OBLIGATIONS AND CONTRACTS CASE DIGESTS
GOLONGO VS PCIB (PUERIN)
FACTS:
William Golangco Construction Corporation (WGCC) and the
Philippine Commercial International Bank (PCIB) entered into a
contract for the construction of the extension of PCIB Tower II on
October 20, 1989. The project included, among others, the
application of a granitite wash-out finish3 on the exterior walls of
the building.
PCIB, with the concurrence of its consultant TCGI Engineers
(TCGI), accepted the turnover of the completed work by WGCC in
a letter dated June 1, 1992. To answer for any defect arising within
a period of one year, WGCC submitted a guarantee bond dated July
1, 1992 issued by Malayan Insurance Company, Inc. in compliance
with the construction contract.
The controversy arose when portions of the granitite wash-out finish
of the exterior of the building began peeling off and falling from the
walls in 1993. WGCC made minor repairs after PCIB requested it
to rectify the construction defects. In 1994, PCIB entered into
another contract with Brains and Brawn Construction and
Development Corporation to re-do the entire granitite wash-out
finish after WGCC manifested that it was "not in a position to do
the new finishing work," though it was willing to share part of the
cost. PCIB incurred expenses amounting to P11,665,000 for the
repair work.
PCIB filed a request for arbitration with the Construction Industry
Arbitration Commission (CIAC) for the reimbursement of its
expenses for the repairs made by another contractor.
ISSUE:
Whether or not petitioner WGCC is liable for defects in the
granitite wash-out finish that occurred after the lapse of the one-year
defects liability period provided in Art. XI of the construction
contract?
RULING:
We rule in favor of WGCC.
Although both parties based their arguments on the same
stipulations, they reached conflicting conclusions. A careful reading
of the stipulations, however, leads us to the conclusion that
WGCC’s arguments are more tenable.
Autonomy of contracts
The autonomous nature of contracts is enunciated in Article 1306 of
the Civil Code.
Article 1306. The contracting parties may establish such
stipulations, clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals, good
customs, public order, or public policy.
Obligations arising from contracts have the force of law between
the parties and should be complied with in good faith. In
characterizing the contract as having the force of law between the
parties, the law stresses the obligatory nature of a binding and valid
agreement.
The provision in the construction contract providing for a defects
liability period was not shown as contrary to law, morals, good
1
THIRD EXAM
customs, pubic order or public policy. By the nature of the
obligation in such contract, the provision limiting liability for
defects and fixing specific guaranty periods was not only fair and
equitable; it was also necessary. Without such limitation, the
contractor would be expected to make a perpetual guarantee on all
materials and workmanship.
The adoption of a one-year guarantee, as done by WGCC and PCIB,
is established usage in the Philippines for private and government
construction contracts. The contract did not specify a different
period for defects in the granitite wash-out finish; hence, any defect
therein should have been brought to WGCC’s attention within the
one-year defects liability period in the contract.
We cannot countenance an interpretation that undermines a
contractual stipulation freely and validly agreed upon. The courts
will not relieve a party from the effects of an unwise or unfavorable
contract freely entered into.
HEIRS OF EK LIONG VS CASTILLO (DEGALA)
Facts:
Alongside with her husband, respondent owned four parcels of land
situated in Silang Mayao, Lucena City. With the death of her
husband, his heirs executed a deed of extrajudicial partition over his
estate. It appears however that the subject properties were
subsequently sold at a public auction. On Sept. 29 1976, respondents
instituted a civil case before the Court of First Instance of Quezon
seeking for the annulment of the transaction involving the subject
parcels of land.
Due to financial difficulties in the prosecution of the case,
respondents entered into an agreement on Sept. 20 1978 whereby
they procure the legal services of Atty. Zepeda and the assistance of
the petitioner as the financier for the litigation expenses. In
exchange, it was stipulated in the notarized agreement that in the
event of a favorable decision in the civil case, Atty. Zepeda and
petitioner would be entitled to a share of 40 percent of all the realties
and/or monetary benefits which may be adjudicated in favor of the
respondents.
On the same date, respondents entered into another notarized
agreement denominated as a Kasunduan whereby they agreed to sell
their remaining sixty (60%) percent share in the subject parcels in
favor of Manuel for the sum of P180,000.00. The parties stipulated
that petitioner would pay a downpayment in the sum of P1,000.00
upon the execution of the Kasunduan.
On Sept. 13 1990, the respondents got a favorable decision with the
civil case and the decision became final and executory. Supposedly
acting on the advice of Atty. Zepeda, respondents wrote petitioners
a letter dated 22 March 1993, essentially informing petitioners that
respondents were willing to sell their sixty (60%) percent share in
the subject parcels for the consideration of P500.00 per square
meter. Insisting on the price agreed upon in the Kasunduan,
however, petitioners sent a letter dated May 19 1993, requesting
respondents to execute within 15 days from notice the necessary
Deed of Absolute Sale over their 60% share and informing that they
are ready to pay the remaining balance of P 179,000. In reply,
Respondents wrote a letter on May 28 1993, reminding the former
of their purported refusal of earlier offers to sell the shares.
Petitioners commenced the instant suit with the filing of their
complaint for specific performance and damages against the
respondents. Faulting respondents with unjustified refusal to
comply with their obligation under the Kasunduan. In response, the
respondents contended that the Agreement and the Kasunduan were
illegal for being unconscionable and contrary to public policy.
Issue: Whether the Agreement and the Ksunduan are void ab initio
for being contrary to law and public policy.
Ruling:
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 OBLIGATIONS AND CONTRACTS CASE DIGESTS
The court find the petition impressed with partial merit. Although
executed on the same day, it cannot likewise be gainsaid that the
Agreement and the Kasunduan are independent contracts, with
parties, objects and causes different from that of the other. Defined
as a meeting of the minds between two persons whereby one binds
himself, with respect to the other to give something or to render
some service, a contract requires the concurrence of the following
requisites:
(a) consent of the contracting parties;
(b) object certain which is the subject matter of the contract; and,
(c) cause of the obligation which is established.
Executed in exchange for the legal services of Atty. Zepeda and the
financial assistance to be extended by the respondent, the
Agreement concerned respondents’ transfer of 40% of the avails of
the suit, in the event of a favorable judgment in Civil Case. While
concededly subject to the same suspensive condition, the
Kasunduan in contrary, concluded by respondents with respondent
alone, for selling in favor of the latter 60% of their share in the
subject parcels for the agreed price of P180, 000.00.
Viewed in the light of the autonomous nature of contracts
enunciated under Article 1306 of the Civil Code, the Kasunduan
was valid and a binding contract between the parties. Already
partially executed with respondents’ receipt of P1,000.00 from the
respondent upon the execution thereof, the Kasunduan simply
concerned the sale of the former’s 60% share in the subject parcel,
for the agreed consideration of P180,000.00.
PNB VS CA (JAVIER)
FACTS:
On April 7, 1982, (private respondents) as owners of a NACIDA-
registered enterprise, obtained a loan under the Cottage Industry
Guaranty Loan Fund (CIGLF) from the Philippine National Bank
(PNB) in the amount of Fifty Thousand (P50,000.00) Pesos, as
evidenced by a Credit Agreement. Under the Promissory Note
covering the loan, the loan was to be amortized over a period of
three (3) years to end on March 29, 1985, at twelve (12%) percent
interest annually. To secure the loan, (private respondents) executed
a Real Estate Mortgage and a Chattel Mortgage
On February 17, 1983, (private respondents) were granted an
additional NACIDA loan of Fifty Thousand (P50,000.00) Pesos by
the PNB, for which (private respondents) executed another
Promissory Note, which was to mature on April 1, 1985. Other than
the date of maturity, the second promissory note contained the same
terms and stipulations as the previous note. The parties likewise
executed a new Credit Agreement, changing the amount of the loan
from P50,000.00 to P100,000.00, but otherwise preserving the
stipulations contained in the original agreement.
In a letter dated August 1, 1984, the PNB informed (private
respondents) "that the interest rate of your CIGLF loan account with
us is now 25% per annum plus a penalty of 6% per annum on past
dues." The PNB further increased this interest rate to 30% on
October 15, 1984; and to 42% on October 25, 1984.
Thereafter, (private respondents) exerted efforts to get the PNB to
re-adopt the 12% interest and to condone the present interest and
penalties due; but to no avail.
On December 15, 1987, private respondents filed a suit for specific
performance against petitioner PNB and the NACIDA. Private
respondents prayed the trial court to order:
On February 26, 1990, the trial court dismissed private respondents'
complaint. On October 15, 1992, the Court of Appeals reversed the
dismissal with respect to petitioner bank, and disallowed the
increases in interest rates.
ISSUE:
Whether or not the creditor can raise the interest rate based solely
in the escalation clause and without consent of the debtor?
2
THIRD EXAM
HELD:
No.
It is basic that there can be no contract in the true sense in the
absence of the element of agreement, or of mutual assent of the
parties. If this assent is wanting on the part of the one who contracts,
his act has no more efficacy than if it had been done under duress or
by a person of unsound mind. 6
Similarly, contract changes must be made with the consent of the
contracting parties. The minds of all the parties must meet as to the
proposed modification, especially when it affects an important
aspect of the agreement. In the case of loan contracts, it cannot be
gainsaid that the rate of interest is always a vital component, for it
can make or break a capital venture. Thus, any change must be
mutually agreed upon, otherwise, it is bereft of any binding effect.
We cannot countenance petitioner bank's posturing that the
escalation clause at bench gives it unbridled right to unilaterally
upwardly adjust the interest on private respondents' loan. That
would completely take away from private respondents the right to
assent to an important modification in their agreement, and would
negate the element of mutuality in contracts.
The unilateral action of the PNB in increasing the interest rate on
the private respondent's loan violated the mutuality of contracts
ordained in Article 1308 of the Civil Code:
Art. 1308. The contract must bind both contracting parties; its
validity or compliance cannot be left to the will of one of them.
In order that obligations arising from contracts may have the force
or law between the parties, there must be mutuality between the
parties based on their essential equality. A contract containing a
condition which makes its fulfillment dependent exclusively upon
the uncontrolled will of one of the contracting parties is void. Hence,
even assuming that the loan agreement between the PNB and the
private respondent gave the PNB a license (although in fact there
was none) to increase the interest rate at will during the term of the
loan, that license would have been null and void for being violative
of the principle of mutuality essential in contracts.
ALLIED BANKING VS CA
JUICO VS CHINA BANKING (PIZZARO)
Facts:
Spouses Ignacio F. Juico and Alice P. Juico (petitioners) obtained a
loan from China Banking Corporation (respondent) as evidenced by
two Promissory Notes. The loan was secured by a Real Estate
Mortgage (REM) over petitioners’ property located at 49
Greensville St., White Plains, Quezon City.
When petitioners failed to pay the monthly amortizations due,
respondent demanded the full payment of the outstanding balance
with accrued monthly interests. On September 5, 2000, petitioners
received respondent’s last demand letter dated August 29, 2000.
As of February 23, 2001, the amount due on the two promissory
notes totaled P19,201,776.63 representing the principal, interests,
penalties and attorney’s fees. On the same day, the mortgaged
property was sold at public auction, with respondent as highest
bidder for the amount of P10,300,000.
On May 8, 2001, petitioners received a demand letter dated May 2,
2001 from respondent for the payment of P8,901,776.63, the
amount of deficiency after applying the proceeds of the foreclosure
sale to the mortgage debt. As its demand remained unheeded,
respondent filed a collection suit in the trial court. In its Complaint,
respondent prayed that judgment be rendered ordering the
petitioners to pay jointly and severally: (1) P8,901,776.63
representing the amount of deficiency, plus interests at the legal
rate, from February 23, 2001 until fully paid; (2) an additional
amount equivalent to 1/10 of 1% per day of the total amount, until
fully paid, as penalty; (3) an amount equivalent to 10% of the
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 OBLIGATIONS AND CONTRACTS CASE DIGESTS
foregoing amounts as attorney’s fees; and (4) expenses of litigation
and costs of suit.
At the trial, respondent presented Ms. Annabelle Cokai Yu, its
Senior Loans Assistant, as witness. She testified that she handled
the account of petitioners and assisted them in processing their loan
application. She called them monthly to inform them of the
prevailing rates to be used in computing interest due on their loan.
As of the date of the public auction, petitioners’ outstanding balance
was P19,201,776.63 based on the statement of account that she
prepared.
Petitioners thereafter received a demand letter dated May 2, 2001
from respondent’s counsel for the deficiency amount of
P8,901,776.63. Ms. Yu further testified that based on the Statement
of Account dated March 15, 2002 which she prepared, the
outstanding balance of petitioners was P15,190,961.48.
On cross-examination, Ms. Yu reiterated that the interest rate
changes every month based on the prevailing market rate and she
notified petitioners of the prevailing rate by calling them monthly
before their account becomes past due. When asked if there was any
written authority from petitioners for respondent to increase the
interest rate unilaterally, she answered that petitioners signed a
promissory note indicating that they agreed to pay interest at the
prevailing rate.
Petitioner Ignacio F. Juico testified that prior to the release of the
loan, he was required to sign a blank promissory note and was
informed that the interest rate on the loan will be based on prevailing
market rates. Every month, respondent informs him by telephone of
the prevailing interest rate. At first, he was able to pay his monthly
amortizations but when he started to incur delay in his payments due
to the financial crisis, respondent pressured him to pay in full,
including charges and interests for the delay. His property was
eventually foreclosed and was sold at public auction.
Issue:
Whether the interest rates imposed by respondent China Banking
Corporation upon the Spouses Juico are valid.
Held:
No.
The principle of mutuality of contracts is expressed in Article 1308
of the Civil Code, which provides:
Article 1308. The contract must bind both contracting parties; its
validity or compliance cannot be left to the will of one of them.
Article 1956 of the Civil Code likewise ordains that "no interest
shall be due unless it has been expressly stipulated in writing."
The binding effect of any agreement between parties to a contract is
premised on two settled principles: (1) that any obligation arising
from contract has the force of law between the parties; and (2) that
there must be mutuality between the parties based on their essential
equality. Any contract which appears to be heavily weighed in favor
of one of the parties so as to lead to an unconscionable result is void.
Any stipulation regarding the validity or compliance of the contract
which is left solely to the will of one of the parties, is likewise,
invalid.
Escalation clauses refer to stipulations allowing an increase in the
interest rate agreed upon by the contracting parties. This Court has
long recognized that there is nothing inherently wrong with
escalation clauses which are valid stipulations in commercial
contracts to maintain fiscal stability and to retain the value of money
in long term contracts. Hence, such stipulations are not void per se.
Nevertheless, an escalation clause "which grants the creditor an
unbridled right to adjust the interest independently and upwardly,
completely depriving the debtor of the right to assent to an important
modification in the agreement" is void. A stipulation of such nature
violates the principle of mutuality of contracts. Thus, this Court has
previously nullified the unilateral determination and imposition by
3
THIRD EXAM
creditor banks of increases in the rate of interest provided in loan
contracts.
It is now settled that an escalation clause is void where the creditor
unilaterally determines and imposes an increase in the stipulated
rate of interest without the express conformity of the debtor. Such
unbridled right given to creditors to adjust the interest
independently and upwardly would completely take away from the
debtors the right to assent to an important modification in their
agreement and would also negate the element of mutuality in their
contracts.
We hold that the escalation clause is void because it grants
respondent the power to impose an increased rate of interest without
a written notice to petitioners and their written consent.
Respondent’s monthly telephone calls to petitioners advising them
of the prevailing interest rates would not suffice. A detailed billing
statement based on the new imposed interest with corresponding
computation of the total debt should have been provided by the
respondent to enable petitioners to make an informed decision. An
appropriate form must also be signed by the petitioners to indicate
their conformity to the new rates. Compliance with these requisites
is essential to preserve the mutuality of contracts. For indeed, one-
sided impositions do not have the force of law between the parties,
because such impositions are not based on the parties’ essential
equality.
PNB VS MANALO
BALUYOT VS CA (VALES)
FACTS:
• Petitioners in this case are residents and members of
Cruz-na-Ligas Homesite Association, Inc. at Diliman, Quezon City.
• Petitioners were contending that they have been in open,
peaceful, adverse and continuous possession in the concept of an
owner, for the rest of the land in Barrio Cruz-na-Ligas, consisting at
least 42 hectares.
• Since Oct. 1972, the said land is actually subject of quasi-
judicial proceedings and administrative investigations by different
branches of government. In fact the Bureau of land and the President
of the RP issued endorsements confirming the rights of the bona fide
residents of barrio Cruz-na-Ligas to the parcel of land.
• In 1979, UP Board of Regents approved the donation of
9.2 hectares of the site that was endorsed by the President of RP.
But after several negotiations with the residents, the area was
increased to 15.8 hectares.
• Due to the unreasonable demand of the residents for an
area bigger than 15.8 hectares, the execution of the legal instrument
to formalize the donation failed.
• Later on, the association proposed to accept the offer of
the UP to donate 15.8 hectares. UP manifested in writing its consent
to the intended donation in favor with the association provided that
they will agree and comply with the terms and conditions of the
donation.
• Defendant UP backed-out from the arrangement to donate
directly to the Association the said land, instead, the former decided
to negotiate the donation thru the Quezon City Gov’t under the
terms and conditions not favorable to the residents of the said barrio.
• The Association added to its cause of action in its petition
the specific performance aside from the exclusion from the technical
description of Certificate of Title of Defendant UP the 42 hectares
covering Barrio Cruz-na-Ligas.
• The said association also filed a petition for writ of
preliminary injunction to restraint defendant UP from donating the
area to the Quezon City Government.
• After the TC’s decision, UP assured the residents through
motion of reconsideration that the donation of the 15.8 hectares to
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 OBLIGATIONS AND CONTRACTS CASE DIGESTS
the Quezon City Gov’t will be for the benefit of the residents of the
said barrio.
• As the Quezon City Government’s willing to comply with
the terms and conditions of the donation made by UP, President Jose
Abueva (UP), failed to deliver the certificate of title of the said land
which enabled the QC government to register the deed of donation.
• It reached the expiration period of 18 months, for the non-
compliance of the QC gov’t under par.16 of the terms and
conditions of the said donation.
• President Abueva issued Administrative order No. 21
declaring the deed of donation revoked.
• RTC ordered that petitioners are not parties to the said
deed of donation.
• CA set aside the TC’s order and dismissed the case.
ISSUE: WON the petitioners’ has the cause of action and right to
seek the enforcement of the deed of donation though they were not
parties of such deed?
HELD: SC said Yes.
• SC said that even if petitioners were not parties to the deed
of donation, they have the right to seek its enforcement upon their
allegation that they are intended beneficiaries of the donation to the
Quezon City Government.
• Art. 1311 provides, 2nd par. of the CC provides that: If a
contract should contain some stipulation in favor of a third person,
he may demand its fulfillment provided he communicated his
acceptance to the obligor before its revocation. A mere incidental
benefit or interest of a person is not sufficient. The contracting
parties must have clearly and deliberately conferred a favor upon a
third person.
• Following requisites must be present in order to have a
stipulation POUR AUTRUI:
• There must be a stipulation in favor of a 3rd person.
• The stipulation must be a part, not the whole of the
contract.
• The contracting parties must have clearly and deliberately
conferred a favor upon a 3rd person, not a mere incidental benefit
or interest.
• The 3rd person must have communicated his acceptance
to the obligor before its revocation.
• Neither of the contracting parties bears the legal
representation of the 3rd party.
• There was stipulation in the said deed of donation that QC
govt as the donee, is required to transfer to qualified residents, said
lots by way of donation.
• The stipulation is part of the conditions imposed by UP.
• Par. 15 and 16 that the intent of the parties to the deed of
donation was to favor petitioner by transferring the latter the lots
occupied by them.
• Through conferences, petitioners accepted the said
donation and private respondents were aware of such acceptance.
• Neither of private respondents acted in representation of
the other. Each of the private respondents had its own obligations,
in view of conferring a favor upon petitioners.
• The trial court’s decision about the donation has been
revoked and petitioner had no clear and legal right to be protected
was still tentative.
• The SC ordered the decision of the CA be reversed and
the case was remanded to the RTC.
INTEGRATED PACKAGING VS CA (LEUTERIO)
Facts:
4
THIRD EXAM
On May 5, 1978 Petitioner and private respondent executed an
order agreement whereby private respondent bound itself to deliver
to petitioner 3,450 reams of printing paper.
Later, on June 7, 1978, petitioner entered into a contract with
Philippine Appliance Corporation (Philacor) to print three volumes
of "Philacor Cultural Books.”
As of July 30, 1979, private respondent had delivered to petitioner
1,097 reams of printing. Private respondent delivered again to
petitioner various quantities of printing paper amounting to
P766,101.70. However, petitioner only made partial payments
totaling P97,200.00.
Meanwhile, petitioner entered into an additional printing contract
with Philacor. Unfortunately, petitioner failed to fully comply with
its contract with Philacor for the printing of books VIII, IX, X and
XI. Thus, Philacor demanded compensation from petitioner for the
delay and damage it suffered on account of petitioner's failure.
On August 14, 1981, private respondent filed with the Regional
Trial Court of Caloocan City a collection suit against petitioner for
the sum of P766,101.70.
In its answer petitioner alleged that private respondent was able to
deliver only 1,097 reams of printing paper which was short of 2,875
reams, in total disregard of their agreement; that private respondent
failed to deliver the balance of the printing paper despite demand
therefor, hence, petitioner suffered actual damages and failed to
realize expected profits.
After filing its reply and answer to the counterclaim, private
respondent added that petitioner made additional purchases of
printing paper on credit amounting to P94,200.00. Private
respondent also averred that petitioner failed and refused to pay its
outstanding obligation although it made partial payments in the
amount of P97,200.00 which was applied to back accounts, thus,
reducing petitioner's indebtedness to P763,101.70.
On July 5, 1990, the trial court rendered judgment declaring that
petitioner should pay private respondent the sum of P763,101.70.
However, the lower court also found petitioner's counterclaim
meritorious. It ruled that were it not for the failure or delay of private
respondent to deliver printing paper, petitioner could have sold
books to Philacor and realized profit of P790,324.30 from the sale.
It further ruled that petitioner suffered a dislocation of business on
account of loss of contracts and goodwill as a result of private
respondent's violation of its obligation, for which the award of
moral damages was justified.
On appeal, the respondent Court of Appeals reversed and set aside
the judgment of the trial court. The appellate court ordered
petitioner to pay private respondent the sum of P763,101.70
However, the appellate court deleted the award of P790,324.30 as
compensatory damages as well as the award of moral damages and
attorney's fees, for lack of factual and legal basis.
ISSUE:
Whether or not private respondent is liable for petitioner's breach of
contract with Philacor.
HELD:
Private respondent cannot be held liable under the contracts entered
into by petitioner with Philacor. Private respondent is not a party to
said agreements. It is also not a contract pour autrui. Aforesaid
contracts could not affect third persons like private respondent
because of the basic civil law principle of relativity of contracts
which provides that 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.
Indeed, the order agreement entered into by petitioner and private
respondent has not been shown as having a direct bearing on the
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 OBLIGATIONS AND CONTRACTS CASE DIGESTS
contracts of petitioner with Philacor. As pointed out by private
respondent and not refuted by petitioner, the paper specified in the
order agreement between petitioner and private respondent are
markedly different from the paper involved in the contracts of
petitioner with Philacor. Furthermore, the demand made by Philacor
upon petitioner for the latter to comply with its printing contract is
dated February 15, 1984, which is clearly made long after private
respondent had filed its complaint on August 14, 1981. This demand
relates to contracts with Philacor dated April 12, 1983 and May 13,
1983, which were entered into by petitioner after private respondent
filed the instant case.lawphi1
Private respondent could not be held liable for petitioner's breach of
contract with Philacor. It follows that there is no basis to hold
private respondent liable for damages.
ASC MINI MART VS VILLAREAL (from the net)
FACTS: Petitioner leased the six stalls of the one-storey
commercial building from spouses Bonifacio under a lease
agreement. However, the ownership of the subject property is under
dispute between respondents Villareal and spouses Bonifacio.
Spouses Bonifacio claimed to have purchased the property from
spouses Sevilla, original owners of the disputed property.
On the other hand Respondents Villareal claimed
ownership of the same alleging that in a separate case, the said
property is sold to them at a public auction and they were adjudged
as the sole and highest bidder. The said property was sold to satisfy
the damages awarded to respondents Villareal against spouses
Sevilla, original owners of the disputed property, arising from the
murder of Jose Villareal.
Upon learning that the spouses Bonifacio’s claim of
ownership over the subject property had been seriously denied by
the Makati RTC, petitioner stopped paying its rentals on the subject
property on March 2, 1999, in violation of the renewed Lease
Contract.
The appellate court ordered petitioner A & C Minimart to
pay respondents Villareal, a monthly interest of 3% on the total
amount of rental and other charges not paid on time, in addition to
the unpaid rental and other charges which the trial court ordered
petitioner to pay.
ISSUE: Whether or not petitioner Minimart is obligated to pay the
penalty interest of 3% per month to respondents Villareal pursuant
to the Contract of Lease.
HELD: No. Petitioner Minimart is not obligated to pay the penalty
interest because the Lease Contract, including the stipulation for the
3% penalty interest, was bilateral between petitioner and Teresita
Bonifacio. So respondents cannot succeed to any contractual rights
which may accrue to the spouses Bonifacio. Contracts produce an
effect only between the parties who execute them. A contract cannot
be binding upon and cannot be enforced by one who is not party to
it.
Article 1311 of the Civil Code: 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. The heir is
not liable beyond the value of the property he received from the
decedent.
Here, the Lease Contract was executed between the
spouses Bonifacio and petitioner. None of the respondents had taken
part in the contract in question nor entered into a contract with either
the lessee or the lessor, as to an assignment of any right under the
Lease Contract in question. Respondents claim ownership over the
subject property, but not as a successor-in-interest of the spouses
Bonifacios. They purchased the property in an execution sale from
5
THIRD EXAM
the spouses Sevilla. Thus, respondents cannot succeed to any
contractual rights which may accrue to the spouses Bonifacio.
Although the respondents were adjudged to be entitled to
rentals accruing from March 2, 1999, until the time the petitioner
vacated the premises, the obligation to pay rent was not derived
from the Lease Contract, but from a quasi-contract. In the present
case, the spouses Bonifacio, who were named as the lessors in the
Lease Contracts, are already adjudged not to be the real owners of
the subject property. In Civil Case, the Makati RTC declared that
the Deed of Sale, between the spouses Bonifacio and the spouses
Sevilla was a forgery and, hence, did not validly transfer ownership
to the spouses Bonifacio.
Since the spouses Bonifacio are not the owners of the
subject property, they cannot unjustly benefit from it by collecting
rent which should accrue to the rightful owners of the same. Hence,
the Makati RTC had set up a bank account where the rent due on
the subject property should be deposited and kept in trust for the real
owners thereto.
BORROMEO VS CA (PIZZARO)
Facts:
Petitioners were client-depositors of EPCIB for more than 12 years.
Petitioners alleged that sometime in mid-1999, the branch manager
of EPCIB, J.P. Rizal Branch, offered a loan to the petitioners under
its "Own-a-Home Loan Program." Petitioners applied for a loan of
P4,000,000.00 and were informed of the approval of their loan
application sometime in October 1999. It was in the early part of
2000 that petitioners signed blank loan documents consisting of the
Loan Agreement, Promissory Notes, a Real Estate Mortgage (REM)
and Disclosure Statements.
To secure the payment of the loan, petitioners executed an REM
over their land, located at Loyola Grand Villas, Quezon City,
consisting of 303 square meters; and the proposed house that was to
be built thereon. Petitioners asserted that even if the loan documents
were signed in blank, it was understood that they executed the REM
in favor of EPCIB.
From April 2001 to September 2002, respondent released a total
amount of P3,600,000.00 in four installments, while the balance of
P400,000.00 was not drawn by petitioners. On the other hand,
petitioners started to pay their monthly amortizations on 21 April
2001.
Petitioners made repeated verbal requests to EPCIB to furnish them
their copies of the loan documents. On 6 August 2003, they sent the
president of EPCIB a letter which reiterated their request for copies
of the loan documents. They further claimed that they purposely did
not draw the remaining balance of the loan in the amount of
P400,000.00 and stopped paying their loan amortizations to protest
EPCIB’s continued failure to provide them copies of the loan
documents and its imposition of an interest rate higher than that
agreed upon. From the time petitioners began paying their monthly
amortizations on 21 April 2001 until the time they stopped,
petitioners made total payments of approximately P500,000.00.
In reply to the petitioners’ letter dated 6 August 2003, the Vice
President of EPCIB, Gary Vargas, sent to the petitioners a letter
dated 27 August 2003 explaining that as a matter of practice, their
clients were given original copies of the loan documents only upon
full release of the amount loaned. EPCIB clarified that since
petitioners’ loan had not been fully released, the original documents
were not yet sent to them.
In the meantime, on 13 August 2003, respondent Equitable Savings
Bank (ESB), through counsel, also sent a letter to the petitioners
demanding payment for their obligation, which, as of 15 August
2003, amounted to P4,097,261.04, inclusive of interest and other
charges. Respondent informed petitioners that failure to pay their
obligation would result in its pursuing legal action against
petitioners, including foreclosure proceedings on their REM.
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 OBLIGATIONS AND CONTRACTS CASE DIGESTS
In a letter dated 18 September 2003, respondent, through counsel,
reiterated to petitioners its demand for the full settlement of their
obligation on or before 30 September 2003.
Finally, on 3 October 2003, petitioners received copies of the loan
documents which they had earlier signed in blank. According to
petitioners, they were surprised to find out that the Loan Agreement
and REM designated respondent ESB as lender and mortgagor,
instead of EPCIB with whom they allegedly entered into the
agreement. However, in contrast to the Loan Agreement and the
REM, the four Promissory Notes designated EPCIB as the lender.
When the petitioners failed to pay for the loan in full by 30
September 2003, respondent ESB sought to extra-judicially
foreclose the REM. The Extrajudicial Sale was set to take place on
26 November 2003. On 14 November 2003, petitioners received
Notice of Extrajudicial Sale of their property.
On 20 November 2003, petitioners filed with the RTC a Complaint
for Injunction, Annulment of Mortgage with Damages and with
Prayer for Temporary Restraining Order and Preliminary and
Mandatory Injunction against EPCIB and respondent. In their
Complaint, petitioners alleged that the loan documents failed to
reflect the true agreement between the parties and more importantly,
that the agreement was between the petitioners and EPCIB and,
consequently, respondent ESB had no interest in the REM.
On 14 December 2003, respondent re-filed its petition for
extrajudicial foreclosure of the REM. The Ex-Officio Sheriff of
Quezon City set the auction sale on 14 January 2004.
Petitioners reacted by filing with the RTC a Motion for
Reconsideration of its Order dated 5 December 2003, again praying
for the issuance of a TRO and/or preliminary injunction to forestall
the extrajudicial sale of their property scheduled for 14 January
2004.
On 3 March 2004, the RTC granted petitioners’ motion for
reconsideration and ordered the issuance of a preliminary injunction
after declaring that the validity of the REM was yet to be
determined. It found that petitioners were bound to suffer grave
injustice if they were deprived of their property before the RTC
could rule on the validity of the REM constituted on the same.
During the proceedings before the Court of Appeals, petitioner
presented a letter dated 19 December 2002, with supporting
documents, written and compiled by EPCIB for Home Guaranty
Corporation, wherein EPCIB included petitioners’ loan among its
housing loans for which it sought insurance coverage. The Court of
Appeals however ruled in favor of the respondent.
Hence, the case reached the Supreme Court.
Issue:
Whether or not a writ of preliminary injunction should be issued to
enjoin the foreclosure and public auction of petitioner’s property
during the proceedings and pending determination of the main cause
of action for annulment of the REM on said property (based on the
petitioner’s contention that ESB has no interest in the REM).
Held:
Yes. A writ of preliminary injunction may be issued only upon clear
showing of an actual existing right to be protected during the
pendency of the principal action. The twin requirements of a valid
injunction are the existence of a right and its actual or threatened
violations. Thus, to be entitled to an injunctive writ, the right to be
protected and the violation against that right must be shown.
In this case, petitioners’ rights to their property is restricted by the
REM they executed over it. Upon their default on the mortgage debt,
the right to foreclose the property would be vested upon the creditor-
mortgagee. Nevertheless, the right of foreclosure cannot be
exercised against the petitioners by any person other than the
creditor-mortgagee or its assigns. According to the pertinent
provisions of the Civil Code:
6
THIRD EXAM
Art. 1311(1). 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. The heir is not liable beyond the
value of the property he received from the decedent.
An extrajudicial foreclosure instituted by a third party to the Loan
Agreement and the REM would, therefore, be a violation of
petitioners’ rights over their property.
It is clear that under Article 1311 of the Civil Code, contracts take
effect only between the parties who execute them. Where there is
no privity of contract, there is likewise no obligation or liability to
speak about. The civil law principle of relativity of contracts
provides that 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. Since a
contract may be violated only by the parties thereto as against each
other, a party who has not taken part in it cannot sue for
performance, unless he shows that he has a real interest affected
thereby.
In the instant case, petitioners assert that their creditor-mortgagee
is EPCIB and not respondent. While ESB claims that petitioners
have had transactions with it, particularly the five check payments
made in the name of ESB, it fails to categorically state that ESB and
not EPCIB is the real creditor-mortgagor in this loan and mortgage
transaction. The four Promissory Notes designate EPCIB as the
"lender." In a letter dated 19 December 2002, addressed to Home
Guaranty Corporation, EPCIB Vice President Gary Vargas even
specified petitioners’ loan as one of its housing loans for which it
sought insurance coverage. Records also show that petitioners
repeatedly dealt with EPCIB. When the petitioners complained of
not receiving the loan documents and the allegedly excessive
interest charges, they addressed their letter dated 3 August 2003 to
the president of EPCIB. The response, which explained the loan
transactions in detail in a letter dated 27 August 2003, was written
by Gary Vargas, EPCIB Vice President. Of almost three years’
amortizations, the checks were issued by petitioners in the name of
EPCIB, except only for five checks which were issued in
respondent’s name.
Respondent ESB, although a wholly-owned subsidiary of EPCIB,
has an independent and separate juridical personality from its parent
company. The fact that a corporation owns all of the stocks of
another corporation, taken alone, is not sufficient to justify their
being treated as one entity. If used to perform legitimate functions,
a subsidiary’s separate existence shall be respected, and the liability
of the parent corporation, as well as the subsidiary, shall be confined
to those arising from their respective businesses. A corporation has
a separate personality distinct from its stockholders and other
corporations to which it may be conducted. Any claim or suit of the
parent corporation cannot be pursued by the subsidiary based solely
on the reason that the former owns the majority or even the entire
stock of the latter.
HEIRS OF LLENADO VS LLENADO (MANAAY)
Facts
The subject of the controversy is a parcel of land, located in
Valenzuela, Metro Manila registered in the name of Eduardo and
Jorge Llenado. Its former owner was their father, Cornelio.
On 1975, it was leased to Cornelio’s nephew, Romeo for a period
of 5 years and renewable for another 5 years at Cornelio’s option.
On March 31, 1978, Cornelio, Romeo and the latter’s cousin
Orlando Llenado (Orlando) executed an Agreement whereby
Romeo assigned all his rights to Orlando over the unexpired portion
of the aforesaid lease contract. The parties further agreed that
Orlando shall have the option to renew the lease contract for another
three years, then for another four years. It was also agreed that
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"during the period that [this agreement] is enforced, the x x x
property cannot be sold, transferred, alienated or conveyed in
whatever manner to any third party."
Then on June 24, 1978, Cornelio and Orlando entered into a
Supplementary Agreement amending the March 31, 1978
Agreement. Under the Supplementary Agreement, Orlando was
given an additional option to renew the lease contract for an
aggregate period of 10 years at five-year intervals. The said
provision was inserted in order to comply with the requirements of
Mobil Philippines, Inc. for the operation of a gasoline station which
was subsequently built on the subject lot.
Upon the death of Orlando on November 7, 1983, his wife,
Wenifreda Llenado (Wenifreda), took over the operation of the
gasoline station. Meanwhile, Cornelio sold Lot 249-D to his
children, namely, Eduardo, Jorge, Virginia and Cornelio, Jr.,
through a deed of sale. Then several months after, Cornelio passed
away.
Sometime in 1993, Eduardo informed Wenifreda of his desire to
take over the subject lot. However, the latter refused to vacate the
premises despite repeated demands. This prompted Eduardo to file
for unlawful detainer against Wenifreda. A final judgment was
rendered in favor of Eduardo.
Previously, after Eduardo instituted the aforesaid unlawful detainer
case on September 24, 1993, herein petitioner Wenifreda, in her
capacity as administratrix of the estate of Orlando Llenado, judicial
guardian of their minor children, and surviving spouse and legal heir
of Orlando, commenced the subject Complaint. She alleged that:
• The transfer and conveyance of the subject lot by
Cornelio in favor of respondents Eduardo and Jorge, was fraudulent
and in bad faith considering that the March 31, 1978 Agreement
provided that while the lease is in force, the subject lot cannot be
sold, transferred or conveyed to any third party;
• The period of the lease was until December 3, 1987 with
the option to renew granted to Orlando;
• That the subject lot was transferred and conveyed to
respondents Eduardo and Jorge on January 29, 1987 when the lease
was in full force and effect making the sale null and void;
• That Cornelio verbally promised Orlando that in case he
(Cornelio) decides to sell the subject lot, Orlando or his heirs shall
have first priority or option to buy the subject lot so as not to
prejudice Orlando’s business and because Orlando is the owner of
the property adjacent to the subject lot and that this promise was
wantonly disregarded when Cornelio sold the said lot to respondents
Jorge and Eduardo.
In their Answer, respondents claim that:
• They bought the subject lot from their father, Cornelio,
for value and in good faith;
• That the lease agreement and its supplement were not
annotated at the back of the mother title of the subject lot and do not
bind them;
• That said agreements are personal only to Cornelio and
Orlando; that the lease expired upon the death of Orlando on
November 7, 1983;
• That they were not aware of any verbal promise to sell the
subject lot granted by Cornelio to Orlando and, even if there was,
said option to buy is unenforceable under the statute of frauds.
RTC: In favor of petitioner.
• It declared the Deed of Sale between Cornelio and his
sons and the TCTs as non-existent and null and void, and ordered
the reconveyance and the issuance of new TCTs in favor of
petitioner.
• The Regional Trial Court found that upon the death of
Orlando on November 7, 1983, his rights under the lease contract
were transmitted to his heirs; that since the lease was in full force
and effect at the time the subject lot was sold by Cornelio to his
sons, the sale violated the prohibitory clause in the said lease
contract. Further, Cornelio’s promise to sell the subject lot to
7
THIRD EXAM
Orlando may be established by parole evidence since an option to
buy is not covered by the statute of frauds. Hence, the same is
binding on Cornelio and his heirs.
CA: Reversed the decision of RTC.
• Held that the death of Orlando did not extinguish the lease
agreement and had the effect of transmitting his lease rights to his
heirs. However, the breach of the non-alienation clause of the said
agreement did not nullify the sale between Cornelio and his sons
because the heirs of Orlando are mere lessees on the subject lot and
can never claim a superior right of ownership over said lot as against
the registered owners thereof. It further ruled that petitioner failed
to establish by a preponderance of evidence that Cornelio made a
verbal promise to Orlando granting the latter the right of first refusal
if and when the subject lot was sold.
Issues
1. Whether rights arising from a contract of lease are transmissible.
2. Whether the sale to Eduardo and Jorge of the subject lot by
Cornelio is null and void for violating the non-alienation clause in
the lease agreement.
Ruling
The petition lacks merit.
Under Article 1311 of the Civil Code, the heirs are bound by the
contracts entered into by their predecessors-in-interest except when
the rights and obligations therein are not transmissible by their
nature, by stipulation or by provision of law. A contract of lease is,
therefore, generally transmissible to the heirs of the lessor or lessee.
It involves a property right and, as such, the death of a party does
not excuse non-performance of the contract. The rights and
obligations pass to the heirs of the deceased and the heir of the
deceased lessor is bound to respect the period of the lease.30 The
same principle applies to the option to renew the lease. As a general
rule, covenants to renew a lease are not personal but will run with
the land. Consequently, the successors-in-interest of the lessee are
entitled to the benefits, while that of the lessor are burdened with
the duties and obligations, which said covenants conferred and
imposed on the original parties.
The foregoing principles apply with greater force in this case
because the parties expressly stipulated in the March 31, 1978
Agreement that Romeo, as lessee, shall transfer all his rights and
interests under the lease contract with option to renew "in favor of
the party of the Third Part (Orlando), the latter’s heirs, successors
and assigns" indicating the clear intent to allow the transmissibility
of all the rights and interests of Orlando under the lease contract
unto his heirs, successors or assigns. Accordingly, the rights and
obligations under the lease contract with option to renew were
transmitted from Orlando to his heirs upon his death on November
7, 1983.
It does not follow, however, that the lease subsisted at the time of
the sale of the subject lot on January 29, 1987. When Orlando died
on November 7, 1983, the lease contract was set to expire 26 days
later or on December 3, 1983, unless renewed by Orlando’s heirs
for another four years. While the option to renew is an enforceable
right, it must necessarily be first exercised to be given effect. The
election of the option to renew the lease in this case cannot be
inferred from petitioner Wenifreda’s continued possession of the
subject lot and operation of the gasoline station even after the death
of Orlando on November 7, 1983 and the expiration of the lease
contract on December 3, 1983. In the unlawful detainer case against
petitioner Wenifreda and in the subject complaint for annulment of
conveyance, respondents consistently maintained that after the
death of Orlando, the lease was terminated and that they permitted
petitioner Wenifreda and her children to remain in possession of the
subject property out of tolerance and respect for the close blood
relationship between Cornelio and Orlando.
It was incumbent, therefore, upon petitioner as the plaintiff with the
burden of proof during the trial below to establish by some positive
act that Orlando or his heirs exercised the option to renew the lease.
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 OBLIGATIONS AND CONTRACTS CASE DIGESTS
But the records of the case reveal that there was no evidence,
testimonial or documentary, presented to prove that Orlando or his
heirs exercised the option to renew prior to or at the time of the
expiration of the lease on December 3, 1983. In particular, the
testimony of petitioner Wenifreda is wanting in detail as to the
events surrounding the implementation of the subject lease
agreement after the death of Orlando and any overt acts to establish
the renewal of said lease.
Given the foregoing, it becomes unnecessary to resolve the issue on
whether the violation of the prohibitory clause invalidated the sale
and conferred ownership over the subject lot to Orlando’s heirs, who
are mere lessees, considering that at the time of said sale on January
29, 1987 the lease agreement had long been terminated for failure
of Orlando or his heirs to validly renew the same. As a result, there
was no obstacle to the sale of the subject lot by Cornelio to
respondents Eduardo and Jorge as the prohibitory clause under the
lease contract was no longer in force.
PNB VS DEE (DELFIN)
FACTS:
Some time in July 1994, respondent Dee Dee bought from
respondent Prime East Properties Inc.5 (PEPI) on an installment
basis a residential lot located in Binangonan, Rizal, with an area of
204 square meters and covered by TCT No. 619608. Subsequently,
PEPI assigned its rights over a 213,093–sq m property on August
1996 to respondent Armed Forces of the Philippines–Retirement
and Separation Benefits System, Inc. (AFP–RSBS), which included
the property purchased by Dee.
Thereafter, or on September 10, 1996, PEPI obtained a
P205,000,000.00 loan from petitioner Philippine National Bank,
secured by a mortgage over several properties, including Dee’s
property. The mortgage was cleared by the Housing and Land Use
Regulatory Board (HLURB) on September 18, 1996.
After Dee’s full payment of the purchase price, a deed of
sale was executed by respondents PEPI and AFP–RSBS on July
1998 in Dee’s favor. Consequently, Dee sought from the petitioner
the delivery of the owner’s duplicate title over the property, to no
avail. Thus, she filed with the HLURB a complaint for specific
performance to compel delivery of TCT No. 619608 by the
petitioner, PEPI and AFP–RSBS, among others.
ISSUE:
Whether or not PNB, as mortgagee, was bound by the
contract to sell previously executed over the subdivision lot
mortgaged.
HELD:
YES. In this case, there are two phases involved in the
transactions between respondents PEPI and Dee – the first phase is
the contract to sell, which eventually became the second phase, the
absolute sale, after Dee’s full payment of the purchase price. In a
contract of sale, the parties’ obligations are plain and simple. The
law obliges the vendor to transfer the ownership of and to deliver
the thing that is the object of sale. On the other hand, the principal
obligation of a vendee is to pay the full purchase price at the agreed
time. Based on the final contract of sale between them, the
obligation of PEPI, as owners and vendors of Lot 12, Block 21–A,
Village East Executive Homes, is to transfer the ownership of and
to deliver Lot 12, Block 21–A to Dee, who, in turn, shall pay, and
has in fact paid, the full purchase price of the property.
It must be stressed that the mortgage contract between
PEPI and the petitioner is merely an accessory contract to the
principal three–year loan takeout from the petitioner by PEPI for its
expansion project. It need not be belabored that “a mortgage is an
accessory undertaking to secure the fulfillment of a principal
obligation,” and it does not affect the ownership of the property as
it is nothing more than a lien thereon serving as security for a debt.
8
THIRD EXAM
Owner or developer of subdivision lot or condominium unit may
mortgage the same despite contract to sell
Note that at the time PEPI mortgaged the property to the
petitioner, the prevailing contract between respondents PEPI and
Dee was still the Contract to Sell, as Dee was yet to fully pay the
purchase price of the property. On this point, PEPI was acting fully
well within its right when it mortgaged the property to the petitioner,
for in a contract to sell, ownership is retained by the seller and is not
to pass until full payment of the purchase price. In other words, at
the time of the mortgage, PEPI was still the owner of the property.
Thus, in China Banking Corporation v. Spouses Lozada,
the Court affirmed the right of the owner/developer to mortgage the
property subject of development, to wit: “P.D. No. 957 cannot
totally prevent the owner or developer from mortgaging the
subdivision lot or condominium unit when the title thereto still
resides in the owner or developer awaiting the full payment of the
purchase price by the installment buyer.” Moreover, the mortgage
bore the clearance of the HLURB, in compliance with Section 18 of
P.D. No. 957, which provides that “no mortgage on any unit or lot
shall be made by the owner or developer without prior written
approval of the HLURB.”
Bank-mortgagee bound by the contract to sell over the property
mortgaged
Nevertheless, despite the apparent validity of the
mortgage between the petitioner and PEPI, the former is still bound
to respect the transactions between respondents PEPI and Dee. The
petitioner was well aware that the properties mortgaged by PEPI
were also the subject of existing contracts to sell with other buyers.
While it may be that the petitioner is protected by Act No. 3135, as
amended, it cannot claim any superior right as against the
installment buyers. This is because the contract between the
respondents is protected by P.D. No. 957, a social justice measure
enacted primarily to protect innocent lot buyers. Thus, in Luzon
Development Bank v. Enriquez, the Court reiterated the rule that a
bank dealing with a property that is already subject of a contract to
sell and is protected by the provisions of P.D. No. 957, is bound by
the contract to sell.
The transferee BANK is bound by the Contract to Sell and
has to respect Enriquez’s rights thereunder. This is because the
Contract to Sell, involving a subdivision lot, is covered and
protected by PD 957. x x x More so in this case where the contract
to sell has already ripened into a contract of absolute sale.
The Court affirmed HLURB’s orders:
1. PNB to cancel the mortgage and surrender/release the title
to Dee.
2. PEPI and AFP-RSBS to pay PNB the redemption value
of the subject property as agreed upon by them in the REM within
6 months from the time the owner’s duplicate of TCT is actually
surrendered and released by PNB to Dee.
3. In the alternative, in case of legal and physical
impossibility on the part of PEPI, AFP–RSBS, and PNB to comply
and perform their respective obligation/s, as above–mentioned,
respondents PEPI and AFP–RSBS are hereby ordered to jointly and
severally pay to Dee the amount of P520,000.00) plus interest to be
computed from the filing of complaint on April 24, 2002 until fully
paid.
4. PEPI, AFP-RSBS and PNB to pay solidarily Dee
attorney’s fees, cost of litigation, and administrative fine.
ROJALES VS DIME
JARDINE DAVIES VS CA (FLORES)
3 Parties involved:
PUREFOODS
Far East Mills Supply Corp. (FEMSCO)
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 OBLIGATIONS AND CONTRACTS CASE DIGESTS
JARDINE DAVIES INC.
FACTS:
-The controversy started in 1992 at the height of the power crisis
which the country was then experiencing. To remedy and curtail
further losses due to the series of power failures, petitioner PURE
PUREFOODS decided to install (2) 1500 KW generators in its food
processing plant.
-November 1992, bidding for the supply and installation of the
generators was held.
- Out of the 8 prospective bidders who attended the pre-bidding
conference, only 3 bidders, namely, respondent FEMSCO,
MONARK and ADVANCE POWER submitted bid proposals and
gave bid bonds equivalent to 5% of their respective bids, as
required.
- 12 December 1992, PUREFOODS confirmed the award of the
contract to FEMSCO
First portion of the letter reads: This will confirm that Pure Foods
Corporation has awarded to your firm the project…
- Immediately, FEMSCO submitted the required performance bond
and contractor's all-risk insurance policy in the amount which
PUREFOODS acknowledged in a letter
- FEMSCO started the PUREFOODS project by purchasing the
necessary materials.
- Later, however, in a letter dated 22 December 1992, unilaterally
canceled the award as "significant factors were uncovered and
brought to (their) attention which dictate (the) cancellation and
warrant a total review and re-bid of (the) project."
-Consequently, FEMSCO protested the cancellation of the award
and sought a meeting with PUREFOODS.
- However, on 26 March 1993, before the matter could be resolved,
PUREFOODS already awarded the project and entered into a
contract with JARDINE which incidentally was not one of the
bidders.1âwphi1.nêt
- FEMSCO thus wrote PUREFOODS to honor its contract with the
former, and to JARDINE to cease and desist from delivering and
installing the two (2) generators at PUREFOODS. Its demand letters
unheeded, FEMSCO sued both PUREFOODS and JARDINE:
PUREFOODS for reneging on its contract, and JARDINE for its
unwarranted interference and inducement. Trial ensued.
-On the issue between PUREFOODS and FEMSCO, the RTC ruled
in favor of the latter and ordered PUREFOODS to indemnify the
FEMSCO for engineering services already rendered, pay for the
contractor’s mark-up on installation work noting that the
construction already started thereon and that it would be impossible
to compel PUREFOODS to honor, perform and fulfill its
contractual obligations in view of PUREFOOD's contract with
JARDINE and to pay the costs and attorneys fees.
-On CA, focusing on the case between FEMSCO and
PUREFOODS, it affirmed in toto the decision of the RTC.
PUREFOODS filed a Motion for Reconsideration but the same was
denied for lack of merit.
-Upon reaching to the SUPREME COURT:
9
THIRD EXAM
- PUREFOODS ARGUED that:
*conclusions of both the trial court and the appellate court are
premised on a misapprehension of facts.
THEIR BASIS:
* 12 December 1992 letter to FEMSCO was not an
acceptance of the latter's bid proposal and award of the project but
more of a QUALIFIED ACCEPTANCE
(we have learned that when an acceptance is qualified, a contract is
yet to be perfected) constituting a counter-offer which required
FEMSCO's express conforme.
*Since PUREFOODS never received FEMSCO's conforme,
PUREFOODS was very well within reason to revoke its qualified
acceptance or counter-offer. Hence, no contract was perfected
between PUREFOODS and FEMSCO.
ISSUE in relation to perfection of contracts:
-Whether there existed a perfected contract between PUREFOODS
and FEMSCO.
-Whether there was acceptance of the offer, and if so, if it was
communicated thereby perfecting the contract
RULING:
-There was a perfected contract between the parties herein and the
acceptance of the offer was communicated which perfected the
contract.
-There can be no contract unless the following requisites concur:
(a) consent of the contracting parties;
(b) object certain which is the subject matter of the contract; and,
(c) cause of the obligation which is established. A contract binds
both contracting parties and has the force of law between them.
-Contracts are perfected by mere consent, upon the acceptance by
the offeree of the offer made by the offeror. From that moment, the
parties are bound not only to the fulfillment of what has been
expressly stipulated but also to all the consequences which,
according to their nature, may be in keeping with good faith, usage
and law.
-To produce a contract, the acceptance must not qualify the terms of
the offer. However, the acceptance may be express or implied.
-For a contract to arise, the acceptance must be made known to the
offeror. Accordingly, the acceptance can be withdrawn or revoked
before it is made known to the offeror.
-In the instant case, there is no issue as regards the subject matter of
the contract and the cause of the obligation.
*The controversy lies in the consent — whether there was an
acceptance of the offer, and if so, if it was communicated, thereby
perfecting the contract.
* To resolve the dispute, there is a need to determine what
constituted the OFFER and the ACCEPTANCE.
- Since petitioner PUREFOODS started the process of entering into
the contract by conducting a BIDDING, Art. 1326 of the Civil Code,
which provides that "[a]dvertisements for bidders are simply
invitations to make proposals," applies. Accordingly, the Terms and
Conditions of the Bidding disseminated by petitioner PUREFOODS
constitutes the "advertisement" to bid on the project.
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 OBLIGATIONS AND CONTRACTS CASE DIGESTS
-OFFER: The bid proposals or quotations submitted by the
prospective suppliers including respondent FEMSCO, are the
offers.
-ACCEPTANCE: the 12 December 1992 letter of petitioner.
PUREFOODS to FEMSCO constituted acceptance of respondent
FEMSCO's offer as contemplated by law. The tenor of the letter,
i.e., "This will confirm that Pure Foods has awarded to your firm
(FEMSCO) the project," could not be more categorical.
* While the same letter enumerated certain "basic terms and
conditions," these conditions were imposed on the performance of
the obligation rather than on the perfection of the contract.
-first "condition" was merely a reiteration of the contract price and
billing scheme based on the Terms and Conditions of Bidding and
the bid or previous offer of respondent FEMSCO.
-second and third "conditions" were nothing more than general
statements that all items and materials including those excluded in
the list but necessary to complete the project shall be deemed
included and should be brand new.
-fourth "condition" concerned the completion of the work to be
done, i.e., within twenty (20) days from the delivery of the generator
set, the purchase of which was part of the contract.
-fifth "condition" had to do with the putting up of a performance
bond and an all-risk insurance, both of which should be given upon
commencement of the project.
-sixth "condition" related to the standard warranty of one (1) year.
*In fine, the enumerated "basic terms and conditions" were
prescriptions on how the obligation was to be performed and
implemented. They were far from being conditions imposed on the
perfection of the contract.
-THERE IS A DISTINCTION between;
1.) condition imposed on the perfection of a contract and a 2.)
condition imposed merely on the performance of an obligation.
* failure to comply with the first condition results in the
failure of a contract, failure to comply with the second merely gives
the other party options and/or remedies to protect his interests.
-in this case there were merely condition imposed on the
performance of an obligation. (failure to comply with the merely
gives the other party options and/or remedies to protect his interests
and doesn’t amount failure of contract)
-SO THE SUPREME COURT AGREED WITH THE CA.
* As can be inferred from the actual phrase used in the
first portion of the letter, the decision to award the contract has
already been made. Hence, to the Court's mind, there is already an
acceptance made of the offer received by Purefoods.
Notwithstanding the terms and conditions enumerated therein, the
offer has been accepted.
-BUT EVEN granting arguendo that the 12 December 1992 letter of
petitioner PUREFOODS constituted a "conditional counter-offer,"
*respondent FEMCO's submission of the performance bond and
contractor's all-risk insurance was an implied acceptance.
Corollarily, the acknowledgment thereof by petitioner
PUREFOODS, not to mention its return of FEMSCO's bidder's
bond, was a concrete manifestation of its knowledge that respondent
FEMSCO indeed consented to the "conditional counter-offer."
- for all intents and purposes, the contract at that point has been
perfected, and respondent FEMSCO's conforme would only be a
mere surplusage.
10
THIRD EXAM
- Petitioner PUREFOODS also makes an issue out of the absence of
a purchase order (PO). Suffice it to say that purchase orders or POs
do not make or break a contract.
-To add, even the tenor of the subsequent letter of petitioner
PUREFOODS, i.e., "Pure Foods Corporation is hereby canceling
the award to your company of the project," presupposes that the
contract has been perfected. For, there can be no cancellation if the
contract was not perfected in the first place.
FALLO:
WHEREFORE, judgment is hereby rendered as follows:
XXXXXXX XXXX XXX XXX
(b) The petition in G.R. No. 128069 is DENIED. The assailed
Decision of the Court of Appeals ordering petitioner PUREFOODS
CORPORATION to pay private respondent FEMSCO the sum of
P2,300,000.00 representing the value of engineering services it
rendered, US$14,000.00 or its peso equivalent, and P900,000.00
representing the contractor's mark-up on installation work, as well
as attorney's fees equivalent to twenty percent (20%) of the total
amount due, is AFFIRMED. In addition, petitioner PURE FOODS
CORPORATION is ordered to pay private respondent FAR EAST
MILLS SUPPLY CORPORATION moral damages in the amount
of P1,000,000.00 and exemplary damages in the amount of
P1,000,000.00. Costs against petitioner.
SO ORDERED.
SOLER VS CA (TOGONON)
Facts :
NOVEMBER 1986 – Rosario Pardo asked Petitioner to
talk to COMBANK Ermita Branch Manager Nida Lopez in re : their
plan to renovate their branch office. During the meeting, Petitioner
was hesitant to accept the job because of her many out of town
commitments and also considering that Ms. Lopez was asking that
the designs be submitted by December 1986. However, Respondent
was insistent so Petitioner acceded to the request. She was assured
by Ms. Lopez that her services would be compensated. Petitioner
told Ms. Lopez that her professional fee was P10,000.00, to which
Responded acceded. The meeting included discussions as to what
was to be renovated – afterwhich, Ms. Lopez again assured
petitioner that the bank would pay her fees. A few days after,
Petitoner requested for the blueprints of the building so that she may
prepare the design and plans according to the given specifications.
Her draftsman, Jackie Barcelon, was the one who went to the jobsite
and took the proper measurements for which she was paid
(P6,000.00). Petitioner also hired the services of an engineer
(ORTANEZ) to make the electrical layout and Architects Frison
Cruz & De Mesa to do the drafting. She paid the engineer P4,000.00
and the architects P5,000.00. Petitoner also researched on designs
and contacted wallpaper suppliers and sash makers for their
quotation. Layout and designs were submitted to Ms. Lopez on time
for her Decmeber 1986 deadline. Petitioner then demanded for
payment of her services but was ignored.
FEBRUARY 1987 – by chance, Petitoner met Respondent
at a concert at the CCP. When she inquired about the payment for
her services, she was told that she was not entitled to it because her
designs did not conform to the bank’s policy of having a standard
design and that there was no agreement between her and the bank.
MAY 20, 1987 - Petitioner Referred the
matter to her layer, who sent Respondent a demand letter which was
ignored.
JUNE 18, 1987 - Sent another demand letter
to ask for the return of the blueprint copies submitted. The same was
also ignored.
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 OBLIGATIONS AND CONTRACTS CASE DIGESTS
OCTOBER 13, 1987 - Filed with the
RTC complaint for collection of professional fees and damages.
CMBANK’s answer was that there was NO CONTRACT between
Petitioner and them because Ms. Lopez merely invited Petitioner to
participate in the bid for the renovations – subject to the approval of
the head office.
NOVEMBER 19, 1990 - Trial court
rendered a decision in favour of Petitioner.
NOVEMBER 29, 1990 - Also, petitioner may be paid on the basis of quantum meruit. It is
COMBANK/NIDA LOPEZ filed notice of appeal
DECEMBER 5, 1990 - Trial Court
ordered records elevated to Court of Appeals. COMBANK
reiterated that there was NO CONTRACT between them and
Petitioner. Petitioner maintains that there was a perfected contract
between her and the bank facilitated by Nida Lopez – there was an
offer and acceptance of the service she rendered to the bank.
OCTOBER 26, 1995 - Court of
Appeals decision :
“ after going over the records of this
case, including the transcribed notes, we are convinced that the
question here is not really whether the alleged contract purportedly
entered into between the plaintiff and defendant is enforceable BUT
whether a contract even exists between the parties.
ART. 1318 : There is no contract unless the ff .
requisites concur :
1. Consent of the contracting parties
2. Object certain which is the subject matter of the contract
3. Cause of the obligation which is established
Defendant bank never gave consent to the contract
considering that the bidding was deferred because the bank was for
sale.”
Petitioner then files Certiorari with the Supreme Court from above-
mentioned CA decision declaring that there was no perfected
contract between her and COMBANK – thereby denying her claim
for payment of professional fees for services rendered.
Petitoner appeals to the SC arguing that :
1. The CA erred in ruling that there was no contract in the
absence of the element of consent
2. The CA erred in ruling that respondents merely invited
Petitioner to present her proposal
3. The CA erred in ruling that Petitioner knew her proposal
was still subject to bidding and approval of the bank’s board
4. The CA erred in reversing the decision of the trial court.
The SC finds 2 issues, to wit :
1. W/N ther was perfected contract between the Petitioner
and Respondents
2. W/N Nida Lopez as branch manager had the authority to
bind the bank in the transaction
There is a PERFECTED ORAL CONTRACT between the
Petitioner and Respondents.
Contract : A meeting of the minds of two persons whereby
one binds himself to another to give something or to render service
to another for consideration.
The SC also referred to exactly the same provision the CA used :
Art. 1318 but then elaborates on the reason for its ruling in this case,
enumerating the stages that a contract undergoes :
1.) When Ms. Lopez and Petitioner met in November 1986,
discussed the details of the work – the first stage – that of
preparation, conception & generation commenced.;
2.) When they agreed that the PF of Petitioner shall be
P10,000.00 and that she should submit the design plans before the
December 1986 board meeting, the second stage – tat of perfection
or birth of the contract proceeded.
11
THIRD EXAM
3.) And when Petitioner finally submitted the designs to Ms.
Lopez, the contract was consummated.
It is familiar doctrine that if a corporation knowingly permits one of
its officers, or any other agent, to act within the scope of an apparent
authority, it holds him out to the public as possessing the power to
do those acts; and thus, the corporation will, as against anyone who
has in good faith dealt with it through such agent, be estopped from
denying the agents authority.
essential for the proper operation of the principle that there is an
acceptance of the benefits by one sought to be charged for the
services rendered under circumstances as reasonably to notify him
that the lawyer performing the task was expecting to be paid
compensation therefor. The doctrine of quantum meruit is a device
to prevent undue enrichment based on the equitable postulate that it
is unjust for a person to retain benefit without paying for it.
PROVINCE OF CEBU VS MORALES (FABE) ((see last page))
GARCIA VS THIO (DU)
Respondent herein received two crossed-checks on two separate
dates both of which made payable to the order of one Marilou
Santiago
The Petitioner then filed a complaint against respondent with the
RTC holding respondent liable for the principal amounts of the
crossed-checks, that respondent had failed to pay such amounts
hence the petition was for a collection of a sum of money plus the
interest rates imposed therein.
Contention of the respondent was that there was no perfected
contract of loan as she did not acquire any of the proceeds of the
checks and that rather, it was Marilou Santiago to whom the money
was actually lent to.
ISSUE: W/N there was a perfected contract of loan between the two
parties
RULING:
There already was a perfect contract of loan. In this case, the court
held that a contract of loan is a real contract, that it is not consensual,
and that the contract of loan is perfect upon the delivery of the object
of the contract. The court herein defined delivery as the act of which
the res or the substance of the thing thereof is placed within the
control and active or constructive possession of another. In this case,
while it may be true that respondent had not acquired the amounts
of the check, she had control and possession of the instruments
thereof to an extent that she could even re-lend the amounts to
Marilou Santiago. Hence, since there was already the delivery of the
object of the contract, the Court finds that respondent is liable for
the payment of the principal amounts.
PANGAN VS PERRERAS (GUALBERTO)
FACTS:
Spouses Pangan were the owners of the lot and two- door
apartment. Consuelo agreed to sell to the respondents the subject
properties for the price of 540k. On that same day, Consuelo
received 20k from the respondents as earnest money, evidenced by
a receipt. Three days after, the parties agreed to increase the
purchase price from 540k to 580k.
In compliance with the agreement, respondents issued two
checks payable to Consuelo in the amounts of 200k and 250k.
Consuelo, however, refused to accept the checks. Her justification
is that her children – co-owners of the subject properties- did not
want to sell the subject properties. Consuelo returned the 20k
earnest money, but the respondents rejected.
LLB-1 Estrellado
 OBLIGATIONS AND CONTRACTS CASE DIGESTS

Consuelo filed complaint for consignation against

respondents. Respondents insisted on enforcing the agreement and PETITION DENIED, CA’s DECISION AFFIRMED.
in turn instituted an action for specific performance against
Consuelo. They sought to compel Consuelo and the petitioner- heirs SMI VS POSADAS
to execute a Deed of Absolute Sale over the subject properties.
Consuelo claimed that she was justified in backing out from
the agreement on the ground that the sale was subject to the consent
LIMSON VS CA (QUITAYEN)
of the petitioner-heirs who became co-owners of the property upon
the death of her husband. Since the petitioner- heirs disapproved of
Facts:
the sale, Consuelo claimed that contract became ineffective for
Spouses de Vera offered to sell the property to Limson. She agreed
lack of the required consent. She expressed her willingness to return
to buy and paid 20k “earnest money”, the receipt issued for the said
the earnest money she received.
payment states that she has the option to buy within 10 days. The
RTC AND CA:
spouses executed a Deed of Sale over said property to SUNVAR.
RTC ruled in the respondents’ favor. It upheld the existence
Limson assails the sale as violative of her right to purchase.Court
of a perfected contract of sale in so far as the sale involved
said that there was only a option contract and not contract to sell
Consuelo’s share on the conjugal and hereditary shares of the
between Limsonand spouses. 20k was not earnest money but option
subject properties. RTC contends that, receipt of the earnest money
money.
was an eloquent manifestation of the perfection of the contract. RTC
Issue:
declared that the sale is valid and can be enforce against Consuelo,
Whether the contract between Spouses de Vera and Limson was a
as a co-owner she has full-ownership of her share which she can
contract of option or a contract to sell.
alienate, assign, or mortgage. RTC ordered her to convey her share
(1/2 conjugal, 1/6 sa hereditary share) of the subject property to the
Ruling:
respondents and pay respondents’ attorney’s fees. Trial court also
The agreement between the parties was a contract of option and not
dismissed Consuelo’s consignation complaint.
a contract to sell.
Consuelo and petitioner-heirs appealed claiming trial court
The consideration of P20,000.00 paid by petitioner to respondent
erred and that the agreement was subject to a suspensive condition-
spouses indicates that the money is not earnest money but option
consent of the petitioner-heirs. CA dismissed the appeal and
money. "Earnest money" and "option money" are not the same but
confirmed RTC’s decision. Both CA and RTC found that the
distinguished thus: (a) earnest money is part of the purchase price,
payment and receipt of earnest money was the operative act that
while option money is the money given as a distinct consideration
gave rise to the perfected contract, and that there was nothing in the
for an option contract; (b) earnest money is given only where there
agreement that would indicate it as a suspensive condition.
is already a sale, while option money applies to a sale not yet
perfected; and, (c) when earnest money is given, the buyer is bound
ISSUES/RULINGS:
to pay the balance, while when the would-be buyer gives option
Unconvinced by the correctness of the RTC and CA’s rulings,
money, he is not required to buy, but may even forfeit it depending
petitioners filed for certiorari raising the following issues:
on the terms of the option.
1. There was no perfected contract. The refusal of the
There is nothing in the Receipt which indicates that the P20,000.00
petitioner-heirs to sell the subject properties purportedly amounted
was part of the purchase price. Moreover, it was not shown that
to the absence of the requisite element of consent.
there was a perfected sale between the parties where earnest money
was given.
SC said there was a perfected contract between the parties since all
On or before 10 August 1978, the last day of the option period, no
essential requisites of a contract provided under Article 1318 are
affirmative or clear manifestation was made by petitioner to accept
present (Consent, Object, Cause of Obligation).
the offer. Certainly, there was no concurrence of private respondent
spouses offer and petitioners acceptance thereof within the option
The presence of Consuelo’s consent and, corollarily, the existence
period. Consequently, there was no perfected contract to sell
of a perfected contract between the parties are further evidenced by
between the parties.
the payment and receipt of P20,000.00, which was the earnest
money. The law on sales, specifically Article 1482 of the Civil
Code, provides that whenever earnest money is given in a contract TAYOG VS LACSON (DAPITAN)
of sale, it shall be considered as part of the price and proof of the
perfection of the contract. Facts:
This involves the three parcels of land owned by the Lacsons being
2. The petitioners-heirs posit that the agreement involves a tilled by 35 farmers. These farmers individually executed separate
contract to sell, and the respondents belated payment of part of the deeds of assignment in favor of petitioner Tayag for the
purchase price, i.e., one day after the June 14, 1989 due date, consideration of P50.00 per square meter. The said amount was
amounted to the non-fulfillment of a positive suspensive condition payable when the legal impediments to the sale of the property to
that prevented the contract from acquiring obligatory force. the petitioner no longer existed. The petitioner was also granted by
the farmers the exclusive right to buy the property. The petitioner
Court said question of the contracts’ characterization is immaterial gave several amounts of money to the farmers as partial payment
in the case at bar as the facts provided are not conclusive. and was issued with receipts. The petitioner called for a meeting of
Whether the parties agreement is characterized as one of contract of the defendant-tenant to work out the implementation of the terms of
sale or to sell is not relevant in light of the respondents payment their separate agreements. However, the defendant-tillers wrote the
within the grace period provided under Article 1592 of the Civil petitioner a letter which said that they will not attend the meeting
Code and Section 4 of the Maceda Law. The petitioner-heirs and gave notice that they will sell the land to the respondent
obligation to accept the payment of the price and to convey Lacsons. The petitioner contended that the deeds of assignment
Consuelos conjugal and hereditary shares in the subject properties were perfected upon Option Contract.
subsists. Issue: W/N the deeds of assignment were perfected upon Option
Contract.

12
THIRD EXAM LLB-1 Estrellado
 OBLIGATIONS AND CONTRACTS CASE DIGESTS

Ruling:
No. An Option Contract is a contract by which the owner of the - In January 1999, respondents attempted once more to
property agrees with another person that he shall have the right to book and reserve an FLP villa for their free use on April 1, 1999, a
buy his property at a price fixed within a certain period of time, or Thursday. Their reservation was confirmed by a certain Murphy
upon compliance of terms and conditions, or which gives to the Magtoto, and that later, another employee called them that the said
owner of the property the right to sell or demand sale. It imposes no reservation was cancelled because the FLP was already fully
binding obligation on the person holding the option aside from the booked.
consideration of the offer. Until accepted, it is not yet treated as a
contract. The second party only gets the right to call for and receive - FLP countered the said allegation by saying that there was
lands if he elects. no confirmation to speak of because as early as the start of the year,
The petitioner was granted not only an option but also the exclusive FLP is already fully booked, and that there was no reservation
right to buy the property but the grantors were merely tenants. They number issued in favor of the Spouses Tan.
do not have any authority to grant the option much more grant
exclusive right to purchase to the petitioner. - Hearing officer Bacalla of SEC ruled in favor of Spouses
The respondent Lacsons also cannot be liable under Article 1314 of Tan by stating that the respondents were induced to buy shares
the Civil Code for they have a justifiable interest on the property as which actually are empty promises. CA ruled by ordering Fontana
they are recognized as the owners. Resort to provide for a refund to the spouses, hence, this petition
before the SC.
EULOGIC VS APELES
Issue: WON there Fontana Resort committed fraud during the
selling of stocks which would warrant the annulment or recission of
the contract which the parties entered into?
FONTANA RESORT VS TAN (from the net)
Facts:
RULING:
- In March 1997, respondent spouses Tan bought from
- Article 1390 of the Civil Code states that contracts are
petitioner RN Development Corp. (RNDC) two class “D” shares of
voidable and annullable when the consent is vitiated by mistake,
stock in petitioner Fontana Resort and Country petitioner Fontana
violence, intimidation, undue influence or fraud. However, they
Resort and Country Club, Inc. worth P387,300.
are susceptible of ratification.
- These bought stocks entail a promise that Fontana Resort
- Article 1191. The power to rescind obligations is implied
would construct a park with first-class leisure facilities in Clark
in reciprocal ones, in case one of the obligors should not comply
Field, Pampanga, to be called Fontana Leisure Park (FLP).
with what is incumbent upon him.
- It was also promised that FLP would be fully developed
- In this case respondents, in their complaint, cannot just
and operational by the first quarter of 1998 and that Fontana Resort
simply pray for refund of the purchase price they had paid for their
Class D shareholders would be admitted to one membership in the
shares without specifically mentioning the annulment or recisision
country club, which entitled them to use park facilities and stay at a
of the sale of said shares.
two-bedroom villa for “five (5) ordinary weekdays and two (2)
weekends every year for free.”
- There is fraud when one party is induced by the other to
enter into a contract, through and solely because of the latter’s
- Two years later, respondents filed before the Securities
insidious words or machinations. But not all forms of fraud can
and Exchange Commission a complaint for the refund of purchase
vitiate consent. Under Article 1330, fraud refers to dolo causante or
price of the bought stocks from the petitioners.
causal fraud, in which, prior to or simultaneous with the execution
of a contract, one party secures the consent of the other by using
- Respondents alleged that they had been deceived into
deception, without which such consent would not have been given.
buying Fontana Resorts shares because of petitioner’s fraudulent
In simple words, the fraud must be the determining cause of the
misrepresentations. That construction of FLP turned out to be still
contract, or must have cause the consent to be given.
unfinished and the policies, rules, and regulations of the country
club were obscure. But FLP said, at that time, most of the amenities
- The general rule is that he who alleges fraud or mistake in
are operational.
a transaction must substantiate his allegation with full, creal, and
convincing evidence because the presumption is the contract is has
- The spouses narrated that they were able to book and avail
been entered into fairly and regularly.
themselves of free accommodations at an FLP villa on a Saturday
in the month of September. They requested that an FLP Villa again
- In the case at bar, Spouses Tan have miserably failed to
be reserved for their free use on another Saturday in October for
prove how petitioners employed fraud to induce them to buy the
their daughter’s 18th Birthday, but were refused by the petitioners
subject shares. It can only be expected that petitioners will advertise
saying that the petitioners could only avail of 5 ORDINARY
FLP in the most positive light in order to attract investor-members.
DAYS, 1 SATURDAY and 1 SUNDAY, annually, and that
There is no showing that in their sales talk to respondents, petitioner
respondents had consumed their free Saturday pass for the said year.
actually used insidious words or machination which led the
respondents to buy the said shares. They appeared to be literate
- Spouses Tan, on the other hand, said that they were not
could no be easily deceived into parting with a substantial amount
informed of said rule regarding their free accommodation at FLP,
of money.
and had they known about it, they would not have availed
themselves of the free accommodations during Saturday last
- What is apparent to us is that respondents knowingly and
September. But this was countered by Fontana Resort saying that
willingly consented to buying the shares and were later on
the respondents were duly informed of the privileges givent to them
disappointed with the actual facilities and club membership
as seen in the propmotional materials for the country club, the
benefits.
Articles of Incorporation, and the By-Laws of FRCCI.
13
THIRD EXAM LLB-1 Estrellado
 OBLIGATIONS AND CONTRACTS CASE DIGESTS
- Similarly, we find no evidence on record that petitioners
defaulted on any of their obligations that would have called for the
rescission of the sale of the FRCCI shares to respondents.
- As to the issue of cancellation of the alleged confirmed
reservation, the SC concluded that there is mix-up in the reservation
process of petitioners. This demonstrates mere negligence on the
part of the petitioners but not willful intention to deprive the spouses
of their benefits. More so, it does not constitute default on the part
of FLP to warrant recission of the contract. At most, Spouses Tan
can only be awarded Nominal Damages as to the mix-up in the
reservation process.
- Respondents’ complaint sufficiently alleged a cause of
action for the annulment of the contract. However, it was dismissed
for lack of merit since they were not able to establish by
preponderance of evidence that they are entitled to such annulment.
DELA CRUZ VS DELA CRUZ
FELICIANO VS ZALDIVAR
VILLEGAS VS RURAL BANK OF TANJAY (MONCANO)
June 1982, Sps. Villegas (petitioners) obtained an agricultural loan
worth 350K from respondent which was secured by a real estate
mortgage on their residential house. Petitioner failed to pay the loan
so the mortgage was extrajudicially foreclosed where respondent
was the highest bidder. Eventually, a certificate of sale was executed
in favor of respondent.
On May 1987, resp and pet entered into an agreement denominated
as “Promise to Sell” where respondent promised to sell to petitioner
the foreclosed properties for 713,312.72 payable within 5 years.
Upon signing of the agreement, petitioner gave respondent 250k as
downpayment. Petitioner failed to pay the first yearly instalment
prompting respondent to consolidate its ownership over the
properties. A TCC was issued in respondent’s name and they took
possession. Petitioner filed nullity of loan and mortgage recovery of
possession of real property, accounting and damages and, in the
alternative, repurchase of real estate.
RTC – dismissed complaint
CA- affirmed RTC decision with modification – respondent shall
reimburse petitioner the 250k
Issue: Whether or not petitioner may recover possession of
mortgaged property
NO.
Petitioner insist the nullity of the loan and mortgage contract since
they were made to appear as “several sugar crop loans” even if they
were not just so respondent could grant the same pursuant to RA
720 (Rural Bank’s Act). In short, the sugar crop loans were merely
simulated contracts and therefore without any force and effect.
To prove such, petitioner enumerates the circumstances which show
that the loans were obtained in clear contravention of RA 720:
1. Petitioner never planted sugarcane in the agri land
2. Mortgaged real estate is residential
3. Petitioners were never required to execute any chattel
mortgage on standing crops
4. To make it appear that they were entitled to the loan
benefits, resp. made them sign promissory notes for 350k in split
amounts
Applicable laws: Art. 1345 and 1346
14
THIRD EXAM
Given of such facts, sugar crop loans were relatively simulated
contract. The juridical act that binds the parties here is the loan and
mortgage contract. It is found that all the essential requisites of a
contract were present. However, the purpose thereof is illicit,
thereby the agreement is void and under Art. 1409 of the Civil Code.
In this case, both petitioners and respondent are in pari delicto and
neither should be accorded affirmative relief as against the other.
But, it does not always follow that both parties, being in pari delicto,
should be left where they are. The court recognized as an exception
a situation when courts must interfere and grant relief to one of the
parties because public policy requires their intervention. The factual
milieu of the present case does not compel us to grant relief to a
party who is in pari delicto. The public policy requiring rural banks
to give preference to bona fide small farmers in the grant of loans
will not be served if a party, such as petitioners, who had equal
participation and equal guilt in the circumvention of the Rural
Banks Act, will be allowed to recover the subject property.
The Promise to Sell ultimately allows petitioners to recover the
subject property since it is a separate and independent contract from
that of the void loan and mortgage contracts. The Promise to Sell
makes no reference whatsoever to petitioners previous ownership of
the subject property and to the void loan and mortgage contracts.
But the parties have no cause of action against the other based on a
void contract. Petitioners recognized respondents ownership of the
subject property by entering into a Promise to Sell, which expressly
designates respondent as the vendor and petitioners as the vendees.
On the whole, the Promise to Sell, an independent contract, did not
purport to ratify the void loan and mortgage contracts.
VILLACERAN VS DE GUZMAN (TINAMPAY)
FACTS:
De Guzman alleged that she is the registered owner of a parcel of
land. April 17, 1995, she mortgaged the lot to the Philippine
National Bank (PNB) of Santiago City to secure a loan of P600,000.
In order to secure a bigger loan to finance a business venture, De
Guzman asked Milagros Villaceran to obtain an additional loan on
her behalf. She executed a Special Power of Attorney in favor of
Milagros. Considering De Guzmans unsatisfactory loan record with
the PNB, Milagros suggested that the title of the property be
transferred to her and Jose Villaceran and they would obtain a
bigger loan as they have a credit line of up to P5,000,000 with the
bank.
On June 19, 1996, De Guzman executed a simulated Deed of
Absolute Salein favor of the spouses Villaceran. On the same day,
they went to the PNB and paid the amount of P721,891.67 using the
money of the spouses Villaceran. The spouses Villaceran registered
the Deed of Sale and secured TCT No. T-257416[8] in their names.
Thereafter, they mortgaged the property with FEBTC Santiago City
to secure a loan of P1,485,000. However, the spouses Villaceran
concealed the loan release from De Guzman. Later, when De
Guzman learned of the loan release, she asked for the loan proceeds
less the amount advanced by the spouses Villaceran to pay the PNB
loan. However, the spouses Villaceran refused to give the money
stating that they are already the registered owners of the property
and that they would reconvey the property to De Guzman once she
returns the P721,891.67 they paid to PNB.[9]
De Guzman offered to pay P350,000 provided that the spouses
Villaceran would execute a deed of reconveyance of the property.
In view of the simulated character of their transaction, the spouses
Villaceran executed a Deed of Absolute Sale[10] dated September
6, 1996 in favor of De Guzman. They also promised to pay their
mortgage debt with FEBTC to avoid exposing the property to
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 OBLIGATIONS AND CONTRACTS CASE DIGESTS
possible foreclosure and auction sale. However, the spouses
Villaceran failed to settle the loan and subsequently the property
was extrajudicially foreclosed. A Sheriffs Certificate of Sale was
issued in favor of FEBTC for the amount of P3,594,000. De
Guzman asserted that the spouses Villaceran should be compelled
to redeem their mortgage so as not to prejudice her as the real owner
of the property.
On the other hand, the spouses Villaceran and FEBTC, in their
Amended Answer,averred that in 1996 De Guzman was introduced
to Milagros by a certain Digna Maranan. Not long afterwards, De
Guzman requested Milagros to help her relative who had a loan
obligation with the PNB in the amount of P300,000. As a
consideration for the accommodation, De Guzman would convey
her property located at Maligaya, Echague, Isabela which was then
being held in trust by her cousin, Raul Sison. Because of this
agreement, Milagros paid De Guzmans obligation with the PNB in
the amount of P300,000.
When Milagros asked for the title of the lot, De Guzman explained
that her cousin would not part with the property unless he is
reimbursed the amount of P200,000 representing the amount he
spent tilling the land. Milagros advanced the amount of P200,000
but De Guzmans cousin still refused to reconvey the property. In
order for De Guzman to settle her obligation, she offered to sell her
house and lot in Echague, Isabela. At first, Milagros signified her
non-interest in acquiring the same because she knew that it was
mortgaged with the PNB Santiago for P600,000. De Guzman
proposed that they will just secure a bigger loan from another bank
using her house and lot as security. The additional amount will be
used in settling De Guzmans obligation with PNB. Later, De
Guzman proposed that she borrow an additional amount from
Milagros which she will use to settle her loan with PNB. To this
request, Milagros acceded. Hence, they went to the PNB and paid
in full De Guzmans outstanding obligation with PNB which already
reached P880,000.
Since De Guzmans total obligation already reached P1,380,000, the
spouses Villaceran requested her to execute a deed of absolute sale
over the subject property in their favor. Thus, the Deed of Absolute
Sale is supported by a valuable consideration, and the spouses
Villaceran became the lawful owners of the property as evidenced
by TCT No. 257416 issued by the Office of the Register of Deeds
of Isabela. Later, they mortgaged the property to FEBTC for
P1,485,000.
The spouses Villaceran denied having executed a deed of
conveyance in favor of De Guzman relative to the subject property
and asserted that the signatures appearing on the September 6, 1996
Deed of Sale, which purported to sell the subject property back to
De Guzman, are not genuine but mere forgeries.
ISSUE: W THE DEED OF SALE WAS SMULATED.
HELD:YES
Article 1345[19] of the Civil Code provides that the simulation of a
contract may either be absolute or relative. In absolute simulation,
there is a colorable contract but it has no substance as the parties
have no intention to be bound by it. The main characteristic of an
absolute simulation is that the apparent contract is not really desired
or intended to produce legal effect or in any way alter the juridical
situation of the parties.[20] As a result, an absolutely simulated or
fictitious contract is void, and the parties may recover from each
other what they may have given under the contract. However, if the
parties state a false cause in the contract to conceal their real
agreement, the contract is only relatively simulated and the parties
are still bound by their real agreement. Hence, where the essential
15
THIRD EXAM
requisites of a contract are present and the simulation refers only to
the content or terms of the contract, the agreement is absolutely
binding and enforceable between the parties and their successors in
interest.[21]
The primary consideration in determining the true nature of a
contract is the intention of the parties. If the words of a contract
appear to contravene the evident intention of the parties, the latter
shall prevail. Such intention is determined not only from the express
terms of their agreement, but also from the contemporaneous and
subsequent acts of the parties.[22] In the case at bar, there is a
relative simulation of contract as the Deed of Absolute Sale dated
June 19, 1996 executed by De Guzman in favor of petitioners did
not reflect the true intention of the parties.
It is worthy to note that both the RTC and the CA found that the
evidence established that the aforesaid document of sale was
executed only to enable petitioners to use the property as collateral
for a bigger loan, by way of accommodating De Guzman. Thus, the
parties have agreed to transfer title over the property in the name of
petitioners who had a good credit line with the bank. The CA found
it inconceivable for De Guzman to sell the property for P75,000 as
stated in the June 19, 1996 Deed of Sale when petitioners were able
to mortgage the property with FEBTC for P1,485,000. Another
indication of the lack of intention to sell the property is when a few
months later, on September 6, 1996, the same property, this time
already registered in the name of petitioners, was reconveyed to De
Guzman allegedly for P350,000.
As regards petitioners assertion that De Guzmans previous loans
should have been considered to prove that there was an actual sale,
the Court finds the same to be without merit. Petitioners failed to
present any evidence to prove that they indeed extended loans to De
Guzman in the amounts of P300,000, P600,000 and P200,000. We
note that petitioners tried to explain that on account of their close
friendship and trust, they did not ask for any promissory note,
receipts or documents to evidence the loan. But in view of the
substantial amounts of the loans, they should have been duly
covered by receipts or any document evidencing the transaction.
Consequently, no error was committed by the CA in holding that
the June 19, 1996 Deed of Absolute Sale was a simulated contract.
CABALU VS TABU
PHIL. BANKING CORP VS DY (REYES)
FACTS: Cipriana was the registered owner of a lot situated in Barrio
Tongkil, Minglanilla, Cebu. She and her husband, respondent Jose
Delgado (Jose), entered into an agreement with a certain Cecilia Tan
(buyer) for the sale of the said property for a consideration of
P10.00/sq.m. It was agreed that the buyer shall make partial
payments from time to time and pay the balance when Cipriana and
Jose (Sps. Delgado) are ready to execute the deed of sale and
transfer the title to her.
At the time of sale, the buyer was already occupying a portion of
the
property where she operates a noodle (bihon) factory while the rest
was occupied by tenants which Sps. Delgado undertook to clear
prior
to full payment. After paying the total sum of P147,000.00 and
being
then ready to pay the balance, the buyer demanded the execution of
the deed, which was refused. Eventually, the buyer learned of the
sale of the property to the Dys and its subsequent mortgage to
petitioner Philippine Banking Corporation (Philbank), prompting
the
filing of the Complaint for annulment of certificate of title, specific
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 OBLIGATIONS AND CONTRACTS CASE DIGESTS
performance and/or reconveyance with damages against Sps.
Delgado, the Dys and Philbank.
In their Answer, Sps. Delgado, while admitting receipt of the partial
payments made by the buyer, claimed that there was no perfected
sale because the latter was not willing to pay their asking price of
P17.00/sq.m. They also interposed a cross-claim against the Dys
averring that the deeds of absolute sale in their favor were fictitious
and merely intended to enable them (the Dys) to use the said
properties as collateral for their loan application with Philbank and
thereafter, pay the true consideration of P17.00/sq.m. for Lot No.
6966. However, after receiving the loan proceeds, the Dys reneged
on their agreement, prompting Sps. Delgado to cause the annotation
of an adverse claim on the Dys' titles and to inform Philbank of the
simulation of the sale. Sps. Delgado, thus, prayed for the dismissal
of
the complaint, with a counterclaim for damages and a cross-claim
against the Dys for the payment of the balance of the purchase price
plus damages.
For their part, the Dys denied knowledge of the alleged transaction
between cross-claimants Sps. Delgado and buyer. They claimed to
have validly acquired the subject property from Sps. Delgado and
paid the full consideration therefor as the latter even withdrew their
adverse claim and never demanded for the payment of any unpaid
balance.
On the other hand, Philbank filed its Answer asserting that it is an
innocent mortgagee for value without notice of the defect in the title
of the Dys. It filed a cross-claim against Sps. Delgado and the Dys
for all the damages that may be adjudged against it in the event they
are declared seller and purchaser in bad faith, respectively.
In answer to the cross-claim, Sps. Delgado insisted that Philbank
was not a mortgagee in good faith for having granted the loan and
accepted the mortgage despite knowledge of the simulation of the
sale to the Dys and for failure to verify the nature of the buyers
physical possession. They thereby prayed for the cancellation of the
mortgage in Philbank's favor.
Subsequently, Sps. Delgado amended their cross-claim against the
Dys to include a prayer for the nullification of the deeds of absolute
sale in the latter's favor and the corresponding certificates of title,
and
for the consequent reinstatement of Ciprianas title.
The RTC dismissed the cross-claims of Sps. Delgado against the
Dys and Philbank. It noted that other than Sps. Delgado's bare
allegation of the Dys' supposed non-payment of the full
consideration
failed to adduce competent evidence to support their claim.
However, on appeal, the CA set aside the RTC's decision and
ordered the cancellation of the Dys' certificates of title and the
reinstatement of Cipriana's title. It ruled that there were no perfected
contracts of sale between Sps. Delgado and the Dys in view of the
latter's admission that the deeds of sale were purposely executed to
facilitate the latter's loan application with Philbank and that the
prices
indicated therein were not the true consideration. Being merely
simulated, the contracts of sale were, thus, null and void, rendering
the subsequent mortgage of the lots likewise void.
The CA also declared Philbank not to be a mortgagee in good faith
for its failure to ascertain how the Dys acquired the properties and
to
exercise greater care when it conducted an ocular inspection thereof.
It thereby canceled the mortgage over the two lots.
In the present petition, Philbank insists that it is a mortgagee in good
faith. It further contends that Sps. Delgado are estopped from
denying the validity of the mortgage constituted over the two lots
since they participated in inducing Philbank to grant a loan to the
Dys.
On the other hand, Sps. Delgado maintain that Philbank was not an
innocent mortgagee for value for failure to exercise due diligence in
16
THIRD EXAM
transacting with the Dys and may not invoke the equitable doctrine
of
estoppel to conceal its own lack of diligence.
For his part, Arturo Dy filed a Petition-in-Intervention, arguing that
while the deeds of absolute sale over the two properties were
admittedly simulated, the simulation was only a relative one
involving
a false statement of the price. Hence, the parties are still bound by
their true agreement.
ISSUE: Whether or not the deed of absolute sale over the property
was simulated
HELD: The petition is meritorious.
At the outset, the Court takes note of the fact that the CA Decision
nullifying the questioned contracts of sale between Sps. Delgado
and
the Dys had become final and executory. Accordingly, the Petition-
inIntervention
filed by Arturo Dy, which seeks to maintain the subject
contracts' validity, can no longer be entertained. The cancellation of
the Dys' certificates of title over the disputed properties and the
issuance of new TCTs in favor of Cipriana must therefore be upheld.
Digests by: VIADA2015
2
Property of : Bea Reyes
However, Philbank's mortgage rights over the subject properties
shall
be maintained. While it is settled that a simulated deed of sale is
null and void and therefore, does not convey any right that
could ripen into a valid title, it has been equally ruled that, for
reasons of public policy, the subsequent nullification of title to a
property is not a ground to annul the contractual right which
may have been derived by a purchaser, mortgagee or other
transferee who acted in good faith.
Primarily, it bears noting that the doctrine of "mortgagee in good
faith" is based on the rule that all persons dealing with property
covered by a Torrens Certificate of Title are not required to go
beyond what appears on the face of the title. This is in deference to
the public interest in upholding the indefeasibility of a certificate of
title as evidence of lawful ownership of the land or of any
encumbrance thereon. In the case of banks and other financial
institutions, however, greater care and due diligence are required
since they are imbued with public interest, failing which renders the
mortgagees in bad faith. Thus, before approving a loan application,
it
is a standard operating practice for these institutions to conduct an
ocular inspection of the property offered for mortgage and to verify
the genuineness of the title to determine the real owner(s) thereof.
The apparent purpose of an ocular inspection is to protect the "true
owner" of the property as well as innocent third parties with a right,
interest or claim thereon from a usurper who may have acquired a
fraudulent certificate of title thereto.
In this case, while Philbank failed to exercise greater care in
conducting the ocular inspection of the properties offered for
mortgage, its omission did not prejudice any innocent third parties.
In
particular, the buyer did not pursue her cause and abandoned her
claim on the property. On the other hand, Sps. Delgado were parties
to the simulated sale in favor of the Dys which was intended to
mislead Philbank into granting the loan application. Thus, no
amount
of diligence in the conduct of the ocular inspection could have led
to
the discovery of the complicity between the ostensible mortgagors
(the Dys) and the true owners (Sps. Delgado). In fine, Philbank can
hardly be deemed negligent under the premises since the ultimate
cause of the mortgagors' (the Dys') defective title was the simulated
sale to which Sps. Delgado were privies.
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 OBLIGATIONS AND CONTRACTS CASE DIGESTS
Indeed, a finding of negligence must always be contextualized in
line
with the attendant circumstances of a particular case. Thus, without
diminishing the time-honored principle that nothing short of
extraordinary diligence is required of banks whose business is
impressed with public interest, Philbank's inconsequential oversight
should not and cannot serve as a bastion for fraud and deceit.
To be sure, fraud comprises "anything calculated to deceive,
including all acts, omissions, and concealment involving a breach
of
legal duty or equitable duty, trust, or confidence justly reposed,
resulting in damage to another, or by which an undue and
unconscientious advantage is taken of another." In this light, the
Dys'
and Sps. Delgado's deliberate simulation of the sale intended to
obtain loan proceeds from and to prejudice Philbank clearly
constitutes fraudulent conduct. As such, Sps. Delgado cannot now
be allowed to deny the validity of the mortgage executed by the Dys
in favor of Philbank as to hold otherwise would effectively sanction
their blatant bad faith to Philbank's detriment.
Accordingly, in the interest of public policy, fair dealing, good faith
and justice, the Court accords Philbank the rights of a mortgagee in
good faith whose lien to the securities posted must be respected and
protected. In this regard, Philbank is entitled to have its mortgage
carried over or annotated on the titles of Cipriana Delgado over the
said properties.
CLEMENTE VS CA (MONTEROYO)
Facts:
Adela owned 3 adjoining parcels of land subdivided as Lots 32, 34
and 35-B . Among the improvements on the Properties was Adela's
house (referred as the "big house") where she allows her children
and grandchildren to use and possess said properties. In 1985 and
1987, Adela simulated the transfer of Lots 32 and Lot 34 to her two
grandsons from Carlos Sr., namely, Carlos, Jr. and Denis. On the
other hand, Lot 35-B remained with Adela. It is undisputed that the
transfers were never intended to vest title to Carlos Jr. and Dennis
who both will return the lots to Adela when requested which they
reconveyed in 1989 prior to Adela’s departure for the United States.
On April 25, 1989, Adela executed a deed of absolute sale over Lots
32 and 34, and their improvements, in favor of petitioner, bearing
on its face the price of P250,000.00. Adela also executed an SPA in
favor of petitioner which included the power to administer, take
charge and manage, for Adela's benefit, the Properties and all her
other real and personal properties in the Philippines. On April 29,
1989, Adela and petitioner left for the United States. When
petitioner returned to the Philippines, she registered the sale over
Lots 32 and 34 with the Registry of Deeds in her name. Then Adela
died in the US and was succeded by her 4 children Soon thereafter,
petitioner sought to eject Annie and Carlos Sr., who were then
staying on the Properties. Only then did Annie and Carlos Sr. learn
of the transfer of titles to petitioner. Thus, private respondents filed
a complaint for reconveyance of property against petitioner before
the RTC.
In the course of the trial, private respondents discovered that Adela
and petitioner executed another deed of absolute sale over Lot 35-B
on April 25, 1989 bearing on its face the price of F60,000.00. Thus,
private respondents amended their complaint to include Lot 35-B.
Respondents sought nullification of the Deeds of Absolute Sale
alleging that Adela only wanted to help petitioner travel to the
United States, by making it appear that petitioner has ownership of
the Properties. Respondents alleged that no consideration was given
by petitioner to Adela in exchange for the simulated conveyances.
17
THIRD EXAM
RTC: Ruled in favor of the respondents. (Petitioner appealed)
CA: affirmed RTC decision with modification. Deeds of Absolute
Sale were simulated. It also ruled that the conveyances of the
Properties to petitioner were made without consideration and with
no intention to have legal effect. The CA found that Adela retained
and continued to exercise dominion over the Properties even after
she executed the conveyances to petitioner.31 By contrast,
petitioner did not exercise control over the properties because she
continued to honor the decisions of Adela.
ISSUE: Whether or not the Deeds of Absolute Sale between
petitioner and her late grandmother over the Properties are
simulated and without consideration, and hence, void and
inexistent.
Holding: Yes! The Deeds of Absolute Sale between petitioner and
the late Adela Shotwell are null and void for lack of consent and
consideration.
A contract of sale is perfected at the moment there is a meeting of
the minds upon the thing that is the object of the contract, and upon
the price. Here, there was no valid contract of sale between
petitioner and Adela because their consent was absent. The contract
of sale was a mere simulation.
Simulation takes place when the parties do not really want the
contract they have executed to produce the legal effects expressed
by its wordings. Article 1345 of the Civil Code provides that the
simulation of a contract may either be absolute or relative. The
former takes place when the parties do not intend to be bound at all;
the latter, when the parties conceal their true agreement.
In determining the true nature of a contract, the primary test is the
intention of the parties. If the words of a contract appear to
contravene the evident intention of the parties, the latter shall
prevail. Such intention is determined not only from the express
terms of their agreement, but also from the contemporaneous and
subsequent acts of the parties. This is especially true in a claim of
absolute simulation where a colorable contract is executed.
In ruling that the Deeds of Absolute Sale were absolutely simulated,
the lower courts considered the totality of the prior,
contemporaneous and subsequent acts of the parties.
a) There was no indication that Adela intended to alienate her
properties in favor of petitioner. In fact, the letter of Adela to Dennis
dated April 18, 1989 reveals that she has reserved the ownership of
the Properties in favor of Dennis.
b) Adela continued exercising acts of dominion and control over the
properties, even after the execution of the Deeds of Absolute Sale,
and though she lived abroad for a time. In Adela's letter dated
August 25, 1989 to a certain Candy, she advised the latter to stay in
the big house. Also, in petitioner's letter to her cousin Dennis dated
July 3, 1989, she admitted that Adela continued to be in charge of
the Properties; that she has no "say" when it comes to the Properties;
that she does not intend to claim exclusive ownership of Lot 35-B;
and that she is aware that the ownership and control of the Properties
are intended to be consolidated in Dennis.
c) The SPA executed on the same day as the Deeds of Absolute Sale
appointing petitioner as administratrix of Adela's properties,
including the Properties, is repugnant to petitioner's claim that the
ownership of the same had been transferred to her.
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 OBLIGATIONS AND CONTRACTS CASE DIGESTS
d) The previous sales of the Properties to Dennis and Carlos, Jr.
were simulated. This history, coupled with Adela's treatment of
petitioner, and the surrounding circumstances of the sales, strongly
show that Adela only granted petitioner the same favor she had
granted to Dennis and Carlos Jr.
REYES VS ASUNCION (TALON)
Facts:
= Petitioner is the owner of a parcel of land which forms part of the
Us Military Reserve
= She hired respondent to be the caretaker of the said property
= 1997: The Bases Conversion and Development Authority
launched a resettlement program for the victims of the Mt. Pinatubo
eruption and one of the property being considered is the petitioner’s
= To prevent it, petitioner created a contract with the respondent
transferring all her right of ownership to the respondent
= Thereafter, petitioner files a case of annulment of the said contract
stating that the contract is a simulated one because her main
intention is just to prevent the BCDA to convert her property to a
resettlement areas
Issue: WON there is simulation of contract
Held:
No.
The finding of the CA is correct when it ruled that petitioner failed
to present evidence to prove that respondent acted in bad faith or
fraud in procuring her signature or that he violated their real
intention, if any, in executing it, thus:
So far, appellant's averments evince an obvious knowledge and
voluntariness on her part to enter into the alleged simulated contract.
Without the slightest doubt, appellant, as plaintiff in the court
below, utterly foiled to adduce any evidence of appellee's bad faith
or fraud in procuring her signature to the contract or that he violated
their real intention, if any, in executing it. It must be stressed that
the determination of whether one acted in bad faith is evidentiary in
nature. Indeed, the unbroken jurisprudence is that "[b]ad faith [or
fraud] under the law cannot be presumed; it must be established by
clear and convincing evidence. The allegation of simulation of
contract as well as lack of consent and/or vitiated consent remains
to be proven. As it stands, We perceive that the contract by its very
terms and conditions, on June 15, 1993, appellant simply intended
to transfer the subject land to appellee. It is a cardinal rule that if the
terms of a contract are clear and leave no doubt as to the intention
of the contracting parties, the literal meaning of its stipulation shall
control
TANCHALING VS CANTELA (MILANA)
FACTS:
On March 17, 2005, spouses Tanchuling and Cantela executed the
subject deed covering 2 parcels of land both with areas of 192 sqm
denominated as lots 5 and 6 of block 1, situated in Rawis, Legazpi
City. On the subject deed, the sum of P400, 000.00 appears as the
consideration for Cantela’s purported purchase of properties.
Sometime after the subject deed’s execution, Vicente delivered the
owner’s copies of the TCT’s to Cantela, although it is undisputed
that none of the parties are in actual possession of the properties.
When Spouses Tanchuling tried to recover the TCT’s from Cantela,
the latter refused despite the formers earnest demands prompting
them to file on August 6, 2007 a Complaint for Annulment of Deed
of Sale and Delivery of the owner’s duplicate copy of the TCT’s
with Preliminary Prohibitory and Mandatory Injunction before the
18
THIRD EXAM
Regional Trial Court. They alleged that the subject deed was
absolutely simulated, hence null and void, given that:
a.) there was no actual consideration paid by Cantela to them;
b.) the subject deed was executed to merely show to their
neighbors that they are the true owners of the property, considering
that there are portions thereof being illegally said by a certain John
Mercado to unsuspecting and ignorant buyers;
c.) Cantela simultaneously executed an undated deed of
absolute sale (undated deed) reconveying the properties in their
favor.
In his answer with Compulsory Counterclaim dated February 10,
2008, Cantela insisted that the sale of the properties to him was valid
as he brought the same from Sps. Tanchuling for the price of P400,
000.00. He further averred that the undated deed was secretly
inserted by Sps. Tanchuling in the copies of the subject deed
presented to him for signing. Finally, he mentioned that when he
attempted to secure a tax declaration over the properties, he
discovered that they were posted as a property bond, and that he
later went to the Bureau of Internal Revenue to have the capital
gains tax computed.
Region Trial Court Ruling
On March 23, 2010, the RTC granted the complaint and
nullified the subject deed for being absolutely simulated. RTC
found that the parties never intended to be bound by the subject deed
in view of the simultaneous execution of the undated deed selling
back the properties to Sps Tanchuling, both of which contain
identical witnesses, signatures, community tax certificate details,
and letter-compositions, adding that Cantela himself admitted that
the signatures appearing on the face of the undated deed was his.
Dissatisfied, Cantela appealed to the CA.
Court of Appeals Ruling
On August 30, 2013, CA reversed the RTC ruling, finding
that the contemporaneous and subsequent acts of the parties,
particularly Cantela, who tried to assert his dominion over the
properties, negate absolute simulation. It also found consideration
of the sale when Sps. Tanchuling acknowledged receipt of sum of
P400,000.00 in the subject deed itself. Finally, it observed that the
subject deed should prevail over the undated deed as the former was
notarized and the latter was not.
ISSUE:
WON the subject deed is simulated, hence, null and void.
Supreme Court Ruling
The SC cited article 1345 of the new civil code which provides that:
“Simulation of contract may be absolute or relative. The former
takes place when the parties do not intend to be bound at all; the
latter when the parties conceal their true agreement”.
In this case, the court agrees with the RTC that the subject deed was
absolutely simulated. The parties never intended to be bound by any
sale agreement. Instead, the subject deed was executed merely as a
front to show the public that Sps. Tanchuling were the owners of the
properties in order to deter the group of John Mercado from illegally
selling the same. In addition, although the subject deed between Sps.
Tanchuling and Cantela stipulated a consideration of P400,000.00,
there was actually no exchange of money between them in
Vicente’s testimony which was corroborated by Navarro and Botero
who were present during the execution of the subject deed and the
undated deed. The court concludes that Sps. Tanchuling never
intended to transfer the properties to Cantela; hence the subject deed
was absolutely simulated and in consequence it is null and void.
MARTINEZ VS CA (CASTRES)
FACTS:
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 OBLIGATIONS AND CONTRACTS CASE DIGESTS

Sometime in February 1981, PR De la Paz, entered into as to the nature of petitioner’s right over the property. But he never
an oral contract with petitioner Martinez, with regards the sale of a talked to petitioner to verify the nature of his right. He merely relied
lot for the sum of P15,000.00. The owner of the lot was private on the assurance of PR Godofredo De la Paz, who was not even the
respondents’ mother who sold it to her daughter, PR Manuela. owner of the lot in question, that he would take care of the matter.
Petitioner has been residing on the said lot since 1981 and has This does not meet the standard of good faith.
already completed payment as of 1983. However, PR de la Paz 2. NO
never delivered the Deed of Sale to petitioner. Art. 1357 and Art. 1358, in relation to Art. 1403(2) of the Civil
In the meantime, PR De la Paz sold with a right to Code, requires that the sale of real property must be in writing for it
repurchase within one year the three lots (including the one to be enforceable. It need not be notarized. If the sale has not been
previously sold to petitioner) to PR Veneracion for the sum of put in writing, either of the contracting parties can compel the other
P150,000.00. The spouses Veneracion never took actual possession to observe such requirement. This is what petitioner did when he
of any of these lots during the period of redemption, but all titles to repeatedly demanded that a Deed of Absolute Sale be executed in
the lots were given to them. his favor by PR De la Paz. There is nothing in the above provisions
Before the expiration of the one year period, PR De la Paz which require that a contract of sale of realty must be executed in a
informed PR Veneracion that he was selling the three lots (including public document. In any event, it has been shown that private
the one sold to petitioner) to another person for P200,000.00. PR respondents Veneracion had knowledge of facts which would put
Veneracion offered to purchase the two lots for the same amount, them on inquiry as to the nature of petitioner’s occupancy of the
which was accepted by PR De La Paz. Accordingly, on 1983, a disputed lot.
Deed of Absolute Sale was executed over the two lots. Thus, the Court declared null and void the deed of sale
Sometime in 1984, PR Veneracion learned that petitioner’s mother executed by PR De la Paz in favor of PR Veneracion, ordered PR
was in possession of the building erected on the subject lot. Assured De la Paz to execute a deed of absolute sale in favor of petitioner
that PR De La Paz will talk to petitioner, PR Veneracion registered Martinez, and ordered PR De la Paz to reimburse PR Veneracion
the lots with the Register of Deeds. the amount the latter may have paid to the former.
Petitioner discovered that the lot he was occupying with
his family had been sold to PR Veneracion after receiving a letter TEOCO VS METRO BANK
from them, claiming ownership of the land and demanding that they
vacate the property and remove their improvements thereon.
Petitioner, in turn, demanded the execution of the deed of sale from
SPILLE VS NICORP (PEROY)
PR De la Paz and informed PR Veneracion that he was the owner
of the property as he had previously purchased the same from PR
FACTS: Petitioner Florentina is the registered owner of a parcel of
De la Paz.
land in Cavite. Petitioner & her husband, Harold, executed a
The RTC found PR Veneracion as the true owners of the
document denominated as “General Power of Attorney” in favor of
lot in dispute by virtue of their prior registration with the Register
petitioner’s brother, respondent Benjamin, authorizing him to
of Deeds, subject to petitioner’s rights as builder in good faith, and
administer all her businesses & properties in the Philippines.
ordering petitioner and his privies to vacate the lot after receipt of
the cost of the construction of the house.
Thereafter, Benjamin & NICORP entered into a contract to sell
The CA affirmed the decision of the RTC, declaring PR
pertaining to the aforementioned Cavite property. It was agreed that
Veneracion to be owners of the lot in dispute as they were the first
upon the receipt of the down payment, the TCT of the property
registrants in good faith, in accordance with Art. 1544 of the Civil
would be deposited with the International Exchange Bank (IE Bank)
Code. Also, it held that the sale between petitioner Martinez and PR
& would be placed in escrow, which would only be released upon
De la Paz was not notarized, as required by Arts. 1357 and 1358 of
full payment of the agreed amount.
the Civil Code, thus it cannot be said that the PR Veneracion had
knowledge of the first sale.
Benjamin was required by NICORP to submit a “Special Power of
ISSUES:
Attorney” covering the transaction, otherwise, the payment of the
1. Whether or not the spouses Veneracion are buyers in good
balance would be suspended, plus a penalty of P150,000 would be
faith of the lot in dispute.
imposed.
2. Whether or not the appellate court’s reliance on Arts.
1357 and 1358 of the Civil Code to determine PR Veneracions’ lack
Consequently, an Escrow Agreement was executed obliging IE
of knowledge of petitioner’s ownership of the disputed lot is correct.
Bank to hold & take custody of the TCT & to release the title to
RULING:
NICORP only upon full payment. NICORP issued a check for the
1. NO
down payment, thus the TCT was deposited with IE Bank & was
With regard to the first sale to PR Veneracion, PR Reynaldo
placed in escrow.
Veneracion testified that on October 10, 1981, 18 days before the
execution of the first Deed of Sale with Right to Repurchase, he
When petitioner discovered the sale, her lawyer immediately sent
inspected the premises and found it vacant. However, this is belied
demand letters to NICORP & Benjamin informing them that she
by the testimony of Engr. Minor, then building inspector of the
was opposing the sale and that Benjamin was not clothed with
DPWH, that he conducted on October 6, 1981 an ocular inspection
authority to enter into a contract to sell & demanding the return of
of the lot in dispute and found that the construction of the building
the owner’s copy of the Certificate of Title to her attorney-in-fact,
was 100% complete. In the absence of contrary evidence, he is to
to which, respondents failed & refused to do so.
be presumed to have regularly performed his official duty. Thus, as
early as October, 1981, PR Veneracion already knew that there was
ISSUE: Whether or not Benjamin was authorized to sell the subject
construction being made on the property they purchased.
property.
With regard to the second sale, PR Reynaldo Veneracion admitted
that petitioner was already in possession of the property in dispute
HELD: No.
at the time the second Deed of Sale was executed on 1983. The fact
that there are persons, other than the vendors, in actual possession
The general rule is that a power of attorney must be strictly
of the disputed lot should have put private respondents on inquiry
construed & courts will not infer or presume broad powers from
19
THIRD EXAM LLB-1 Estrellado
 OBLIGATIONS AND CONTRACTS CASE DIGESTS
deeds which do not sufficiently include property or any other
subject under which the agent is to deal. When the authority is
couched in general terms, without mentioning any specific power to
sell or mortgage or to do other specific acts of strict dominion, only
acts of administration are deemed conferred.
The only evidence adduced by respondent NICORP herein was the
document denominated as “General Power of Attorney”, and
nowhere in the GPA was Benjamin granted any power to sell the
subject property. The authority expressed in the GPA was couched
in very broad terms covering petitioner’s businesses & properties.
Time & again, the Court has stressed that the power of
administration does not include acts of disposition which are acts of
strict ownership. The authority to dispose cannot proceed from an
authority to administer & vice versa.
BITTE VS JONAS (OTAZA)
Facts: On July 19, 1985, before Rosa Elsa went to Australia, she
had executed a Special Power of Attorney (SPA) authorizing her
mother, Andrea C. Serrano (Andrea), to sell the property.
Sometime in May 1996, Cipriano Serrano (Cipriano), son of Andrea
and brother of Rosa Elsa, offered the property for sale to Spouses
Benjamin and Farida Yap Bitte (Spouses Bitte) showing them the
authority of Andrea. On September 3, 1996, Cipriano received from
Spouses Bitte the amount of ₱200,000.00 as advance payment for
the property. Later on, on September 10, 1996, he received the
additional amount of ₱400,000.00.
Spouses Bitte sought a meeting for final negotiation with Rosa Elsa,
the registered owner of the subject property. At that time, Rosa Elsa
was in Australia and had no funds to spare for her travel to the
Philippines. To enable her to come to the country, Spouses Bitte
paid for her round trip ticket.
On October 10, 1996, shortly after her arrival here in the
Philippines, Rosa Elsa revoked the SPA, through an instrument of
even date, and handed a copy thereof to Andrea.
The next day, on October 11, 1996, the parties met at Farida Bitte’s
office, but no final agreement was reached. The next day, Rosa Elsa
withdrew from the transaction.
On October 17, 1996, Spouses Bitte filed before the RTC a
Complaint for Specific Performance with Damages seeking to
compel Rosa Elsa, Andrea and Cipriano to transfer to their names
the title over the subject property.
While the case was pending, Andrea sold the subject property to
Spouses Bitte, through a deed of absolute sale, dated February 25,
1997, and notarized by one Atty. Bernardino Bolcan, Jr.
Immediately thereafter, Rosa Elsa asked Andrea about the sale. Her
questions about the sale, however, were ignored and her pleas for
the cancellation of the sale and restoration of the property to her
possession were disregarded.
Undisputed by the parties is the fact that Rosa Elsa earlier
mortgaged the subject property to Mindanao Development Bank.
Upon failure to pay the loan on maturity, the mortgage was
foreclosed and sold at a public auction on December 14, 1998 as
evidenced by the annotation on the title, Entry No. 1173153.5
Armed with the deed of absolute sale executed by Andrea, Spouses
Bitte were able to redeem the property on September 14, 1998 from
the highest bidder, Thelma Jean Salvana, for P1.6 Million Pesos.
Thereafter, Spouses Bitte sold the property to Ganzon Yap
(Ganzon), married to Haima Yap.
On May 26, 2000 RTC branch finds the need to consolidate the 2
civil cases.
In a Joint decision by the RTC on January 18, 2007 RTC Dismissed
Civil case and directed Spouses Bitte to pay Rosa Elsa the Amount
of 1,546,752.80 representing the balance of the sale of the subject
property.
20
THIRD EXAM
Aggrieved by the decision of the RTC Spouses Jonas appeled to the
CA
September 26, 2013 the CA reversed the ruling of the RTC. In the
ruling, the CA focused on the validity
Aggrieved, Spouses Jonas appealed to the CA. On September 26,
2013, the CA reversed the RTC-Branch 13 Joint Decision. In so
ruling, the CA focused on the validity and enforceability of the deed
of absolute sale executed by Andrea in the name of Rosa Elsa. The
CA explained:
1. Andrea’s execution on behalf of Rosa Elsa of the deed of absolute
sale in favor of Spouses Bitte was void and unenforceable as the
authority to represent Rosa Elsa had already been revoked as early
as October 10, 1996. Without the authority to effect the conveyance,
the contract was without effect to Rosa Elsa, who was a stranger to
the conveyance in favor of Spouses Bitte. Rosa Elsa did not consent
to the transaction either.
2. Considering that no valid conveyance was effected, Spouses Bitte
had no right to redeem the foreclosed property because they were
not among those persons who could redeem a property under Sec. 6
of Act. No. 3135 and Section 27 of Rule 39 of the Rules of Court.
They could not be considered successors-in-interest or transferees
because no right was conveyed by Rosa Elsa on account of the
revocation of the authority given to Andrea.
3. Ganzon, the one who subsequently purchased the property from
Spouses Bitte, was not an innocent purchaser of the property as the
conveyance was attended with circumstances which should have
alerted him of the fallibility of the title over the property. Ganzon
transacted with Spouses Bitte, who were then not yet the registered
owners of the property. He should have made inquiries first as to
how Spouses Bitte acquired the rights over the property.
Supreme Court ruled in this case
1. The Genuineness and Due Execution of the Deed of Sale
in favor of Spouses Bitte were not proven
The Court agrees with the CA that the genuineness and due
execution of the deed of sale in favor Spouses Bitte were not
established. Indeed, a notarized document has in its favor the
presumption of regularity. Nonetheless, it can be impugned by
strong, complete and conclusive proof of its falsity or nullity on
account of some flaws or defects on the document.
In the case at bench, it is on record that the National Archives,
Records Management and Archives Office, Regional Archives
Division, Davao City, certified that it had no copy on file of the
Deed of Absolute Sale, dated February 25, 1997, sworn before Atty.
Bernardino N. Bolcan, Jr., Their record shows that, instead, the
document executed on said date with exactly the same notarial
entries pertained to a Deed of Assignment of Foreign Letter of
Credit in favor of Allied Banking Corporation. irrefutable fact
rendered doubtful that the subject deed of absolute sale was
notarized.
Article 1358 of the New Civil Code requires that the form of a
contract transmitting or extinguishing real rights over immovable
property should be in a public document. Pertinently, Section 19,
Rule 132 of the Rules of Court reads:
Section 19 Classes of documents.- For the purposes of their
presentation in evidence, documents are either public or private.
Public documents are:
(a) The written official acts, or records of the official acts of the
sovereign authority, official bodies and tribunals, and public
officers, whether of the Philippines, or of a foreign country;
(b) Documents acknowledged before a notary public except last
wills and testaments; and
(c) Public records, kept in the Philippines, of private documents
required by law to be entered therein.
All other writings are private.
Not having been properly and validly notarized, the deed of sale
cannot be considered a public document. It is an accepted rule,
however, that the failure to observe the proper form does not render
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 OBLIGATIONS AND CONTRACTS CASE DIGESTS
the transaction invalid. It has been settled that a sale of real
property, though not consigned in a public instrument or formal
writing is, nevertheless, valid and binding among the parties, for the
time-honored rule is that even a verbal contract of sale or real estate
produces legal effects between the parties.19
Not being considered a public document, the deed is subject to the
requirement of proof under Section 20, Rule 132, which reads:
Section 20. Proof of private document.- Before any private
document offered as authentic is received in evidence its due
execution and authenticity must be proved either:
(a) By anyone who saw the document executed or written; or
(b) By evidence of the genuineness of the signature or handwriting
of
Accordingly, the party invoking the validity of the deed of absolute
sale had the burden of proving its authenticity and due execution.
Unfortunately, Spouses Bitte were declared as in default and, for
said reason, they failed to discharge such burden in the court below.
Thus, the Court agrees with the CA that the RTC erred in applying
the presumption of regularity that attaches only to duly notarized
documents as distinguished from private documents.
Without the presumption of regularity accorded to the deed coupled
with the default of the party relying much on the same, the purported
sale cannot be considered. It is as if there was no deed of sale
between Spouses Bitte and Spouses Jonas.
The genuineness and due execution of the deed of sale in favor of
Spouses Bitte not having been established, the said deed can be
considered non-existent.
Other topic still in the coverage of our exam:
“It is a basic axiom in civil law embodied in our Civil Code that no
one may contract in the name of another without being authorized
by the latter, or unless he has by law a right to represent him. A
contract entered into in the name of another by one who has no
authority or legal representation, or who has acted beyond his
powers, shall be unenforceable, unless it is ratified, expressly or
impliedly, by the person on whose behalf it has been executed,
before it is revoked by the other contracting party.”27 Considering
that the sale was executed by an agent whose authority, be it actual
or apparent, had been revoked, the transaction is unenforceable
pursuant to Article 1317 and 1403(1) of the Civil Code which read:
Article 1317. No one may contract in the name of another without
being authorized by the latter, or unless he has by law a right to
represent him.
A contract entered into in the name of another by one who has no
authority or legal representation, or who has acted beyond his
powers, shall be unenforceable, unless it is ratified, expressly or
impliedly, by the person on whose behalf it has been executed,
before it is revoked by the other contracting party. (1259a)
ART. 1403. The following contracts are unenforceable, unless they
are ratified:
(1) Those entered into the name of another person by one who
has been given no authority or legal representation, or who has acted
beyond his powers;
xxx. [Emphases Supplied]
Considering that the deed of absolute sale was executed at a time
when Spouses Bitte were deemed notified of the termination of the
agency, the sale must be treated as having been entered into by
Andrea in her personal capacity. One can sell only what one owns
or is authorized to sell, and the buyer can acquire no more right than
what the seller can transfer legally.28 Accordingly, Spouses Bitte
acquired no better title than what Andrea had over the property,
which was nil.
In sum, the deed of absolute sale executed by Andrea in favor of
Spouses Bitte is unenforceable against Rosa Elsa because of their
notice of the revocation of the agency.
BENTIR VS LEANDA AND LEYTE GULF TRADERS
21
THIRD EXAM
VILLEGAS VS ARJONA
MARTIRES VS CHUA (DEGALA)
Facts:
Subject of the instant controversy are twenty-four memorial lots
located at the Holy Cross Memorial Park in Barangay Bagbag,
Novaliches, Quezon City. On December 18, 1995, respondent
borrowed from petitioner spouses the amount of P150,000.00. The
loan was secured by a real estate mortgage over the abovementioned
property. Respondent committed to pay a monthly interest of 8%
and an additional 10% monthly interest in case of default.
Unfortunately, respondent failed to fully settle the obligation.
Subsequently, without foreclosure of the mortgage, ownership of
the subject lots were transferred in the name of petitioners via a
Deed of Transfer.
On June 23, 1997, respondent filed with the Regional Trial Court
(RTC) of Quezon City a Complaint against petitioners, praying for
the annulment of the contract of mortgage between her and
petitioners on the ground that the interest rates imposed are unjust
and exorbitant. On November 20, 1998, respondent moved for the
amendment of her complaint to include the allegation that she later
discovered that ownership of the subject lots were transferred in the
name of petitioners by virtue of a forged Deed of Transfer and
Affidavit of Warranty. Petitioners did not oppose respondent's
motion.
When the case was elevated in the Court of Appeals (CA), it ruled
in favor of the respondent. The mortgage entered by the parties was
an Equitable Mortgage. It held that the true intention of the
respondent was merely to provide a security for her loan and not to
transfer the ownership.
Issue: whether the CA erred in ruling that the Deed of Transfer
executed constitutes an Equitable Mortgage.
Ruling:
The Petition lacks merit. The Supreme Court finds no cogent reason
to depart from the findings of the CA that the agreement between
petitioners and respondent is, in fact, an equitable mortgage.
An equitable mortgage has been defined as 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, there being no
impossibility nor anything contrary to law in this intent.
One of the circumstances provided for under Article 1602 of the
Civil Code, where a contract shall be presumed to be an equitable
mortgage, is "where it may be fairly inferred that the real intention
of the parties is that the transaction shall secure the payment of a
debt or the performance of any other obligation." In the instant case,
it has been established that the intent of both petitioners and
respondent is that the subject property shall serve, as security for the
latter's obligation to the former.
Since the original transaction between the parties was a mortgage,
the subsequent assignment of ownership of the subject lots to
petitioners without the benefit of foreclosure proceedings, partakes
of the nature of a pactum commissorium, as provided for under
Article 2088 of the Civil Code.
Pactum commissorium is a stipulation empowering the creditor to
appropriate the thing given as guaranty for the fulfillment of the
obligation in the event the obligor fails to live up to his
undertakings, without further formality, such as foreclosure
proceedings, and a public sale.
Article 2088 of the Civil Code provides:
The creditor cannot appropriate the thing given by a way of pledge
or mortgage, or dispose them. Any stipulation to the contrary is null
and void.
ROMULO VS LAYUG (MILANA)
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 OBLIGATIONS AND CONTRACTS CASE DIGESTS
FACTS:
-April 11, 1996, petitioners Spouses Cesar and Nenita Romulo filed
a verified Complaint for Cancellation of Title, Annulment of Deed
of Absolute Sale and Contract of Lease with Damages against
respondents Spouses Moises and Felisarin Layug.
-This stemmed when Sps. Romulo obtained from respondents a loan
in the amount of P50,000.00 with a monthly interest of 10%, which
subsequently ballooned to P580,292.00. To secure the payment of
the loan, respondents allegedly duped petitioners into signing a
Contract of Lease and a Deed of Absolute Sale.
-So after which, the Deed of Absolute Sale purportedly facilitated
the cancellation of title in the name petitioners herein and an
issuance of a new TCT in the name or respondents Layug. Thus,
petitioners prayed for the nullification of the Deed of Absolute Sale,
the contract of lease and new TCT.
-Respondents denied petitioners’ allegations, they vouched for the
validity of the Deed of Absolute Sale, particularly as having been
voluntarily executed by the parties for the purpose of extinguishing
petitioners’ indebtedness to respondents. As consideration of the
sale, respondents allegedly paid the amount of P200,000.00 in
addition to the writing off of petitioners’ obligation to them. That
they allowed petitioners to occupy the house and lot as lessees
thereof was founded on the trust they reposed on petitioners,
claimed respondents.
* Prior to the filing of this instant case, respondent Moises Layug,
Jr. ("Moises") filed an action for ejectment, against petitioners to
compel the latter to vacate the house and lot allegedly sold by
petitioners to Moises and subsequently rented out by him to
petitioners. This was denied with finality by this Court for various
reasons among other things.
-Now, in the case at bar, RTC and CA had conflicting resolutions of
the case
-RTC ruled in favor of petitioners and that there was actually no
intent to sell the subject property herein but only an equitable
mortgage.
*The trial court based its declaration that an equitable mortgage was
intended by the parties on the finding that petitioners remained in
possession of the house and lot even after the property was
supposedly sold to respondents. The trial court also gave evidentiary
weight to the decisions of the MeTC and RTC dismissing the action
for ejectment in the prior Civil where both courts found that
petitioners neither vacated the property nor paid any rental even
after the execution of the Deed of Absolute Sale.
-CA ruled in favor of the respondents
* Court of Appeals disagreed and declared that an
absolute sale was contemplated by the parties based on the express
stipulations in the Deed of Absolute Sale and on the acts of
ownership by respondents subsequent to its execution.
ISSUE:
In interpreting the contract, Whether or not the parties intended an
equitable mortgage or a sale.
RULING:
-The purported contract was an EQUITABLE MORTGAGE and
not a sale.
22
THIRD EXAM
-The form of the instrument cannot prevail over the true intent of
the parties as established by the evidence.
-SC have been ruling that in determining the nature of a contract,
courts are not bound by the title or name given by the parties. The
decisive factor in evaluating such agreement is the intention of the
parties, as shown not necessarily by the terminology used in the
contract but by their conduct, words, actions and deeds prior to,
during and immediately after execution of the agreement.
-In order to ascertain the intention of the parties, their
contemporaneous and subsequent acts should be considered.
-SC also noted that in case of doubt, a contract purporting to be a
sale with right to repurchase shall be construed as an equitable
mortgage.
- Respondents’ continuing to lend money to petitioners does not
make sense if the intention of the parties was really to extinguish
petitioners’ outstanding obligation.
*The logical and inevitable conclusion is that respondents
deemed it wise to formalize a security instrument on petitioners’
house and lot by executing the Deed of Absolute Sale after realizing
that petitioners could no longer fully satisfy their obligation to
respondents.
*For at that time, as petitioners were hard-pressed to come up with
funds to pay their loan. The preponderance of evidence shows that
they signed knowing that said documents did not express their real
intention, and if they did so notwithstanding this, it was due to the
urgent necessity of obtaining funds. "Necessitous men are not, truly
speaking, free men; but to answer a present emergency will submit
to any terms that the crafty may impose upon them." The
circumstances surrounding the execution of the Deed of Absolute
Sale, particularly the fact that respondents continued to extend some
loans to petitioners after its execution, precludes the Court from
declaring that the parties intended the transfer of the property from
one to the other by way of sale.
-Consistent with the foregoing state of the evidence, Articles 1604
and 1602 of the Civil Code come into play. The articles provide that
when the parties to a contract of sale actually intended such contract
to secure the payment of an obligation, it shall be presumed to be an
equitable mortgage:
Art. 1602. The contract shall be presumed to be an equitable
mortgage in any of the following cases:
2) When the vendor remains in possession as lessee or otherwise;
6) In any other case where it may be fairly inferred that the real
intention of the parties is that the transaction shall secure the
payment of a debt or the performance of any other obligation.
Art. 1604. The provisions of Article 1602 shall also apply to a
contract purporting to be an absolute sale.
-For the presumption of equitable mortgage to arise, two requisites
must be satisfied, namely:
1.) that the parties entered into a contract denominated as a contract
of sale
2.) that their intention was to secure an existing debt by way of
mortgage.
*Under Article 1604 of the Civil Code, a contract purporting to be
an absolute sale shall be presumed to be an equitable mortgage
should any of the conditions in Article 1602 be present.
-SC also held that, when in doubt, courts are generally inclined to
construe a transaction purporting to be a sale as an equitable
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 OBLIGATIONS AND CONTRACTS CASE DIGESTS
mortgage, which involves a lesser transmission of rights and
interests over the property in controversy.
-The purported contract was an EQUITABLE MORTGAGE and
not a sale.
-In the case at bar, petitioners remained in possession of the house
and lot even after the execution of the Deed of Absolute Sale.
Moreover, they remained in possession of the property for more
than the reasonable time that would suggest that petitioners were
mere lessees thereof.
*For one, it took respondents more than 5 years from the time of the
execution of the Deed of Absolute Sale and the Contract of Lease
to file the action for ejectment. Within this period, petitioners
neither paid any rental nor exercised the option to buy purportedly
the leased property from respondents.
-The claim that petitioners’ possession of the house and lot was by
sheer tolerance of respondents is specious. Respondents could not
explain why they allowed petitioners more than five years to look
for another place to transfer.
*These circumstances only support the conclusion that the parties
never really intended to transfer title to the property.
-Under paragraph 2 of Article 1602, where the purported vendor
remains in possession of the property subject of the sale and it can
be inferred that the true intention of the parties was to secure an
existing debt, the transaction shall be deemed an equitable
mortgage.
-Under paragraph 1 of Article 1602, where the purchase price is
inadequate, a contract of sale is also presumed to be an equitable
mortgage. Based on respondents’ evidence, petitioners’ property
was valued at P700,000.00 but the assailed Deed of Absolute Sale
stated a consideration of only P200,000.00
SECURITY BANK VS CA (DELFIN)
FACTS:
On October 23, 1991, SBC and PISA entered into a “Contract of
Security Services” (CSS) wherein PISA undertook to secure, guard,
and protect the personnel and property of SBC through the
deployment of qualified and properly equipped guards in SBC’s
premises and branches. A part of paragraph 9 of the CSS provides
that PISA shall be liable for any loss, damage or injury suffered by
[SBC], its officers, employees, clients, guests, visitors and other
persons allowed entry into SBC’s premises where such loss, damage
or injury is due to the negligence or willful act of the guards or
representatives of PISA.
On March 12, 1992, the Taytay Branch Office of SBC was robbed
PHP12,927,628.01. Among the suspects in the robbery were two
regular security guards of PISA.
At the time, SBC Taytay Branch was covered by a “Money,
Securities and Payroll Robbery Policy” with Liberty Insurance
Corporation (LIC), wherein the latter endeavored to indemnify the
former against “loss of money, payroll and securities that may result
from robbery or any attempt thereof within the premises of SBC’s
Taytay Branch Office, up to the maximum amount of
PHP9,900,000.00.” The insurance policy provided, however, that
LIC would not be liable if the loss was caused by any dishonest,
fraudulent or criminal act of SBC officers, employees or by its
authorized representative.
Subsequently, SBC and PISA entered into a Post-Robbery
Agreement (PRA) whereby PISA paid PHP3,027,728.01, which
was the difference between the total amount lost and the maximum
amount insured.
23
THIRD EXAM
Paragraph 5 of the PRA specifically states that PISA’s payment was
subject to express terms and conditions, one of which was that the
parties agree that the agreement and/or payment of the whole
amount of P3,027,728.01, shall not affect or prejudice, directly or
indirectly, whatever cause of action SBC may have against PISA
and whatever claim or defense the latter may have against SBC, if
the maximum recoverable proceeds of the insurance covering the
loss suffered by SBC could not be recovered from the insurer.
SBC filed a claim with LIC based on its existing insurance policy.
LIC denied the claim for indemnification on the ground that the loss
suffered by SBC fell under the general exceptions to the policy, in
view of the alleged involvement of PISA’s two security guards.
SBC informed PISA of the denial of the former’s insurance claim
with LIC and thereafter sought indemnification of the unrecovered
amount of PHP9,900,000.00. PISA denied the claim contending that
such claim is premature.
SBC filed a complaint for a sum of money against LIC based on the
“Money, Securities and Payroll Robbery Policy,” and against PISA
as an alternative defendant based on the CSS. SBC prayed that it be
indemnified by either one of the defendants for PHP9,900,000.00.
PISA filed a motion to dismiss, invoking paragraph 5 (e) of the PRA
and claimed that SBC’s right of action against PISA was subject to
at least two conditions. First, SBC could not recover the PHP9.9-
million from the insurer, defendant LIC; and second, the two
security guards facing criminal prosecution for robbery in band
must first be convicted and found to have been involved in the
robbery or otherwise found by a competent court to have been
negligent.
PISA concluded that SBC’s complaint against it was premature and
should be dismissed.
SBC opposed PISA’s motion to dismiss, arguing that the latter’s
interpretation of the PRA was erroneous.
RTC granted PISA’s motion, and dismissed the case. On appeal, the
Court of Appeals affirmed the dismissal.
ISSUE: WON the condition “could not be recovered from the
insurer” of the PRA requires final judgment against SBC’s claim for
indemnity against LIC. NO.
RULING:
Contrary to the interpretation of PISA to the condition “could not
be recovered from the insurer” requires final judgment. The SC held
that reading the clause as requiring a final judgment is a strained
interpretation and contrary to settled rules of interpretation of
contracts. Paragraph 5(e) only requires that the proceeds “could not
be recovered from the insurer,” and does not state that it should be
so declared by a court, or even with finality. In determining the
signification of terms, words are presumed to have been used in
their primary and general acceptance, and there was no evidence
presented to show that the words used signified a judicial
adjudication. Indeed, if the parties had intended the non-recovery to
be through a judicial and final adjudication, they should have stated
so. In its primary and general meaning, paragraph 5(e) would cover
LIC’s extrajudicial denial of SBC’s claim.
In sustaining PISA, the Court of Appeals relied on the argument that
paragraph 5(e) of the PRA was intended to benefit PISA. The
appellate court held that the phrase “could not be recovered from
the insurer” gives rise to doubt as to the intention of the parties, as
it is capable of two interpretations: either (1) the insurer rejects the
written demand for indemnification by the insured; or (2) a court
adjudges that the insurer is not liable under the policy. The Court of
Appeals then interpreted the antecedent circumstances prior to the
institution of Civil Case as manifesting SBC’s agreement to suspend
the filing of the suit against PISA until after the case against LIC
has been decisively terminated.
In contrary to CA’s interpretation, it seems clear that SBC’s suit
against LIC was not a mere afterthought after LIC had rejected its
claim. Rather, SBC exercised its right of action against PISA
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pursuant to paragraph 5(e) of the PRA. This interpretation is
consistent with settled canons of contract interpretation, has the
import that would make SBC’s right of action effectual, and would
yield the greatest reciprocity of interests. Indeed, the SC agree with
SBC that PISA’s interpretation of the clause would lead to an
effective waiver of SBC’s right of action, because to await the
judicial determination of the LIC suit may lead to the prescription
of SBC’s right of action against PISA.
Article 1373 of the Civil Code states that, if some stipulations of
any contract should admit of several meanings, it shall be
understood as bearing that import which is most adequate to render
it effectual. Also, Article 1374 states that the various stipulations of
a contract shall be interpreted together, attributing to the doubtful
ones that sense which may result from all of them taken jointly.
Lastly, Article 1378 of the Civil Code states that “when it is
impossible to settle doubts by the rules established in the preceding
articles, and the doubts refer to incidental circumstances of an
onerous contract, the doubt shall be settled in favor of the greatest
reciprocity of interests.”
The SC hold that SBC’s suit against PISA was not premature, and
the dismissal of the action as against PISA was improper.
CALANASAN VS DOLORITY (CASTRES)
FACTS:
Petitioner Cerila Calanasan, took care of her orphan niece,
respondent Evelyn Dolorita, since the latter was a child. In 1982,
when Evelyn was already married to respondent Virgilio Dolorita,
petitioner donated to Evelyn a parcel of land which had earlier been
mortgaged for Pl5,000.00. The donation was conditional: Evelyn
must redeem the land and petitioner should be entitled to possess
and enjoy the property as long as she lived. Evelyn signified her
acceptance of the donation and its terms in the same deed. Soon
thereafter, Evelyn redeemed the property, had the title of the land
transferred to her name, and granted the petitioner usufructuary
rights over the donated land.
On 2002, the petitioner, assisted by her sister Teodora
Calanasan, complained with the RTC that Evelyn had committed
acts of ingratitude against her. She prayed that her donation in favor
of her niece be revoked. In their answer, the respondents denied the
commission of any act of ingratitude.
The petitioner died while the case was pending with the RTC. Her
sisters, Teodora and Dolores Calanasan, substituted for her.
The RTC dismissed the complaint and held that Article
765 of the New Civil Code did not apply because the ungrateful acts
were committed against Teodora, the donor’s sister, and not against
the donor, the petitioner. Equally important, the perpetrator of the
ungrateful acts was not Evelyn, but her husband Virgilio.
The CA affirmed the RTC’s ruling but on a different legal
ground. The CA found that the donation was inter vivos and
onerous. Therefore, the deed of donation must be treated as an
ordinary contract and Article 765 of the New Civil Code finds no
relevance.
Before the SC, the petitioner insists that Evelyn
committed acts of ingratitude against her. She argues that, if the
donation was indeed onerous and was subject to the rules of
contracts, then greater reason exists to revoke it. Petitioner added
that Evelyn violated all the terms of the contract, especially the
provision enjoining the latter from acquiring ownership over the
property during the lifetime of the donor.
On the other hand, respondents point out that petitioner misleads the
Court in claiming that the deed of donation prohibited Evelyn from
acquiring ownership of the land. In fact, the deed of donation
confined the donation to only two conditions: 1) redemption of the
mortgage; and 2) the petitioner’s usufruct over the land as long as
she lived. The respondents complied with these conditions. Finally,
the respondents applaud the CA in finding that the donation, being
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THIRD EXAM
inter vivos and onerous, is irrevocable under Article 765 of the New
Civil Code.
ISSUE:
Whether or not the rules of contract will govern the
donation made by Cerila to Evelyn.
RULING:
YES
The Court in Republic of the Phils. v. Silim, classified
donations according to purpose. A pure/simple donation is the truest
form of donation as it is based on pure gratuity. The
remuneratory/compensatory type has for its purpose the rewarding
of the donee for past services, which services do not amount to a
demandable debt. A conditional/modal donation, on the other hand,
is a consideration for future services; it also occurs where the donor
imposes certain conditions, limitations or charges upon the donee,
whose value is inferior to the donation given. Lastly, an onerous
donation imposes upon the donee a reciprocal obligation; this is
made for a valuable consideration whose cost is equal to or more
than the thing donated.
The Court agreed with the CA that since the donation imposed on
the donee the burden of redeeming the property for P15,000.00, the
donation was onerous. As an endowment for a valuable
consideration, it partakes of the nature of an ordinary contract;
hence, the rules of contract will govern and Article 765 of the New
Civil Code finds no application with respect to the onerous portion
of the donation.
Insofar as the value of the land exceeds the redemption
price paid for by the donee, a donation exists, and the legal
provisions on donation apply. Nevertheless, despite the
applicability of the provisions on donation to the gratuitous portion,
the petitioner may not dissolve the donation. She has no factual and
legal basis for its revocation, as aptly established by the RTC. First,
the ungrateful acts were committed not by the donee; it was her
husband who committed them. Second, the ungrateful acts were
perpetrated not against the donor; it was the petitioner's sister who
received the alleged ill treatments. These twin considerations place
the case out of the purview of Article 765 of the New Civil Code.
FORTUNE MEDICARE VS AMORIN (TINAMPAY)
FACTS: David Robert U. Amorin (Amorin) was a
cardholder/member
of Fortune Medicare, Inc. (Fortune Care), a corporation engaged in
providing health maintenance services to its members. The terms of
Amorin's medical coverage were provided in a Corporate Health
Program Contract Health Care Contract) which was executed on
January 6, 2000 by Fortune Care and the House of Representatives,
where Amorin was a permanent employee.
While on vacation in Honolulu, Hawaii, United States of America
(U.S.A.) in May 1999, Amorin underwent an emergency surgery,
specifically appendectomy, at the St. Francis Medical Center,
causing him to incur professional and hospitalization expenses of
US$7,242.35 and US$1,777.79, respectively. He attempted to
recover from Fortune Care the full amount thereof upon his return
to
Manila, but the company merely approved a reimbursement of
P12,151.36, an amount that was based on the average cost of
appendectomy, net of medicare deduction, if the procedure were
performed in an accredited hospital in Metro Manila.
Amorin received under protest the approved amount, but asked for
its adjustment to cover the total amount of professional fees which
he
had paid, and eighty percent (80%) of the approved standard
charges based on "American standard", considering that the
emergency procedure occurred in the U.S.A. To support his claim,
Amorin cited Section 3, Article V on Benefits and Coverages of the
Health Care Contract, to wit:
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 OBLIGATIONS AND CONTRACTS CASE DIGESTS
A. EMERGENCY CARE IN ACCREDITED HOSPITAL.
Whether as an in-patient or
out-patient, the member shall be entitled to full coverage under the
benefits provisions
of the Contract at any FortuneCare accredited hospitals subject only
to the pertinent
provision of Article VII (Exclusions/Limitations) hereof. For
emergency care attended
by non affiliated physician (MSU), the member shall be reimbursed
80% of the
professional fee which should have been paid, had the member been
treated by an
affiliated physician. The availment of emergency care from an
unaffiliated physician
shall not invalidate or diminish any claim if it shall be shown to have
been reasonably
impossible to obtain such emergency care from an affiliated
physician.
B. EMERGENCY CARE IN NON-ACCREDITED HOSPITAL
1. Whether as an in-patient or out-patient, FortuneCare shall
reimburse the total
hospitalization cost including the professional fee (based on the
total approved
charges) to a member who receives emergency care in a non-
accredited hospital. The
above coverage applies only to Emergency confinement within
Philippine Territory.
However, if the emergency confinement occurs in a foreign
territory, Fortune
Care will be obligated to reimburse or pay eighty (80%) percent of
the approved
standard charges which shall cover the hospitalization costs and
professional
fees. x x x
Digests by: VIADA2015
3 to be construed strictly against the party which prepared the contract
Property of : Bea Reyes
Still, Fortune Care denied Amorin’s request, prompting the latter to
file a complaint for breach of contract with damages with the
Regional Trial Court.
For its part, Fortune Care argued that the Health Care Contract did
not cover hospitalization costs and professional fees incurred in
foreign countries, as the contract’s operation was confined to
Philippine territory. Further, it argued that its liability to Amorin
was
extinguished upon the latter’s acceptance from the company of the
amount of P12,151.36.
On May 8, 2006, the RTC of Makati rendered its Decision
dismissing
Amorin’s complaint. Citing Section 3, Article V of the Health Care
Contract.
In the absence of evidence to the contrary, the trial court considered
the amount of P12,151.36 already paid by Fortune Care to Amorin
as
equivalent to 80% of the hospitalization and professional fees
payable to the latter had he been treated in an affiliated hospital.
On September 27, 2010, the CA rendered its Decision granting the
appeal.
In so ruling, the appellate court pointed out that, first, health care
agreements such as the subject Health Care Contract, being like
insurance contracts, must be liberally construed in favor of the
subscriber. In case its provisions are doubtful or reasonably
susceptible of two interpretations, the construction conferring
coverage is to be adopted and exclusionary clauses of doubtful
import should be strictly construed against the provider. Second, the
CA explained that there was nothing under Article V of the Health
25
THIRD EXAM
Care Contract which provided that the Philippine standard should
be
used even in the event of an emergency confinement in a foreign
territory.
ISSUE: (1) Whether or not the phrase "approved standard charges"
is subject to interpretation, and that it did not automatically mean
"Philippine Standard"
(2) Whether or not the American Standard Cost shall be applied in
the payment of medical and hospitalization expenses and
professional fees incurred by the respondent.
HELD: The petition is bereft of merit.
The Court finds no cogent reason to disturb the CA’s finding that
Fortune Care’s liability to Amorin under the subject Health Care
Contract should be based on the expenses for hospital and
professional fees which he actually incurred, and should not be
limited by the amount that he would have incurred had his
emergency treatment been performed in an accredited hospital in
the
Philippines.
We emphasize that for purposes of determining the liability of a
health care provider to its members, jurisprudence holds that a
health
care agreement is in the nature of non-life insurance, which is
primarily a contract of indemnity. Once the member incurs hospital,
medical or any other expense arising from sickness, injury or other
stipulated contingent, the health care provider must pay for the same
to the extent agreed upon under the contract.
To aid in the interpretation of health care agreements, the Court laid
down the following guidelines in Philamcare Health Systems v. CA:
When the terms of insurance contract contain limitations on
liability, courts should
construe them in such a way as to preclude the insurer from non-
compliance with his
obligation. Being a contract of adhesion, the terms of an insurance
contract are
– the
insurer. By reason of the exclusive control of the insurance company
over the terms
and phraseology of the insurance contract, ambiguity must be
strictly interpreted
against the insurer and liberally in favor of the insured, especially
to avoid forfeiture.
This is equally applicable to Health Care Agreements. The
phraseology used in
medical or hospital service contracts, such as the one at bar, must
be liberally
construed in favor of the subscriber, and if doubtful or reasonably
susceptible
of two interpretations the construction conferring coverage is to be
adopted,
and exclusionary clauses of doubtful import should be strictly
construed
against the provider. (Citations omitted and emphasis ours)
In the instant case, the extent of Fortune Care’s liability to Amorin
under the attendant circumstances was governed by Section 3(B),
Article V of the subject Health Care Contract, considering that the
appendectomy which the member had to undergo qualified as an
emergency care, but the treatment was performed at St. Francis
Medical Center in Honolulu, Hawaii, U.S.A., a non-accredited
hospital.
The point of dispute now concerns the proper interpretation of the
phrase "approved standard charges", which shall be the base for the
allowable 80% benefit. The trial court ruled that the phrase should
be
interpreted in light of the provisions of Section 3(A), i.e., to the
extent
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 OBLIGATIONS AND CONTRACTS CASE DIGESTS
that may be allowed for treatments performed by accredited
physicians in accredited hospitals. As the appellate court however
held, this must be interpreted in its literal sense, guided by the
rule that any ambiguity shall be strictly construed against
Fortune Care, and liberally in favor of Amorin.
The Court agrees with the CA. As may be gleaned from the Health
Care Contract, the parties thereto contemplated the possibility of
emergency care in a foreign country. As the contract recognized
Fortune Care’s liability for emergency treatments even in foreign
territories, it expressly limited its liability only insofar as the
percentage of hospitalization and professional fees that must be paid
or reimbursed was concerned, pegged at a mere 80% of the
approved standard charges.
The word "standard" as used in the cited stipulation was vague and
ambiguous, as it could be susceptible of different meanings. Plainly,
the term "standard charges" could be read as referring to the
"hospitalization costs and professional fees" which were
specifically
cited as compensable even when incurred in a foreign country.
Contrary to Fortune Care’s argument, from nowhere in the Health
Care Contract could it be reasonably deduced that these "standard
charges" referred to the "Philippine standard", or that cost which
would have been incurred if the medical services were performed in
an accredited hospital situated in the Philippines. The RTC ruling
that
the use of the "Philippine standard" could be inferred from the
provisions of Section 3(A), which covered emergency care in an
accredited hospital, was misplaced. Evidently, the parties to the
Health Care Contract made a clear distinction between emergency
care in an accredited hospital, and that obtained from a
nonaccredited
hospital.1âwphi1 The limitation on payment based on
"Philippine standard" for services of accredited physicians was
Digests by: VIADA2015
4 from the Far East Bank and Trust company, now Bank of Philippine
Property of : Bea Reyes
expressly made applicable only in the case of an emergency care in
an accredited hospital.
The proper interpretation of the phrase "standard charges" could
instead be correlated with and reasonably inferred from the other
provisions of Section 3(B), considering that Amorin’s case fell
under
the second case, i.e., emergency care in a non-accredited hospital.
Rather than a determination of Philippine or American standards,
the
first part of the provision speaks of the full reimbursement of "the
total
hospitalization cost including the professional fee (based on the
total
approved charges) to a member who receives emergency care in a
non-accredited hospital" within the Philippines. Thus, for
emergency
care in non-accredited hospitals, this cited clause declared the
standard in the determination of the amount to be paid, without any
reference to and regardless of the amounts that would have been
payable if the treatment was done by an affiliated physician or in an
affiliated hospital. For treatments in foreign territories, the only
qualification was only as to the percentage, or 80% of that payable
for treatments performed in non-accredited hospital.
All told, in the absence of any qualifying word that clearly limited
Fortune Care's liability to costs that are applicable in the
Philippines,
the amount payable by Fortune Care should not be limited to the
cost
of treatment in the Philippines, as to do so would result in the clear
disadvantage of its member. If, as Fortune Care argued, the
premium
26
THIRD EXAM
and other charges in the Health Care Contract were merely
computed on assumption and risk under Philippine cost and, that the
American cost standard or any foreign country's cost was never
considered, such limitations should have been distinctly specified
and clearly reflected in the extent of coverage which the company
voluntarily assumed. This was what Fortune Care found appropriate
when in its new health care agreement with the House of
Representatives, particularly in their 2006 agreement, the provision
on emergency care in non-accredited hospitals was modified to read
as follows:
However, if the emergency confinement occurs in a foreign
territory, Fortunecare will
be obligated to reimburse or pay one hundred (100%) percent under
approved
Philippine Standard covered charges for hospitalization costs and
professional fees
but not to exceed maximum allowable coverage, payable in pesos at
prevailing
currency exchange rate at the time of availment in said territory
where he/she is
confined. x x
Settled is the rule that ambiguities in a contract are interpreted
against the party that caused the ambiguity. "Any ambiguity in a
contract whose terms are susceptible of different interpretations
must be read against the party who drafted it.
ST. RAPHAEL MONTESSORI SCHOOL VS BPI (PUERIN)
FACTS:
Spouses Rolando and Josefina Andaya (Sps. Andaya) are the
President and Vice-President, respectively, of St. Raphael
Montessori, Inc. (St. Raphael). From 1994 to 1998, the Spouses
Andaya obtained a loan for themselves and on behalf of St. Raphael,
Islands (BPI). As security for the loan, they executed real estate
mortgages over a parcel of land covered by Transfer Certificate of
Title (TCT) No. T-45006.4 They, however, defaulted on their
obligation and thus, BPI extrajudicially foreclosed the mortgaged
property.
A Certificate of Sale was then issued and annotated at the back of
TCT No. 45006. When the mortgagors failed to redeem the subject
property, BPI executed an Affidavit of Consolidation and TCT No.
T-1757407 was issued in its name. On March 15, 2005, upon
petition by BPI, the court a quo issued a Writ of Possession8
ordering the sheriff to place the subject property and all its
improvements thereon, in possession of the same.
The Spouses Andaya asked for deferment of the implementation of
the writ of possession and executed for themselves and on behalf of
St. Raphael an Undertaking wherein they: (i) acknowledged BPI's
ownership of the property; (ii) promised to vacate the premises and
remove all movables from the same on or before September 23,
2005; (iii) promised to voluntarily and peacefully surrender the
property in favor of the rightful owner BPI without the necessity of
any demand on or before September 23, 2005; and (iv) pledged not
to take advantage of the accommodation extended to them to secure
any remedy from the courts. BPI, thus, deferred the implementation
of the writ to September 23, 2005 and upon the lapse thereof even
extended for another 60 days or until November 23, 2005 the
implementation of the writ.
The Spouses Andaya, however, failed to vacate the subject property.
Despite BPI's reminder of their commitment to surrender possession
of the property without further need of demand, the Spouses Andaya
refused to turn over its possession.
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 OBLIGATIONS AND CONTRACTS CASE DIGESTS

ISSUE:
Whether or not St. Raphael (petitioner) was not a party to the real
estate mortgage between Spouses Andaya and BPI?
Whether or not the mortgage does not include the building allegedly
owned by St. Raphael Montessori?

RULING:

The ruling of the court a quo that St. Raphael was a mere stranger
to the case between the Spouses Andaya and BPI and that it entered
into possession of the property before the suit began is not supported
by evidence on record. On the contrary, the record before us reveals
that St. Raphael is a party to the mortgage agreement since the real
estate mortgages show that it obtained credit accommodations from
BPI through the spouses Josefina and Rolando Andaya who arc its
president and vice-president, respectively. The fact that a mortgage
was executed in favor of St. Raphael is likewise annotated at the
back of TCT No. T-45006. Moreover, the undertaking executed by
the Spouses Andaya reveals that they affixed their respective
signatures therein in their capacity as President and Vice-President
of St. Raphael. These clearly show that St. Raphael is privy to the
dealings between the Spouses Andaya and BPI and thus belie that it
is a mere stranger to the case.

Finally, the real estate mortgage agreement entered into by BPI and
the Spouses Andaya is the law between them. Suffice it to say that
in all of the real mortgage agreements executed by BPI and the
Spouses Andaya in favor of St. Raphael, it was clearly and
commonly stipulated that the parties intend to include the
improvements or buildings erected or to be erected in the subject
lot, to wit:
x x x the MORTGAGOR does hereby transfer and convey by way
of mortgage unto to MORTGAGEE, its successors or assigns, the
parcel of land which are described in the list inserted on the back of
this document and/or appended hereto, together with all the
buildings and improvements now existing or which may hereafter
be erected or constructed thereon, of which the MORTGAGOR
declares that he/it is the absolute owner free from lien and
encumbrances. x x x
It is a cardinal rule in the interpretation of a contract that if its terms
are clear and leave no doubt on the intention of the contracting
parties, the literal meaning of its stipulation shall control. In the
absence of proof that the parties intended otherwise, we will not
delve to interpret the terms of the contract which are unequivocal as
to the intention of the parties.

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