OBLIGATIONS AND CONTRACTS CASE DIGESTS

Atty. Christine Joy Tan

21. ARRIETA v. National Rice and Corn Corporation

FACTS :
On May 19, 1952, plaintiff-appellee Mrs. Arrieta participated in the public bidding called by the NARIC for
the supply of 20,000 metric tons of Burmese rice. As her bid of $203.00 per metric ton was the lowest, she was
awarded the contract for the same. On July 1, 1952, plaintiff-appellee and the appellant corporation entered into a
Contract of Sale of Rice, under the terms of which the former obligated herself to deliver to the latter 20,000
metric tons of Burmese Rice at $203.00 per metric ton. In turn, the defendant corporation committed itself to pay
for the imported rice by means of an irrevocable, confirmed and assignable letter of credit in U.S. currency in
favor of the plaintiff-appellee and/or supplier in Burma, immediately.

It was only on July 30, 1952, or a full month from the execution of the contract, that the defendant
corporation, thru its general manager, took the first step to open a letter of credit by forwarding to the Philippine
National Bank its Application for Commercial Letter of Credit. On the same day, plaintiff-appellee, thru counsel,
advised the appellant corporation of the extreme necessity for the immediate opening of the letter of credit since
she had by then made a tender to her supplier in Rangoon, Burma and in compliance with the regulations in
Rangoon the 5% of the F.O.B price will be confiscated if the required letter of credit is not received by them before
August 4, 1952.

On August 4, 1952, the Philippine National Bank informed the appellant corporation that its application,
for a letter of credit for $3,614,000.00 in favor of Thiri Setkya has been approved by the Board of Directors with
the condition that 50% marginal cash deposit be paid and that drafts are to be paid upon presentment. However,
the appellant corporation was not in any financial position to meet the condition, and this was bluntly confessed to
the appellee.

As a result of the delay, the allocation of appellees supplier in Rangoon was cancelled and the 5% deposit
was forfeited. Even with the 15-day grace, the appellant corporation was unable to make good its commitment to
open the disputed letter of credit. The appellee endeavored, but failed, to restore the cancelled Burmese rice
allocation. She offered to substitute Thailand rice instead to the defendant NARIC, which was rejected by the
appellant in a resolution dated Nov. 15, 1952.

On the foregoing, the appellee sent a letter to the appellant, demanding compensation for the damages
caused her in the sum of $286,000.00, U.S. currency, representing unrealized profit.

ISSUE:

Whether or not appellant was guilty of breach of contract through contravention of tenor, thereby
making it liable for damages.

HELD :

Yes. It is clear that what singularly delayed the opening of the stipulated letter of credit and which, in
turn, caused the cancellation of the allocation in Burma, was the inability of the appellant corporation to meet the
condition imposed by the Bank for granting the same. This failure must, therefore, be taken as the immediate
cause for the consequent damage which resulted. Article 1170 provides that those who in the performance of their
obligations are guilty of fraud, negligence, or delay and those who in any manner contravene the tenor thereof are
liable for damages. In general, every debtor who fails in the performance of his obligations is bound to indemnify
for the losses and damages caused thereby. The phrase in any manner contravene the tenor of the obligation
includes any illicit act which impairs the strict and faithful fulfillment of the obligation, or every kind or defective
performance.

PRINCIPLE :
No one shall enter into a contract or agreement well-aware that he is incapacitated or incompetent to
comply with the terms and conditions.


73. ARRIETA v. National Rice and Corn Corporation

FACTS :
On May 19, 1952, plaintiff-appellee Mrs. Arrieta participated in the public bidding called by the NARIC for
the supply of 20,000 metric tons of Burmese rice. As her bid of $203.00 per metric ton was the lowest, she was
awarded the contract for the same. On July 1, 1952, plaintiff-appellee and the appellant corporation entered into a
Contract of Sale of Rice, under the terms of which the former obligated herself to deliver to the latter 20,000
metric tons of Burmese Rice at $203.00 per metric ton. In turn, the defendant corporation committed itself to pay
for the imported rice by means of an irrevocable, confirmed and assignable letter of credit in U.S. currency in
favor of the plaintiff-appellee and/or supplier in Burma, immediately.

It was only on July 30, 1952, or a full month from the execution of the contract, that the defendant
corporation, thru its general manager, took the first step to open a letter of credit by forwarding to the Philippine
National Bank its Application for Commercial Letter of Credit. On the same day, plaintiff-appellee, thru counsel,
advised the appellant corporation of the extreme necessity for the immediate opening of the letter of credit since
she had by then made a tender to her supplier in Rangoon, Burma and in compliance with the regulations in
Rangoon the 5% of the F.O.B price will be confiscated if the required letter of credit is not received by them before
August 4, 1952.

On August 4, 1952, the Philippine National Bank informed the appellant corporation that its application,
for a letter of credit for $3,614,000.00 in favor of Thiri Setkya has been approved by the Board of Directors with
the condition that 50% marginal cash deposit be paid and that drafts are to be paid upon presentment. However,
the appellant corporation was not in any financial position to meet the condition, and this was bluntly confessed to
the appellee.

As a result of the delay, the allocation of appellees supplier in Rangoon was cancelled and the 5% deposit
was forfeited. Even with the 15-day grace, the appellant corporation was unable to make good its commitment to
open the disputed letter of credit. The appellee endeavored, but failed, to restore the cancelled Burmese rice
allocation. She offered to substitute Thailand rice instead to the defendant NARIC, which was rejected by the
appellant in a resolution dated Nov. 15, 1952.

On the foregoing, the appellee sent a letter to the appellant, demanding compensation for the damages
caused her in the sum of $286,000.00, U.S. currency, representing unrealized profit.

ISSUE:

Whether the rate of exchange to be applied in the conversion is that prevailing at the time of breach, or at
the time the obligation was incurred, or on the promulgation of the decision.

HELD:

Republic Act 529 specifically requires the discharge of obligations only in any coin or currency which at
the time of payment is legal tender for public and private debts. In view of that law, the award should be
converted into and expressed in Philippine Peso. As ruled in the case of Eastboard Navigation Ltd. v. Juan Ysmael &
Co., Inc., if there is any agreement to pay an obligation in a currency other than Philippine legal tender, the same is
null and void as contrary to public policy, and the most that could be demanded is to pay said obligation in
Philippine currency to be measured in the prevailing rate of exchange at the time the obligation was incurred.

PRINCIPLE :
No one shall enter into a contract or agreement well-aware that he is incapacitated or incompetent to
comply with the terms and conditions.


74. KALALO v. LUZ

FACTS:
On Nov. 17, 1959, plaintiff-appellee Octavio A. Kalalo, a licensed civil engineering, with defendant-
appellant Alfredo J. Luz, a licensed architect, whereby the former was to render engineering design services to the
latter for fees, as stipulated in the agreement. The fees agreed upon were percentages of the architects fee. On
Dec. 11, 1961, appellee sent to appellant a statement of account to which was attached an itemized statement of
defendant-appellants account according to which the total engineering fee asked by engineer amounted to
P116,565 from which sum was to be deducted the previous payments made in the amount of P57K. Luz then sent
a resume of fees to Kalalo (May 18 1962). Said fees, according to appellant amounted to P10,861.08 instead of the
amount claimed by appellee. On June 14 1962, appellant sent appellee a check for said amount which appellee
refused to accept as full payment of the balance of the fees due him.

Luz contends that some of Kalalos services were not in accordance with the agreement and his claims
were not justified by the services actually rendered. Luz also claims that the statement of account given to him
by Kalalo barred the latter from asserting any claim contrary to what was stated therein. On the other hand, Kalalo
asserts that when he prepared the said statement of account, he was laboring an innocent mistake. Second,
Luz was aware of the services actually rendered by Kalalo and the fees due to the latter under the original
agreement and third, appellant did not rely on the data appearing in the said statement of account

ISSUE :
Whether the balance owing from defendant-appellant to plaintiff-appellee on the IRRI Project should be
paid on the basis of the rate of exchange of the U.S. dollar to the Philippine peso at the time of payment of
judgment.

HELD :
Under Section 1 of Republic Act 529, if the obligation was incurred prior to the enactment of the Act and
requires payment in a particular kind of coin or currency other than the Philippine currency the same shall be
discharged in Philippine currency measured at the prevailing rate of exchange at the time the obligation was
incurred. In the case, the obligation of appellant to pay appellee the 20% of $140,000.00, or the sum of
$28,000.00, accrued on Aug. 25, 1961, or after the enactment of RA 529. It follows that the provision of RA 529
which requires payment at the prevailing rate of exchange when the obligation was incurred cannot be applied.
The rate of exchange should be that prevailing at the time of payment. The appellant should pay the appellee the
equivalent in pesos of $28,000.00 at the free market rate of exchange at the time of payment.

75. PAPA v. A.U. VALENCIA AND CO., INC.

FACTS:





85. OCCENA v. CA

FACTS :

On Feb 25, 1975, private respondent Tropical Homes, Inc. filed a complaint for modification of the terms and
conditions of its subdivision contract with petitioners, the landowners, by fixing the proper shares that should
pertain to both parties out of the gross proceeds from the sales of subdivided lots of subject subdivision. Under the
said subdivision contract, respondent guaranteed (petitioners as landowners) as the latters fixed and sole share
and participation an amount equivalent to 40% of all cash receipts from the sale of the subdivision lots.
Petitioners insist that the worldwide increase in prices cited by respondent does not constitute a sufficient cause
of action for modification of the subdivision contract. According to the respondents, it will result in situation where
defendants will be unjustly enriched at the expense of the plaintiff. Thus, they seek the revision of the contract on
the basis of Article 1267 of the Civil Code.

ISSUE:

Whether or not Article 1267 of the Civil Code is applicable.

HELD :

No. Respondents complaint seeks not release from the subdivision contract but that the court render judgment
modifying the terms and conditions of the contract by fixing the proper shares that should pertain to the parties
out of the gross proceeds from the sales of subdivided lots of subject subdivision. Thus, Article 1267 does not grant
the courts the authority to remake, modify or revise the contract or to fix the division of shares between the
parties as contractually stipulated with the force of law between the parties, so as to substitute its own terms for
those covenanted by the parties themselves.

PRINCIPLE :

Difficulty of service authorizes release of obligor but does not authorize courts to modify or revise contract
between parties.


86. NAGA TELEPHONE CO., INC. v. CA

FACTS :



87. PNCC v. CA

FACTS :

Petitioner entered into a contract of lease for a parcel of land owned by private respondents. Stated in the Term
of Lease of the said contract, the lease shall be for a period 5 years, commencing on the date of issuance of the
industrial clearance by the Ministry of Human Settlements, x x x. On January 7, 1986, petitioner obtained from the
Ministry of Human Settlements a Temporary Use Permit for the proposed rock crushing project. The permit was to
be valid for 2 years unless sooner revoked by the Ministry.

On January 16, 1986, private respondents wrote petitioner requesting payment of the first annual rental in the
amount of P240,000 which was due and payable upon the execution of the contract. Petitioner did not pay and
expressed its intention to terminate the contract, as it had decided to cancel or discontinue with the rock crushing
project due to financial, as well as technical, difficulties. Private respondents refused to accede to petitioners
request for the pretermination of the lease contract. They insisted on the performance of the petitioners
obligation and reiterated their demand for the payment of the first annual rental.

ISSUE :

Whether or not Article 1266 and the principle of rebus sic stantibus apply to this case.

HELD :

No. Article 1266 of the Civil Code provides that The debtor in obligations to do shall also be released when the
prestation becomes legally or physically impossible without the fault of the obligor. It is applicable only to
obligations to do, and not obligations to give. The obligation to pay rentals or deliver the thing in a contract of
lease falls within the prestation to give; hence, it is not covered within the scope of Article 1266. At any rate, the
unforeseen event and causes mentioned by petitioner are not the legal or physical impossibilities contemplated in
the said article.

The principle of rebus sic stantibus neither fits in with the facts of the case. Under this theory, the parties stipulate
in the light of certain prevailing conditions, and once these conditions cease to exist, the contract also ceases to
exist.

PRINCIPLE :

Contracts bind both contracting parties, and the obligations arising therefrom have the force of law between the
parties and should be complied with in good faith.


88. YAM v. CA

FACTS :

On May 10, 1979, the parties entered in a Loan Agreement with Assumption of Solidary Liability whereby
petitioners were given a loan of P500,000 by private respondents, Denominated the first OGLF, the loan was
secured by a chattel mortgage on the printing machinery in petitoners establishment.

Petitioner subsequently obtained a second IGLF loan of P300,000 evidenced by two promissory notes, dated July 3,
1981 and Set. 30, 1981. The deed of chattel mortgage was amended.

By April 1985, petitioners had paid their first loan of P500,000. On Nov. 4, 1985, private respondent was placed
under receivership by the Central Bank and Ricardo Lirio and Cristina Destajo were appointed as receiver and in-
house examiner, respectively.

On May 17, 1986, petitioners made a partial payment of P50,000 on the second loan. They sent a letter to the
respondent proposing to settle their obligation. On July 2, 1986, private respondent, through its counsel, made a
counter-offer that it would reduce the penalty charges up to P140,000, provided petitioners can pay their
obligation on or before July 30, 1986.

On July 31, 1986, petitioners paid P410,854.47, sum of the principal and the interest less the ppartial payment of
P50,000, by means of a Pilipinas Bank check, receipt of which was acknowledged by Destajo. The corresponding
voucher for the check bears the following notation: full payment of IGLF LOAN.

The private respondent sent two demand letters to petitioners seeking the payment of the balance of
P266,146.88. Petitioners claimed that they had fully paid their obligation to private respondent. They added that
the full payment is reflected in the voucher accompanying the Pilipinas Bank check they issued, which bore the
notation full payment of OGLF loan.

ISSUE :

Whether or nor petitioners are liable for the payment of the penalties and service charges on their loan which, as
of July 31, 1986, amounted to P266, 146.88.

HELD :

Yes. Article 1270, par. 2 of the Civil Code provides that express condonation must comply with the forms of
donation. In the case at bar, it is undisputed that the alleged agreement to condone P266,146.88 of the second
IGLF loan was not reduced in writing. If private respondent really condoned the amount in question, petitioners
should have asked for a certificate of full payment from respondent corporation, as they did in the case of their
first IGLF loan of P500,000. Moreover, Cristina Destajo had no authority to condone any indebtedness, her duties
being limited to issuing official receipts, preparing check vouchers and documentation.

PRINCIPLE :

The appointment of a receiver operates to suspend the authority of a corporation and of its directors and officers
over its property and effects, such authority being reposed in the receiver.


89. GAN TION V. C.A.

FACTS :

Ong Wang SIen was a tenant in certain premises owned by Gan Tion. In 1961, the latter filed an ejectment case
against the former, alleging non-payment of rents for August and September of that year, at P180 a month, or
P360 altogether. The defendant denied the allegation and said that the agreed monthly rental was only P160,
which je had offered to but was refused by the plaintiff. The CFI reversed the judgment of the municipal court and
dismissed the complaint, and ordered the plaintiff to pay the defendant the sum of P500 as attorneys fee. Ong
Wan Sieng was able to obtain a writ of execution of the judgment for attorneys fees in his favor. That judgment
became final.

On Oct 10, 1963, Gan Tion served noticed on Ong wan Sieng that he was increasing the rent to P180 a month and
at the same time demanded the rents in arrears at the old rate in the aggregate amount of P4,320.00.

Gan Tion went on certiorari to the court of Appeals, where he pleaded legal compensation, claiming that Ong Wan
Sieng was indebted to him in the sum of P4,320.00 for unpaid rents. The appellate court accepted the petition but
eventually decided for the respondent, holding that although respondent Ong is indebted to the petitioner for
unpaid rentals in an amount of more than P4,000.00, the sum of P500 could not be the subject of legal
compensation, it being a trust fund for the benefit of the lawyer, which would have to be turned over by the
client to his counsel.

ISSUE :

Whether or not the award of attorneys fee may be the subject of legal compensation.

HELD :
Yes. The requisites of legal compensation are not present in the instant case, since the real creditor with respect to
the sum of P500 was the defendants counsel. The award is made in favor of the litigant, not of his counsel, and is
justified by way of indemnity for damages recoverable by the former. It is the litigant, not his counsel, who is the
judgment creditor and who may enforce the judgment by execution. Such credit, therefore, may properly be the
subject of legal compensation.

PRINCIPLE :

An award for attorneys fees is a proper subject of legal compensation.


90. SILAHIS MARKETING CORP. VS. IAC

FACTS :

A review of the record shoes that on various dates in October, November and December, 1975, Gregorio de Leon
doing business under the name and style of Mark Industrial Sales sold and delivered to Silahis Marketing
Corporation various items of merchandise covered by several invoices in the aggregate amount of P22,213.75
payable within 30 days from the date of the covering invoices.

Allegedly due to Silahis failure to pay its account upon maturity despite repeated demands, de Leom filed before
the then CFI of Manila a complaint for the collection of the said accounts including accrued interest thereon in the
amount of P661.03 and attorneys fees of P5,000.00 plus costs of litigation.

The lower court confirmed the liability of Silahis for the claim of de Leon but at the same time ordered that it be
partially offset by Silahis counterclaim as contained in the debit memo for unrealized profit and commission.

De Leon appealed from the said decision insofar as it directed partial compensation and its failure to award
interest on his principal claim as well as attorneys fees in his favor. The appellate court found there was no
agreement, verbal or otherwise, nor was there any contractual obligation between De Leon and Silahis prohibiting
any direct sales to Dole Philippines, Inc. by de Leon; nor was there anything in the debit memo obligating de Leon
to pay commission to Silahis for the sale of P111,000.00 worth of sprockets to Dole Philippines.

ISSUE :

Whether or not private respondent is liable to the petitioner for the commission or margin for the direct sale
which the former concluded and consummated with Dole Phil., Inc. without coursing the same through herein
petitioner.

HELD :

It must be remembered that compensation takes place when two persons, in their own right, are creditors and
debtors to each other. When all the requisites stated in Art. 1279 of the Civil Code are present, compensation
takes effect by operation of law, even without the consent or knowledge of the creditors and debtors.
Compensation is not proper where the claim of the person asserting the set-off against the other is not clear nor
liquidated; compensation cannot extend to unliquidated, disputed claim existing from breach of contract.

Petitioner admits the validity of its outstanding accounts with private respondent. But whether private respondent
is liable to pay the petitioner a 20% margin or commission on the subject sale to Dole Phils., Inc. is vigorously
disputed. This circumstance prevents legal compensation from taking place.

There is no evidence on record from which it can be inferred that there was any agreement between Silahis and de
Leon prohibiting the latter from selling directly to Dole Philippines, Inc. The debit memo is not a binding contract
since it was not signed by de Leon nor was there any mention therein of any commitment by the latter to pay any
commission to the former involving the subject sale of sprockets.