Bernales vs.

Northwest Airlines
G.R. No. 182395, October 5, 2015
Second Division

Brion, J.:

DOCTRINE: A party to a contract cannot be held liable for breach of contract where the
real and proximate cause was a fortuitous event.

FACTS:

The petitioner Marito T. Bernales and several delegates of a trade and tourism mission of
the Province of Bicol were on their way to Honolulu, Hawaii. They were economy class
passengers of Northwest Airlines Flight No. 10 from Manila to Honolulu via Narita, Japan.

The delegation arrived at Narita International Airport (NRT) at around 11:00 a.m. Their
connecting flight was scheduled at 8:40 p.m. However, at around 6:00 p.m., a typhoon hit
Japan, leading to the cancellation of flights including NWA Flight No. 10. Under NWA
policy, affected passengers are protected in their booking for the next available flight in
case of cancellations which means if there are available seats in the next flight, the delayed
passengers would be accommodated with priority given to first class and business class
passengers. If only limited seats are available, the delayed passengers are wait-listed
according to their priority level and in the sequence of their check-in.

At around 9:00 p.m., the storm subsided and the airport resumed its operations. Ordinarily,
NRT has an 11:00 p.m. cut-off for flights, but on this day, the Narita Airport Authority
extended the airplane curfew to 1:00 a.m. to accommodate the delayed flights. The
delegates opted to be wait-listed for Flight No. 22 where petitioner was placed last in the
wait-list as he was the last economy class passenger to check in for Flight No. 10. When
the passengers of Flight 22 were called for boarding at around 11:00 p.m., petitioner was
politely informed by NWA Customer Service Agent Tsuruki Ohashi that he could not take
Flight 22 as no available seat was left for him, but within ten minutes he was immediately
transported to the airplane since a volunteer passenger was found.

Unfortunately, Flight No. 22 failed to depart in time to beat the Narita curfew. Thus, the
passengers of Flight No. 22 were instructed to disembark and wait for the next flight. They
were returned to the terminal where they had to wait with 1,500 other stranded passengers.
In the morning of 2 October 2002, the delegates chose the option of taking a 3:35 p.m.
flight later that day to Los Angeles, California, with an immediate connecting flight to
Honolulu so they could leave immediately. The delegates arrived at Honolulu between 3:00
and 4:00 p.m., on the same day. But they had already missed the courtesy calls they were
to make on the governor and the mayor, which were scheduled for earlier that day.

On 12 February 2003, the petitioner filed a complaint for moral and exemplary damages
against the respondent NWA for breach of their contract of carriage alleging among others
the resulting missed obligations in Honolulu due to the flight's delay.

ISSUE:

Whether or not there was a breach of contact arising from fortuitous event.

RULING:

The primary cause of NWA's delay in the fulfilment of its obligation was the unusually
strong typhoon that struck Japan that evening. The arrival of Typhoon Higos was an
extraordinary and unavoidable event. Its occurrence made it impossible for NWA to bring
the petitioner to Honolulu in time for his commitments. We cannot hold the respondent
liable for a breach of contract resulting from a fortuitous event. From this perspective, we
cannot attribute bad faith or ill motives on NWA for cancelling Flight No. 10. Pushing
through would have recklessly endangered the lives of the passengers and the crew.
Evidently, the real and proximate cause of NWA's breach of contract was a fortuitous event.
 Mallari vs. Prudential Bank
G.R. No. 197861, June 5, 2013
Third Division

Peralta, J.:

DOCTRINE: A 24% per annum stipulated interest rate is not considered unconscionable,
but interest rates of 3% per month and higher are excessive, unconscionable and exorbitant,
hence, void for being contrary to morals.

FACTS:

Petitioner Florentino T. Mallari obtained from respondent Prudential Bank a loan in the
amount of ₱300,000.00 evidenced by PN No. BD 84-055. The loan has an interest rate of
21% per annum, attorney's fees equivalent to 15% p.a. of the total amount due, but not less
than ₱200.00, and, in case of default, a penalty and collection charges of 12% p.a. of the
total amount due. Petitioner executed a Deed of Assignment authorizing the respondent to
pay his loan with his time deposit with the latter amounting to ₱300,000.00. Another loan
of ₱1.7 million evidenced by PN No. BDS 606-895 was obtained from respondent. They
stipulated on an interest rate of 23% p.a., attorney's fees of 15% p.a. of the total amount
due, but not less than ₱200.00, and penalty and collection charges of 12% p.a. Petitioners
also executed a Deed of Real Estate Mortgage in favor of respondent covering petitioners'
property under TCT No. T-215175 to answer for the said loan.

Petitioners failed to settle their loan obligations, thus respondent bank sent a demand letter
to the former for them to pay the amounts ₱571,218.54 for PN No. BD 84-055 and
₱2,991,294.82 for PN No. BDS 606-89. Respondent bank also filed with the RTC of Tarlac
a petition for the extrajudicial foreclosure of petitioners' mortgaged property for the
satisfaction of the latter's obligation of ₱1,700,000.00, and proceeded with the auction sale
where respondent bank is the highest bidder. Petitioners on the other hand tried to nullify
the mortgage claiming that the Bank imposed onerous terms and conditions and that the
bank was unilaterally increasing its charges and interest over and above those stipulated.
The Bank claimed that the basis for its computation was all written in the Promissory Notes.
Trial ensued. The CA affirmed the RTC’s finding, among others, that the 23% interest rate
p.a., which was then the prevailing loan rate of interest is not unconscionable, since banks
are not hospitable or equitable institutions but are entities formed primarily for profit. It
likewise found that the 12% penalty charges imposed were not unconscionable.

ISSUE:

Whether or not the 23% p.a. interest rate and the 12% p.a. penalty charge on petitioners'
₱1,700,000.00 loan to which they agreed upon is excessive or unconscionable under the
circumstances.

RULING:

The Court has ruled in a plethora of cases that the 24% p.a. stipulated interest rate was not
considered unconscionable, thus, the 23% p.a. interest rate imposed on petitioners' loan of
P1, 700,000 in this case can by no means be excessive or unconscionable. But, interest
rates of 3% per month and higher are excessive, unconscionable and exorbitant.

Neither is the 12% per annum penalty charge unconscionable. The enforcement of the
penalty can be demanded by the creditor when the non-performance is due to the fault or
fraud of the debtor. The non-performance gives rise to the presumption of fault; in order to
avoid the payment of the penalty, the debtor has the burden of proving an excuse - the
failure of the performance was due to either force majeure or the acts of the creditor
himself. Here, petitioners defaulted in the payment of their loan obligation and their
contract provided for the payment of 12% p.a. penalty charge, and since there was no
showing that petitioners' failure to perform their obligation was due to force majeure or to
respondent bank's acts, petitioners cannot now back out on their obligation to pay the
penalty charge. A contract is the law between the parties and they are bound by the
stipulations therein.
 Anchor Savings Bank vs. Pinzman Realty and Development Corp.
G.R. No. 192304, August 14, 2014
First Division

Villarama, Jr.:

DOCTRINE: A foreclosure sale arising from a usurious mortgage cannot be given legal
effect.

FACTS:

In December 1997, the private respondents obtained a loan from the petitioner in the
amount of ₱3,000,000 secured by a real estate mortgage over parcels of land registered in
the name of herein private respondent Marylin Mañalac. Private respondent Mañalac
executed a Promissory Note and Disclosure Statement in favor of the petitioner in the total
amount of ₱3,308,447.74 which amount already included payment for three months
interest. The loan documents stipulated that the first instalment shall be for ₱148,640 and
will be due on December 26, 1997, the second instalment will be for the same amount and
shall be due on January 26, 1998, and the third instalment will be for ₱3,011,167.74 and
will be due on February 26, 1998. Moreover, the Promissory Note and Disclosure
Statement imposed a monthly 5% late payment charge, 25% attorney’s fees, and 25%
liquidated damages in case of unpaid instalments on the part of private respondent Mañalac.
On December 3, 1997, the proceeds of the loan were released to private respondent
Mañalac who issued three checks for the payment of monthly instalments to the petitioner.
However, only the first one was cleared for payment, and the private respondents incurred
an outstanding balance of ₱3,012,252.32 which they failed to settle. Subsequently, the
private respondents received a Second Notice of Extrajudicial Sale for the satisfaction of
an obligation amounting to ₱4,577,269.42, excluding penalties, charges, attorney’s fees
and costs of foreclosure. On June 1, 1999, the foreclosure sale was held where the petitioner
is the highest bidder and a Certificate of Sale was issued in its favor. As private respondent
Mañalac failed to redeem the properties, ownership of the foreclosed properties was
eventually consolidated in petitioner’s name.

On September 6, 2000, private respondents filed a complaint for the nullification of the
foreclosure sale alleging that the amount demanded in the Notice of Extrajudicial Sale was
exorbitant and excessive. Specifically, instead of the amount of ₱4,577,269.42 as
demanded therein, the private respondents contended that the proper amount should only
be ₱3,825,907.16 if the balance of the loan is computed with interest at the rate of 3%
reckoned from the date of last payment.

The CA declared that the loan agreement as embodied in the Promissory Note and
Disclosure Statement failed to stipulate a rate of interest, and that petitioner erred in
unilaterally imposing an interest rate of 30.33% on the unpaid portion of the loan. It held
held that said rate was excessive, iniquitous, unconscionable and blatantly contrary to law
and morals.

ISSUE:

Whether or not the imposition of usurious interest rates on a loan obligation secured by a
real estate mortgage will result in the invalidity of the subsequent foreclosure sale of the
mortgage.

RULING:

It is jurisprudential axiom that a foreclosure sale arising from a usurious mortgage cannot
be given legal effect. This Court has previously struck down a foreclosure sale where the
amount declared as mortgage indebtedness involved excessive, unreasonable, and
unconscionable interest charges. In no uncertain terms, this Court ruled that a mortgagor
cannot be legally compelled to pay for a grossly inflated loan. In the case at bar, the
unlawful interest charge which led to the amount demanded will result to the invalidity of
the subsequent foreclosure sale.
 Rey vs. Anson
G.R. No. 211206, November 7, 2018
Third Division

Peralta, J..:

DOCTRINES: The interest rates of 7.5% and 7% are excessive, unconscionable,

iniquitous, and contrary to law and morals; and, therefore, void ab initio.
No interest shall be due unless it has been stipulated in writing.

FACTS:

Rosemarie Rey borrowed from Cesar Anson the following amounts:

Loan 1: P200, 000.00 payable in one year, and subject to 7.5% interest per month or P15,
000.00 monthly interest, which would be paid bi-monthly by way of post-dated checks. It
was secured by a real estate mortgage on Spouses Teodoro and Rosemarie Rey's property,
Loan 2: P 350,000.00, subject to 7% interest per month, and payable in four months. It was
secured by a real estate mortgage over a parcel of land covered by TCT No. 2776.
Loan 3: P100, 000.00. The third loan was not put in writing, but the parties verbally agreed
that the same would be subject to 3% monthly interest.
Loan 4: P100, 000.00. It was also not put in writing, but there was an oral agreement of 4%
monthly interest.

Rosemarie Rey faithfully paid the interest on the first loan for twelve (12) months. She
was, however, unable to pay the principal amount of P200, 000.00 and also failed to fulfil
her obligation on the second loan. Cesar Anson then sent Rosemarie Rey a Statement of
Account seeking full payment of all four loans amounting to P2, 214,587.50. Instead of
paying her loan obligations, Rosemarie Rey, sent Cesar Anson a letter stating that the 7.5%
and 7% monthly interest rates imposed on the first and second loans, respectively, were
excessive and unconscionable and should be adjusted to the legal rate. Moreover, no
interest should have been imposed on the third and fourth loans in the absence of any
written agreement imposing interest.

Per Rosemarie Rey's computation using the legal rate of interest, all four loans were already
fully paid, as well as the interests thereon. Rey contended that she had overpaid the amount
of P283, 434.19. She demanded from Cesar Anson the return of the excess payment;
otherwise, she would be compelled to seek redress in court.

ISSUE:
Whether or not the interest rates on the first and second loans are unconscionable
and contrary to morals.

RULING:

Even if Rosemarie Rey initially suggested the interest rate on the first loan, voluntariness
does not make the stipulation on an interest, which is iniquitous, valid. The Court holds
that the interest rates of 7.5% monthly interest rate or 90% interest per annum and 7%
monthly interest rate or 84% interest per annum are excessive, unconscionable, iniquitous,
and contrary to law and morals ,therefore, void ab initio. Hence, the RTC correctly imposed
the legal interest of 12% per annum in place of the said interest rates.

As to the third and fourth loans both in the amount of P100, 000.00, since the agreement
of 3% monthly interest on the third loan and 4% monthly interest on the fourth loan was
merely verbal and not put in writing, no interest was due thereon. This is in accordance
with Article 1956 of the Civil Code which provides that "[n]o interest shall be due unless
it has been stipulated in writing."
 Marquez vs. Elisan Credit Corporation
G.R. No. 194642, April 6, 2015
Second Division

Brion, J.:

DOCTRINES: Article 1176 presumes that the creditor waives the payment of
interest because he accepts payment for the principal without any reservation.
Article 1253 provides a hierarchy involving payment of interest-
bearing debts: payments shall first be applied to the interest; payment shall then be applied
to the principal only after the interest has been fully-paid.

FACTS:

Petitioner obtained a from Elisan Credit Corporation (respondent) for fifty-three thousand
pesos (Php 53,000.00) payable in 180 day and secured by a chattel mortgage over a motor
vehicle. Both the petitioner and respondent acknowledged the full payment of the first loan.

Petitioner obtained another loan (second loan) from the respondent for P55, 000.00. The
promissory note covering the second loan contained exactly the same terms and conditions
as the first promissory note. When the second loan matured, the petitioner had only paid
P29, 960.00, leaving an unpaid balance P25, 040.00. Due to liquidity problems, the
petitioner asked the respondent if he could pay in daily instalments until paid. The
respondent granted the petitioner's request, thus, 21 months after the second loan's maturity,
the petitioner had already paid a total of P56, 440.00, an amount greater than the principal.

Despite the receipt of more than the amount of the principal, the respondent filed a
complaint for judicial foreclosure of the chattel mortgage because the petitioner allegedly
failed to settle the balance of the second loan. He further alleged that pursuant to the terms
of the promissory note, the petitioner's failure to fully pay upon maturity triggered the
imposition of the ten percent (10%) monthly penalty and twenty-five percent (25%)
attorney's fees.

ISSUE:

Whether or not the respondent acted lawfully when it credited the daily payments against
the interest instead of the principal?

RULING:

The respondent acted pursuant to law and jurisprudence when it credited the daily
payments against the interest instead of the principal. Article 1253 states: "If the debt
produces interest, payment of the principal shall not be deemed to have been made until
the interests have been covered." Under this article, payments shall first be applied to the
interest and not to the principal shall govern if two facts exist: (1) the debt produces interest
(e.g., the payment of interest is expressly stipulated) and (2) the principal remains unpaid.

The exception is a situation covered under Article 1176, i.e., when the creditor waives
payment of the interest despite the presence of (1) and (2) above. In such case, the payments
shall obviously be credited to the principal.

Under this analysis, we rule that the respondent properly credited the daily payments to the
interest and not to the principal because: (1) the debt produces interest, i.e., the promissory
note securing the second loan provided for payment of interest; (2) a portion of the second
loan remained unpaid upon maturity; and (3) the respondent did not waive the payment of
interest.

There was no waiver of interest. The fact that the official receipts did not indicate whether
the payments were made for the principal or the interest does not prove that the respondent
waived the interest.
 Bonrostro vs. Luna
G.R. No. 172346, July 24, 2013
Second Division

Del Castillo, J.:

DOCTRINE: In a contract to sell, payment of the price is a positive suspensive condition,

failure of which is not a breach of contract warranting rescission.

FACTS:

Constancia Luna entered into a contract to sell with Lourdes Bonrostro over a house in
Quezon City for P1, 250,000.00 which shall be paid by the vendee to the vendor in the
following manner:
(a) P200, 000.00 upon signing the Contract To Sell,
(b) P300, 000.00 payable on or before April 30, 1993,
(c) P330, 000.00 payable on or before July 31, 1993,
(d) P417, 000.00 payable to the New Capitol Estate, for 15 years at P6, 867.12 a month.
In the event the vendee fails to pay the second instalment on time, the vendee will pay
starting May 1, 1993 a 2% interest on the P300, 000.00 monthly. Likewise, in the event
the vendee fails to pay the amount of p630,000.00 on the stipulated time, this contract to
sell shall likewise be deemed cancelled and rescinded and 5% of the total contract price of
P1,250,000.00 shall be deemed forfeited in favor of the vendor. Unpaid monthly
amortization shall likewise be deducted from the initial down payment in favor of the
vendor. After execution of the contract, Bonrostro took possession of the property.
However, except for P200, 000.00 downpayment, she failed to pay subsequent
amortization. On November 24, 1993, Lourdes sent a letter expressing their intention to
pay but without the accompanying payment. They argue that the sending of the said letter
constitutes a valid tender of payment on their part. Hence, they should not be assessed any
interest subsequent to the date of the said letter.
ISSUE:

Whether or not delay in the payment of instalment is a substantial breach of obligation as

to warrant its rescission.

RULING:

No, in a contract to sell, payment of the price is a positive suspensive condition. Failure of
which is not a breach of contract warranting rescission under Article 1191 of the Civil
Code, but rather just an event that prevents the supposed seller from being bound to convey
title to the supposed buyer. The contract to sell entered by the parties refers to real property
on instalment basis, in which Art. 1191 cannot apply since they are governed by the
Maceda Law. However, there being no breach, Bonrostro is still not excused from being
made liable for interest on the instalments due from the date of default until fully paid.
Tender of payment, a manifestation by the debtor of a desire to comply with or pay an
obligation, asserted by Bonrostro for the accrual of interest to be suspended is not a valid
defense because for a tender of payment to take effect it must be accompanied by the means
of payment and debtor must take immediate step to make a consignation, the deposit of the
proper amount with a judicial authority, then interest is suspended from the time of such
tender.
 Lim vs. Development Bank of the Philippines
G.R. No. 177050, July 1, 2013
Second Division

Del Castillo, J.:

DOCTRINE: The doctrine of constructive fulfillment of suspensive conditions applies

when the following three (3) requisites concur, viz: (1) The condition is suspensive; (2)
The obligor actually prevents the fulfillment of the condition; and (3) He acts voluntarily.

FACTS:

Petitioners obtained a loan of P40, 000.00 on November 24, 1969 from respondent
Development Bank of the Philippines (DBP) to finance their cattle raising business. To
secure the loans, petitioners executed a mortgage in favor of DBP over real properties.
Due to violent confrontations between government troops and Muslim rebels in Mindanao
from 1972 to 1977, petitioners were forced to abandon their cattle ranch. As a result, their
business collapsed and they failed to pay the loan amortizations which became due and
demandable as early as 1972 and 1976.

In 1978, petitioners made a partial payment of ₱902,800.00. No subsequent payments were

made. It was only in 1989 that petitioners tried to negotiate the settlement of their loan
obligations. And although DBP could have foreclosed the mortgaged properties, it instead
agreed to restructure the loan. In fact, from 1989 to 1994, DBP gave several extensions for
petitioners to settle their loans, but they never did, thus, prompting DBP to cancel the
Restructuring Agreement. On July 11, 1994, a public auction sale of the mortgaged
properties for the satisfaction of petitioners’ total obligations in the amount of
₱5,902,476.34. DBP was the highest bidder in the amount of ₱3,310,176.55.
Petitioners filed before the RTC a Complaint against DBP for Annulment of Foreclosure.
They insist that DBP’s cancellation of the Restructuring Agreement justifies the
extinguishment of their loan obligation.

ISSUE:

Whether or not the cancellation of the Restructuring Agreement justifies the

extinguishment of the obligation under the Principle of Constructive Fulfilment found in
Article 1186 of the Civil Code.

RULING:

Article 1186 of the Civil Code states that "the condition shall be deemed fulfilled when the
obligor voluntarily prevents its fulfillment," does not apply in this case. The said provision
enunciates the doctrine of constructive fulfillment of suspensive conditions, which applies
when the following three (3) requisites concur, viz: (1) The condition is suspensive; (2)
The obligor actually prevents the fulfillment of the condition; and (3) He acts voluntarily.
Suspensive condition is one the happening of which gives rise to the obligation. It will be
irrational for any Bank to provide a suspensive condition in the the Restructuring
Agreement that will allow the debtor-promisor to be freed from the duty to pay the loan
without paying it.

Besides, petitioners have no one to blame but themselves for the cancellation of the
Restructuring Agreement. It is significant to point out that when the Regional Credit
Committee reconsidered petitioners’ proposal to restructure the loan, it imposed additional
conditions. In fact, when DBP forwarded the Restructuring Agreement to the Legal
Services Department of DBP, petitioners were required to pay the amount of
₱1,300,672.75, plus a daily interest of ₱632.15 starting November 16, 1993 up to the date
of actual payment of the said amount. This, petitioners failed to do. DBP therefore had
reason to cancel the Restructuring Agreement.
 International Hotel Corporation vs. Joaquin
G.R. No. 158361, April 10, 2013
First Division

Bersamin, J.:

DOCTRINE: The prevailing rule in conditional obligations is that the acquisition of

rights, as well as the extinguishment or loss of those already acquired, shall depend upon
the happening of the event that constitutes the condition.

FACTS:

Respondent Francisco B. Joaquin, Jr. submitted a proposal to the Board of Directors of the
International Hotel Corporation (IHC) for him to render technical assistance in securing a
foreign loan for the construction of a hotel, to be guaranteed by the Development Bank of
the Philippines (DBP). IHC granted Joaquin’s requested that the payment of his fees for
his services would be in the form shares of stock instead of cash. Joaquin presented to the
IHC Board of Directors the results of his negotiations with potential foreign financiers. He
narrowed the financiers to Roger Dunn & Company and Materials Handling Corporation,
and recommended the latter based on the more beneficial terms it had offered which was
accepted. Negotiations with Materials Handling Corporation and with its principal, Barnes
International ensued. While the negotiations with Barnes were ongoing, Joaquin and Jose
Valero, the Executive Director of IHC, met with another financier, the Weston
International Corporation to explore possible financing. When Barnes failed to deliver the
needed loan, IHC informed DBP that it would submit Weston for DBP’s consideration. As
a result, DBP cancelled its previous guaranty through a letter dated December 6, 1971.
On December 13, 1971, IHC entered into an agreement with Weston, and communicated
this development to DBP. However, DBP denied the application for guaranty for failure to
comply with the conditions.
Due to Joaquin’s failure to secure the needed loan, IHC, through its President Bautista,
cancelled the 17,000 shares of stock previously issued to Joaquin and Suarez as payment
for their services. The latter requested a reconsideration of the cancellation, but their
request was rejected. Consequently, Joaquin and Suarez commenced this action for specific
performance, annulment, damages and injunction. IHC in its answer claimed that Joaquin
and Suarez had not provided a foreign financier acceptable to DBP. IHC argued that the
obligation with a suspensive condition did not arise when the event or occurrence did not
happen. In that instance, partial performance of the contract subject to the suspensive
condition was tantamount to no performance at all. As such, the respondents were not
entitled to any compensation.

ISSUE:

Whether or not IHC is liable to pay under the rule on constructive fulfillment of a mixed
conditional obligation.

RULING:

Considering that the agreement between the parties was not circumscribed by a definite
period, its termination was subject to a condition – the happening of a future and uncertain
event. The prevailing rule in conditional obligations is that the acquisition of rights, as well
as the extinguishment or loss of those already acquired, shall depend upon the happening
of the event that constitutes the condition. There is no question that when the fulfillment of
a condition is dependent partly on the will of one of the contracting parties, or of the
obligor, and partly on chance, hazard or the will of a third person, the obligation is mixed.
The existing rule in a mixed conditional obligation is that when the condition was not
fulfilled but the obligor did all in his power to comply with the obligation, the condition
should be deemed satisfied. Considering that the respondents were able to secure an
agreement with Weston, and subsequently tried to reverse the prior cancellation of the
guaranty by DBP, we rule that they thereby constructively fulfilled their obligation.
 The Wellex Group, Inc. vs. U-Land Airlines, Co., Ltd.
G.R. No. 167519, January 14, 2015
Second Division

Leonen, J.:

DOCTRINES: The condition that some event will not happen at a determinate time
shall render the obligation effective from the moment the time indicated has elapsed, or if
it has become evident that the event cannot occur.
The power to rescind obligations is implied in reciprocal ones, in
case one of the obligors should not comply with what is incumbent upon him.

FACTS:

Wellex and U-Land entered into a Memorandum of Agreement to expand their respective
airline operations in Asia. In the Memorandum of Agreement, Wellex and U-Land agreed
to develop a long-term business relationship through the creation of joint interest in airline
operations and property development projects in the Philippines. This long-term business
relationship would be implemented through the acquisition of shares of stocks of APIC
PEC, and ESB by U-Land. The execution of a joint development agreement was
conditioned on the execution of a share purchase agreement. While the transfer of APIC
shares and PEC shares to U-Land was conditioned among others on the full remittance of
the final purchase price as reflected in the share purchase agreement. They also agreed that
if they were unable to agree on the terms of the share purchase agreement and the joint
development agreement within 40 days from signing, the Memorandum of Agreement
would cease to be effective and that the parties would be released from their respective
undertakings, except that Wellex would be required to refund within three days the US$3
million given as initial funding by U-Land. If Wellex was unable to refund the US$3
million to U-Land, U-Land would have the right to recover on the 57,000,000 PEC shares
that would be delivered to it. The 40-day period lapsed Wellex and U-Land were not able
to enter into any share purchase agreement although drafts were exchanged between the
two. In the letter10 months after the last formal communication between the two parties,
U-Land, through counsel, demanded the return of the US$7,499,945.00.58 this letter was
sent 14 months after the signing of the Memorandum of Agreement. U-Land filed a
Complaint praying for rescission of the First Memorandum of Agreement and damages
against Wellex and for the issuance of a Writ of Preliminary Attachment.

ISSUES:

Whether or not the parties are bound to return to each other all they have received.
Whether rescission under Article 1191 is availing to respondent.

RULING:

Article 1185 provides that if an obligation is conditioned on the non-occurrence of a

particular event at a determinate time, that obligation arises (a) at the lapse of the indicated
time, or (b) if it has become evident that the event cannot occur. Petitioner Wellex and
respondent U-Land bound themselves to negotiate with each other within a 40-day period
to enter into a share purchase agreement. If no share purchase agreement was entered into,
both parties would be freed from their respective undertakings. This includes returning to
each other all that they received in pursuit of entering into the share purchase agreement.
As such, petitioner Wellex is obligated to return the remittances made by respondent U-
Land, in the same way that respondent U-Land is obligated to return the certificates of
shares of stock and the land titles to petitioner Wellex.

Respondent U-Land correctly sought the principal relief of rescission or resolution under
Article 1191.The obligations of the parties gave rise to reciprocal prestations, which arose
from the same cause: the desire of both parties to enter into a share purchase agreement
that would allow them to expand their respective airline operations in the Philippines and
other neighbouring countries. The injured party may choose between the fulfillment and
the rescission of the obligation, with the payment of damages in either case. He may also
seek rescission, even after he has chosen fulfillment, if the latter should become impossible.
 Hilltop Market Fish Vendors' Association V. Braulio Yaranon +
GR No. 188057, Jul 12, 2017
Second Division

Carpio, J.:

DOCTRINE: Difference between a condition imposed upon the perfection of the contract
and a condition imposed on the performance of an obligation. Failure to comply with the
first condition results in the failure of a contract, while the failure to comply with the second
condition only gives the other party the option either to refuse to proceed or to waive the
condition.

FACTS:

Petitioner Hilltop Market Fish Vendors' Association, Inc. (Hilltop), represented by its
president Gerardo Rillera (Rillera), and respondent City of Baguio, represented by its then
Mayor Luis Lardizabal, entered into a Contract of Lease over a lot owned by the City of
Baguio, with an area of 568.80 square meters and located at the Hilltop Market, Baguio
City. The contract provided that the period of lease is 25 years, renewable for the same
period at the option of both parties, and the annual lease rental is P25,000, with the first
payment commencing upon the issuance by the City Engineer's Office of the Certificate of
full occupancy (Certificate) of the building to be constructed by Hilltop. Before the
Certificate is issued, the City of Baguio can continue collecting market fees from the
vendors who are allowed to occupy any portion of the building. At the termination of the
lease period, the City of Baguio will own the building without payment or reimbursement
for Hilltop's costs. Hilltop constructed the building even though the City Engineer's Office
did not issue a Certificate, Hilltop's members occupied the Rillera building and conducted
business in it. The City Engineer's Office issued its finding that the building were unsafe
for occupancy. Respondent then Mayor Braulio Yaranon (Yaranon) issued AO No. 30,
ordering the City Building and Architects Office (CBAO) and Public Order and Safety
Division to immediately close the Rillera building to have it cleaned, sanitized and
enclosed; to prevent illegal activities in it; and for its completion and preparation for
commercial use. Hilltop filed with the RTC a Complaint praying that the court issue an
injunction against the implementation of AO No. 30 and order the concerned office to issue
the Certificate to make the contract of lease effective. They argued that the issuance of the
Certificate shall only signal the start of payment of annual lease rental and not the
affectivity of the contract.

ISSUE:

Whether or not there was a perfected contract of lease.

RULING:

The thing or subject matter of the contract in this case was clearly identified and agreed
upon as the lot where the building would be constructed by Hilltop. The consideration were
the annual lease rental and the ownership of the building upon the termination of the lease
period. Considering that Hilltop and the City of Baguio agreed upon the essential elements
of the contract, the contract of lease had been perfected.

From the moment that the contract is perfected, the parties are bound to fulfil what they
have expressly stipulated. Thus, the City of Baguio gave the use and enjoyment of its lot
to Hilltop. Since Hilltop exercised its right as lessee based on the contract of lease and the
law, it has no basis in claiming that the contract of lease did not commence. The issuance
of the Certificate was not a suspensive condition which determines the perfection of the
contract or its effectivity. The issuance of the Certificate is only a condition that will make
Hilltop start paying the annual lease rental to the City of Baguio. Because the Certificate
was not issued, the payment of annual lease rental did not commence. In this case, the
condition, which is the issuance of the Certificate, was imposed only for the obligation to
pay the rent to commence. Payment of the price, or the rent, in this case, goes into the
performance of the contract and has nothing to do with the perfection of the contract.
 Salonte vs. Commission on Audit
G.R. No. 207348, August 19, 2014
En Banc

Velasco Jr., J.:

DOCTRINE: Obligations for whose fulfillment a day certain has been fixed, shall be
demandable only when that day comes.

FACTS:

On April 26, 1989, the City of Mandaue and F.F. Cruz and Co., Inc. entered into a Contract
of Reclamation in which F.F. Cruz, in consideration of a defined land sharing formula thus
stipulated, agreed to undertake, the reclamation of 180 hectares of foreshore and submerged
lands from the Cabahug Causeway in that city. The project is estimated to be completed in
six (6) years. The parties also inked in relation to the above project a Memorandum of
Agreement whereby the City of Mandaue allowed F.F. Cruz to put up structures on a
portion of a parcel of land owned by the city for the use of F.F. Cruz personnel assigned at
the project site with no rental to be paid; that upon the completion of the Mandaue City
Reclamation Project, all improvements introduced by F.F. therein shall ipso facto belong
to the City of Mandaue in ownership as compensation for the use of said parcel of land.

Later developments saw the City of Mandaue undertaking the Metro Cebu Development
Project II, part of which required the widening of where the structures and facilities built
by F.F. Cruz stood within the direct path of the road widening project. Thus, DPWH
entered into an Agreement to Demolish, Remove and Reconstruct Improvement dated July
23, 19976 with F.F. Cruz to demolish the improvements outside of the boundary of the
road widening project upon payment of the amount of PhP 1,084,836.42 in compensation.

COA, however disallowed the payment of PhP 1,084,836.42 as F.F. Cruz was no longer
the lawful owner of the properties at the time the payment was made. It concluded that after
the six (6)-year period, F.F. Cruz is automatically deemed to be in delay, the contract
considered as completed, and the ownership of the structures built in accordance with the
MOA transferred to the City of Mandaue.

ISSUE:

Who between the City of Mandaue and F.F. Cruz owned the subject property during the
period material the properties that were demolished?

RULING:

Respondent Cruz, and/or his company were still the owner of the structures along Plaridel
Extension when these were demolished to give way to road widening. Hence, it was
nothing but equitable that they get compensated for the damages caused by the demolition.
A plain reading of the Contract of Reclamation reveals that the six (6)-year period provided
for project completion, or, with like effect, termination of the contract was a mere estimate
and cannot be considered a period or a "day certain" in the context of the Art. 1193, viz:
Article 1193. Obligations for whose fulfillment a day certain has been fixed, shall
be demandable only when that day comes.
Obligations with a resolutory period take effect at once, but terminate upon arrival
of the day certain.
A day certain is understood to be that which must necessarily come, although it
may not be known when.
If the uncertainty consists in whether the day will come or not, the obligation is
conditional, and it shall be regulated by the rules of the preceding Section.

The lapse of six (6) years from the perfection of the contract did not, by itself, make the
obligation to finish the reclamation project demandable, such as to put the obligor in a state
of actionable delay for its inability to finish. Neither the lapse of six (6) years from the
perfection of the subject reclamation contract could not have automatically vested
Mandaue City, under the MOA, with ownership of the structures.
 Fil-Estate Properties, Inc. vs. Spouses Ronquillo
G.R. No. 185798, January 13, 2014
Second Division

Perez, J.:

DOCTRINE: The power to rescind obligations is implied in reciprocal ones, in case one
of the obligors should not comply with what is incumbent upon him.

FACTS:

Respondent Spouses Ronquillo purchased from petitioner Fil-Estate Properties, Inc. an 82-
square meter condominium unit at Central Park Place Tower in Mandaluyong City for a
pre-selling contract price of ₱5,174,000.00. Respondents executed and signed a
Reservation Application Agreement wherein they deposited ₱200,000.00 as reservation
fee. As agreed upon, respondents paid the full downpayment of ₱1,552,200.00 and had
been paying the ₱63,363.33 monthly amortizations.

Upon learning that construction works had stopped, respondents likewise stopped paying
their monthly amortization. Claiming to have paid a total of ₱2,198,949.96 to petitioners,
respondents through two (2) successive letters, demanded a full refund of their payment
with interest. When their demands went unheeded, respondents were constrained to file a
Complaint for Refund and Damages before the Housing and Land Use Regulatory Board
which issued an Order of Default against petitioners for failing to file their Answer within
the reglementary period despite service of summons. Petitioners filed a motion to lift order
of default and attached their position paper attributing the delay in construction to the 1997
Asian financial crisis.

The Arbiter considered petitioners’ failure to develop the condominium project as a

substantial breach of their obligation which entitles respondents to seek for rescission with
payment of damages. The Arbiter also stated that mere economic hardship is not an excuse
for contractual and legal delay.

ISSUE:

Whether or not the respondent are entitled to rescind the contract.

RULING:

The Asian financial crisis is not a fortuitous event that would excuse petitioners from
performing their contractual obligation. A real estate enterprise engaged in the pre-selling
of condominium units is concededly a master in projections on commodities and currency
movements and business risks. The fluctuating movement of the Philippine peso in the
foreign exchange market is an everyday occurrence, and fluctuations in currency exchange
rates happen everyday, thus, not an instance of caso fortuito. Thus, as a result of the breach
committed by petitioners, respondents are entitled to rescind the contract and to be refunded
the amount of amortizations paid including interest and damages.

The non-performance of petitioners’ obligation entitles respondents to rescission under

Article 1191 of the New Civil Code which states:

Article 1191. The power to rescind obligations is implied in reciprocal ones, in case
one of the obligors should not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the obligation,
with payment of damages in either case. He may also seek rescission, even after he has
chosen fulfillment, if the latter should become impossible.
 Golden Valley Exploration vs. Pinkian Mining Company
G.R. No. 190080, June 11, 2014
Second Division

Perlas-Bernabe, J.:

DOCTRINE: The power to rescind an obligation must be invoked judicially and cannot
be exercised solely on a party’s own judgment. However, an injured party need not resort
to court action in order to rescind a contract when the contract itself provides that it may
be revoked or cancelled upon violation of its terms and conditions.

FACTS:

PMC is the owner of 81 mining claims located in Kayapa, Nueva Vizcaya, it entered into
an Operating Agreement with GVEI, granting the latter "full, exclusive and irrevocable
possession, use, occupancy, and control over the mining claims, and every matter
pertaining to the examination, exploration, development and mining of the mining claims
and the processing and marketing of the products 8 for a period of 25 years.

After some time, PMC extra-judicially rescinded the OA upon GVEI’s violation of Section
5.01 thereof. GVEI contested the extra-judicial rescission of the OA through a Letter
averring therein that its obligation to pay royalties to PMC arises only when the mining
claims are placed in commercial production which condition has not yet taken place. It also
reminded PMC of its prior payment of the amount of ₱185,000.00 as future royalties in
exchange for PMC’s express waiver of any breach or default on the part of GVEI.

PMC no longer responded, instead, it entered into a Memorandum of Agreement with CVI,
granting the right to "enter, possess, occupy and control the mining claims" and "to explore
and develop the mining claims, mine or extract the ores, mill, process and beneficiate
and/or dispose the mineral products in any method or process," among others, for a period
of 25 years.
GVEI filed a Complaint for Specific Performance, Annulment of Contract and Damages
against PMC and CVI.

ISSUE:

Whether or not there was a valid rescission of the OA.

RULING:

By expressly stipulating in the OA that GVEI’s non-payment of royalties would give PMC
sufficient cause to cancel or rescind the OA, the parties clearly had considered such
violation to be a substantial breach of their agreement. PMC’s extra-judicial rescission of
the OA based on the said ground was valid.

In reciprocal obligations, either party may rescind the contract upon the other’s substantial
breach of the obligation/s he had assumed thereunder. In a case, it was held that judicial
permission to rescind an obligation is not necessary if a contract contains a special
provision granting the power of cancellation to a party. PMC’s unilateral rescission of the
OA due to GVEI’s non-payment of royalties considering the parties’ express stipulation in
the OA that said agreement may be cancelled on such ground.

The right of rescission under Article 1191 is predicated on a breach of faith that violates
the reciprocity between parties to the contract. This retaliatory remedy is given to the
contracting party who suffers the injurious breach on the premise that it is "unjust that a
party be held bound to fulfil his promises when the other violates his."
 Sangguniang Panlungsod ng Baguio City vs. Jadewell Parking System
G.R. No. 160025, April 23, 2014
Second Division

Brion, J.:

DOCTRINE: If the rescission is not opposed, extrajudicial declaration of rescission

produces legal effect such that the injured party is already relieved from performing the
undertaking.

FACTS:

Jadewell proposed the privatization of the administration of on-street parking in Baguio

City using Schlumberger's DG4S Pay and Display Parking Meter, which it touted as
"technologically advanced, up to the level of more progressive countries and which would
make the city as the first and only city in the Philippines, if not in Asia, to have metered
parking as an important part of its traffic and parking system.

Respondent Sanggunian acted favorably on the proposal. The City Mayor of Baguio wrote
to Jadewell, transmitting to it the finalized draft of the MOA. The City Mayor informed
Jadewell that the finalization of the MOA would be subject to the appropriate action of the
Sanggunian and the passage of an enabling ordinance. Respondent Sanggunian enacted
City Ordinance No. 003, Series of 2000 outlining the rules and policy on the privatization
of the administration of on-street parking in the city streets of Baguio. For this purpose, the
City of Baguio authorized the intervention of a private operator for the regulation, charging
and collection of parking fees and the installation of modern parking meters. A MOA was
finally executed between Jadewell and the City of Baguio through its then City Mayor for
the installation, management and operation of the parking meters.

The Sanggunian passed Resolution No. 395, Series of 2000, directing Jadewell to comply
with its obligations under the MOA for the installation of the necessary number of parking
meters. In response, Jadewell wrote to the City Mayor informing him that the former had
started operation of the off-street parking and of the on-street parking. In response to the
letter of Jadewell, the City Treasurer demanded the remittance of Baguio's share of the
parking fees collected by Jadewell since it started operations.

Thereafter, the Sanggunian passed Resolution 37 expressing its intent to rescind the MOA
enumerating all the alleged violations of Jadewell prompting it to rescind the MOA.

ISSUE:

Whether or not there was a valid act of rescission exercised by the Sanggunian.

RULING:

Extrajudicial declaration of rescission is recognized as a power which does not require

judicial intervention. If the rescission is not opposed, extrajudicial declaration of rescission
produces legal effect such that the injured party is already relieved from performing the
undertaking.

At the outset, 60 days had lapsed from receipt of the letter informing Jadewell of the
decision of the City of Baguio to rescind the MOA under Section 12 thereof. It may be
recalled that Section 12 requires that notice of the intention to rescind be given 60 days
prior to the effectivity of the rescission. Jadewell has not questioned the legal efficacy of
this notice. Since the legal efficacy of the rescission has not been contested by Jadewell in
any of the petitions before us, we thus consider this notice of rescission to have taken legal
effect and therefore, at the latest, the MOA between the City of Baguio and Jadewell has
ceased to legally exist.

Inasmuch as there is no longer any existing MOA, no order of this Court can have the effect
of directing the City of Baguio to enforce any of the terms of the MOA.
 Metropolitan Band and Trust Company vs. Chiok
G.R. No. 172652, November 26, 2014
First Division

Leonardo-De Castro, J.

DOCTRINE: The right of rescission under Article 1191 of the Civil Code can only be
exercised in accordance with the principle of relativity of contracts under Article 1131.

FACTS:

Respondent Wilfred N. Chiok bought US$1,022,288.50 dollars from Gonzalo B. Nuguid

where Chiok deposited the three manager’s checks (Asian Bank MC Nos. 025935, 025939,
and Metrobank CC No. 003380), with an aggregate value of ₱26,068,350.00 in Nuguid’s
account with petitioner Bank of the Philippine Islands. Nuguid, however, failed to deliver
the dollar equivalent of the three checks as agreed upon, prompting Chiok to request that
payment on the three checks be stopped.

On the following day, Chiok filed a Complaint for damages with application for ex parte
restraining order and/or preliminary injunction with the Regional Trial Court (RTC) of
Quezon City against the spouses Gonzalo and Marinella Nuguid, and the depositary banks,
Asian Bank and Metrobank.

The RTC issued an Order directing the issuance of a writ of preliminary prohibitory
injunction. When checks were presented for payment, Asian Bank refused to honour MC
Nos. 025935 and 025939 in deference to the TRO.

ISSUE:

Whether respondent has a cause of action against Nuguid and the banks calling for the
exercise of the right to rescind.
HELD:

When Nuguid failed to deliver the agreed amount to Chiok, the latter had a cause of action
against Nuguid to ask for the rescission of their contract; but, Chiok did not have a cause
of action against Metrobank and Global Bank that would allow him to rescind the contracts
of sale of the manager’s or cashier’s checks, which would have resulted in the crediting of
the amounts thereof back to his accounts. Otherwise stated, the right of rescission under
Article 1191 of the Civil Code can only be exercised in accordance with the principle of
relativity of contracts under Article 1131 of the same code, which provides:

Art. 1311. Contracts take effect only between the parties, their assigns and heirs,
except in case where the rights and obligations arising from the contract are not
transmissible by their nature, or by stipulation or by provision of law. x x x.

This Court has ruled that under the civil law principle of relativity of contracts under Article
1131, contracts can only bind the parties who entered into it, and it cannot favor or
prejudice a third person, even if he is aware of such contract and has acted with knowledge
thereof. Metrobank and Global Bank are not parties to the contract to buy foreign currency
between Chiok and Nuguid. Therefore, they are not bound by such contract and cannot be
prejudiced by the failure of Nuguid to comply with the terms thereof.

As between two innocent persons, one of whom must suffer the consequences of a breach
of trust, the one who made it possible by his act of confidence must bear the loss. Evidently,
it was the utmost trust and confidence reposed by Chiok to Nuguid that caused this entire
debacle, dragging three banks into the controversy, and having their resources threatened
because of an alleged default in a contract they were not privy to.