CIV LAW REVIEW - OBLICON DIGESTS
determining culpability. The terms and conditions surrounding the
1. GENERAL PROVISIONS ON OBLIGATIONS (ARTS. 1156-1162)
1.4 SOURCES issuance of the checks are also irrelevant.”
EMMA P. NUGUID V. CLARITA S. NICDAO
G.R. No. 150785, September 15, 2006
FACTS:
 Accused Clarita S. Nicdao is charged with having
committed 14 counts of Violation of BP 22. The criminal
complaints allege that sometime in 1996, from April to August
thereof, Nicdao and her husband of Vignette Superstore
approached Nuguid and asked her if they could borrow money
to settle some obligations. Having been convinced by them and
because of the close relationship of respondent to petitioner, the
latter lent the money. Thus, every month, she was persuaded to
release P100k to the accused until the total amount reached
P1.15M.
 As security, respondent gave petitioner 14 open dated
Hermosa Savings Bank checks with the assurance that if the
entire amount is not paid within 1 year, petitioner can deposit
the checks.
 In June 1997, petitioner together with Samson Ching
demanded payment of the sums, but respondent refused to
acknowledge the indebtedness. Thus, petitioner deposited all
the checks in the bank of Samson Ching totaling P1.15M since
all the money given by her to respondent came from Samson
Ching. The checks were all returned for having been drawn
against insufficient funds (DAIF).
 A verbal and written demand was made upon respondent,
but to no avail. Hence, a complaint for violation of BP 22 was
filed against respondent.
 MTC found respondent guilty of the charges against her.
RTC affirmed. CA reversed the decision of the lower courts and
acquitted respondent.
ISSUE: WON respondent remains civilly liable for the sum of
P1,150,000?
HELD: NO. From the standpoint of its effects, a crime has a dual
character: (1) as an offense against the State because of the
disturbance of the social order and (2) as an offense against the
private person injured by the crime unless it involves the crime of
treason, rebellion, espionage, contempt and others (wherein no civil
liability arises on the part of the offender either because there are no
damages to be compensated or there is no private person injured by
the crime). What gives rise to the civil liability is really the
obligation of everyone to repair or to make whole the damage caused
to another by reason of his act or omission, whether done
intentionally or negligently and whether or not punishable by law.
Extinction of penal action does not carry with it the eradication of
civil liability, unless the extinction proceeds from a declaration in
the final judgment that the fact from which the civil liability might
arise did not exist.
On one hand, as regards the criminal aspect of a violation of BP 22,
suffice it to say that: “the gravamen of BP 22 is the act of making
and issuing a worthless check or one that is dishonored upon its
presentment for payment [and] the accused failed to satisfy the
amount of the check or make arrangement for its payment within 5
banking days from notice of dishonor. The act is malum prohibitum,
pernicious and inimical to public welfare. Laws are created to
achieve a goal intended to guide and prevent against an evil or
mischief. Why and to whom the check was issued is irrelevant in
On the other hand, the basic principle in civil liability ex delicto is
that every person criminally liable is also civilly liable, crime being
one of the five sources of obligations under the Civil Code. A person
acquitted of a criminal charge, however, is not necessarily civilly
free because the quantum of proof required in criminal prosecution
(proof beyond reasonable doubt) is greater than that required for
civil liability (mere preponderance of evidence). In order to be
completely free from civil liability, a person’s acquittal must be
based on the fact that he did not commit the offense. If the acquittal
is based merely on reasonable doubt, the accused may still be held
civilly liable since this does not mean he did not commit the act
complained of. It may only be that the facts proved did not constitute
the offense charged.
Acquittal will not bar a civil action in the following cases: (1) where
the acquittal is based on reasonable doubt as only preponderance of
evidence is required in civil cases; (2) where the court declared the
accused’s liability is not criminal but only civil in nature and (3)
where the civil liability does not arise from or is not based upon the
criminal act of which the accused was acquitted.
In this petition, we find no reason to ascribe any civil liability to
respondent. As found by the CA, her supposed civil liability had
already been fully satisfied and extinguished by payment. The
statements of the appellate court leave no doubt that respondent,
who was acquitted from the charges against her, had already
been completely relieved of civil liability:
Petitioner admitted having received cash payments from petitioner
on a daily basis but argues that the same were applied to interest
payments only. It however appears that petitioner was charging
respondent with an exorbitant rate of interest. In any event, the cash
payments made were recorded at the back of the cigarette cartons by
petitioner in her own handwriting as testified to by respondent and
her employees. Indeed, the daily cash payments reveal that
respondent had already paid her obligation to petitioner in the
amount of P5.78M and that she stopped making further payments
when she realized that she had already paid such amount.
Moreover, we find no evidence was presented by the prosecution to
prove that there was a stipulation in writing that interest will be paid
by respondent on her loan obligations, as required under Article
1956 of the Civil Code.
The obligation of respondent has already been extinguished long
before the encashment of the subject checks. A check is said to
apply for account only when there is still a pre-existing obligation. In
the case at bench, the pre-existing obligation was extinguished after
full payment was made by respondent.
2. PRESTATIONS (ARTS. 1163-1168)
2.3 CONSEQUENCES OF FAILURE TO COMPLY W/
PRESTATION
BUENAVENTURA ANGELES V. URSULA TORRES
CALASANZ
G.R. No. L-42283 March 18, 1985
FACTS:
CIV LAW REVIEW - OBLICON DIGESTS
 Ursula Torres Calasanz and Tomas Calasanz entered into a
contract to sell a piece of land with Buenaventura Angeles and
Teofila Juani for the amount of P3,920.00 plus 7% interest per
annum. Angeles & Juani made a downpayment of P392.00 upon
the execution of the contract. They promised to pay the balance
in monthly installments of P 41.20 until fully paid, the
installments being due and payable on the 19th day of each
month. Angeles & Juani paid the monthly installments until July
1966, when their aggregate payment already amounted to
P4,533.38. On numerous occasions, the defendants (Calsanz)
accepted and received delayed installment payments from the
plaintiffs (Angeles & Juani).
 In 1966, the defendants-appellants wrote the plaintiffs a
letter requesting the remittance of past due accounts. Defendants
cancelled the said contract because the plaintiffs failed to meet
subsequent payments. The plaintiffs' letter with their plea for
reconsideration of the said cancellation was denied by the
defendants
 The plaintiffs filed Civil Case to compel the defendants to
execute in their favor the final deed of sale alleging inter alia
that after computing all subsequent payments for the land in
question, they found out that they have already paid the total
amount of P4,533.38 including interests, realty taxes and
incidental expenses for the registration and transfer of the land.
 The defendants alleged that the plaintiffs violated par. 6 of
the contract to sell when they failed to pay and/or offer to pay
the monthly installments corresponding to the month of August
1966 for more than 5 months, thereby constraining the
defendants-appellants to cancel the said contract.
ISSUE: WON the contract to sell has been validly cancelled by the
defendants?
HELD: NO. Article 1191 is explicit. In reciprocal obligations, either
party the right to rescind the contract upon the failure of the other to
perform the obligation assumed thereunder. Moreover, there is
nothing in the law that prohibits the parties from entering into an
agreement that violation of the terms of the contract would cause its
cancellation even without court intervention.
Well settled is, however, the rule that a judicial action for the
rescission of a contract is not necessary where the contract provides
that it may be revoked and cancelled for violation of any of its terms
and conditions. The rule is that it is not always necessary for the
injured party to resort to court for rescission of the contract when the
contract itself provides that it may be rescinded for violation of its
terms and conditions, was qualified by this Court in University of the
Philippines v. De los Angeles: “Of course, it must be understood that
the act of a party in treating a contract as cancelled or resolved on
account of infractions by the other contracting party must be made
known to the other and is always provisional, being ever subject to
scrutiny and review by the proper court. If the other party denies that
rescission is justified, it is free to resort to judicial action in its own
behalf, and bring the matter to court. Then, should the court, after
due hearing, decide that the resolution of the contract was not
warranted, the responsible party will be sentenced to damages; in the
contrary case, the resolution will be affirmed, and the consequent
indemnity awarded to the party prejudiced. In other words, the
party who deems the contract violated may consider it resolved
or rescinded, and act accordingly, without previous court action,
but it proceeds at its own risk. For it is only the final judgment
of the corresponding court that will conclusively and finally
settle whether the action taken was or was not correct in law.
The right to rescind the contract for non-performance of one of its
stipulations, therefore, is not absolute. The general rule is that
rescission of a contract will not be permitted for a slight or
casual breach, but only for such substantial and fundamental
breach as would defeat the very object of the parties in making
the agreement.
The breach of the contract adverted to by the defendants is so slight
and casual when we consider that apart from the initial
downpayment of P392.00 the plaintiffs had already paid the monthly
installments for a period of almost 9 years. In other words, in only a
short time, the entire obligation would have been paid. To sanction
the rescission made by the defendants-appellants will work injustice
to the plaintiffs and would unjustly enrich the defendants.
We agree with the plaintiffs that when the defendants, instead of
availing of their alleged right to rescind, accepted and received
delayed payments of installments, though the plaintiffs have been in
arrears beyond the grace period mentioned in paragraph 6 of the
contract, the defendants waived and are now estopped from
exercising their alleged right of rescission.
Plaintiffs contend that the contract herein is a contract of adhesion.
We agree. The contract to sell entered into by the parties has some
characteristics of a contract of adhesion. The defendants drafted and
prepared the contract. The plaintiffs, eager to acquire a lot upon
which they could build a home, affixed their signatures and assented
to the terms and conditions of the contract. They had no opportunity
to question nor change any of the terms of the agreement. It was
offered to them on a "take it or leave it" basis.
While generally, stipulations in a contract come about after
deliberate drafting by the parties thereto, there are certain contracts
almost all the provisions of which have been drafted only by one
party, usually a corporation. Such contracts are called contracts of
adhesion, because the only participation of the party is the signing of
his signature or his "adhesion" thereto. Insurance contracts, bills of
lading, contracts of sale of lots on the installment plan fall into this
category.
The contract to sell, being a contract of adhesion, must be construed
against the party causing it.
ADELFA S. RIVERA V. FIDELA DEL ROSARIO
G.R. No. 144934. January 15, 2004
FACTS:
 Respondents Fidela, et al. were the registered owners of a
parcel of land. Fidela borrowed P250k from Mariano Rivera and
to secure the loan, she and Mariano Rivera agreed to execute a
deed of REM and an agreement to sell the land. Mariano went to
his lawyer to have 3 documents drafted: the Deed of REM, a
Kasunduan (Agreement to Sell), and a Deed of Absolute Sale.
 The Kasunduan provided that the children of Mariano
Rivera, herein petitioners, would purchase the land for a
consideration of P2M, to be paid in 3 installments. It also
provided that the Deed of Absolute Sale would be executed only
after the 2nd installment is paid and a postdated check for the last
installment is deposited with Fidela.
 Mariano Rivera then went to his lawyer bringing with him
the signed documents. He also brought Fidela and her son
Oscar, so that the latter two may sign the mortgage and the
CIV LAW REVIEW - OBLICON DIGESTS
Kasunduan there. Although Fidela intended to sign only the
Kasunduan and the REM, she inadvertently affixed her
signature on all 3 documents. Mariano then gave Fidela the
amount for the 1st installment. Later, he also gave Fidela a check
for the 2nd installment. Mariano also gave Oscar several amounts
upon the latter’s demand for the payment of the balance despite
his lack of authority to receive payments under the Kasunduan.
Fidela entrusted the owner’s copy of TCT to Mariano to
guarantee compliance with the Kasunduan.
 When Mariano unreasonably refused to return the TCT,
respondents caused the annotation on TCT of an Affidavit of
Loss of the owner’s duplicate copy of the title. However,
Mariano then registered the Deed of Absolute Sale and got a
new TCT.
 Respondents then filed a complaint asking that the
Kasunduan be rescinded for failure of the Riveras to comply
with its conditions, with damages. They also sought the
annulment of the Deed of Absolute Sale on the ground of fraud.
 Respondents claimed that Fidela never intended to enter
into a deed of sale at the time of its execution and that she
signed the said deed on the mistaken belief that she was merely
signing copies of the Kasunduan.
ISSUE: WON the Deed of Absolute Sale is valid and binding?
HELD: NO. The deed is void in its entirety.
Rescission of reciprocal obligations under Article 1191 of the New
Civil Code should be distinguished from rescission of contracts
under Article 1383 of the same Code. Both presuppose contracts
validly entered into as well as subsisting, and both require mutual
restitution when proper, nevertheless they are not entirely identical.
While Article 1191 uses the term rescission, the original term used in
Article 1124 of the old Civil Code, from which Article 1191 was
based, was resolution. Resolution is a principal action that is based
on breach of a party, while rescission under Article 1383 is a
subsidiary action limited to cases of rescission for lesion under
Article 1381 of the New Civil Code.
Obviously, the Kasunduan does not fall under any of those situations
mentioned in Article 1381. Consequently, Article 1383 is
inapplicable. Hence, we rule in favor of the respondents.
May the contract entered into between the parties, however, be
rescinded based on Article 1191? A careful reading of the
Kasunduan reveals that it is in the nature of a contract to sell, as
distinguished from a contract of sale. In a contract of sale, the title
to the property passes to the vendee upon the delivery of the thing
sold; while in a contract to sell, ownership is, by agreement, reserved
in the vendor and is not to pass to the vendee until full payment of
the purchase price. In a contract to sell, the payment of the purchase
price is a positive suspensive condition, the failure of which is not a
breach, casual or serious, but a situation that prevents the obligation
of the vendor to convey title from acquiring an obligatory force.
Respondents in this case bound themselves to deliver a deed of
absolute sale and clean title covering Lot No. 1083-C after
petitioners have made the second installment. This promise to sell
was subject to the fulfillment of the suspensive condition that
petitioners pay P750,000 on August 31, 1987, and deposit a
postdated check for the third installment of P1M. Petitioners,
however, failed to complete payment of the second installment. The
non-fulfillment of the condition rendered the contract to sell
ineffective and without force and effect. It must be stressed that the
breach contemplated in Article 1191 of the New Civil Code is the
obligor’s failure to comply with an obligation already extant, not a
failure of a condition to render binding that obligation. Failure to
pay, in this instance, is not even a breach but an event that prevents
the vendor’s obligation to convey title from acquiring binding force.
Hence, the agreement of the parties in the instant case may be set
aside, but not because of a breach on the part of petitioners for
failure to complete payment of the second installment. Rather, their
failure to do so prevented the obligation of respondents to convey
title from acquiring an obligatory force.
Coming now to the matter of prescription. Contrary to petitioners’
assertion, we find that prescription has not yet set in. Article 1391
states that the action for annulment of void contracts shall be brought
within four years. This period shall begin from the time the fraud or
mistake is discovered. Here, the fraud was discovered in 1992 and
the complaint filed in 1993. Thus, the case is well within the
prescriptive period.
SPOUSES BARREDO V. SPOUSES LEAÑO
[G.R. No. 156627. June 4, 2004]
FACTS:
 Barredo Spouses bought a house and lot with the proceeds
of a P50k loan from the SSS which was payable in 25 years and
an P88k loan from the Apex Mortgage and Loans Corporation
which was payable in 20 years. To secure the twin loans, they
executed a first mortgage over the house and lot in favor of SSS
and a second one in favor of Apex.
 Barredo Spouses later sold their house and lot to
respondents Spouses Leaño by way of a Conditional Deed of
Sale with Assumption of Mortgage. The Leaño Spouses would
pay the Barredo Spouses P200k, P100k of which would be
payable on July 15, 1987, while the balance of P100k would be
paid in 10 equal monthly installments after the signing of the
contract. The Leaño Spouses would also assume the first and
second mortgages and pay the monthly amortizations to SSS
and Apex beginning July 1987 until both obligations are fully
paid.
 In accordance with the agreement, the purchase price of
P200k was paid to the Barredo Spouses who turned over the
possession of the house and lot in favor of the Leaño Spouses. 2
years later, Barredo Spouses initiated a complaint before the
RTC seeking the rescission of the contract on the ground that
the Leaño Spouses despite repeated demands failed to pay the
mortgage amortizations to the SSS and Apex, causing the
Barredo Spouses great and irreparable damage. The Leaño
Spouses, however, answered that they were up-to-date with their
amortization payments to Apex but were not able to pay the SSS
amortizations because their payments were refused upon the
instructions of the Barredo Spouses.
 Meanwhile, allegedly in order to save their good name,
credit standing and reputation, the Barredo Spouses took it upon
themselves to settle the mortgage loans and paid the SSS. They
also settled the mortgage loan with Apex. They also paid the
real estate property taxes for the 1987 up to 1990.
 Petitioners argue that the terms of the agreement called for
the strict compliance of 2 equally essential and material
obligations on the part of the Leaño Spouses, namely, the
payment of the P200,000.00 to them and the payment of the
mortgage amortizations to the SSS and Apex. Respondents
Leaño Spouses, however, contend that they were only obliged to
assume the amortization payments of the Barredo Spouses with
CIV LAW REVIEW - OBLICON DIGESTS
the SSS and Apex, which they did upon signing the agreement.
The contract does not stipulate as a condition the full payment
of the SSS and Apex mortgages.
ISSUE: WON THE BARREDO SPOUSES MAY RESCIND THE
CONTRACT, ON THE GROUND OF NON-FULFILLMENT OF
THE PRESTATIONS?
HELD: NO. A careful reading of the pertinent provisions of the
agreement readily shows that the principal object of the contract was
the sale of the Barredo house and lot, for which the Leaño Spouses
gave a down payment of P100,000.00 as provided for in par. 1 of the
contract, and thereafter ten (10) equal monthly installments
amounting to another P100,000.00, as stipulated in par. 2 of the
same agreement. The assumption of the mortgages by the Leaño
Spouses over the mortgaged property and their payment of
amortizations are just collateral matters which are natural
consequences of the sale of the said mortgaged property.
To include the full payment of the obligations with the SSS and
Apex as a condition would be to unnecessarily stretch and put a new
meaning to the provisions of the agreement. For, as a general rule,
when the terms of an agreement have been reduced to writing, such
written agreement is deemed to contain all the terms agreed upon
and there can be, between the parties and their successors-in-interest,
no evidence of such terms other than the contents of the written
agreement. And, it is a familiar doctrine in obligations and contracts
that the parties are bound by the stipulations, clauses, terms and
conditions they have agreed to, which is the law between them, the
only limitation being that these stipulations, clauses, terms and
conditions are not contrary to law, morals, public order or public
policy. Not being repugnant to any legal proscription, the agreement
entered into by the parties must be respected and each is bound to
fulfill what has been expressly stipulated therein.
But even if we consider the payment of the mortgage amortizations
to the SSS and Apex as a condition on which the sale is based on,
still rescission would not be available since non-compliance with
such condition would just be a minor or casual breach thereof as it
does not defeat the very object of the parties in entering into the
contract. A cursory reading of the agreement easily reveals that the
main consideration of the sale is the payment of P200K to the
vendors within the period agreed upon. The assumption of mortgage
by the Leaño Spouses is a natural consequence of their buying a
mortgaged property. In fact, the Barredo Spouses do not stand to
benefit from the payment of the amortizations by the Leaño Spouses
directly to the SSS and Apex simply because the Barredo Spouses
have already parted with their property, for which they were already
fully compensated in the amount of P200K.
If the Barredo Spouses were really protective of their reputation and
credit standing, they should have sought the consent, or at least
notified the SSS and Apex of the assumption by the Leaño Spouses
of their indebtedness. Besides, in ordering rescission, the trial court
should have likewise ordered the Barredo Spouses to return the
P200K they received as purchase price plus interests. Art. 1385 of
the Civil Code provides that “[r]escission creates the obligation to
return the things which were the object of the contract, together with
their fruits, and the price with its interest.” The vendor is therefore
obliged to return the purchase price paid to him by the buyer if the
latter rescinds the sale. Thus, where a contract is rescinded, it is the
duty of the court to require both parties to surrender that which they
have respectively received and place each other as far as practicable
in his original situation.
GENEROSO V. VILLANUEVA V. STATE OF GERARDO L.
GONZAGA
[G.R. No. 157318, August 09, 2006]
FACTS:
 Petitioners Generoso and Raul Villanueva bought parcels of
land from the estate of Gonzaga (through its judicial
adminsitratrix). The lots were then mortgaged with the PNB. In
their agreement, the parties stipulated that the estate of Gonzaga
would cause the release of the lots from PNB at the earliest
possible time; that the Villanuevas will pay P100k upon signing
the agreement, P191k on Jan 1990, then P194k upon the
approval by the PNB of the release of the lots. It was also
stipulated that upon payment of 60% of the purchase price, the
Villanuevas may start to introduce improvements in the area if
they so desire. Lastly, they agreed that upon the release by PNB
of the lots, the Estate of Gonzaga shall immediately execute a
Deed of Sale in favor of the Villanuevas.
 As stipulated in the agreement, petitioners introduced
improvements after paying 60% of the total purchase price.
Petitioners then requested permission from respondent
Administratrix to use the premises for the next milling season.
Respondent refused on the ground that petitioners cannot use the
premises until full payment of the purchase price. Petitioners
informed respondent that their immediate use of the premises
was absolutely necessary and that any delay will cause them
substantial damages. Respondent remained firm in her refusal,
and demanded that petitioners stop using the lots as a
transloading station to service the Victorias Milling Company
unless they pay the full purchase price. In a letter-reply,
petitioners assured respondent of their readiness to pay the
balance but reminded respondent of her obligation to redeem the
lots from mortgage with the PNB. Petitioners gave respondent
10 days within which to do so.
 Respondent Administratrix wrote petitioners informing
them that the PNB had agreed to release the lots from mortgage.
She demanded payment of the balance of the purchase price.
 Petitioners demanded that respondent show the clean titles
to the lots first before they pay the balance of the purchase price.
 Respondent Administratrix then executed a Deed of
Rescission rescinding the MOA on two grounds: (1) petitioners
failed to pay the balance of the purchase price despite notice of
the lots’ release from mortgage, and (2) petitioners violated the
MOA by using the lots as a transloading station without
permission from the respondents.
 Petitioners then filed a complaint against respondents for
breach of contract, specific performance and damages before the
RTC. Petitioners alleged that respondents delayed performance
of their obligation by unreasonably failing to secure the release
of the lots from mortgage with the PNB.
ISSUE: WON respondents failed to comply with their reciprocal
obligation of securing the release of the lots from the PNB
mortgage?
HELD: YES, rescission was invalid. CA erred in ruling that
respondents had already fulfilled their obligation to cause the release
of the lots from the PNB at the time they demanded payment of the
balance of the purchase price.
A reading of PNB’s letter of approval clearly shows that the
approval was conditional. 3 conditions were laid down by the bank
before the lots could be finally released from mortgage. It was
CIV LAW REVIEW - OBLICON DIGESTS
therefore premature for respondents to demand payment of the
balance of the purchase price from the petitioners and, failing in that,
to “rescind” the MOA.
Moreover, there is no legal basis for the rescission. The remedy of
rescission under Art. 1191 is predicated on a breach of faith by the
other party that violates the reciprocity between them. We have held
in numerous cases that the remedy does not apply to contracts to
sell.
In a contract to sell, title remains with the vendor and does not pass
on to the vendee until the purchase price is paid in full. Thus, in a
contract to sell, the payment of the purchase price is a positive
suspensive condition. Failure to pay the price agreed upon is not a
mere breach, casual or serious, but a situation that prevents the
obligation of the vendor to convey title from acquiring an obligatory
force. This is entirely different from the situation in a contract of
sale, where non-payment of the price is a negative resolutory
condition. The effects in law are not identical. In a contract of sale,
the vendor has lost ownership of the thing sold and cannot recover it,
unless the contract of sale is rescinded and set aside. In a contract to
sell, however, the vendor remains the owner for as long as the
vendee has not complied fully with the condition of paying the
purchase price. If the vendor should eject the vendee for failure to
meet the condition precedent, he is enforcing the contract and not
rescinding it. Article 1592 speaks of non-payment of the purchase
price as a resolutory condition. It does not apply to a contract to sell.
As to Article 1191, it is subordinated to the provisions of Article
1592 when applied to sales of immovable property. Neither
provision is applicable [to a contract to sell].
The MOA between petitioners and respondents is a conditional
contract to sell. Ownership over the lots is not to pass to the
petitioners until full payment of the purchase price. Petitioners’
obligation to pay, in turn, is conditioned upon the release of the lots
from mortgage with the PNB to be secured by the respondents.
Although there was no express provision regarding reserved
ownership until full payment of the purchase price, the intent of the
parties in this regard is evident from the provision that a deed of
absolute sale shall be executed only when the lots have been released
from mortgage and the balance paid by petitioners. Since ownership
has not been transferred, no further legal action need have been
taken by the respondents, except an action to recover possession in
case petitioners refuse to voluntarily surrender the lots.
The records show that the lots were finally released from mortgage
in July 1991. Petitioners have always expressed readiness to pay the
balance of the purchase price once that is achieved. Hence,
petitioners should be allowed to pay the balance now, if they so
desire, since it is established that respondents’ demand for them to
pay in April 1991 was premature. However, petitioners may not
demand production by the respondents of the titles to the lots as a
condition for their payment. It was not required under the MOA.
3. BREACH (ARTS/ 1169-1174)
3.1.2 CULPA
RADIO COMM. OF THE PHILS., INC. (RCPI). V. CA &
LORETO DIONELA
G.R. No. L-44748 August 29, 1986
FACTS:
 The basis of the complaint against the defendant
corporation is a telegram sent through its Manila Office to the
offended party, Loreto Dionela, reading as follows: SA IYO
WALANG PAKINABANG DUMATING KA DIYAN-WALA-
KANG PADALA DITO KAHIT BULBUL MO
 Loreto Dionela alleges that the defamatory words on the
telegram sent to him not only wounded his feelings but also
caused him undue embarrassment and affected adversely his
business as well because other people have come to know of
said defamatory words. Defendant corporation as a defense,
alleges that the additional words in Tagalog was a private joke
between the sending and receiving operators and that they were
not addressed to or intended for plaintiff and therefore did not
form part of the telegram and that the Tagalog words are not
defamatory. The telegram sent through its facilities was received
in its station at Legaspi City. Nobody other than the operator
manned the teletype machine which automatically receives
telegrams being transmitted. The said telegram was detached
from the machine and placed inside a sealed envelope and
delivered to plaintiff, obviously as is. The additional words in
Tagalog were never noticed and were included in the telegram
when delivered.
 RTC ruled in favor of Dionela, holding that the additional
Tagalog words are libelous. It ruled that there was sufficient
publication because the office file of the defendant containing
copies of telegrams received are open and held together only by
a metal fastener. Moreover, they are open to view and
inspection by third parties. RTC also held that the defendant is
sued directly not as an employer. The business of the defendant
is to transmit telegrams. It will open the door to frauds and
allow the defendant to act with impunity if it can escape liability
by the simple expedient of showing that its employees acted
beyond the scope of their assigned tasks.
ISSUE: WON Petitioner-employer should answer directly and
primarily for the civil liability arising from the criminal act of its
employee.
HELD: YES. The action for damages was filed in the lower court
directly against respondent corporation not as an employer
subsidiarily liable under the provisions of Article 1161 of the New
Civil Code in relation to Art. 103 of the Revised Penal Code. The
cause of action of the private respondent is based on Arts. 19 and 20
of the New Civil Code, as well as on respondent's breach of contract
thru the negligence of its own employees.
Petitioner is a domestic corporation engaged in the business of
receiving and transmitting messages. Everytime a person transmits a
message through the facilities of the petitioner, a contract is entered
into. Upon receipt of the rate or fee fixed, the petitioner undertakes
to transmit the message accurately. There is no question that in the
case at bar, libelous matters were included in the message
transmitted, without the consent or knowledge of the sender. There is
a clear case of breach of contract by the petitioner in adding
extraneous and libelous matters in the message sent to the private
respondent. As a corporation, the petitioner can act only through its
employees. Hence the acts of its employees in receiving and
transmitting messages are the acts of the petitioner. To hold that the
petitioner is not liable directly for the acts of its employees in the
pursuit of petitioner's business is to deprive the general public
availing of the services of the petitioner of an effective and adequate
remedy. In most cases, negligence must be proved in order that
plaintiff may recover. However, since negligence may be hard to
substantiate in some cases, we may apply the doctrine of RES IPSA
LOQUITUR (the thing speaks for itself), by considering the
presence of facts or circumstances surrounding the injury.
CIV LAW REVIEW - OBLICON DIGESTS
JUAN J. SYQUIA V. C.A. & MANILA MEMORIAL PARK
CEMETERY, INC.
G.R. No. 98695 January 27, 1993
FACTS:
 Pursuant to a Deed of Sale and an Interment Order executed
between plaintiff and defendant, Juan J. Syquia (father of
deceased Vicente Syquia) authorized and instructed defendant to
inter the remains of the deceased in the Manila Memorial Park
Cemetery conformably and in accordance with defendant's
interment procedures.
 After a few months, preparatory to transferring the said
remains to a newly purchased family plot also at the Manila
Memorial Park Cemetery, the concrete vault encasing the coffin
of the deceased was removed from its niche underground with
the assistance of certain employees of defendant. As the
concrete vault was being raised to the surface, plaintiffs
discovered that the concrete vault had a hole approximately 3
inches in diameter near the bottom of one of the walls closing
out the width of the vault on one end and that for a certain
length of time, water drained out of the hole.
 Pursuant to an authority granted by the MTC, plaintiffs,
with the assistance of licensed morticians and certain personnel
of defendant, caused the opening of the concrete vault. Upon
opening the vault, the following became apparent: (a) the
interior walls of the concrete vault showed evidence of total
flooding; (b) the coffin was entirely damaged by water, filth and
silt causing the wooden parts to warp and separate and to crack
the viewing glass panel located directly above the head and
torso of the deceased; (c) the entire lining of the coffin, the
clothing of the deceased, and the exposed parts of the deceased's
remains were damaged and soiled by the action of the water and
silt and were also coated with filth.
 Plaintiffs filed a case for damages, based on the alleged
unlawful and malicious breach by the defendant of its obligation
to deliver a defect-free concrete vault designed to protect the
remains of the deceased and the coffin against the elements
which resulted in the desecration of deceased's grave and in the
alternative, because of defendant-appellee's gross negligence
conformably to Article 2176 of the New Civil Code in failing to
seal the concrete vault.
ISSUE: WON DEFENDANT IS LIABLE FOR QUASI-DELICT?
HELD: NO, there was no fault or negligence on the part of the
defendant that would render him liable for quasi-delict. Although a
pre-existing contractual relation between the parties does not
preclude the existence of a culpa aquiliana, we find no reason to
disregard the respondent's Court finding that there was no
negligence. In this case, it has been established that the Syquias and
the Manila Memorial Park Cemetery, Inc., entered into a contract
entitled "Deed of Sale and Certificate of Perpetual Care." That
agreement governed the relations of the parties and defined their
respective rights and obligations. Hence, had there been actual
negligence on the part of the Manila Memorial Park Cemetery, Inc.,
it would be held liable not for a quasi-delict or culpa aquiliana, but
for culpa contractual as provided by Article 1170 of the Civil Code.
The Manila Memorial Park Cemetery, Inc. bound itself to provide
the concrete box to be sent in the interment. Rule 17 of the Rules and
Regulations of private respondent provides that: Rule 17. Every
earth interment shall be made enclosed in a concrete box, or in an
outer wall of stone, brick or concrete, the actual installment of which
shall be made by the employees of the Association. Pursuant to this
above-mentioned Rule, a concrete vault was provided the day before
the interment, and was, on the same day, installed by private
respondent's employees in the grave which was dug earlier. After the
burial, the vault was covered by a cement lid.
Petitioners however claim that private respondent breached its
contract with them as the latter held out in the brochure it distributed
that the lot may hold a single or double internment underground, in a
sealed concrete vault. Petitioners claim that the vault provided by
private respondent was not sealed, that is, not waterproof.
Consequently, water seeped through the cement enclosure and
damaged everything inside it. We do not agree. There was no
stipulation in the Deed of Sale and Certificate of Perpetual Care
and in the Rules and Regulations of the Manila Memorial Park
Cemetery, Inc. that the vault would be waterproof. Private
respondent's witness, Mr. Dexter Heuschkel, explained that the term
"sealed" meant "closed." Moreover, it is also quite clear that "sealed"
cannot be equated with "waterproof". Well settled is the rule that
when the terms of the contract are clear and leave no doubt as to the
intention of the contracting parties, then the literal meaning of the
stipulation shall control. Contracts should be interpreted according to
their literal meaning and should not be interpreted beyond their
obvious intendment.
We hold, therefore, that private respondent did not breach the tenor
of its obligation to the Syquias. While this may be so, can private
respondent be liable for culpa aquiliana for boring the hole on the
vault? It cannot be denied that the hole made possible the entry of
more water and soil than was natural had there been no hole.
The law defines negligence as the "omission of that diligence which
is required by the nature of the obligation and corresponds with the
circumstances of the persons, of the time and of the place." In the
absence of stipulation or legal provision providing the contrary, the
diligence to be observed in the performance of the obligation is that
which is expected of a good father of a family.
FAR EAST BANK AND TRUST COMPANY V. C.A. & LUIS
A. LUNA
G.R. No. 108164 February 23, 1995
FACTS:
 Private respondent Luis A. Luna applied for, and was
accorded, a FAREASTCARD issued by petitioner FEBTC.
Upon his request, the bank also issued a supplemental card to
private respondent Clarita S. Luna. Later, Clarita lost her credit
card. FEBTC was informed. In order to replace the lost card,
Clarita submitted an affidavit of loss. In cases of this nature, the
bank's internal security procedures and policy would be to
record the lost card, along with the principal card, as a "Hot
Card" or "Cancelled Card" in its master file.
 Luis then tendered a despedida lunch for a close friend, a
Filipino-American, and another guest at the Bahia Rooftop
Restaurant of the Hotel Intercontinental Manila. To pay for the
lunch, Luis presented his fareastcard to the attending waiter who
promptly had it verified through a telephone call to the bank's
Credit Card Department. Since the card was not honored, Luis
was forced to pay in cash the bill amounting to P588.13.
Naturally, Luis felt embarrassed by this incident.
 Private respondent Luis Luna, through counsel, demanded
from FEBTC the payment of damages. Adrian V. Festejo, a
vice-president of the bank, expressed the bank's apologies to
Luis, admitting that: “An investigation of your case revealed
that FAREASTCARD failed to inform you about its security
policy. Furthermore, an overzealous employee of the Bank's
CIV LAW REVIEW - OBLICON DIGESTS
Credit Card Department did not consider the possibility that it
may have been you who was presenting the card at that time (for
which reason, the unfortunate incident occurred).”
 Luna then filed a case for damages in the RTC, which
rendered a decision against FEBTC, and awarded moral
damages.
ISSUE: WON FEBTC IS LIABLE FOR QUASI-DELICT?
HELD: NO. In culpa contractual, moral damages may be recovered
where the defendant is shown to have acted in bad faith or with
malice in the breach of the contract. Bad faith, in the context of
Article 2220, includes gross, but not simple, negligence.
Exceptionally, in a contract of carriage, moral damages are also
allowed in case of death of a passenger attributable to the fault
(which is presumed) of the common carrier.
Concededly, the bank was remiss in indeed neglecting to personally
inform Luis of his own card's cancellation. Nothing in the findings
of the trial court and the appellate court, however, can sufficiently
indicate any deliberate intent on the part of FEBTC to cause harm to
private respondents. Neither could FEBTC's negligence in failing to
give personal notice to Luis be considered so gross as to amount to
malice or bad faith.
Malice or bad faith implies a conscious and intentional design to do
a wrongful act for a dishonest purpose or moral obliquity; it is
different from the negative idea of negligence in that malice or bad
faith contemplates a state of mind affirmatively operating with
furtive design or ill will.
We are not unaware of the previous rulings of this Court, sanctioning
the application of Article 21, in relation to Article 2217 and Article
2219 7 of the Civil Code to a contractual breach similar to the case at
bench. Article 21 of the Code, it should be observed, contemplates a
conscious act to cause harm. Thus, even if we are to assume that the
provision could properly relate to a breach of contract, its application
can be warranted only when the defendant's disregard of his
contractual obligation is so deliberate as to approximate a degree of
misconduct certainly no less worse than fraud or bad faith. Most
importantly, Article 21 is a mere declaration of a general principle in
human relations that clearly must, in any case, give way to the
specific provision of Article 2220 of the Civil Code authorizing the
grant of moral damages in culpa contractual solely when the breach
is due to fraud or bad faith.
Justice Jose B.L. Reyes, in his ponencia in Fores vs. Miranda,
explained: ”Moral damages are not recoverable in damage actions
predicated on a breach of the contract of transportation, in view of
Articles 2219 and 2220 of the new Civil Code. By contrasting the
provisions of these two articles it immediately becomes apparent
that: (a) In case of breach of contract (including one of
transportation) proof of bad faith or fraud (dolus), i.e., wanton or
deliberately injurious conduct, is essential to justify an award of
moral damages; and (b) That a breach of contract can not be
considered included in the descriptive term "analogous cases" used
in Art. 2219; not only because Art. 2220 specifically provides for the
damages that are caused contractual breach, but because the
definition of quasi-delict in Art. 2176 of the Code expressly excludes
the cases where there is a "preexisitng contractual relations between
the parties."
The distinction between fraud, bad faith or malice in the sense of
deliberate or wanton wrong doing and negligence (as mere
carelessness) is too fundamental in our law to be ignored (Arts.
1170-1172); their consequences being clearly differentiated by the
Code. It is to be presumed, in the absence of statutory provision to
the contrary, that this difference was in the mind of the lawmakers
when in Art. 2220 they limited recovery of moral damages to
breaches of contract in bad faith. It is true that negligence may be
occasionally so gross as to amount to malice; but the fact must be
shown in evidence, and a carrier's bad faith is not to be lightly
inferred from a mere finding that the contract was breached through
negligence of the carrier's employees.
The Court has not in the process overlooked another rule that a
quasi-delict can be the cause for breaching a contract that might
thereby permit the application of applicable principles on tort even
where there is a pre-existing contract between the plaintiff and the
defendant. This doctrine, unfortunately, cannot improve private
respondents' case for it can aptly govern only where the act or
omission complained of would constitute an actionable tort
independently of the contract. The test (whether a quasi-delict can be
deemed to underlie the breach of a contract) can be stated thusly:
Where, without a pre-existing contract between two parties, an act or
omission can nonetheless amount to an actionable tort by itself, the
fact that the parties are contractually bound is no bar to the
application of quasi-delict provisions to the case. Here, private
respondents' damage claim is predicated solely on their contractual
relationship; without such agreement, the act or omission
complained of cannot by itself be held to stand as a separate cause of
action or as an independent actionable tort.
3.1.3 MORA / DEFAULT
A. BY THE OBLIGOR / DEBTOR
BRICKTOWN DEVELOPMENT CORP. V. AMOR TIERRA
DEV’T CORP.
G.R. No. 112182 December 12, 1994
FACTS:
 Bricktown Dev’t Corp. executed 2 Contracts to Sell in favor
of Amor Tierra Dev’t Corp. covering 96 residential lots in
Parañaque. The total price of P21M was stipulated to be paid in
3 installments and the balance of P11.5M to be paid by means of
an assumption of Bricktown's mortgage liability to Philippine
Savings Bank or, alternatively, to be made payable in cash.
 Later, the parties executed a Supplemental Agreement
providing that private respondent would additionally pay to
Bricktown the amounts representing interest on the balance of
downpayments and the interest paid by Bricktown to PSB in
updating the bank loan.
 Private respondent was only able to pay petitioner
corporation the sum of P1.3M. In the meanwhile, however, the
parties continued to negotiate for a possible modification of
their agreement, although nothing conclusive would appear to
have ultimately been arrived at.
 Finally, Bricktown, sent private respondent a "Notice of
Cancellation of Contract" on account of the latter's continued
failure to pay the installment due 30 June 1981 and the interest
on the unpaid balance of the stipulated initial payment.
Bricktown advised Amor Tierra, however, that Amor Tierra still
had the right to pay its arrearages within 30 days from receipt of
the notice "otherwise the actual cancellation of the contract
would take place."
 Several months later, Amor Tierra, through counsel,
demanded the refund of it's various payments to Bricktown,
with interest within fifteen days from receipt of said letter, or, in
CIV LAW REVIEW - OBLICON DIGESTS
lieu of a cash payment, to assign to private respondent an
equivalent number of unencumbered lots at the same price fixed
in the contracts. The demand, not having been heeded, Amor
Tierra commenced an action against Bricktown.
 RTC declared the K to sell and the supplemental agreement
rescinded, and ordered Bricktown to return to Amor Tierra the
amounts the latter have paid, with interest. CA affirmed.
ISSUE: WON THE K TO SELL WERE VALIDLY RESCINDED?
HELD: YES, Bricktown acted well within its right, in accordance
with the agreement. Admittedly, the terms of payment agreed upon
by the parties were not met by Amor Tierra. Of a total selling price
of P21M, Amor Tierra was only able to remit the sum of P1.3M
which was even short of the stipulated initial payment of P2.2M. No
additional payments, it would seem, were made. A notice of
cancellation was ultimately made months after the lapse of the
contracted grace period. Paragraph 15 of the Contracts to Sell
provided thusly: “Should the PURCHASER fail to pay when due
any of the installments mentioned in stipulation No. 1 above, the
OWNER shall grant the purchaser a sixty (60)-day grace period
within which to pay the amount/s due, and should the PURCHASER
still fail to pay the due amount/s within the 60-day grace period, the
PURCHASER shall have the right to ex-parte cancel or rescind this
contract, provided, however, that the actual cancellation or rescission
shall take effect only after the lapse of thirty (30) days from the date
of receipt by the PURCHASER of the notice of cancellation of this
contract or the demand for its rescission by a notarial act, and
thereafter, the OWNER shall have the right to resell the lot/s subject
hereof to another buyer and all payments made, together with all
improvements introduced on the aforementioned lot/s shall be
forfeited in favor of the OWNER as liquidated damages, and in this
connection, the PURCHASER obligates itself to peacefully vacate
the aforesaid lot/s without necessity of notice or demand by the
OWNER.”
A grace period is a right, not an obligation, of the debtor. When
unconditionally conferred, such as in this case, the grace period is
effective without further need of demand either calling for the
payment of the obligation or for honoring the right. The grace period
must not be likened to an obligation, the non-payment of which,
under Article 1169 of the Civil Code, would generally still require
judicial or extrajudicial demand before "default" can be said to arise.
Verily, in the case at bench, the sixty-day grace period under the
terms of the contracts to sell became ipso facto operative from the
moment the due payments were not met at their stated maturities. On
this score, the provisions of Article 1169 of the Civil Code would
find no relevance whatsoever.
The cancellation of the contracts to sell by petitioner corporation
accords with the contractual covenants of the parties, and such
cancellation must be respected. It may be noteworthy to add that in a
contract to sell, the non-payment of the purchase price (which is
normally the condition for the final sale) can prevent the obligation
to convey title from acquiring any obligatory force.
The forfeiture of the payments thus far remitted under the cancelled
contracts in question, given the factual findings of both the trial court
and the appellate court, must be viewed differently. Petitioners do
not deny the fact that there has indeed been a constant dialogue
between the parties during the period of their juridical relation.
In fine, while we must conclude that petitioner corporation still acted
within its legal right to declare the contracts to sell rescinded or
cancelled, considering, nevertheless, the peculiar circumstances
found to be extant by the trial court, confirmed by the Court of
Appeals, it would be unconscionable, in our view, to likewise
sanction the forfeiture by petitioner corporation of payments made to
it by private respondent. Indeed, in the opening statement of this
ponencia, we have intimated that the relationship between parties in
any contract must always be characterized and punctuated by good
faith and fair dealing. Judging from what the courts below have said,
petitioners did fall well behind that standard. We do not find it
equitable, however, to adjudge any interest payment by petitioners
on the amount to be thus refunded, computed from judicial demand,
for, indeed, private respondent should not be allowed to totally free
itself from its own breach.
BERLIN TAGUBA V. MARIA PERALTA VDA. DE DE LEON
G.R. No. L-59980 October 23, 1984
FACTS:
 Berlin Taguba married to Sebastiana Domingo (petitioner)
is the owner of a residential lot in Isabela. Spouses Pedro
Asuncion and Marita Lungab, (also petitioners) and herein
private respondent Maria Peralta Vda. de De Leon, were
separately occupying portions of the aforementioned lot as
lessees.
 Berlin Taguba sold a portion of the said lot to private
respondent Maria Peralta Vda de De Leon. The portion sold
comprises the area occupied by the Asuncions and private
respondent Vda de De Leon. The deed evidencing said sale was
denominated as "Deed of Conditional Sale," which stipulated
that a downpayment shall be made upon signing of the contract,
then P1k a month installments shall be made. It also provided
that if the vendee fails to pay the whole balance by December
1972, she shall be given 6 months extension period but with
legal interest, after which the vendor may increase the purchase
price.
 De Leon alleges that she had already paid the sum of
P12,500 and had tendered payment of the balance of P5,500 to
complete the stipulated purchase price of P18k to petitioner
within the grace period but the latter refused to receive payment.
Private respondent then instituted a complaint for Specific
Performance with Preliminary Mandatory Injunction with
Damages against Spouses Berlin Taguba and Sebastiana
Domingo.
 Spouses Taguba admitted the sale of the property, but
claimed that private respondent failed to comply with her
obligation under the Deed of Conditional Sale despite the
several extensions granted her, by reason of which petitioner
was compelled but with the express knowledge and consent and
even upon the proposal of private respondent, to negotiate the
sale of a portion of the property sold, to the Spouses Asuncion
who were actually in possession thereof.
ISSUE: WON THE DEED OF CONDITIONAL SALE WAS
VALIDLY RESCINDED?
HELD: NO. The contract of sale between petitioner and private
respondent was absolute in nature. Despite the denomination of the
deed as a "Deed of Conditional Sale" a reading of the conditions
therein set forth reveals the contrary. Nowhere in the said contract in
question could we find a proviso or stipulation to the effect that title
to the property sold is reserved in the vendor until full payment of
the purchase price. There is also no stipulation giving the vendor the
CIV LAW REVIEW - OBLICON DIGESTS
right to unilaterally rescind the contract the moment the vendee fails
to pay within a fixed period. Indeed, a reading of the contract in its
entirety would show that the only right of petitioner Taguba as
vendor was to collect interest at the legal rate if private respondent
fails to pay the full purchase price, and to increase the price if
vendee still fails to pay within the six months grace period.
Considering, therefore, the nature of the transaction between
petitioner Taguba and private respondent, which We affirm and
sustain to be a contract of sale, absolute in nature, the applicable
provision is Article 1592 of the New Civil Code. In the case at bar, it
is undisputed that petitioner Taguba never notified private
respondent by notarial act that he was rescinding the contract, and
neither had he filed a suit in court to rescind the sale.
Finally, it has been ruled that "where time is not of the essence of the
agreement, a slight delay on the part of one party in the performance
of his obligation is not a sufficient ground for the rescission of the
agreement. Considering that in the instant case, private respondent
had already actually paid the sum of P12,500.00 of the total
stipulated purchase price of P18,000.00 and had tendered payment of
the balance of P5,500.00 within the grace period of six months from
December 31, 1972, equity and justice mandate that she be given
additional period within which to complete payment of the purchase
price.
AQUILINA P. MARIN V. JUDGE MIDPANTAO L. ADIL
G.R. No. L-49018 & L-47986, July 16, 1984
FACTS:
 Brothers Manuel & Ariston Armada and Aquiline Marin are
first cousins. The Armadas in 1963 expected to inherit some lots
in General Santos City from their uncle, Proceso Pacificar, who
died in 1954. Marin, who resided in Cotabato, had hereditary
rights in the estates of her parents, the deceased spouses,
Francisco and Monica Provido, of Janiuay Iloilo, who died in
1938 and 1960, respectively. Manuel P. Armada resided in
Janiuay.
 In a document entitled “Deed of Exchange with Quitclaim,”
Marin assigned to the Armada brothers her hereditary share in
the testate estate of her deceased mother, Monica Pacificar Vda.
de Provido, in Iloilo, in exchange for the land of the Armadas
located in Cotabato. The exchange would be rescindible when it
is definitely ascertained that the parties have respectively no
right to the properties sought to be exchanged. The exchange did
not mean that the parties were definitely entitled to the
properties being exchanged but it was executed "in anticipation
of a declaration of said right".
 When the deed of exchange was executed, the estate of
Proceso Pacificar, in which the Armadas expected to inherit a
part, had been adjudicated to Soledad Pronido- Elevencionado a
sister of Mrs. Marin and a first cousin also of the Armadas.
Soledad claimed to be the sole heir of Proceso. So, the Armadas
and the other heirs had to sue Soledad.
 The protracted litigation ended in a compromise in 1976
when the Armadas were awarded Lots 906-A-2 and 906-A-3,
located in Barrio lagao, General Santos City; Marin never
possessed these two lots. They were supposed to be exchange
for her proindiviso share in her parents' estate in Janiuay.
 Five years after the deed was executed, Marin agreed to
convey to her sister, Aurora Provido-Collado, her interest in 2
lots in January in payment of her obligation amounting to
P1,700. Then, in the extra-judicial partition of her parents'
estate, Marin’s share was formally adjudicated to Aurora. It was
stated therein that Marin "has waived, renounced and quit-
claimed her share" in favor of Aurora. As already stated, that
share was supposed to be exchanged for the two lots in General
Santos City which the Armadas received in 1976 after a
pestiferous litigation. Hence, the Armadas filed the instant
rescissory action against Mrs. Marin.
ISSUE: WON THE DEED OF EXCHANGE WAS VALID AND
BINDING?
HELD: NO. It is evident from the deed of exchange that the
intention of the parties relative to the lots, which are the objects of
the exchange, cannot be definitely ascertained. We hold that this
circumstance renders the exchange void or inexistent (Art. 1378, 2nd
par. and Art. 1409[6], Civil Code).
It is provided in paragraph 7 that the deed should not be construed as
an acknowledgment by the Armadas and Mrs. Marin that they are
entitled to the properties involved therein and that it was executed
"in anticipation of a declaration of" their rights to the properties.
Then, it is stipulated in paragraph 8 that the parties should take
possession and make use of the properties involved in the deed. The
two provisions are irreconcilable because paragraph contemplates
that the properties are still to be awarded or adjudicated to the parties
whereas paragraph 8 envisages a situation where the parties have
already control and possession thereof.
It should be noted that in Marin's answer with affirmative defense
she avers therein that her 1968 agreement with her sister means that
she would convey her properties to Aurora when the Armadas
should be "adjudged to be without rights or interests to any
properties in General Santos City." Such a qualifications is not found
in her agreement with her sister.
The instant rescissory action may be treated as an action to
declare void the deed of exchange. The action to declare the
inexistence of a contract does not prescribe (Art. 1410, Civil
Code).
The properties covered by the deed should have been specified and
described. A perusal of the deed gives the impression that it involves
many properties. In reality, it refers only to 8,124 square meters of
land, which the Armadas would inherit from their uncle in General
Santos City, and to the 9,000 square meters representing the
proindiviso share of Mrs. Marin in her parents' estate. As we have
seen, Mrs. Marin rendered impossible the performance of her
obligation under the deed. Because of that impossibility, the
Armadas could rescind extrajudicially the deed of exchange (Art.
1191 Civil Code). If Mrs. Marin should sue the Armadas, her action
would be barred under the rule of exceptio non adimpleti contractus
(plaintiff is not entitled to sue because he has not performed his part
of the agreement).
3.1.3 MORA / DEFAULT
B. BY THE OBLIGEE / CREDITOR
LUISA F. MCLAUGHLIN V. C.A. & RAMON FLORES
G.R. No. L-57552 October 10, 1986
FACTS:
 Petitioner Luisa F. McLaughlin and private respondent
Ramon Flores entered into a contract of conditional sale of real
property. The deed of conditional sale fixed the total purchase
price of P140k payable as follows: a) P26k upon the execution
CIV LAW REVIEW - OBLICON DIGESTS
of the deed; and b) the balance of P113k to be paid not later than
May 1977. The parties also agreed that the balance shall bear
interest at the rate of 1% per month to commence from
December 1976, until the full purchase price was paid.
 In 1979, petitioner filed a complaint for the rescission of the
deed of conditional sale due to the failure of private respondent
to pay the balance due on May 31, 1977. Later, the parties
submitted a Compromise Agreement on the basis of which the
court rendered a decision. In said compromise agreement,
private respondent acknowledged his indebtedness to petitioner
under the deed of conditional sale in the amount of P119k, and
the parties agreed that said amount would be payable as follows:
a) P50k upon signing of the agreement; and b) the balance of
P69k in two equal installments on June 1980 and December
1980. As agreed upon, private respondent paid P50k upon the
signing of the agreement and in addition he also paid an
"escalation cost" of P25k.
 Under paragraph 3 of the Compromise Agreement, private
respondent agreed to pay P1k monthly rental beginning
December 1979 until the obligation is duly paid, for the use of
the property subject matter of the deed of conditional sale.
 Paragraphs 6 and 7 of the Compromise Agreement further
state: “That the parties are agreed that in the event the defendant
(private respondent) fails to comply with his obligations herein
provided, the plaintiff (petitioner) will be entitled to the issuance
of a writ of execution rescinding the Deed of Conditional Sale
of Real Property. In such eventuality, defendant (private
respondent) hereby waives his right to appeal to (from) the
Order of Rescission and the Writ of Execution which the Court
shall render in accordance with the stipulations herein provided
for. Xxx That in the event of execution all payments made by
defendant (private respondent) will be forfeited in favor of the
plaintiff (petitioner) as liquidated damages.”
 In October 1980, petitioner wrote to private respondent
demanding that the latter pay the balance of P69k. This demand
included not only the installment due on June 1980 but also the
installment due on December 1980.
 Private respondent then sent a letter to petitioner signifying
his willingness and intention to pay the full balance of P69k,
and at the same time demanding to see the certificate of title of
the property and the tax payment receipts.
 Private respondent holds that on the first working day of
said month, he tendered payment to petitioner but this was
refused acceptance by petitioner. Petitioner filed a Motion for
Writ of Execution alleging that private respondent failed to pay
the installment due on June 1980 and that since June 1980 he
had failed to pay the monthly rental of P1k.
 RTC granted the motion for writ of execution. It denied the
motion for reconsideration in an order dated November 21, 1980
and issued the writ of execution on November 25, 1980. In an
order dated November 27, 1980, the trial court granted
petitioner's ex-parte motion for clarification of the order of
execution rescinding the deed of conditional sale of real
property.
ISSUE: WON THE CA ERRED IN DECLARING THE
COMPROMISE AGREEMENT RESCINDED?
HELD: NO. The general rule is that rescission will not be permitted
for a slight or casual breach of the contract, but only for such
breaches as are substantial and fundamental as to defeat the object of
the parties in making the agreement. In the case at bar, despite
Flores' failure to make the payment which was due on June
1980, McLaughlin waived whatever right she had under the
compromise agreement to demand rescission. It is significant to
note that on November 17, 1980, or just 17 days after October 31,
1980, the deadline set by McLaughlin, Flores tendered the certified
manager's check. Considering that Flores had already paid
P101,550.00 under the contract to sell, excluding the monthly rentals
paid, certainly it would be the height of inequity to have this amount
forfeited in favor McLaughlin. Under the questioned orders,
McLaughlin would get back the property and still keep P101,550.00.
Moreover, section 4 of Republic Act No. 6552 (Maceda Law)
provides as follows: “In case where less than two years of
installments were paid, the seller shall give the buyer a grace period
of not less than sixty days from the date the installment became due.
If the buyer fails to pay the installments due at the expiration of the
grace period, the seller may cancel the contract after thirty days from
receipt by the buyer of the notice of the cancellation or the demand
for rescission of the contract by a notarial act.” Section 7 of said law
provides as follows: “Any stipulation in any contract hereafter
entered into contrary to the provisions of Sections 3, 4, 5 and 6, shall
be null and void. “
The spirit of these provisions further supports the decision of the
appellate court. Assuming that under the terms of said agreement the
December 31, 1980 installment was due and payable when on
October 15, 1980, petitioner demanded payment of the balance of
P69,059.71 on or before October 31, 1980, petitioner could cancel
the contract after thirty days from receipt by private respondent of
the notice of cancellation. Considering petitioner's motion for
execution filed on November 7, 1980 as a notice of cancellation,
petitioner could cancel the contract of conditional sale after thirty
days from receipt by private respondent of said motion. The tender
made by private respondent of a certified bank manager's check
payable to petitioner was a valid tender of payment.
Moreover, Section 49, Rule 130 of the Revised Rules of Court
provides that: “An offer in writing to pay a particular sum of money
or to deliver a written instrument or specific property is, if rejected,
equivalent to the actual production and tender of the money,
instrument, or property.“ However, although private respondent had
made a valid tender of payment which preserved his rights as a
vendee in the contract of conditional sale of real property, he did not
follow it with a consignation or deposit of the sum due with the
court.
In one case, it was held: “True that consignation of the redemption
price is not necessary in order that the vendor may compel the
vendee to allow the repurchase within the time provided by law or
by contract. We have held that in such cases a mere tender of
payment is enough, if made on time, as a basis for action against the
vendee to compel him to resell. But that tender does not in itself
relieve the vendor from his obligation to pay the price when
redemption is allowed by the court. In other words, tender of
payment is sufficient to compel redemption but is not in itself a
payment that relieves the vendor from his liability to pay the
redemption price."
In compliance with a resolution issued by the lower court, both
parties submitted their respective manifestations which confirm that
the Manager's Check in question was subsequently withdrawn and
replaced by cash, but the cash was not deposited with the court.
According to Article 1256 of the Civil Code of the Philippines, if the
creditor to whom tender of payment has been made refuses without
just cause to accept it, the debtor shall be released from
responsibility by the consignation of the thing or sum due, and that
CIV LAW REVIEW - OBLICON DIGESTS
consignation alone shall produce the same effect in the five cases
enumerated therein; Article 1257 provides that in order that the
consignation of the thing (or sum) due may release the obligor, it
must first be announced to the persons interested in the fulfillment of
the obligation; and Article 1258 provides that consignation shall be
made by depositing the thing (or sum) due at the disposal of the
judicial authority and that the interested parties shall also be notified
thereof.
Tender of payment must be distinguished from consignation.
Tender is the antecedent of consignation, that is, an act preparatory
to the consignation, which is the principal, and from which are
derived the immediate consequences which the debtor desires or
seeks to obtain. Tender of payment may be extrajudicial, while
consignation is necessarily judicial, and the priority of the first is the
attempt to make a private settlement before proceeding to the
solemnities of consignation.
In the case at bar, although as above stated private respondent had
preserved his rights as a vendee in the contract of conditional sale of
real property by a timely valid tender of payment of the balance of
his obligation which was not accepted by petitioner, he remains
liable for the payment of his obligation because of his failure to
deposit the amount due with the court.
3.1.3 BY MORA / DEFAULT
C. COMPENSATIO MORAE
ELNORA R. CORTES V. C.A. & F. S. MGT AND DEV’T
CORP.
[G.R. No. 121772. January 13, 2003]
FACTS:
 The controversy stemmed from a civil case for specific
performance with damages filed by F.S. Management and
Development Corporation (FSMDC) against spouses Edmundo
and Elnora Cortes involving the sale of the parcel of land owned
by the said spouses. Spouses Cortes retained the professional
services of Atty. Felix Moya. However, they did not agree on
the amount of compensation for the services to be rendered by
Atty. Moya.
 Before a full-blown trial could be had, defendants spouses
Cortes and plaintiff FSMDC decided to enter into a compromise
agreement. Defendants spouses received from plaintiff FSMDC,
three checks totaling P2.7M. Thereafter, Atty. Moya filed an
“Urgent Motion to Fix Attorney’s Fees, Etc.” praying that he be
paid a sum equivalent to 35% of the amount received by the
defendants spouses which the latter opposed contending that the
amount Atty. Moya seeks to recover is utterly excessive and is
not commensurate to the nature, extent and quality of the
services he had rendered.
 Later, the Cortes spouses and Atty. Moya settled their
differences by agreeing in open court that the former will pay
the latter the amount of P100k as his attorney’s fees. About six
months after the compromise, Atty. Moya filed an Ex-Parte
Manifestation praying that his Motion to Fix Attorney’s Fees be
resolved on the basis of the agreement of the parties “in
chambers”.
 The Cortes spouses filed their Comment claiming: (1) That
they agreed to the settlement of P100,000k attorney’s fees
expecting that the checks paid by FSMDC will be good but it
turned out that they were all dishonored, and no compromise
agreement was pushed through; (2) That defendants are willing
to pay Atty. Moya as additional compensation for his services
only in the amount of P50k subject to the condition that same
shall be paid after the case is terminated in their favor and/or the
property involved is sold; and (3) That defendants shall
compensate Atty. Moya said amount in addition to what they
have paid before.” The trial court issued an Order directing the
spouses to pay Atty. Moya the sum of P100,000.00 as and by
way of attorney’s fees.
ISSUE: WON THE P100K AWARD ATTORNEY’S FEES WAS
PROPER?
HELD: NO. The reasonableness of the amount of attorney’s fees
awarded to private respondent should be properly gauged on the
basis of the long-standing rule of quantum meruit, meaning, “as
much as he deserves”. Where a lawyer is employed without
agreement as to the amount to be paid for his services, the courts
shall fix the amount on quantum meruit basis. In such a case, he
would be entitled to receive what he merits for his services. In
this respect, Section 24, Rule 138 of the Rules of Court provides:
“Sec. 24. Compensation of attorneys, agreement as to fees. - An
attorney shall be entitled to have and recover from his client no more
than a reasonable compensation for his services, with a view to the
importance of the subject matter of the controversy, the extent of the
services rendered, and the professional standing of the attorney. x x
x”
In addition, the following circumstances, codified in Rule 20.1,
Canon 20 of the Code of Professional Responsibility, serves as a
guideline in fixing a reasonable compensation for services rendered
by a lawyer on the basis of quantum meruit:
a) The time spent and the extent of the
services rendered or required;
b) The novelty and difficulty of the
questions involved;
c) The importance of the subject matter;
d) The skill demanded;
e) The probability of losing other
employment as a result of acceptance of the
proffered case;
f) The customary charges for similar
services and the schedule of fees of the IBP
chapter to which he belongs;
g) The amount involved in the controversy
and the benefits resulting to the client from the
services;
h) The contingency or certainty of
compensation;
i) The character of the employment,
whether occasional or established; and
j) The professional standing of the lawyer.”
In the present case, aside from invoking his professional standing,
private respondent claims that he was the one responsible in forging
the initial compromise agreement wherein FSMDC agreed to pay
P2.7M. The fact remains, however, that such agreement was not
consummated because the checks given by FSMDC were all
dishonored. It was not the private respondent who was responsible
in bringing into fruition the subsequent compromise agreement
between petitioners and FSMDC.
Nonetheless, it is undisputed that private respondent has rendered
services as counsel for the petitioners. He prepared petitioners’
Answer and Pre- Trial Brief, appeared at the Pre-Trial Conference,
CIV LAW REVIEW - OBLICON DIGESTS
attended a hearing held on July 13, 1990, cross-examined the witness
of FSMDC, and was present in the conference at the Manila Hotel
between the parties and their respective counsels. All these services
were rendered in the years 1990 and 1991 where the value of a peso
is higher. Thus, we find the sum of P100,000.00 awarded to private
respondent as his attorney’s fees to be disproportionate to the
services rendered by him to petitioners.The amount of P50,000.00 as
compensation for the services rendered by Atty. Moya is just and
reasonable.
Besides, the imposition of legal interest on the amount payable to
private respondent is unwarranted. Article 2209 of the Civil Code
invoked by Atty. Moya and cited by the appellate court, finds no
application in the present case. It is a provision of law governing
ordinary obligations and contracts. Contracts for attorney’s services
in this jurisdiction stand upon an entirely different footing from
contracts for the payment of compensation for any other services.
We have held that lawyering is not a moneymaking venture and
lawyers are not merchants. Thus, a lawyer’s compensation for
professional services rendered are subject to the supervision of the
court, not just to guarantee that the fees he charges and receives
remain reasonable and commensurate with the services rendered, but
also to maintain the dignity and integrity of the legal profession to
which he belongs.
SPOUSES WILLIAM AND JEANETTE YAO V.
CARLOMAGNO B. MATELA,
[G.R. NO. 167767 & 167799, AUGUST 29, 2006]
FACTS:
 Spouses Yao contracted the services of Matela, a licensed
architect, to manage and supervise the construction of a two-unit
townhouse at a total cost of P5M. The construction started in the
first week of April 1997 and was completed in April 1998, with
additional works costing P300K. Matela alleged that the spouses
Yao paid him the amount of P4.6M, thereby leaving a balance
of P741k. When his demand for payment went unheeded,
Matela filed a complaint for sum of money with the RTC.
 In their answer, the spouses Yao denied that the project was
completed in April 1998. Instead, they alleged that Matela
abandoned the project without notice. They claimed that they
paid Matela the sum of P4.7M which should be considered as
sufficient payment considering that Matela used sub-standard
materials causing damage to the project which needed a
substantial amount of money to repair.
 RTC rendered judgment in favor of Matela, based on
documents issued by the Building Official of Makati City. The
Court of Appeals affirmed the decision of the lower court but
modified the amount of actual damages to P391k.
 Thereafter, another case was filed by Matela, regarding the
collection of the P300k additional construction cost.
ISSUE: WON MATELA MAY COLLECT ACTUAL DAMAGES
AND THE ADDITIONAL CONSTRUCTION COST?
HELD: NO, BOTH PARTIES ARE GUILTY OF BREACH.
Reciprocal obligations are those which are created or established at
the same time, out of the same cause, and which result in mutual
relationships of creditor and debtor between the parties. These
obligations are conditional in the sense that the fulfillment of an
obligation by one party depends upon the fulfillment of the
obligation by the other. In reciprocal obligations, the general rule is
that fulfillment by both parties should be simultaneous or at the same
time.
The rule then is that in reciprocal obligations, one party incurs in
delay from the moment the other party fulfills his obligation, while
he himself does not comply or is not ready to comply in a proper
manner with what is incumbent upon him. If neither party complies
or is ready to comply with what is incumbent upon him, the default
of one compensates for the default of the other. In such case, there
can be no legal delay.
Both the trial court and the Court of Appeals found that Matela’s
“delivery” of the project constitutes a faithful discharge of his
duties. We find otherwise. Our evaluation of the records reveal that
Matela failed to comply with his obligation to construct the
townhouses based on the agreed specifications. As such, he cannot
be discharged from his obligations by mere delivery of the same to
the spouses Yao.
The agreed construction cost of the project was P5M, however, the
amounts reflected in the Building Permit, the Certificate of
Completion and the Certificate of Occupancy are far less. In the
Building Permit, the total cost was pegged at P2.1M; in the
Certificate of Completion, the actual cost of construction was
P2.3M; while in the Certificate of Occupancy the cost of the project
as built was declared at P2.31M. Considering the discrepancies, the
conclusiveness of the said documents fall when arrayed against the
pieces of evidence introduced by the spouses Yao.
However, we find that the spouses Yao likewise failed to comply
with their undertakings. As alleged by Matela, the spouses Yao made
periodic payments to him based on progress billings. However, the
spouses Yao refused to pay the balance of the agreed construction
cost despite demands. The spouses Yao justified their non-payment
by arguing that Matela abandoned the project and that there were
defects in its construction.
Evidently, both parties in this case breached their respective
obligations. The well entrenched doctrine is that the law does not
relieve a party from the effects of an unwise, foolish or disastrous
contract, entered into with full awareness of what he was doing and
entered into and carried out in good faith. However, in situations
such as the one discussed above, where it cannot be conclusively
determined which of the parties first violated the contract, equity
calls and justice demands that we apply the solution provided in
Article 1192 of the Civil Code: “Art. 1192. In case both parties have
committed a breach of the obligation, the liability of the first
infractor shall be equitably tempered by the courts. If it cannot be
determined which of the parties first violated the contract, the same
shall be deemed extinguished, and each shall bear his own
damages.”
In the instant case, the losses to be incurred by the parties will come,
as far as Matela is concerned, in the form of the alleged unpaid
balance of the construction cost that he is seeking to collect from the
spouses Yao. For the latter, the lossesthat they will bear is the cost
of repairing the defects in the project. We consider the amount of
P4,699,610.93 which Matela has already received from the spouses
Yao, as sufficient payment for his services and the materials used in
the project.
3. BREACH
3.1.4 EFFECT ON PERSONS SUBSIDIARILY
LIABLE
CIV LAW REVIEW - OBLICON DIGESTS
PHIL. EXPORT AND FOREIGN LOAN GUARANTEE CORP.
V. V.P. EUSEBIO CONSTRUCTION, INC.
[G.R. No. 140047. July 13, 2004]
FACTS:
 The State Organization of Buildings (SOB) under the
Government of Iraq awarded the construction of a Medical
Center in Baghdad to Ajyal Trading, 3-Plex International, Inc.,
and VPECI, which are Filipino contractors. The Iraq
Government required the contractors to submit a performance
bond and an advance payment bond. To comply with these
requirements, 3-Plex and VPECI applied for the issuance of a
guarantee with petitioner Philguarantee.
 Letters of guarantee were issued by Philguarantee to the
Rafidain Bank of Baghdad, but they were not accepted by SOB.
SOB required a letter-guarantee from Rafidain Bank, the
government bank of Iraq. Rafidain Bank then issued a
performance bond in favor of SOB on the condition that another
foreign bank, not Philguarantee, would issue a counter-
guarantee to cover its exposure. Al Ahli Bank of Kuwait was,
therefore, engaged to provide a counter-guarantee to Rafidain
Bank, but it required a similar counter-guarantee in its favor
from Philguarantee.
 Philguarantee then issued in favor of Al Ahli Bank Letters
of Guarantee for the Performance Bond Guarantee and the
Advance Payment Guarantee. These letters of guarantee were
secured by (1) a Deed of Undertaking executed by respondents
VPECI, Spouses Vicente P. Eusebio and Soledad C. Eusebio, 3-
Plex, and Spouses Eduardo E. Santos and Iluminada Santos
[herein respondents]; and (2) a surety bond issued by respondent
First Integrated Bonding and Insurance Company, Inc. (FIBICI).
 The construction, which was supposed to start on June
1981, commenced only on the last week of August 1981.
Because of this delay and the slow progress of the construction
work due to some setbacks and difficulties, the Project was not
completed on schedule.
 Al Ahli Bank of Kuwait demanded full payment of its
performance bond counter-guarantee. Philguarantee received a
telex message from Al Ahli Bank stating that it had already paid
to Rafidain Bank the sum under its letter of guarantee, and
demanding reimbursement by Philguarantee.
 VPECI requested the Central Bank to hold in abeyance the
payment by the petitioner but the Central Bank authorized the
remittance for its account of the amount to Al Ahli Bank.
Philguarantee thus paid the amount to Al Ahli Bank.
 Philguarantee then sent to repondents separate letters
demanding full payment of the amount plus accruing interest,
penalty charges, and 10% attorney’s fees pursuant to their joint
and solidary obligations under the deed of undertaking and
surety bond. When the respondents failed to pay, the petitioner
filed a civil case for collection of a sum of money.
ISSUE: WON Philguarantee is entitled to reimbursement of what it
paid under Letter of Guarantee it issued to Al Ahli Bank of Kuwait
based on the deed of undertaking and surety bond from the
respondents?
HELD: NO. The Court of Appeals and the trial court were correct in
ruling that the petitioner is a guarantor and not a surety. That the
guarantee issued by the petitioner is unconditional and irrevocable
does not make the petitioner a surety. As a guaranty, it is still
characterized by its subsidiary and conditional quality because it
does not take effect until the fulfillment of the condition, namely,
that the principal obligor should fail in his obligation at the time and
in the form he bound himself. In other words, an unconditional
guarantee is still subject to the condition that the principal debtor
should default in his obligation first before resort to the guarantor
could be had. A conditional guaranty, as opposed to an
unconditional guaranty, is one which depends upon some extraneous
event, beyond the mere default of the principal, and generally upon
notice of default and reasonable diligence in exhausting proper
remedies against the principal.
It appearing that Letter of Guarantee merely stated that in the event
of default by respondent VPECI the petitioner shall pay, the
obligation assumed by the petitioner was simply that of an
unconditional guaranty, not conditional guaranty. But as earlier
ruled the fact that petitioner’s guaranty is unconditional does not
make it a surety. Besides, surety is never presumed. It is only when
the guarantor binds himself solidarily with the principal debtor that
the contract becomes one of suretyship.
The issue of whether respondent VPECI defaulted in its obligations
may be determined by the laws of Iraq. However, since that foreign
law was not properly pleaded or proved, the presumption of identity
or similarity, otherwise known as the processual presumption, comes
into play. Our law, specifically Article 1169, last paragraph, of the
Civil Code, provides: “In reciprocal obligations, neither party incurs
in delay if the other party does not comply or is not ready to comply
in a proper manner with what is incumbent upon him.” Default or
mora on the part of the debtor is delay in fulfillment of the prestation
by reason of a cause imputable to the former. It is the non-fulfillment
of an obligation with respect to time.
It is undisputed that only 51.7% of the total work had been
accomplished. As found by both the Court of Appeals and the trial
court, the delay or the non-completion of the Project was caused by
factors not imputable to the respondent contractor. It was rather due
mainly to the persistent violations by SOB of the terms and
conditions of the contract, particularly its failure to pay 75% of the
accomplished work in US Dollars. Indeed, where one of the
parties to a contract does not perform in a proper manner the
prestation which he is bound to perform under the contract, he
is not entitled to demand the performance of the other party. A
party does not incur in delay if the other party fails to perform
the obligation incumbent upon him.
In order that the debtor may be in default it is necessary that the
following requisites be present: (1) that the obligation be
demandable and already liquidated; (2) that the debtor delays
performance; and (3) that the creditor requires the performance
because it must appear that the tolerance or benevolence of the
creditor must have ended.
As stated earlier, SOB cannot yet demand complete performance
from VPECI because it has not yet itself performed its obligation in
a proper manner, particularly the payment of the 75% of the cost of
the Project in US Dollars. VPECI cannot yet be said to have
incurred in delay. Even assuming that there was delay and that the
delay was attributable to VPECI, still the effects of that delay ceased
upon the renunciation by the creditor, SOB, which could be implied
when the latter granted several extensions of time to the former.
Besides, no demand has yet been made by SOB against the
respondent contractor. Demand is generally necessary even if a
period has been fixed in the obligation. And default generally begins
from the moment the creditor demands judicially or extra-judicially
the performance of the obligation. Without such demand, the effects
of default will not arise.
CIV LAW REVIEW - OBLICON DIGESTS
Moreover, the petitioner as a guarantor is entitled to the benefit of
excussion, that is, it cannot be compelled to pay the creditor SOB
unless the property of the debtor VPECI has been exhausted and all
legal remedies against the said debtor have been resorted to by the
creditor. It could also set up compensation as regards what the
creditor SOB may owe the principal debtor VPECI. In this case,
however, the petitioner has clearly waived these rights and
remedies by making the payment of an obligation that was yet to
be shown to be rightfully due the creditor and demandable of the
principal debtor.
As found by the Court of Appeals, the petitioner fully knew that the
joint venture contractor had collectibles from SOB which could be
set off with the amount covered by the performance guarantee. Since
the petitioner was aware of the contractor’s outstanding receivables
from SOB, it should have set up compensation as was proposed in its
project situationer.
As a rule, a guarantor who pays for a debtor should be
indemnified by the latter and would be legally subrogated to the
rights which the creditor has against the debtor. However, a
person who makes payment without the knowledge or against
the will of the debtor has the right to recover only insofar as the
payment has been beneficial to the debtor. If the obligation was
subject to defenses on the part of the debtor, the same defenses
which could have been set up against the creditor can be set up
against the paying guarantor.
It is clear that the payment made by the petitioner guarantor did not
in any way benefit the principal debtor, given the project status and
the conditions obtaining at the Project site at that time. Moreover,
the respondent contractor was found to have valid defenses against
SOB, which are fully supported by evidence and which have been
meritoriously set up against the paying guarantor, the petitioner in
this case. And even if the deed of undertaking and the surety bond
secured petitioner’s guaranty, the petitioner is precluded from
enforcing the same by reason of the petitioner’s undue payment on
the guaranty. Rights under the deed of undertaking and the surety
bond do not arise because these contracts depend on the validity of
the enforcement of the guaranty.
The petitioner guarantor should have waited for the natural course of
guaranty: the debtor VPECI should have, in the first place, defaulted
in its obligation and that the creditor SOB should have first made a
demand from the principal debtor. It is only when the debtor does
not or cannot pay, in whole or in part, that the guarantor should pay.
When the petitioner guarantor in this case paid against the will of the
debtor VPECI, the debtor VPECI may set up against it defenses
available against the creditor SOB at the time of payment. This is
the hard lesson that the petitioner must learn.
3.2 FORTUITOUS EVENTS
ROBERTO JUNTILLA V. CLEMENTE FONTANAR
G.R. No. L-45637 May 31, 1985
FACTS:
 Plaintiff was a passenger of the public utility jeepney on the
course of the trip from Danao City to Cebu City. The jeepney
was driven by defendant Berfol Camoro. It was registered under
the franchise of defendant Clemente Fontanar but was actually
owned by defendant Fernando Banzon.
 When the jeepney reached Mandaue City, the right rear tire
exploded causing the vehicle to turn turtle. In the process, the
plaintiff who was sitting at the front seat was thrown out of the
vehicle. Upon landing on the ground, the plaintiff momentarily
lost consciousness. When he came to his senses, he found that
he had a lacerated wound on his right palm. Aside from this, he
suffered injuries on his left arm, right thigh and on his back.
Because of his shock and injuries, he went back to Danao City
but on the way, he discovered that his "Omega" wrist watch was
lost. Upon his arrival in Danao City, he immediately entered the
Danao City Hospital to attend to his injuries, and also requested
his father-in-law to proceed immediately to the place of the
accident and look for the watch. In spite of the efforts of his
father-in-law, the wrist watch, which he bought for P 852.70
could no longer be found. He later filed a civil case for breach
of contract with damages against Clemente Fontanar, Fernando
Banzon and Berfol Camoro.
 The respondents filed their answer, alleging inter alia that
the accident that caused losses to the petitioner was beyond the
control of the respondents taking into account that the tire that
exploded was newly bought and was only slightly used at the
time it blew up.
ISSUE: WON RESPONDENTS’ LIABILITY IS NEGATED BY
THE HAPPENING OF A FORTUITOUS EVENT?
HELD: NO, the tire blowout was NOT a fortuitous event. The CFI
relied on the ruling of the CA in Rodriguez v. Red Line
Transportation Co., where the CA ruled that: “A tire blow-out does
not constitute negligence unless the tire was already old and should
not have been used at all. Indeed, this would be a clear case of
fortuitous event.” The foregoing conclusions of the CFI are based on
a misapprehension of overall facts from which a conclusion should
be drawn. The reliance of the CFI on the Rodriguez case is not in
order. In La Mallorca and Pampanga Bus Co. v. De Jesus, et al. we
held that: “Petitioner maintains that a tire blow-out is a fortuitous
event and gives rise to no liability for negligence, citing the rulings
of the Court of Appeals in Rodriguez v. Red Line Transportation Co.
and People v. Palapad. These rulings, however, not only are not
binding on this Court but were based on considerations quite
different from those that obtain in the case at bar. The appellate court
there made no findings of any specific acts of negligence on the part
of the defendants and confined itself to the question of whether or
not a tire blow-out, by itself alone and without a showing as to the
causative factors, would generate liability.”
In the case at bar, there are specific acts of negligence on the
part of the respondents. The records show that the passenger
jeepney turned turtle and jumped into a ditch immediately after its
right rear tire exploded. The evidence shows that the passenger
jeepney was running at a very fast speed before the accident. We
agree with the observation of the petitioner that a public utility jeep
running at a regular and safe speed will not jump into a ditch when
its right rear tire blows up. There is also evidence to show that the
passenger jeepney was overloaded at the time of the accident. The
petitioner stated that there were 3 passengers in the front seat and 14
passengers in the rear.
While it may be true that the tire that blew-up was still good
because the grooves of the tire were still visible, this fact alone
does not make the explosion of the tire a fortuitous event. No
evidence was presented to show that the accident was due to adverse
road conditions or that precautions were taken by the jeepney driver
to compensate for any conditions liable to cause accidents. The
CIV LAW REVIEW - OBLICON DIGESTS
sudden blowing-up, therefore, could have been caused by too much
air pressure injected into the tire coupled by the fact that the jeepney
was overloaded and speeding at the time of the accident.
In a legal sense and, consequently, also in relation to contracts, a
caso fortuito presents the following essential characteristics: (1) The
cause of the unforeseen and unexpected occurrence, or of the
failure of the debtor to comply with his obligation, must be
independent of the human will. (2) It must be impossible to
foresee the event which constitutes the caso fortuito, or if it can
be foreseen, it must be impossible to avoid. (3) The occurrence
must be such as to render it impossible for the debtor to fulfill
his obligation in a normal manner. And (4) the obligor (debtor)
must be free from any participation in the aggravation of the
injury resulting to the creditor.
In the case at bar, the cause of the unforeseen and unexpected
occurrence was not independent of the human will. The accident was
caused either through the negligence of the driver or because of
mechanical defects in the tire. Common carriers should teach their
drivers not to overload their vehicles, not to exceed safe and legal
speed limits, and to know the correct measures to take when a tire
blows up thus insuring the safety of passengers at all times.
Relative to the contingency of mechanical defects, we held in
Necesito, et al. v. Paras, et al. that: “The preponderance of authority
is in favor of the doctrine that a passenger is entitled to recover
damages from a carrier for an injury resulting from a defect in an
appliance purchased from a manufacturer, whenever it appears that
the defect would have been discovered by the carrier if it had
exercised the degree of care which under the circumstances was
incumbent upon it, with regard to inspection and application of the
necessary tests. For the purposes of this doctrine, the manufacturer is
considered as being in law the agent or servant of the carrier, as far
as regards the work of constructing the appliance. According to this
theory, the good repute of the manufacturer will not relieve the
carrier from liability'. “
ACE-AGRO DEV’T CORP. V. C.A. & COSMOS BOTTLING
CORP.
G.R. No. 119729 January 21, 1997
FACTS:
 Private respondent Cosmos Bottling Corp. is engaged in the
manufacture of soft drinks. Since 1979 petitioner Ace-Agro
Development Corp. (Ace-Agro) had been cleaning soft drink
bottles and repairing wooden shells for Cosmos, rendering its
services within the company premises in San Fernando,
Pampanga. The parties entered into service contracts which they
renewed every year. In January 1990, they signed a contract
covering the period January 1, 1990 to December 31, 1990.
Private respondent had earlier contracted the services of Aren
Enterprises in view of the fact that petitioner could handle only
from 2,000 to 2,500 cases a day and could not cope with private
respondent's daily production of 8,000 cases. Unlike petitioner,
Aren Enterprises rendered service outside private respondent's
plant.
 On April 25, 1990, fire broke out in private respondent's
plant, destroying, among other places, the area where petitioner
did its work. As a result, petitioner's work was stopped.
Petitioner asked private respondent to allow it to resume its
service, but petitioner was advised that on account of the fire,
which had "practically burned all old soft drink bottles and
wooden shells," private respondent was terminating their
contract.
 Petitioner expressed surprise at the termination of the
contract and requested private respondent to reconsider its
decision and allow petitioner to resume its work in order to
"cushion the sudden impact of the unemployment of many of its
workers." As it received no reply from private respondent,
petitioner informed its employees of the termination of their
employment. This led the employees to file a complaint for
illegal dismissal before the Labor Arbiter against petitioner and
private respondent.
 Private respondent then advised petitioner that the latter
could resume the repair of wooden shells under terms similar to
those contained in its contract but work had to be done outside
the company premises. Petitioner refused the offer, claiming
that to do its work outside the company's premises would make
it incur additional costs for transportation. In subsequent
meetings with Cosmos’ representatives, Ace-Agro asked for an
extension of the term of the contract in view of the suspension
of work. But its request was apparently turned down.
 Later, private respondent advised petitioner that the latter
could then resume its work inside the plant in accordance with
its original contract with Cosmos. Petitioner rejected private
respondent's offer, this time, citing the fact that there was a
pending labor case.
 Subsequently, Ace-Agro brought a case against private
respondent for breach of contract and damages. It complained
that the termination of its service contract was illegal and
arbitrary and that, as a result, it stood to lose profits and to be
held liable to its employees for backwages, damages and/or
separation pay.
 A decision was rendered in the labor case, finding petitioner
liable for the claims of its employees. Petitioner was ordered to
reinstate the employees and pay them backwages. However,
private respondent Cosmos was absolved from the employees'
claims on the ground that there was no privity of contract
between them and private respondent.
 On the other hand, RTC found respondent guilty of breach
of contract and ordered it to pay damages to petitioner.
Petitioner's claim for reimbursement for what it had paid to its
employees in the labor case was denied.
ISSUE: WON COSMOS BOTTLING IS LIABLE FOR BREACH?
HELD: NO. Petitioner claims that the appellate court erred "in
ruling that respondent was justified in unilaterally terminating the
contract on account of a force majeure." Quite possibly it did not
understand the appellate court's decision, or it would not be
contending that there was no valid cause for the termination of the
contract but only for its suspension. The following is what the
appellate court said: “Article 1231 of the New Civil Code on
extinguishment of obligations does not specifically mention
unilateral termination as a mode of extinguishment of obligation but,
according to Tolentino, "there are other causes of extinguishment of
obligations which are not expressly provided for in this chapter." He
further said: “But in some contracts, either because of its
indeterminate duration or because of the nature of the prestation
which is its object, one of the parties may free himself from the
contractual tie by his own will (unilateral extinguishment).”
And that was just what defendant-appellant did when it unilaterally
terminated the agreement it had with plaintiff-appellee. As per its
letter, the reason given by defendant-appellant for unilaterally
terminating the agreement was because the fire practically burned all
CIV LAW REVIEW - OBLICON DIGESTS
of the softdrink bottles and wooden shells which plaintiff-appellee
was working on under the agreement. What defendant-appellant was
trying to say was that the prestation or the object of their agreement
had been lost and destroyed in the above-described fire. Apparently,
the defendant-appellant would like this situation to fall within what
according to Tolentino would be: “Obligations may be extinguished
by the happening of unforeseen events, under whose influence the
obligation would never have been contracted, because in such cases,
the very basis upon which the existence of the obligation is founded
would be wanting.”
Both parties admitted that the fire was a force majeure or unforeseen
event and that the same even burned practically all the softdrink
bottles and wooden shells which are the objects of the agreement.
But the story did not end there. It is true that defendant-appellant still
had other bottles that needed cleaning and wooden shells that needed
repairing; therefore, the suspension of the work of the plaintiff-
appellee brought about by the fire is, at best, temporary as found by
the trial court.
Appellant sent its November 7, 1990 letter to appellee, this time
specifically stating that plaintiff-appellee can now resume work in
accordance with their existing agreement. This time, it could not be
denied that by the tenor of the letter, appellant was willing to honor
its agreement with appellee, that it had finally made a
reconsideration of appellee's plea to resume work under the contract.
But again, plaintiff-appellee refused this offer to resume work.
Why did the appellee refuse to resume work? Its November 17, 1990
letter stated that it had something to do with the settlement of the
NLRC case filed against it by its employees. But that was not the
real reason. In his cross-examination, the witness for appellee stated
that its real reason for refusing to resume work with the appellant
was, as in its previous refusal, because it wanted an extension of the
period or duration of the contract beyond December 31, 1991, to
cover the period within which it was unable to work.
The agreement between the appellee and the appellant is with a
resolutory period, beginning from January 1, 1990 and ending on
December 31, 1990. When the fire broke out, there resulted a
suspension of the appellee's work as per agreement. But this
suspension of work due to force majeure did not merit an
automatic extension of the period of the agreement between
them.
According to Tolentino: “The stipulation that in the event of a
fortuitous event or force majeure the contract shall be deemed
suspended during the said period does not mean that the happening
of any of those events stops the running of the period the contract
has been agreed upon to run. It only relieves the parties from the
fulfillment of their respective obligations during that time. If during
six of the thirty years fixed as the duration of a contract, one of the
parties is prevented by force majeure to perform his obligation
during those years, he cannot after the expiration of the thirty-year
period, be compelled to perform his obligation for six more years to
make up for what he failed to perform during the said six years,
because it would in effect be an extension of the term of the contract.
The contract is stipulated to run for thirty years, and the period
expires on the thirtieth year; the period of six years during which
performance by one of the parties is prevented by force majeure
cannot be deducted from the period stipulated.”
In fine, the appellant withdrew its unilateral termination of its
agreement with appellee in its letter dated November 7, 1990.
But the appellee's refusal to resume work was, in effect, a
unilateral termination of the parties' agreement, an act that was
without basis. When the appellee asked for an extension of the
period of the contract beyond December 31, 1990 it was, in effect,
asking for a new contract which needed the consent of defendant-
appellant. The appellee might be forgiven for its first refusal, but the
second refusal must be construed as a breach of contract by plaintiff-
appellee.
PHIL. COMMUNICATIONS SATELLITE CORP. V. GLOBE
TELECOM, INC.
G.R. No. 147324, May 25, 2004
FACTS:
 Globe Telecom, Inc. (Globe), had been engaged in the
coordination of the provision of various communication
facilities for the military bases of the US in Clark Air Base and
Subic Naval Base. Philcomsat and Globe entered into an
Agreement whereby Philcomsat obligated itself to establish,
operate and provide an IBS Standard B earth station (earth
station) within Cubi Point for the exclusive use of the USDCA.
The term of the contract was for 60 months, or 5 years. In turn,
Globe promised to pay Philcomsat monthly rentals for each
leased circuit involved.
 At the time of the execution of the Agreement, both parties
knew that the RP-US Military Bases Agreement, which was the
basis for the occupancy of the Clark Air Base and Subic Naval
Base in Cubi Point, was to expire in 1991.
 Subsequently, Philcomsat installed and established the earth
station at Cubi Point and the USDCA made use of the same. On
16 September 1991, the Senate passed and adopted Senate
Resolution No. 141, expressing its decision not to concur in the
ratification of the Treaty that was supposed to extend the term of
the use by the US of Subic Naval Base, among others.
 Globe notified Philcomsat of its intention to discontinue the
use of the earth station in view of the withdrawal of US military
personnel from Subic Naval Base after the termination of the
RP-US Military Bases Agreement. Globe invoked as basis for
the letter of termination Section 8 (Default) of the Agreement,
which provides: ”Neither party shall be held liable or deemed to
be in default for any failure to perform its obligation under this
Agreement if such failure results directly or indirectly from
force majeure or fortuitous event. Either party is thus precluded
from performing its obligation until such force majeure or
fortuitous event shall terminate. For the purpose of this
paragraph, force majeure shall mean circumstances beyond the
control of the party involved including, but not limited to, any
law, order, regulation, direction or request of the Government of
the Philippines, strikes or other labor difficulties, insurrection
riots, national emergencies, war, acts of public enemies, fire,
floods, typhoons or other catastrophies or acts of God.”
 Philcomsat sent a reply letter, stating that "we expect
[Globe] to know its commitment to pay the stipulated rentals for
the remaining terms of the Agreement even after [Globe] shall
have discontinue[d] the use of the earth station after November
08, 1992," citing Section 7 of the Agreement.
 After the US military forces left Subic Naval Base,
Philcomsat demanded payment from Globe of its outstanding
obligations under the Agreement. However, Globe refused to
heed Philcomsat’s demand. Philcomsat filed a Complaint
against Globe, praying that the latter be ordered to pay
liquidated damages under the Agreement, with legal interest,
exemplary damages, attorney’s fees and costs of suit.
CIV LAW REVIEW - OBLICON DIGESTS
ISSUE: WON THE TERMINATION OF THE RP-US MILITARY
BASES AGREEMENT WAS A FORTUITOUS EVENT?
HELD: YES. There is no merit is Philcomsat’s argument that
Section 8 of the Agreement cannot be given effect because the
enumeration of events constituting force majeure therein unduly
expands the concept of a fortuitous event under Article 1174 of the
Civil Code and is therefore invalid. In support of its position,
Philcomsat contends that under Article 1174 of the Civil Code, an
event must be unforeseen in order to exempt a party to a contract
from complying with its obligations therein. It insists that since the
expiration of the RP-US Military Bases Agreement, the non-
ratification of the Treaty of Friendship, Cooperation and Security
and the withdrawal of US military forces and personnel from Cubi
Point were not unforeseeable, but were possibilities known to it and
Globe at the time they entered into the Agreement, such events
cannot exempt Globe from performing its obligation of paying
rentals for the entire five-year term thereof.
However, Article 1174, which exempts an obligor from liability on
account of fortuitous events or force majeure, refers not only to
events that are unforeseeable, but also to those which are
foreseeable, but inevitable. A fortuitous event under Article 1174
may either be an "act of God," or natural occurrences such as floods
or typhoons,or an "act of man," such as riots, strikes or wars.
The enumeration under Section 8 of the Contract are either
unforeseeable, or foreseeable but beyond the control of the parties.
There is nothing in the enumeration that runs contrary to, or
expands, the concept of a fortuitous event. Not being contrary to law,
morals, good customs, public order, or public policy, Section 8 of
the Agreement which Philcomsat and Globe freely agreed upon has
the force of law between them.
In order that Globe may be exempt from non-compliance with its
obligation to pay rentals under Section 8, the concurrence of the
following elements must be established: (1) the event must be
independent of the human will; (2) the occurrence must render it
impossible for the debtor to fulfill the obligation in a normal manner;
and (3) the obligor must be free of participation in, or aggravation of,
the injury to the creditor.
The Court agrees with the Court of Appeals and the trial court that
the abovementioned requisites are present in the instant case.
Philcomsat and Globe had no control over the non-renewal of the
term of the RP-US Military Bases Agreement when the same expired
in 1991, because the prerogative to ratify the treaty extending the life
thereof belonged to the Senate. Neither did the parties have control
over the subsequent withdrawal of the US military forces and
personnel from Cubi Point in December 1992.
Considering the foregoing, the Court finds and so holds that the
afore-narrated circumstances constitute "force majeure or fortuitous
event(s) as defined under paragraph 8 of the Agreement. From the
foregoing, the Court finds that the defendant is exempted from
paying the rentals for the facility for the remaining term of the
contract. Moreover, it would be unjust to require Globe to continue
paying rentals even though Philcomsat cannot be compelled to
perform its corresponding obligation under the Agreement.
4. USURIOUS TRANSACTIONS/OBLIGATIONS PAYABLE
INSTALLMENTS (ARTS. 1175-1176)
LIAM LAW V. OLYMPIC SAWMILL CO.
G.R. No. L-30771 May 28, 1984
FACTS:
 Plaintiff loaned P10k, without interest, to Olympic Sawmill
and defendant Elino Lee Chi, as the managing partner. The loan
became ultimately due, but was not paid, with the debtors
asking for an extension of three months.
 Parties then executed another loan document. Payment of
the P10k was extended to April 30, 1960, but the obligation was
increased by P6k, to form part of the principal obligation to
answer for attorney's fees, legal interest, and other cost incident
thereto to be paid unto the creditor and his successors in interest
upon the termination of this agreement.
 Defendants again failed to pay their obligation and plaintiff
instituted this collection case. Defendants admitted the P10k
principal obligation, but claimed that the additional P6k
constituted usurious interest.
 RTC rendered decision ordering defendants to pay plaintiff
the amount of P10,000.00 plus the further sum of P6,000.00 by
way of liquidated damages with legal rate of interest on both
amounts from April 30, 1960." It is from this judgment that
defendants have appealed.
ISSUE: WON DEFENDANT MAY EVADE PAYMENT OF THE
6K OBLIGATION ON THE CLAIM THAT SUCH INTEREST
WAS USURIOUS?
HELD: NO. The main thrust of defendants' appeal is the allegation
in their Answer that the P6,000.00 constituted usurious interest.
They insist the claim of usury should have been deemed admitted by
plaintiff as it was "not denied specifically and under oath". Section 9
of the Usury Law (Act 2655) provided: “SEC.9. The person or
corporation sued shall file its answer in writing under oath to any
complaint brought or filed against said person or corporation before
a competent court to recover the money or other personal or real
property, seeds or agricultural products, charged or received in
violation of the provisions of this Act. The lack of taking an oath to
an answer to a complaint will mean the admission of the facts
contained in the latter.”
The foregoing provision envisages a complaint filed against an entity
which has committed usury, for the recovery of the usurious interest
paid. In that case, if the entity sued shall not file its answer under
oath denying the allegation of usury, the defendant shall be deemed
to have admitted the usury. The provision does not apply to a case,
as in the present, where it is the defendant, not the plaintiff, who is
alleging usury.
Moreover, for sometime now, usury has been legally non-existent.
Interest can now be charged as lender and borrower may agree upon.
The Rules of Court in regards to allegations of usury, procedural in
nature, should be considered repealed with retroactive effect.
6. DIFFERENT KINDS OF OBLIGATIONS
6.2 CONDITIONAL (ARTS. 1179-
1180)
6.2.1 SUSPENSIVE CONDITION
FELIX I. GONZALES V. THE HEIRS OF THOMAS and
PAULA CRUZ
G.R.IN
No. 131784 September 16, 1999
FACTS:
CIV LAW REVIEW - OBLICON DIGESTS
 Paula Año Cruz together with the respondent heirs entered
into a Contract of Lease/Purchase with the Petitioner Felix L.
Gonzales, the sole proprietor and manager of Felgon Farms, of a
half-portion of a parcel of land.
 The contract of Lease/Purchase contains the following
provisions:
1. The terms of this Contract is for a period of one year upon
the signing thereof. After the period of this Contract, the
LESSEE shall purchase the property on the agreeable
price of P1M payable within 2 Years period with an
interest of 12% per annum subject to the devalued
amount of the Philippine Peso, according to the
following schedule of payment: Upon the execution of
the Deed of Sale 50% - and thereafter 25% every 6
months thereafter, payable within the first 10 days of the
beginning of each period of 6 months.
2. The LESSEE shall pay by way of annual rental an amount
equivalent to P2,500.00 per hectare, upon the signing of
this contract on Dec. 1, 1983.
9. The LESSORS hereby commit themselves and shall
undertake to obtain a separate and distinct T.C.T. over
the herein leased portion to the LESSEE within a
reasonable period of time which shall not in any case
exceed 4 years, after which a new Contract shall be
executed by the herein parties which shall be the same in
all respects with this Contract of Lease/Purchase insofar
as the terms and conditions are concerned.
 Gonzales paid the P2,500.00 per hectare of P15k annual
rental on the half-portion of the property in accordance with the
second provision of the Contract of Lease/Purchase and
thereafter took possession of the property. Gonzales did not,
however, exercise his option to purchase the property
immediately after the expiration of the 1year lease. He remained
in possession of the property without paying the purchase price
in the Contract of Lease/Purchase and without paying any
further rentals thereon.
 Ricardo Cruz informed Gonzales of the lessors' decision to
rescind the Contract of Lease/Purchase due to a breach thereof
committed by the petitioner. The letter also served as a demand
on the defendant to vacate the premises within 10 days from
receipt of said letter.
 Gonzales refused to vacate the property and continued
possession thereof. A final demand letter to vacate the premises
was sent. Alleging breach of the provisions of the Contract of
Lease/Purchase, the plaintiffs filed a complaint for recovery of
possession with damages.
ISSUE: WON CONTRACT COULD BE RESCINDED BY
RESPONDENT HEIRS?
HELD: NO, PAR. 9 WAS A SUSPENSIVE CONDITION. Alleging
that petitioner has not purchased the property after the lapse of one
year, respondents seek to rescind the Contract and to recover the
property. Petitioner, on the other hand, argues that he could not be
compelled to purchase the property, because respondents have not
complied with paragraph nine, which obligates them to obtain a
separate and distinct title in their names. He contends that paragraph
nine was a condition precedent to the purchase of the property. Basic
is the rule in the interpretation of contracts that if some stipulation
therein should admit of several meanings, it shall be understood as
bearing that import most adequate to render it effectual. Considering
the antecedents of the ownership of the disputed lot, it appears that
petitioner's interpretation renders clause nine most effectual.
Thus, the clear intent of the ninth paragraph was for respondents to
obtain a separate and distinct TCT in their names. This was
necessary to enable them to show their ownership of the stipulated
portion of the land and their concomitant right to dispose of it.
Absent any title in their names, they could not have sold the disputed
parcel of land.
In a contract of sale, the title to the property passes to the vendee
upon the delivery of the thing sold. In this case, the respondent could
not deliver ownership or title to a specific portion of the yet
undivided property. True, they could have intended to sell their
hereditary interest, but in the context of the Contract of
Lease/Purchase, the parties under paragraph nine wanted the specific
portion of the land to be segregated, identified and specifically titled.
Hence, by the said Contract, the respondents as sellers were given a
maximum of four years within which to acquire a separate TCT in
their names, preparatory to the execution of the deed of sale and the
payment of the agreed price in the manner described in paragraph
nine.
Because the ninth clause required respondents to obtain a separate
and distinct TCT in their names and not in the name of petitioner, it
logically follows that such undertaking was a condition precedent to
the latter's obligation to purchase and pay for the land. Put
differently, petitioner's obligation to purchase the land is a
conditional one and is governed by Article 1181 of the Civil Code.
Condition has been defined as "every future and uncertain event
upon which an obligation or provision is made to depend. It is a
future and uncertain event upon which the acquisition or
resolution of rights is made to depend by those who execute the
juridical act." Without it, the sale of the property under the
Contract cannot be perfected, and petitioner cannot be obliged to
purchase the property. "When the consent of a party to a contract is
given subject to the fulfillment of a suspensive condition, the
contract is not perfected unless that condition is first complied with."
The Court has held that "[w]hen the obligation assumed by a party to
a contract is expressly subjected to a condition, the obligation cannot
be enforced against him unless the condition is complied with."
Furthermore, "[t]he obligatory force of a conditional obligation is
subordinated to the happening of a future and uncertain event, so that
if that event does not take place, the parties would stand as if the
conditional obligation had never existed." In this case, the obligation
of the petitioner to buy the land cannot be enforced unless
respondents comply with the suspensive condition that they acquire
first a separate and distinct TCT in their names. The suspensive
condition not having been fulfilled, then the obligation of the
petitioner to purchase the land has not arisen.
6.2 CONDITIONAL OBLIGATIONS
6.2.2 RESOLUTORY
CONDITION
AGAPITO B. DUCUSIN V. C.A. & VIRGILIO S. BALIOLA
G.R. No. L-58286 May 16, 1983
FACTS:
 Petitioner Agapito Ducusin leased to private respondent,
Virgilio S. Baliola married to Lilia Baliola a one-door apartment
unit. The contract of lease provides: 2. The term of this contract
CIV LAW REVIEW - OBLICON DIGESTS
shall be in a month to month basis commencing on February
19,1975 until terminated by the lessor on the ground that his
children need the premises for their own use or residence or
upon any ground provided for in accordance with law.
 The Baliola spouses occupied the apartment for almost 2
years when Ducusin sent a "Notice to Terminate Lease
Contract," terminating the lease and giving them until March 15,
1977 within which to vacate the premises for the reason that his
two children were getting married and will need the apartment
for their own use and residence. A second letter was thereafter
sent by Ducusin to respondents Baliolas making an inquiry on
any action the latter had taken on the previous notice to
terminate the lease contract. Respondents made no reply to the
"Notice to Terminate Lease Contract".
 So petitioners filed an action for ejectment against the
Baliola spouses, alleging that having constructed the apartment
complex for the use and residence of his children (each to a
unit) if and when they decide to marry and live independently
and that the apartment unit having been allotted to his son,
Agapito Ducusin, Jr., the said unit is now needed by Agapito, Jr.
who is getting married in the month of May, 1977 and that said
Agapito, Jr. has decided to live independently. The complaint
for eviction further alleged that the lessees have violated the
terms of the contract by subleasing the premises; that the lessees
have not used the premises solely for residential purposes but
have used the same as factory and/or manufacturing premises
for their commercial goods; and that they have neglected to
undertake repairs of the apartment and the premises according to
their agreement.
 The lessees denied the allegations of the lessor and claimed
in their Answer that the ejectment suit "is a well-planned
scheme to rid the defendants and family out of their apartment,
and to circumvent the law prohibiting raising the rental of
apartments and houses."
 Court decided in favor of the lessor Ducusin on the ground
that the "defendants' contract with the plaintiff has already
terminated with the notice of termination sent by the plaintiff to
the defendants on the ground that he needs the premises for his
own children."
ISSUE: WON THE LEASE CONTRACT WAS SUBJECT TO A
RESOLUTORY CONDITION?
HELD: YES. We find for the petitioners. We do not agree with the
holding of the respondent court that the petitioners have not proved
by a preponderance of evidence the alleged need of the immediate
members of his family for the use of the leased premises.
The contention of the petitioner that the contract of lease in question
is for a definite period, being on a month-to-month basis beginning
February 19, 1975 and is, therefore, not covered by P.D. No. 20, is
correct.
Period relates to "length of existence; duration" or even a "series of
years, months or days in which something is completed" Definite
means "having distinct or certain limits; determinate in extent or
character; limited fixed." A definite period, therefore, refers to a
portion of time certain or ascertainable as to its beginning, duration
and termination.
In one case, it was held: “As to the duration and termination of the
aforementioned contractual relations, the parties used the phrase "on
a month to month basis" in the Agreement with reference to the
length of time during which petitioner Rantael would have use and
occupancy of the leased premises. And month here should be
construed, in like manner as in the interpretation of laws pursuant to
the provisions of Article 12 of the Civil Code of the Philippines,
there being no reason to deviate therefrom, as a period composed of
thirty days. The contractual relations between petitioner Rantael and
respondent Llave ceased after the expiration of the first thirty days
reckoned from August 1, 1974 but continued for the next thirty-day
period and expired after the last day thereof, repeating the same
cycle for the succeeding thirty-day periods, until the Id respondent
Llave exercised her express prerogative under the agreement to
terminate the same. Xxx However, by express exception of P.D. No.
20, judicial ejectment lies "when the lease is for a definite period"or
when the fixed or definite period agreed upon has expired. The lease
in the case at bar having a definite period, it indubitably follows that
the exception, rather than the general rule, applies and, therefore,
respondent Llave's right to judicially eject petitioner Rantael from
the premises may be duly enforced. This has been the consistent
administrative interpretation of the Office of the President.”
As to the holding of the respondent court that petitioner Ducusin, Sr.
"did not show that the one-door apartment leased to the petitioners
was the only place available for the use of his son, Agapito Ducusin,
Jr.," on the contrary, We find in the records evidence that out of the
eight doors apartment building belonging to the petitioner Ducusin
Sr., three doors, now 31 years old, became untenantable due to wear
and tear and the remaining five doors were all occupied by tenants;
first door, 3319, is occupied by Mr. Coluso, 3319-A by the Baliola
spouses, 3319-B by Mr. & Mrs. Magsano, 3319-C by Mr. & Mrs. de
los Santos, and 3319-D by Videz. From this evidence may be
deduced that there is no other place available for the use and
residence of petitioner's son, Agapito Ducusin, Jr. Assuming that
Agapito Ducusin, Sr. informed his tenant Virgilio Baliola that
another apartment unit No. 3319, would soon be vacated, the alleged
vacancy is nearly speculative and there is no showing that it actually
became vacant and available.
OSCAR A. JACINTO V. ROGELIO KAPARAZ
G.R. No. 81158 May 22, 1992
FACTS:
 Petitioners and private respondents entered into an
agreement under which the private respondents agreed to sell
and convey to petitioners a lot located in Davao Oriental for a
total consideration of P1,800. A downpayment of P800 was paid
upon execution of the Agreement. The balance of P1,000 was to
be paid by petitioners on installment at the rate of P100 a month
to the DBP to be applied to private respondents' loan accounts.
 Upon the execution of the agreement, petitioners paid the
downpayment of P800 and were placed in possession of the
portion described therein. As to the P1,000 which was to be paid
directly to the DBP, petitioners claim that they had even made
an excess payment of P100.
 In view of the refusal of private respondents to execute the
deed of sale, petitioners filed a complaint for specific
performance. Private respondents answered that the sale did not
materialize because of the failure of petitioners to fulfill their
promise to make timely payments on the stipulated price to the
DBP; as a result of such failure, private respondents failed to
secure the release of the mortgage on the property.
ISSUE: WON THERE WAS A VALID RESCISSION?
HELD: NO. ALTHOUGH THE AGREEMENT IS A CONTRACT
OF SALE, TO WHICH NON-PAYMENT OF THE PURCHASE
CIV LAW REVIEW - OBLICON DIGESTS
PRICE IS A RESOLUTORY CONDITION, PRIVATE
RESPONDENTS FAILED TO FULFILL THE REQUIREMENTS
OF ARTICLE 1592 TO EFFECT RESCISSION.
Vital to the resolution of the controversy is the determination of the
true nature of the questioned agreement. Is it a contract of sale or a
contract to sell? The two are not, of course, the same. In the latter
case, ownership is retained by the seller and is not to pass until full
payment of the price. Such payment is a positive suspensive
condition the failure of which is not a breach, casual or serious, but
simply an event that prevents the obligation of the vendor to convey
title from acquiring binding force. In such a situation, to argue that
there was only a casual breach is to proceed from the assumption
that the contract is one of absolute sale, where non-payment is a
resolutory question. Otherwise stated, as capsulized in Luzon
Brokerage Co., Inc. vs. Maritime Building Co., Inc., "there can be no
rescission or resolution of an obligation as yet non-existent, because
the suspensive condition did not happen." On the other hand, since
in a contract of sale, the non-payment of the price is a resolutory
condition, the remedy of the seller under Article 1191 of the Civil
Code is to exact fulfillment or to rescind the contract. In respect,
however, to the sale of immovable property, this Article must be
read together with Article 1592 of the same Code.
The agreement in the instant case has all the earmarks of a contract
of sale. The possession of the portion sold was immediately
delivered to the petitioners. They were granted the right to enjoy all
the improvements therein effective from the date of the execution of
the agreement. Private respondents unqualifiedly bound themselves
to execute the final deed of sale "as soon as the settlement or
partition of the estate of the deceased Narcisa R. Kaparaz shall have
been consummated and effected, but not later than March 31, 1967"
and only upon full payment of the unpaid portion of the purchase
price. The private respondents did not reserve unto themselves the
ownership of the property until full payment of the unpaid balance of
P1,000. Finally, there is no stipulation giving the private respondents
the right to unilaterally rescind the contract the moment the vendee
fails to pay within a fixed period. In reality, the agreement was an
absolute sale which allowed the petitioners to pay the remaining
balance of the purchase price in installment. Thus, it has been held
that a deed of sale is absolute in nature although denominated as a
"Deed of Conditional Sale" where nowhere in the contract in
question is a proviso or stipulation to the effect that title to the
property sold is reserved in the vendor until full payment of the
purchase price, nor is there a stipulation giving the vendor the right
to unilaterally rescind the contract the moment the vendee fails to
pay within a fixed period.
As stated earlier, in a contract of sale, the remedy of an unpaid seller
is either specific performance or rescission. The latter, with respect
to the sale of immovables, is specifically governed by Article 1592
of the Civil Code. In the case at bar, there was non-compliance with
the requirements prescribed in these provisions. It is not controverted
that private respondents had neither filed an action for specific
performance nor demanded the rescission of the agreement either
judicially or by a notarial act before the filing of the complaint. It is
only in their Answer that they belatedly raised the defense of
resolution of the contract pursuant to Article 1191 by reason of
petitioners' breach of their obligation.
Even if the general law on resolution, Article 1191 of the Civil Code,
is to be applied, Our decision would still be for the petitioners. It is
not denied that petitioners made 2 payments in the sums of P200 and
P300 at a time when what remained unsettled under the agreement
was only P400. There was then an excess payment of P100. These
payments were made to the DBP which applied them to an
outstanding account of the private respondents. Private respondents
neither complained of the delay in these payments nor rejected their
application to their account. They were, undoubtedly, benefited by
the application because it either satisfied their account or
correspondingly reduced it. The claim that the account to which it
was applied was not the account stipulated in the agreement is
without merit. In the first place, the agreement fails to disclose an
express agreement that the monthly amortizations on the P1,000
unpaid balance of the purchase price to be made to the DBP should
be applied exclusively to the agricultural loan indicated in the
exordium of the agreement. The loan was mentioned only to lay the
basis for private respondents' need for the downpayment. Second, to
allow private respondents to reject the payment of P400, plus the
excess of P100 after they benefited therefrom, would be unjust.
Finally, the delay incurred by petitioners was but a casual or slight
breach of the agreement, which did not defeat the object of the
parties in entering into the agreement. A mere casual breach does not
justify rescission. The prompt payment of the monthly amortizations
of the unpaid balance of P1,000 was not a condition precedent to the
execution of the final deed of sale. Besides, petitioners had already
paid P1,400 of the total consideration of P1,800 within the period
stipulated. Moreover, they had in fact overpaid the private
respondents by P100.
6.2 CONDITIONAL OBLIGATIONS
6.2.3 POTESTATIVE, CASUAL OR
MIXED
SECURITY BANK & TRUST CO. V. C.A. & YSMAEL
FERRER
G.R. No. 117009 October 11, 1995
FACTS:
 Private respondent Ysmael C. Ferrer was contracted by
herein petitioners SBTC and Rosito C. Manhit to construct the
building of SBTC in Davao City for the price of P1.7M. The
contract provided that Ferrer would finish the construction in
200 working days. Respondent Ferrer was able to complete the
construction of the building within the contracted period but he
was compelled by a drastic increase in the cost of construction
materials to incur eadditional xpenses of about P300k. The
additional expenses were made known to SBTC and
Supervising Architect Rudy de la Rama early on. Respondent
Ferrer made timely demands for payment of the increased cost.
Said demands were supported by receipts, invoices, payrolls and
other documents proving the additional expenses.
 SBTC and a representative of an architectural firm
consulted by SBTC, verified Ferrer's claims for additional cost.
A recommendation was then made to settle Ferrer's claim but
only for P200k. SBTC, instead of paying the recommended
additional amount, denied ever authorizing payment of any
amount beyond the original contract price. SBTC likewise
denied any liability for the additional cost based on Article IX of
the building contract.
 Ferrer then filed a complaint for breach of contract with
damages. RTC ruled for Ferrer and ordered SBTC and Rosito C.
Manhit to pay damages.
ISSUE: WON SBTC IS LIABLE FOR THE ADDITIONAL
EXPENSES?
CIV LAW REVIEW - OBLICON DIGESTS
HELD: YES. In the present case, petitioners' arguments to support
absence of liability for the cost of construction beyond the original
contract price are not persuasive. Under Article IX of the
construction contract, petitioners would make the appropriate
adjustment to the contract price in case the cost of the project
increases through no fault of the contractor (private respondent).
Under Article 1182 of the Civil Code, a conditional obligation
shall be void if its fulfillment depends upon the sole will of the
debtor. In the present case, the mutual agreement, the absence of
which petitioner bank relies upon to support its non-liability for the
increased construction cost, is in effect a condition dependent on
petitioner bank's sole will, since private respondent would naturally
and logically give consent to such an agreement which would allow
him recovery of the increased cost.
Further, it cannot be denied that petitioner bank derived benefits
when private respondent completed the construction even at an
increased cost. Hence, to allow petitioner bank to acquire the
constructed building at a price far below its actual construction cost
would undoubtedly constitute unjust enrichment for the bank to the
prejudice of private respondent. Such unjust enrichment, as
previously discussed, is not allowed by law.
RUSTAN PULP & PAPER MILLS, INC. V. I.A.C. & ILIGAN
DIVERSIFIED PROJECTS, INC.
G.R. No. 70789 October 19, 1992
FACTS:
 Petitioner Rustan established a pulp and paper mill in Lano
del Norte, to which Respondent Lluch, who is a holder of a
forest products license, supplies wood materials. The contract
provides: “That the BUYER shall have the right to stop delivery
of the said raw materials by the seller covered by this contract
when supply of the same shall become sufficient until such time
when need for said raw materials shall have become necessarily
provided, however, that the SELLER is given sufficient notice.”
 In the installation of the plant facilities, the technical staff
of Rustan Pulp and Paper Mills, Inc. recommended the
acceptance of deliveries from other suppliers of the pulp wood
materials for which the corresponding deliveries were made. But
during the test run of the pulp mill, the machinery line thereat
had major defects while deliveries of the raw materials piled up,
which prompted the Japanese supplier of the machinery to
recommend the stoppage of the deliveries. The suppliers were
informed to stop deliveries and the letter of similar advice sent
by petitioners to private respondents.
 Private respondent Romeo Lluch sought to clarify the tenor
of the letter as to whether stoppage of delivery or termination of
the contract of sale was intended, but the query was not
answered by petitioners. This alleged ambiguity
notwithstanding, Lluch and the other suppliers resumed
deliveries after the series of talks between Romeo S. Vergara
and Romeo Lluch. A complaint for contractual breach was then
filed.
ISSUE: WON THE STOPPAGE OF DELIVERIES WAS
PROPER?
HELD: NO. Insofar as the express discretion on the part of
petitioners is concerned regarding the right of stoppage, We feel that
there is cogent basis for private respondent's apprehension on the
illusory resumption of deliveries inasmuch as the prerogative
suggests a condition solely dependent upon the will of
petitioners. Petitioners can stop delivery of pulp wood from private
respondents if the supply at the plant is sufficient as ascertained by
petitioners, subject to re-delivery when the need arises as determined
likewise by petitioners. This is Our simple understanding of the
literal import of paragraph 7 of the obligation in question. A purely
potestative imposition of this character must be obliterated from
the face of the contract without affecting the rest of the
stipulations considering that the condition relates to the
fulfillment of an already existing obligation and not to its
inception. It is, of course, a truism in legal jurisprudence that a
condition which is both potestative (or facultative) and resolutory
may be valid, even though the saving clause is left to the will of the
obligor like what this Court said in Taylor vs. Uy Tieng Piao and
Tan Liuan. But the conclusion drawn from the Taylor case, which
allowed a condition for unilateral cancellation of the contract when
the machinery to be installed on the factory did not arrive in Manila,
is certainly inappropriate for application to the case at hand because
the factual milieu in the legal tussle conveys that the proviso relates
to the birth of the undertaking and not to the fulfillment of an
existing obligation.
Petitioners are of the impression that they acted well within the right
of stoppage guaranteed to them by paragraph 7 of the contract of sale
which was construed by petitioners to be a temporary suspension of
deliveries. There is no doubt that the contract speaks loudly about
petitioners' prerogative but what diminishes the legal efficacy of
such right is the condition attached to it which, as aforesaid, is
dependent exclusively on their will for which reason, We have no
alternative but to treat the controversial stipulation as inoperative
(Article 1306, New Civil Code). It is for this same reason that We
are not inclined to follow the interpretation of petitioners that the
suspension of delivery was merely temporary since the nature of the
suspension itself is again conditioned upon petitioner's determination
of the sufficiency of supplies at the plant.
Neither are We prepared to accept petitioners' exculpation grounded
on frustration of the commercial object under Article 1267 of the
New Civil Code, because petitioners continued accepting deliveries
from the suppliers. This conduct will estop petitioners from claiming
that the breakdown of the machinery line was an extraordinary
obstacle to their compliance to the prestation. It was indeed
incongruous for petitioners to have sent the letters calling for
suspension and yet, they in effect disregarded their own advice by
accepting the deliveries from the suppliers.
6.2 CONDITIONAL OBLIGATIONS
6.2.5 COUPLED WITH A TERM
A. IF PERIOD INTENDED FOR FULFILLMENT
(ART 1197)
PACIFICA MILLARE V. HON. HAROLD M. HERNANDO
G.R. No. L-55480 June 30, 1987
FACTS:
 A five-year Contract of Lease was executed between
petitioner Pacifica Millare as lessor and private respondent Elsa
Co, married to Antonio Co, as lessee. Under the written
agreement, lessor-petitioner agreed to rent out to thelessee at a
monthly rate of P350 the "People's Restaurant." Paragraph 13 of
the Contract of Lease reads as follows: 13. This contract of lease
is subject to the laws and regulations ofthe goverrunent; and that
this contract of lease may be renewed after a period of 5 years
under the terms and conditions as will be mutually agreed upon
by the parties at the time of renewal.
CIV LAW REVIEW - OBLICON DIGESTS
 According to the Co spouses, sometime during the last
week of May 1980, the lessor informed them that they could
continue leasing the People's Restaurant so long as they were
amenable to paying increased rentals of P1,200 a month. In
response, a counteroffer of P700 a month was made by the Co
spouses. At this point, the lessor allegedly stated that the amount
of monthly rentals could be resolved at a later time since "the
matter is simple among us", which alleged remark was
supposedly taken by the spouses Co to mean that the Contract of
Lease had been renewed, prompting them to continue occupying
the subject premises and to forego their search for a substitute
place to rent. In contrast, the lessor flatly denied ever having
considered, much less offered, a renewal of the Contract of
Lease.
 Mrs. Millare then requested the Co spouses to vacate the
leased premises as she had no intention of renewing the
Contract of Lease which had, in the meantime, already expirecl.
In reply, the Co spouses reiterated their unwillingness to pay the
Pl,200 monthly rentals supposedly sought bv Mrs. Millare
which they considered "highly excessive, oppressive and
contrary to existing laws". They also signified their intention to
deposit the amount of rentals in court, in view of Mrs. Millare's
refusal to accept their counter-offer.
 CO spouses then filed a complaint seeking renewal of the
Contract of Lease at a rental rate of P700/month and for a period
of 10 years, and damages.
ISSUE: WON THE CO SPOUSES MAY CLAIM RENEWAL OF
THE CONTRACT
HELD: NO. The first paragraph of Article 1197 is clearly
inapplicable, since the Contract of Lease did in fact fix an original
period of five years, which had expired. It is also clear from
paragraph 13 of the Contract of Lease that the parties reserved to
themselves the faculty of agreeing upon the period of the renewal
contract. The second paragraph of Article 1197 is equally clearly
inapplicable since the duration of the renewal period was not left to
the wiu of the lessee alone, but rather to the will of both the lessor
and the lessee. Most importantly, Article 1197 applies only where a
contract of lease clearly exists. Here, the contract was not renewed at
all, there was in fact no contract at all the period of which could have
been fixed.
Article 1670 of the Civil Code reads thus: “If at the end of the
contract the lessee should continue enjoying the thing left for 15
days with the acquiescence of the lessor and unless a notice to the
contrary by either party has previously been given. It is understood
that there is an implied new lease, not for the period of the original
contract but for the time established in Articles 1682 and 1687. The
ther terms of the original contract shall be revived.”
The respondents themselves, public and private, do not pretend that
the continued occupancy of the leased premises after the date of
expiration of the contract, was with the acquiescence of the lessor.
Even if it be assumed that tacite reconduccion had occurred, the
implied new lease could not possibly have a period of 5 years, but
rather would have been a month-to-month lease since the rentals
(under the original contract) were payable on a monthly basis. At the
latest, an implied new lease (had one arisen) would have expired as
of the end of July 1980 in view of the written demands served by the
petitioner upon the private respondents to vacate the previously
leased premises.
It follows that the respondent judge's decision requiring renewal of
the lease has no basis in law or in fact. Save in the limited and
exceptional situations envisaged in Articles ll97 and 1670 of the
Civil Code, which do not obtain here, courts have no authority to
prescribe the terms and conditions of a contract for the parties. As
pointed out by Mr. Justice J.B.L. Reyes in Republic vs. PLDT:
“[P]arties cannot be coerced to enter into a contract where no
agreement is had between them as to the principal terms and
conditions of the contract. Freedom to stipulate such terms and
conditions is of the essence of our contractual system, and by
express provision of the statute, a contract may be annulled if tainted
by violence, intimidation or undue influence.”
Contractual terms and conditions created by a court for two parties
are a contradiction in terms. If they are imposed by a judge who
draws upon his own private notions of what morals, good customs,
justice, equity and public policy" demand, the resulting "agreement"
cannot, by definition, be consensual or contractual in nature. It
would also follow that such coerced terms and conditions cannot be
the law as between the parties themselves. Contracts spring from the
volition of the parties. That volition cannot be supplied by a judge
and a judge who pretends to do so, acts tyrannically, arbitrarily and
in excess of his jurisdiction. 19
6.3 RECIPROCAL OBLIGATIONS
6.3.1 NATURE; EFFECT – CONDITION FOR
PERFORMANCE
SPOUSES HENRY AND ELIZABETH CO V. C.A &
ADORACION CUSTODIO
[G.R. No. 112330. August 17, 1999]
FACTS:
 Mrs. Adoracion Custodio entered into a verbal contract
with the Spouses Co for her purchase of the latter’s house and
lot, for and in consideration of the sum of $100k. One week
thereafter, and shortly before she left for the US, Custodio paid
to the Spouses Co the amounts of $1,000 and P40k as earnest
money, in order that the same may be reserved for her purchase,
said earnest money to be deducted from the total purchase
price. The purchase price of $100k is payable in 2 payments
$40k on December 4, 1984 and the balance of $60k on January
5, 1985. On January 25, 1985, although the period of payment
had already expired, Custodio paid to the other petitioner
Melody Co in the United States, the sum of $30k, as partial
payment of the purchase price. Co’s counsel wrote a letter to
Custodio demanding that she pay the balance of $70k and not
receiving any response thereto, said lawyer wrote another letter
to Custodio, informing her that she has lost her ‘option to
purchase’ the property subject of this case and offered to sell her
another property.
 Counsel for Custodio then wrote Co’s counsel, informing
him that Custodio ‘is now ready to pay the remaining balance to
complete the sum of $100k, the agreed amount as selling price.’
On October 24, 1986, plaintiff filed the instant complaint.”
 RTC ruled in favor of Custodio and ordered the petitioner
spouses Henry and Elizabeth Co to refund the amount of $30k
in Custodio’s favor, and ordered that the earnest money of $1k
and P40k be forfeited in favor of the Sps. Co.
ISSUE: WON THE ORDER TO RETURN THE $30K PAID BY
CUSTODIO PURSUANT TO THE “OPTION” GRANTED, WAS
PROPER?
CIV LAW REVIEW - OBLICON DIGESTS
HELD: YES. The COs’ main argument is that CUSTODIO lost her
“option” over the Beata property and her failure to exercise said
option resulted in the forfeiture of any amounts paid by her.
An option is a contract granting a privilege to buy or sell within an
agreed time and at a determined price. It is a separate and distinct
contract from that which the parties may enter into upon the
consummation of the option. It must be supported by consideration.
An option contract conforms with the second paragraph of Article
1479 of the Civil Code which reads: “An accepted unilateral promise
to buy or to sell a determinate thing for a price certain is binding
upon the promissor if the promise is supported by a consideration
distinct from the price.”
However, the letter sent by the Cos through their lawyer to Custodio
reveals that the parties entered into a perfected contract of sale and
not an option contract. A contract of sale is a consensual contract
and is perfected at the moment there is a meeting of the minds upon
the thing which is the object of the contract and upon the price.
From that moment the parties may reciprocally demand performance
subject to the provisions of the law governing the form of contracts.
The elements of a valid contract of sale under Article 1458 of the
Civil Code are (1) consent or meeting of the minds; (2) determinate
subject matter; and (3) price certain in money or its equivalent.
Custodio’s offer to purchase the Beata property, subject of the sale at
a price of $100k was accepted by the Cos. Even the manner of
payment of the price was set forth in the letter. Earnest money in the
amounts of US$1k and P40k was already received by the Cos.
Under Article 1482 of the Civil Code, earnest money given in a sale
transaction is considered part of the purchase price and proof of the
perfection of the sale.
Despite the fact that CUSTODIO’s failure to pay the amounts of
$40k and $60k on or before December 4, 1984 and January 5, 1985
respectively was a breach of her obligation under Article 1191, the
Cos did not sue for either specific performance or rescission of the
contract. The Cos were of the mistaken belief that Custodio had lost
her “option” over the Beata property when she failed to pay the
remaining balance of $70k. In the absence of an express
stipulation authorizing the sellers to extrajudicially rescind the
contract of sale, the Cos cannot unilaterally and extrajudicially
rescind the contract of sale. Accordingly, Custodio acted well
within her rights when she attempted to pay the remaining balance of
$70k to complete the sum owed of $100k as the contract was still
subsisting at that time. When the Cos refused to accept said
payment and to deliver the Beata property, Custodio immediately
sued for the rescission of the contract of sale and prayed for the
return of the $30k she had initially paid.
Under Article 1385 of the Civil Code, rescission creates the
obligation to return the things which were the object of the contract
but such rescission can only be carried out when the one who
demands rescission can return whatever he may be obliged to
restore. This principle has been applied to rescission of reciprocal
obligations under Article 1191 of the Civil Code. The Court of
Appeals therefore did not err in ordering the COS to return the
amount of $30k to Custodio after ordering the rescission of the
contract of sale over the Beata property.
Since it has been shown that Custodio was not in default, was
willing to perform part of the contract while the Cos were not,
rescission of the contract is in order. The power to rescind
obligations is implied in reciprocal ones, in case one of the obligors
should not comply with what is incumbent upon him, (Article
1191). Rescission creates the obligation to return the things which
were the object of the contract, together with their fruits, and the
price with its interest (Article 1385). In the case at bar, the property
involved has not been delivered to the appellee. She has therefore
nothing to return to the appellants. The price received by the
appellants has to be returned to the appellee as aptly ruled by the
lower court, for such is a consequence of rescission, which is to
restore the parties in their former situations.
CENTRAL BANK OF THE PHILIPPINES V. SPOUSES
BICHARA
G.R. No. 131074 March 27, 2000
FACTS:
 Respondents Bichara were the former registered owners of
2 Lots. Respondents sold the two properties to petitioner Central
Bank for the sum of P405k. The deed of sale further provided:
“4. The VENDORS hereby likewise undertake at their expense
to fill the parcels of land with an escombro free from waste
materials compacted to the street level upon signing of the Deed
of Sale to suit the ground for the construction of the regional
office of the Central Bank of the Philippines thereat.”
 The record discloses that despite respondents' failure to pay
the capital gains tax and other transfer fees, a TCT was
nonetheless issued in petitioner's name. Despite the issuance of
the title, petitioner failed to pay respondent. On its part,
respondents did not fill up the lot with escombro despite several
demands made by petitioner. Petitioner was thus constrained to
undertake the filling up of the said lots, by contracting the
services of BGV Construction. The filling up of the lots cost
petitioner P45l. Petitioner deducted the said amount from the
purchase price payable to respondents.
 Petitioner, however, still did not pay the respondents.
Consequently, respondents filed for rescission or specific
performance with damages.
ISSUE: WON RESCISSION IS PROPER?
HELD: NO. The right to rescind a contract involving reciprocal
obligations is provided for in Article 1191 of the Civil Code. The
law speaks of the right of the "injured party" to choose between
rescission or fulfillment of the obligation, with the payment of
damages in either case. Here, respondents claim to be the injured
party and consequently seek the rescission of the deed of sale, or in
the alternative, its fulfillment but on terms different from those
previously agreed upon. Respondents aver that they are entitled to
cancel the obligation altogether in view of petitioner's failure to pay
the purchase price when the same became due. Petitioner disputes
respondent's stand, claiming that if anyone was at fault, it was the
latter who dismally failed to comply with their contractual
obligations. Hence, it was entitled to withhold payment of the
purchase price.
An instance where the law clearly allows the vendee to withhold
payment of the purchase price is Article 1590 of the Civil Code,
which provides: “Should the vendee be disturbed in the possession
or ownership of the thing acquired, or should he have reasonable
grounds to fear such disturbance, by a vindicatory action or a
foreclosure of mortgage, he may suspend the payment of the price
until the vendor has cause the disturbance or danger to cease, unless
the latter gives security for the return of the price in a proper case, or
it has been stipulated that, notwithstanding any such contingency,
the vendee shall be bound to make the payment. A mere act of
trespass shall not authorize the suspension of the payment of the
price.” This is not, however, the only justified cause for retention or
CIV LAW REVIEW - OBLICON DIGESTS
withholding the payment of the agreed price. A noted authority on
civil law states that the vendee is nonetheless entitled if the
vendor fails to perform any essential obligation of the contract.
Such right is premised not on the aforequoted article, but on general
principles of reciprocal obligations. This view is consistent with our
rulings in earlier cases that resolution is allowed only for substantial
breaches and not for those which are slight or casual.
Certainly, non-payment of the purchase price constitutes a very good
reason to rescind a sale, for it violates the very essence of the
contract of sale. By the contract of sale one of the contracting parties
obligates himself to transfer the ownership of and to deliver a
determinate thing, and the other to pay therefor a price certain in
money or its equivalent. Thus, nonpayment of the purchase price is a
resolutory condition, for which the remedy is either rescission or
specific performance under Article 1191. This is true for reciprocal
obligations, where the obligation of one is a resolutory condition of
the other.
Petitioner contends that it was entitled to retain the purchase price
due to respondents' failure to pay the capital gains and documentary
stamp taxes and other transfer fees. Petitioner likewise insists that its
delay in paying the purchase price was justified since a squatters
occupied the premises, contravening the stipulation that the
respondent vendors shall convey the properties free from liens and
encumbrances. So far, what emerges as clear is that petitioner's
obligation to pay was not subject to the foregoing "conditions," only
its demandability is suspended until the opportune time. That arrived
upon the registration of the deed of sale and issuance of a clean title
in favor of the petitioner. Relative thereto, the notice of adverse
claim and lis pendens became moot issues because they were
cancelled less than a year after their inscription.
As to petitioner's argument that it was not obliged to pay until
respondents compact the lots to street level with escombro free from
waste material, we find that particular argument of petitioner to be
well-taken. The use to which the parcels of land was to be devoted
was no secret between the parties. Thus, petitioner specified that the
lots be filled up in the manner specified in the contract. The
importance thereof could not have been lost on respondents.
Evidently then, respondents were guilty of non-performance of said
stipulation. The deed of sale expressly stipulated that the vendors
were to undertake, at their expense, the filling up of the lots with
escombro free from waste material compacted to the street level.
This was to be accomplished upon the signing of the contract and
insofar as petitioner was concerned, respondents obligation was
demandable at once. Other than his testimony, Alfonso Bichara
offered no proof tending to show that he had complied in the manner
agreed upon. Although he did state that he saw no need to comply
with the stipulation because the parcels of land were already level
with the street, it was still not shown that the same were in a
condition suitable for the construction of petitioner's regional office.
We find it hard to believe that the deed of sale would have specified
the nature, quantity and quality of the filling material were it not to
prepare the lots for the construction. Where the terms of a contract
are clear they should be fulfilled according to the literal tenor of their
stipulation. If indeed it were true that the lots were already at street
level, petitioner would not have incurred the additional cost of P45k
for having them filled up by the BGV Corporation.
On the other hand, respondent argue that as proof of petitioner's bad
faith, the latter could have undertake the filling up of the lots as early
as 1989, 36 when it would have cost only about P9k. We disagree.
Petitioner was under no duty to have done, at the least cost to the
latter, what was clearly respondents’ obligation from the very
beginning. If petitioner was forced to have the subject parcels of land
filled up by another party, and subsequently bill respondents, the
former was entitled to do so by right. Respondents are not in a
position to question the resulting expense. Had they performed their
obligation under the contract of sale at the proper time, the expense
would surely have been even less than the P9k estimate in 1989.
In this context, the appellate court erred in decreeing the rescission,
otherwise called resolution, of the subject deed of sale. Respondents
should not be allowed to rescind the contract where they themselves
did not perform their essential obligation thereunder. It should be
emphasized that a contract of sale involves reciprocity between the
parties. Since respondents were in bad faith, they may not seek the
rescission of the agreement they themselves breached. Consequently,
the decision rendered by the trial court should be reinstated as being
just and proper under the premises.
6.3 RECIPROCAL OBLIGATIONS
6.3.2 NECESSITY OF COURT APPROVAL
AGUSTINA LIQUETTE TAN V. C.A. & SPS. SINGSON
G.R. No. 80479 July 28, 1989
FACTS:
 Private respondents Singsons are the owners of a house and
lot which were then for sale. Petitioner Tan together with her
agent went to see said spouses at their residence regarding the
property. After Singsons had shown Tan around the house and
had conversation about the encumbrances and/or liens on the
property, the parties finally agreed on the price of Pl.8M, with
Tan to advance earnest money of P200k to enable Singsons to
secure the cancellation of the mortgage and lien annotated on
the title of the property and the balance of the price to be paid
by Tan on June 21, 1984. Forthwith, Tan handed to Singsons a
check for P200k.
 In turn, appellants handed to appellee a xerox copy of the
title and other papers pertaining to the property as well as an
inventory of the furnishings of the house that are included in the
sale. 3 days thereafter, Tan returned to Singsons' house together
with her daughter Corazon and one Ines, to ask for a reduction
of the price to Pl.75M and Singson spouses agreed, and so
another receipt entitled "Agreement" was signed by the parties.
 The very same day that Singsons received the earnest
money of P 200k, they started paying their mortgage loan with
the DBP to clear up the title of the subject property. DBP then
executed a cancellation of mortgage, which was registered with
the Registry of Property. Spouses also paid all the taxes due and
in arrears on the property.
 Appellee accompanied by her daughter Corazon and her
lawyer, Atty. Vicente Quitoriano, went to Baguio City to inquire
about the status of the property and Singsons told her that the
DBP was taking some time processing their payments and
preparing the deed of cancellation of the mortgage. On that
occasion, the parties agreed on an extension of 2 weeks for the
execution of the deed of sale. Here, the parties' respective
versions on the matter parted ways. According to appellants, it
was appellee who asked for the extension because she was not
yet ready to pay the balance of P l.55M. On the other hand,
appellee said that it was appellants who asked for it because the
title of the property was not yet cleared. The court below
believed appellee because on said date the DBP had not yet
CIV LAW REVIEW - OBLICON DIGESTS
executed the deed of cancellation of mortgage, and no title has
yet been issued for the driveway although already fully paid for.
 Immediately, upon execution by the DBP of the deed of
cancellation of mortgage, Singsons tried to contact Tan and/or
her daughter Corazon to come to Baguio City for the formal
execution of the deed of sale, but to no avail. Instead, appellants
received a telegram from Atty. Quitoriano cancelling the sale
and demanding the return of the P200k earnest money.
Appellants countered with a letter of their lawyer, Atty. Tiofisto
Rodes, calling on appellee to perform her part of the contract
because "the title to the house and lot right now suffers no
imperfection or doubt.
 Tan then filed a case for recovery of sum of money with
damages,
ISSUE: WON THERE WAS SUBSTANTIAL BREACH BY THE
SPOUSES, MERITING RESCISSION OF THE CONTRACT?
HELD: NO. That the power to rescind obligations is implied in
reciprocal ones in case one of the obligors should not comply with
what is incumbent upon him is clear from a reading of the Civil
Code provisions. However, it is equally settled that, in the absence of
a stipulation to the contrary, this power must be invoked judicially; it
cannot be exercised solely on a party's own judgment that the other
has committed a breach of the obligation. Where there is nothing in
the contract empowering the petitioner to rescind it without resort to
the courts, the petitioner's action in unilaterally terminating the
contract in this case is unjustified.
Petitioner, in rescinding the sale, claims that a substantial breach of
the obligation has been committed by the private respondents.
Nevertheless, the alleged breach of the obligation by the private
respondents, which consists in a mere delay for a few days in
clearing the title to the property, cannot be considered
substantial enough to warrant rescission of the contract.
A thorough review of the records clearly indicates that private
respondents had substantially complied with their undertaking of
clearing the title to the property. It is a settled principle of law that
rescission will not be permitted for a slight or casual breach of the
contract but only for such breaches as are so substantial and
fundamental as to defeat the object of the parties in making the
agreement. A court, in determining whether rescission is warranted,
must exercise its discretion judiciously considering that the question
of whether a breach of a contract is substantial depends upon the
attendant circumstances.
In this case, it is true that as of the date set for the execution of the
final deed of sale, the mortgage lien in favor of DBP annotated in the
title has not yet been cancelled as it took DBP some time in
processing the papers relative thereto. However, just a few days
after, the cancellation of the DBP mortgage was entered by the
Register of Deeds and duly noted on the title. Time not being of the
essence in the agreement, a slight delay on the part of the private
respondents in the performance of their obligation, is not sufficient
ground for the resolution of the agreement, more so when the delay
was not totally attributable to them.
Inasmuch as the private respondents are ready, willing and able to
comply with their obligation to deliver title to the property subject of
the sale and had already demanded that petitioner pay the full
amount of the purchase price, the petitioner must be considered as
having incurred in delay. This conclusion is warranted by the clear
provision of Article 1169 of the Civil Code.
In reciprocal obligations, neither party incurs in delay if the other
does not comply or is not ready to comply in a proper manner with
what is incumbent upon him. From the moment one of the parties
fulfills his obligation, delay by the other begins. It is basic that the
breach of a contract gives the aggrieved party under the law and
even under general principles of fairness, the right to rescind the
contract or to ask for specific performance. Petitioner having failed
to comply with her obligation of paying the balance of the purchase
price despite demands by private respondents, private respondents
were clearly entitled to their counterclaim for specific performance,
as correctly adjudged by the respondent court.
One final point, the decision of the respondent Court of Appeals
ordered execution by private respondents of the absolute deed of sale
conveying the subject property to petitioner and payment by
petitioner of the balance of the purchase price immediately upon
finality of such judgment. However, under the third paragraph of
Article 1191 of the Civil Code, the Court is given a discretionary
power to allow a period within which a person in default may be
permitted to perform his obligation. Considering the huge amount of
money involved in this sale, the Court, in the exercise of its sound
discretion, hereby fixes a period of 90 days within which petitioner
shall pay the balance of the purchase price amounting to Pl.55M plus
interest thereon at the legal rate from finality of this judgment until
fully paid. After such payment has been made, the private
respondents are ordered to sign and execute the necessary absolute
deed of sale in favor of petitioner.
ALFONSO L. IRINGAN V. C.A & ANTONIO PALAO
[G.R. No. 129107. September 26, 2001]
FACTS:
 Private respondent Antonio Palao sold to petitioner Alfonso
Iringan, a parcel of land. The parties executed a Deed of Sale on
the same date with the purchase price of P295k, payable in 3
payments. When the second payment was due, Iringan paid only
P40k. Thus, Palao sent a letter to Iringan stating that he
considered the contract as rescinded and that he would not
accept any further payment considering that Iringan failed to
comply with his obligation to pay the full amount of the second
installment.
 Iringan through his counsel replied that they were not
opposing the revocation of the Deed of Sale but asked for the
reimbursement of the P50k received, geodetic engineer’s fees
and attorney’s fee, plus interest.
 Palao refused. Later, Iringan proposed that the P50,000
which he had already paid Palao be reimbursed or Palao could
sell to Iringan, an equivalent portion of the land. Palao instead
wrote Iringan that the latter’s standing obligation had reached
P61,600, representing payment of arrears for rentals from
October 1985 up to March 1989. The parties failed to arrive at
an agreement. Thus, Palao filed a Complaint for Judicial
Confirmation of Rescission of Contract and Damages against
Iringan and his wife.
ISSUE: WON THE CONTRACT OF SALE WAS VALIDLY
RESCINDED?
HELD: YES. Petitioner contends that no rescission was effected
simply by virtue of the letter sent by respondent stating that he
considered the contract of sale rescinded. Petitioner asserts that a
judicial or notarial act is necessary before one party can unilaterally
effect a rescission. Respondent Palao, on the other hand, contends
CIV LAW REVIEW - OBLICON DIGESTS
that the right to rescind is vested by law on the obligee and since
petitioner did not oppose the intent to rescind the contract, Iringan in
effect agreed to it and had the legal effect of a mutually agreed
rescission.
Article 1592 of the Civil Code is the applicable provision regarding
the sale of an immovable property. In the case of Villaruel v. Tan
King, the Court said that the requirement of then Article 1504,
“refers to a demand that the vendor makes upon the vendee for the
latter to agree to the resolution of the obligation and to create no
obstacles to this contractual mode of extinguishing obligations.”
Clearly, a judicial or notarial act is necessary before a valid
rescission can take place, whether or not automatic rescission
has been stipulated. It is to be noted that the law uses the phrase
“even though” emphasizing that when no stipulation is found on
automatic rescission, the judicial or notarial requirement still applies.
On the first issue, both the trial and appellate courts affirmed the
validity of the alleged mutual agreement to rescind based on Article
1191 of the Civil Code. But in our view, even if Article 1191 were
applicable, petitioner would still not be entitled to automatic
rescission. In Escueta v. Pando, we ruled that under Article 1124
(now Article 1191), the right to resolve reciprocal obligations, is
deemed implied in case one of the obligors shall fail to comply with
what is incumbent upon him. But that right must be invoked
judicially. The same article also provides: “The Court shall decree
the resolution demanded, unless there should be grounds which
justify the allowance of a term for the performance of the
obligation.” This requirement has been retained in the third
paragraph of Article 1191, which states that “the court shall decree
the rescission claimed, unless there be just cause authorizing the
fixing of a period.”
Consequently, even if the right to rescind is made available to the
injured party, the obligation is not ipso facto erased by the failure of
the other party to comply with what is incumbent upon him. The
party entitled to rescind should apply to the court for a decree of
rescission. The right cannot be exercised solely on a party’s own
judgment that the other committed a breach of the obligation. The
operative act which produces the resolution of the contract is the
decree of the court and not the mere act of the vendor. Since a
judicial or notarial act is required by law for a valid rescission to
take place, the letter written by respondent declaring his intention to
rescind did not operate to validly rescind the contract.
Notwithstanding the above, however, in our view when private
respondent filed an action for Judicial Confirmation of
Rescission and Damages before the RTC, he complied with the
requirement of the law for judicial decree of rescission. The
complaint categorically stated that the purpose was 1) to compel
appellants to formalize in a public document, their mutual agreement
of revocation and rescission; and/or 2) to have a judicial
confirmation of the said revocation/rescission under terms and
conditions fair, proper and just for both parties. In Luzon Brokerage
Co., Inc. v. Maritime Building Co., Inc., we held that even a
crossclaim found in the Answer could constitute a judicial
demand for rescission that satisfies the requirement of the law.
The prescriptive period applicable to rescission under Articles 1191
and 1592, is found in Article 1144, which provides that the action
upon a written contract should be brought within ten years from the
time the right of action accrues. The suit was brought on July 1,
1991, or six years after the default. It was filed within the period for
rescission. Thus, the contract of sale between the parties as far as
the prescriptive period applies, can still be validly rescinded.
6.3 RECIPROCAL OBLIGATIONS
6.3.3 RESOLUTION (ART. 1191) V. RESCISSION
(ARTS. 1381-1384)
MARGARITA SURIA V. I.A.C.
G.R. No. 73893 June 30, 1987
FACTS:
 Respondents are the owners of a parcel of land. They
entered into a contract denominated as DEED OF SALE WITH
MORTGAGE, with herein petitioner Suria. They allege that the
petitioners violated the terms and conditions of the contract by
failing to pay the stipulated installments and in fact only one
installment due in July 1975 (paid very late in the month of
September, 1975) was made. Respondents claim that repeated
verbal and written demands were made by them upon the
petitioners for the payment of the installments, but petitioner for
no justifiable reason failed to comply.
 Petitioners filed a motion to disniiss complaint, alleging
that respondents are not entitled to the subsidiary remedy of
rescission because of the presence of remedy of foreclosure in
the Deed of Sale with Mortgage
ISSUE: WON RESCISSION IS PROPER?
HELD: NO. The respondent court rejected the petitioners' reliance
on paragraph (H) of the contract which grants to the vendors
mortgagees the right to foreclose "in the event of the failure of the
vendees-mortgagors to comply with any provisions of this
mortgage." According to the appellate court, this stipulation merely
recognizes the right of the vendors to foreclose and realize on the
mortgage but does not preclude them from availing of other
remedies under the law, such as rescission of contract and damages
under Articles 1191 and 1170 of the Civil Code in relation to
Republic Act No. 6552. The appellate court committed reversible
error. Art. 1191 on reciprocal obligations is not applicable under
the facts of this case.
RESOLUTION V. RESCISSION
The rescission on account of breach of stipulations is not
predicated on injury to economic interests of the party plaintiff but
on the breach of faith by the defendant, that violates the reciprocity
between the parties. It is not a subsidiary action, and Article 1191
may be scanned without disclosing anywhere that the action for
rescission thereunder is subordinated to anything other than the
culpable breach of his obligations by the defendant. This rescission
is a principal action retaliatory in character, it being unjust that a
party be held bound to fulfill his promises when the other violates
his. As expressed in the old Latin aphorism: "Non servanti fidem,
non est fides servanda," Hence, the reparation of damages for the
breach is purely secondary.
On the contrary, in the rescission by reason of lesion or
economic prejudice, the cause of action is subordinated to the
existence of that prejudice, because it is the raison d 'etre as well as
the measure of the right to rescind. Hence, where the defendant
makes good the damages caused, the action cannot be maintained or
continued, as expressly provided in Articles 1383 and 1384. But the
operation of these two articles is limited to the cases of rescission for
lesion enumerated in Article 1381 of the Civil Code of the
Philippines, and does not apply to cases under Article 1191.
CIV LAW REVIEW - OBLICON DIGESTS
The petitioners' breach of obligations in this case is not with respect
to the perfected contract of sale but in the obligations created by the
mortgage contract. The remedy of rescission is not a principal action
retaliatory in character but becomes a subsidiary one which by law is
available only in the absence of any other legal remedy. (Art. 1384,
Civil Code). Foreclosure here is not only a remedy accorded by law
but, as earlier stated, is a specific provision found in the contract
between the parties.
The petitioners are correct in citing this Court's ruling in Villaruel v.
Tan King where we Stated: At the outset it must be said that since
the subject-matter of the sale in question is real property, it does not
come strictly within the provisions of article 1124 of the Civil Code,
but is rather subjected to the stipulations agreed upon by the
contracting parties and to the provisions of Article 1504 of the Civil
Code. The "pacto comisorio" of "ley comisoria" is nothing more than
a condition subsequent of the contract of purchase and sale.
Considered carefully, it is the very condition subsequent that is
always attached to all bilateral obligations according to article 1124;
except that when applied to real property it is not within the scope of
said article 1124, and it is subordinate to the stipulations made by the
contracting parties and to the provisions of the article on which we
are now commenting" (article 1504).
Now, in the contract of purchase and sale before us, the parties
stipulated that the payment of the balance of P1,000 was guaranteed
by the mortgage of the house that was sold. This agreement has the
two-fold effect of acknowledging indisputably that the sale had been
consummated, so much so that the vendee was disposing of it by
mortgaging it to the vendor, and of waiving the pacto comisorio, that
is, the resolution of the sale in the event of failure to pay the P1,000
such waiver being proved by the execution of the mortgage to
guarantee the payment, and in accord therewith the vendor's
adequate remedy, in case of nonpayment, is the foreclosure of such
mortgage.
There is, therefore, no cause for the resolution of the sale as prayed
for by the plaintiff. His action, at all events, should have been one
for the foreclosure of the mortgage, which is not the action brought
in this case. Article 1124 of the Civil Code, as we have seen, is not
applicable to this case.
JAIME G. ONG V. C.A & SPOUSES ROBLES
[G.R. No. 97347. July 6, 1999]
FACTS:
 Petitioner Jaime Ong, on the one hand, and respondent
spouses Miguel K. Robles and Alejandra Robles, on the other
hand, executed an “Agreement of Purchase and Sale” respecting
two parcels of land for the amount of P2M. The contract
provided that P103K will be paid as a downpayment, then
P496k will be paid directly to BPI to answer for a loan of the
sellers. Then, the balance of P1.4M shall be paid to the sellers in
4 installments.
 Petitioner Ong took possession of the subject parcels of
land together with the piggery, building, ricemill, residential
house and other improvements thereon. Pursuant to the contract
they executed, petitioner paid respondent spouses the sum of
P103k by depositing it with the UCPB. Subsequently, petitioner
deposited sums of money with the BPI, in accordance with their
stipulation that petitioner pay the loan of respondents with BPI.
 To answer for his balance of P1.4M petitioner issued 4
post-dated Metro Bank checks payable to respondent spouses.
When presented for payment, however, the checks were
dishonored due to insufficient funds. Petitioner promised to
replace the checks but failed to do so. To make matters worse,
out of the P496k loan of respondent spouses with the Bank of
the Philippine Islands, which petitioner should have paid,
petitioner only managed to dole out no more than P393k. When
the bank threatened to foreclose the respondent spouses’
mortgage, they sold three transformers of the rice mill worth
P51k to pay off their outstanding obligation with said bank, with
the knowledge and conformity of petitioner. Petitioner, in
return, voluntarily gave the spouses authority to operate the rice
mill. He, however, continued to be in possession of the two
parcels of land while private respondents were forced to use the
rice mill for residential purposes.
 Respondent spouses then sent petitioner a demand letter
asking for the return of the properties. Their demand was left
unheeded, so they filed a complaint for rescission of contract
and recovery of properties with damages.
ISSUE: WON THE CONTRACT MAY BE VALIDLY SET
ASIDE?
HELD: YES. Petitioner contends that Article 1191 of the New Civil
Code is not applicable since he has already paid respondent spouses
a considerable sum and has therefore substantially complied with his
obligation. He cites Article 1383 instead, to the effect that where
specific performance is available as a remedy, rescission may not be
resorted to.
RESCISSION V. RESOLTION
Rescission, as contemplated in Articles 1380, et seq., of the
New Civil Code, is a remedy granted by law to the contracting
parties and even to third persons, to secure the reparation of damages
caused to them by a contract, even if this should be valid, by
restoration of things to their condition at the moment prior to the
celebration of the contract. t implies a contract, which even if
initially valid, produces a lesion or a pecuniary damage to someone.
On the other hand, Article 1191 of the New Civil Code
refers to rescission applicable to reciprocal obligations. Reciprocal
obligations are those which arise from the same cause, and in which
each party is a debtor and a creditor of the other, such that the
obligation of one is dependent upon the obligation of the other. They
are to be performed simultaneously such that the performance of one
is conditioned upon the simultaneous fulfillment of the other.
Rescission of reciprocal obligations under Article 1191 of the New
Civil Code should be distinguished from rescission of contracts
under Article 1383. Although both presuppose contracts validly
entered into and subsisting and both require mutual restitution when
proper, they are not entirely identical.
While Article 1191 uses the term “rescission,” the original
term which was used in the old Civil Code, from which the article
was based, was “resolution.” Resolution is a principal action which
is based on breach of a party, while rescission under Article 1383 is
a subsidiary action limited to cases of rescission for lesion under
Article 1381 of the New Civil Code, which expressly enumerates the
rescissible contracts.
In the case at bar, a careful reading of the parties’ “Agreement of
Purchase and Sale” shows that it is in the nature of a contract to sell,
as distinguished from a contract of sale. Respondents in the case at
bar bound themselves to deliver a deed of absolute sale and clean
title covering the two parcels of land upon full payment by the buyer
CIV LAW REVIEW - OBLICON DIGESTS
of the purchase price of P2M. This promise to sell was subject to the
fulfillment of the suspensive condition of full payment of the
purchase price by the petitioner. Petitioner, however, failed to
complete payment of the purchase price. The non-fulfillment of the
condition of full payment rendered the contract to sell ineffective
and without force and effect. It must be stressed that the breach
contemplated in Article 1191 of the New Civil Code is the
obligor’s failure to comply with an obligation already extant, not
a failure of a condition to render binding that obligation. Failure
to pay, in this instance, is not even a breach but merely an event
which prevents the vendor’s obligation to convey title from
acquiring binding force. Hence, the agreement of the parties in
the case at bench may be set aside, but not because of a breach
on the part of petitioner for failure to complete payment of the
purchase price. Rather, his failure to do so brought about a
situation which prevented the obligation of respondent spouses
to convey title from acquiring an obligatory force.
6.4 OBLIGATIONS WITH A PERIOD
6.4.8 WHEN COURTS MAY FIX PERIOD
JOSE L. CHUA V. C.A. & RAMON IBARRA
G.R. No. 109840 January 21, 1999
FACTS:
 Petitioners were lessees of a commercial unit. The lease
was for a period of five 5 years, from January 1, 1985 to
December 31, 1989. The contract expressly provided for the
renewal of the lease at the option of the lessees "in accordance
with the terms of agreement and conditions set by the lessor."
Prior to the expiration of the lease, the parties discussed the
possibility of renewing it. They exchanged proposal and
counterproposal, but they failed to reach agreement. The dispute
was referred to the barangay captain for conciliation but still no
settlement was reached by the parties. Consequently, private
respondent filed a complaint for unlawful detainer against
petitioners
ISSUE: WON COURTS MAY FIX PERIOD FOR RENEWAL OF
LEASE?
HELD: NO. Petitioners claim that they are entitled to an estension
of time to occupy the premises in question. This, too, is without
merit. After the lease terminated on January 1, 1990 and without the
parties thereafter reaching any agreement for its renewal, petitioners
became deforciants subject to ejectment from the premises. Neither
did the Court of Appeals err in ruling that petitioners are not entitled
to a reasonable extension of time to occupy the premises on account
of the fact that the lease contract between the parties has already
expired. As there was no longer any lease to speak of which could be
extended, the MTC was in effect making a contract for the parties
which it obviously did not have the power to do. The potestative
authority of the courts to fix a longer term for a lease under Art.
1687 of the Civil Code applies only to cases where there is no period
fixed by the parties. To the contrary, in this case, the contract of
lease provided for a fixed period of 5 years from January 1, 1985 to
December 31, 1989. As the Court held in Bacolod-Murcia Milling
Co., Inc. v. Banco Nacional Filipino: “It is not the province of the
court to alter a contract by construction or to make a new contract
for the parties; its duty is confined to the interpretation of the one
which they have made for themselves, without regard to its wisdom
or folly, as the court cannot supply material stipulations or read into
contract words which it does not contain.”
Indeed, Art. 1675 of the Civil Code excludes cases falling under Art.
1673 (which provides among others, that the lessor may judicially
eject the lessee when the period agreed upon or that which is fixed
has expired) from the cases wherein, pursuant to Art. 1687, courts
may fix a longer period of lease. For these reasons, we hold that the
Court of Appeals did not err in ruling that petitioners were not
entitled to an extension of the lease upon its expiration.
EULOGIO "EUGUI" LO CHUA V. C.A. & ERIC CHUA
G.R. No. 140886 April 19, 2001
FACTS:
 A Complaint for Unlawful Detainer and Damages was filed
by respondent Eric Chua against petitioner Eulogio "Eugui" Lo
Chua. Respondent Eric Chua alleged that he was the former
owner of a parcel of land with a 4-storey commercial building
thereon known as National Business Center (NBC) Bldg. where
2 units were leased by petitioner on a month-to-month basis for
P12k. Subsequently, respondent Eric Chua decided to sell the
property. Through a letter, he offered petitioner a right of first
refusal to be exercised within 5 days from receipt thereof.
Petitioner failed to manifest his intention within the period.
Thus, Chua sold the property to respondent MAGICAIRE for
P25M subject to the condition stated in the Deed of Conditional
Sale that P5M would be paid after the building was completely
vacated by the tenants.
 Respondent Chua through a letter informed petitioner about
the sale transaction, the termination of their lease agreement,
and demanded that petitioner vacate the premises after the end
of the period, at the same time waiving the rentals for January to
March 1996 in consideration of petitioner's understanding and
cooperation. On 23 January 1996 petitioner tendered payment of
the rental for that month but was declined by respondent Chua.
Consequently, petitioner filed a Petition for Consignation.
Respondent Chua made a final demand on petitioner to vacate
the property but was refused.
 Petitioner contended that he ignored the demand letters of
respondent Chua because upon verification from the Register of
Deeds of Manila petitioner learned that respondent Chua was no
longer the owner of the property; that petitioner allowed the
Petition for Consignation to be dismissed because respondent
Chua was not the real party-in-interest; and, that petitioner made
a counter offer to purchase the property but respondent Chua
nonetheless proceeded with the sale to respondent
MAGICAIRE.
ISSUE: WON THE LEASE CONTRACT SHOULD BE
RENEWED/EXTENDED?
HELD: No, although the courts may fix the period for the contract,
petitioner’s continued possession of the property pending this case,
bar further extension of the contract.
Petitioner contradicts himself by arguing that since he has been
occupying the premises for more than 30 years, his lease contract
should be understood as one for an indefinite period entitling him to
an extension thereof pursuant to Article 1687 of the Civil Code.
Article 1687 reads – “Article 1687. If the period for the lease has not
been fixed. It is understood to be from year to year, if the rent agreed
upon is annual; from month to month. if it is monthly; from week to
week, if the rent is weekly; and from day to day, if the rent is to be
paid daily. However, even though a monthly rent is paid, and no
period for the lease has been set. the courts may fix a longer term for
CIV LAW REVIEW - OBLICON DIGESTS
the lease after the lessee has occupied the premises for over one
year. If the rent is weekly, the courts may likewise determine a
longer period after the lessee has been in possession for over six
months. In case of daily rent, the courts may also fix a longer period
after the lessee has stayed in the place for over one month.”
Article 1687, to the extent pertinent to the present case, is explicit
that if the period for the lease has not been fixed, it is understood to
be from month to month if the rent agreed upon is monthly.
However, even though a monthly rent is paid, and no period for the
lease has been set, the courts may fix a longer term for the lease after
the lessee has occupied the premises for over a year. Thus, the
provision contemplates 2 situations. One, where the period for the
lease has not been fixed but the rent agreed upon is monthly, in
which event the period is understood to be from month to month. In
other words, the law itself fixes the period. Two, where no period
for the lease has been set, a monthly rent is paid and the lessee
has occupied the premises for over a year authorizing the courts
to fix a longer period of lease. In this second situation, both
circumstances mentioned in the first situation also exist and coupled
with another circumstance, i.e., the lessee has occupied the premises
for over a year. The law treats the matter differently in the second
situation because the length of stay of the lessee in the premises may
justify the courts to fix a longer period of lease. The second situation
is understood thus: where no period for the lease has been set and a
monthly rent is paid the law itself fixes the period as monthly; yet
the circumstance that the lessee has occupied the premises for over a
year warrants the fixing of a longer period by the courts. It is
precisely the second situation that is involved in the present case, not
the first situation, as all lower courts erroneously appreciated.
Apparently, to them since the first sentence of Art. 1687 already
fixed the period of lease, recourse to the second sentence is no
longer relevant.
Inasmuch as the existence in the present case of the circumstances
that no period for the lease has been set, rent was being paid
monthly, and petitioner has been occupying the premises for more
than 30 years justify extending the period by the courts, it cannot be
said that the period expired on 31 March 1996 when respondent
Chua stated this date as the effectivity of the termination of their
lease agreement in his 4 December 1995 letter. The unilateral act of
the lessor in terminating the lease should not be recognized as
writing finis to the agreement when the second situation in Art. 1687
is involved. A contrary view would result in barring recourse to
judicial lengthening of the period and in allowing the utilization as
subterfuge of the concept that "once a period had expired, nothing is
left to extend."
According to Mr. Justice Jose C. Vitug – “There are rulings to the
effect that an extension of time may be sought by the lessee before,
but not after, the termination or expiration of the lease. This
statement should not be taken out of context; it is valid and sound
where the lease, in fact, had been terminated or had expired. But
where the term of the lease in understood to be that which is
provided for in Article 1687 because the contract itself has failed to
state the period thereof, the mere notice by the lessor, without
concurrence by the lessee, to terminate the lease is not enough to
consider the lease as having ex Fired that would thereby render
powerless the courts to fix a term longer than the periods stated in
the law. The periods set by Article 1687 are presumptive in nature
and are clearly held subject to the potestative authority of the court
in the event that the parties are unable to reach an agreement on a
definitive term. If it were otherwise, then the power of the courts to
grant an extended period becomes illusory since it is only when the
lessor decides not to grant a longer period or refuses to grant an
extended term that the lessee should and can be expected to seek
court relief. Considering that the authority of the court is predicated
not only on the presumed intention of the parties but on equity as
well, the application and interpretation of the provision must not be
too restrictive and limitative to the point of rendering the remedy of
seeking for extension meaningless and useless such as by the simple
and expedient process of the lessor promptly giving notice of
termination and making the lessor, rather than the Court, the final
arbiter on the presumptive of the lease.“
The power of the courts to establish a grace period pursuant to
Art. 1687 is potestative or discretionary, to be exercised or not
depending on the particular circumstances of the case: a longer
term to be granted where equities come into play demanding
extension, to be denied where none appears, always with due
deference to the parties' freedom to contract. Here, even as this
Court has the discretion to fix a longer term for the lease, we find
that petitioner's continuing possession as lessee of the premises from
the supposed expiration of the lease on 31 March 1996 up to the
present, or for a period now of more than 5 years, suffices as an
extension of the period. There is no longer need to extend it any
further.
6.6 JOINT OBLIGATIONS
6.6.1 CONCEPT
SPOUSES GEORGE TIU V. C.A. & JUAN GO
G.R. No. 107481 November 18, 1993
FACTS:
 George Tiu is the registered owner of 2 condominium units.
He and Rosalina Tiu (his mother), negotiated a loan of P300k
with Juan Go who then asked for a mortgage of the aforesaid
Condo Units as security for the payment therefor and additional
thereto, a pledge of jewelries and checks from Rosalina.
 Go then prepared a document denominated as "Deed of
Sale of a Condomimium with Right to Repurchase " and another
as "Contract of Lease," the former was prepared in favor of
Juanito Lim and Lim Lee Show Fong, while the latter was
prepared in favor of George Tiu.
 Later, George Tiu sought reformation of the contract,
alleging that he merely agreed to mortgage the properties, in
signing the Deed of Sale of a Condominium Unit with Right to
Repurchase. He also alleged that the Deed, in law, was an
equitable mortgage at the same time.
ISSUE: WON GEORGE & ROSLINDA TIU ARE SOLIDARILY
LIABLE?
HELD: NO. We shall also not disturb the ruling of the Court of
Appeals that George and Joaquin Tiu are not solidary liable with
Rosalina Tiu on the amount of P1,060,000.00, for apt and correct
are the findings of the appellate court on this point: “The various
receipts clearly show that the appellant George Tiu never signed the
receipts nor received any money from appellant Go while appellant
Joaquin Tiu signed and received the money for an in behalf of
Rosalina. Consequently, they are not liable solidarily for the said
amounts even if the money were used for tobacco business. And
even if they admitted that they received the money, both are not
liable in solidum because there was no express provision in said
receipts that appellants George and Joaquin Tiu should be liable in
solidum. There is solidary obligation only when the obligation
CIV LAW REVIEW - OBLICON DIGESTS
expressly so states or when the law or nature of the obligation
requires solidarity (Article 1207, NCC).
And there is no truth to the allegation that appellants George
and Joaquin Tiu admitted that they are jointly and solidarily
liable for said amount. What they admitted was that they
received said money. Be it noted that appellants Tiu, in their
reply and answer to the counterclaim of appellant Go, admitted
that only appellant Rosalina Tiu received the monies. Assuming
arguendo that they admitted their solidary liability, still they are not
liable. As aptly held by the lower court: “At any rate, the doctrine
laid down on the case of Un Fak Leang vs. Nigurra falls squarely on
the point wherein the Supreme Court ruled that an admission of two
debtors in their brief that their liability in the contract is a
solidary one does not convert the joint character of their
obligation as appearing in their contract, for what determines
the nature of the obligation is the tenor of their contract itself,
not the admission of the parties.”
GIL M. CEMBRANO V. CITY OF BUTUAN, represented
G.R. No. 163605 September 20, 2006
FACTS:
 CVC Lumber Industries, Inc. (CVC) was a timber
concession licensee. It was awarded the project for the supply of
piles and poles which were to be used for the construction of the
new City Hall of Butuan City. Due to some delay in the
delivery, the City refused to grant an extension of the period of
the contract and caused a new bidding to be held on the
unexecuted portion of the contract. The re-bidding was held
without notice to CVC.
 CVC and Cembrano, through their counsel GO, filed a
complaint for breach of contract and damages against
respondent, claiming that CVC sustained damages.
 RTC rendered judgment in favor of the defendants and
ordered the dismissal of the complaint. CA reversed and ruled in
favor of CVC and Cembrano. SC denied petition for review.
Thus, the CA decision became final and executory.
 Later, Cembrano, in his behalf and as attorney-in-fact of
CVC, executed a Deed of Assignment covering part of the
monetary award of the CA in favor of Go, his uncle. Go then
wrote the City Mayor of Butuan City, requesting payment of the
judgment award. However, CVC, through its Resident Manager
Isidro B. Plaza, informed the City Mayor that it was laying
claim to the money judgment and requested that the amount be
remitted it.
 During a meeting with the Sangguniang Panglungsod
Chairman and Members of the Committee on Appropriation and
Finance, Cembrano and Go agreed that under the decision, the
amount due to CVC was P926,845.00 with 6% interest per year.
The Sanggunian resolved to refer the matter to the City Budget
Officer. The City Treasurer and the City Mayor signed a check
for the said amount with "CVC LUMBER INDUSTRIES,
INC/MONICO E. PAG-ONG [president of CVC]" as payee.
The check was received by Pag-Ong for CVC, as evidenced by
a disbursement voucher.
 Thereafter, Atty. Go, acting as counsel for CVC and
Cembrano, filed a "Alternative Motion for Issuance of a Writ of
Execution or Entry of Judgment" in the RTC. The court issued
an order granting the motion. The Sheriffs arrived in the Office
of the City Mayor to enforce the writ, but were told that the City
had already remitted the amount.
ISSUE: WON PAYMENT TO CVC THROUGH PAG-ONG
RELEASED THE CITY OF BUTUAN FROM LIABILITY?
HELD: NO. Respondent City, as judgment debtor, is burdened to
prove with legal certainty that its obligation under the CA decision
has been discharged by payment, which under Article 1240 of the
Civil Code, is a mode of extinguishing an obligation. Article 1240 of
the Civil Code provides that payment shall be made to the person in
whose favor the obligation has been constituted, or his successor-in-
interest, or any person authorized to receive it.
Payment made by the debtor to the person of the creditor or to one
authorized by him or by the law to receive it extinguishes the
obligation. When payment is made to the wrong party, however, the
obligation is not extinguished as to the creditor who is without fault
or negligence even if the debtor acted in utmost good faith and by
mistake as to the person of the creditor or through error induced by
fraud of a third person.
In general, a payment in order to be effective to discharge an
obligation, must be made to the proper person. Thus, payment must
be made to the obligee himself or to an agent having authority,
express or implied, to receive the particular payment. Payment made
to one having apparent authority to receive the money will, as a rule,
be treated as though actual authority had been given for its receipt.
Likewise, if payment is made to one who by law is authorized to act
for the creditor, it will work a discharge. The receipt of money due
on a judgment by an officer authorized by law to accept it will,
therefore, satisfy the debt.
When there is a concurrence of several creditors or of several
debtors or of several creditors and debtors in one and the same
obligation, it is presumed that the obligation is joint and not solidary.
The most fundamental effect of joint divisible obligations is that
each creditor can demand only for the payment of his proportionate
share of the credit, while each debtor can be held liable only for the
payment of his proportionate share of the debt. As a corollary to this
rule, the credit or debt shall be presumed, in the absence of any law
or stipulation to the contrary, to be divided into as many shares as
there are creditors and debtors, the credits or debts being considered
distinct from one another. It necessarily follows that a joint creditor
cannot act in representation of the others. Neither can a joint debtor
be compelled to answer for the liability of the others. The pertinent
rules are provided in Articles 1207 and 1208 of the Civil Code.
As gleaned from the complaint in Civil Case No. 3851, the plaintiffs
therein are petitioner Gil Cembrano and respondent CVC; as such,
the judgment creditors under the fallo of the CA decision are
petitioner Cembrano and respondent CVC. Each of them is entitled
to one-half (1/2) of the amount of P926,845.00 or P463,422.50 each.
Since respondent CVC was entitled to only P490,605.955 under the
CA decision but received P926,845.00, there was, in fine, an
overpayment of P490,605.955 made by respondent City. Thus,
respondent CVC is obliged to return the amount of P490,605.955 to
respondent City. Since petitioner Cembrano had already assigned
P490,609.955 to petitioner Go, the latter likewise had the right to
receive the P490,609.955 from DBP. Petitioner Cembrano should
thus be made to return the amount of P490,609.955 he received from
the DBP to respondent City.
CIV LAW REVIEW - OBLICON DIGESTS
6.6 JOINT OBLIGATIONS
6.6.4 COURT DECISIONS
PH CREDIT CORPORATION V. C.A. & CARLOS M.
FARRALES
G.R. No. 109648 November 22, 2001
FACTS:
 PH Credit Corp. filed a case against Pacific Lloyd Corp.,
Carlos Farrales, Thomas H. Van Sebille and Federico C. Lim,
for a sum of money. After service of summons, defendants
failed to file their answer, hence they were declared in default.
RTC rendered judgment in favor of PH Credit and against
defendants Pacific Lloyd Corporation, Thomas H. Van Sebille,
Carlos M. Farrales, and Federico C. Lim, ordering the latter to
pay damages.
 The decision became final and executory, and a Writ of
Execution was issued and implemented. Personal and real
properties of defendant Carlos M. Farrales were levied and sold
at public auction wherein PH Credit Corp. was the highest
bidder. A motion for the issuance of a writ of possession was
filed and granted. The writ of possession itself was issued on
October 26, 1990. Said order and writ of possession are now the
subject of this petition.
 It appears that on January 31, 1991, respondent Judge
issued an order considering the assailed Order dated October 12,
1990 as well as the writ of possession issued on October 26,
1990 as 'of no force and effect.' Hence, in another case,
petitioner claims that the respondent Judge's Order dated
January 31, 1991 was tainted with grave abuse of discretion,
among the grounds cited were that Respondent Judge erred in
applying the presumption of a joint obligation in the face of the
conclusion of fact and law contained in the decision showing
that the obligation is solidary.
ISSUE: WON CA erred when it concluded that the obligation was
merely a joint obligation due to the failure of the dispositive portion
of the trial court’s decision to state that the obligation was joint and
solidary?
HELD: NO. Petitioner argues that the CA erred in relying on the
failure of the dispositive portion of the Decision to state that the
obligation was solidary. We are not impressed.
A solidary obligation is one in which each of the debtors is liable for
the entire obligation, and each of the creditors is entitled to demand
the satisfaction of the whole obligation from any or all of the
debtors. On the other hand, a joint obligation is one in which each
debtors is liable only for a proportionate part of the debt, and the
creditor is entitled to demand only a proportionate part of the credit
from each debtor. The well-entrenched rule is that solidary
obligations cannot be inferred lightly. They must be positively and
clearly expressed. A liability is solidary "only when the obligation
expressly so states, when the law so provides or when the nature of
the obligation so requires." Article 1207 of the Civil Code explains
the nature of solidary obligations in this wise: "ARTICLE 1207. The
concurrence of two or more creditors or of two or more debtors in
one and the same obligation does not imply that each one of the
former has a right to demand, or that each one of the latter is bound
to render, entire compliance with the prestations. There is a solidary
liability only when the obligation expressly so states, or when the
law or the nature of the obligation requires solidarity."
In the dispositive portion of the Decision of the trial court, the word
solidary neither appears nor can it be inferred therefrom. The fallo
merely stated that the following respondents were liable: Pacific
Lloyd Corporation, Thomas H. Van Sebille, Carlos M. Farrales and
Federico C. Lim. Under the circumstances, the liability is joint, as
provided by the Civil Code, which we quote: "ARTICLE 1208. If
from the law, or the nature or the wording of the obligations to
which the preceding article refers[,] the contrary does not appear, the
credit or debt shall be presumed to be divided into as many equal
shares as there are creditors or debtors x x x"
We should stress that respondent's obligation is based on the
judgment rendered by the trial court. The dispositive portion or the
fallo is its decisive resolution and is thus the subject of execution.
The other parts of the decision may be resorted to in order to
determine the ratio decidendi for the disposition. Where there is a
conflict between the dispositive part and the opinion of the court
contained in the text or body of the decision, the former must prevail
over the latter on the theory that the dispositive portion is the final
order, while the opinion is merely a statement ordering nothing.
Hence the execution must conform with that which is ordained or
decreed in the dispositive portion of the decision.
Petitioner maintains that the Court of Appeals improper and
incorrectly disregarded the body of the trial court's Decision, which
clearly stated as follows: "To support the Promissory Note, a
Continuing Suretyship Agreement was executed by the defendants,
Federico C. Lim, Carlos M. Farrales and Thomas H. Van Sebille, in
favor of the plaintiff corporation, to the effect that if Pacific Lloyd
Corporation cannot pay the amount loaned by plaintiff to said
corporation, then Federico C. Lim, Carlos M. Farrales and Thomas
H. Van Sebille will hold themselves jointly and severally together
with defendant Pacific Lloyd Corporation to answer for the payment
of said obligation."
As early as 1934 in Oriental Commercial Co. v. Abeto and Mabanag,
this Court has already answered such argument in this wise: "It is of
no consequence that, under the written contract of suretyship
executed by the parties, the obligation contracted by the sureties was
joint and several in character. The final judgment, which superseded
the action brought for the enforcement of said contract, declared the
obligation to be merely joint, and the same cannot be executed
otherwise." Doctrinally, the basis of execution is the January 31,
1984 Decision rendered by the trial court, not the "written contract
of suretyship" executed by the parties. As correctly observed by the
trial judge: W]hat was stated in the body of the decision of January
31, 1984 was] only part of the narration of facts made by the Judge,
and the dispositive portion is to prevail." The only exception when
the body of a decision prevails over the fallo is when the inevitable
conclusion from the former is that there was a glaring error in the
latter, in which case the body of the decision will prevail. In this
instance, there was no clear declaration in the body of the January
31, 1984 Decision to warrant a conclusion that there was an error in
the fallo. Nowhere in the former can we find a definite declaration of
the trial court that, indeed, respondent's liability was solidary.
6.7 SOLIDARY OBLIGATIONS
6.7.1 CONCEPT
SMITH, BELL & CO., INC. V. C.A. & JOSEPH BENGZON
CHUA
G.R. No. 110668 February 6, 1997
FACTS:
CIV LAW REVIEW - OBLICON DIGESTS
 Chua, doing business under the style of Tic Hin Chiong,
Importer, bought and imported to the Philippines from the firm
Chin Gact Co., Ltd. of Taipei; Taiwan, 50 metric tons of
Dicalcium Phosphate. Shipment was insured by the defendant
First Insurance Co. for US$19,500.00 "against all risks" at port
of departure, with the note "Claim, if any, payable in U.S.
currency at Manila and with defendant Smith, Bell, and Co.”
stamped at the lower left side of the policy as "Claim Agent."
 The cargo arrived at the Port of Manila. Thereafter, the
entire cargo was discharged to the local arrastre contractor,
Metroport Services Inc. with a number of the cargo in apparent
bad order condition.
 Chua filed with Smith, Bell, and Co., Inc. a formal
statement of claim with proof of loss and a demand for
settlement of the corresponding value of the losses. After
purportedly conveying the claim to its principal, Smith, Bell,
and Co., Inc. informed the plaintiff that its principal offered only
50% of the claim, on the alleged ground of discrepancy between
the amounts contained in the shipping agent's reply to the
claimant with that of Metroport's. The offer not being acceptable
to the plaintiff, the latter wrote Smith, Bell, & Co. expressing
his refusal to the "redress" offer, contending that the
discrepancy was a result of loss from vessel to arrastre to
consignees' warehouse, which losses were still within the "all
risk" insurance cover. No settlement of the claim having been
made, the plaintiff then caused the instant case to be filed.
 Denying any liability, defendant-appellant averred in its
answer that it is merely a settling or claim agent of defendant
insurance company and as such agent, it is not personally liable
under the policy in which it has not even taken part of.
 RTC rendered a decision against smith-Bell, ruling that
since it is admittedly a claim agent of the foreign insurance firm
doing business in the Philippines justice is better served if said
agent is made liable without prejudice to its right of action
against its principal, the insurance firm.
ISSUE: WON a local settling or claim agent of a disclosed principal,
a foreign insurance company, can be held jointly and severally liable
with said principal under the latter's marine cargo insurance policy,
given that the agent is not a party to the insurance contract?
HELD: NO. Petitioner, undisputedly a settling agent acting within
the scope of its authority, cannot be held personally and/or solidarily
liable for the obligations of its disclosed principal merely because
there is allegedly a need for a speedy settlement of the claim of
private respondent.
The scope and extent of the functions of an adjustment and
settlement agent do not include personal liability. His functions are
merely to settle and adjusts claims in behalf of his principal if those
claims are proven and undisputed, and if the claim is disputed or is
disapproved by the principal, like in the instant case, the agent does
not assume any personal liability. The recourse of the insured is to
press his claim against the principal. Private respondent's contention
that petitioner is responsible because both agent and principal were
impleaded and found solidarily liable is without merit. Such
distinction is immaterial. The agent can not be sued nor held liable
whether singly or solidarily with its principal.
Every cause of action ex contractu must be founded upon a contract,
oral or written, either express or implied. The only "involvement" of
petitioner in the subject contract of insurance was having its name
stamped at the bottom left portion of the policy as "Claim Agent."
Without anything else to back it up, such stamp cannot even be
deemed by the remotest interpretation to mean that petitioner
participated in the preparation of said contract. Hence, there is no
privity of contract, and correspondingly there can be no obligation or
liability, and thus no Cause of action against petitioner attaches.
Under Article 1311 of the Civil Code, contracts are binding only
upon the parties (and their assigns and heirs) who execute them. The
subject cargo insurance was between the First Insurance Company,
Ltd. and the Chin Gact Co., Ltd., both of Taiwan, and was signed in
Taipei, Taiwan by the president of the First Insurance Company,
Ltd. and the president of the Chin Gact Co., Ltd. 18 There is
absolutely nothing in the contract which mentions the personal
liability of petitioner.
May then petitioner, in its capacity as resident agent be held
solidarily liable with the foreign insurer? Article 1207 of the Civil
Code clearly provides that "(t)here is a solidary liability only when
the obligation expressly so states, or when the law or the nature of
the obligation requires solidarity." The well-entrenched rule is that
solidary obligation cannot lightly be inferred. It must be positively
and clearly expressed. The contention that, in the end, it would really
be First Insurance Company, Ltd. which would be held liable is
specious and cannot be accepted. Such a stance would inflict
injustice upon petitioner which would be made to advance the funds
to settle the claim without any assurance that it can collect from the
principal which disapproved such claim, in the first place. More
importantly, such position would have absolutely no legal basis. The
Insurance Code is quite clear as to the Purpose and role of a resident
agent. Such agent, as a representative of the foreign insurance
company, is tasked only to receive legal processes on behalf of its
principal and not to answer personally for any insurance claims.
REPUBLIC GLASS CORP. and GERVEL, INC. V.
LAWRENCE C. QUA
G.R. No. 144413 July 30, 2004
FACTS:
 Petitioners Republic Glass Corporation (RGC) and Gervel,
Inc. together with respondent Lawrence C. Qua were
stockholders of Ladtek, Inc. Ladtek obtained loans from
Metrobank and Private Development Corporation of the
Philippines (PDCP) with RGC, Gervel and Qua as sureties.
Among themselves, RGC, Gervel and Qua executed
Agreements for Contribution, Indemnity and Pledge of Shares
of Stocks.
 The Agreements states that in case of default in the
payment of Ladtek’s loans, the parties would reimburse each
other the proportionate share of any sum that any might pay to
the creditors.
 Under the same Agreements, Qua pledged stocks of
General Milling Corporation (GMC) in favor of RGC and
Gervel. The pledged shares of stock served as security for the
payment of any sum which RGC and Gervel may be held liable
under the Agreements.
 Ladtek defaulted on its loan obligations to Metrobank and
PDCP. Hence, Metrobank filed a collection case against Ladtek,
RGC, Gervel and Qua. During the pendency of Collection Case,
RGC and Gervel paid Metrobank P7M. Later, Metrobank
executed a waiver and quitclaim in favor of RGC and Gervel.
 RGC and Gervel’s counsel, Atty. Antonio C. Pastelero,
demanded that Qua pay reimbursement of the total amount RGC
and Gervel paid to Metrobank and PDCP. Qua refused to
reimburse the amount to RGC and Gervel. Subsequently, RGC
and Gervel furnished Qua with notices of foreclosure of Qua’s
pledged shares.
CIV LAW REVIEW - OBLICON DIGESTS
 Qua filed a complaint for injunction and damages with
application for a temporary restraining order to prevent RGC
and Gervel from foreclosing the pledged shares. Although it
issued a temporary restraining order, RTC denied Qua’s "Urgent
Petition to Suspend Foreclosure Sale." RGC and Gervel
eventually foreclosed all the pledged shares of stock at public
auction.
ISSUE: WON RGC & GERVEL MAY SEEK REIMBURSEMENT
FROM QUA?
HELD: NO. RGC and Gervel assail the Court of Appeals’ ruling
that the parties’ liabilities under the Agreements depend on the full
payment of the obligation. RGC and Gervel insist that it is not an
essential condition that the entire obligation must first be paid before
they can seek reimbursement from Qua. RGC and Gervel contend
that Qua should pay 42.22% of any amount which they paid or
would pay Metrobank and PDCP. RGC and Gervels’ contention is
partly meritorious.
Payment of the entire obligation by one or some of the solidary
debtors results in a corresponding obligation of the other debtors to
reimburse the paying debtor. However, we agree with RGC and
Gervel’s contention that in this case payment of the entire obligation
is not an essential condition before they can seek reimbursement
from Qua. The words of the Agreements are clear. RGC, GERVEL
and QUA each covenant that each will respectively reimburse the
party made to pay the Lenders to the extent and subject to the
limitations set forth herein, all sums of money which the party made
to pay the Lenders shall pay or become liable to pay by reason of
any of the foregoing, and will make such payments within 5 days
from the date that the party made to pay the Lenders gives written
notice to the parties hereto that it shall have become liable therefor
and has advised the Lenders of its willingness to pay whether or not
it shall have already paid out such sum or any part thereof to the
Lenders or to the persons entitled thereto.
The Agreements are contracts of indemnity not only against actual
loss but against liability as well. Whether the solidary debtor has
paid the creditor, the other solidary debtors should indemnify the
former once his liability becomes absolute. However, in this case,
the liability of RGC, Gervel and Qua became absolute
simultaneously when Ladtek defaulted in its loan payment. As a
result, RGC, Gervel and Qua all became directly liable at the same
time to Metrobank and PDCP. Thus, RGC and Gervel cannot
automatically claim for indemnity from Qua because Qua himself is
liable directly to Metrobank and PDCP.
If we allow RGC and Gervel to collect from Qua his proportionate
share, then Qua would pay much more than his stipulated liability
under the Agreements. In addition to the amount claimed by RGC
and Gervel, Qua would have to pay his liability of P6.2 million to
Metrobank and more than P1 million to PDCP. Since Qua would
surely exceed his proportionate share, he would then recover from
RGC and Gervel the excess payment. This situation is absurd and
circuitous.
Contrary to RGC and Gervel’s claim, payment of any amount will
not automatically result in reimbursement. If a solidary debtor pays
the obligation in part, he can recover reimbursement from the co-
debtors only in so far as his payment exceeded his share in the
obligation. This is precisely because if a solidary debtor pays an
amount equal to his proportionate share in the obligation, then
he in effect pays only what is due from him. If the debtor pays
less than his share in the obligation, he cannot demand
reimbursement because his payment is less than his actual debt.
Since they only made partial payments, RGC and Gervel should
clearly and convincingly show that their payments to Metrobank and
PDCP exceeded their proportionate shares in the obligations before
they can seek reimbursement from Qua. This RGC and Gervel failed
to do. RGC and Gervel, in fact, never claimed that their payments
exceeded their shares in the obligations. Consequently, RGC and
Gervel cannot validly seek reimbursement from Qua.
6.7.2 WHEN SOLIDARY LIABILITY EXISTS
A. WHEN OBLIGATION SO STATES
VICENTE ONGKEKO V. BPI EXPRESS CARD
CORPORATION
[G.R. NO. 147275, March 31, 2006]
FACTS:
 Lina Lodovica applied for a credit card with BPI, with
Vicente Ongkeko acting as surety. Her application was
approved and she was originally given a P3k credit limit. When
Lodovica’s card expired in 1991, it was renewed and her credit
limit was increased to P10k. As of May 12, 1996, Lodovica had
an outstanding balance of P22,476.61.
 BPI brought an action for sum of money against Lodovica
and Ongkeko. Ongkeko filed his Answer admitting his
undertaking, but he maintained that he can only be liable for the
original credit limit of P3,000.00, and that the renewal of the
credit card without his consent extinguished his undertaking.
 MTC rendered judgment finding Ongkeko liable.
ISSUE: WON ONGKEKO IS LIABLE?
HELD: YES. The nature and extent of petitioner’s obligations are
set out in clear and unmistakable terms in the Surety Undertaking.
Thus: (1) She bound herself jointly and severally with Danilo Alto to
pay SDIC all obligations and charges in the use of the Diners Club
Card, including fees, interest, attorney’s fees, and costs; (2) She
declared that “any change or novation in the Agreement or any
extension of time granted by SECURITY DINERS to pay such
obligation, charges, and fees, shall not release (her) from this Surety
Undertaking”; (3) “(S)aid undertaking is a continuous one and shall
subsist and bind (her) until all such obligations, charges, and fees
have been fully paid and satisfied”; and (4) “The indication of a
credit limit to the cardholder shall not relieve (her) of liability for
charges and all other amounts voluntarily incurred by the cardholder
in excess of said credit limit.”
We cannot give any additional meaning to the plain language of the
subject undertaking. The extent of a surety’s liability is determined
by the language of the suretyship contract or bond itself. Article
1370 of the Civil Code provides: “If the terms of a contract are clear
and leave no doubt upon the intention of the contracting parties, the
literal meaning of its stipulations shall control.”
Petitioner’s undertaking is clear and concise. He solidarily obliged
himself to pay respondent all the liabilities incurred under the credit
card account, whether under the principal, renewal, or extension card
issued, regardless of the changes or novation in the terms and
conditions in the issuance and use of the credit card. Petitioner’s
liability shall be extinguished only when the obligations are fully
paid and satisfied.
CIV LAW REVIEW - OBLICON DIGESTS
Petitioner cannot seek sanctuary in his arguments considering that
the terms and conditions of his undertaking are unambiguous and
well defined; there is no room for any interpretation - only
application. Given that Lodovica reneged on her obligations covered
by the credit card account, petitioner is, therefore, liable.
Indeed, petitioner’s surety undertaking partakes the nature of a
contract of adhesion, in that the stipulations were unilaterally
prepared and imposed by respondent on a take-it-or-leave-it basis;
however, the Court has also ruled that such a contract is “as binding
as ordinary contracts, the reason being that the party who adheres to
the contract is free to reject it entirely.”[12]
Petitioner is the employer of Lodovica. It is safe to assume that he
takes great care of his affairs and he very well knows the potential
consequences of his acts. He took on the responsibility freely and
intelligently, and whatever liability he may have incurred in this case
is one within bounds of the law.
Finally, in the Molino case, the Court took time to exhort
prospective sureties to exercise caution in signing surety
undertakings prepared by credit card companies, and to read
carefully the terms and conditions of the agreement. The Court finds
the present case another opportune time to reiterate said exhortation,
to wit: “Prospective sureties to credit card applicants would be well-
advised to study carefully the terms of the agreements prepared by
the credit card companies before giving their consent, and pay heed
to stipulations that could lead to onerous effects.”
STRONGHOLD INSURANCE CO., INC. V. REPUBLIC-
ASAHI GLASS CORP.
G.R. No. 147561 June 22, 2006
FACTS:
 Republic-Asahi Glass Corporation entered into a contract
with Jose D. Santos, Jr., the proprietor of JDS Construction, for
the construction of roadways and a drainage system in Republic-
Asahi’s compound, for the amount of P5.3M inclusive of value
added tax for said construction, which was supposed to be
completed within a period of 240 days beginning May 8, 1989.
In order to guarantee the faithful and satisfactory performance
of its undertakings, JDS posted a performance bond of P795k.
JDS executed, jointly and severally with Stronghold Insurance
Co., Inc. (SICI) such performance bond.
 Several times Republic’s engineers called the attention of
JDS to the alleged alarmingly slow pace of the construction,
which resulted in the fear that the construction will not be
finished within the stipulated 240-day period. However, said
reminders went unheeded by JDS. Dissatisfied with the progress
of the work undertaken, Republic-Asahi extrajudicially
rescinded the contract pursuant to Article XIII of said contract,
and wrote a letter to JDS informing the latter of such rescission.
Such rescission, according to Article XV of the contract shall
not be construed as a waiver of Republic’s right to recover
damages from JDS and the latter’s sureties.
 Republic alleged that, as a result of JDS’s failure to comply
with the provisions of the contract, which resulted in the said
contract’s rescission, it had to hire another contractor to finish
the project, for which it incurred an additional expense of
P3.2M.
 Republic sent a letter to Stronghold, filing its claim under
the bond for not less than P795k. The demand went unheeded.
Republic then filed a complaint against JDS and Stronghold. It
sought from JDS payment of P3.2M representing the additional
expenses incurred for the completion of the project using
another contractor, and from JDS and Stronghold, jointly and
severally, payment of P750k as damages in accordance with the
performance bond. Stronghold then filed its answer, alleging
that the Republic’s money claims against it and JDS have been
extinguished by the death of Jose D. Santos, Jr. (proprietor of
JDS, who was the party to the Contract with Republic).
ISSUE: WON STRONGHOLD IS LIABLE?
HELD: YES. Petitioner contends that the death of Santos, the bond
principal, extinguished his liability under the surety bond.
Consequently, it says, it is automatically released from any liability
under the bond.
As a general rule, the death of either the creditor or the debtor does
not extinguish the obligation. Obligations are transmissible to the
heirs, except when the transmission is prevented by the law, the
stipulations of the parties, or the nature of the obligation. Only
obligations that are persona or are identified with the persons
themselves are extinguished by death. Section 5 of Rule 86 of the
Rules of Court expressly allows the prosecution of money claims
arising from a contract against the estate of a deceased debtor.
Evidently, those claims are not actually extinguished. What is
extinguished is only the obligee’s action or suit filed before the
court, which is not then acting as a probate court.
In the present case, whatever monetary liabilities or obligations
Santos had under his contracts with respondent were not
intransmissible by their nature, by stipulation, or by provision of
law. Hence, his death did not result in the extinguishment of those
obligations or liabilities, which merely passed on to his estate. Death
is not a defense that he or his estate can set up to wipe out the
obligations under the performance bond. Consequently, petitioner as
surety cannot use his death to escape its obligation under its
performance bond.
The liability of petitioner is contractual in nature, because it
executed a performance bond. As a surety, petitioner is solidarily
liable with Santos in accordance with the Civil Code, which provides
as follows: "Art. 2047. By guaranty a person, called the guarantor,
binds himself to the creditor to fulfill the obligation of the principal
debtor in case the latter should fail to do so. XXX If a person binds
himself solidarily with the principal debtor, the provisions of Section
4, Chapter 3, Title I of this Book shall be observed. In such case the
contract is called a suretyship."
Also, "Art. 1216. The creditor may proceed against any one of the
solidary debtors or some or all of them simultaneously. The demand
made against one of them shall not be an obstacle to those which
may subsequently be directed against the others, so long as the debt
has not been fully collected."
Elucidating on these provisions, the Court in Garcia v. Court of
Appeals stated thus: “The surety’s obligation is not an original and
direct one for the performance of his own act, but merely accessory
or collateral to the obligation contracted by the principal.
Nevertheless, although the contract of a surety is in essence
secondary only to a valid principal obligation, his liability to the
creditor or promisee of the principal is said to be direct, primary and
absolute; in other words, he is directly and equally bound with the
principal."
CIV LAW REVIEW - OBLICON DIGESTS
Under the law and jurisprudence, respondent may sue, separately or
together, the principal debtor and the petitioner herein, in view of the
solidary nature of their liability. The death of the principal debtor
will not work to convert, decrease or nullify the substantive right of
the solidary creditor. Evidently, despite the death of the principal
debtor, respondent may still sue petitioner alone, in accordance with
the solidary nature of the latter’s liability under the performance
bond.
TIU HIONG GUAN V. METROPOLITAN BANK & TRUST
COMPANY
G.R. No. 144339 August 9, 2006
FACTS:
 Petitioners applied for a continuing credit facility for and in
behalf of themselves and their corporation, Sunta Rubberized
Industrial Corporation (Sunta), and executed in their personal
and official capacities a Continuing Surety Agreement. In the
said Agreement, petitioners jointly and severally obligated
themselves to pay all loans and credit accommodations that they
and Sunta may incur, supposedly not exceeding P3M. It was
further stipulated therein that, in case of default in the payment
thereof, notwithstanding Sunta's dissolution, failure in business,
insolvency, and the filing of a petition for bankruptcy or
suspension of payments in the proceeding related thereto, the
whole obligation shall become due and payable without benefit
of demand or notice of payment.
 Petitioners then opened an irrevocable Commercial Letter
of Credit (LC) for the purchase of raw materials amounting to
P480k in favor of Sunta. These materials were delivered and
custody thereof transferred to Sunta, after which a Trust Receipt
Agreement was jointly and severally executed by petitioners in
their personal capacities.
 Later, Sunta and petitioners also in their personal capacities
obtained a loan of P350k. After maturity of the obligation, there
was both failure of payment and compliance with the surety and
trust receipt agreements, sight draft, and promissory note. The
total unpaid obligation came to P1.57M.
 Prayed for by respondent in its complaint were the
payments of P741k, with interest and penalties on the
promissory note, with interest and penalties as stipulated in the
Trust Receipt Agreement; and attorney's fees. In their Answer,
petitioners admitted execution of the Continuing Surety
Agreement not in their personal capacities but as officers of
Sunta. It was also asserted therein that none of them personally
benefited from the loan transaction, while two of them signed
the LC as mere officers of Sunta.
 The failure of Sunta to pay its obligation was attributed to
both force majeure – when fire “gutted down” its factory
buildings, equipment, machinery, raw materials and finished
products – and the Order by the SEC suspending all actions for
claims against Sunta that are pending before any court or
tribunal.
 It was contended that the real party-in-interest as far as the
actionable documents herein were concerned was Sunta, not
petitioners who merely acted as its agents and as guarantors of
its obligation. Therefore, petitioners should not be compelled to
pay the obligations of Sunta, because Sunta is solvent and its
assets have not yet been exhausted.
ISSUE: WON PETITIONERS CAN BE HELD LIABLE FOR THE
UNPAID LOAN OF SUNTA CORP.?
HELD: YES. Petitioners should be held liable for their unpaid
obligation of P1.57M, based on both the non-negotiable Promissory
Note and Continuing Surety Agreement they executed. Under the
Promissory Note, petitioners Tiu Hiong Guan and Juanito Rellera
promised to pay respondent jointly and severally the single-payment
loan of P350k at 28.92% interest per annum, binding themselves in
both their personal and official capacities. In case of default inter
alia in the payment of any installment, interest, or charges, it is
stipulated that the entire principal, as well as the interest and
charges, shall become due and payable at the option of and without
notice by respondent. A penalty charge of 18% per annum and
attorney's fees of 10% were also agreed upon therein.
The Continuing Surety Agreement clearly states that the liability of
all petitioners, as sureties, shall be solidary with Sunta, as their
principal, for all of the latter's loans, credits, overdrafts, advances,
discounts and/or other credit accommodations not exceeding P3M.
In case of default inter alia in the payment of any obligation upon
maturity or any amortization thereof, it is similarly stipulated that all
instruments, indebtedness, or other obligations thereby secured shall
become due and payable by the sureties, at the option of and without
demand or notice by respondent. In fact, their liability is expressly
stated to be direct and immediate, not contingent upon the pursuit by
respondent of whatever remedies it may have against Sunta. All
parties therein have agreed that the sureties shall at any time pay
respondent, with or without demand upon Sunta, any of the loans,
indebtedness, or other obligations secured, whether due or not. Any
notice given by respondent to any of the sureties shall be sufficient
notice to all.
From these two documents, the liability of petitioners is joint and
several in both their personal and official capacities. They are not
mere guarantors, but sureties. They do not insure the solvency of the
debtor, but rather the debt itself. They obligate themselves “to pay
the debt if the principal debtor will not pay, regardless of whether or
not the latter is financially capable to fulfill his obligation.”
Time and again, the liability of a surety is determined strictly on the
basis of the terms and conditions set out in the surety agreement.
Solidary liability is one of its primary characteristics. The creditor
may proceed against any one of the solidary debtors or some or all of
them simultaneously. Thus, respondent may proceed against Sunta
alone or some or all of petitioners herein.
Suretyship arises upon the solidary binding of a person, deemed the
surety, with the principal debtor, for the purpose of fulfilling an
obligation. A suretyship is merely an accessory to a principal
obligation. Although a surety contract is secondary to the principal
obligation, the liability of the surety is direct, primary and absolute;
or equivalent to that of a regular party to the undertaking. A surety
becomes liable to the debt and duty of the principal obligor even
without possessing a direct or personal interest in the obligations
constituted by the latter.
Petitioners are considered “as being the same party as the debtor in
relation to whatever is adjudged touching the obligation of the latter,
and their liabilities are interwoven as to be inseparable.” It is
irrelevant that none of petitioners personally benefited from the loan
transaction between Sunta and respondent. The failure to pay
attributable to either force majeure or the SEC Order does not veer
away from the fact of liability as sureties. Even though ownership
over the goods remains with respondent, the loss thereof has nothing
to do with the loan that petitioners bound themselves to be solidarily
liable with respondent. The Trust Receipt Agreement between them
CIV LAW REVIEW - OBLICON DIGESTS
is a mere collateral agreement independent of the Continuing Surety
Agreement, the purpose of which is to serve as additional security
for the loan. Parties are bound by the terms of their contract, which
is the law between them.
6.7.2 WHEN SOLIDARY LIABILITY
EXISTS
B. BY LAW
SPOUSES HERNANDEZ V. SPOUSES DOLOR
G.R. No. 160286 July 30, 2004
FACTS:
 At about 3:00 p.m. of December 19, 1986, Lorenzo Menard
"Boyet" Dolor, Jr. was driving an owner-type jeepney owned by
his mother, Margarita, towards Anilao, Batangas. As he was
traversing the road at Barangay Anilao East, Mabini, Batangas,
his vehicle collided with a passenger jeepney driven by
petitioner Juan Gonzales and owned by his co-petitioner
Francisco Hernandez, which was travelling towards Batangas
City. Boyet Dolor and his passenger, Oscar Valmocina, died as
a result of the collision. Fred Panopio, Rene Castillo and Joseph
Sandoval, who were also on board the owner-type jeep, which
was totally wrecked, suffered physical injuries. The collision
also damaged the passenger jeepney of Francisco Hernandez
and caused physical injuries to its passengers, namely, Virgie
Cadavida, Fiscal Artemio Reyes and Francisca Corona.
 Consequently, respondents commenced an action for
damages against petitioners before the RTC, alleging that driver
Juan Gonzales was guilty of negligence and lack of care and that
the Hernandez spouses were guilty of negligence in the selection
and supervision of their employees.
 Petitioners countered that the proximate cause of the death
and injuries sustained by the passengers of both vehicles was the
recklessness of Boyet Dolor, the driver of the owner-type
jeepney, who was driving in a zigzagging manner under the
influence of alcohol. Petitioners also alleged that Gonzales was
not the driver-employee of the Hernandez spouses as the former
only leased the passenger jeepney on a daily basis. The
Hernandez spouses further claimed that even if an employer-
employee relationship is found to exist between them, they
cannot be held liable because as employers they exercised due
care in the selection and supervision of their employee.
 During the trial of the case, it was established that the
drivers of the two vehicles were duly licensed to drive and that
the road where the collision occurred was asphalted and in fairly
good condition. The owner-type jeep was travelling uphill while
the passenger jeepney was going downhill. It was further
established that the owner-type jeep was moderately moving
and had just passed a road bend when its passengers, private
respondents Joseph Sandoval and Rene Castillo, saw the
passenger jeepney at a distance of three meters away. The
passenger jeepney was traveling fast when it bumped the owner
type jeep. Moreover, the evidence presented by respondents
before the trial court showed that petitioner Juan Gonzales
obtained his professional driver's license only 3 months before
the accident. Prior to this, he was holder of a student driver's
permit.
 RTC rendered a decision in favor of respondents, ordering
the spouses Francisco Hernandez and Aniceta Abel Hernandez
and Juan Gonzales to pay jointly and severally, to spouses
Dolor, Valmocina, Panopio, and Fred Panopio.
ISSUE: WON SPOUSES HRNANDEZ MAY BE HELD
SOLIDARILY LIABLE WITH DRIVER JUAN GONZALES?
HELD: YES. Petitioners contend that the absence of the Hernandez
spouses inside the passenger jeepney at the time of the collision
militates against holding them solidarily liable with their co-
petitioner, Juan Gonzales, invoking Article 2184 of the Civil Code,
which provides: “ARTICLE 2184. In motor vehicle mishaps, the
owner is solidarily liable with his driver, if the former, who was in
the vehicle, could have, by the use of the due diligence, prevented
the misfortune. It is disputably presumed that a driver was negligent,
if he had been found guilty of reckless driving or violating traffic
regulations at least twice within the next preceding two months. xxx
If the owner was not in the motor vehicle, the provisions of article
2180 are applicable.”
The Hernandez spouses argue that since they were not inside the
jeepney at the time of the collision, the provisions of Article 2180 of
the Civil Code, which does not provide for solidary liability between
employers and employees, should be applied. We are not persuaded.
Articles 2180 and 2176 apply.
While the above provisions of law do not expressly provide for
solidary liability, the same can be inferred from the wordings of the
first paragraph of Article 2180 which states that the obligation
imposed by article 2176 is demandable not only for one's own acts
or omissions, but also for those of persons for whom one is
responsible. Moreover, Article 2180 should be read with Article
2194 of the same Code, which categorically states that the
responsibility of two or more persons who are liable for quasi-delict
is solidary. In other words, the liability of joint tortfeasors is
solidary. Verily, under Article 2180 of the Civil Code, an employer
may be held solidarily liable for the negligent act of his employee.
The solidary liability of employers with their employees for quasi-
delicts having been established, the next question is whether Julian
Gonzales is an employee of the Hernandez spouses. An affirmative
answer will put to rest any issue on the solidary liability of the
Hernandez spouses for the acts of Julian Gonzales. The Hernandez
spouses maintained that Julian Gonzales is not their employee since
their relationship relative to the use of the jeepney is that of a lessor
and a lessee. They argue that Julian Gonzales pays them a daily
rental of P150.00 for the use of the jeepney. In essence, petitioners
are practicing the "boundary system" of jeepney operation albeit
disguised as a lease agreement between them for the use of the
jeepney. We hold that an employer-employee relationship exists
between the Hernandez spouses and Julian Gonzales.
Indeed to exempt from liability the owner of a public vehicle who
operates it under the "boundary system" on the ground that he is a
mere lessor would be not only to abet flagrant violations of the
Public Service Law, but also to place the riding public at the mercy
of reckless and irresponsible drivers, reckless because the measure of
their earnings depends largely upon the number of trips they make
and, hence, the speed at which they drive; and irresponsible because
most if not all of them are in no position to pay the damages they
might cause.
BENITO ARATEA V. ESMERALDO P. SUICO
G.R. No. 170284 March 16, 2007
FACTS:
 Petitioners Aratea and Canonigo are the controlling
stockholders of SAMDECO, a domestic corporation engaged in
CIV LAW REVIEW - OBLICON DIGESTS
mining operations in Western Samar. Private respondent Suico
is a businessman engaged in export and general merchandise.
Suico entered into a MOA with SAMDECO. Armed with the
proper board resolution, Aratea and Canonigo signed the MOA
as the duly authorized representatives of the corporation. Under
the MOA, Suico would extend loans and cash advances to
SAMDECO in exchange for the grant of the exclusive right
to market 50% of the total coal extracted by SAMDECO from
its mining sites in San Isidro, Wright, Western Samar.
 Suico was enticed into the aforementioned financing
scheme because Aratea and Canonigo assured him that the
money he would lend to SAMDECO would easily be paid with
5% monthly interest as the coals in said sites is easier to gather
because it is excavated from open-pit mines. Aratea and
Canonigo also promised to Suico that the loan the latter would
extend to SAMDECO could easily be paid from the profits of
his 50% share of the coal produced. Also reserved in favor of
Suico was the right of first priority to operate the mining
facilities in the event SAMDECO becomes incapable of coping
with the work demands. By way of further incentive, Suico was
actually appointed SAMDECO’s VP for Administration.
 Pursuant to the same MOA, Suico started releasing loans
and cash advances to SAMDECO, still through Aratea and
Suico. SAMDECO started operations in its mining sites to
gather the coal. As agreed in the MOA, 50% of the coals
produced were offered by Suico to different buyers. However,
SAMDECO, again through Aratea and Canonigo, prevented the
full implementation of the marketing arrangement by not
accepting the prices offered by Suico’s coal buyers even though
such prices were competitive and fair enough, giving no other
explanation for such refusal other than saying that the price was
too low. Aratea and Canonigo did not also set any criterion or
standard with which any price offer would be measured against.
Because he failed to close any sale of his 50% share of the coal-
produce and gain profits therefrom, Suico could not realize
payment of the loans and advances to SAMDECO.
 SAMDECO, on the other hand, successfully disposed of its
50% share of the coal-produce. Even with said coal sales,
however, SAMDECO absolutely made no payment of its loan
obligations to Suico, despite demands.
 Aratea and Canonigo eventually sold the mining rights and
passed on the operations of SAMDECO to Southeast Pacific
Marketing, Inc. (SPMI). They also sold their shares in
SAMDECO to SPMI’s President, Arturo E. Dy without notice
to, or consent of Suico, in violation of the MOA.
 Hence, Suico filed a complaint for a Sum of Money and
Damages against SAMDECO, Aratea, Canonigo, and Seiko
Philippines, Inc. (SEIKO, which was later substituted by SPMI
and Arturo E. Dy).
ISSUE: WON ARATEA & CANONIGO ARE SOLIDARILY
LIABLE WITH SAMDECO?
HELD: YES. The Court must determine whether, upon the same
facts found by the two courts below, there is basis to pierce the veil
of corporate fiction and hold SAMDECO’s stockholders and/or
officers personally and solidarily liable with the corporation.
Well-settled is the rule that a corporation has a personality separate
and distinct from that of its officers and stockholders. Officers of a
corporation are not personally liable for their acts as such officers
unless it is shown that they have exceeded their authority. However,
the legal fiction that a corporation has a personality separate and
distinct from stockholders and members may be disregarded if it is
used as a means to perpetuate fraud or an illegal act or as a vehicle
for the evasion of an existing obligation, the circumvention of
statutes, or to confuse legitimate issues.
A corporation is a juridical entity with legal personality separate and
distinct from those acting for and in its behalf and, in general, from
the people comprising it. The general rule is that obligations
incurred by the corporation, acting through its directors, officers and
employees, are its sole liabilities. There are times, however, when
solidary liabilities may be incurred but only when exceptional
circumstances warrant such as in the following cases:
1. When directors and trustees or, in appropriate cases, the
officers of a corporation:
a) vote for or assent to patently unlawful acts of the
corporation;
b) act in bad faith or with gross negligence in directing the
corporate affairs;
(c) are guilty of conflict of interest to the prejudice of the
corporation, its stockholders or members, and
other persons;
2. When a director or officer has consented to the issuance
of watered stocks or who, having knowledge thereof, did
not forthwith file with the corporate secretary his written
objection thereto;
3. When a director, trustee or officer has contractually
agreed or stipulated to hold himself personally and
solidarily liable with the corporation; or
4. When a director, trustee or officer is made, by specific
provision of law, personally liable for his corporate
action.
In labor cases, particularly, corporate directors and officers are
solidarily liable with the corporation for the termination of
employment of corporate employees done with malice or in bad
faith.
Petitioners Aratea and Canonigo, despite having separate and
distinct personalities from SAMDECO may be held personally liable
for the loans and advances made by Suico to SAMDECO which they
represent on account of their bad faith in carrying out the business of
the corporation. Canonigo, Aratea and SAMDECO prevented the
full implementation of the marketing agreement concerning the coal
produced from the mining site, specifically called the Arizona
project, by not agreeing to the price of the coal offered by the buyers
procured by Suico even though the prices offered were competitive
and fair enough. By not acquiescing in to the proffered price, Suico
was not able to obtain his share of 50% of the profits from the sale of
the coal produced by the mining site.
On the other hand, the petitioners were able to sell coal produced in
the mining site in question. Hence, this undoubtedly exhibits their
bad faith, malice and wanton disregard of the respondent’s rights in
not complying with their part of the covenant. While the petitioners
were able to market their share of the coal, they precluded the
respondent from marketing his. Moreover, Canonigo and Aratea
further violated the respondent’s rights when they without informing
respondent sold their shares of SAMDECO to defendants Dy and
SPMI thereby vesting on the latter the right to operate SAMDECO’s
coal mining area. The Contract expressly states that Suico had the
right of first priority in acquiring the coal area of SAMDECO.
Thus, petitioners Aratea and Canonigo acted in bad faith when they,
as officers of SAMDECO, unreasonably prevented Suico from
selling his part of the coal-produce of the mining site, in gross
violation of their MOA. This resulted in Suico not being unable to
realize profits from his 50% share of the coal-produce, from which
CIV LAW REVIEW - OBLICON DIGESTS
Suico could obtain part of the payment for the loans and advances he
made in favor of SAMDECO. Moreover, petitioners also acted in
bad faith when they sold, transferred and assigned their proprietary
rights over the mining area in favor of SPMI and Dy, thereby
causing SAMDECO to grossly violate its MOA with Suico. Suico
suffered grave injustice because he was prevented from acquiring the
opportunity to obtain payment of his loans and cash advances, while
petitioners Aratea and Canonigo profited from the sale of their
shareholdings in SAMDECO in favor of SPMI and Dy. These facts
duly established Aratea and Canonigo’s personal liability as
officers/stockholders of SAMDECO and their solidary liability with
SAMDECO for its obligations in favor of Suico for the loans and
cash advances received by the corporation.
6.7.2 WHEN SOLIDARY LIABILITY EXISTS
C. WHEN NATURE OF OBLIGATION
REQUIRES IT
METROPOLITAN WATERWORKS AND SEWERAGE
SYSTEM V. HON. REYNALDO B. DAWAY
[G.R. No. 160732. June 21, 2004]
FACTS:
 MWSS granted Maynilad under a Concession Agreement a
20year period to manage, operate, repair, decommission and
refurbish the existing MWSS water delivery and sewerage
services in the West Zone Service Area, for which Maynilad
undertook to pay the corresponding concession fees on the dates
agreed upon in said agreement which, among other things,
consisted of payments of petitioner’s mostly foreign loans. To
secure the concessionaire’s performance of its obligations under
the Concession Agreement, Maynilad was required under
Section 6.9 of said contract to put up a bond, bank guarantee or
other security acceptable to MWSS.
 In compliance with this requirement, Maynilad arranged for
a three-year facility with a number of foreign banks, led by
Citicorp International Limited, for the issuance of an Irrevocable
Standby Letter of Credit in the amount of $120M in favor of
MWSS for the full and prompt performance of Maynilad’s
obligations to MWSS as aforestated.
 Sometime in September 2000, respondent Maynilad
requested MWSS for a mechanism by which it hoped to recover
the losses it had allegedly incurred and would be incurring as a
result of the depreciation of the Philippine Peso against the US
Dollar. Failing to get what it desired, Maynilad issued a Force
Majeure Notice and unilaterally suspended the payment of the
concession fees. In an effort to salvage the Concession
Agreement, the parties entered into a MOA wherein Maynilad
was allowed to recover foreign exchange losses under a formula
agreed upon between them. Sometime in August 2001 Maynilad
again filed another Force Majeure Notice and, since MWSS
could not agree with the terms of said Notice, the matter was
referred to the Appeals Panel for arbitration. This resulted in the
parties agreeing to resolve the issues through an amendment of
the Concession Agreement, known as Amendment No. 1, which
was based on the terms set down in a MWSS Board of Trustees
Resolution, which provided inter alia for a formula that would
allow Maynilad to recover foreign exchange losses it had
incurred or would incur under the terms of the Concession
Agreement.
 As part of this agreement, Maynilad committed, among
other things, to: a) infuse the amount of UD$80.0 million as
additional funding support from its stockholders; b) resume
payment of the concession fees; and c) mutually seek the
dismissal of the cases pending before the Court of Appeals and
with Minor Dispute Appeals Panel.
 However, Maynilad later served upon MWSS a Notice of
Event of Termination, claiming that MWSS failed to comply
with its obligations under the Concession Agreement and
Amendment No. 1 regarding the adjustment mechanism that
would cover Maynilad’s foreign exchange losses. Maynilad
filed a Notice of Early Termination of the concession, which
was challenged by MWSS. This matter was eventually brought
before the Appeals Panel, which ruled that there was no Event
of Termination as defined under the Concession Agreement and
therefore, Maynilad should pay the concession fees that had
fallen due.
ISSUE: WON THE PERFORMANCE BOND OBLIGATIONS OF
THE BANKS WERE SOLIDARY IN NATURE?
HELD: YES. Respondent Maynilad would persuade us that there is
nothing in the Standby Letter of Credit nor in law nor in the nature
of the obligation that would show or require the obligation of the
banks to be solidary with the respondent Maynilad. We disagree.
Respondent Maynilad’s claim that the banks are not solidarily liable
with the debtor does not find support in jurisprudence.
We held in Feati Bank & Trust Company v. Court of Appeals that
the concept of guarantee vis-à-vis the concept of an irrevocable letter
of credit are inconsistent with each other. The guarantee theory
destroys the independence of the bank’s responsibility from the
contract upon which it was opened and the nature of both contracts is
mutually in conflict with each other. In contracts of guarantee, the
guarantor’s obligation is merely collateral and it arises only upon the
default of the person primarily liable. On the other hand, in an
irrevocable letter of credit, the bank undertakes a primary obligation.
We have also defined a letter of credit as an engagement by a bank
or other person made at the request of a customer that the issuer shall
honor drafts or other demands of payment upon compliance with the
conditions specified in the credit.
Letters of credit were developed for the purpose of insuring to a
seller payment of a definite amount upon the presentation of
documents and is thus a commitment by the issuer that the party in
whose favor it is issued and who can collect upon it will have his
credit against the applicant of the letter, duly paid in the amount
specified in the letter. They are in effect absolute undertakings to pay
the money advanced or the amount for which credit is given on the
faith of the instrument. They are primary obligations and not
accessory contracts and while they are security arrangements, they
are not converted thereby into contracts of guaranty. What
distinguishes letters of credit from other accessory contracts, is the
engagement of the issuing bank to pay the seller once the draft and
other required shipping documents are presented to it. They are
definite undertakings to pay at sight once the documents stipulated
therein are presented.
Letters of Credits have long been and are still governed by the
provisions of the Uniform Customs and Practice for Documentary
Credits of the International Chamber of Commerce. In the 1993
Revision it provides in Art. 2 that “the expressions Documentary
Credit(s) and Standby Letter(s) of Credit mean any arrangement,
however made or described, whereby a bank acting at the request
and on instructions of a customer or on its own behalf is to make
payment against stipulated document(s)” and Art. 9 thereof defines
the liability of the issuing banks on an irrevocable letter of credit as a
“definite undertaking of the issuing bank, provided that the
CIV LAW REVIEW - OBLICON DIGESTS
stipulated documents are presented to the nominated bank or the
issuing bank and the terms and conditions of the Credit are complied
with, to pay at sight if the Credit provides for sight payment.”
The participating banks’ obligation are solidary with respondent
Maynilad in that it is a primary, direct, definite and an absolute
undertaking to pay and is not conditioned on the prior exhaustion of
the debtor’s assets. These are the same characteristics of a surety or
solidary obligor.
Being solidary, the claims against them can be pursued separately
from and independently of the rehabilitation case, as held in Traders
Royal Bank v. Court of Appeals, we said that property of the surety
cannot be taken into custody by the rehabilitation receiver (SEC) and
said surety can be sued separately to enforce his liability as surety
for the debts or obligations of the debtor. The debts or obligations
for which a surety may be liable include future debts, an amount
which may not be known at the time the surety is given.
The terms of the Irrevocable Standby Letter of Credit do not show
that the obligations of the banks are not solidary with those of
respondent Maynilad. On the contrary, it is issued at the request of
and for the account of Maynilad Water Services, Inc., in favor of the
Metropolitan Waterworks and Sewerage System, as a bond for the
full and prompt performance of the obligations by the concessionaire
under the Concession Agreement and herein petitioner is authorized
by the banks to draw on it by the simple act of delivering to the
agent a written certification substantially in the form Annex “B” of
the Letter of Credit. It provides further in Sec. 6, that for as long as
the Standby Letter of Credit is valid and subsisting, the Banks shall
honor any written Certification made by MWSS in accordance with
Sec. 2, of the Standby Letter of Credit regardless of the date on
which the event giving rise to such Written Certification arose.
Taking into consideration our own rulings on the nature of
letters of credit and the customs and usage developed over the
years in the banking and commercial practice of letters of credit,
we hold that except when a letter of credit specifically stipulates
otherwise, the obligation of the banks issuing letters of credit are
solidary with that of the person or entity requesting for its
issuance, the same being a direct, primary, absolute and definite
undertaking to pay the beneficiary upon the presentation of the
set of documents required therein.
6.7.3 WORDS IMPORTING
SOLIDARITY
ERNESTO V. RONQUILLO V. C.A. & ANTONIO P. SO
G.R. No. L-55138 September 28, 1984
FACTS:
 Petitioner Ernesto V. Ronquillo was one of 4 defendants in
a Civil Case filed by private respondent Antonio P. So for the
collection of sum of money. The other defendants were
Offshore Catertrade Inc., Johnny Tan and Pilar Tan. The amount
of P117,498.98 sought to be collected represents the value of the
checks issued by said defendants in payment for foodstuffs
delivered to and received by them. The said checks were
dishonored by the drawee bank.
 Lower court rendered its Decision based on the compromise
agreement submitted by the parties. Private respondent filed a
Motion for Execution on the ground that defendants failed to
make the initial payment of P55K on or before December 24,
1979 as provided in the Decision. Said motion for execution was
opposed by herein petitioner (as one of the defendants)
contending that his inability to make the payment was due to
private respondent's own act of making himself scarce and
inaccessible on December 24, 1979. Petitioner then prayed that
private respondent be ordered to accept his payment in the
amount of P13,750.
 During the hearing of the Motion for Execution and the
Opposition thereto, petitioner, as one of the four defendants,
tendered the amount of P13,750.00, as his pro-rata share in the
P55,000.00 initial payment. Another defendant, Pilar P. Tan,
offered to pay the same amount. Because private respondent
refused to accept their payments, demanding from them the full
initial installment of P 55K, petitioner and Pilar Tan instead
deposited the said amount with the Clerk of Court.
 The lower court ordered the issuance of a writ of execution
for the balance of the initial amount payable, against the other
two defendants, Offshore Catertrade Inc. and Johnny Tan who
did not pay their shares.
 Private respondent moved for the reconsideration and/or
modification of the aforesaid Order of execution and prayed
instead for the "execution of the decision in its entirety against
all defendants, jointly and severally." Petitioner opposed the
said motion arguing that under the decision of the lower court
being executed which has already become final, the liability of
the 4 defendants was not expressly declared to be solidary,
consequently each defendant is obliged to pay only his own pro-
rata or 1/4 of the amount due.
ISSUE: WON THE PETITIONER WAS LIABLE FOR THE FULL
AMOUNT?
HELD: YES. Article 1207 and 1208 of the Civil Code provides:
“Art. 1207. The concurrence of two or more debtors in one and the
same obligation does not imply that each one of the former has a
right to demand, or that each one of the latter is bound to render,
entire compliance with the prestation. Then is a solidary liability
only when the obligation expressly so states, or when the law or the
nature of the obligation requires solidarity. XXX Art. 1208. If from
the law,or the nature or the wording of the obligation to which the
preceding article refers the contrary does not appear, the credit or
debt shall be presumed to be divided into as many equal shares as
there are creditors and debtors, the credits or debts being considered
distinct from one another, subject to the Rules of Court governing
the multiplicity of suits.”
The decision of the lower court based on the parties' compromise
agreement, provides: “1. Plaintiff agrees to reduce its total claim of
P117,498.95 to only P110,000.00 and defendants agree to
acknowledge the validity of such claim and further bind themselves
to initially pay out of the total indebtedness of P110,000.00, the
amount of P5,000.00 on or before December 24, 1979, the balance
of P55,000.00, defendants individually and jointly agree to pay
within a period of six months from January 1980 or before June 30,
1980.”
Clearly then, by the express term of the compromise agreement and
the decision based upon it, the defendants obligated themselves to
pay their obligation "individually and jointly". The term
"individually" has the same meaning as "collectively", "separately",
"distinctively", respectively or "severally". An agreement to be
"individually liable" undoubtedly creates a several obligation, and a
CIV LAW REVIEW - OBLICON DIGESTS
"several obligation is one by which one individual binds himself to
perform the whole obligation.
In the case of Parot vs. Gemora, We therein ruled that "the phrase
juntos or separadamente in the promissory note is an express
statement making each of the persons who signed it individually
liable for the payment of the full amount of the obligation contained
therein." Likewise in Un Pak Leung vs. Negorra, We held that "in
the absence of a finding of facts that the defendants made themselves
individually hable for the debt incurred they are each liable only for
one-half of said amount. The obligation in the case at bar being
described as "individually and jointly", the same is therefore
enforceable against one of the numerous obligors.
6.7.4 SOLIDARY DEBTOR V.
SURETY
SALVADOR P. ESCAÑO VS. RAFAEL ORTIGAS, JR.
[G. R. No. 151953, June 29, 2007]
FACTS:
 Private Development Corporation of the Philippines
(PDCP) entered into a loan agreement with Falcon Minerals,
Inc. whereby PDCP agreed to make available and lend to Falcon
the amount of $320K, for specific purposes and subject to
certain terms and conditions. On the same day, 3 stockholders-
officers of Falcon, namely: respondent Rafael Ortigas, Jr.,
George A. Scholey and George T. Scholey executed an
Assumption of Solidary Liability whereby they agreed “to
assume in their individual capacity, solidary liability with
Falcon for the due and punctual payment” of the loan contracted
by Falcon with PDCP. In the meantime, 2 separate guaranties
were executed to guarantee the payment of the same loan by
other stockholders and officers of Falcon, acting in their
personal and individual capacities. One Guaranty was executed
by petitioner Salvador Escaño, while the other by petitioner
Mario M. Silos, Ricardo C. Silverio, Carlos L. Inductivo and
Joaquin J. Rodriguez.
 2 years later, an agreement developed to cede control of
Falcon to Escaño, Silos and Joseph M. Matti. Thus, contracts
were executed whereby Ortigas, George A. Scholey, Inductivo
and the heirs of then already deceased George T. Scholey
assigned their shares of stock in Falcon to Escaño, Silos and
Matti. Part of the consideration that induced the sale of stock
was a desire by Ortigas, et al., to relieve themselves of all
liability arising from their previous joint and several
undertakings with Falcon, including those related to the loan
with PDCP. Thus, an Undertaking was executed by the
concerned parties with Escaño, Silos and Matti identified in the
document as “SURETIES,” on one hand, and Ortigas, Inductivo
and the Scholeys as “OBLIGORS,” on the other.
 Falcon eventually availed of the sum of $178k from the
credit line extended by PDCP. It would also execute a Deed of
Chattel Mortgage over its personal properties to further secure
the loan. However, Falcon subsequently defaulted in its
payments. After PDCP foreclosed on the chattel mortgage, there
remained a subsisting deficiency of P5M, which Falcon did not
satisfy despite demand.
 In order to recover the indebtedness, PDCP filed a
complaint for sum of money against Falcon, Ortigas, Escaño,
Silos, Silverio and Inductivo. Ortigas filed together with his
answer a cross-claim against his co-defendants Falcon, Escaño
and Silos, and also manifested his intent to file a third-party
complaint against the Scholeys and Matti. The cross-claim
lodged against Escaño and Silos was predicated on the 1982
Undertaking, wherein they agreed to assume the liabilities of
Ortigas with respect to the PDCP loan.
 Escaño, Ortigas and Silos each sought to seek a settlement
with PDCP. The first to come to terms with PDCP was Escaño,
who entered into a compromise agreement whereby he agreed
to pay the bank P1M. In exchange, PDCP waived or assigned in
favor of Escaño 1/3 of its entire claim in the complaint against
all of the other defendants in the case. Then Ortigas entered into
his own compromise agreement with PDCP, allegedly without
the knowledge of Escaño, Matti and Silos. Thereby, Ortigas
agreed to pay PDCP P1.3M as “full satisfaction of the PDCP’s
claim against Ortigas.” Silos and PDCP entered into a Partial
Compromise Agreement whereby he agreed to pay P500k in
exchange for PDCP’s waiver of its claims against him. In the
meantime, after having settled with PDCP, Ortigas pursued his
claims against Escaño, Silos and Matti, on the basis of the 1982
Undertaking. He initiated a third-party complaint against Matti
and Silos, while he maintained his cross-claim against Escaño.
 RTC issued the Summary Judgment, ordering Escaño, Silos
and Matti to pay Ortigas, jointly and severally, the amount of
P1.3M, as well as P20K in attorney’s fees. The trial court
ratiocinated that none of the third-party defendants disputed the
1982 Undertaking.
ISSUE: WON PETITIONERS ARE SOLIDARILY LIABLE TO
ORTIGAS?
HELD: NO. Ortigas argues that petitioners, as well as Matti, are
jointly and severally liable for the Undertaking, as the language used
in the agreement “clearly shows that it is a surety agreement”
between the obligors (Ortigas group) and the sureties (Escaño
group). Ortigas points out that the Undertaking uses the word
“SURETIES” although the document, in describing the parties. It is
further contended that the principal objective of the parties in
executing the Undertaking cannot be attained unless petitioners are
solidarily liable “because the total loan obligation can not be paid or
settled to free or release the OBLIGORS if one or any of the
SURETIES default from their obligation in the Undertaking.”
In case there is a concurrence of two or more creditors or of two or
more debtors in one and the same obligation, Article 1207 of the
Civil Code states that among them, “[t]here is a solidary liability
only when the obligation expressly so states, or when the law or the
nature of the obligation requires solidarity.” Article 1210 supplies
further caution against the broad interpretation of solidarity by
providing: “The indivisibility of an obligation does not necessarily
give rise to solidarity. Nor does solidarity of itself imply
indivisibility.”
These Civil Code provisions establish that in case of concurrence of
two or more creditors or of two or more debtors in one and the same
obligation, and in the absence of express and indubitable terms
characterizing the obligation as solidary, the presumption is that the
obligation is only joint. It thus becomes incumbent upon the party
alleging that the obligation is indeed solidary in character to prove
such fact with a preponderance of evidence.
The Undertaking does not contain any express stipulation that the
petitioners agreed “to bind themselves jointly and severally” in their
obligations to the Ortigas group, or any such terms to that effect.
Hence, such obligation established in the Undertaking is presumed
only to be joint. Ortigas, as the party alleging that the obligation is in
CIV LAW REVIEW - OBLICON DIGESTS
fact solidary, bears the burden to overcome the presumption of
jointness of obligations. He has failed to discharge such burden.
The term “surety” has a specific meaning under our Civil Code. As
provided in Article 2047 in a surety agreement the surety undertakes
to be bound solidarily with the principal debtor. Thus, a surety
agreement is an ancillary contract as it presupposes the existence of
a principal contract. It appears that Ortigas’s argument rests solely
on the solidary nature of the obligation of the surety under Article
2047. In tandem with the nomenclature “SURETIES” accorded to
petitioners and Matti in the Undertaking, however, this argument
can only be viable if the obligations established in the
Undertaking do partake of the nature of a suretyship as defined
under Article 2047 in the first place. That clearly is not the case here,
notwithstanding the use of the nomenclature “SURETIES” in the
Undertaking.
Again, as indicated by Article 2047, a suretyship requires a principal
debtor to whom the surety is solidarily bound by way of an ancillary
obligation of segregate identity from the obligation between the
principal debtor and the creditor. The suretyship does bind the surety
to the creditor, inasmuch as the latter is vested with the right to
proceed against the former to collect the credit in lieu of proceeding
against the principal debtor for the same obligation. At the same
time, there is also a legal tie created between the surety and the
principal debtor to which the creditor is not privy or party to. The
moment the surety fully answers to the creditor for the obligation
created by the principal debtor, such obligation is extinguished. At
the same time, the surety may seek reimbursement from the principal
debtor for the amount paid, for the surety does in fact “become
subrogated to all the rights and remedies of the creditor.”
Note that Article 2047 itself specifically calls for the application of
the provisions on joint and solidary obligations to suretyship
contracts. Article 1217 of the Civil Code thus comes into play,
recognizing the right of reimbursement from a co-debtor (the
principal debtor, in case of suretyship) in favor of the one who paid
(i.e., the surety). However, a significant distinction still lies between
a joint and several debtor, on one hand, and a surety on the other.
Solidarity signifies that the creditor can compel any one of the joint
and several debtors or the surety alone to answer for the entirety of
the principal debt. The difference lies in the respective faculties of
the joint and several debtor and the surety to seek reimbursement for
the sums they paid out to the creditor.
Dr. Tolentino explains the differences between a solidary co-debtor
and a surety: “A guarantor who binds himself in solidum with the
principal debtor under the provisions of the second paragraph does
not become a solidary co-debtor to all intents and purposes. There is
a difference between a solidary co-debtor and a fiador in solidum
(surety). The latter, outside of the liability he assumes to pay the debt
before the property of the principal debtor has been exhausted,
retains all the other rights, actions and benefits which pertain to him
by reason of the fiansa; while a solidary co-debtor has no other rights
than those bestowed upon him in Section 4, Chapter 3, Title I, Book
IV of the Civil Code.”
The second paragraph of [Article 2047] is practically equivalent to
the contract of suretyship. The civil law suretyship is, accordingly,
nearly synonymous with the common law guaranty; and the civil law
relationship existing between the co-debtors liable in solidum is
similar to the common law suretyship.
In the case of joint and several debtors, Article 1217 makes plain
that the solidary debtor who effected the payment to the creditor
“may claim from his co-debtors only the share which corresponds to
each, with the interest for the payment already made.” Such solidary
debtor will not be able to recover from the co-debtors the full
amount already paid to the creditor, because the right to recovery
extends only to the proportional share of the other co-debtors, and
not as to the particular proportional share of the solidary debtor who
already paid. In contrast, even as the surety is solidarily bound with
the principal debtor to the creditor, the surety who does pay the
creditor has the right to recover the full amount paid, and not just
any proportional share, from the principal debtor or debtors. Such
right to full reimbursement falls within the other rights, actions and
benefits which pertain to the surety by reason of the subsidiary
obligation assumed by the surety.
What is the source of this right to full reimbursement by the surety?
We find the right under Article 2066 of the Civil Code, which
assures that “[t]he guarantor who pays for a debtor must be
indemnified by the latter,” such indemnity comprising of, among
others, “the total amount of the debt.” Further, Article 2067 of the
Civil Code likewise establishes that “[t]he guarantor who pays is
subrogated by virtue thereof to all the rights which the creditor had
against the debtor.”
Articles 2066 and 2067 explicitly pertain to guarantors, and one
might argue that the provisions should not extend to sureties,
especially in light of the qualifier in Article 2047 that the provisions
on joint and several obligations should apply to sureties. We reject
that argument, and instead adopt Dr. Tolentino’s observation that
“[t]he reference in the second paragraph of [Article 2047] to the
provisions of Section 4, Chapter 3, Title I, Book IV, on solidary or
several obligations, however, does not mean that suretyship is
withdrawn from the applicable provisions governing guaranty.” For
if that were not the implication, there would be no material
difference between the surety as defined under Article 2047 and the
joint and several debtors, for both classes of obligors would be
governed by exactly the same rules and limitations.
Accordingly, the rights to indemnification and subrogation as
established and granted to the guarantor by Articles 2066 and 2067
extend as well to sureties as defined under Article 2047. These rights
granted to the surety who pays materially differ from those granted
under Article 1217 to the solidary debtor who pays, since the
“indemnification” that pertains to the latter extends “only [to] the
share which corresponds to each [co-debtor].” It is for this reason
that the Court cannot accord the conclusion that because petitioners
are identified in the Undertaking as “SURETIES,” they are
consequently joint and severally liable to Ortigas.
In order for the conclusion espoused by Ortigas to hold, in light of
the general presumption favoring joint liability, the Court would
have to be satisfied that among the petitioners and Matti, there is one
or some of them who stand as the principal debtor to Ortigas and
another as surety who has the right to full reimbursement from the
principal debtor or debtors. No suggestion is made by the parties that
such is the case, and certainly the Undertaking is not revelatory of
such intention. If the Court were to give full fruition to the use of the
term “sureties” as conclusive indication of the existence of a surety
agreement that in turn gives rise to a solidary obligation to pay
Ortigas, the necessary implication would be to lay down a
corresponding set of rights and obligations as between the
“SURETIES” which petitioners and Matti did not clearly intend.
CIV LAW REVIEW - OBLICON DIGESTS
6.7 SOLIDARY OBLIGATIONS
6.7.5 KINDS – B. PASSIVE
IV. RELEASE OF SOLIDARY
DEBTOR
GREAT ASIAN SALES CENTER CORP. V. C.A. &
BANCASIA FINANCE
G.R. No. 105774 April 25, 2002
FACTS:
 Great Asian is engaged in the business of buying and
selling general merchandise, in particular household appliances.
Its board of directors approved a resolution authorizing its
Treasurer and General Manager, Arsenio Lim Piat, Jr. to secure
a loan from Bancasia in an amount not to exceed P1M. The
board resolution also authorized Arsenio to sign all papers,
documents or promissory notes necessary to secure the loan.
Later, the board approved a second resolution authorizing Great
Asian to secure a discounting line with Bancasia in an amount
not exceeding P2M. The second board resolution also
designated Arsenio as the authorized signatory.
 Tan Chong Lin signed 2 Surety Agreements in favor of
Bancasia to guarantee, solidarily, the debts of Great Asian to
Bancasia.
 Great Asian, through its Treasurer and General Manager
Arsenio, signed 4 Deeds of Assignment of Receivables,
assigning to Bancasia 15 postdated checks. Arsenio endorsed all
the 15 checks by signing his name at the back of the checks. 8 of
the dishonored checks bore the endorsement of Arsenio below
the stamped name of "Great Asian Sales Center", while the rest
of the dishonored checks just bore the signature of Arsenio. The
drawee banks dishonored the 15 checks on maturity when
deposited for collection.
 Bancasia sent by registered mail to Tan Chong Lin a letter
notifying him of the dishonor and demanding payment from
him. Neither Great Asian nor Tan Chong Lin paid Bancasia the
dishonored checks.
 Great Asian filed for insolvency. Attached to the verified
petition was a "Schedule and Inventory of Liabilities and
Creditors," listing Bancasia as one of the creditors of Great
Asian for P1.2M.
 Bancasia filed a complaint for collection of a sum of money
against Great Asian and Tan Chong Lin. Bancasia impleaded
Tan Chong Lin because of the Surety Agreements he signed in
favor of Bancasia. In its answer, Great Asian denied the material
allegations of the complaint claiming it was unfounded,
malicious, baseless, and unlawfully instituted since there was
already a pending insolvency proceedings, although Great Asian
subsequently withdrew its petition for voluntary insolvency.
Great Asian further raised the alleged lack of authority of
Arsenio to sign the Deeds of Assignment as well as the absence
of consideration and consent of all the parties to the Surety
Agreements signed by Tan Chong Lin.
ISSUE: WON TAN CHONG LIM IS LIABLE?
HELD: YES. Tan Chong Lin, the President of Great Asian, is being
sued in his personal capacity based on the Surety Agreements he
signed wherein he solidarily held himself liable with Great Asian for
the payment of its debts to Bancasia. The Surety Agreements contain
the following common condition: "Upon failure of the Principal to
pay at maturity, with or without demand, any of the obligations
above mentioned, or in case of the Principal?s failure promptly to
respond to any other lawful demand made by the Creditor, its
successors, administrators or assigns, both the Principal and the
Surety/ies shall be considered in default and the Surety/ies agree/s to
pay jointly and severally to the Creditor all outstanding obligations
of the Principal, whether due or not due, and whether held by the
Creditor as Principal or agent, and it is agreed that a certified
statement by the Creditor as to the amount due from the Principal
shall be accepted by the Surety/ies as correct and final for all legal
intents and purposes."
Indisputably, Tan Chong Lin explicitly and unconditionally bound
himself to pay Bancasia, solidarily with Great Asian, if the drawers
of the checks fail to pay on due date. The condition on which Tan
Chong Lin’s obligation hinged had happened. As surety, Tan Chong
Lin automatically became liable for the entire obligation to the same
extent as Great Asian.
Tan Chong Lin maintains that the warranties in the Deeds of
Assignment materially altered his obligations under the Surety
Agreements, and therefore he is released from any liability to
Bancasia. Under Article 1215 of the Civil Code, what releases a
solidary debtor is a "novation, compensation, confusion or remission
of the debt" made by the creditor with any of the solidary debtors.
These warranties, however, are the usual warranties made by one
who discounts receivables with a financing company or bank. The
Surety Agreements, written on the letter head of "Bancasia Finance
& Investment Corporation," uniformly state that "Great Asian Sales
Center has obtained and/or desires to obtain loans, overdrafts,
discounts and/or other forms of credits from" Bancasia. Tan Chong
Lin was clearly on notice that he was holding himself as surety of
Great Asian which was discounting postdated checks issued by its
buyers of goods and merchandise. Moreover, Tan Chong Lin, as
President of Great Asian, cannot feign ignorance of Great Asian’s
business activities or discounting transactions with Bancasia. Thus,
the warranties do not increase or enlarge the risks of Tan Chong Lin
under the Surety Agreements. There is, moreover, no novation of the
debt of Great Asian that would warrant release of the surety.
In any event, the provisions of the Surety Agreements are broad
enough to include the obligations of Great Asian to Bancasia under
the warranties. Article 1207 of the Civil Code provides, "xxx There
is a solidary liability only when the obligation expressly so states, or
when the law or nature of the obligation requires solidarity." The
stipulations in the Surety Agreements undeniably mandate the
solidary liability of Tan Chong Lin with Great Asian. Moreover, the
stipulations in the Surety Agreements are sufficiently broad,
expressly encompassing "all the notes, drafts, bills of exchange,
overdraft and other obligations of every kind which the PRINCIPAL
may now or may hereafter owe the Creditor". Consequently, Tan
Chong Lin must be held solidarily liable with Great Asian for the
nonpayment of the fifteen dishonored checks, including penalty and
attorney’s fees in accordance with the Deeds of Assignment.
SECURITY BANK AND TRUST COMPANY, Inc., V.
RODOLFO M. CUENCA
[G.R. No. 138544. October 3, 2000]
FACTS:
 Security Bank and Trust Co. granted Sta. Ines Melale
Corporation [SIMC] a credit line in the amount of P8M to assist
the latter in meeting the additional capitalization requirements
of its logging operations. The Credit Approval Memorandum
expressly stated that the P8M Credit Loan Facility shall be
effective until 30 November 1981.
CIV LAW REVIEW - OBLICON DIGESTS
 To secure the payment of the amounts drawn by appellant
SIMC from the credit line, SIMC executed a Chattel Mortgage
over some of its machinery and equipment in favor of SBTC. As
additional security for the payment of the loan, Respondent
Rodolfo Cuenca executed an Indemnity Agreement in favor of
SBTC whereby he solidarily bound himself with SIMC.
 4 days prior to the expiration of the period of effectivity of
the P8M-Credit Loan Facility, SIMC made a first drawdown
from its credit line with SBTC in the amount of P6.1M. To
cover said drawdown, SIMC duly executed promissory note.
 Sometime in 1985, Cuenca resigned as President and
Chairman of the Board of Directors of SIMC. Subsequently, the
shareholdings of Cuenca in SIMC were sold at a public auction.
Said shares were bought by Adolfo Angala who was the highest
bidder during the public auction.
 Subsequently, SIMC repeatedly availed of its credit line
and obtained 6 other loans from SBTC in the aggregate amount
of P6.3M. Accordingly, SIMC executed Promissory Notes to
cover the amounts of the additional loans.
 SIMC, however, encountered difficulty in making the
amortization payments on its loans and requested SBTC for a
complete restructuring of its indebtedness. SBTC
accommodated SIMC’s request and signified its approval in a
letter wherein SBTC and SIMC, without notice to or the prior
consent of Cuenca, agreed to restructure the past due obligations
as embodied in a 1989 Loan Agreement. SBTC agreed to extend
to SIMC loans of P8.8M to be applied to liquidate the principal
portion of SIMC’s total outstanding indebtedness to SBTC, and
a loan of P3.4M to be applied to liquidate the past due interest
and penalty portion of the indebtedness.
 In restructuring SIMC’s indebtedness, the P6.1M first loan
(the only one covered by the Indemnity Agreement executed
with Cuenca) was not segregated from, but was instead lumped
together with, the other loans which were not secured by the
Indemnity Agreement.
 SIMC defaulted in the payment of its restructured loan
obligations despite demands. Thus, SBTC filed a complaint for
collection of sum of money.
ISSUE: WON CUENCA IS LIABLE?
HELD: NO. Original Obligation Extinguished by Novation. An
obligation may be extinguished by novation, pursuant to Article
1292 of the Civil Code. Novation of a contract is never presumed. It
has been held that “[i]n the absence of an express agreement,
novation takes place only when the old and the new obligations are
incompatible on every point.” Indeed, the following requisites must
be established: (1) there is a previous valid obligation; (2) the parties
concerned agree to a new contract; (3) the old contract is
extinguished; and (4) there is a valid new contract. Clearly, the
requisites of novation are present in this case. The 1989 Loan
Agreement extinguished the obligation obtained under the 1980
credit accomodation. Since the 1989 Loan Agreement had
extinguished the original credit accommodation, the Indemnity
Agreement, an accessory obligation, was necessarily extinguished
also, pursuant to Article 1296 of the Civil Code.
While respondent held himself liable for the credit accommodation
or any modification thereof, such clause should be understood in the
context of the P8 million limit and the November 30, 1981 term. It
did not give the bank or Sta. Ines any license to modify the nature
and scope of the original credit accommodation, without informing
or getting the consent of respondent who was solidarily liable.
Taking the bank’s submission to the extreme, respondent (or his
successors) would be liable for loans even amounting to, say, P100
billion obtained 100 years after the expiration of the credit
accommodation, on the ground that he consented to all alterations
and extensions thereof.
Indeed, it has been held that a contract of surety “cannot extend to
more than what is stipulated. It is strictly construed against the
creditor, every doubt being resolved against enlarging the liability of
the surety.” Iit is a well-settled legal principle that if there is any
doubt on the terms and conditions of the surety agreement, the doubt
should be resolved in favor of the surety. Ambiguous contracts are
construed against the party who caused the ambiguity.” In the
absence of an unequivocal provision that respondent waived his right
to be notified of or to give consent to any alteration of the credit
accommodation, we cannot sustain petitioner’s view that there was
such a waiver.
Contending that the Indemnity Agreement was in the nature of a
continuing surety, petitioner maintains that there was no need for
respondent to execute another surety contract to secure the 1989
Loan Agreement. This argument is incorrect. That the Indemnity
Agreement is a continuing surety does not authorize the bank to
extend the scope of the principal obligation inordinately. In Dino v.
CA, the Court held that “a continuing guaranty is one which covers
all transactions, including those arising in the future, which are
within the description or contemplation of the contract of guaranty,
until the expiration or termination thereof.”
Accordingly, the surety of Cuenca secured only the first loan of P6.1
million obtained on November 26, 1991. It did not secure the
subsequent loans, purportedly under the 1980 credit accommodation,
that were obtained in 1986. Certainly, he could not have guaranteed
the 1989 Loan Agreement, which was executed after November 30,
1981 and which exceeded the stipulated P8 million ceiling.
It is a common banking practice to require the JSS (“joint and
solidary signature”) of a major stockholder or corporate officer, as
an additional security for loans granted to corporations. There are at
least two reasons for this. First, in case of default, the creditor’s
recourse, which is normally limited to the corporate properties under
the veil of separate corporate personality, would extend to the
personal assets of the surety. Second, such surety would be
compelled to ensure that the loan would be used for the purpose
agreed upon, and that it would be paid by the corporation.
Following this practice, it was therefore logical and reasonable for
the bank to have required the JSS of respondent, who was the
chairman and president of Sta. Ines in 1980 when the credit
accommodation was granted. There was no reason or logic, however,
for the bank or Sta. Ines to assume that he would still agree to act as
surety in the 1989 Loan Agreement, because at that time, he was no
longer an officer or a stockholder of the debtor-corporation. Verily,
he was not in a position then to ensure the payment of the obligation.
Neither did he have any reason to bind himself further to a bigger
and more onerous obligation.
Indeed, the stipulation in the 1989 Loan Agreement providing for the
surety of respondent, without even informing him, smacks of
negligence on the part of the bank and bad faith on that of the
principal debtor. Since that Loan Agreement constituted a new
indebtedness, the old loan having been already liquidated, the spirit
of fair play should have impelled Sta. Ines to ask somebody else to
act as a surety for the new loan.
CIV LAW REVIEW - OBLICON DIGESTS
In sum, we hold that the 1989 Loan Agreement extinguished by
novation the obligation under the 1980 P8 million credit
accommodation. Hence, the Indemnity Agreement, which had been
an accessory to the 1980 credit accommodation, was also
extinguished. Furthermore, we reject petitioner’s submission that
respondent waived his right to be notified of, or to give consent to,
any modification or extension of the 1980 credit accommodation.
6.10 OBLIGATIONS WITH A PENAL CLAUSE
6.10.3 COLLECTION OF PENALTY
GOVERNMENT SERVICE INSURANCE SYSTEM V. C.A. &
NEMENCIO R. MEDINA
G.R. No. L-52478 October 30, 1986
FACTS:
 Private respondents spouses Medinas applied with the
herein petitioner GSIS for a loan of P600k. The GSIS Board of
Trustees approved only the amount of P350k, subject to the
following conditions: that the rate of interest shall be 9% per
annum compounded monthly; repayable in 10 years at a
monthly amortization of P4,433.65 including principal and
interest, and that any installment or amortization that remains
due and unpaid shall bear interest at the rate of 9%/12% per
month. The Office of the Economic Coordinator, in a 2nd
Indorsement, further reduced the approved amount to P295k.
The Medinas accepting the reduced amount, executed a
promissory note and a real estate mortgage in favor of GSIS.
 GSIS, upon request of the Medinas, then approved the
restoration of the amount of P350k originally approved by the
GSIS. Later, the Medinas executed in favor of GSIS an
Amendment of Real Estate Mortgage, in light of the increase of
the amount of the loan, providing: “That the mortgagor shall pay
to the system P4,433.65 monthly including principal and
interest.”
 Upon application by the Medinas, the GSIS approved an
additional loan (2nd loan) of P230k on the security of the same
mortgaged properties and the additional properties.
 Beginning 1965, the Medinas having defaulted in the
payment of the monthly amortization on their loan, the GSIS
imposed 9%/12% interest on installments due and unpaid. In
1967, the Medinas began defaulting in the payment of fire
insurance premiums.
 GSIS notified the Medinas that they had arrearages in the
aggregate amount of P575k and demanded payment, otherwise,
it would foreclose the mortgage. GSIS later filed an Application
for Foreclosure of Mortgage with the Sheriff of the City of
Manila. Under a Notice of Sale on Extra-Judicial Foreclosure,
the real properties of the Medinas were sold at public auction to
the GSIS as the highest bidder.
 Medinas then filed an Amended Complaint with the trial
court, praying for (a) the declaration of nullity of their two real
estate mortgage contracts with the GSIS as well as of the extra-
judicial foreclosure proceedings; and (b) the refund of excess
payments, plus damages and attorney's fees.
ISSUE: WON THE COMPOUNDED INTEREST STIPULATED
IN THE AMENDED REM SHOULD BE APPLIED?
HELD: YES. GSIS claims that the amendment of the real estate
mortgage did not supersede the original mortgage contract which
was being amended only with respect to the amount secured thereby,
and the amount of monthly amortizations. All other provisions of
aforesaid mortgage contract including that on compounding of
interest were deemed rewritten and thus binding on and enforceable
against the respondent spouses. On the other hand the Medinas
maintain that there is no express stipulation on compounded interest
in the amendment of mortgage contract so that the compounded
interest stipulation in the original mortgage contract which has been
superseded cannot be enforced in the later mortgage. The difference
in the computation lies in the inclusion of the compounded interest
as demanded by the GSIS on the one hand and the exclusion thereof,
as insisted by the Medinas on the other.
There appears no ambiguity whatsoever in the terms and conditions
of the amendment of the mortgage contract. As correctly stated by
the GSIS, a careful perusal of the title, preamble and body of the
Amendment of Real Estate Mortgage, taking into account the prior,
contemporaneous, and subsequent acts of the parties, ineluctably
shows that said Amendment was never intended to completely
supersede the original mortgage contract.
First, the title "Amendment of Real Estate Mortgage" recognizes the
existence and effectivity of the previous mortgage contract. Second,
nowhere in the aforesaid Amendment did the parties manifest their
intention to supersede the original contract. On the contrary in the
WHEREAS clauses, the existence of the previous mortgage contract
was fully recognized and the fact that the same was just being
amended as to amount and amortization is fully established as to
obviate any doubt. Third, the Amendment of Real Estate Mortgage
does not embody the act of conveyancing the subject properties by
way of mortgage. In fact the intention of the parties to be bound by
the unaffected provisions of the original mortgage contract expressed
in unmistakable language is clearly evident in the last provision of
the Amendment of Real Estate Mortgage.
A review of prior, contemporaneous, and subsequent acts supports
the conclusion that both contracts are fully subsisting insofar as the
latter is not inconsistent with the former. The fact is the GSIS, as a
matter of policy, imposes uniform terms and conditions for all its
real estate loans, particularly with respect to compounding of
interest. As shown in the case at bar, the original mortgage contract
embodies the same terms and conditions as in the additional loan
while the amendment carries the provision that it shall be subject to
the same terms and conditions as the real estate mortgage except as
to amount and amortization.
Furthermore, it would be contrary to human experience and to
ordinary practice for the mortgagee to impose less onerous
conditions on an increased loan by the deletion of compound interest
exacted on a lesser loan.
As to whether or not the interest rates on the loan accounts of the
Medinas are usurious, it has already been settled that the Usury Law
applies only to interest by way of compensation for the use or
forbearance of money. Interest by way of damages is governed by
Article 2209 of the Civil Code of the Philippines which
provides:”Art. 2209. If the obligation consists in the payment of a
sum of money, and the debtor incurs in delay, the indemnity for
damages, there being no stipulation to the contrary, shall be the
payment of the interest agreed upon.”
In the Bachrach case the Supreme Court ruled that the Civil Code
permits the agreement upon a penalty apart from the interest. Should
there be such an agreement, the penalty does not include the interest,
and as such the two are different and distinct things which may be
demanded separately. Reiterating the same principle in the later case
of Equitable Banking Corp., where this Court held that the
stipulation about payment of such additional rate partakes of the
nature of a penalty clause, which is sanctioned by law.
Based on the finding that the GSIS had the legal right to impose an
interest 9% per annum, compounded monthly, on the loans of the
Medinas and an interest of 9%/12% per annum on all due and unpaid
CIV LAW REVIEW - OBLICON DIGESTS
amortizations or installments, there is no question that the Medinas
failed to settle their accounts with the GSIS and that the GSIS had a
perfect right to foreclose the mortgage.
6.10 OBLIGATIONS WITH A PENAL CLAUSE
6.10.4 REDUCTION
NEWTON JISON V. C.A. & ROBERT 0. PHILLIPS & SONS,
INC.
G.R. No. L-45349 August 15, 1988
FACTS:
 Petitioners, the spouses Jison, entered into a Contract to
Sell with private respondent, Robert O. Phillips & Sons, Inc.,
whereby the latter agreed to sell to the former a lot for the
agreed price of P55,000.00, with interest at 8,1965 per annum,
payable on an installment basis. Pursuant to the contract,
petitioners paid private respondents a down payment of P11k
and from October 27, 1961 to May 8, 1965 a monthly
installment of P533.85.
 Thereafter, due to the failure of petitioners to build a house
as provided in the contract, the stipulated penalty of P5.00 per
square meter was imposed to the effect that the monthly
amortization was increased to P707.24.
 Petitioners failed to pay the monthly installments due for
January to March, although petitioners subsequently paid the
amounts due and these were accepted by private respondent.
Again from October to December 1966 and January 1967,
petitioners failed to pay. Private respondents made a demand
and petitioners eventually paid in March 1967.
 Petitioners again failed to pay from Feb to April 1967.
Thus, private respondent returned petitioners' check and
informed them that the contract was cancelled when petitioners
failed to pay the monthly installment due, thereby making their
account delinquent for three months.
 Petitioners then tendered payment for all the installments
due but the tender was refused. Thus, petitioners countered by
filing a complaint for specific performance and consigning the
monthly installments due with the court.
ISSUE: WON THE PAYMENTS ALREADY MADE MAY BE
FORFEITED AFTER RESCISSION OF THE CONTRACT?
HELD: YES, BUT THE COURT REDUCED THE AMOUNT
FOREFEITED. Since the contract was executed and cancelled prior
to the effectivity of the Realty Installment Buyers' Protection Act
and the Subdivision and Condominium Buyers' Protective Decree, it
becomes necessary to resort to jurisprudence and the general
provisions of law to resolve the controversy. In deciding whether the
rescission of the contract to sell a subdivision lot after the lot buyer
has failed to pay several installments was valid, well settled is the
rule that judicial action for the rescission of a contract is not
necessary where the contract provides that it may be cancelled for
violation of any of its terms and conditions. However, even in the
cited cases, there was at least a written notice sent to the
degeneration, informing him of the rescission.The act of a party in
treating a contract as cancelled should be made known to the other.
In other words, resolution of reciprocal contracts may be made
extrajudicially unless successfully impugned in Court. If the debtor
impugns the declaration it shall be subject to judicial determination.
There is no denying that in the instant case the resolution or
rescission of the Contract to Sell was valid. Neither can it be said
that the cancellation of the contract was ineffective for failure of
private respondents to give petitioners notice thereof as petitioners
were informed cancelled private respondent that the contract was
cancelled. As the Realty Installment Buyers’ Protection Act was not
yet effective, the notice of cancellation need not be by notarial act,
private respondent's letter being sufficient compliance with the legal
requirement.
While the resolution of the contract and the forfeiture of the amounts
already paid are valid and binding upon petitioners, the Court is
convinced that the forfeiture of the amount of P5.00 per square meter
although it includes the accumulated fines for petitioners' failure to
construct a house as required by the contract, is clearly iniquitous
considering that the contract price is only P6,173.15 The forfeiture
of 50% of the amount already paid, or P3,283.75 appears to be a fair
settlement. In arriving at this amount the Court gives weight to the
fact that although petitioners have been delinquent in paying their
amortizations several times to the prejudice of private respondent,
the cancellation of the contract leaves the private respondent free to
resell it to another party.
The Court's decision to reduce the amount forfeited finds support in
the Civil Code. As stated in paragraph 3 of the contract, in case the
contract is cancelled, the amounts already paid shall be forfeited in
favor of the vendor as liquidated damages. The Code provides that
liquidated damages, whether intended as an indemnity or a
penalty, shall be equitably reduced if they are iniquitous or
unconscionable [Art. 2227] Further, in obligations with a penal
clause, the judge shall equitably reduce the penalty when the
principal obligation has been partly or irregularly complied with
by the debtor. In this connection, the Court said: “It follows that, in
any case wherein there has been a partial or irregular compliance
with the provisions in a contract for special indemnification in the
event of failure to comply with its terms, courts will rigidly apply the
doctrine of strict construction and against the enforcement in its
entirety of the industry.' where it is clear from the terms of the
contract that the amount or character of the indemnity is fixed
without regard to the probable damages which might be anticipated
as a result of a breach of the terms of the contract; or, in other words,
where the indemnity provided for is essentially a mere penalty
having for its principal object the enforcement of compliance with
the corporations; (Laureano v. Kilayco).
7. MODES OF EXTINGUISMENT OF OBLIGATIONS
7.2.8. COMPENSATION
PNB v. Madecor v. Uy
FACTS:
This is a case on whether or not there can be legal compensation
between PNEI’s receivables from PNB MADECOR and the latter’s
obligation to the former because PNB MADECOR’s supposed debt
to PNEI is the subject of attachment proceedings initiated by a third
party (herein respondent Gerardo Uy).
RULING:
Compensation is a mode of extinguishing to the concurrent amount
the obligations of persons who in their own right and as principals
are reciprocally debtors and creditors of each other. Legal
compensation takes place by operation of law when all the requisites
are present, as opposed to conventional compensation which takes
CIV LAW REVIEW - OBLICON DIGESTS
place when the parties agree to compensate their mutual obligations
even in the absence of some requisites.
Legal compensation requires the concurrence of the following
conditions:
(1) that each one of the obligors be bound principally, and
that he be at the same time a principal creditor of the other;
(2) that both debts consist in a sum of money, or if the
things due are consumable, they be of the same kind, and
also of the same quality if the latter has been stated;
(3) that the two debts be due;
(4) that they be liquidated and demandable;
(5) that over neither of them there be any retention or
controversy, commenced by third persons and
communicated in due time to the debtor.
Petitioner insists that legal compensation had taken place such that
no amount of money belonging to PNEI remains in its hands, and,
consequently, there is nothing that could be garnished by respondent.
We find, however, that legal compensation could not have occurred
because of the absence of one requisite in this case: that both debts
must be due and demandable.
BPI v. CA
Citibank v. Sabeniano
FACTS:
Sabeniano claimed to have substantial deposits and money market
placements with the bank Citibank and FNCB, as well as money
market placements with the Ayala Investment and Development
Corporation (AIDC), the proceeds of which were supposedly
deposited automatically and directly to respondent’s accounts with
petitioner Citibank. Sabeniano alleged that the banksrefused to
return her deposits and the proceeds of her money market
placements despite her repeated demands, thus, compelling
respondent to file Civil Case.
In their joint Answer and Answer to Amended Complaint, filed on
12 September 1985 and 6 November 1985, respectively, petitioners
admitted that respondent had deposits and money market placements
with them, including dollar accounts in the Citibank branch in
Geneva, Switzerland (Citibank-Geneva).
Banks further alleged that the respondent later obtained several loans
from petitioner Citibank, for which she executed Promissory Notes
(PNs), and secured by (a) a Declaration of Pledge of her dollar
accounts in Citibank-Geneva, and (b) Deeds of Assignment of her
money market placements with petitioner FNCB Finance.
When respondent failed to pay her loans despite repeated demands
by petitioner Citibank, the latter exercised its right to off-set or
compensate respondent’s outstanding loans with her deposits and
money market placements, pursuant to the Declaration of Pledge and
the Deeds of Assignment executed by respondent in its favor.
Petitioner Citibank supposedly informed respondent Sabeniano of
the foregoing compensation through letters, dated 28 September
1979 and 31 October 1979. Petitioners were therefore surprised
when six years later, in 1985, respondent and her counsel made
repeated requests for the withdrawal of respondent’s deposits and
money market placements with petitioner Citibank, including her
dollar accounts with Citibank-Geneva and her money market
placements with petitioner FNCB Finance.
ISSUE:
Whether or not compensation was proper?
RULING:
Compensation proper only on the savings account with the bank and
her money market placements with petitioner FNCB Finance; but
illegal and void in so far as petitioner Citibank used respondent’s
dollar accounts with Citibank-Geneva.
There is little controversy when it comes to the right of petitioner
Citibank to compensate respondent’s outstanding loans with her
deposit account. As already found by this Court, petitioner Citibank
was the creditor of respondent for her outstanding loans. At the
same time, respondent was the creditor of petitioner Citibank, as far
as her deposit account was concerned, since bank deposits, whether
fixed, savings, or current, should be considered as simple loan or
mutuum by the depositor to the banking institution. Both debts
consist in sums of money. By June 1979, all of respondent’s PNs in
the second set had matured and became demandable, while
respondent’s savings account was demandable anytime. Neither was
there any retention or controversy over the PNs and the deposit
account commenced by a third person and communicated in due
time to the debtor concerned. Compensation takes place by
operation of law, therefore, even in the absence of an expressed
authority from respondent, petitioner Citibank had the right to effect,
on 25 June 1979, the partial compensation or off-set of respondent’s
outstanding loans with her deposit account, amounting to
P31,079.14.
Things though are not as simple and as straightforward as regards to
the money market placements and bank account used by petitioner
Citibank to complete the compensation or off-set of respondent’s
outstanding loans, which came from persons other than petitioner
Citibank.
Respondent’s money market placements were with petitioner FNCB
Finance, and after several roll-overs, they were ultimately covered
by PNs No. 20138 and 20139, which, by 3 September 1979, the date
the check for the proceeds of the said PNs were issued, amounted to
P1,022,916.66, inclusive of the principal amounts and interests. As
to these money market placements, respondent was the creditor and
petitioner FNCB Finance the debtor; while, as to the outstanding
loans, petitioner Citibank was the creditor and respondent the
debtor. Consequently, legal compensation, under Article 1278 of the
Civil Code, would not apply since the first requirement for a valid
compensation, that each one of the obligors be bound principally,
and that he be at the same time a principal creditor of the other, was
not met.
Commercial Bank & Trust v. BPI
Francia v. IAC
FACTS:
Francia is the owner of the subj. property and a 2 storey house built
on it. It was then expropriated for the sum of P4116.00. Since 1963
until 1977 inclusive, Francia failed to pay his real estate taxes. Thus
his property was sold at a public auction in order to satisfy the tax
delinquency of P2400.00
Ho Fernandez was the highest bidder for the prop. Francia was not
present during the auction sale and discovered that a final bill of sale
had been issued in favor of Ho on Dec. 11, 1978. Francia filed a
complaint to annul the auction sale.
ISSUE:
WON, there can be a set-off of amounts between the tax delinquency
and the amount due Francia due the expropriation.
RULING:
NO. Taxes cannot be the subject of compensation. They are not
creditors and debtors of each other with respect to the amount due
CIV LAW REVIEW - OBLICON DIGESTS
from each side. The tax is a legal obligation of every citizen that it
can’t be made to wait to be paid.
LEGAL COMPENSATION has no place in this situation. It has not
been present because the requisites are lacking in the case at hand.
Also the taxes are not in the nature of contracts but rather they are a
duty imposed on every citizen to pay on time.
Perez v. CA
FACTS:
COGENERIC issued promissory notes Bill 1298 and Bill 1419 in
favor of MOJICA. Bill 1298 is in the amount of P111, 973.58 due on
August 6, 1974. Bill 1419 is in the amount of P208, 666.67 due on
August 13, 1974.
MEVER films, Inc. borrowed P500, 000.00 from COGENERIC.
MEVER issued promissory note NCI0352 in favor of COGENERIC
due on August 5, 1974. The promissory note will bear an interest of
14% per annum only upon default.
On August 6, 1974, Bill 1298 was rolledover to mature on October
4, 1974.
On August 13, 1974, Bill 1419 was rolled-over to mature on
October 11, 1974.
On Sept, 9, 1974, MOJICA assigned Bill NO 1298 and 1419 to
MEVER.
On Oct. 3 , 1974, MEVER surrendered the 2 bills to COGENERIC
and asked the latter to compensate the 2 bills to its debt with
COGENERIC.
ISSUE:
Whether or not there can be compensation.
1
RULING:
For legal compensation to take place, the debts must be due and
demandable.
In this case, the 2 bills surrendered by MEVER is not due since they
were rolled over to Oct 4 and Oct 7 respectively.
7.2.9 NOVATION
Fortune Motors v. CA
Rillo v. CA
Rillo entered into a contract to sell with Corb Realty. Rillo defaulted.
A compromise agreement was entered into by the parties where the
balance of Rillo was fixed down to P50,000.
WON there was a novation through the compromise agreement
No. The parties execute their compromise agreement precisely to
give life to their “Contract to Sell”. It merely clarified the total sum
owed by Rillo to Corb Realty with the view that the former would
find it easier to comply with his obligations under the “Contract to
Sell”.
In order that an obligation may be extinguished by another which
substitutes the same, it is imperative that it be so declared in the
unequivocal terms, or that the old and new obligations be on every
point incompatible with each other.
Espina v. CA
FACTS:
Diaz is a lessee of the condo unit owned by Espina. Later, they
executed a Provisional Deed of Sale whereby Espina sold to Diaz the
said condo unit for P100,000.
ISSUE:
WON the “Provisional Deed of Sale” novated the existing contract
of lease.
RULING:
No. The deed of cession of the right to repurchase a piece of land
does not supersede a contract of lease over the same property.
Novation must be clearly proved since its existence is not presumed
– it must be proven as a fact either by express stipulation of the
parties or by implication derived from an irreconcilable
incompatibility between old and new obligations or contracts.
Reyes v. BPI Family Bank
FACTS:
Reyes spouses executed a real estate mortgage on their property in
Iloilo City in favor of respondent BPI Family Savings Bank, Inc.
(BPI-FSB) to secure a P15,000,000 loan of Transbuilders Resources
and Development Corporation (Transbuilders). When Transbuilders
failed to pay its P15M loan within the stipulated period of one year,
the bank restructured the loan through a promissory note executed by
Transbuilders in its favor.
Petitioners aver that they were not informed about the restructuring
of Transbuilders’ loan. In fact, when they learned of the new loan
agreement sometime in December 1996, they wrote BPI-FSB
requesting the cancellation of their mortgage and the return of their
certificate of title to the mortgaged property. They claimed that the
new loan novated the loan agreement of March 24, 1995. Because
the novation was without their knowledge and consent, they were
allegedly released from their obligation under the mortgage.
ISSUE:
Whether there was a novation of the mortgage loan contract between
petitioners and BPI-FSB that would result in the extinguishment of
petitioners’ liability to the bank.
RULING:
We agree with the CA that there was none. Novation is defined as
the extinguishment of an obligation by the substitution or change of
the obligation by a subsequent one which terminates the first, either
by changing the object or principal conditions, or by substituting the
person of the debtor, or subrogating a third person in the rights of the
creditor.
The cancellation of the old obligation by the new one is a necessary
element of novation which may be effected either expressly or
impliedly.
In Garcia, Jr. v. Court of Appeals, we held that:
In every novation there are four essential requisites:(1) a previous
valid obligation; (2) the agreement of all the parties to the new
contract; (3) the extinguishment of the old contract; and (4) validity
of the new one.
Thus, the well-settled rule is that, with respect to obligations to pay a
sum of money, the obligation is not novated by an instrument that
expressly recognizes the old, changes only the terms of payment,
adds other obligations not incompatible with the old ones, or the new
contract merely supplements the old one.
BPI-FSB and Transbuilders only extended the repayment term of the
loan from one year to twenty quarterly installments at 18% interest
per annum. There was absolutely no intention by the parties to
supersede or abrogate the old loan contract secured by the real estate
mortgage executed by petitioners in favor of BPI-FSB. In fact, the
intention of the new agreement was precisely to revive the old
obligation after the original period expired and the loan remained
unpaid. The novation of a contract cannot be presumed. In the
CIV LAW REVIEW - OBLICON DIGESTS
absence of an express agreement, novation takes place only when the
old and the new obligations are incompatible on every point.
Ong v. Bognalbal
FACTS:
Ernesto Bogñalbal, an architect-contractor doing business under the
name and style of E.B. Bogñalbal Construction, entered into an
“Owner-Contractor Agreement” with Victoria Ong, a
businesswoman, for the construction of a proposed boutique owned
by the latter to be known as Les Galeries de Paris located at the 3rd
Floor of the Shangri-La Plaza, Epifanio Delos Santos Avenue corner
Shaw Boulevard, Mandaluyong City.
The agreement provides that in consideration of the sum of two
hundred thousand pesos (P200,000.00), the contractor agrees to
furnish labor, tools and equipment to complete the work on the
boutique as per specification within forty-five (45) days excluding
Sundays from the date of delivery of the construction materials.
Payment by the owner shall be made by progress billing to be
collected every two (2) weeks based on the accomplishment of work
value submitted by the contractor to the owner as certified for
payment by the architect assigned on site.
It is with respect to progress billing no. 4 that the present
controversy arose. When [respondent Bogñalbal] submitted the
fourth progress billing on March 31, 1995 for the period covering
March 4 to 18, 1995, in the sum of P30,950.00 equivalent to 15.47%
of the total job refused to pay the same.
Petitioner Ong claims, as a defense against payment of the fourth
progress billing, that “the only reason why the fourth billing was not
paid was because [respondent Bogñalbal] himself agreed and
committed to collect the fourth progress billing after he completed
the Kenzo flooring.” Petitioner Ong claims that, because of this
promise, her obligation to pay respondent Bogñalbal has not yet
become due and demandable.
The Court of Appeals rejected this argument, ruling that respondent
Bogñalbal’s stoppage of work on the project prior to its completion
cannot justify petitioner Ong’s refusal to pay the fourth progress
billing and the value of respondent Bogñalbal’s accomplished work
on the Kenzo flooring. On the contrary, according to the Court of
Appeals, respondent Bogñalbal was justified to refuse to continue
the project due to petitioner Ong’s failure to pay the fourth progress
billing.
ISSUE:
Whether or not there was a novation?
RULING:
The Court of Appeals is in error. If the parties indeed had a verbal
agreement that collection of said billing will be held on abeyance
until after respondent Bogñalbal finished the work on the Kenzo
flooring, there would have been a novation of petitioner Ong’s
obligation to pay the price covered by the fourth billing by changing
the principal conditions therefor. This falls under the first type of
novation under Article 1291 of the Civil Code which provides:
Article 1291. Obligations may be modified by:
(1) Changing their object or principal conditions;
(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the creditor.
While the subject of novation is, in the Civil Code, included in Book
IV, Title I, Chapter 4, which refers to extinguishment of obligations,
the effect of novation may be partial or total. There is partial
novation when there is only a modification or change in some
principal conditions of the obligation. It is total, when the obligation
is completely extinguished. Also, the term principal conditions in
Article 1291 should be construed to include a change in the period to
comply with the obligation. Such a change in the period would only
be a partial novation, since the period merely affects the
performance, not the creation of the obligation.
Novation is never presumed. Unless it is clearly shown either by
express agreement of the parties or by acts of equivalent import, this
defense will never be allowed.
The evidence preponderates in favor of respondent Bogñalbal that
there had been no novation of the contract. At best, what was
proven was a grudging accommodation on the part of respondent
Bogñalbal to continue working on the project despite petitioner
Ong’s failure to pay the fourth progress billing. Respondent
Bogñalbal’s fourth partial billing demand letters dated 21 April 1995
and 15 May 1995, both of which were served upon petitioner Ong
after the alleged 20 April 1995 meeting, is inconsistent with the
theory that the meeting had produced a novation of the petitioner
Ong’s obligation to pay the subject billing.
More importantly, assuming that there was indeed a novation of the
obligation of petitioner Ong to pay the fourth billing so as to include
as additional condition the completion of the Kenzo flooring, such
new condition would, nevertheless, be deemed fulfilled. This is
pursuant to Article 1186 of the Civil Code, which provides that the
condition shall be deemed fulfilled when the obligor voluntarily
prevents its fulfillment. Ongs obligation has become a pure
obligation.
Inc. v. IAC
Ajax Marketing v. CA
FACTS:
Ylang-Ylang Merchandising Company obtained a loan in the amount
of P250K from Metropolitan Bank secured by a REM of a property
in Paco. Mortgage was annotated at the back of the title. The
partnership then changed its name to Ajax Marketing Company with
the same owners and obtained another loan of P150K secure by the
same REM.
The partnership was converted into a corporation (Ajax Corp), with
original partners plus 3 incorporators, which loaned P600K under the
same REM
The 3 loans. Amounting to P1M was re-structured and consolidated
into one loan and Ajax Corporation executed a promissory note.
Ajax was not able to pay the loan and the Metrobank moved to
foreclose the REM. Ajax said there was
ISSUE:
Whether or no the consolidation of the loans constituted novation,
thereby releasing the mortgaged property from liability. .
RULING
NO. The promissory note merely re-structured and renewed the
previous loans to expediently make them current. There was no
change in the object of the prior obligations. The consolidation did
not release the mortgaged real estate property from any liability
because the mortgage annotations at the back of the title remain
uncancelled, thus indicating the continuing subsistence of the REMs.
There was also no change or substitution or change in the persons of
either the debtor or creditor. The debtor’s conversion from
partnership to a corporation without sufficient evidence that they
CIV LAW REVIEW - OBLICON DIGESTS
were released from their obligations did not make Ajax, with its new
corporate personality, a third person or new debtor.
To effect a subjective novation by the change in the person of the
debtor, it is necessary that the old debtor be released expressly from
the obligation, and the third person or new debtor assumes his place
in the relation. There is no novation without such release as the third
person who has assumed the debtor’s obligation becomes merely a
co-debtor or surety.

Licaros v. Gatmaitan
FACTS:
Licaros, a businessman, invested in Anglo-Asean Bank.
Afterhaving invested, he encountered tremendous difficulties in
retrieving the interest and the investment itself.
Liicaros sought the help of Gatmaitan whovoluntarily offered to
aasume the payment of Anglo-Asean’s indebtedness to Licaros.
They entered into a memorandum agreement stating the Licaros
would be entitled to the dividends of his stocks in case he could not
pay P3.2M, which represented Licaros’ investment.
Gatmaitan was not able to collect so he did not pay Licaros. Licaros
went to court contending that the agreement was an assignment of
credit.

ISSUE:
Whether or not the agreement was an assignment of credit or a
conventional subrogation.
1
RULING:
The nature of the agreement was a conventional subrogation which
requires the consent of the debtor, Anglo-Asean Bank, for its
validity.
Both parties intended their agreement as conventional subrogation
borne by the stipulation in the agreement that it required “the express
conformity of the third parties concerned”, which admittedly is
Anglo-Asean Bank.
The agreement was conditioned on the express conformity of the
Bank. Without the consent, the contract is incomplete and
unenforceable.
Assignment of Credit
The process of transferring the right of the assignor to the assignee
who would then have the right to proceed against the debtor.
Consent of the debtor is not necessary, only notice.

Subrogation
The transfer of all the rights of the creditor to a third person, who
substitutes him in all his rights.
Requires consent of the creditor, debtor and new creditor.

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