan (subject loan) from Z bank through

the execution of the real estate mortgage over the property and
promissory note of the spouses to secure its payment. Later on, spouses X
and Y obtained from the same bank two other loans which were secured by
mortgages of their other properties. In a later year, before the subject loan
became due, spouses X and Y asked permission from Z bank to sell the
properties. Requiring that the subject loan be fully paid first, Mr. Q, the
manager of the Z bank verbally agreed with spouses X and Y of their
request. Spouses X and Y fully paid the subject loan and thereafter
requested that Deed of Release of Mortgaged Property be given to them.
However, Z bank refused to grant the request.

As unequivocally agreed in the cross-collateral stipulation, Z bank

contended that the three loans and not just the subject loan shall be fully
paid first before any of the mortgages could be released. On the other
hand, spouses X and Y contended that mortgaged property should be
released on the basis of their verbal agreement they made with Mr. Q.
Being the manager or an agent of Z bank, Mr.Q has the authority to modify
or nullify existing contracts or agreements. Thus, the agreement between
Mr. Q and spouses X and Y is valid and therefore the same shall bind the
corporation, Z bank.

Z bank answered that the agreement shall not bind the corporation
(Z bank) since the manager lacks the authority to do so. Hence, such
agreement is invalid and shall not release the mortgagors over their
mortgaged property.

Does the verbal agreement between Mr. Q, the manager or agent of

Z bank and spouses X and Y valid and thus bind the corporation?
 If you were the judge, how would you rule the case?

SUGGESTED ANSWER

The verbal agreement in this case between the corporation’s agent,

Mr. Q and spouses X and Y is not valid and therefore would not bind the
said corporation. Hence, if I were the judge, I will rule in favor of the
corporation, the Z bank.

Under the doctrine of apparent authority, acts and contracts of the

agent, as are within the apparent scope of the authority conferred on him,
although no actual authority to do such acts or to make such contracts has
been conferred, bind the principal. The principal's liability, however, is
limited only to third persons who have been led reasonably to believe by
the conduct of the principal that such actual authority exists, although none
was given.

In other words, apparent authority is determined only by the acts of

the principal and not by the acts of the agent. There can be no apparent
authority of an agent without acts or conduct on the part of the principal;
such acts or conduct must have been known and relied upon in good faith
as a result of the exercise of reasonable prudence by a third party as
claimant, and such acts or conduct must have produced a change of
position to the third party's detriment.

Although a branch manager, within his field and as to third persons,

is the general agent and is in general charge of the corporation, with
apparent authority commensurate with the ordinary business entrusted
him and the usual course and conduct thereof, yet the power to modify or
nullify corporate contracts remains generally in the board of directors.

Being a mere branch manager alone is insufficient to support the

conclusion that Mr. Q has been clothed with "apparent authority" to
verbally alter terms of written contracts, especially when viewed against
the telling circumstances of this case: the unequivocal provision in the
mortgage contract and the fact that the purported agreement was not even
reduced into writing considering its legal effects on the parties' interests.

It is a settled rule that persons dealing with an agent are bound at

their peril, if they would hold the principal liable, to ascertain not only the
fact of agency but also the nature and extent of the agent's authority, and
in case either is controverted, the burden of proof is upon them to establish
it. As parties to the mortgage contract, spouses X and Y are expected to
abide by its terms. The subsequent purported agreement is of no moment,
and cannot prejudice Z bank, as it is beyond Mr. Q's actual or apparent
authority.

TOPIC: AGENCY

Principle of Undisclosed Principal

QUESTION

Mrs. C executed a special power of attorney in favor of her daughter

Ms. T authorizing her to contract a loan from F bank in an amount of
P300,000and to mortgage her 2 lots with TCT numbers 12304 and 11621.
For the approval of the loan, Mrs. C also executed an affidavit of non-
tenancy.

F bank approved the loan in the amount of P100,000 secured by

promissory notes and a real estate mortgage over Mrs. C’s properties.
However, the mortgage was signed by Ms. T and the husband of Mrs. C as
mortgagors in their individual capacities without stating that Ms. T was
executing the mortgage contract for and in behalf of Mrs. C, the owner of
the mortgaged lots.

Later F bank foreclosed the mortgage for failure to pay the loan. A
notice of public auction sale was sent to Mrs. C and her husband.
Subsequently, F bank consolidated its title and obtained new titles in its
name after the redemption period lapsed. The counsel of Mrs. C contended
that the latter is not bound by the real estate mortgage executed by her
authorized agent, Ms. T. This is because the name of Mrs. C was not
indicated as the principal in the contract of loan. Thus, the counsel of Mrs.
C sought nullification of the real estate mortgage and extrajudicial
foreclosure sale, as well as the cancellation of F banks’s title over the
properties. Is the contention of Mrs. C’s counsel meritorious?

SUGGESTED ANSWER

Yes. The contention of Mrs. C’s counsel is meritorious.

Under the principle of undisclosed principal or in the law of agency, it

is a general rule that, in order to bind the principal by a mortgage on real
property executed by an agent, it must upon its face purport to be made,
signed and sealed in the name of the principal, otherwise, it will bind the
agent only. It is not enough merely that the agent was in fact authorized
to make the mortgage, if he has not acted in the name of the
principal. Neither is it ordinarily sufficient that in the mortgage the agent
describes himself as acting by virtue of a power of attorney, if in fact the
agent has acted in his own name and has set his own hand and seal to the
mortgage. This is especially true where the agent himself is a party to the
instrument. However clearly the body of the mortgage may show and
intend that it shall be the act of the principal, yet, unless in fact it is
executed by the agent for and on behalf of his principal and as the act and
deed of the principal, it is not valid as to the principal.

TOPIC: AGENCY

Ratification, Agency By Estoppel

QUESTION

X contracted the services of Y, for dry docking and ship repair works
on its vessel, the M/V Pacific Ocean. In compliance with the agreement, x,
through A, secured from Q Insurance Corp. through the latter’s agent, B, Q
Insurance Corp. Q Surety Inc. executed a special power of attorney in favor
of B. The SPA includes the authority to issue a surety bond in favor of
Department of Public Works and Highways, the National Power
Corporation, and other government agencies and report the same to the
company. Later, X failed to pay Y for the repair of the Ship despite repeated
demand. Y inform Q Insurance Corp. of X’s nonpayment, and to ask them to
fulfill their obligations as sureties, but Q Insurance Corp. refuse to pay
saying that that the surety bond was issued by its B, in excess of his
authority. Is Q Insurance Corp. liable for the acts of its agent in excess of its
authority?

SUGGESTED ANSWER

Our law mandates an agent to act within the scope of his

authority. The scope of an agent’s authority is what appears in the written
terms of the power of attorney granted upon him. Under Article 1878(11)
of the Civil Code, a special power of attorney is necessary to obligate the
principal as a guarantor or surety.
In the case at bar, Q Insurance Corp. could be held liable even if B
exceeded the scope of his authority only if B’s act of issuing Surety Bond is
deemed to have been performed within the written terms of the power of
attorney he was granted.

Q Insurance Corp. not only clearly stated the limits of its agents’
powers in their contracts, it even stamped its surety bonds with the
restrictions, in order to alert the concerned parties. Moreover, its company
procedures, such as reporting requirements, show that it has designed a
system to monitor the insurance contracts issued by its agents. Q Insurance
Corp. cannot be faulted for B’s deliberate failure to notify it of his
transactions with X.

It is apparent that X had been negligent or less than prudent in its

dealings with B. It is a settled rule that persons dealing with an agent are
bound at their peril, if they would hold the principal liable, to ascertain not
only the fact of agency but also the nature and extent of authority, and in
case either is controverted, the burden of proof is upon them to establish
it. The basis for agency is representation and a person dealing with an
agent is put upon inquiry and must discover upon his peril the authority of
the agent. If he does not make such an inquiry, he is chargeable with
knowledge of the agent’s authority and his ignorance of that authority will
not be any excuse.
 TOPIC: AGENCY

Agency Accounting and Fruits

QUESTION

X is a resident of the USA, she entrusted the management,

administration, care and preservation of her properties to Y. Y as the
administrator has collected and received all the fruits and income accruing
therefrom. For 18 years Y never rendered a full accounting of the fruits and
income derived from the properties, but has instead appropriated and in
fact applied these for her own use and benefit. Denying this allegation, Y
presented five letters which had been sent Xt as proof of the accounting.
Are letters considered proof of accounting?

SUGGESTED ANSWER

No. the letters cannot be considered as sufficient to keep the

principal informed and updated of the condition and status of the X’s
properties.

Art. 1891. Every agent is bound to render an account of his

transactions and to deliver to the principal whatever he may have received
by virtue of the agency, even though it may not be owing to the principal.

Every stipulation exempting the agent from the obligation to render

an account shall be void.

In the case at bar, the five letters sent by Y to X is not a sufficient

proof of accounting considering the many years of his administration of X’s
property.
 TOPIC: LOAN

Perfection of Contract of Loan

QUESTION

A loaned from Bank B for the amount of Php 3M.A then received
from the bank the amount of 1M as additional working capital evidenced by
a promissory npte and secured by a real estate mortgage in favor of the
bank coceringseveral real propertied. Later, A defaulted which caused the
bank to foreclose on the properties of A. A now claims that the foreclosure
was invalid on the ground of fraud and bad faith for releasing only 1M of
the agreed 3M loan andthat some of the foreclosed properties cannot be
included in the list of properties mortgaged as these were mortgaged with
another bank at that time.

Was the foreclosure valid and the loan perfected?

SUGGESTED ANSWER

The loan contract was perfected.

Under Article 1934 of the Civil Code, a loan contract is perfected only upon
the delivery of the object of the contract.

In Palada vs Solidbank [G.R. NO. 172227, June 29, 2011] the Supreme
Court held that bad faith and fraud must be proved by clear and convincing
evidence.In this case, although petitioners applied for a P3 million loan, only the
amount of P1 million was approved by the bank because petitioners became
collaterally deficient when they failed to purchase TCT No. T-227331 which had
an appraised value of P1,944,000.00Hence, only the amount of P1 million was
released by the bank to petitioners

There was nothing on the face of the real estate mortgage contract to
arouse any suspicion of insertion or forgery. Except for the bare denials of
petitioner, no other evidence was presented to show that the signatures
appearing on the dorsal portion of the real estate mortgage contract are
forgeries.

Further, our laws provide that a mortgagor is allowed to take a second or

subsequent mortgage on a property already mortgaged, subject to the prior
rights of the previous mortgagor.

Clearly, the positive presumption of the due execution of the subject real
estate mortgage outweighs bare and unsubstantiated denial and imputations of
fraud.

TOPIC: LOANS

Accommodation Party on Contract of Loan

QUESTION

Bank A extended a loan to B through the accommodation of C. Later,

B defaulted resulting to the freezing of account including that of C. C now
claims that he should not be made liable for he is merely an
accommodation party and that he was not properly notified by Bank A that
B had defaulted in his payments.

Is C liable to Bank A?

SUGGESTED ANSWER

Yes, C is liable to Bank A.

Under Section 29 of the Negotiable Instruments Law, an

accommodation party is a person "who has signed the instrument as
maker, drawer, acceptor, or indorser, without receiving value therefor, and
for the purpose of lending his name to some other person."
In the case of Gonzales vs PCIB ( GR # 180257, Feb. 23, 2011), the Court
explained that :

The accommodation party is liable on the instrument

to a holder for value even though the holder, at the
time of taking the instrument, knew him or her to be
merely an accommodation party, as if the contract
was not for accommodation.

As petitioner acknowledged it to be, the relation

between an accommodation party and the
accommodated party is one of principal and surety--
the accommodation party being the surety. As such,
he is deemed an original promisor and debtor from
the beginning; he is considered in law as the same
party as the debtor in relation to whatever is adjudged
touching the obligation of the latter since their
liabilities are interwoven as to be inseparable any
benefit therefrom.

However, C, as accommodation party must be properly

apprised of the default of B precisely because he is a co-signatory
of the promissory notes and has solidary liability. Proper notice of
the default is mandatory.

TOPIC: DEPOSIT

Contract of Deposit and Necessary Deposit in Hotels/Inns

QUESTION

J checked-in at XYZ Hotel in Makati. R, the hotel’s parking attendant,

approached and volunteered to park his Pajero at the parking area in front
of the hotel and issued him a valet customer parking claim stub. Hours
later, he found out that his Pajero was carnapped while parked at parking
space of the hotel. J filed and was paid of his claim with the insurance
company. Consequently, by right of subrogation, the insurance company
filed a complaint for recovery of damages against XYZ Hotel. Is XYZ Hotel
liable by virtue of the necessary contract of deposit?

SUGGESTED ANSWER

YES, XYZ Hotel is liable. Under Article 1962 of our Civil Code, “A
deposit is constituted from the moment a person receives a thing belonging
to another, with the obligation of safely keeping it and returning the same.
If the safekeeping of the thing delivered is not the principal purpose of the
contract, there is no deposit but some other contract.

In the case at bar, J, upon checked-in at XYZ Hotel, deposited his

vehicle for safekeeping by giving the key to R, the hotel’s parking attendant.
In turn, R issued a claim stub to Jeffrey as proof of necessary deposit of the
latter’s Pajero. Needless to state, the contract of deposit was perfected
upon J’s delivery, when he handed over to R the key to his Pajero, which R
received with the obligation of safely keeping and returning it.

Therefore, XYZ Hotel is liable for the loss of J’s Pajero by virtue of the
necessary contract of deposit. (Durban Apartments Corp., etc. vs. Pioneer
Insurance and Surety Corp.;G.R. No. 179419. January 12, 2011.)

TOPIC: COMPROMISE

Compromise Agreement
QUESTION

X filed a complaint for illegal dismissal against ABC Company.

Unfortunately, the Labor Arbiter dismissed the complaint. On appeal, the
NLRC reversed the Labor Arbiter’s decision in favor of X. Aggrieved by the
ruling, ABC Company filed a Petition for Certiorari to the Court of Appeals
but was later denied. Not contented, ABC Company filed a Petition for
Review on Certiorari to the Supreme Court. Pending resolution of the case,
the parties have reached an amicable settlement through Compromise
Agreement executed between the parties. Subsequently, the case was
terminated on the basis of the Compromise Agreement. What is the effect
of the Compromise Agreement in relation to this case?

SUGGESTED ANSWER

The Compromise Agreement shall have the effect and authority of

res judicata upon its approval by the court where the litigation is pending.

Under the Civil Code of the Philippines, contracting parties may

establish such stipulations, clauses, terms, and conditions, as they deem
convenient, so long as they are not contrary to law, morals, good customs,
public order, or public policy. A compromise agreement is a contract
whereby the parties undertake reciprocal obligations to resolve their
differences in order to avoid litigation or put an end to one already
instituted. It is a judicial covenant having the force and effect of a
judgment, subject to execution in accordance with the Rules of Court, and
having the effect and authority of res judicata upon its approval by the
court where the litigation is pending.

In the case at bar, while the case is still pending before the Supreme
Court, X and ABC Company agreed to settle amicably by executing a
Compromise Agreement. Considering that such Compromise Agreement
was executed in accordance with law, morals, good customs, public order,
or public policy, the same was also adopted by the Labor Arbiter in
terminating the case.

Therefore, the case of illegal dismissal filed by X against ABC

Company was validly terminated by virtue of the Compromise Agreement
and therefor, res judicata shall apply. (Coca-Cola Bottlers Philippines, Inc.
vs. Rodrigo Mercado, et al.;G.R. No. 190381. October 6, 2010)

TOPIC: GUARANTY & SURETY

Contract of Guaranty
QUESTION

JB purchased fertilizer from XYZ, payable from the proceeds of the

loan that ABC Bank extended to her. JB executed a document. The
document stated that JB had an approved loan with ABC Bank for Php
200,000 and was signed by branch manager Reno stated that the
"assignment has been duly accepted and payment duly guaranteed within
60 days from XYZ's Invoice." XYZ presented the documents but the bank
denied the claim on the ground that it neither authorized the transactions
nor the execution of the documents which were not part of its usual
banking transactions. Is ABC Bank is bound by Reno's undertaking on its
behalf to deliver to XYZ the proceeds of the bank's loan to JB in payment of
the fertilizers she bought? Is Reno considered as a guarantee?

SUGGESTED ANSWER

A. No.

As a rule, a corporation is liable to innocent third persons where it

knowingly permits its officer, or any other agent, to perform acts within the
scope of his general or apparent authority, holding him out to the public as
possessing power to do those acts.

In the present case, ABC Bank cannot be bound by Reno's

undertaking since it is in his personal capacity. He signed it under his own
name, not in ABC Banks name or as its branch manager.

B.
YES. Reno’s undertaking was a guarantee. Reno was acting for
himself, not in representation of ABC Bank.

As it happens, bank guarantees are highly regulated transactions

under the law. They are undertakings that are not so casually issued by
banks or by their branch managers at the dorsal side of a client’s
promissory note as if an afterthought. A bank guarantee is a contract that
binds the bank and so may be entered into only under authority granted by
its board of directors. Such authority does not appear on any document.
Indeed, XYZ had no right to expect branch manager Reno to issue one
without such authorization.

TOPIC: GUARANTY & SURETY

Contract of Surety, Novation

QUESTION

Apple Galaxy Company entered into a building contract with Wood

Construction for the construction of Korpel Building. The parties agreed
that the construction work would begin on January 5,2012 and should be
finished by October 27, 2012. Wood Construction signed the Undertaking
of Surety holding themselves personally liable for the accountabilities of
Wood Construction. Wood Construction procured Performance Bond from
ABC Insurance Corporation to secure full and faithful performance of its
obligation under the Building Contract. Wood Construction failed to
accomplish the project, Apple Galaxy Company informed Wood
Construction that it was terminating their contract. Apple Galaxy Company
sent demand letters to Wood Construction and its officers for the payment
of liquidated damages for the delay. Apple Galaxy Company informed
Wood construction that it was terminating their contract. Apple Galaxy
Company wrote ABC Insurance asking for remuneration pursuant to
Performance Bond. What is the effect in the failure of performance by
Wood Construction? What is Surety Agreement?

SUGGESTED ANSWER
a.
The effect of failure of performance by Wood Construction gave rise
to the obligation of Performance Bond that must be complied by ABC
Insurance. The primary purpose for the acquisition of the
performance bond was to guarantee to Apple Galaxy Company that
the project would proceed in accordance with the terms and
 conditions of the contract and to ensure the payment of a sum of
money in case the contractor would fail in the full performance of
the contract. When Apple Galaxy communicated to Wood
Construction that it was terminating the contract, ABC Insurance
liability, as surety, arose. The claim of Apple Galaxy Company against
ABC insurance occurred from the failure of Wood Construction to
perform its obligation under the building contract.

b.
A contract of suretyship is an agreement whereby a party, called the
surety, guarantees the performance by another party, called the
principal or obligor, of an obligation or undertaking in favor of
another party, called the obligee. Although the contract of a surety is
secondary only to a valid principal obligation, the surety becomes
liable for the debt or duty of another although it possesses no direct
or personal interest over the obligations nor does it receive any
benefit therefrom.

TOPIC: PLEDGE

Contract of Pledge
QUESTION

XYZ Securities is the stockbroker of ABC Corporation. Subsequently,

the latter made two stock purchases, first from Y-Claro Inc of 10,000,000
shares and second from Y-Siguro Corp of 7,500,000 shares, all the stocks
purchased were placed in XYZ possession. On later dates, ABC ordered the
sale of 10,000,000 Y-Claro shares with buy-back obligation. As ABC failed to
honor the buy-back, the XYZ sold the 7,500,000 Y-Siguro shares to
reacquire the Y-Claro shares without ABC consent. On January 2012, ABC
demanded the return of the 7,500,000 Y-Siguro shares; however such
demand was rejected as XYZ argued that Y-Siguro shares were validly
disposed since it was agreed that any properties of ABC held by XYZ
Securities shall be subject to a general lien in favour of the XYZ for the
discharge of all or any indebtedness of ABC. It also agreed that XYZ has also
the right to retain, apply, sell or dispose such property as payment thereof.
XYZ further argued that the notices of sales it issued to ABC upon selling the
Y-Claro shares, wherein the collateral is “Y-Claro Shares/Property” refers to
all property of ABC held by XYZ, in effect, XYZ can validly sell the Y-Siguro
shares, to buy-back the Y-Claro Shares.

Is the sale of Y-Siguro shares to reacquire Y-Claro made by XYZ valid?

SUGGESTED ANSWER

The sale is void. It cannot be covered by the agreement between the

parties since such agreement is confined only to obligations of ABC to XYZ
and not to third parties like the purchase of the Y-Claro shares. Thus, the
sale of the Y-Siguro shares to buy back the Y-Claro shares is illegal and
ineffective.

As to XYZ second contention, since it was stated in Notices of Sale

that “Y-Claro Shares/Property” were made as collaterals in selling the Y-
Claro shares, were placed to XYZ, a third party by common agreement, then
the accessory contract in this case is a contract of pledge. To have a valid
pledge, the following requisites must be present (Art. 2085 of Civil Code):
(1) That they be constituted to secure the fulfillment of a principal
obligation; (2) That the pledgor or mortgator be the absolute owner of the
thing pledged or mortgaged; (3) That the persons constituting the pledge or
mortgage have the free disposal of their property, and in the absence
thereof, that they be legally authorized for the purpose. It is however such
accessory contract terminated from the moment Y-Claro shares were sold
to third party, since ABC were no longer the absolute owner of said shares.
As to the word “Property” as collateral, it does not meet the legal
requirement laid down in Art. 2096 of Civil code which provides that "a
pledge shall not take effect against third persons if description of the thing
pledged and the date of the pledge do not appear in a public instrument."
Evidently, the word "Property" is vague, broad, and confusing as to the
ownership. Further, the notice of sale is not in a public instrument as
required by said legal provision; therefore, the pledge on "property" is void
and without legal effect.
 TOPIC: PLEDGE

Presumption, Lesser Transmission of Rights

QUESTION

A executed a Chattel Mortgage over several motorized sewing

machines in favor of U-Bank on January 2, 2012 to secure his obligation
arising from export bills transactions. However, on May 8, 2012, A pledged
the same equipment to B as a guarantee for settlement of his obligation.
This prompted U-Bank to file a Complaint with prayer for the issuance of
ex-parte writs of preliminary attachment and replevin against A and B.
Upon granting of writ by the RTC, Union Bank sold the mortgaged
machines. B now contended that his prior possession of the sewing
machines was made in good faith, likewise, since the chattel mortgage was
unnotarized it does not bind third party. On the other hand, U-Bank argued
that it has a better title to the proceeds of the sale, although the Chattel
Mortgage executed in its favor was not notarized, it is nevertheless valid,
and thus, has preference over a subsequent unnotarized pledge.

Who has the better title over the proceeds of the sale of sewing
machines?

SUGGESTED ANSWER

U-Bank has the better title over the proceeds of the sale of the
sewing machines. Though it is true that unnotarized Chattel Mortgage does
not bind B, however such fact does not affect the cause of action of U-Bank
since it is for a sum of money. U-Bank only needed to show that the loan of
A remains unpaid. As to the question whose agreement will take
precedence, Article 2096 of the Civil Code provides that "[a] pledge shall
not take effect against third persons if a description of the thing pledged
and the date of the pledge do not appear in a public instrument." Hence,
just like the chattel mortgage executed in favor of U-Bank, the pledge
executed by A in favor of B cannot bind U-Bank, however, since the Chattel
Mortgage in favor of U-Bank was executed earlier, U-Bank has a better right
over the motorized sewing machines under the doctrine of "first in time,
stronger in right" (prius tempore, potior jure).

TOPIC: ANTICHRESIS

QUESTION

A allegedly mortage a parcel of land to B who immediately took

possession of said property. 28 years later the heirs of A asked to redeem
the said parcel of land to B but the later refused claiming that the contract
that was entered into was of sale even without a proof of said sale. The
heirs of A claimed before the RTC that the contract was of antichresis who
in turn failed to produce a valid proof. What is the nature of the contract?

SUGGESTED ANSWER

There was neither an antichresis or sale existed. For the contract of

antichresis to be valid, Article 2134 of the Civil Code requires that "the
amount of the principal and of the interest shall be specified in writing;
otherwise the contract of antichresis shall be void."In this case, the Heirs of
A were indisputably unable to produce any document in support of their
claim that the contract between A and B was an antichresis. Likewise, the
heirs of B failed to establish the existence and due execution of the subject
deed of sale on which their claim of ownership was founded.

TOPIC: MORTGAGE

Validity of Blanket or Dragnet Clause

QUESTION
A, an owner of a parcel of land mortgage the same to PCSO in favor
of unpaid tickets of B in the amount of One Million pesos. Three years later
A sold the parcel of land to C which in turn filed a complaint in the RTC
against A for failure to deliver the TCT which is in the possession of PCSO.
While the case is pending, PCSO registered the mortgage and forclosed the
parcel of land for the subsequent unpaid tickets of B after the amount of
One Million was paid. PCSO claimed that the sale was invalid for the
mortgage is a continuing guaranty. Is PCSO correct?

SUGGESTED ANSWER

PCSO is not correct. A mortgage liability is usually limited to the

amount mentioned in the contract. However, a mortgage that provides for
a dragnet clause is in the nature of a continuing guaranty and constitutes
an exception to the rule than an action to foreclose a mortgage must be
limited to the amount mentioned in the mortgage contract. . Its validity is
anchored on Article 2053 of the Civil Code and is not limited to a single
transaction, but contemplates a future course of dealing, covering a series
of transactions, generally for an indefinite time or until revoked.
In this case, the subject mortgage had already been cancelled or
terminated upon B’s full payment before PCSO availed of registration in
1992.In other jurisdictions, it has been held that the use of the particular
words and expressions such as payment of “any debt”, “any indebtedness”,
“any deficiency”, or “any sum”, or the guaranty of “any transaction” or
money to be furnished the principal debtor “at any time”, or “on such time”
that the principal debtor may require, have been construed to indicate a
continuing guaranty.

TOPIC: EQUITABLE MORTGAGE

Deficiency Claim after Extrajudicial Foreclosure

QUESTION
S executed a deed of sale of a parcel of land in favor of R for a
consideration of P 10, 000 although, the land worth was double the price.
The contract provided that S will retain the possession of the land as lessee
and pay the land taxes thereon. Is the sale made by S valid?

Suggested Answer
In reality, the contract in the instant case is an equitable mortgage.
The land is merely the collateral or security for the payment of a loan of P
10,000. This is obvious from the deed of sale itself. In the first place, it says
that S will retain possession of the land as lessee and the latter shall pay the
taxes thereon.

Moreover the purchase price is unusually inadequate. When there is

a right to redeem, inadequacy of price should not be material because the
judgment debtor may re-acquire the property or else sell his right to
redeem and thus recover any loss he claims to have suffered by reason of
the price obtained at the execution sale. Thus, respondent stood to gain
rather than be harmed by the low sale value of the auctioned properties
because it possesses the right of redemption.

These are badges of an equitable mortgage. According to the New

Civil Code, the presence of any of these will be sufficient to raise the
presumption that the contract is an equitable mortgage. Therefore, the sale
made by S is valid which is commonly known as pacto de retro sales.

TOPIC: EQUITABLE MORTGAGE

QUESTION

On June 29, 2005, X is a registered owner of a parcel of land with an

area of 150, 000 square meters as evidence by a Deed of Sale with right of
redemption for P 500,000. X sold a portion of his land containing 100,000
square meters to Y, thus leaving an unsold portion of 50,000 square
meters. X never redeemed the sold portion to Y.

On October 12, 2012, X sold the entire lot to T without specifying

whether it included the 100,000-square portion sold (with right of
redemption) to Y. X then file a complaint of recovery and damages against
Y. Will the case prosper?
SUGGESTED ANSWER
The petition is denied.
 An equitable mortgage is one which, although lacking in some
formality, or form, or words, or other requisites demanded by a statute,
nevertheless reveals the intention of the parties to charge real property as
security for a debt, and contains nothing impossible or contrary to law. The
essential requisites of an equitable mortgage are: (1) the parties enter into
what appears to be a contract of sale, (2) but their intention is to secure an
existing debt by way of mortgage.

Jurisprudence recognizes that there is no conclusive test to

determine whether a deed purporting to be a sale on its face is really a
simple loan accommodation secured by a mortgage. However, our case law
consistently shows that the presence of even one of the circumstances
enumerated in Article 1602 suffices to convert a purported contract of sale
into an equitable mortgage.

In sales denominated as pacto de retro, the price agreed upon should

not generally be considered as the just value of the thing sold, absent other
corroborative evidence. In the present case, there is no evidence herein
whatsoever to show that X did not understand the ramifications of her
signing the “Deed of Sale with Right of Redemption.” Nor is there any
showing that she was threatened, forced or defrauded into affixing her
signature on the said contract. If the terms of the pacto de retro sale were
unfavorable to X, this Court has no business extricating her from that bad
bargain. Courts are not guardians of persons who are not legally
incompetent, like X.

Also, X failed to prove before the trial court that the price agreed
upon by the parties in 2005 was grossly inadequate. Even assuming that the
contract of sale with right to repurchase executed by X and Y in 2005 is an
equitable mortgage, the fact remains that from 2005 up to the filing of the
complaint in 2012, or a period of 7 years, she failed to redeem the
property. X claim that she had been paying the realty taxes follows that she
owns the property, not Y. Settled is the rule that tax receipts per se are not
conclusive evidence of land ownership absent other corroborative
evidence.

TOPIC: MORTGAGE
 Pactum Commissorium

QUESTION

A, the original owner of a piece of property, mortgaged the same to

B as security for a loan with a stipulation appointing B, the mortgagee, as
the mortgagor’s attorney-in-fact, to sell the property in case of default in
the payment of the loan. Thereafter, A again mortgaged the same subject
property to C to secure her loan. Later, A sold the subject property to B. As
a result, C filed a Complaint for Foreclosure of Real Estate Mortgage with
Damages claiming that the stipulation appointing B, the mortgagee, as the
mortgagor’s attorney-in-fact, to sell the property in case of default in the
payment of the loan, is in violation of the prohibition on pactum
commissorium. Decide.

SUGGESTED ANSWER

B’s purchase of the subject property did not violate the prohibition
on pactum commissorium.

The following are the elements of pactum commissorium:

(1) There should be a property mortgaged by way of security for the

payment of the principal obligation; and

(2) There should be a stipulation for automatic appropriation by the

creditor of the thing mortgaged in case of non-payment of the principal
obligation within the stipulated period.

In the case at bar, the power of attorney provision did not provide
that the ownership over the subject property would automatically pass to B
upon A’s failure to pay the loan on time. What it granted was the mere
appointment of B, as attorney-in-fact, with authority to sell or otherwise
dispose of the subject property, and to apply the proceeds to the payment
of the loan. A’s decision to eventually sell the subject property to B was
well within the scope of her rights as the owner of the subject
property. The subject property was transferred to B by virtue of another
and separate contract, which is the Deed of Sale.

TOPIC: MORTGAGE

“Piece-Meal” Redemption

QUESTION

Spouses Jerloyd and Charo are the registered owners of seven (7)
parcels of land. Later, they executed a Real Estate Mortgage of all the lots
in favor of PCI Bank, predecessor of Banco De Oro (BDO), to secure a loan.
Subsequently, they sold the mortgaged lots to Lord without the consent
and knowledge of BDO. This sale was followed by a default on the part of
Jerloyd and Charo to pay their loans to BDO. Thus, BDO extrajudicially
foreclosed the mortgage and had the lots sold at public auction.

At the auction sale, BDO was proclaimed the highest bidder and
bought said lots. Twelve (12) days after the sale was registered, BDO sold
two (2) of the mortgaged lots to Candies under a Deed of Sale with
Agreement to Mortgage. Roughly a month before the one-year
redemption period was set to expire, Lord attempted to redeem the lots
sold to Candies. He tendered the amount to BDO and Candies, but both
refused, contending that the redemption should be for the full amount of
the winning bid plus interest for all the foreclosed properties. They further
contend that the mortgage is indivisible so in order for the tender to be
valid and effectual, it must be for the entire auction price plus legal
interest. Does the argument of Candies and BDO tenable?

SUGGESTED ANSWER

The argument of BDO and Candies on the indivisibility of the

mortgage is bereft of merit. As held in the case of Philippine National Bank
v. De los Reyes, the doctrine of indivisibility of mortgage does not apply
once the mortgage is extinguished by a complete foreclosure thereof.
 What the law proscribes is the foreclosure of only a portion of the
property or a number of the several properties mortgaged corresponding
to the unpaid portion of the debt where before foreclosure proceedings
partial payment was made by the debtor on his total outstanding loan or
obligation. This also means that the debtor cannot ask for the release of
any portion of the mortgaged property or of one or some of the several lots
mortgaged unless and until the loan thus, secured has been fully paid,
notwithstanding the fact that there has been a partial fulfillment of the
obligation. Hence, it is provided that the debtor who has paid a part of the
debt cannot ask for the proportionate extinguishment of the mortgage as
long as the debt is not completely satisfied.

That the situation obtaining in the case at bar is not within the
purview of the aforesaid rule on indivisibility is obvious since the aggregate
number of the lots which comprise the collaterals for the mortgage had
already been foreclosed and sold at public auction. There is no partial
payment or partial extinguishment of the obligation to speak of. The
aforesaid doctrine, which is actually intended for the protection of the
mortgagee, specifically refers to the release of the mortgage which secures
the satisfaction of the indebtedness and naturally presupposes that the
mortgage still exists. Once the mortgage is extinguished by a complete
foreclosure thereof, said doctrine of indivisibility ceases to apply since,
with the full payment of the debt, there is nothing more to
secure. Nothing in the law prohibits the piecemeal redemption of
properties sold at one foreclosure proceeding.

TOPIC: QUASI-CONTRACTS

Solutio Indebiti

QUESTION

Y, availed a loan from X in the amount of P540,000.00. The

agreement was not reduced into writing. Y paid the loan by issuing a check
amounting to P500,000.00 and another check amounting to P200,000.00.
Not satisfied with the payment, X, demanded additional payment to be
applied as interest and Y paid a total amount of P1,200,000.00.
 Feeling aggrieved of the overpayment made, he consulted a lawyer
who finished his law in USJR. Y was advised that X has no right to demand
interest because their was no agreement in writing made by the parties.
Upon hearing the advice of the brilliant lawyer from USJR, Y immediately
sent demand letters for the return of the overpayment based on the
principle of solutio indebiti.

X, on the other hand, claimed that there was no overpayment

because the excess amount was a payment for the interest.

Is the contention of X tenable?

Suggested Answer:

The contention is without merit. Article 1956 of the Civil Code, which
refers to monetary interest, specifically mandates that no interest shall be
due unless it has been expressly stipulated in writing.

Payment of monetary interest is allowed only if: (1) there was an

express stipulation for the payment of interest; and (2) the agreement for
the payment of interest was reduced in writing. The concurrence of the two
conditions is required for the payment of monetary interest. Thus, we have
held that collection of interest without any stipulation therefor in writing is
prohibited by law.

The quasi-contract of solutio indebiti harks back to the ancient

principle that no one shall enrich himself unjustly at the expense of
another.The principle of solutio indebiti applies where (1) a payment is
made when there exists no binding relation between the payor, who has no
duty to pay, and the person who received the payment; and (2) the
payment is made through mistake, and not through liberality or some other
cause.

In the case at bar, the parties did not agree in writing as to the
charging of interest for the loan. Therefore, X has no right to receive
payment for the interest and by the principle of solutio indebiti, he must
return the payment made by mistake of Y.
 TOPIC: DAMAGES

Quasi-Delict and Vicarious Liability

QUESTION

X, was driving along the highway when suddenly, someone bumped

his car and ran after. Because of his 20-20 eye vision, X, was able to get the
plate number of the car who bumped him. Upon verification with the LTO,
he learned that it was owned by Y.

X sent demands to Y for the payment of the damages incurred by him

because of the hit and run that happened. Y, on the other hand, denied the
claim because, according to him, though the car is registered in his name
but it was his secretary who is using the car and the driver who bumped
was hired by his secretary.

Is the contention of Y, tenable?

Suggested Answer:

The contention is NOT tenable. As a general rule, one is only

responsible for his own act or omission. Thus, a person will generally be
held liable only for the torts committed by himself and not by another.

The law, however, provides for exceptions when it makes certain

persons liable for the act or omission of another. One exception is an
employer who is made vicariously liable for the tort committed by his
employee. Article 2180 of the Civil Code states:

Article 2180. The obligation imposed by Article 2176 is demandable

not only for one’s own acts or omissions, but also for those of persons for
whom one is responsible.
 Although the employer is not the actual tortfeasor, the law makes
him vicariously liable on the basis of the civil law principle of pater
familias for failure to exercise due care and vigilance over the acts of one’s
subordinates to prevent damage to another.

In the case at bar, Y, as registered owner, is deemed the employer of

the driver, and is thus vicariously liable under Article 2176 in relation with
Article 2180 of the Civil Code.

Thus, whether there is an employer-employee relationship between

the registered owner and the driver is irrelevant in determining the liability
of the registered owner who the law holds primarily and directly
responsible for any accident, injury or death caused by the operation of the
vehicle in the streets and highways.

TOPIC: DAMAGES

Negligence, Proximate Cause and Diligence Required of Banks

QUESTION

What is meant by the following? Explain.

1. Doctrine of Proximate Cause

2. Doctrine of Contributory Negligence

SUGGESTED ANSWER:

1. One of the essential facts which the plaintiff must prove in order that
he can recover from the defendant is the relation of cause and effect
between the defendant’s negligence and the damage or injury which
he has incurred. This is more frequently known as the doctrine of
proximate cause. It is defined as that cause which, in natural and
continuous sequence, unbroken by any efficient intervening cause,
produces the injury and without which the result would not have
incurred.
 2. The doctrine of contributory negligence may be stated as follows: If
the negligence of the plaintiff cooperated with the negligence of the
defendant in bringing about the accident causing the injury
complained of, such negligence of the plaintiff would be an absolute
bar to recovery. If the negligence of the plaintiff was merely
contributory to his injury, the immediate and proximate cause of the
accident causing the injury being the defendant’s negligence, such
negligence would be not be a bar to recovery, but the amount
recoverable shall be mitigated by the courts.

TOPIC: DAMAGES

Moral, Exemplary, Actual, Temperate Damages and Attorney’s Fees

QUESTION

What are the different kinds of damages recoverable under the New Civil
Code? Define each of them.

SUGGESTED ANSWER

1. Actual or compensatory damages, or the compensation awarded to a

person for such pecuniary loss suffered by him as he has duly proved.
(Art. 2199, NCC.)

2. Moral damages, or the compensation awarded to a person for

physical suffering, mental anguish, fright, serious anxiety.
Besmirched reputation, wounded feelings, moral shock, social
humiliation, and similar injury. (Art. 2217, NCC.)

3. Nominal damages, or the account awarded to a person in order that

his right, which had been violated or invaded, may be vindicated or
recognized. (Art. 2221, NCC.)
4. Temperate or moderate damages, or the compensation which is
more than nominal but less than compensatory damages, awarded
to a person when the court finds that he has suffered some
pecuniary loss, but its amount cannot, from the nature of the case,
be proved with certainty. (Art. 2224, NCC.)

5. Liquidated damages, or that agreed upon by the parties to a contract,

to be paid in case of breach thereof. (Art. 2226, NCC.)

6. Exemplary or corrective damages, or that imposed by way of

example or correction for the public good, in addition to the moral,
temperate, liquidated or compensatory damages. (Art. 2229, NCC.)