GONZAGA 91 PHIL 11 (Hindi ko po mahanap online. I’ll take a picture of it na lang from the library.

:D)

71 PHIL 140 GR No. L-47362 December 19, 1940

JOHN F. VILLARROEL, appellant-appellant,
vs.
BERNARDINO ESTRADA, turned-appellee.

D. Felipe Agoncillo in representation of the appellant-appelante.

D. Crispin Oben in representation of the defendant-appellee.

DECISION

Avanceña,J.:

On May 9, 1912, Alejandro F. Callao, mother of defendant John F. Villarroel, obtained from thespouses Mariano
Estrada and Severina a loan of P1, 000 payable after seven years (ExhibitoA). Alejandra died, leaving as sole
heir to the defendant.Spouses Mariano Estrada and Severina alsodied, leaving as sole heir to the
plaintiff Bernardino Estrada. On August 9, 1930, the defendant signeda document (Exhibito B) by which the
applicant must declare in the amount of P1, 000, with aninterest of 12 percent per year. This action relates to
the recovery of this amount.

The Court of First Instance of Laguna, which was filed in this action, condemn the defendant to paythe claimed
amount of P1, 000 with legal interest of 12 percent per year since the August 9, 1930until full pay. He appealed
the sentence.

It will be noted that the parties in the present case are, respectively, the only heirs and creditors of the original
debtor. This action is brought under the defendant's liability as the only son of the originaldebtor in favor of the
plaintiff contracted, sole heir of primitive loa creditors. It is recognized that theamount of P1, 000 to which
contracts this obligation is the same debt of the mother's parents sued theplaintiff.

Although the action to recover the original debt has prescribed and when the lawsuit was filed in thiscase, the
question raised in this appeal is primarily whether, notwithstanding such requirement, theaction taken is
appropriate. However, this action is based on the original obligation contracted by themother of the defendant,
who has already prescribed, but in which the defendant contracted theAugust 9, 1930 (Exhibito B) by assuming
the fulfillment of that obligation, as prescribed. Being theonly defendant in the original herdero debtor eligible
successor into his inheritance, that debt broughtby his mother in law, although it lost its effectiveness by
prescription, is now, however, for a moralobligation, that is consideration enough to create and make
effective and enforceable obligationvoluntarily contracted its August 9, 1930 in Exhibito B.

The rule that a new promise to pay a debt prrescrita must be made by the same person obligated orotherwise
legally authorized by it, is not applicable to the present case is not required in compliancewith the mandatory
obligation orignalmente but which would give it voluntarily assumed thisobligation.It confirms the judgment
appealed from, with costs against the appellant. IT IS SO ORDERED.

Imperial, Diaz, Laurel, and Horrilleno, MM., Concur.

69 PHIL 101 [No. 46274. November 2, 1939]

A. 0. FISHER, plaintiff and appellee, vs. JOHN C. ROBB, defendant and appellant.

ONEROUS CONTRACTS; CONSIDERATION; ARTICLE 1261 OF THE CrviL CODE.—The promise made by
an organizer of a dog racing course to a stockholder to return to him certain amounts paid by the latter in
satisfaction of his subscription, upon the belief of said organizer that he was morally responsible because of the
failure of the enterprise, is not the consideration required by article 1261 of the Civil Code as an essential element
for the legal existence of an onerous contract which would bind the promisor to comply with his promise.

APPEAL from a judgment of the Court of First Instance of Manila. Montemayor, J.

The facts are stated in the opinion of the court.
Marcial P. Lichauco and Manuel M. Mejia for appellant.
Wolfson, Barrion & Baradi and Ignacio Y caza for appellee.

VlLLA-REAL, J.:

The defendant John C. Robb appeals to this Court from the judgment of the Court of First Instance of Manila,
the dispositive part of which reads:

"Judgment is hereby rendered in favor of the plaintiff and against the defendant, who is ordered to pay to the
former the sum of F2.000, with interest at the legal rate from March 11, 1938, until paid, plus costs."
The facts established at the trial without discussion are the following:

In September, 1935, the board of directors of the Philippine Greyhound Club, Inc., told the herein defendant-
appellant John C. Robb, to make a business trip to Shanghai to study the operation of a dog racing course. In
Shanghai, the defendant-appellant stayed at the American Club where he became acquainted with the plaintiff-
appellee, A. 0. Fisher, through their mutual friends. In the course of a conversation, the defendant-appellant
came to know that the plaintiff-appellee was the manager of a dog racing course. Upon knowing the purpose of
the defendant-appellant's trip, the plaintiff-appellee showed great interest and invited him to his establishment
and for several days gave him information about the business. It seems that the plaintiff became interested in
the Philippine Greyhound Club, Inc., and asked the defendant if he could have a part therein as a stockholder.
As the defendant-appellant answered in the affirmative, the plaintiff-appellee thereupon filled a subscription blank
and, through his bank in Shanghai, sent to the Philippine Greyhound Club, Inc., in Manila a telegraphic transfer
for P3,000 in payment of the first installment of his subscription. Later on the defendant-appellant returned to
Manila from Shanghai.

Some months thereafter, when the board of directors of the Philippine Greyhound Club, Inc., issued a call for
the payment of the second installment of the subscriptions, the defendant-appellant sent a radiogram to the
plaintiff-appellee in Shanghai, requesting him to send the amount of the second installment of his subscription.
The plaintiff-appellee did so and sent ¥2,000 directly to the Philippine Greyhound Club, Inc., in payment of the
said installment. Due to the manipulations of those who controlled the Philippine Greyhound Club, Inc., during
the absence of the defendant in Manila, the enterprise failed. Upon his return to Manila, the defendant-appellant
undertook the organization of a company called The Philippine'Racing Club, which now manages the race track
of the Santa Ana Park. The defendant immediately endeavored to save the investment of those who had
subscribed to the Philippine Greyhound Club, Inc., by having the Philippine Racing Club acquire the remaining
assets of the Philippine Greyhound Club, Inc. The defendant-appellant wrote a letter to the plaintiff-appellee in
Shanghai explaining in detail the critical condition of the Philippine Greyhound Club, Inc., and outlining his plans
to save the properties and assets of the plaintiff-appellee that he felt morally responsible to the stockhloders who
had paid their second installment (Exh. C). In answer to said letter, the plaintiff-appellee wrote the defendant-
appellant requiring him to return the entire amount paid by him to the Philippine Greyhound Club, Inc., (Exhibit
E). Upon receiving this letter, the defendant-appellant answered the plaintiff-appellee on March 16, 1936, to the
effect that it was not his duty under the law to reimburse the plaintiff-appellee for any loss which he might have
suffered in connection with the Philippine Greyhound Club, Inc., in the same way that he could not expect anyone
to reimburse him for his own losses which were much more than those of the plaintiff-appellee (Exh. B).
The principal question to be decided in this appeal is whether or not the trial court erred in holding that there was
sufficient consideration to justify the promise made by the defendant-appellant in his letters Exhibits B and C.

In the fifth paragraph of the letter Exhibit B, dated March 16, 1936, addressed by the defendant-appellant to the
plaintiff-appellee, the former said: "I feel a moral responsibility for these second payments, which were made in
order to carry out my plan (not the first payments, as you have it in your letter), and Mr. Hilscher and I will see to
it that stockholders who made second payments receive these amounts back as soon as possible, out of our
own personal funds." And in the seventh paragraph of the same letter Exhibit B, same defendant-appellant states
the following: "As it is, I have had to take my loss along with everyone else here, and so far as I can see that is
what all of us must do. The corporation is finally flat, so it is out of the question to receive back any of your
investment from that source; the only salvage will be the second payment that you made, and that will come
from Hilscher and me personally, as I say, not because of any obligation, but simply because we have taken it
on ourselves to do that. (And I wish I could find someone who would undertake to repay a part of my own losses
in the enterprise!)" And in the seventh paragraph of the letter Exhibit C, dated February 21, 1936, addressed by
the same defendant-appellant to the same plaintiff-appellee, the former said the following:

"However, Mr. Hilscher and I feel a personal responsibility to those f ew stockholders who made their second
payments, including yourself, and it is our intention to personally repay the amounts of the second payments
made by those few.

* * *" And, finally, paragraph 8 of 'the same letter Exhibit C states: "We are to receive a certain share of the new
Philippine Racing Club for our services as promoters of that organization, and as soon as this is received by us,
we will be in a position to compensate you and the few others who made the second payment, for the amount of
those second payments. That, as I have said, will come from us personally, in an effort to make things easier for
those who were sportsmen enough to try to save the Greyhound organization by making second payments."

Article 1254 of the Civil Code provides as f follows:

"A contract exists from the moment one or more persons consent to be bound with respect to another or others
to deliver something or to render some services."

And article 1261 of the same Civil Code provides the following:

"ART. 1261. There is no contract unless the following requisites exist:

"1.The consent of the contracting parties;

"2.A definite object which is the subject-matter of the contract;
"3.A consideration for the obligation established."
In the present case, while the defendant-appellant told the plaintiff-appellee that he felt morally responsible for
the second payments which had been made to carry out his plan, and that Mr. Hilscher and he would do
everything possible so that the stockholders who had made second payments may receive the amount paid by
them from their personal funds without delay, not because they were bound to do so, but because they voluntarily
assumed the responsibility to make such payment as soon as they receive from the Philippine Racing Club
certain shares for their services as promoters of said organization, nevertheless, it does not appear that the
plaintiff-appellee had consented to said form of reimbursement of the P2,000 which he had directly paid to the
Philippine Greyhound Club, Inc., in satisfaction of the second installment.

The first essential requisite, therefore, required by the cited article 1261 of the Civil Code for the existence of a
contract, does not exist.
As to the third essential requisite, namely, "A consideration for the obligation established," article 1274 of the
same Code provides:

"In onerous contracts the consideration as to each of the parties is the delivery or performance or the promise
of delivery or performance of a thing or service by the other party; in remuneratory contracts the consideration
is the service or benefit for which the remuneration is given, and in contracts of pure beneficence the
consideration is the liberality of the benefactors."

And article 1275 of the same Code provides:

"ART. 1275. Contracts without consideration or with an illicit consideration produce no effect whatsoever. A
consideration is illicit when it is contrary to law or morality."

Manresa, in volume 8, 4th edition, pages 618-619 of his Commentaries on the Civil Code, interpreting article
1274 to 1277 of the Civil Code, has this to say:

"Considering the concept of the consideration as the explanation and motive of the contract, it is related to the
latter's object and even more to its motives with which it is often confused. It is differentiated from them, however,
in that the former is the essential reason for the contract, while the latter are the particular reasons of a contracting
party which do not affect the other party and which do not preclude the existence of a different consideration. To
clarify by an example: A thing purchased constitutes the consideration for the purchaser and not the motives
which have influenced his mind, like its usefulness, its perfection, its relation to another, the use thereof which
he may have in mind, etc., a very important distinction, which precludes the annulment of the contract by the
sole influence of the motives, unless the efficacy of the former had been subordinated to compliance with the
latter as conditions.

"The jurisprudence shows some cases wherein this important distinction is established. The -consideration of
contracts, states the decision of February 24, 1904, is distinct from the motive which may prompt the parties in
executing them. The inaccuracies committed in expressing its accidental or secondary details do not imply lack
of consideration or false consideration, wherefore, they do not affect the essence and validity of the contract. In
a loan the consideration in its essence is, for the borrower the acquisition of the amount, and for the lender the
power to demand its return, whether the money be for the former or for another person and whether it be invested
as stated or otherwise.

"The same distinction between the consideration and the motive is found in the decisions of November 23, 1920
and March 5, 1924."

The contract sought to be judicially enforced by the plaintiff-appellee against the defendant-appellant is onerous
in character, because it supposes the deprivation of the latter of an amount of money which impairs his property,
which is a burden, and for it to be legally valid it is necessary that it should have a consideraion consisting in the
lending or promise of a thing or service by such party. The defendant-appellant is required to give a thing, namely,
the payment of the sum of P2,000, but the plaintiff-appellee has not given or promised anything or service to the
former which may compel him to make such payment. The promise which said defendant-appellant has made
to the plaintiff-appellee to return to him P2,000 which he had paid to the Philippine Greyhound Club, Inc., as
second installment of the payment of the amount of the shares for which he had subscribed, was prompted by a
feeling of pity which said defendant-appellant had for the plaintiff-appellee as a result of the loss which the latter
had suffered because of the failure of the enterprise. The obligation which the said defendant-appellant had
contracted with the plaintiff-appellee is, therefore, purely moral and, as such, is not demandable in law but only
in conscience, over which human judges have no jurisdiction.

As to whether a moral obligation is a sufficient consideration, read in volume 12 of the American Jurisprudence,
pages 589-590, paragraphs 96, 67, the following:

"SEC. 96. Moral obligation.—Although there is authority in support of the broad proposition that a moral obligation
is sufficient consideration, such proposition is usually denied. * * *.

"The case presenting the question whether a moral obligation will sustain an express executory promise may be
divided into five classes: (1) Cases in which the moral obligation arose wholly from ethical considerations,
unconnected with any legal obligations, perfect or imperfect, and without the receipt of actual pecuniary or
material benefit by the promisor prior to the subsequent promise; (2) cases in which the moral obligation arose
from a legal liability already performed or still enforceable; (3) cases in which the moral obligation arose out of,
or was connected with, a previous request or promise creating originally an enforceable legal liability, which,
however, at the time of the subsequent express promise had become discharged or barred by operation of a
positive rule of law, so that at that time there was no enforceable legal liability; (4) cases in which the moral
obligation arose from, or was connected with, a previous request or promise which, however, never created any
enforceable legal liability, because of a rule of law which rendered the original agreement void, or at least
unenforceable; and (5) cases in which the moral obligation arose out of, or was connected with, the receipt of
actual material or pecuniary benefit by the promisor, without, however, any previous request or promise on his
part, express or implied, and therefore, of course, without any original legal liability, perfect or imperfect.

"SEC. 97. Moral obligation unconnected with legal liability or legal benefit.—Although, as subsequently shown
there was formerly some doubt as to the point, it is now well established that a mere moral obligation or
conscientious duty arising wholly from ethical motives or a mere conscientious duty unconnected with any legal
obligation, perfect or imperfect, or with the receipt of benefit by the promisor of a material or pecuniary nature
will not furnish a consideration for an executory promise. * * *."

In view of the foregoing considerations, we are of the opinion and so hold, that the promise made by an organizer
of a dog racing course to a stockholder to return to him certain amounts paid by the latter in satisfaction of his
subscription upon the belief of said organizer that he was morally responsible because of the failure of the
enterprise, is not the consideration required by article 1261 of the Civil Code as an essential element for the
legal existence of an onerous contract which would bind the promisor to comply with his promise.

Wherefore, the appealed judgment is reversed and the defendant is absolved from the complaint, with the costs
to the plaintiff.

Avanceña, C. J., Imperial, Diaz, Laurel, Concepcion, and Moran, JJ., concur.

Judgment reversed.

585 SCRA 120 G.R. No. 138814 April 16, 2009

MAKATI STOCK EXCHANGE, INC., MA. VIVIAN YUCHENGCO, ADOLFO M. DUARTE, MYRON C. PAPA,
NORBERTO C. NAZARENO, GEORGE UY-TIOCO, ANTONIO A. LOPA, RAMON B. ARNAIZ, LUIS J.L.
VIRATA, and ANTONIO GARCIA, JR. Petitioners,
vs.
MIGUEL V. CAMPOS, substituted by JULIA ORTIGAS VDA. DE CAMPOS, 1 Respondent.
Actions; Causes of Action; Obligations; Motion to Dismiss; If a defendant moves to dismiss the complaint on the
ground of lack of cause of action, he is regarded as having hypothetically admitted all the averments thereof.—
A cause of action is the act or omission by which a party violates a right of another. A complaint states a cause
of action where it contains three essential elements of a cause of action, namely: (1) the legal right of the plaintiff,
(2) the correlative obligation of the defendant, and (3) the act or omission of the defendant in violation of said
legal right. If these elements are absent, the complaint becomes vulnerable to dismissal on the ground of failure
to state a cause of action. If a defendant moves to dismiss the complaint on the ground of lack of cause of action,
he is regarded as having hypothetically admitted all the averments thereof. The test of sufficiency of the facts
found in a complaint as constituting a cause of action is whether or not admitting the facts alleged, the court can
render a valid judgment upon the same in accordance with the prayer thereof. The hypothetical admission
extends to the relevant and material facts well pleaded in the complaint and inferences fairly deducible therefrom.
Hence, if the allegations in the complaint furnish sufficient basis by which the complaint can be maintained, the
same should not be dismissed regardless of the defense that may be assessed by the defendant.

Same; Same; Same; Words and Phrases; Right and obligation are legal terms with specific legal meaning—a
right is a claim or title to an interest in anything whatsoever that is enforceable by law while an obligation is
defined in the Civil Code as a juridical necessity to give, to do or not to do; For every right enjoyed by any person,
there is a corresponding obligation on the part of another person to respect such right.—There is no question
that the Petition in SEC Case No. 02-94-4678 asserts a right in favor of respondent, particularly, respondent’s
alleged right to subscribe to the IPOs of corporations listed in the stock market at their offering prices; and
stipulates the correlative obligation of petitioners to respect respondent’s right, specifically, by continuing to allow
respondent to subscribe to the IPOs of corporations listed in the stock market at their offering prices. However,
the terms right and obligation in respondent’s Petition are not magic words that would automatically lead to the
conclusion that such Petition sufficiently states a cause of action. Right and obligation are legal terms with
specific legal meaning. A right is a claim or title to an interest in anything whatsoever that is enforceable by law.
An obligation is defined in the Civil Code as a juridical necessity to give, to do or not to do. For every right enjoyed
by any person, there is a corresponding obligation on the part of another person to respect such right. Thus,
Justice J.B.L. Reyes offers the definition given by Arias Ramos as a more complete definition: An obligation is a
juridical relation whereby a person (called the creditor) may demand from another (called the debtor) the
observance of a determinative conduct (the giving, doing or not doing), and in case of breach, may demand
satisfaction from the assets of the latter.

Same; Same; Same; Civil Law; Pleadings and Practice; The mere assertion of a right and claim of an obligation
in an initiatory pleading, whether a Complaint or Petition, without identifying the basis or source thereof, is merely
a conclusion of fact and law—a pleading should state the ultimate facts essential to the rights of action or defense
asserted, as distinguished from mere conclusions of fact or conclusions of law.—The Civil Code enumerates the
sources of obligations: Art. 1157. Obligations arise from: (1) Law; (2) Contracts; (3) Quasi-contracts; (4) Acts or
omissions punished by law; and (5) Quasi-delicts. Therefore, an obligation imposed on a person, and the
corresponding right granted to another, must be rooted in at least one of these five sources. The mere assertion
of a right and claim of an obligation in an initiatory pleading, whether a Complaint or Petition, without identifying
the basis or source thereof, is merely a conclusion of fact and law. A pleading should state the ultimate facts
essential to the rights of action or defense asserted, as distinguished from mere conclusions of fact or
conclusions of law. Thus, a Complaint or Petition filed by a person claiming a right to the Office of the President
of this Republic, but without stating the source of his purported right, cannot be said to have sufficiently stated a
cause of action. Also, a person claiming to be the owner of a parcel of land cannot merely state that he has a
right to the ownership thereof, but must likewise assert in the Complaint either a mode of acquisition of ownership
or at least a certificate of title in his name.

Same; Same; Same; Words and Phrases; A practice or custom is, as a general rule, not a source of a legally
demandable or enforceable right.—A meticulous review of the Petition reveals that the allocation of IPO shares
was merely alleged to have been done in accord with a practice normally observed by the members of the stock
exchange, to wit: IPOs are shares of corporations offered for sale to the public, prior to their listing in the trading
floor of the country’s two stock exchanges. Normally, Twenty-Five Percent (25%) of these shares are divided
equally between the two stock exchanges which in turn divide these equally among their members, who pay
therefor at the offering price. A practice or custom is, as a general rule, not a source of a legally demandable or
enforceable right. Indeed, in labor cases, benefits which were voluntarily given by the employer, and which have
ripened into company practice, are considered as rights that cannot be diminished by the employer.
Nevertheless, even in such cases, the source of the employees’ right is not custom, but ultimately, the law, since
Article 100 of the Labor Code explicitly prohibits elimination or diminution of benefits.

DECISION

CHICO-NAZARIO, J.:

This is a Petition for Review on Certiorari under Rule 45 seeking the reversal of the Decision2 dated 11
February 1997 and Resolution dated 18 May 1999 of the Court of Appeals in CA-G.R. SP No. 38455.

The facts of the case are as follows:

SEC Case No. 02-94-4678 was instituted on 10 February 1994 by respondent Miguel V. Campos, who filed
with the Securities, Investigation and Clearing Department (SICD) of the Securities and Exchange Commission
(SEC), a Petition against herein petitioners Makati Stock Exchange, Inc. (MKSE) and MKSE directors, Ma.
Vivian Yuchengco, Adolfo M. Duarte, Myron C. Papa, Norberto C. Nazareno, George Uy-Tioco, Antonio A,
Lopa, Ramon B. Arnaiz, Luis J.L. Virata, and Antonio Garcia, Jr. Respondent, in said Petition, sought: (1) the
nullification of the Resolution dated 3 June 1993 of the MKSE Board of Directors, which allegedly deprived him
of his right to participate equally in the allocation of Initial Public Offerings (IPO) of corporations registered with
MKSE; (2) the delivery of the IPO shares he was allegedly deprived of, for which he would pay IPO prices; and
(3) the payment of ₱2 million as moral damages, ₱1 million as exemplary damages, and ₱500,000.00 as
attorney’s fees and litigation expenses.

On 14 February 1994, the SICD issued an Order granting respondent’s prayer for the issuance of a Temporary
Restraining Order to enjoin petitioners from implementing or enforcing the 3 June 1993 Resolution of the
MKSE Board of Directors.

The SICD subsequently issued another Order on 10 March 1994 granting respondent’s application for a Writ of
Preliminary Injunction, to continuously enjoin, during the pendency of SEC Case No. 02-94-4678, the
implementation or enforcement of the MKSE Board Resolution in question. Petitioners assailed this SICD
Order dated 10 March 1994 in a Petition for Certiorari filed with the SEC en banc, docketed as SEC-EB No.
393.

On 11 March 1994, petitioners filed a Motion to Dismiss respondent’s Petition in SEC Case No. 02-94-4678,
based on the following grounds: (1) the Petition became moot due to the cancellation of the license of MKSE;
(2) the SICD had no jurisdiction over the Petition; and (3) the Petition failed to state a cause of action.

The SICD denied petitioner’s Motion to Dismiss in an Order dated 4 May 1994. Petitioners again challenged
the 4 May 1994 Order of SICD before the SEC en banc through another Petition for Certiorari, docketed as
SEC-EB No. 403.

In an Order dated 31 May 1995 in SEC-EB No. 393, the SEC en banc nullified the 10 March 1994 Order of
SICD in SEC Case No. 02-94-4678 granting a Writ of Preliminary Injunction in favor of respondent. Likewise, in
an Order dated 14 August 1995 in SEC-EB No. 403, the SEC en banc annulled the 4 May 1994 Order of SICD
in SEC Case No. 02-94-4678 denying petitioners’ Motion to Dismiss, and accordingly ordered the dismissal of
respondent’s Petition before the SICD.

Respondent filed a Petition for Certiorari with the Court of Appeals assailing the Orders of the SEC en banc
dated 31 May 1995 and 14 August 1995 in SEC-EB No. 393 and SEC-EB No. 403, respectively. Respondent’s
Petition before the appellate court was docketed as CA-G.R. SP No. 38455.

On 11 February 1997, the Court of Appeals promulgated its Decision in CA-G.R. SP No. 38455, granting
respondent’s Petition for Certiorari, thus:
WHEREFORE, the petition in so far as it prays for annulment of the Orders dated May 31, 1995 and August
14, 1995 in SEC-EB Case Nos. 393 and 403 is GRANTED. The said orders are hereby rendered null and void
and set aside.

Petitioners filed a Motion for Reconsideration of the foregoing Decision but it was denied by the Court of
Appeals in a Resolution dated 18 May 1999.

Hence, the present Petition for Review raising the following arguments:

I.

THE SEC EN BANC DID NOT COMMIT GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR
EXCESS OF JURISDICTION WHEN IT DISMISSED THE PETITION FILED BY RESPONDENT BECAUSE
ON ITS FACE, IT FAILED TO STATE A CAUSE OF ACTION.

II.

THE GRANT OF THE IPO ALLOCATIONS IN FAVOR OF RESPONDENT WAS A MERE ACCOMMODATION
GIVEN TO HIM BY THE BOARD OF [DIRECTORS] OF THE MAKATI STOCK EXCHANGE, INC.

III.

THE COURT OF APPEALS ERRED IN HOLDING THAT THE SEC EN BANC COMMITTED GRAVE ABUSE
OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION WHEN IT MADE AN EXTENDED
INQUIRY AND PROCEEDED TO MAKE A DETERMINATION AS TO THE TRUTH OF RESPONDENT’S
ALLEGATIONS IN HIS PETITION AND USED AS BASIS THE EVIDENCE ADDUCED DURING THE
HEARING ON THE APPLICATION FOR THE WRIT OF PRELIMINARY INJUNCTION TO DETERMINE THE
EXISTENCE OR VALIDITY OF A STATED CAUSE OF ACTION.

IV.

IPO ALLOCATIONS GRANTED TO BROKERS ARE NOT TO BE BOUGHT BY THE BROKERS FOR
THEMSELVES BUT ARE TO BE DISTRIBUTED TO THE INVESTING PUBLIC. HENCE, RESPONDENT’S
CLAIM FOR DAMAGES IS ILLUSORY AND HIS PETITION A NUISANCE SUIT.3

On 18 September 2001, counsel for respondent manifested to this Court that his client died on 7 May 2001. In
a Resolution dated 24 October 2001, the Court directed the substitution of respondent by his surviving spouse,
Julia Ortigas vda. de Campos.

Petitioners want this Court to affirm the dismissal by the SEC en banc of respondent’s Petition in SEC Case
No. 02-94-4678 for failure to state a cause of action. On the other hand, respondent insists on the sufficiency
of his Petition and seeks the continuation of the proceedings before the SICD.

A cause of action is the act or omission by which a party violates a right of another. 4 A complaint states a
cause of action where it contains three essential elements of a cause of action, namely: (1) the legal right of
the plaintiff, (2) the correlative obligation of the defendant, and (3) the act or omission of the defendant in
violation of said legal right. If these elements are absent, the complaint becomes vulnerable to dismissal on the
ground of failure to state a cause of action.

If a defendant moves to dismiss the complaint on the ground of lack of cause of action, he is regarded as
having hypothetically admitted all the averments thereof. The test of sufficiency of the facts found in a
complaint as constituting a cause of action is whether or not admitting the facts alleged, the court can render a
valid judgment upon the same in accordance with the prayer thereof. The hypothetical admission extends to
the relevant and material facts well pleaded in the complaint and inferences fairly deducible therefrom. Hence,
if the allegations in the complaint furnish sufficient basis by which the complaint can be maintained, the same
should not be dismissed regardless of the defense that may be assessed by the defendant.5

Given the foregoing, the issue of whether respondent’s Petition in SEC Case No. 02-94-4678 sufficiently states
a cause of action may be alternatively stated as whether, hypothetically admitting to be true the allegations in
respondent’s Petition in SEC Case No. 02-94-4678, the SICD may render a valid judgment in accordance with
the prayer of said Petition.

A reading of the exact text of respondent’s Petition in SEC Case No. 02-94-4678 is, therefore, unavoidable.
Pertinent portions of the said Petition reads:

7. In recognition of petitioner’s invaluable services, the general membership of respondent corporation [MKSE]
passed a resolution sometime in 1989 amending its Articles of Incorporation, to include the following provision
therein:

"ELEVENTH – WHEREAS, Mr. Miguel Campos is the only surviving incorporator of the Makati Stock
Exchange, Inc. who has maintained his membership;

"WHEREAS, he has unselfishly served the Exchange in various capacities, as governor from 1977 to the
present and as President from 1972 to 1976 and again as President from 1988 to the present;

"WHEREAS, such dedicated service and leadership which has contributed to the advancement and well being
not only of the Exchange and its members but also to the Securities industry, needs to be recognized and
appreciated;

"WHEREAS, as such, the Board of Governors in its meeting held on February 09, 1989 has correspondingly
adopted a resolution recognizing his valuable service to the Exchange, reward the same, and preserve for
posterity such recognition by proposing a resolution to the membership body which would make him as
Chairman Emeritus for life and install in the Exchange premises a commemorative bronze plaque in his honor;

"NOW, THEREFORE, for and in consideration of the above premises, the position of the "Chairman Emeritus"
to be occupied by Mr. Miguel Campos during his lifetime and irregardless of his continued membership in the
Exchange with the Privilege to attend all membership meetings as well as the meetings of the Board of
Governors of the Exchange, is hereby created."

8. Hence, to this day, petitioner is not only an active member of the respondent corporation, but its Chairman
Emeritus as well.

9. Correspondingly, at all times material to this petition, as an active member and Chairman Emeritus of
respondent corporation, petitioner has always enjoyed the right given to all the other members to participate
equally in the Initial Public Offerings (IPOs for brevity) of corporations.

10. IPOs are shares of corporations offered for sale to the public, prior to the listing in the trading floor of the
country’s two stock exchanges. Normally, Twenty Five Percent (25%) of these shares are divided equally
between the two stock exchanges which in turn divide these equally among their members, who pay therefor at
the offering price.

11. However, on June 3, 1993, during a meeting of the Board of Directors of respondent-corporation, individual
respondents passed a resolution to stop giving petitioner the IPOs he is entitled to, based on the ground that
these shares were allegedly benefiting Gerardo O. Lanuza, Jr., who these individual respondents wanted to
get even with, for having filed cases before the Securities and Exchange (SEC) for their disqualification as
member of the Board of Directors of respondent corporation.

12. Hence, from June 3, 1993 up to the present time, petitioner has been deprived of his right to subscribe to
the IPOs of corporations listing in the stock market at their offering prices.
13. The collective act of the individual respondents in depriving petitioner of his right to a share in the IPOs for
the aforementioned reason, is unjust, dishonest and done in bad faith, causing petitioner substantial financial
damage.6

There is no question that the Petition in SEC Case No. 02-94-4678 asserts a right in favor of respondent,
particularly, respondent’s alleged right to subscribe to the IPOs of corporations listed in the stock market at
their offering prices; and stipulates the correlative obligation of petitioners to respect respondent’s right,
specifically, by continuing to allow respondent to subscribe to the IPOs of corporations listed in the stock
market at their offering prices.

However, the terms right and obligation in respondent’s Petition are not magic words that would automatically
lead to the conclusion that such Petition sufficiently states a cause of action. Right and obligation are legal
terms with specific legal meaning. A right is a claim or title to an interest in anything whatsoever that is
enforceable by law.7 An obligation is defined in the Civil Code as a juridical necessity to give, to do or not to
do.8 For every right enjoyed by any person, there is a corresponding obligation on the part of another person to
respect such right. Thus, Justice J.B.L. Reyes offers9 the definition given by Arias Ramos as a more complete
definition:

An obligation is a juridical relation whereby a person (called the creditor) may demand from another (called the
debtor) the observance of a determinative conduct (the giving, doing or not doing), and in case of breach, may
demand satisfaction from the assets of the latter.

The Civil Code enumerates the sources of obligations:

Art. 1157. Obligations arise from:

(1) Law;

(2) Contracts;

(3) Quasi-contracts;

(4) Acts or omissions punished by law; and

(5) Quasi-delicts.

Therefore, an obligation imposed on a person, and the corresponding right granted to another, must be rooted
in at least one of these five sources. The mere assertion of a right and claim of an obligation in an initiatory
pleading, whether a Complaint or Petition, without identifying the basis or source thereof, is merely a
conclusion of fact and law. A pleading should state the ultimate facts essential to the rights of action or defense
asserted, as distinguished from mere conclusions of fact or conclusions of law.10 Thus, a Complaint or Petition
filed by a person claiming a right to the Office of the President of this Republic, but without stating the source of
his purported right, cannot be said to have sufficiently stated a cause of action. Also, a person claiming to be
the owner of a parcel of land cannot merely state that he has a right to the ownership thereof, but must likewise
assert in the Complaint either a mode of acquisition of ownership or at least a certificate of title in his name.

In the case at bar, although the Petition in SEC Case No. 02-94-4678 does allege respondent’s right to
subscribe to the IPOs of corporations listed in the stock market at their offering prices, and petitioners’
obligation to continue respecting and observing such right, the Petition utterly failed to lay down the source or
basis of respondent’s right and/or petitioners’ obligation.

Respondent merely quoted in his Petition the MKSE Board Resolution, passed sometime in 1989, granting him
the position of Chairman Emeritus of MKSE for life. However, there is nothing in the said Petition from which
the Court can deduce that respondent, by virtue of his position as Chairman Emeritus of MKSE, was granted
by law, contract, or any other legal source, the right to subscribe to the IPOs of corporations listed in the stock
market at their offering prices.

A meticulous review of the Petition reveals that the allocation of IPO shares was merely alleged to have been
done in accord with a practice normally observed by the members of the stock exchange, to wit:

IPOs are shares of corporations offered for sale to the public, prior to their listing in the trading floor of the
country’s two stock exchanges. Normally, Twenty-Five Percent (25%) of these shares are divided equally
between the two stock exchanges which in turn divide these equally among their members, who pay therefor at
the offering price.11 (Emphasis supplied)

A practice or custom is, as a general rule, not a source of a legally demandable or enforceable right. 12 Indeed,
in labor cases, benefits which were voluntarily given by the employer, and which have ripened into company
practice, are considered as rights that cannot be diminished by the employer.13 Nevertheless, even in such
cases, the source of the employees’ right is not custom, but ultimately, the law, since Article 100 of the Labor
Code explicitly prohibits elimination or diminution of benefits.

There is no such law in this case that converts the practice of allocating IPO shares to MKSE members, for
subscription at their offering prices, into an enforceable or demandable right. Thus, even if it is hypothetically
admitted that normally, twenty five percent (25%) of the IPOs are divided equally between the two stock
exchanges -- which, in turn, divide their respective allocation equally among their members, including the
Chairman Emeritus, who pay for IPO shares at the offering price -- the Court cannot grant respondent’s prayer
for damages which allegedly resulted from the MKSE Board Resolution dated 3 June 1993 deviating from said
practice by no longer allocating any shares to respondent.1avvphi1

Accordingly, the instant Petition should be granted. The Petition in SEC Case No. 02-94-4678 should be
dismissed for failure to state a cause of action. It does not matter that the SEC en banc, in its Order dated 14
August 1995 in SEC-EB No. 403, overstepped its bounds by not limiting itself to the issue of whether
respondent’s Petition before the SICD sufficiently stated a cause of action. The SEC en banc may have been
mistaken in considering extraneous evidence in granting petitioners’ Motion to Dismiss, but its discussion
thereof are merely superfluous and obiter dictum. In the main, the SEC en banc did correctly dismiss the
Petition in SEC Case No. 02-94-4678 for its failure to state the basis for respondent’s alleged right, to wit:

Private respondent Campos has failed to establish the basis or authority for his alleged right to participate
equally in the IPO allocations of the Exchange. He cited paragraph 11 of the amended articles of incorporation
of the Exchange in support of his position but a careful reading of the said provision shows nothing therein that
would bear out his claim. The provision merely created the position of chairman emeritus of the Exchange but
it mentioned nothing about conferring upon the occupant thereof the right to receive IPO allocations.14

With the dismissal of respondent’s Petition in SEC Case No. 02-94-4678, there is no more need for this Court
to resolve the propriety of the issuance by SCID of a writ of preliminary injunction in said case.

WHEREFORE, the Petition is GRANTED. The Decision of the Court of Appeals dated 11 February 1997 and
its Resolution dated 18 May 1999 in CA-G.R. SP No. 38455 are REVERSED and SET ASIDE. The Orders
dated 31 May 1995 and 14 August 1995 of the Securities and Exchange Commission en banc in SEC-EB
Case No. 393 and No. 403, respectively, are hereby reinstated. No pronouncement as to costs.

SO ORDERED.
238 SCRA 602 G.R. No. 109125 December 2, 1994

ANG YU ASUNCION, ARTHUR GO AND KEH TIONG, petitioners,

vs.
THE HON. COURT OF APPEALS and BUEN REALTY DEVELOPMENT CORPORATION, respondents.

Antonio M. Albano for petitioners.

Umali, Soriano & Associates for private respondent.

Obligations; Essential elements of an obligation.—An obligation is a juridical necessity to give, to do or not to

do (Art. 1156, Civil Code). The obligation is constituted upon the concurrence of the essential elements
thereof, viz: (a) The vinculum juris or juridical tie which is the efficient cause established by the various sources
of obligations (law, contracts, quasi-contracts, delicts and quasi-delicts); (b) the object which is the prestation
or conduct, required to be observed (to give, to do or not to do); and (c) the subject-persons who, viewed from
the demandability of the obligation, are the active (obligee) and the passive (obligor) subjects.

Same; Contracts; Various stages of a contract.—Among the sources of an obligation is a contract (Art. 1157,
Civil Code), which is a meeting of minds between two persons whereby one binds himself, with respect to the
other, to give something or to render some service (Art. 1305, Civil Code). A contract undergoes various
stages that include its negotiation or preparation, its perfection and, finally, its consummation. Negotiation
covers the period from the time the prospective contracting parties indicate interest in the contract to the time
the contract is concluded (perfected). The perfection of the contract takes place upon the concurrence of the
essential elements thereof. A contract which is consensual as to perfection is so established upon a mere
meeting of minds, i.e., the concurrence of offer and acceptance, on the object and on the cause thereof. A
contract which requires, in addition to the above, the delivery of the object of the agreement, as in a pledge or
commodatum, is commonly referred to as a real contract. In a solemn contract, compliance with certain
formalities prescribed by law, such as in a donation of real property, is essential in order to make the act valid,
the prescribed form being thereby an essential element thereof. The stage of consummation begins when the
parties perform their respective undertakings under the contract culminating in the extinguishment thereof.

Same; Same; Sales; In sales, the contract is perfected when the seller obligates himself, for a price certain, to
deliver and to transfer ownership of a thing or right to the buyer, over which the latter agrees.—Until the
contract is perfected, it cannot, as an independent source of obligation, serve as a binding juridical relation. In
sales, particularly, to which the topic for discussion about the case at bench belongs, the contract is perfected
when a person, called the seller, obligates himself, for a price certain, to deliver and to transfer ownership of a
thing or right to another, called the buyer, over which the latter agrees.

Same; Same; Same; When the sale is not absolute but conditional, the breach of the condition will prevent the
obligation to convey title from acquiring an obligatory force.—When the sale is not absolute but conditional,
such as in a “Contract to Sell” where invariably the ownership of the thing sold is retained until the fulfillment of
a positive suspensive condition (normally, the full payment of the purchase price), the breach of the condition
will prevent the obligation to convey title from acquiring an obligatory force. In Dignos vs. Court of Appeals (158
SCRA 375), we have said that, although denominated a “Deed of Conditional Sale,” a sale is still absolute
where the contract is devoid of any proviso that title is reserved or the right to unilaterally rescind is stipulated,
e.g., until or unless the price is paid. Ownership will then be transferred to the buyer upon actual or
constructive delivery (e.g., by the execution of a public document) of the property sold. Where the condition is
imposed upon the perfection of the contract itself, the failure of the condition would prevent such perfection. If
the condition is imposed on the obligation of a party which is not fulfilled, the other party may either waive the
condition or refuse to proceed with the sale (Art. 1545, Civil Code).

Same; Same; Same; An unconditional mutual promise to buy and sell, with an object that is determinate and
the price fixed, can be obligatory on the parties.—An unconditional mutual promise to buy and sell, as long as
the object is made determinate and the price is fixed, can be obligatory on the parties, and compliance
therewith may accordingly be exacted.
Same; Same; Same; Options; An accepted unilateral promise which specifies the thing to be sold and the price
to be paid, when coupled with a valuable consideration distinct and separate from the price, may be termed a
perfected contract of option.—An accepted unilateral promise which specifies the thing to be sold and the price
to be paid, when coupled with a valuable consideration distinct and separate from the price, is what may
properly be termed a perfected contract of option. This contract is legally binding, and in sales, it conforms with
the second paragraph of Article 1479 of the Civil Code. Observe, however, that the option is not the contract of
sale itself. The optionee has the right, but not the obligation, to buy. Once the option is exercised timely, i.e.,
the offer is accepted before a breach of the option, a bilateral promise to sell and to buy ensues and both
parties are then reciprocally bound to comply with their respective undertakings.

Same; Same; Same; Same; Rules applicable where a period is given to the offeree within which to accept the
offer.—Where a period is given to the offeree within which to accept the offer, the following rules generally
govern: (1) If the period is not itself founded upon or supported by a consideration, the offeror is still free and
has the right to withdraw the offer before its acceptance, or, if an acceptance has been made, before the offeror’s
coming to know of such fact, by communicating that withdrawal to the offeree. The right to withdraw, however,
must not be exercised whimsically or arbitrarily; otherwise, it could give rise to a damage claim under Article 19
of the Civil Code; (2) If the period has a separate consideration, a contract of “option” is deemed perfected, and
it would be a breach of that contract to withdraw the offer during the agreed period. The option, however, is an
independent contract by itself, and it is to be distinguished from the projected main agreement (subject matter of
the option) which is obviously yet to be concluded. If, in fact, the optioner-offeror withdraws the offer before its
acceptance (exercise of the option) by the optionee-offeree, the latter may not sue for specific performance on
the proposed contract (“object” of the option) since it has failed to reach its own stage of perfection. The optionee-
offeror, however, renders himself liable for damages for breach of the option. In these cases, care should be
taken on the real nature of the consideration given, for if, in fact, it has been intended to be part of the
consideration for the main contract with a right of withdrawal on the part of the optionee, the main contract could
be deemed perfected; a similar instance would be an “earnest money” in a contract of sale that can evidence its
perfection (Art. 1482, Civil Code).

Same; Same; Same; Same; Words and Phrases; “Right of First Refusal,” Explained; In the law on sales, the so-
called “right of first refusal” is an innovative juridical relation, but it cannot be deemed a perfected contract of sale
under Article 1458 of the Civil Code.—In the law on sales, the so-called “right of first refusal” is an innovative
juridical relation. Needless to point out, it cannot be deemed a perfected contract of sale under Article 1458 of
the Civil Code, Neither can the right of first refusal, understood in its normal concept, per se be brought within
the purview of an option under the second paragraph of Article 1479, aforequoted, or possibly of an offer under
Article 1319 of the same Code. An option or an offer would require, among other things, a clear certainty on both
the object and the cause or consideration of the envisioned contract. In a right of first refusal, while the object
might be made determinate, the exercise of the right, however, would be dependent not only on the grantor’s
eventual intention to enter into a binding juridical relation with another but also on terms, including the price, that
obviously are yet to be later firmed up. Prior thereto, it can at best be so described as merely belonging to a
class of preparatory juridical relations governed not by contracts (since the essential elements to establish the
vinculum juris would still be indefinite and inconclusive) but by, among other laws of general application, the
pertinent scattered provisions of the Civil Code on human conduct.

Same; Same; Same; Same; Same; Same; Breach of a right of first refusal decreed under a final judgment does
not entitle the aggrieved party to a writ of execution of the judgment but to an action for damages.—Even on the
premise that such right of first refusal has been decreed under a final judgment, like here, its breach cannot
justify correspondingly an issuance of a writ of execution under a judgment that merely recognizes its existence,
nor would it sanction an action for specific performance without thereby negating the indispensable element of
consensuality in the perfection of contracts. It is not to say, however, that the right of first refusal would be
inconsequential for, such as already intimated above, an unjustified disregard thereof, given, for instance, the
circumstances expressed in Article 19 of the Civil Code, can warrant a recovery for damages. The final judgment
in Civil Case No. 87-41058, it must be stressed, has merely accorded a “right of first refusal” in favor of
petitioners. The consequence of such a declaration entails no more than what has heretofore been said. In fine,
if, as it is here so conveyed to us, petitioners are aggrieved by the failure of private respondents to honor the
right of first refusal, the remedy is not a writ of execution on the judgment, since there is none to execute, but an
action for damages in a proper forum for the purpose.
Due Process; Actions; A party not impleaded in an action cannot be held subject to the writ of execution issued
therein.—Furthermore, whether private respondent Buen Realty Development Corporation, the
allegedpurchaser of the property, has acted in good faith or bad faith and whether or not it should, in any case,
be considered bound to respect the registration of the lis pendens in Civil Case No. 87-41058 are matters that
must be independently addressed in appropriate proceedings. Buen Realty, not having been impleaded in Civil
Case No.87-41058, cannot be held subject to the writ of execution issued by respondent Judge, let alone ousted
from the ownership and possession of the property, without first being duly afforded its day in court.

VITUG, J.:

Assailed, in this petition for review, is the decision of the Court of Appeals, dated 04 December 1991, in CA-
G.R. SP No. 26345 setting aside and declaring without force and effect the orders of execution of the trial
court, dated 30 August 1991 and 27 September 1991, in Civil Case No. 87-41058.

The antecedents are recited in good detail by the appellate court thusly:

On July 29, 1987 a Second Amended Complaint for Specific Performance was filed by Ang Yu
Asuncion and Keh Tiong, et al., against Bobby Cu Unjieng, Rose Cu Unjieng and Jose Tan
before the Regional Trial Court, Branch 31, Manila in Civil Case No. 87-41058, alleging, among
others, that plaintiffs are tenants or lessees of residential and commercial spaces owned by
defendants described as Nos. 630-638 Ongpin Street, Binondo, Manila; that they have occupied
said spaces since 1935 and have been religiously paying the rental and complying with all the
conditions of the lease contract; that on several occasions before October 9, 1986, defendants
informed plaintiffs that they are offering to sell the premises and are giving them priority to
acquire the same; that during the negotiations, Bobby Cu Unjieng offered a price of P6-million
while plaintiffs made a counter offer of P5-million; that plaintiffs thereafter asked the defendants
to put their offer in writing to which request defendants acceded; that in reply to defendant's
letter, plaintiffs wrote them on October 24, 1986 asking that they specify the terms and
conditions of the offer to sell; that when plaintiffs did not receive any reply, they sent another
letter dated January 28, 1987 with the same request; that since defendants failed to specify the
terms and conditions of the offer to sell and because of information received that defendants
were about to sell the property, plaintiffs were compelled to file the complaint to compel
defendants to sell the property to them.

Defendants filed their answer denying the material allegations of the complaint and interposing
a special defense of lack of cause of action.

After the issues were joined, defendants filed a motion for summary judgment which was
granted by the lower court. The trial court found that defendants' offer to sell was never
accepted by the plaintiffs for the reason that the parties did not agree upon the terms and
conditions of the proposed sale, hence, there was no contract of sale at all. Nonetheless, the
lower court ruled that should the defendants subsequently offer their property for sale at a price
of P11-million or below, plaintiffs will have the right of first refusal. Thus the dispositive portion of
the decision states:

WHEREFORE, judgment is hereby rendered in favor of the defendants and

against the plaintiffs summarily dismissing the complaint subject to the
aforementioned condition that if the defendants subsequently decide to offer their
property for sale for a purchase price of Eleven Million Pesos or lower, then the
plaintiffs has the option to purchase the property or of first refusal, otherwise,
defendants need not offer the property to the plaintiffs if the purchase price is
higher than Eleven Million Pesos.

SO ORDERED.
Aggrieved by the decision, plaintiffs appealed to this Court in
CA-G.R. CV No. 21123. In a decision promulgated on September 21, 1990 (penned by Justice
Segundino G. Chua and concurred in by Justices Vicente V. Mendoza and Fernando A.
Santiago), this Court affirmed with modification the lower court's judgment, holding:

In resume, there was no meeting of the minds between the parties concerning
the sale of the property. Absent such requirement, the claim for specific
performance will not lie. Appellants' demand for actual, moral and exemplary
damages will likewise fail as there exists no justifiable ground for its award.
Summary judgment for defendants was properly granted. Courts may render
summary judgment when there is no genuine issue as to any material fact and
the moving party is entitled to a judgment as a matter of law (Garcia vs. Court of
Appeals, 176 SCRA 815). All requisites obtaining, the decision of the court a
quo is legally justifiable.

WHEREFORE, finding the appeal unmeritorious, the judgment appealed from is

hereby AFFIRMED, but subject to the following modification: The court a quo in
the aforestated decision gave the plaintiffs-appellants the right of first refusal only
if the property is sold for a purchase price of Eleven Million pesos or lower;
however, considering the mercurial and uncertain forces in our market economy
today. We find no reason not to grant the same right of first refusal to herein
appellants in the event that the subject property is sold for a price in excess of
Eleven Million pesos. No pronouncement as to costs.

SO ORDERED.

The decision of this Court was brought to the Supreme Court by petition for review on certiorari.
The Supreme Court denied the appeal on May 6, 1991 "for insufficiency in form and
substances" (Annex H, Petition).

On November 15, 1990, while CA-G.R. CV No. 21123 was pending consideration by this Court,
the Cu Unjieng spouses executed a Deed of Sale (Annex D, Petition) transferring the property in
question to herein petitioner Buen Realty and Development Corporation, subject to the following
terms and conditions:

1. That for and in consideration of the sum of FIFTEEN MILLION PESOS

(P15,000,000.00), receipt of which in full is hereby acknowledged, the
VENDORS hereby sells, transfers and conveys for and in favor of the VENDEE,
his heirs, executors, administrators or assigns, the above-described property with
all the improvements found therein including all the rights and interest in the said
property free from all liens and encumbrances of whatever nature, except the
pending ejectment proceeding;

2. That the VENDEE shall pay the Documentary Stamp Tax, registration fees for
the transfer of title in his favor and other expenses incidental to the sale of
above-described property including capital gains tax and accrued real estate
taxes.

As a consequence of the sale, TCT No. 105254/T-881 in the name of the Cu Unjieng spouses
was cancelled and, in lieu thereof, TCT No. 195816 was issued in the name of petitioner on
December 3, 1990.

On July 1, 1991, petitioner as the new owner of the subject property wrote a letter to the lessees
demanding that the latter vacate the premises.
On July 16, 1991, the lessees wrote a reply to petitioner stating that petitioner brought the
property subject to the notice of lis pendens regarding Civil Case No. 87-41058 annotated on
TCT No. 105254/T-881 in the name of the Cu Unjiengs.

The lessees filed a Motion for Execution dated August 27, 1991 of the Decision in Civil Case
No. 87-41058 as modified by the Court of Appeals in CA-G.R. CV No. 21123.

On August 30, 1991, respondent Judge issued an order (Annex A, Petition) quoted as follows:

Presented before the Court is a Motion for Execution filed by plaintiff represented
by Atty. Antonio Albano. Both defendants Bobby Cu Unjieng and Rose Cu
Unjieng represented by Atty. Vicente Sison and Atty. Anacleto Magno
respectively were duly notified in today's consideration of the motion as
evidenced by the rubber stamp and signatures upon the copy of the Motion for
Execution.

The gist of the motion is that the Decision of the Court dated September 21, 1990
as modified by the Court of Appeals in its decision in CA G.R. CV-21123, and
elevated to the Supreme Court upon the petition for review and that the same
was denied by the highest tribunal in its resolution dated May 6, 1991 in G.R. No.
L-97276, had now become final and executory. As a consequence, there was an
Entry of Judgment by the Supreme Court as of June 6, 1991, stating that the
aforesaid modified decision had already become final and executory.

It is the observation of the Court that this property in dispute was the subject of
the Notice of Lis Pendens and that the modified decision of this Court
promulgated by the Court of Appeals which had become final to the effect that
should the defendants decide to offer the property for sale for a price of P11
Million or lower, and considering the mercurial and uncertain forces in our market
economy today, the same right of first refusal to herein plaintiffs/appellants in the
event that the subject property is sold for a price in excess of Eleven Million
pesos or more.

WHEREFORE, defendants are hereby ordered to execute the necessary Deed of

Sale of the property in litigation in favor of plaintiffs Ang Yu Asuncion, Keh Tiong
and Arthur Go for the consideration of P15 Million pesos in recognition of
plaintiffs' right of first refusal and that a new Transfer Certificate of Title be issued
in favor of the buyer.

All previous transactions involving the same property notwithstanding the

issuance of another title to Buen Realty Corporation, is hereby set aside as
having been executed in bad faith.

SO ORDERED.

On September 22, 1991 respondent Judge issued another order, the dispositive portion of
which reads:

WHEREFORE, let there be Writ of Execution issue in the above-entitled case

directing the Deputy Sheriff Ramon Enriquez of this Court to implement said Writ
of Execution ordering the defendants among others to comply with the aforesaid
Order of this Court within a period of one (1) week from receipt of this Order and
for defendants to execute the necessary Deed of Sale of the property in litigation
in favor of the plaintiffs Ang Yu Asuncion, Keh Tiong and Arthur Go for the
consideration of P15,000,000.00 and ordering the Register of Deeds of the City
 of Manila, to cancel and set aside the title already issued in favor of Buen Realty
Corporation which was previously executed between the latter and defendants
and to register the new title in favor of the aforesaid plaintiffs Ang Yu Asuncion,
Keh Tiong and Arthur Go.

SO ORDERED.

On the same day, September 27, 1991 the corresponding writ of execution (Annex C, Petition)
was issued.1

On 04 December 1991, the appellate court, on appeal to it by private respondent, set aside and declared
without force and effect the above questioned orders of the court a quo.

In this petition for review on certiorari, petitioners contend that Buen Realty can be held bound by the writ of
execution by virtue of the notice of lis pendens, carried over on TCT No. 195816 issued in the name of Buen
Realty, at the time of the latter's purchase of the property on 15 November 1991 from the Cu Unjiengs.

We affirm the decision of the appellate court.

A not too recent development in real estate transactions is the adoption of such arrangements as the right of
first refusal, a purchase option and a contract to sell. For ready reference, we might point out some
fundamental precepts that may find some relevance to this discussion.

An obligation is a juridical necessity to give, to do or not to do (Art. 1156, Civil Code). The obligation is
constituted upon the concurrence of the essential elements thereof, viz: (a) The vinculum juris or juridical
tie which is the efficient cause established by the various sources of obligations (law, contracts, quasi-
contracts, delicts and quasi-delicts); (b) the object which is the prestation or conduct; required to be observed
(to give, to do or not to do); and (c) the subject-persons who, viewed from the demandability of the obligation,
are the active (obligee) and the passive (obligor) subjects.

Among the sources of an obligation is a contract (Art. 1157, Civil Code), which is a meeting of minds between
two persons whereby one binds himself, with respect to the other, to give something or to render some service
(Art. 1305, Civil Code). A contract undergoes various stages that include its negotiation or preparation, its
perfection and, finally, its consummation. Negotiation covers the period from the time the prospective
contracting parties indicate interest in the contract to the time the contract is concluded (perfected).
The perfection of the contract takes place upon the concurrence of the essential elements thereof. A contract
which is consensual as to perfection is so established upon a mere meeting of minds, i.e., the concurrence of
offer and acceptance, on the object and on the cause thereof. A contract which requires, in addition to the
above, the delivery of the object of the agreement, as in a pledge or commodatum, is commonly referred to as
a real contract. In a solemn contract, compliance with certain formalities prescribed by law, such as in a
donation of real property, is essential in order to make the act valid, the prescribed form being thereby an
essential element thereof. The stage of consummation begins when the parties perform their respective
undertakings under the contract culminating in the extinguishment thereof.

Until the contract is perfected, it cannot, as an independent source of obligation, serve as a binding juridical
relation. In sales, particularly, to which the topic for discussion about the case at bench belongs, the contract is
perfected when a person, called the seller, obligates himself, for a price certain, to deliver and to transfer
ownership of a thing or right to another, called the buyer, over which the latter agrees. Article 1458 of the Civil
Code provides:

Art. 1458. 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.

A contract of sale may be absolute or conditional.

When the sale is not absolute but conditional, such as in a "Contract to Sell" where invariably the ownership of
the thing sold is retained until the fulfillment of a positive suspensive condition (normally, the full payment of the
purchase price), the breach of the condition will prevent the obligation to convey title from acquiring an
obligatory force.2 In Dignos vs. Court of Appeals (158 SCRA 375), we have said that, although denominated a
"Deed of Conditional Sale," a sale is still absolute where the contract is devoid of any proviso that title is
reserved or the right to unilaterally rescind is stipulated, e.g., until or unless the price is paid. Ownership will
then be transferred to the buyer upon actual or constructive delivery (e.g., by the execution of a public
document) of the property sold. Where the condition is imposed upon the perfection of the contract itself, the
failure of the condition would prevent such perfection.3 If the condition is imposed on the obligation of a party
which is not fulfilled, the other party may either waive the condition or refuse to proceed with the sale (Art.
1545, Civil Code).4

An unconditional mutual promise to buy and sell, as long as the object is made determinate and the price is
fixed, can be obligatory on the parties, and compliance therewith may accordingly be exacted. 5

An accepted unilateral promise which specifies the thing to be sold and the price to be paid, when coupled with
a valuable consideration distinct and separate from the price, is what may properly be termed a perfected
contract of option. This contract is legally binding, and in sales, it conforms with the second paragraph of
Article 1479 of the Civil Code, viz:

Art. 1479. . . .

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.
(1451a)6

Observe, however, that the option is not the contract of sale itself.7 The optionee has the right, but not the
obligation, to buy. Once the option is exercised timely, i.e., the offer is accepted before a breach of the option,
a bilateral promise to sell and to buy ensues and both parties are then reciprocally bound to comply with their
respective undertakings.8

Let us elucidate a little. A negotiation is formally initiated by an offer. An imperfect promise (policitacion) is
merely an offer. Public advertisements or solicitations and the like are ordinarily construed as mere invitations
to make offers or only as proposals. These relations, until a contract is perfected, are not considered binding
commitments. Thus, at any time prior to the perfection of the contract, either negotiating party may stop the
negotiation. The offer, at this stage, may be withdrawn; the withdrawal is effective immediately after its
manifestation, such as by its mailing and not necessarily when the offeree learns of the withdrawal (Laudico vs.
Arias, 43 Phil. 270). Where a period is given to the offeree within which to accept the offer, the following rules
generally govern:

(1) If the period is not itself founded upon or supported by a consideration, the offeror is still free and has the
right to withdraw the offer before its acceptance, or, if an acceptance has been made, before the offeror's
coming to know of such fact, by communicating that withdrawal to the offeree (see Art. 1324, Civil Code; see
also Atkins, Kroll & Co. vs. Cua, 102 Phil. 948, holding that this rule is applicable to a unilateral promise to sell
under Art. 1479, modifying the previous decision in South Western Sugar vs. Atlantic Gulf, 97 Phil. 249; see
also Art. 1319, Civil Code; Rural Bank of Parañaque, Inc., vs. Remolado, 135 SCRA 409; Sanchez vs. Rigos,
45 SCRA 368). The right to withdraw, however, must not be exercised whimsically or arbitrarily; otherwise, it
could give rise to a damage claim under Article 19 of the Civil Code which ordains that "every person must, in
the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and
observe honesty and good faith."

(2) If the period has a separate consideration, a contract of "option" is deemed perfected, and it would be a
breach of that contract to withdraw the offer during the agreed period. The option, however, is an independent
contract by itself, and it is to be distinguished from the projected main agreement (subject matter of the option)
which is obviously yet to be concluded. If, in fact, the optioner-offeror withdraws the offer before its
acceptance (exercise of the option) by the optionee-offeree, the latter may not sue for specific performance on
the proposed contract ("object" of the option) since it has failed to reach its own stage of perfection. The
optioner-offeror, however, renders himself liable for damages for breach of the option. In these cases, care
should be taken of the real nature of the consideration given, for if, in fact, it has been intended to be part of
the consideration for the main contract with a right of withdrawal on the part of the optionee, the main contract
could be deemed perfected; a similar instance would be an "earnest money" in a contract of sale that can
evidence its perfection (Art. 1482, Civil Code).

In the law on sales, the so-called "right of first refusal" is an innovative juridical relation. Needless to point out,
it cannot be deemed a perfected contract of sale under Article 1458 of the Civil Code. Neither can the right of
first refusal, understood in its normal concept, per se be brought within the purview of an option under the
second paragraph of Article 1479, aforequoted, or possibly of an offer under Article 13199 of the same Code.
An option or an offer would require, among other things,10 a clear certainty on both the object and the cause or
consideration of the envisioned contract. In a right of first refusal, while the object might be made determinate,
the exercise of the right, however, would be dependent not only on the grantor's eventual intention to enter into
a binding juridical relation with another but also on terms, including the price, that obviously are yet to be later
firmed up. Prior thereto, it can at best be so described as merely belonging to a class of preparatory juridical
relations governed not by contracts (since the essential elements to establish the vinculum juris would still be
indefinite and inconclusive) but by, among other laws of general application, the pertinent scattered provisions
of the Civil Code on human conduct.

Even on the premise that such right of first refusal has been decreed under a final judgment, like here, its
breach cannot justify correspondingly an issuance of a writ of execution under a judgment that merely
recognizes its existence, nor would it sanction an action for specific performance without thereby negating the
indispensable element of consensuality in the perfection of contracts.11 It is not to say, however, that the right
of first refusal would be inconsequential for, such as already intimated above, an unjustified disregard thereof,
given, for instance, the circumstances expressed in Article 1912 of the Civil Code, can warrant a recovery for
damages.

The final judgment in Civil Case No. 87-41058, it must be stressed, has merely accorded a "right of first
refusal" in favor of petitioners. The consequence of such a declaration entails no more than what has
heretofore been said. In fine, if, as it is here so conveyed to us, petitioners are aggrieved by the failure of
private respondents to honor the right of first refusal, the remedy is not a writ of execution on the judgment,
since there is none to execute, but an action for damages in a proper forum for the purpose.

Furthermore, whether private respondent Buen Realty Development Corporation, the alleged purchaser of the
property, has acted in good faith or bad faith and whether or not it should, in any case, be considered bound to
respect the registration of the lis pendens in Civil Case No. 87-41058 are matters that must be independently
addressed in appropriate proceedings. Buen Realty, not having been impleaded in Civil Case No. 87-41058,
cannot be held subject to the writ of execution issued by respondent Judge, let alone ousted from the
ownership and possession of the property, without first being duly afforded its day in court.

We are also unable to agree with petitioners that the Court of Appeals has erred in holding that the writ of
execution varies the terms of the judgment in Civil Case No. 87-41058, later affirmed in CA-G.R. CV-21123.
The Court of Appeals, in this regard, has observed:

Finally, the questioned writ of execution is in variance with the decision of the trial court as
modified by this Court. As already stated, there was nothing in said decision 13 that decreed the
execution of a deed of sale between the Cu Unjiengs and respondent lessees, or the fixing of
the price of the sale, or the cancellation of title in the name of petitioner (Limpin vs. IAC, 147
SCRA 516; Pamantasan ng Lungsod ng Maynila vs. IAC, 143 SCRA 311; De Guzman vs. CA,
137 SCRA 730; Pastor vs. CA, 122 SCRA 885).

It is likewise quite obvious to us that the decision in Civil Case No. 87-41058 could not have decreed at the
time the execution of any deed of sale between the Cu Unjiengs and petitioners.
WHEREFORE, we UPHOLD the Court of Appeals in ultimately setting aside the questioned Orders, dated 30
August 1991 and 27 September 1991, of the court a quo. Costs against petitioners.

SO ORDERED.

Narvasa, C.J., Padilla, Bidin, Regalado, Davide, Jr., Romero, Bellosillo, Melo, Quiason, Puno and Mendoza,
JJ., concur.

Kapunan, J., took no part.

Feliciano, J., is on leave.

492 SCRA 179 G.R. No. 147561 June 22, 2006

STRONGHOLD INSURANCE COMPANY, INC., Petitioner,

vs.
REPUBLIC-ASAHI GLASS CORPORATION, Respondent.

Obligations and Contracts; Death of a Party; 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.—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 personal 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.

Same; Same; Surety; Since death is not a defense that a party or his estate can set up to wipe out the obligations
under a performance bond, the surety cannot use such party’s death to escape its monetary obligation.—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 monetary obligation under its performance bond.

Same; Same; Same; Although the contract of 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—he is directly
and equally bound with the principal.—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.” 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.” x x x x x x x x x “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, 191 SCRA 493 (1990), stated thus: “x x x. 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. x x x.”
Same; Same; Same; The death of the principal debtor will not work to convert, decrease or nullify the substantive
right of the solidary creditor.—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.

DECISION

PANGANIBAN, CJ:

Asurety company’s liability under the performance bond it issues is solidary. The death of the principal obligor
does not, as a rule, extinguish the obligation and the solidary nature of that liability.

The Case

Before us is a Petition for Review1 under Rule 45 of the Rules of Court, seeking to reverse the March 13, 2001
Decision2 of the Court of Appeals (CA) in CA-GR CV No. 41630. The assailed Decision disposed as follows:

"WHEREFORE, the Order dated January 28, 1993 issued by the lower court is REVERSED and SET ASIDE.
Let the records of the instant case be REMANDED to the lower court for the reception of evidence of all
parties."3

The Facts

The facts of the case are narrated by the CA in this wise:

"On May 24, 1989, [respondent] Republic-Asahi Glass Corporation (Republic-Asahi) entered into a contract
with x x x Jose D. Santos, Jr., the proprietor of JDS Construction (JDS), for the construction of roadways and a
drainage system in Republic-Asahi’s compound in Barrio Pinagbuhatan, Pasig City, where [respondent] was to
pay x x x JDS five million three hundred thousand pesos (P5,300,000.00) inclusive of value added tax for said
construction, which was supposed to be completed within a period of two hundred forty (240) days beginning
May 8, 1989. In order ‘to guarantee the faithful and satisfactory performance of its undertakings’ x x x JDS,
shall post a performance bond of seven hundred ninety five thousand pesos (P795,000.00). x x x JDS
executed, jointly and severally with [petitioner] Stronghold Insurance Co., Inc. (SICI) Performance Bond No.
SICI-25849/g(13)9769.

"On May 23, 1989, [respondent] paid to x x x JDS seven hundred ninety five thousand pesos (P795,000.00) by
way of downpayment.

"Two progress billings dated August 14, 1989 and September 15, 1989, for the total amount of two hundred
seventy four thousand six hundred twenty one pesos and one centavo (P274,621.01) were submitted by x x x
JDS to [respondent], which the latter paid. According to [respondent], these two progress billings accounted for
only 7.301% of the work supposed to be undertaken by x x x JDS under the terms of the contract.

"Several times prior to November of 1989, [respondent’s] engineers called the attention of x x x 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 x x x JDS.

"On November 24, 1989, dissatisfied with the progress of the work undertaken by x x x JDS, [respondent]
Republic-Asahi extrajudicially rescinded the contract pursuant to Article XIII of said contract, and wrote a letter
to x x x JDS informing the latter of such rescission. Such rescission, according to Article XV of the contract
shall not be construed as a waiver of [respondent’s] right to recover damages from x x x JDS and the latter’s
sureties.
"[Respondent] alleged that, as a result of x x x 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 three million two hundred fifty six thousand, eight hundred seventy four
pesos (P3,256,874.00).

"On January 6, 1990, [respondent] sent a letter to [petitioner] SICI filing its claim under the bond for not less
than P795,000.00. On March 22, 1991, [respondent] again sent another letter reiterating its demand for
payment under the aforementioned bond. Both letters allegedly went unheeded.

"[Respondent] then filed [a] complaint against x x x JDS and SICI. It sought from x x x JDS payment
of P3,256,874.00 representing the additional expenses incurred by [respondent] for the completion of the
project using another contractor, and from x x x JDS and SICI, jointly and severally, payment of P750,000.00
as damages in accordance with the performance bond; exemplary damages in the amount of P100,000.00 and
attorney’s fees in the amount of at least P100,000.00.

"According to the Sheriff’s Return dated June 14, 1991, submitted to the lower court by Deputy Sheriff Rene R.
Salvador, summons were duly served on defendant-appellee SICI. However, x x x Jose D. Santos, Jr. died the
previous year (1990), and x x x JDS Construction was no longer at its address at 2nd Floor, Room 208-A, San
Buena Bldg. Cor. Pioneer St., Pasig, Metro Manila, and its whereabouts were unknown.

"On July 10, 1991, [petitioner] SICI filed its answer, alleging that the [respondent’s] money claims against
[petitioner and JDS] have been extinguished by the death of Jose D. Santos, Jr. Even if this were not the case,
[petitioner] SICI had been released from its liability under the performance bond because there was no
liquidation, with the active participation and/or involvement, pursuant to procedural due process, of herein
surety and contractor Jose D. Santos, Jr., hence, there was no ascertainment of the corresponding liabilities of
Santos and SICI under the performance bond. At this point in time, said liquidation was impossible because of
the death of Santos, who as such can no longer participate in any liquidation. The unilateral liquidation on the
party (sic) of [respondent] of the work accomplishments did not bind SICI for being violative of procedural due
process. The claim of [respondent] for the forfeiture of the performance bond in the amount of P795,000.00
had no factual and legal basis, as payment of said bond was conditioned on the payment of damages which
[respondent] may sustain in the event x x x JDS failed to complete the contracted works. [Respondent] can no
longer prove its claim for damages in view of the death of Santos. SICI was not informed by [respondent] of the
death of Santos. SICI was not informed by [respondent] of the unilateral rescission of its contract with JDS,
thus SICI was deprived of its right to protect its interests as surety under the performance bond, and therefore
it was released from all liability. SICI was likewise denied due process when it was not notified of plaintiff-
appellant’s process of determining and fixing the amount to be spent in the completion of the unfinished
project. The procedure contained in Article XV of the contract is against public policy in that it denies SICI the
right to procedural due process. Finally, SICI alleged that [respondent] deviated from the terms and conditions
of the contract without the written consent of SICI, thus the latter was released from all liability. SICI also
prayed for the award of P59,750.00 as attorney’s fees, and P5,000.00 as litigation expenses.

"On August 16, 1991, the lower court issued an order dismissing the complaint of [respondent] against x x x
JDS and SICI, on the ground that the claim against JDS did not survive the death of its sole proprietor, Jose D.
Santos, Jr. The dispositive portion of the [O]rder reads as follows:

‘ACCORDINGLY, the complaint against the defendants Jose D. Santos, Jr., doing business under trade and
style, ‘JDS Construction’ and Stronghold Insurance Company, Inc. is ordered DISMISSED.

‘SO ORDERED.’

"On September 4, 1991, [respondent] filed a Motion for Reconsideration seeking reconsideration of the lower
court’s August 16, 1991 order dismissing its complaint. [Petitioner] SICI field its ‘Comment and/or Opposition to
the Motion for Reconsideration.’ On October 15, 1991, the lower court issued an Order, the dispositive portion
of which reads as follows:
‘WHEREFORE, premises considered, the Motion for Reconsideration is hereby given due course. The Order
dated 16 August 1991 for the dismissal of the case against Stronghold Insurance Company, Inc., is
reconsidered and hereby reinstated (sic). However, the case against defendant Jose D. Santos, Jr. (deceased)
remains undisturbed.

‘Motion for Preliminary hearing and Manifestation with Motion filed by [Stronghold] Insurance Company Inc.,
are set for hearing on November 7, 1991 at 2:00 o’clock in the afternoon.

‘SO ORDERED.’

"On June 4, 1992, [petitioner] SICI filed its ‘Memorandum for Bondsman/Defendant SICI (Re: Effect of Death of
defendant Jose D. Santos, Jr.)’ reiterating its prayer for the dismissal of [respondent’s] complaint.

"On January 28, 1993, the lower court issued the assailed Order reconsidering its Order dated October 15,
1991, and ordered the case, insofar as SICI is concerned, dismissed. [Respondent] filed its motion for
reconsideration which was opposed by [petitioner] SICI. On April 16, 1993, the lower court denied
[respondent’s] motion for reconsideration. x x x."4

Ruling of the Court of Appeals

The CA ruled that SICI’s obligation under the surety agreement was not extinguished by the death of Jose D.
Santos, Jr. Consequently, Republic-Asahi could still go after SICI for the bond.

The appellate court also found that the lower court had erred in pronouncing that the performance of the
Contract in question had become impossible by respondent’s act of rescission. The Contract was rescinded
because of the dissatisfaction of respondent with the slow pace of work and pursuant to Article XIII of its
Contract with JDS.

The CA ruled that "[p]erformance of the [C]ontract was impossible, not because of [respondent’s] fault, but
because of the fault of JDS Construction and Jose D. Santos, Jr. for failure on their part to make satisfactory
progress on the project, which amounted to non-performance of the same. x x x [P]ursuant to the [S]urety
[C]ontract, SICI is liable for the non-performance of said [C]ontract on the part of JDS Construction."5

Hence, this Petition.6

Issue

Petitioner states the issue for the Court’s consideration in the following manner:

"Death is a defense of Santos’ heirs which Stronghold could also adopt as its defense against obligee’s
claim."7

More precisely, the issue is whether petitioner’s liability under the performance bond was automatically
extinguished by the death of Santos, the principal.

The Court’s Ruling

The Petition has no merit.

Sole Issue:

Effect of Death on the Surety’s Liability

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. 8 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.9 Only obligations that are personal10 or are identified with the persons
themselves are extinguished by death.11

Section 5 of Rule 8612 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. 13 What
is extinguished is only the obligee’s action or suit filed before the court, which is not then acting as a probate
court.14

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.15 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 monetary obligation under its
performance bond.

The liability of petitioner is contractual in nature, because it executed a performance bond worded as follows:

"KNOW ALL MEN BY THESE PRESENTS:

"That we, JDS CONSTRUCTION of 208-A San Buena Building, contractor, of Shaw Blvd., Pasig, MM
Philippines, as principal and the STRONGHOLD INSURANCE COMPANY, INC. a corporation duly organized
and existing under and by virtue of the laws of the Philippines with head office at Makati, as Surety, are held
and firmly bound unto the REPUBLIC ASAHI GLASS CORPORATION and to any individual, firm, partnership,
corporation or association supplying the principal with labor or materials in the penal sum of SEVEN
HUNDRED NINETY FIVE THOUSAND (P795,000.00), Philippine Currency, for the payment of which sum, well
and truly to be made, we bind ourselves, our heirs, executors, administrators, successors and assigns, jointly
and severally, firmly by these presents.

"The CONDITIONS OF THIS OBLIGATION are as follows;

"WHEREAS the above bounden principal on the ___ day of __________, 19__ entered into a contract with the
REPUBLIC ASAHI GLASS CORPORATION represented by _________________, to fully and faithfully.
Comply with the site preparation works road and drainage system of Philippine Float Plant at Pinagbuhatan,
Pasig, Metro Manila.

"WHEREAS, the liability of the Surety Company under this bond shall in no case exceed the sum of PESOS
SEVEN HUNDRED NINETY FIVE THOUSAND (P795,000.00) Philippine Currency, inclusive of interest,
attorney’s fee, and other damages, and shall not be liable for any advances of the obligee to the principal.

"WHEREAS, said contract requires the said principal to give a good and sufficient bond in the above-stated
sum to secure the full and faithfull performance on its part of said contract, and the satisfaction of obligations
for materials used and labor employed upon the work;

"NOW THEREFORE, if the principal shall perform well and truly and fulfill all the undertakings, covenants,
terms, conditions, and agreements of said contract during the original term of said contract and any extension
thereof that may be granted by the obligee, with notice to the surety and during the life of any guaranty
required under the contract, and shall also perform well and truly and fulfill all the undertakings, covenants,
terms, conditions, and agreements of any and all duly authorized modifications of said contract that may
hereinafter be made, without notice to the surety except when such modifications increase the contract price;
and such principal contractor or his or its sub-contractors shall promptly make payment to any individual, firm,
partnership, corporation or association supplying the principal of its sub-contractors with labor and materials in
the prosecution of the work provided for in the said contract, then, this obligation shall be null and void;
otherwise it shall remain in full force and effect. Any extension of the period of time which may be granted by
the obligee to the contractor shall be considered as given, and any modifications of said contract shall be
considered as authorized, with the express consent of the Surety.

"The right of any individual, firm, partnership, corporation or association supplying the contractor with labor or
materials for the prosecution of the work hereinbefore stated, to institute action on the penal bond, pursuant to
the provision of Act No. 3688, is hereby acknowledge and confirmed."16

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.

"If a person binds himself solidarily with the principal debtor, the provisions of Section 4,17 Chapter 3, Title I of
this Book shall be observed. In such case the contract is called a suretyship."

xxxxxxxxx

"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 Appeals18 stated thus:

"x x x. 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. x x x."19

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.

WHEREFORE, the Petition is DENIED and the Decision of the Court of Appeals AFFIRMED. Costs against
petitioner.

SO ORDERED.