2008

XV.

Eduardo was granted a loan by XYZ Bank for the purpose of improving a building
which XYZ leased from him. Eduardo, executed the promissory note ("PN") in
favor of the bank, with his friend Recardo as co-signatory. In the PN, they both
acknowledged that they are "individually and collectively" liable and waived the
need for prior demand. To secure the PN, Recardo executed a real estate
mortgage on his own property. When Eduardo defaulted on the PN, XYZ stopped
payment of rentals on the building on the ground that legal compensation had set
in. Since there was still a balance due on the PN after applying the rentals, XYZ
foreclosed the real estate mortgage over Recardo's property. Recardo opposed
the foreclosure on the ground that he is only a co-signatory; that no demand was
made upon him for payment, and assuming he is liable, his liability should not go
beyond half the balance of the loan. Further, Recardo said that when the bank
invoked compensation between the rentals and the amount of the loan, it
amounted to a new contract or novation, and had the effect of extinguishing the
security since he did not give his consent (as owner of the property under the
real estate mortgage) thereto.

a. Can XYZ Bank validly assert legal compensation? (2%)

b. Can Recardo's property be foreclosed to pay the full balance of the loan?
(2%)
c. Does Recardo have basis under the Civil Code for claiming that the original
contract was novated? (2%)

SUGGESTED ANSWER:

a. Yes, XYZ Bank can validly assert legal compensation.

Art. 1279 of the Civil Code provides that legal compensation is proper when the
following elements are present:

(1) That each one of the obligors be bound principally, and that he be at the same time
a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they
be of the same kind, and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor. (1196)
In this case, all of the aforementioned elements are present. (1) XYZ Bank is the
creditor of Eduardo while Eduardo is the lessor of XYZ Bank; (2) both debts consist in a
sum of money, or if the things due are consumable, they be of the same kind, and also
of the same quality if the latter has been stated; (3) the two debts be due; (4) they be
liquidated and demandable, and (5) over neither of them there be any retention or
controversy, commenced by third persons and communicated in due time to the debtor.

Therefore, XYZ Bank can validly assert legal compensation.

b. Yes, Recardo's property can be foreclosed to pay the full balance of the loan.

Article 1207 of the Civil Code provides that in solidary obligations, a creditor has the
right to demand full payment of the obligation from any of the solidary debtors..

Here, when he signed as co-signatory in the promissory note, he acknowledged he is

solidarily liable with Eduardo. Therefore, his property can be foreclosed to pay the full
balance of the loan.

c. No. Recardo has no basis for claiming novation of the original contract when the bank
invoked compensation.

(Art. 1290, Civil Code provides that when all elements for legal compensation under Art.
1279 is present, compensation takes effect by operation of law and extinguishes both
debts to the concurrent amount, even through the creditors and debtors are not aware
of the compensation.

Here, there was simply partial compensation when the bank invoked compensation.
This would not bar the bank from recovering the remaining balance of the obligation.

ALTERNATIVE ANSWER:

No. In order that an obligation may be extinguished by another, it is imperative that it be

so declared in unequivocal terms, or that the old and new obligations be on every point
compatible with each other. Novation is never presumed (Art. 1292, Civil Code).

XVI.

Dux leased his house to Iris for a period of 2 years, at the rate of P25,000.00
monthly, payable annually in advance. The contract stipulated that it may be
renewed for another 2-year period upon mutual agreement of the parties. The
contract also granted Iris the right of first refusal to purchase the property at any
time during the lease, if Dux decides to sell the property at the same price that the
property is offered for sale to a third party. Twenty-three months after execution
of the lease contract, Dux sold breach of her right of first refusal. Dux said there
was no breach because the property was sold to his mother who is not a third
party. Iris filed an action to rescind the sale and to compel Dux to sell the
property to her at the same price. Alternatively, she asked the court to extend the
lease for another 2 years on the same terms.

a. Can Iris seek rescission of the sale of the property to Dux's mother? (3%)
b. Will the alternative prayer for extension of the lease prosper? (2%)

SUGGESTED ANSWER:

a. Yes, because the right of first refusal is included in the contract signed by the parties.
Only if the lessee failed to exercise the right of first refusal could the lessor lawfully sell
the subject property to others, under no less than the same terms and conditions
previously offered to the lessee. Granting that the mother is not a third party, this would
make her privy to the agreement of Dux and Iris, aware of the right of first refusal. This
makes the mother a buyer in bad faith, hence giving more ground for rescission of the
sale to her (Equatorial Realty, et al. v. Mayfair Theater, G.R. No. 106063, 21 Nov.
1996).

ALTERNATIVE ANSWER: No, Iris cannot seek rescission of the sale of the property to
Dux’s mother because the sale is not one of those rescissible contracts under Art. 1381
of the Civil Code.

b. No. Art. 1308 provides that contracts are binding between the parties; validity or
compliance cannot be left to the will of one of the parties. Here, the contract stipulated
that it may be renewed for another 2-year period upon mutual agreement of the parties.

ALTERNATIVE ANSWER: It depends. The alternative prayer for the extension of the
lease may prosper if (a) there is a stipulation in the contract of sale; (b) Dux's mother is
aware of the existing contract of lease; or (c) the lease is recorded in the Registry of
Property (Art. 1676, Civil Code).

XVII.

Felipe borrowed $100 from Gustavo in 1998, when the Phil P - US$ exchange rate
was P56 - US$1. On March 1, 2008, Felipe tendered to Gustavo a cashier's check
in the amount of P4,135 in payment of his US$ 100 debt, based on the Phil P - US$
exchange rate at that time. Gustavo accepted the check, but forgot to deposit it
until Sept. 12, 2008. His bank refused to accepted the check because it had
become stale. Gustavo now wants Felipe to pay him in cash the amount of
P5,600. Claiming that the previous payment was not in legal tender, and that there
has been extraordinary deflation since 1998, and therefore, Felipe should pay him
the value of the debt at the time it was incurred. Felipe refused to pay him again,
claiming that Gustavo is estopped from raising the issue of legal tender, having
accepted the check in March, and that it was Gustavo's negligence in not
depositing the check immediately that caused the check to become stale.
 a. Can Gustavo now raise the issue that the cashier's check is not legal
tender? (2%)
b. Can Felipe validly refuse to pay Gustavo again? (2%)
c. Can Felipe compel Gustavo to receive US$100 instead? (1%)

SUGGESTED ANSWER:

a. No. Gustavo previously accepted a check as payment. It was his fault why the check
became stale. He is now estopped from raising the issue that a cashier's check is not
legal tender.

b. Yes, Felipe can refuse to pay Gustavo, who allowed the check to become stale.
Although a check is not legal tender, there are instances when a check produces the
effects of payment, for example: (a) when the creditor is in estoppel or he had
previously promised he would accept a check; (b) when the check has lost its value
because of the fault of the creditor as when he was unreasonably delayed in presenting
the check for payment (PNB v. Seeto, G.R. No, L-4388, 13 August 1952).

c. Felipe cannot compel Gustavo to receive US$100 because under RA 529, payment
of loans should be at Philippine currency at the rate of exchange prevailing at the time
of the stipulated date of payment. Felipe could only compel Gustavo to receive US$ 100
if they stipulated that obligation be paid in foreign currency (R.A. 4100).

XVIII.

AB Corp. entered into a contract with XY Corp. whereby the former agreed to
construct the research and laboratory facilities of the latter. Under the terms of
the contract, AB Corp. agreed to complete the facility in 18 months, at the total
contract price of P10 million. XY Corp. paid 50% of the total contract price, the
balance to be paid upon completion of the work. The work stated immediately,
but AB Corp. later experienced work slippage because of labor unrest in his
company. AB Corp.'s employees claimed that they are not being paid on time;
hence, the work slowdown. As of the 17th month, work was only 45% completed.
AB Corp. asked for extension of time, claiming that its labor problems is a case of
fortuitous event, but this was denied by XY Corp. When it became certain that the
construction could not be finished on time, XY Corp. sent written notice
cancelling the contract, and requiring AB Corp. to immediately vacate the
premises.

a. Can the labor unrest be considered a fortuitous event? (1%)

b. Can XY Corp. unilaterally and immediately cancel the contract? (2%)
c. Must AB Corp. return the 50% downpayment? (2%)
SUGGESTED ANSWER:

a. No. The labor unrest cannot be considered a fortuitous event under Art. 1174 of the
Civil Code. A fortuitous event should occur independent of the will of the debtor or
without his participation or aggravation. As mentioned in the facts, labor unrest of the
employees was caused by AB Corp.'s failure to pay its employees on time.

b. No, XY Corp. cannot unilaterally and immediately cancel the contract. Art. 1191 of the
Civil Code provides that in the absence of any stipulation for automatic rescission,
rescission must be judicial.

c. AB Corp. need not return the 50% down payment because 45% of the work was
already completed, otherwise, XY Corp. would be unjustly enriching itself at the
expense of AB Corp.