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    ANNA MARIE MENDOZA
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    This document summarizes two court cases related to divisible obligations: 1) Dimayuga v. PCIB - The court ruled that when an obligation is solidary (joint and several), the creditor can collect the full amount from any of the solidary debtors. The death of one debtor does not dismiss the claim against the surviving debtor. 2) Esparwa Security v. Liceo de Cagayan - The court ruled that both a contractor and principal are solidarily liable for wage violations under the labor code. This ensures workers are paid even if the contractor is unable to pay. The workers can collect from either party. As between the solidary debtors, the principal is ultimately liable when the

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    This document summarizes two court cases related to divisible obligations: 1) Dimayuga v. PCIB - The court ruled that when an obligation is solidary (joint and several), the creditor can collect the full amount from any of the solidary debtors. The death of one debtor does not dismiss the claim against the surviving debtor. 2) Esparwa Security v. Liceo de Cagayan - The court ruled that both a contractor and principal are solidarily liable for wage violations under the labor code. This ensures workers are paid even if the contractor is unable to pay. The workers can collect from either party. As between the solidary debtors, the principal is ultimately liable when the

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
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    141 views40 pages

    Case Digest Oblicon Part 4

    Uploaded by

    ANNA MARIE MENDOZA
    This document summarizes two court cases related to divisible obligations: 1) Dimayuga v. PCIB - The court ruled that when an obligation is solidary (joint and several), the creditor can collect the full amount from any of the solidary debtors. The death of one debtor does not dismiss the claim against the surviving debtor. 2) Esparwa Security v. Liceo de Cagayan - The court ruled that both a contractor and principal are solidarily liable for wage violations under the labor code. This ensures workers are paid even if the contractor is unable to pay. The workers can collect from either party. As between the solidary debtors, the principal is ultimately liable when the

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    © All Rights Reserved
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    of 40

    Passive Solidarity or Mutual Guaranty: Effects (A.

    1217-1222)
    Dimayuga v. PCIB, G.R. No. L-42542, 5 August 1991
    FACTS:
    On February 6, 1962, petitioner borrowed from the plaintiff-respondent, the sum of ten thousand (P10,000.00) pesos as evidenced by a
    promissory note executed and signed by Pedro Tanjuatco and Carlos Dimayuga. The indebtedness was to be paid on May 7, 1962 with
    interest at the rate of ten percent (10%) per annum in case of non-payment at maturity as evidenced by and in accordance with the terms
    and conditions of the promissory note executed jointly and severally by defendants.
    In the aforementioned promissory note, Carlos Dimayuga bound himself to pay jointly and severally with Pedro Tanjuatco interest at the
    rate of 10% per annum on the said amount of P10,000.00 until fully paid. Moreover, both undertook to "jointly and severally authorize the
    respondent Philippine Commercial and Industrial Bank, at its option to apply to the payment of this note any and all funds, securities or
    other real or personal property of value which hands (sic) on deposit or otherwise belonging to anyone or all of us. Upon the default of the
    promissors to pay, a complaint was filed on July 11, 1969 by the PCIB for some of money.
    Defendant Carlos Dimayuga, however, had remitted to the plaintiff -respondent the amount totalling P4,000.00 by way of partial payments
    made from August 1, 1969 to May 7, 1970 as evidenced by corresponding receipts thereto. These payments were nevertheless applied to
    past interests, charges and partly on the principal. On May 28, 1974, the trial court rendered a decision holding defendants jointly and
    severally liable to pay the plaintiff the sum of P9,139.60 with interest at 10% per annum until fully paid plus P913.96 as attorneys' fees.
    On July 11, 1974, petitioner filed a motion alleging that since Pedro Tanjuatco died on December 23, 1973, the money claim of the
    respondents should be dismissed and prosecuted against the estate of the late Pedro Tanjuatco. On June 22, 1974, the trial court denied the
    motion for lack of merit.Not satisfied, the petitioner appealed to the respondent court. The Court of Appeals dismissed the appeal. Hence,
    this petition.

    ISSUE:
    Whether the position of the petitioner that Pedro Tanjuatco having died on December 23, 1973, the money claim of PCIB should be
    dismissed and prosecuted against the estate of the late Tanjuatco.

    RULING:
    From the evidence presented, there can be no dispute that Carlos Dimayuga bound himself jointly and severally with Pedro C. Tanjuatco,
    now deceased, to pay the obligation with PCIB in the amount of P10,000.00 plus 10% interest per annum. In addition, as above stated, in
    case of non-payment, they undertook among others to jointly and severally authorize respondent bank, at its option to apply to the payment
    of this note, any and all funds, securities, real or personal properties, etc. belonging to anyone or all of them. Otherwise stated, the
    promissory note in question provides in unmistakable language that the obligation of petitioner Dimayuga is joint and several with Pedro C.
    Tanjuatco.
    It is well settled under the law and jurisprudence that when the obligation is solidary, the creditor may bring his action in toto against the
    debtors obligated in solidum. As expressly allowed by Article 1216 of the Civil Code, the creditor may proceed against any one of the solidary
    debtors or some or all of them simultaneously. "Hence, there is nothing improper in the creditor's filing of an action against the surviving
    solidary debtors alone, instead of instituting a proceeding for the settlement of the estate of the deceased debtor wherein his claim could be
    filed." The notice is undoubtedly left to the solidary creditor to determine against whom he will enforce collection. Thus, the appeal
    interposed by petitioner-appellant is dismissed for lack of merit and the decision of the Court of First Instance is Affirmed in toto.

    Esparwa Security v. Liceo de Cagayan, G.R. NO. 150402 : November 28, 2006
    Facts :
    On 1 December 1997, Eparwa and LDCU, entered into a Contract for Security Services. On 21 December 1998, 11 security guards (“security
    guards”) whom Eparwa assigned to LDCU from 1 December 1997 to 30 November 1998, filed a complaint before the NLRC Regional
    Arbitration Branch No. 10 in Cagayan de Oro City. The complaint was filed against both Eparwa and LDCU for underpayment of salary, legal
    holiday pay, 13th month pay, rest day, service incentive leave, night shift differential, overtime pay, and payment for attorney’s fees. The
    Labor Arbiter found that the security guards are entitled to wage differentials and premium for holiday and rest day work. The Labor Arbiter
    held Eparwa and LDCU solidarily liable pursuant to Article 109 of the Labor Code. LDCU filed an appeal before the NLRC. LDCU agreed with
    the Labor Arbiter’s decision on the security guards’ entitlement to salary differential but challenged the propriety of the amount of the
    award. LDCU alleged that security guards not similarly situated were granted uniform monetary awards and that the decision did not
    include the basis of the computation of the amount of the award.

    ISSUE: Is LDCU alone ultimately liable to the security guards for the wage differentials and premium for holiday and rest day pay?

    RULING:
    Articles 106, 107 and 109 of the Labor Code read:Art. 106. Contractor or subcontractor. — Whenever an employer enters into a contract
    with another person for the performance of the former’s work, the employees of the contractor and of the latter’s subcontractor, if any, shall
    be paid in accordance with the provisions of this Code.Article 107. Indirect employer. — The provisions of the immediately preceding Article
    shall likewise apply to any person, partnership, association or corporation which, not being an employer, contracts with an independent
    contractor for the performance of any work, task, job or project. Article 109. Solidary liability. — The provisions of existing laws to the
    contrary notwithstanding, every employer or indirect employer shall be held responsible with his contractor or subcontractor for any
    violation of any provision of this Code. For purposes of determining the extent of their civil liability under this Chapter, they shall be
    considered as direct employers.
    This joint and several liability of the contractor and the principal is mandated by the Labor Code to assure compliance of the provisions
    therein including the statutory minimum wage [Article 99, Labor Code]. The contractor is made liable by virtue of his status as direct
    employer. The principal, on the other hand, is made the indirect employer of the contractor’s employees for purposes of paying the
    employees their wages should the contractor be unable to pay them. This joint and several liability facilitates, if not guarantees, payment of
    the workers’ performance of any work, task, job or project, thus giving the workers ample protection as mandated by the 1987 Constitution.
    For the security guards, the actual source of the payment of their wage differentials and premium for holiday and rest day work does not
    matter as long as they are paid. This is the import of Eparwa and LDCU’s solidary liability. Creditors, such as the security guards, may collect
    from anyone of the solidary debtors. Solidary liability does not mean that, as between themselves, two solidary debtors are liable for only
    half of the payment. LDCU’s ultimate liability comes into play because of the expiration of the Contract for Security Services. There is no
    privity of contract between the security guards and LDCU, but LDCU’s liability to the security guards remains because of Articles 106, 107
    and 109 of the Labor Code.

    H. Divisible Obligations
    1. Nature (A. 1223)
    2. Kinds of Division: Qualitative, Quantitative and Ideal / Intellectual
    3. Kinds of Divisible Obligations (A. 1225, par. 3-4)

    Sps. Lam v. Kodak, Phil. G.R. No. 167615, January 11, 2016
    FACTS:
    The Lam Spouses and Kodak Philippines, Ltd. entered into an agreement (Letter Agreement) for the sale of three (3) units of the Kodak
    Minilab System 22XL (Minilab Equipment). Kodak Philippines, Ltd. delivered one (1) unit of the Minilab Equipment in Tagum, Davao
    Province. The Lam Spouses issued postdated checks amounting to P35,000.00 each for 12 months as payment for the first delivered unit.
    The Lam Spouses requested that Kodak Philippines, Ltd. not negotiate the check dated March 31, 1992 allegedly due to insufficiency of
    funds. The same request was made for the check due on April 30, 1992. However, both checks were negotiated by Kodak Philippines, Ltd.
    and were honored by the depository bank. The 10 other checks were subsequently dishonored after the Lam Spouses ordered the
    depository bank to stop payment. Kodak Philippines, Ltd. canceled the sale and demanded that the Lam Spouses return the unit it delivered
    together with its accessories. The Lam Spouses ignored the demand but also rescinded the contract through the letter dated November 18,
    1992 on account of Kodak Philippines, Ltd.'s failure to deliver the two (2) remaining Minilab Equipment units. A Complaint for replevin
    and/or recovery of sum of money was filed by Kodak in the RTC which ruled in their favor. The Lam Spouses then filed before the Court of
    Appeals a Petition to Set Aside the Orders issued by the trial court and the Orders were subsequently set aside by the Court of Appeals and
    the case was remanded to the RTC. The Trial Court found that Kodak Philippines, Ltd. defaulted in the performance of its obligation under its
    Letter Agreement with the Lam Spouses for its failure to deliver two (2) out of the three (3) units of the Minilab Equipment. Nevertheless,
    the trial court also ruled that when the Lam Spouses accepted delivery of the first unit, they became liable for the fair value of the goods
    received. The Lam Spouses were under obligation to pay for the amount of one unit, and the failure to deliver the remaining units did not
    give them the right to suspend payment for the unit already delivered. However, the trial court held that since Kodak Philippines, Ltd. had
    elected to cancel the sale and retrieve the delivered unit, it could no longer seek payment for any deterioration that the unit may have
    suffered while under the custody of the Lam Spouses. Petitioners argue that the Letter Agreement it executed with respondent for three (3)
    Minilab Equipment units was not severable, divisible, and susceptible of partial performance. Respondent's recovery of the delivered unit
    was unjustified. With the obligation being indivisible, petitioners argue that respondent's failure to comply with its obligation to deliver the
    two (2) remaining Minilab Equipment units amounted to a breach. Petitioners claim that the breach entitled them to the remedy of
    rescission and damages under Article 1191 of the New Civil Code. Respondent argues that the parties' Letter Agreement contained divisible
    obligations susceptible of partial performance as defined by Article 1225 of the New Civil Code. In respondent's view, it was the intention of
    the parties to be bound separately for each individually priced Minilab Equipment unit to be delivered to different outlets. With the contract
    being severable in character, respondent argues that it performed its obligation when it delivered one unit of the Minilab Equipment. Since
    each unit could perform on its own, there was no need to await the delivery of the other units to complete its job.

    ISSUE:
    Whether the contract between petitioners and respondent pertained to obligations that are severable, divisible, and susceptible of partial
    performance.

    RULING:
    The Letter Agreement contained an indivisible obligation. Both parties rely on the Letter Agreement as basis of their respective obligations.
    Written by respondent's Jeffrey T. Go and Antonio V. Mines and addressed to petitioner Alexander Lam, the Letter Agreement contemplated
    a "package deal" involving three (3) units of the Kodak Minilab System 22XL. The intention of the parties is for there to be a single
    transaction covering all three (3) units of the Minilab

    I. Indivisible Obligations
    1. Nature (A. 1223)
    2. Kinds of Indivisibility: Natural, Legal or Conventional ( A. 1225)
    Nazareno v. Court of Appeals, G.R. No. 138842, October 18, 2000
    FACTS
    During their marriage, Maximino Nazarano, Sr. and Aurea Poblete acquired properties in Quezon City. After their death, Romeo, one of their
    children, filed an intestate case in the Court of First Instance of Cavite. He was thereafter appointed as the administrator. In the course of the
    intestate proceedings, Romeo discovered that his parents executed several deeds of sale in January 1970 conveying a number of real
    properties to his sister, Natividad. One of the properties involved six lots in Quezon City. By virtue of the said deed, transfer certificates of
    title were issued to Natividad. Among the lots covered was Lot 3-B which was occupied by Romeo and his wife, and by his brother,
    Maximino, Jr.

    Unknown to Romeo, Natividad sold Lot 3-B to Maximino, Jr. When he found out of the sale, Romeo and his wife locked Maximino, Jr. of of the
    house. As such, Maximino, Jr. filed an action for recovery of possession and damages. The trial court ruled in favor of Maximino, Jr. which the
    Court of Appeals affirmed. On Jun 1988, Romeo in turn filed for the annulment of sale against Natividad and Maximino, Jr on the ground of
    lack of consideration. Natividad and Maximino, Jr. then filed a third-party complaint seeking the annulment of the transfer to Romeo and
    cancellation of his title.

    During the trial, Romeo presented evidence to show that Maximino and Aurea never intended to sell the six lots to Natividad and Natividad
    was only to hold the said lots in trust for her siblings. He presented a Deed of Partition and Distribution dated June 1962. Further, Romeo
    testified that the deeds were created for consideration, but they never really paid any amount for the supposed sale in order to avoid
    payment of inheritance taxes. On the other hand, Natividad and Maximino, Jr. claimed that she bought the properties because she was the
    one financially able to do so.
    The trial court declared thereafter the nullity of the January 1970 Deed of Sale and ordered that the remaining properties were held in trust
    by Natividad in favor of his brother, Jose. On appeal, the Court of Appeals modified the decision in the sense that the titles of Lot 3 and Lot 3-
    B were canceled and restored to the estate of Maximino, Sr.
    Hence, the petitioner filed a case before the Supreme Court.

    ISSUE

    Whether or not the Deed of Sale is valid, thus transferring ownership to Natividad.

    RULING
    The Supreme Court ruled in the negative. The Court held that the sale was simulated since there was lack of consideration. The ownership
    therefore never transferred to Natividad. Nevertheless, the Court ruled that the intention of Maximino, Sr. and Aurea to transfer the subject
    properties to Natividad was present in order to escape payment of inheritance taxes. If at all, there was an implied trust constituted under
    Art. 1449 of the Civil Code which states that there is implied trust when a donation is made to a person but it appears that although the legal
    estate is transmitted to the donee, he nevertheless is either to have no beneficial interest or only a part thereof.

    Further, Art. 1061 provides that every compulsory heirs who succeeds with other compulsory heirs must bring into the mass of the estate
    any property or right which may have received from the decedent, during the lifetime of the latter, by way or donation or gratuituous title,
    for the determination of the legitime of each hair.

    Joint Indivisible Obligations (A. 1224 and A. 1209)


    1. Nature
    2. Effects:
    a. as to creditors
    b. as to debtors
    Obligations with a Penal Clause (A. 1226-1230) 1. Meaning and Definition
    2. Penalty Clause, defined (A. 1226)
    3. Purposes

    J Plus Asia Development Corp. v. Utility Assurance Corp., G.R. No. 199650, June 26, 2013
    J"Plus"Development"Asia"Corporation"v."Utility"Assurance"
    Corporation,"G.R."No."199650,"June"26,"2013"
    "
    Facts:"
    Petitioner(J(Plus(Asia(Development(Corporation(and(Seven(Shades(of(
    Blue(Trading(and(Services,(entered(into(a(Construction(Agreement, (whereby(
    the(latter(undertook(to(build(the(former's(72-room(condominium/hotel(
    (Condotel(Building(25).(The(project(was(to(be(completed(within(one(year(
    reckoned(from(the(first(calendar(day(after(signing(of(the(Notice(of(Award(
    and(Notice(to(Proceed(and(receipt(of(down(payment.(The(down(payment(
    was(fully(paid.(Payment(of(the(balance(of(the(contract(price(will(be(based(on(
    actual(work(finished(within(15(days(from(receipt(of(the(monthly(progress(
    billings.(Mabuhay(also(submitted(the(required(Performance(Bond(in(the(
    amount(equivalent(to(20%(down(payment.(Mabunay(commenced(work(at(
    the(project(site.((
    Thereafter,(petitioner(terminated(the(contract(for(the(reason(that(
    respondent(incurred(in(delay(and(sent(demand(letters(to(Mabunay(and(
    respondent(surety.(As(its(demands(went(unheeded,(petitioner(filed(a(
    Request(for(Arbitration(before(the(Construction(Industry(Arbitration(
    Commission((CIAC).((
    Respondent(filed(a(motion(to(dismiss(on(the(ground(that(petitioner(
    has(no(cause(of(action(and(the(complaint(states(no(cause(of(action(against(it.(
    The(CIAC(denied(the(motion(to(dismiss.(Respondent’s(motion(for(
    reconsideration(was(likewise(denied.((
    Issue:"" whether(or(not(CIAC(arbitral(award(need(not(be(confirmed(by(the(
    regional(trial(court(to(be(executory.(
    (
    Held:(( ( (
    A(CIAC(arbitral(award(need(not(be(confirmed(by(the(regional(trial(
    court(to(be(executory(as(provided(under(E.O.(No.(1008.((
    Executive(Order((EO)(No.(1008(vests(upon(the(CIAC(original(and(
    exclusive(jurisdiction(over(disputes(arising(from,(or(connected(with,(
    contracts(entered(into(by(parties(involved(in(construction(in(the(Philippines,(
    whether(the(dispute(arises(before(or(after(the(completion(of(the(contr act,(or(
    after(the(abandonment(or(breach(thereof.(By(express(provision(of(Section(
    19(thereof,(the(arbitral(award(of(the(CIAC(is(final(and(unappealable,(except(
    on(questions(of(law,(which(are(appealable(to(the(Supreme(Court.(With(the(
    amendments(introduced(by(R.A.(No.(7902(and(promulgation(of(the(1997(
    Rules(of(Civil(Procedure,(as(amended,(the(CIAC(was(included(in(the(
    enumeration(of(quasijudicial(agencies(whose(decisions(or(awards(may(be(
    appealed(to(the(CA(in(a(petition(for(review(under(Rule(43.(Such(review(of(
    the(CIAC(award(may(involve(either(questions(of(fact,(of(law,(or(of(fact(and(
    law.(

    J"Plus"Development"Asia"Corporation"v."Utility"Assurance"
    Corporation,"G.R."No."199650,"June"26,"2013"
    "
    Facts:"
    Petitioner(J(Plus(Asia(Development(Corporation(and(Seven(Shades(of(
    Blue(Trading(and(Services,(entered(into(a(Construction(Agreement, (whereby(
    the(latter(undertook(to(build(the(former's(72-room(condominium/hotel(
    (Condotel(Building(25).(The(project(was(to(be(completed(within(one(year(
    reckoned(from(the(first(calendar(day(after(signing(of(the(Notice(of(Award(
    and(Notice(to(Proceed(and(receipt(of(down(payment.(The(down(payment(
    was(fully(paid.(Payment(of(the(balance(of(the(contract(price(will(be(based(on(
    actual(work(finished(within(15(days(from(receipt(of(the(monthly(progress(
    billings.(Mabuhay(also(submitted(the(required(Performance(Bond(in(the(
    amount(equivalent(to(20%(down(payment.(Mabunay(commenced(work(at(
    the(project(site.((
    Thereafter,(petitioner(terminated(the(contract(for(the(reason(that(
    respondent(incurred(in(delay(and(sent(demand(letters(to(Mabunay(and(
    respondent(surety.(As(its(demands(went(unheeded,(petitioner(filed(a(
    Request(for(Arbitration(before(the(Construction(Industry(Arbitration(
    Commission((CIAC).((
    Respondent(filed(a(motion(to(dismiss(on(the(ground(that(petitioner(
    has(no(cause(of(action(and(the(complaint(states(no(cause(of(action(against(it.(
    The(CIAC(denied(the(motion(to(dismiss.(Respondent’s(motion(for(
    reconsideration(was(likewise(denied.((
    Issue:"" whether(or(not(CIAC(arbitral(award(need(not(be(confirmed(by(the(
    regional(trial(court(to(be(executory.(
    (
    Held:(( ( (
    A(CIAC(arbitral(award(need(not(be(confirmed(by(the(regional(trial(
    court(to(be(executory(as(provided(under(E.O.(No.(1008.((
    Executive(Order((EO)(No.(1008(vests(upon(the(CIAC(original(and(
    exclusive(jurisdiction(over(disputes(arising(from,(or(connected(with,(
    contracts(entered(into(by(parties(involved(in(construction(in(the(Philippines,(
    whether(the(dispute(arises(before(or(after(the(completion(of(the(contr act,(or(
    after(the(abandonment(or(breach(thereof.(By(express(provision(of(Section(
    19(thereof,(the(arbitral(award(of(the(CIAC(is(final(and(unappealable,(except(
    on(questions(of(law,(which(are(appealable(to(the(Supreme(Court.(With(the(
    amendments(introduced(by(R.A.(No.(7902(and(promulgation(of(the(1997(
    Rules(of(Civil(Procedure,(as(amended,(the(CIAC(was(included(in(the(
    enumeration(of(quasijudicial(agencies(whose(decisions(or(awards(may(be(
    appealed(to(the(CA(in(a(petition(for(review(under(Rule(43.(Such(review(of(
    the(CIAC(award(may(involve(either(questions(of(fact,(of(law,(or(of(fact(and(
    law.(
    TOPIC: Default or mora, INTERPRETATION of Contracts, PENAL CLAUSE/ LIQUIDATED DAMAGES FACTS: J Plus Asia, represented by its
    chairman Joo Han lee, and Martin Mabunay, entered into a CONSTRUCTION AGREEMENT whereby Mabunay undertook to build the former’s
    Condominium/hotel in Boracay. The project was to be completed within 1 yr from the siigning of the NOTICE OF AWARD and receipt of 20%
    down payment (8.4 milllion) The down payment was fully paid on January 14, 2008. Per the agreed work schedule, the completion date of
    the project was December 31, 2008. Mabunay also submitted the required Performance Bond issued by Utility Assurance Corporation
    (UTASSCO) in the amount equivalent to 20% down payment or P8.4 million. Mabunay commenced work on January 7, 2008. However, as
    evidenced by the Joint Construction Evaluation Result and Status, signed by both parties, the project was only 31.39 % complete as of
    November 14, 2008. Thus, J PLUS ASIA terminated the contract and sent demand letters to Mabunay and the surety. J Plus Asia filed a
    request for arbitration before the Construction Industry Arbitration Commission (CIAC) and prayed that MAbunay and Surety be ordered to
    pay 8.9 Million as liquidated damages and 2.3 Million to the unrecouped down payment or overpayment made to Mabunay. Mabunay’s
    answer alleged that the delay was caused by retrofitting and other revision works ordered by Joo Han Lee. The surety on the other hand filed
    a MTD for lack of cause of action. The surety argued that the performance bond merely guaranteed the 20% down payment and not the
    entire obligation of Mabunay. THE CIAC ruled in favor of JPLUS ASIA. THE CA ruled that Mabunay has not yet incurred delay and that
    obligation was not yet demandable because the contract was terminated prior to completion date.

    ISSUES:
    W/n the Mabunay had incurred delay? (YES)
    w/n the delay should be reckoned only after the lapse of the 1 year contract period, and consequently
    w/n Mabunay’s liability for liquidated damages arises only upon the happening of such condition (DELAY MUST BE RECKONED FROM
    FILING OF COMPLAINT)

    HELD: Mabunay already incurred delay at the time the contract was terminated. Default or mora on the part of the debtor is the delay in the
    fulfillment of the prestation by reason of a cause imputable to the former. It is the nonfulfillment of an obligation with respect to time. Article
    1169 of the Civil Code provides that those obliged to deliver or to do something incur in delay from the time the obligee judicially or
    extrajudicially demands from them the fulfillment of their obligation. One who contracts to complete certain work within a certain time is
    liable for the damage for not completing it within such time, unless the delay is excused or waived. The following requisites must be present
    in order that the debtor may be in
    default: (1) that the obligation be demandable and already liquidated; (2) that the debtor delays performance; and (3) that the creditor
    requires the performance judicially or extrajudicially. Mabunay was already in delay. Article 1374 of the Civil Code requires that the various
    stipulations of a contract shall be interpreted together, attributing to the doubtful ones that sense which may result from all of them taken
    jointly. Here, the work schedule approved by petitioner was intended, not only to serve as its basis for the payment of monthly progress
    billings, but also for evaluation of the progress of work by the contractor. The Construction Agreement provided that the contractor shall be
    deemed in default, if among others, it had delayed without justifiable cause the completion of the project by more than 30 calendar days
    based on official work schedule duly approved by the owner. The Construction Agreement authorizes petitioner to confiscate the
    Performance Bond to answer for all kinds of damages it may suffer as a result of the contractor’s failure to complete the building. Having
    terminated the contract, petitioner is entitled to the proceeds of the bond as indemnification for damages it sustained due to the breach
    committed by Mabunay. Such stipulation allowing the confiscation of the contractor’s performance bond partakes of the nature of a penalty
    clause, which is an accessory undertaking to assume greater liability on the part of the obligor in case of breach of an obligation. The
    Performance Bond guaranteed not only the 20% down payment but the full and faithful compliance of Mabunay’s obligations under the
    Construction Agreement. Nowhere in law or jurisprudence does it state that the obligation or undertaking by a surety may be apportioned.
    The imposition of interest on the claims of petitioner is in order. If a surety upon demand fails to pay, he can be held liable for interest, even
    if in thus paying, its liability becomes more than the principal obligation. The increased liability is not because of the contract but because of
    the default and the necessity of judicial collection.
    Secretary of the Department of Public Works and Highways v. Tecson, G.R. No. 179334, April 21, 2015
    Facts: In 1940, Department of Public Works and Highways (DPWH) took respondents-movants' subject property without the benefit of
    expropriation proceedings for the construction of the MacArthur Highway. In 1994, upon a letter submitted by the respondents, DPWH
    offered to pay P0.70 per square meter of the property, the fair market value of the property at the time of taking on 1940 Unsatisfied with
    the offer, the respondent-movantsdemanded the return of their property, or the payment of compensation at the current fair market value,
    with P1, 500 per square meter. The decision of the TC and CA were in favor of the respondent-movants for the payment of the current fair
    market value with P 1, 500 per square meter. The petitioner, on the other hand, elevated the matter to the Supreme Court in a petition for
    review on certiorari that just compensation should be based on the value of the property at the time of taking in 1940.

    Issue: Whether or not the valuation would be based on the corresponding value at the time of the taking or at the time of the filing of the
    action

    Held: Current Market Value. At the outset, it should be stressed that the matter of the validity of the State's exercise of the power of eminent
    domain has long been settled. Notwithstanding the foregoing, the court also recognize that the owner's loss is not only his property but also
    its income-generating potential. Thus, when property is taken, full and just compensation of its value must immediately be paid to achieve a
    fair exchange for the property and the potential income lost.

    The just compensation due to the landowners amounts to an effective forbearance on the part of the State-a proper subject of interest
    computed from the time the property was taken until the full amount of just compensation is paid-in order to eradicate the issue of the
    constant variability of the value of the currency over time.

    4. Kinds of Penalties
    a. Legal v. Conventional
    b. Compensatory v. Punitive
    c. Subsidiary v. Joint (A. 1226 in rel. to 1227-1228)
    5. Penalty Interest v. Moratory/Monetary Interest
    • RP v. Sps. Bonifacio, G.R. No. 226734, May 10, 2021

    • Tan v. Court of Appeals, G.R. No. 116285, October 19, 2001 (on monetary v. penalty interest)

    Facts:
    Antonio Tan obtained 2 loans each in the principal amount of Php 2 million from Cultural Center of the Philippines (CCP). Tan defaulted but
    after a few partial payments, he had restructured the loan and Tan executed a promissory note in the amount of Php 3,411,421.32 payable in
    five installments. Tan still failed to pay the installment. Tan submits proposal on the mode of paying the installments but CCP did not favor
    Tan’s proposal and instead demanded the full payment which amounted to Php 6,088,735.03.
    CCP filed a complaint for the collection of sum of money against Tan. Tan’s defense was he just accommodated a friend who asked for his
    help to obtain a loan named Wilfredo Lucmen and that he could not find his friend anymore. RTC rendered a decision to have Tan pay CCP
    the amount of Php 7,996,314.67 which represents Tan’s outstanding loan with the corresponding stipulated interest and charges. Plus 25%
    attorneys fees and Php 50,000 for exemplary damages.
    Tan appealed to Court of Appeals regarding the interest, surcharges, attorneys fees and the exemplary damages. Tan asked to reduce the
    penaltes and charges for his loan on the basis of partial performance but the Court of Appeals affirmed RTC’s decision which explained that
    there was no partial performance when Tan offered proposal on the modes of paying the installment as there was not a single cent paid to
    CCP. CA deleted the exemplary damages and reduced the attorneys fees to 5% due to the said fees are unconscionable.
    Issue:
    1.Whether there are contractual and legal bases for the imposition of penalty, interest on the penaly, and attorney’s fees. (yes there is)
    2.Whether interest may accrue on the penalty or compensatory interest without violating Article 1959 “interest due and unpaid shall not
    earn interest. However, the contracting parties may by stipulation capitalize the interest due and unpaid, which as added principal, shall
    earn new interest” (yes)
    3.Whether Tan can file reduction of penalty due to partial payments (yes but not 10% as he proposed)

    Held:
    1st issue – art 1266 is the legal basis “In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the
    payment of interests in case of non-compliance, if there is no stipulation to the contrary. Nevertheless, damages shall be paid if the obligor
    refuses to pay the penalty or is guilty of fraud in the fulfillment of the obligation”. The romissory note expressed the imposition of both
    interest and penalties in case of default on the part of the petitioner in the payment of the subject restructured loan.
    2nd issue – 5th paragraph of the promissory note held that any interest which may be due if not paid shall be added to the total amount
    when due and shall become part thereof, the whole amount to bear interest at the maximum rate allowed by law.” Therefore, any penalty
    interest not paid when due shall earn the legal interest of 12% which applies to this case
    3rd – the partial payments showed his good faith despite difficulty in complying with the obligation

    Doctrines:
    Interests and penalties may both be awarded where the promissory note expressly provides for the imposition of both in cases of default.
    Article 1226 of the New Civil Code provides that: In obligations with a penal clause, the penalty shall substitute the indemnity for damages
    and the payment of interests in case of non-compliance, if there is no stipulation to the contrary. Nevertheless, damages shall be paid if the
    obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the obligation. The penalty may be enforced only when it is
    demandable in accordance with the provisions of this Code. In the case at bar, the promissory note (Exhibit “A”) expressly provides for the
    imposition of both interest and penalties in case of default on the part of the petitioner in the payment of the subject restructured loan.

    The compounding of the penalty or compensatory interest is sanctioned by and allowed pursuant to Article 1959 of the New Civil Code.
    Penalty clauses can be in the form of penalty or compensatory interest. Thus, the compounding of the penalty or compensatory interest is
    sanctioned by and allowed pursuant to the above-quoted provision of Article 1959 of the New Civil Code.
    6. Penalties v. Liquidated Damages
    7. Escalation Clause v. Acceleration Clause in Loans
    Gotesco v. International Exchange Bank, G.R. No. 212262, August 26, 2020

    Gotesco Properties, Inc. (Gotesco), as borrower, and International Exchange Bank (IBank), as lender, executed a Credit Agreement executing
    a real estate mortgage as security. Unable to pay, IBank foreclosed the mortgage and eventually bought the property.

    Gotesco filed a complaint for annulment of foreclosure sale and damages with the RTC. Then, Gotesco and IBank executed a Compromise
    Agreement where Gotesco’s loan was restructured. The RTC issued a judgment approving the agreement.

    IBank filed a Motion for Execution claiming that Gotesco failed to comply with the terms of the Compromise Agreement when it did not pay
    the restructured amount which the RTC denied and found the action premature as the 10-year term loan in the Compromise Agreement,
    which started on March 31, 2003, would end in 2013. IBank filed a Motion for Reconsideration, which was granted.

    The RTC found that the Compromise Agreement provided for the entire loan to be demandable should Gotesco default in the payment of its
    quarterly amortizations. Hence, Gotesco filed a petition for certiorari with the CA which was denied.

    Hence, petitioner claimed that its loan obligation under the Compromise Agreement was demandable only in 2013, upon the expiry of the
    10-year term loan period. Petitioner averred that the immediate execution of the Compromise Agreement would be unjust and inequitable

    Issue:

    Whether or not respondent bank has the right to cause the immediate execution of the Judgment on the Compromise Agreement upon
    petitioner’s failure to pay its quarterly amortizations.

    Ruling:

    Yes. Under the terms of the Compromise Agreement, should petitioner fail to pay any amount when due, Section 1.7 of the Compromise
    Agreement allowed respondent to declare the entire obligation due and demandable. Furthermore, pursuant to Section 4.03 of the
    Compromise Agreement, respondent was given the right to move for the immediate execution of the total amount due.
    An examination of Sections 1.7 and 4.03 of the Compromise Agreement shows that they are in the nature of acceleration clauses. An
    acceleration clause is a provision in a contract wherein, should the debtor default, the entire obligation shall become due and demandable.
    This Court has held that acceleration clauses are valid and produce legal effect.

    Petitioner’s claim that the loan only becomes due and demandable after 10 years is wrong. Even when there is a fixed term for the loan, the
    creditor may invoke the contract’s acceleration clause should the debtor fail to comply with their obligation to pay the stipulated
    installments.

    Acceleration clauses in loans for a fixed term give creditors a choice to: (1) defer collection of any unpaid amounts until the period ends; or
    (2) invoke the clause and collect the entire demandable amount immediately. This right to choose is meaningless if the obligation is made
    demandable only when the term expires.

    In this case, it is undisputed that petitioner had defaulted payment on its quarterly amortizations, with its last payment being made on June
    2, 2006. Petitioner has neither pleaded nor produced any evidence to the contrary. Because of petitioner’s nonpayment, respondent invoked
    the acceleration clauses in the Compromise Agreement to declare petitioner’s entire loan due and demandable, then exercised its right
    pursuant to Section 4.03 to move for the immediate execution of the Compromise Agreement. Thus, the Regional Trial Court correctly
    reversed its earlier ruling and granted respondent’s Motion for Execution.

    Security Bank v. Sps. Roadrigo, G.R. No. 192934, June 27, 2018
    Failure to advertise a mortgage foreclosure sale in compliance with statutory requirements constitutes a jurisdictional defect which
    invalidates the sale. This jurisdictional requirement may not be waived by the parties; to allow them to do so would convert the required
    public sale into a private sale. Thus, the statutory provisions governing publication of notice of mortgage foreclosure sale must be strictly
    complied with and that even slight deviations therefrom will invalidate the notice and render the sale at least voidable.
    In this case, the errors in the notice consist of: (1) TCT No. T-33150- "Lot 952-C-1" which should be "Lot 952-C-1-B;" (2) TCT No. T-89822
    "Lot 1931, Cadm- 164-D" which should be "Lot 1931 Cadm 464- D;''64 and (3) the omission of the location. While the errors seem
    inconsequential, they in fact constitute data important to prospective bidders when they decide whether to acquire any of the lots
    announced to be auctioned. First, the published notice misidentified the identity of the properties. Since the lot numbers are misstated, the
    notice effectively identified lots other than the ones sought to be sold. Second, the published notice omitted the exact locations of the
    properties. As a result, prospective buyers are left completely unaware of the type of neighborhood and conforming areas they may consider
    buying into. With the properties misidentified and their locations omitted, the properties' sizes and ultimately, the determination of their
    probable market prices, are consequently compromised. The errors are of such nature that they will significantly affect the public's decision
    on whether to participate in the public auction. We find that the errors can deter or mislead bidders, depreciate the value of the properties
    or prevent the process from fetching a fair price.
    FACTS:
    On September 13, 1996, Security Bank granted spouses Mercado a revolving credit line in the amount of P1,000,000.00. To secure the credit
    line, the spouses Mercado executed a Real Estate Mortgage in favor of Security Bank over their properties covered by Transfer Certificate of
    Title (TCT) No. T-103519 (located in Lipa City, Batangas), and TCT No. T-89822 (located in San Jose, Batangas). The spouses Mercado
    executed another Real Estate Mortgage in favor of Security Bank this time over their properties located in Batangas City, Batangas covered
    by TCT Nos. T-33150, T- 34288, and T-34289 to secure an additional amount of P7,000,000.00 under the same revolving credit agreement.
    Subsequently, the spouses Mercado defaulted in their payment under the revolving credit line agreement. Security Bank requested the
    spouses Mercado to update their account, and sent a final demand letter on March 31, 1999.12 Thereafter, it filed a petition for extrajudicial
    foreclosure pursuant to Act No. 3135,13 as amended, with respect to the parcel of land situated in Lipa City. Security Bank likewise filed a
    similar petition with the Office of the Clerk of Court and Ex-Officio Sheriff of the RTC of Batangas City with respect to the parcels of land
    located in San Jose, Batangas and Batangas City.
    The respective notices of the foreclosure sales of the properties were published in newspapers of general circulation once a week for three
    consecutive weeks as required by Act No. 3135, as amended. However, the publication of the notices of the foreclosure of the properties in
    Batangas City and San Jose, Batangas contained errors with respect to their technical description. Security Bank caused the publication of an
    erratum in a newspaper to correct these errors. The corrections consist of the following: (1) TCT No. 33150 􏰀 "Lot 952-C-1" to "Lot 952-C-1-
    B;" and (2) TCT No. 89822 􏰀 "Lot 1931 Cadm- 164-D" to "Lot 1931 Cadm 464-D." The erratum was published only once, and did not correct
    the lack of indication of location in both cases.
    The foreclosure sale of the parcel of land in Lipa City, Batangas was held wherein Security Bank was adjudged as the winning bidder. A
    similar foreclosure sale was conducted over the parcels of land in Batangas City and San Jose, Batangas where Security Bank was likewise
    adjudged as the winning bidder. The spouses Mercado offered to redeem the foreclosed properties for P10,000,000.00. However, Security
    Bank allegedly refused the offer and made a counter-offer in the amount of P15,000,000.00.
    The spouses Mercado filed a complaint for annulment of foreclosure sale, damages, injunction, specific performance, and accounting with
    application for temporary restraining order and/or preliminary injunction with the RTC of Batangas City. In the complaint, the spouses
    Mercado averred that: (1) the parcel of land in San Jose, Batangas should not have been foreclosed together with the properties in Batangas
    City because they are covered by separate real estate mortgages; (2) the requirements of posting and publication of the notice under Act No.
    3135, as amended, were not complied with; (3) Security Bank acted arbitrarily in disallowing the redemption of the foreclosed properties for
    P10,000,000.00; (4) the total price for all of the parcels of land only amounted to P4723,620.00; and (5) the interests and the penalties
    imposed by Security Bank on their obligations were iniquitous and unconscionable.

    Meanwhile, Security Bank, after having consolidated its titles to the foreclosed parcels of land, filed an ex-parte petition for issuance of a writ
    of possession over the parcels of land located in Batangas City and San Jose, Batangas.
    RTC declared that: (1) the foreclosure sales of the five parcels of land void; (2) the interest rates contained in the revolving credit line
    agreement void for being potestative or solely based on the will of Security Bank; and (3) thesum of P8,000,000.00 as the true and correct
    obligation of the spouses Mercado to Security Bank. RTC modified its Decision in an Amendatory Order where it declared that: (1) only the
    foreclosure sales of the parcels of land in Batangas City and San Jose, Batangas are void as it has no jurisdiction over the properties in Lipa
    City, Batangas; (2) the obligation of the spouses Mercado is P7,500,000.00, after deducting P500,000.00 from the principal loan of
    P1,000,000.00; and (3) as "cost of money," the obligation shall bear the interest at the rate of 6% from the time of date of the Amendatory
    Order until fully paid. The CA, on appeal, affirmed with modifications the RTC Amended Decision.
    ISSUES:
    (1) Whether the foreclosure sales of the parcels of land in Batangas City and San Jose, Batangas
    are valid. (NO)
    (2) Whether the provisions on interest rate in the revolving credit line agreement and its addendum are void for being violative of the
    principle of mutuality of contracts. (YES)
    (3) Whether interest and penalty are due and demandable from date of auction sale until finality of the judgment declaring the foreclosure
    void under the doctrine of operative facts. (NO)
    RULING:
    (1) The foreclosure sales of the properties in Batangas City and San Jose, Batangas are void for non-
    compliance with the publication requirement of the notice of sale.
    Act No. 3135, as amended, provides for the statutory requirements for a valid extrajudicial foreclosure sale. Among the requisites is a valid
    notice of sale. Section 3, as amended, requires that when the value of the property reaches a threshold, the notice of sale must be published
    once a week for at least three consecutive weeks in a newspaper of general circulation:
    Sec. 3. Notice shall be given by posting notices of the sale for not less than twenty days in at least three public places of the municipality or
    city where the property is situated, and if such property is worth more than four hundred pesos, such notice shall also be published once a
    week for at least three consecutive weeks in a newspaper of general circulation in the municipality or city.
    Failure to advertise a mortgage foreclosure sale in compliance with statutory requirements constitutes a jurisdictional defect which
    invalidates the sale. This jurisdictional requirement may not be waived by the parties; to allow them to do so would convert the required
    public sale into a private sale. Thus, the statutory provisions governing publication of notice of mortgage foreclosure sale must be strictly
    complied with and that even slight deviations therefrom will invalidate the notice and render the sale at least voidable.
    Nevertheless, the validity of a notice of sale is not affected by immaterial errors. Only a substantial error or omission in a notice of sale will
    render the notice insufficient and vitiate the sale. An error is substantial if it will deter or mislead bidders, depreciate the value of the
    property or prevent it from bringing a fair price.
    In this case, the errors in the notice consist of: (1) TCT No. T-33150- "Lot 952-C-1" which should be "Lot 952-C-1-B;" (2) TCT No. T-89822
    "Lot 1931, Cadm- 164-D" which should be "Lot 1931 Cadm 464-D;''64 and (3) the omission of the location. While the errors seem
    inconsequential, they in fact constitute data important to prospective bidders when they decide whether to acquire any of the lots
    announced to be auctioned. First, the published notice misidentified the identity of the properties. Since the lot numbers are misstated, the
    notice effectively identified lots other than the ones sought to be sold. Second, the published notice omitted the exact locations of the
    properties. As a result, prospective buyers are left completely unaware of the type of neighborhood and conforming areas they may consider
    buying into. With the properties misidentified and their locations omitted, the properties' sizes and ultimately, the determination of their
    probable market prices, are consequently compromised. The errors are of such nature that they will significantly affect the public's decision
    on whether to participate in the public auction. We find that the errors can deter or mislead bidders, depreciate the value of the properties
    or prevent the process from fetching a fair price.
    The publication of a single erratum, however, does not cure the defect. As correctly pointed out by the RTC, "[t]he act of making only one
    corrective publication in the publication requirement, instead of three (3) corrections is a fatal omission committed by the mortgagee bank."
    To reiterate, the published notices that contain fatal errors are nullities. Thus, the erratum is considered as a new notice that is subject to the
    publication requirement for once a week for at least three consecutive weeks in a newspaper of general circulation in the municipality or
    city where the property is located. Here, however, it was published only once.
    (2) The interest rate provisions in the parties' agreement violate the principle of mutuality of contracts.
    The principle of mutuality of contracts is found in Article 1308 of the New Civil Code, which states that contracts must bind both contracting
    parties, and its validity or compliance cannot be left to the will of one of them. The binding effect of any agreement between parties to a
    contract is premised on two settled principles: (I) that any obligation arising from contract has the force of law between the parties; and (2)
    that there must be mutuality between the parties based on their essential equality. As such, any contract which appears to be heavily
    weighed in favor of one of the parties so as to lead to an unconscionable result is void. Likewise, any stipulation regarding the validity or
    compliance of the contract that is potestative or is left solely to the will of one of the parties is invalid. This holds true not only as to the
    original terms of the contract but also to its modifications. Consequently, any change in a contract must be made with the consent of the
    contracting parties, and must be mutually agreed upon. Otherwise, it has no binding effect.
    Stipulations as to the payment of interest are subject to the principle of mutuality of contracts. As a principal condition and an important
    component in contracts of loan, interest rates are only allowed if agreed upon by express stipulation of the parties, and only when reduced
    into writing.

    Here, the spouses Mercado supposedly: (1) agreed to pay an annual interest based on a "floating rate of interest;" (2) to be determined solely
    by Security Bank; (3) on the basis of Security Bank's own prevailing lending rate; (4) which shall not exceed the total monthly prevailing rate
    as computed by Security Bank; and (5) without need of additional confirmation to the interests stipulated as computed by Security Bank.
    Notably, stipulations on floating rate of interest differ from escalation clauses. Escalation clauses are stipulations which allow for the
    increase (as well as the mandatory decrease) of the original fixed interest rate. Meanwhile, floating rates of interest refer to the variable
    interest rate stated on a market-based reference rate agreed upon by the parties. The former refers to the method by which fixed rates may
    be increased, while the latter pertains to the interest rate itself that is not fixed. Nevertheless, both are contractual provisions that entail
    adjustment of interest rates subject to the principle of mutuality of contracts. Thus, while the cited cases involve escalation clauses, the
    principles they lay down on mutuality equally apply to floating interest rate clauses.
    The Banko Sentral ng Pilipinas (BSP) Manual of Regulations for Banks (MORB) allows banks and borrowers to agree on a floating rate of
    interest, provided that it must be based on market-based reference rates:
    § X305.3 Floating rates of interest. The rate of interest on a floating rate loan during each interest period shall be stated on the basis of
    Manila Reference Rates (MRRs), T-Bill Rates or other market based reference rates plus a margin as may be agreed upon by the parties.
    The MRRs for various interest periods shall be determined and announced by the Bangko Sentral every week and shall be based on the
    weighted average of the interest rates paid during the immediately preceding week by the ten (10) KBs with the highest combined levels of
    outstanding deposit substitutes and time deposits, on promissory notes issued and time deposits received by such banks, of P100,000 and
    over per transaction account, with maturities corresponding to the interest periods tor which such MRRs are being determined. Such rates
    and the composition of the sample KBs shall be reviewed and determined at the beginning of every calendar semester on the basis of the
    banks' combined levels of outstanding deposit substitutes and time deposits as of 31 May or 30 November, as the case may be.
    The rate of interest on floating rate loans existing and outstanding as of 23 December 1995 shall continue to be determined on the basis of
    the MRRs obtained in accordance with the provisions of the rules existing as of 01 January 1989: Provided, however, That the parties to such
    existing floating rate loan agreements are not precluded from amending or modifying their loan agreements by adopting a floating rate of
    interest determined on the basis of the TBR or other market based reference rates.
    Where the loan agreement provides for a floating interest rate, the interest period, which shall be such period of time for which the rate of
    interest is fixed, shall be such period as may be agreed upon by the parties.
    For the purpose of computing the MRRs, banks shall accomplish the report forms, RS Form 2D and Form 2E (BSP 5-17-34A).
    101

    This BSP requirement is consistent with the principle that the determination of interest rates cannot be left solely to the will of one party. It
    further emphasizes that the reference rate must be stated in writing, and must be agreed upon by the parties.
    The authority to change the interest rate was given to Security Bank alone as the lender, without need of the written assent of the spouses
    Mercado. This unbridled discretion given to Security Bank is evidenced by the clause "I hereby give my continuing consent without need of
    additional confirmation to the interests stipulated as computed by [Security Bank]." The lopsidedness of the imposition of interest rates is
    further highlighted by the lack of a breakdown of the interest rates imposed by Security Bank in its statement of account accompanying its
    demand letter.
    The interest rate to be imposed is determined solely by Security Bank for lack of a stated, valid reference rate. The reference rate of "Security
    Bank's prevailing lending rate" is not pegged on a market-based reference rate as required by the BSP. The stipulated interest rate based on
    "Security Bank's prevailing lending rate" is not synonymous with "prevailing market rate." For one, Security Bank is still the one who
    determines its own prevailing lending rate. More, the argument that Security Bank is guided by other facts (or external factors such as
    Singapore Rate, London Rate, Inter-Bank Rate) in determining its prevailing monthly rate fails because these reference rates are not
    contained in writing as required by law and the BSP.
    Nevertheless, while we find that no stipulated interest rate may be imposed on the obligation, legal interest may still be imposed on the
    outstanding loan. Eastern Shipping Lines, Inc. v. Court of Appeals and Nacar v. Gallery Frames provide that in the absence of a stipulated
    interest. a loan obligation shall earn legal interest from the time of default, i.e., from judicial or extrajudicial demand.
    (3) For purposes of computing when legal interest shall run, it is enough that the debtor be in default on the principal obligation. To be
    considered in default under the revolving credit line agreement, the borrower need not be in default for the whole amount, but for any
    amount due. The spouses Mercado never challenged Security Bank's claim that they defaulted as to the payment of the principal obligation of
    P8,000,000.00. Thus, we find they have defaulted to this amount at the time Security Bank made an extrajudicial demand on March 31, 1999.
    We also find no merit in their argument that penalty charges should not be imposed. While we see no legal basis to strike down the penalty
    stipulation, however, we reduce the penalty of 2% per month or 24% per annum for being iniquitous and unconscionable as allowed under
    Article 1229 of the Civil Code.
    In MCMP Construction Corp. v. Monark Equipment Corp.,103 we declared the rate of 36% per annum unconscionable and reduced it to 6%
    per annum. We thus similarly reduce the penalty here from 24% per annum to 6% per annum from the time of default, i.e., extrajudicial
    demand.
    We also modify the amount of the outstanding obligation of the spouses Mercado to Security Bank. To recall, the foreclosure sale over the
    parcel of land in Lipa City is not affected by the annulment proceedings. We thus find that the proceeds of the foreclosure sale over the parcel
    of land in Lipa City in the amount of P483,120.00 should be applied to the principal obligation of P8,000,000.00 plus interest and penalty
    from extrajudicial demand (March 31, 1999) until date of foreclosure sale (October 19, 1999). The resulting deficiency shall earn legal
    interest at the rate of 12% from the filing of Security Bank's answer with counterclaim105 on January 5, 2001 until June 30, 2013, and shall
    earn legal interest at the present rate of 6% from July 1, 2013 until finality of judgment.

    8. Legal Rate: Loans and Forbearances of Money v. Other Monetary Obligations


    Nacar v. Gallery Frames, 13 August 2013 compared with

    FACTS
    On January 24, 1997, Dario Nacar got dismissed by his employer, Gallery Frames. He filed a complaint; the Labor Arbiter ruled that
    petitioner was dismissed without just cause. A computation for the separation pay and back wages were made it amounted to Php
    158,919.92. The respondent sought appeal to the NLRC, CA and Supreme Court, but they were all dismissed, thus the judgment became final
    on April 17, 2002.
    During the execution of the final judgment, the petitioner filed a motion for the re-computation of the damages. The amount previously
    computed includes the separation pay and back wages up to the time of his dismissal. The petitioner argued that the damages should cover
    the period until the date of final judgment. A re-computation was made and the damages was increased to 471,320.31. Respondent prayed
    for the quashal of such motion on the ground that the judgment made by the SC is already final and the amount should not be further altered.
    Petitioner also filed another motion asking the court to order the respondent to pay the appropriate legal interest of the damages from the
    date of final judgment until full payment.
    ISSUES
    1.Whether or not a subsequent correction of the damages awarded during the final judgment of the Supreme Court violates the rule on
    immutability of judgments.
    2.Whether or not the re-computation made by the Labor Arbiter is correct.
    3.Whether or not appropriate interests may be claimed by the petitioner.
    RULING
    1.Whether or not a subsequent correction of the damages awarded during the final judgment of the Supreme Court violates the rule on
    immutability of judgments.

    The Supreme Court ruled that a correction in the computation of the damages does not violate the rule on immutability of judgments. The
    final decision made by the Supreme Court to award the petitioner with damages with regards to the dismissal without justifiable cause can
    be divided into two important parts. One is the finding that an illegal dismissal was indeed made. And the other is the computation of
    damages. According to a previous case of Session Delights Ice Cream and Fast Foods v. Court of Appeals, the Supreme Court held that the
    second part of the decision - being merely a computation of what the first part of the decision established and declared - can, by its nature, be
    re-computed. The re-computation of the consequences of illegal dismissal upon execution of the decision does not constitute an alteration or
    amendment of the final decision being implemented. The illegal dismissal ruling stands; only the computation of monetary consequences of
    this dismissal is affected, and this is not a violation of the principle of immutability of final judgments.

    2.Whether or not the re-computation made by the Labor Arbiter is correct.

    The Supreme Court believes that the amount of 471,320.31 as damages is correct. According to Article 279 of the Labor Code, reliefs in case
    of illegal dismissal continue to add up until its full satisfaction. The original computation clearly includes damages only up to the finality of
    the labor arbiter's decision. Therefore, the Supreme Court approves the decision confirming that a re-computation is necessary. The labor
    arbiter re-computed the award to include the separation pay and the back wages due up to the finality of the decision that fully terminated
    the case on the merits.
    3.Whether or not appropriate interests may be claimed by the petitioner.

    The Supreme Court ruled that the petitioner shall be entitled to interest. In the case of Eastern Shipping Lines, Inc. v. Court of Appeals,
    among the guidelines laid down by the Supreme Court regarding the manner of computing legal interest is - when the judgment of the court
    awarding a sum of money becomes final and executory, the rate of legal interest shall be 12% per annum from such finality until its
    satisfaction. In addition to this, the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), in its Resolution No. 796 dated May 16, 2013
    declared that the rate of interest for the loan or forbearance of any money, goods or credits and the rate allowed in judgments, in the absence
    of an express contract as to such rate of interest, shall be six percent (6%) per annum. Consequently, the twelve percent (12%) per annum
    legal interest shall apply until June 30, 2013. Afterwards, the new rate of six percent (6%) per annum shall be the prevailing rate of interest
    when applicable.
    The respondent was ordered to pay interest of twelve percent (12%) per annum of the total monetary awards, computed from May 27, 2002
    to June 30, 2013 and six percent (6%) per annum from July 1, 2013 until their full satisfaction.

    Lara’s Gifts v. Midtown, G.R. No. 225433, August 28, 2019 and

    Ignacio v. Ragasa, 29 January 2020

    9. Reduction of Conventional Penalties: Nullity of Penalties/ Usurious Transactions (A. 1175 in rel. to A. 1229-1230)
    Mallari v. Prudential, 5 June 2013
    FACTS: In 1984, petitioner Florentino T. Mallari (Florentino) obtained from respondent Prudential Banka loan in the amount of P300,000.00
    as evidenced by Promissory Note the loan was subject to an interest rate of 21% per annum (p.a.), attorney's fees equivalent to 15% and, in
    case of default, a penalty and collection charges of 12% p.a. of the total amount due. Petitioner executed a Deed of Assignment wherein he
    authorized the respondent bank to pay his loan with his time deposit with the latter in the amount ofP300,000.00. Petitioners obtain again
    from respondent bank another loan of P1.7 million. They stipulated that the loan will bear 23% interest p.a., attorney's fees equivalent to
    15% p.a. and penalty and collection charges of 12% p.a. Petitioners executed a Deed of Real Estate Mortgage in favor of respondent bank
    covering petitioners' property for the said loan. Petitioners failed to settle their loan obligations with respondent bank, thus, the latter sent a
    demand letter to the former for them to pay their obligations. Respondent bank filed with the RTC a petition for the extrajudicial foreclosure
    of petitioners' mortgaged property for the satisfaction of the latter's obligation ofP1,700,000.00 secured by such mortgage.

    Petitioners filed a complaint for annulment of mortgage, deeds, injunction, preliminary injunction, temporary restraining order and damages
    claiming, among others, that: (1) The P300,000.00 loan obligation should have been considered paid, because the time deposit with the same
    amount already been assigned to respondent bank; (2) respondent bank still added theP300,000.00 loan to the P1.7 million loan obligation
    for purposes of applying the proceeds of the auction sale; and (3) they realized that there were onerous terms and conditions imposed by
    respondent bank when it tried to unilaterally increase the charges and interest over and above those stipulated. Respondent bank filed its
    Answer with counterclaim arguing that: (1) the interest rates were clearly provided in the promissory notes, which were used in computing
    for interest charges; (2) petitioners' time deposit was made to apply for the payment of interest of their P300,000.00 loan; and (3) the
    statement of account provided for a computation of interest and penalty charges since the proceeds of petitioners' time deposit was applied
    to the payment of interest and penalty charges for the preceding period. Respondent bank also claimed that petitioners were fully apprised
    of the bank's terms and conditions.

    ISSUE: WON the 23% p.a. interest rate and the 12% p.a. penalty charge on petitioners loan to which they agreed upon is excessive or
    unconscionable.

    HELD: NO Parties are free to enter into agreements and stipulate as to the terms and conditions of their contract, but such freedom is not
    absolute. As Article 1306 of the Civil Code provides, "The contracting parties may establish such stipulations, clauses, terms and conditions
    as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy." Hence, if the
    stipulations in the contract are valid, the parties thereto are bound to comply with them, since such contract is the law between the parties.
    In this case, petitioners and respondent bank agreed upon on a 23% p.a. interest rate on the P1.7 million loan. However, petitioners now
    contend that the interest rate of 23% p.a. imposed by respondent bank is excessive or unconscionable. We said that we need not unsettle the
    principle we had affirmed in a plethora of cases that stipulated interest rates of 3% per month and higher are excessive, unconscionable and
    exorbitant, hence, the stipulation was void for being contrary to morals. We do not consider the interest rate of 23% p.a. agreed upon by
    petitioners and respondent bank to be unconscionable.

    Jurisprudence establish that the 24% p.a. stipulated interest rate was not considered unconscionable, thus, the 23% p.a. interest rate
    imposed on petitioners' loan in this case can by no means be considered excessive or unconscionable. We also do not find the stipulated 12%
    p.a. penalty charge excessive or unconscionable. The 1% surcharge on the principal loan for every month of default is valid. It is an accessory
    undertaking to assume greater liability on the part of an obligor in case of breach of an obligation Here, petitioners defaulted in the payment
    of their loan obligation with respondent bank and their contract provided for the payment of 12% p.a. penalty charge, and since there was
    no showing that petitioners' failure to perform their obligation was due to force majeure or to respondent bank's acts, petitioners cannot
    now back out on their obligation to pay the penalty charge. A contract is the law between the parties and they are bound by the stipulations
    therein.

    RGM Industries v. United Pacific, 27 June 2012


    GR No. 194781, June 27, 2012
    TOPIC: Usurious Transactions

    FACTS:
    Petitioner, RGM Industries, Inc. loaned thirty million peso short-term credit facility to United Pacific Capital Corporation, a domestic
    corporation engaged in the business of lending and financing.
    In 1998, petitioner issued a consolidated promissory note with a stipulated interest of 32% per annum. RGM failed to render payments of its
    loan to United Pacific prompting the respondent to file a complaint for collection of sum of money against the petitioner.
    RGM contends that the agreed interest rate was fixed at 15.5% per annum and not the varying interest rates imposed by the respondent
    which reached as high as 40% per annum. RTC and CA ruled in favor of the petitioner.

    ISSUE:
    Whether the increased interest rates is in violation of the principle of mutuality of contracts.

    HELD:
    Yes. Stipulated interest rates are illegal if they are unconscionable and courts are allowed to temper interest rates when necessary. In
    exercising this vested power to determine what is iniquitous and unconscionable, the Court must consider the circumstances of each case.
    What may be iniquitous and unconscionable in one case, may be just in another. On the basis of the same precedent, the attorney's fees must
    likewise be equitably reduced considering that: (1) the petitioner has already made partial payments; (2) the attorney's fees are not an
    integral part of the cost of borrowing but a mere incident of collection; and (3) the attorney's fees were intended as penal clause to answer
    for liquidated damages, hence, the rate of 10% of the unpaid obligation is too onerous. Under the premises, attorney’s fees equivalent to one
    percent (1%) of the outstanding balance is reasonable.

    Prisma Construction v. Menchavez, 9 March 2010

    FACTS:
    On December 8, 1993, Pantaleon, the President and Chairman of the Board of PRISMA, obtained a P1,000,000.00 loan from the
    respondent, with a monthly interest of P40,000.00 payable for six months, or a total obligation of P1,240,000.00 to be paid within six (6)
    months. To secure the payment of the loan, Pantaleon issued a promissory note. As of January 4, 1997, the petitioners had already paid a
    total of P1,108,772.00. However, the respondent found that the petitioners still had an outstanding balance of P1,364,151.00 as of January 4,
    1997, to which it applied a 4% monthly interest. Thus, on August 28, 1997, the respondent filed a complaint for sum of money with the RTC
    to enforce the unpaid balance, plus 4% monthly interest, P30,000.00 in attorney’s fees, P1,000.00 per court appearance and costs of suit.

    ISSUE:
    What is the proper interest rate to be awarded?

    RULING:
    In the present case, the respondent issued a check for P1,000,000.00. In turn, Pantaleon, in his personal capacity and as authorized
    by the Board, executed the promissory note quoted above. Thus, the P1,000,000.00 loan shall be payable within six (6) months, or from
    January 8, 1994 up to June 8, 1994. During this period, the loan shall earn an interest of P40,000.00 per month, for a total obligation of
    P1,240,000.00 for the six-month period. We note that this agreed sum can be computed at 4% interest per month, but no such rate of
    interest was stipulated in the promissory note; rather a fixed sum equivalent to this rate was agreed upon.
    Article 1956 of the Civil Code specifically mandates that "no interest shall be due unless it has been expressly stipulated in writing."
    Under this provision, the payment of interest in loans or forbearance of money is allowed only if: (1) there was an express stipulation for the
    payment of interest; and (2) the agreement for the payment of interest was reduced in writing. The concurrence of the two conditions is
    required for the payment of interest at a stipulated rate. Thus, we held in Tan v. Valdehueza and Ching v. Nicdao that collection of interest
    without any stipulation in writing is prohibited by law.
    Applying this provision, we find that the interest of P40,000.00 per month corresponds only to the six (6)-month period of the loan,
    or from January 8, 1994 to June 8, 1994, as agreed upon by the parties in the promissory note. Thereafter, the interest on the loan should be
    at the legal interest rate of 12% per annum, consistent with our ruling in Eastern Shipping Lines, Inc. v. Court of Appeals:
    When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest
    due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is
    judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial
    or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code."
    PART 3 – EXTINGUISHMENT OF OBLIGATIONS
    IV. EXTINGUISHMENT OF OBLIGATIONS (A. 1231)
    • Metro Concast Steel Corp. v. Allied Bank Corp., G.R. No. 177921, Dec. 4, 2013.
    FACTS:
    On various dates and for different amounts, Metro Concast, a corporation duly organized and existing under and by virtue of
    Philippine laws and engaged in the business of manufacturing steel,[5] through its officers, herein individual petitioners, obtained several
    loans from Allied Bank. These loan transactions were covered by a promissory note and separate letters of credit/trust receipts. Petitioners
    failed to settle their obligations under the aforementioned promissory note and trust receipts, hence, Allied Bank, through counsel, sent
    them demand letters,[20] all dated December 10, 1998, seeking payment of the total amount of P51,064,093.62, but to no avail. Thus, Allied
    Bank was prompted to file a complaint for collection of sum of money.
    In 2002, Peakstar Oil Corporation (Peakstar), represented by one Crisanta Camiling (Camiling), expressed interest in buying the
    scrap metal. During the negotiations with Peakstar, petitioners claimed that Atty. Peter Saw (Atty. Saw), a member of Allied Bank's legal
    department, acted as the latter's agent. Eventually, with the alleged conformity of Allied Bank, through Atty. Saw, a Memorandum of
    Agreement[25] dated November 8, 2002 (MoA) was drawn between Metro Concast, represented by petitioner Jose Dychiao, and Peakstar,
    through Camiling, under which Peakstar obligated itself to purchase the scrap metal. Unfortunately, Peakstar reneged on all its obligations
    under the MoA. In this regard, petitioners asseverated that: (a) their failure to pay their outstanding loan obligations to Allied Bank must be
    considered as force majeure; and (b) since Allied Bank was the party that accepted the terms and conditions of payment proposed by
    Peakstar, petitioners must therefore be deemed to have settled their obligations to Allied Bank. aiming that the subject complaint was falsely
    and maliciously filed, petitioners prayed for the award of moral damages.

    ISSUE:
    Whether or not the loan obligations incurred by the petitioners under the subject promissory note and various trust receipts have
    already been extinguished.

    RULING:
    Anent petitioners' reliance on force majeure, suffice it to state that Peakstar's breach of its obligations to Metro Concast arising
    from the MoA cannot be classified as a fortuitous event under jurisprudential formulation. As discussed in Sicam v. Jorge: “Fortuitous events
    by definition are extraordinary events not foreseeable or avoidable. It is therefore, not enough that the event should not have been foreseen
    or anticipated, as is commonly believed but it must be one impossible to foresee or to avoid. The mere difficulty to foresee the happening is
    not impossibility to foresee the same.”
    To constitute a fortuitous event, the following elements must concur: (a) the cause of the unforeseen and unexpected occurrence or
    of the failure of the debtor to comply with obligations must be independent of human will; (b) it must be impossible to foresee the event that
    constitutes the caso fortuito or, if it can be foreseen, it must be impossible to avoid; (c) the occurrence must be such as to render it
    impossible for the debtor to fulfill obligations in a normal manner; and, (d) the obligor must be free from any participation in the aggravation
    of the injury or loss.
    While it may be argued that Peakstar's breach of the MoA was unforeseen by petitioners, the same is clearly not "impossible" to
    foresee or even an event which is "independent of human will." Neither has it been shown that said occurrence rendered it impossible for
    petitioners to pay their loan obligations to Allied Bank and thus, negates the former's force majeure theory altogether. In any case, as earlier
    stated, the performance or breach of the MoA bears no relation to the performance or breach of the subject loan transactions, they being
    separate and distinct sources of obligation.

    A. Payment / Performance (A. 1232-1261) 1. Meaning (A. 1232)/ Effects


    • Lo v. KJS, G.R. No. 149420, 8 October 2003 on deed of assignment 11
    Facts:
    Respondent KJS ECO-FORMWORK System Phil., Inc. is a corporation engaged in the sale of steel scaffoldings, while petitioner Sonny Lo is a
    building contractor. On 22 February 22 1990, petitioner ordered scaffolding equipments from respondent worth P540,425.80. He paid
    P150,000.00 as downpayment, the balance of which was made payable in ten monthly installments.
    Petitioner was only able to pay the first two monthly installments and was unable to settle his obligation due to financial difficulties. On 11
    October 11 1990, petitioner and respondent executed a Deed of Assignment, the former assigning to the latter his receivables in the amount
    of P335,462.14 from Jomero Realty Corporation. However, when respondent tried to collect the said credit from Jomero, the latter refused to
    honor the Deed of Assignment because it claimed that petitioner was also indebted to it. On 26 November 26 1990, respondent sent a letter
    to petitioner demanding payment of his obligation. However, petitioner refused to pay claiming that his obligation had been extinguished
    when they executed the Deed of Assignment.

    Issue:
    Was the obligation alreadye extinguised when the petitoner and respondent executted the Deed of Assignment?

    Held:
    No. An assignment of credit is an agreement by virtue of which the owner of a credit, known as the assignor, by a legal cause, such as sale,
    dacion en pago, exchange or donation, and without the consent of the debtor, transfers his credit and accessory rights to another, known as
    the assignee, who acquires the power to enforce it to the same extent as the assignor could enforce it against the debtor.

    2. Characteristics
    3. Kinds: Normal/ Voluntary v. Abnormal /Involuntary
    4. Requisites (A. 1233): Identity and Integrity of Prestation
    5. Identity of Prestation

    Cathay Pacific v. Vazquez, G.R. No. 150843, March 14, 2003 as compared with
    FACTS:
    Sps. Dr. Daniel and Maria Luisa Vazquez, resposdents, together with their maid and two friends went to Hongkong for pleasure and business.
    On their return flight, they booked Cathay Pacific Airways. While boarding, they were advised that there was a seat change from Business
    Class to First Class. Dr. Vazquez refused the upgrade for the reason that it would not look nice for them as hosts to travel First Class and their
    guests, in the Business Class; and that they were going to discuss business matter during the flight. Cathay informed the Vazquezes that the
    Business Class was fully booked, and that since they are Marco Polo Club members, they had the priority to be upgraded to first class. Dr.
    Vazquez eventually gave in, after being prohibited to take the flight if they would not avail themselves of the privilege. Upon their return to
    Manila, the Vazquezes filed a complaint and demanded to be indemnified for the humiliation and embarrassment caused by Cathay’s
    employees.

    ISSUES:
    Are the Vazquezes obliged to avail the privilege and take the First Class flight?

    HELD:
    No. A contract of carriage existed between Cathay and the Vazquezes. They voluntarily and freely gave their consent to an agreement whose
    object was the transportation of the Vazquezes from Manila to Hong Kong and back to Manila, with seats in the Business Class Section of the
    aircraft, and whose cause or consideration was the fare paid by the Vazquezes to Cathay. The Vazquezes should have been consulted first
    whether they wanted to avail themselves of the privilege or would consent to a change of seat accommodation before their seat assignments
    were given to other passengers. It should not have been imposed on them over their vehement objection. By insisting on the upgrade,
    Cathay breached its contract of carriage with the Vazquezes. Art. 1244. The debtor of a thing cannot compel the creditor to receive a
    different one, although the latter may be of the same value as, or more valuable than that which is due. In obligations to do or not to do, an
    act or forbearance cannot be substituted by another act or forbearance against the obligee’s will.

    Fernando v. Northwest, G.R. No. 212038, 8 February 2017


    FACTS:

    Spouses Jesus and Elizabeth S. Fernando are frequent flyers of Northwest Airlines, Inc. and are holders of Elite Platinum World Perks Card,
    the highest category given to frequent flyers of the carrier.

    The Fernandos initiated the filing of the instant case which arose from two separate incidents: first, when Jesus Fernando arrived at Los
    Angeles Airport on December 20, 2001; second, when the Fernandos were to depart from the LA Airport on January 29, 2002.

    Jesus Fernando arrived at the LA Airport via Northwest Airlines Flight No. NW02 to join his family for Christmas, however upon arrival at
    the airport it was found out that his documents reflect his return ticket as August 2001. So he approached Northwest personnel who was
    later identified as Linda Puntawongdaycha, but the latter merely glanced at his ticket without checking its status with the computer and
    peremptorily said that the ticket has been used and could not be considered as valid.
    The Immigration Officer brought Jesus Fernando to the interrogation room of the Immigration and Naturalization Services where he was
    asked humiliating questions for more than two (2) hours. When he was finally cleared by the Immigration Officer, he was granted only a
    twelve-day stay in the United States, instead of the usual six months.

    When the Fernandos reached the gate area where boarding passes need to be presented, Northwest supervisor Linda Tang stopped them
    and demanded for the presentation of their paper tickets (coupon type). They failed to present the same since, according to them, Northwest
    issued electronic tickets (attached to the boarding passes) which they showed to the supervisor. In the presence of the other passengers,
    Linda Tang rudely pulled them out of the queue. Elizabeth Fernando explained to Linda Tang that the matter could be sorted out by simply
    verifying their electronic tickets in her computer and all she had to do was click and punch in their Elite Platinum World Perks Card number.
    But when the Fernandos reached the boarding gate, the plane had already departed. They were able to depart, instead, the day after, or on
    January 30, 2002, and arrived in the Philippines on January 31, 2002.
    Northwest airlines employees on the other hand claim that they were “courteous” and “was very kind enough” to assist them. Northwest also
    offered them free hotel accommodations but they, again, rejected the offer Northwest then made arrangements for the transportation of the
    Fernandos from the airport to their house in LA, and booked the Fernandos on a Northwest flight that would leave the next day, January 30,
    2002. On January 30, 2002, the Fernandos flew to Manila on business class seats.

    ISSUES:

    (1) Whether or not there was breach of contract of carriage and whether it was done In a wanton, malevolent or reckless manner amounting
    to bad faith.
    (2) Whether or not Northwest is liable for the payment of moral damages and attorney’s fees and whether it is liable to pay more than that
    awarded by the RTC.

    HELD:

    (1). Yes. The Fernandos’ cause of action against Northwest stemmed from a breach of contract of carriage. A contract is a meeting of minds
    between two persons whereby one agrees to give something or render some service to another for a consideration. There is no contract
    unless the following requisites concur:

    consent of the contracting parties;


    an object certain which is the subject of the contract; and
    the cause of the obligation which is established.

    A contract of carriage is defined as one whereby a certain person or association of persons obligate themselves to transport persons, things,
    or goods from one place to another for a fixed price.
    Under Article 1732 of the Civil Code, this “persons, corporations, firms, or associations engaged in the business of carrying or transporting
    passengers or goods or both, by land, water, or air, for compensation, offering their services to the public” is called a common carrier.
    Undoubtedly, a contract of carriage existed between Northwest and the Fernandos. They voluntarily and freely gave their consent to an
    agreement whose object was the transportation of the Fernandos from LA to Manila, and whose cause or consideration was the fare paid by
    the Fernandos to Northwest.

    (2) Yes. Northwest is in bad faith. While We agree that the discrepancy between the date of actual travel and the date appearing on the
    tickets of the Fernandos called for some verification, however, the Northwest personnel failed to exercise the utmost diligence in assisting
    the Fernandos. The actuations of Northwest personnel in both subject incidents are constitutive of bad faith.
    On the first incident, Jesus Fernando even gave the Northwest personnel the number of his Elite Platinum World Perks Card for the latter to
    access the ticket control record with the airline’s computer for her to see that the ticket is still valid. But Linda Puntawongdaycha refused to
    check the validity of the ticket in the computer. As a result, the Immigration Officer brought Jesus Fernando to the interrogation room of the
    INS where he was interrogated for more than two (2) hours. When he was finally cleared by the Immigration Officer, he was granted only a
    twelve (12)-day stay in the United States (US), instead of the usual six (6) months.

    Real Obligations: General Requirements (A. 1239)


    Specific Real Obligations (A. 1244)
    Generic Real Obligations (A. 1246)
    Personal Obligations (A. 1244)
    Obligations to Pay Money (A. 1249-1250 in rel to R.A. 8183)

    Citibank v. Sabeniano, G.R. No. 156132 February 6, 20078


    FACTS: Modesta Sabeniano is a client of Citibank and FNCB Finance. On February 1978, Sabeniano obtained a loan of Php 200,000 from
    Citibank. This loan was followed with several other loans – some were paid, while some were not. Those that were not paid upon maturity
    were rolled over, reflecting a total unpaid loan of Php 1,069,847.40 as of September 1979.

    These loans were secured by Sabeniano’s money market placements with FNCB Finance through a Deed of Assignment plus a Declaration of
    Pledge which states that all present and future fiduciary placements held in her personal and/or joint name with Citibank Switzerland, will
    secure all claims that Citibank may have or, in the future, acquire against her.

    The Deeds of Assignment were duly notarized, while the Declaration of Pledge was not notarized and Citibank’s copy was undated, while
    that of Sabeniano bore the date, September 24, 1979.

    Since Sabeniano failed to pay her obligations to Citibank, the latter sent demand letters to request payment. Her total unpaid loan initially
    amounted to Php 2,123,843.20 (inclusive of interests).

    Still failing to pay, Citibank executed the Deeds of Assignment and used the proceeds of Sabeniano’s money market placement from FNCB
    Finance which totaled Php 1,022,916.66 and her deposits with Citibank which totaled Php 31,079.14 to set-off her loan.

    This reduced the unpaid balance to Php 1,069,847.40 as previously mentioned. Since the loan remains unpaid, Citibank proceeded to execute
    the Declaration of Pledge and remitted a total of $149,632.99 from Sabeniano’s Citibank-Geneva accounts to off-set the loan.
    Sabeniano then filed a complaint against Citibank for damages and specific performance (for proper accounting and return of the remitted
    proceeds from her personal accounts). She also contended that the proceeds of 2 promissory notes (PN) from her money market placements
    with Citibank were rolled over or reinvested into the petitioner bank, and these should also be returned to her.
    Regarding the execution of the pledge, the RTC declared this illegal, null and void. Citibank was ordered to return the $149,632.99 to
    Sabeniano’s Citibank-Geneva account with a legal interest of 12% per annum. The RTC also ordered Sabeniano to pay her outstanding loan
    to Citibank without interests and penalty charges.

    Both parties appealed to the CA which affirmed the RTC’s decision, but further ruled entirely in favor of Sabeniano – holding that Citibank
    failed to establish her indebtedness and that all the executed deeds should be returned to her account. The case has now reached the
    Supreme Court.

    ISSUE: Whether or not Citibank’s execution of deeds and pledge to off-set Sabeniano’s loan was valid and legal.

    HELD: The Supreme Court reversed the CA’s findings regarding Sabeniano’s Citibank loan as this was properly documented and sufficient in
    evidence. Thus, the execution of deeds was valid, especially that the agreement was duly notarized, signed and prepared in accordance with
    the law.

    The court also ordered Citibank to return the amount of P318,897.34 and P203,150.00 plus 14.5% per annum to Sabeniano. This is the total
    amount from the 2 PNs which were executed despite being reinvested in said bank. The bank was also ordered to pay moral damages of
    P300,000, exemplary damages for P250,000, attorney’s fees of P200,000.

    The SC however affirmed the RTC’s decision regarding the pledge. Being a separate entity, Citibank cannot exercise automatic remittance
    from Sabeniano’s Citibank Geneva account to off-set her outstanding loan.

    The court also noted that the pledge was filled out irregularly – it was not notarized and Citibank’s copy bore no date. The original copy was
    not also produced in court.

    Regarding Sabeniano’s obligation, the Supreme Court affirmed RTC’s decision and ordered her to pay the remaining balance of her loan
    which amounts to P1,069,847.40 as of 5 September 1979. These loans continue to earn interest based on the maturity date that were agreed
    and stipulated upon by the parties.

    Currency, defined (Secs. 48-49, R.A. 7653 or the Bangko Sentral ng Pilipinas Act)
    Legal Tender, defined (Sec. 52, R.A. 7653)
    Demand Deposits, defined (Secs. 58-60, R.A. 7653) Instruments/ Evidences of Credit
    Evangelista v. Screenex, 20 November 2017
    Effects of Inflation (A. 1250)

    Almeda v. Bathala Mktng., G.R. No. 150806, January 28, 2008

    FACTS:
    In May 1997, Bathala Marketng, renewed its Contract of Lease with Ponciano Almeda. Under the contract, Ponciano agreed to lease
    a porton of Almeda Compound for a monthly rental of P1,107,348.69 for four years. On January 26, 1998, petitioner informed respondent
    that its monthly rental be increased by 73% pursuant to the condition No. 7 of the contract and Article 1250. Respondent refused the
    demand and insisted that there was no extraordinary inflation to warrant such application. Respondent refused to pay the VAT and adjusted
    rentals as demanded by the petitioners but continually paid the stipulated amount. RTC ruled in favor of the respondent and declared that
    plaintiff is not liable for the payment of VAT and the adjustment rental, there being no extraordinary inflation or devaluation. CA affirmed
    the decision deleting the amounts representing 10% VAT and rental adjustment.

    ISSUE:
    Whether or not the amount of rentals due the petitioners should be adjusted by reason of extraordinary inflation or devaluation.

    RULING:
    Essential to contract construction is the ascertainment of the intention of the contracting parties, and such determination must
    take into account the contemporaneous and subsequent acts of the parties. This intention, once ascertained, is deemed an integral part of the
    contract. While, indeed, condition No. 7 of the contract speaks of "extraordinary inflation or devaluation" as compared to Article 1250's
    "extraordinary inflation or deflation," we find that when the parties used the term "devaluation," they really did not intend to depart from
    Article 1250 of the Civil Code. Condition No. 7 of the contract should, thus, be read in harmony with the Civil Code provision.
    That this is the intention of the parties is evident from petitioners' letter22 dated January 26, 1998, where, in demanding rental
    adjustment ostensibly based on condition No. 7, petitioners made explicit reference to Article 1250 of the Civil Code, even quoting the law
    verbatim. Thus, the application of Del Rosario is not warranted. Rather, jurisprudential rules on the application of Article 1250 should be
    considered.
    Article 1250 of the Civil Code states:
    In case an extraordinary inflation or deflation of the currency stipulated should supervene, the value of the currency at the time of the
    establishment of the obligation shall be the basis of payment, unless there is an agreement to the contrary.
    Inflation has been defined as the sharp increase of money or credit, or both, without a corresponding increase in business
    transaction. There is inflation when there is an increase in the volume of money and credit relative to available goods, resulting in a
    substantial and continuing rise in the general price level. In a number of cases, this Court had provided a discourse on what constitutes
    extraordinary inflation, thus: [E]xtraordinary inflation exists when there is a decrease or increase in the purchasing power of the Philippine
    currency which is unusual or beyond the common fluctuation in the value of said currency, and such increase or decrease could not have
    been reasonably foreseen or was manifestly beyond the contemplation of the parties at the time of the establishment of the obligation.
    The factual circumstances obtaining in the present case do not make out a case of extraordinary inflation or devaluation as would
    justify the application of Article 1250 of the Civil Code. We would like to stress that the erosion of the value of the Philippine peso in the past
    three or four decades, starting in the mid-sixties, is characteristic of most currencies. And while the Court may take judicial notice of the
    decline in the purchasing power of the Philippine currency in that span of time, such downward trend of the peso cannot be considered as
    the extraordinary phenomenon contemplated by Article 1250 of the Civil Code. Furthermore, absent an official pronouncement or
    declaration by competent authorities of the existence of extraordinary inflation during a given period, the effects of extraordinary inflation
    are not to be applied.

    6. Integrity of Prestation
    a. Strict Payment for the Entire Prestation; Exceptions (A. 1248)
    b. Substantial Payment/Performance (A. 1234-1235)

    • Palanca v. Guides, 452 S 461 7. Who May Demand Payment


    FACTS: In August 1983, petitioner Palanca executed a contract to sell a parcel of land on installment with Jopson for P11,250. Jopson paid
    petitioner P1,650 as downpayment, leaving a balance of P9600. In December 1983, Jopson assigned ad transferred all her rights and
    interests over the property to respondent Guides. Believing that she had fully paid the purchase prize, respondent found out when she
    verified with the Register of Deeds that the property in question was still in the name of de Leon. Petitioner stated that she refused to
    execute the document of sale in favor of the respondent since the latter failed with the said obligation- that he was not paid the complete
    amount in the contract. RTC ruled in favor of the plaintiff and against Palanca, ordering him to execute a Deed of Absolute Sale and the
    issuance of TCT, reimburse plaintiff the amount paid n excess and for damages.

    ISSUE: Whether the petitioner‘s claim of unpaid charges from the respondent proper

    HELD: Petitioner was deemed to have waived his right to present evidence and thus was unable to adduce evidence of such inflation or
    fluctuation. Even if there were such, petitioner did not make a demand on respondent for the satisfaction of the claim. When petitioner
    accepted respondent‘s installment payments despite the alleged charges, and without any showing that he protested the irregularity of such
    payment, nor demanded the payment of the alleged charges, respondent‘s liability, if any for said charges is deemed fully satisfied.

    a. Creditor’s Right of Payment (A. 1240)


    • Cpnception, 11 October 2012 on payment through agent

    Payment to an Incapacitated (A. 1241)


    Payment to Third Person (A. 1241)
    8. Who Must Pay
    a. Debtor (A. 1236 in rel. to A. 1243 and A. 1247)

    • Audion Electric v. NLRC, G.R. No. 106648. June 17, 1999


    Facts:
    In 1940, Department of Public Works and Highways (DPWH) took respondents-movants' subject property without the benefit of
    expropriation proceedings for the construction of the MacArthur Highway. In 1994, upon a letter submitted by the respondents, DPWH
    offered to pay P0.70 per square meter of the property, the fair market value of the property at the time of taking on 1940

    Unsatisfied with the offer, the respondent-movantsdemanded the return of their property, or the payment of compensation at the current
    fair market value, with P1, 500 per square meter. The decision of the TC and CA were in favor of the respondent-movants for the payment of
    the current fair market value with P 1, 500 per square meter. The petitioner, on the other hand, elevated the matter to the Supreme Court in
    a petition for review on certiorari that just compensation should be based on the value of the property at the time of taking in 1940.

    Issue:
    Whether or not the valuation would be based on the corresponding value at the time of the taking or at the time of the filing of the action

    Held:
    Current Market Value. At the outset, it should be stressed that the matter of the validity of the State's exercise of the power of eminent
    domain has long been settled. Notwithstanding the foregoing, the court also recognize that the owner's loss is not only his property but also
    its income-generating potential. Thus, when property is taken, full and just compensation of its value must immediately be paid to achieve a
    fair exchange for the property and the potential income lost.

    The just compensation due to the landowners amounts to an effective forbearance on the part of the State-a proper subject of interest
    computed from the time the property was taken until the full amount of just compensation is paid-in order to eradicate the issue of the
    constant variability of the value of the currency over time.

    Persons Having Interest in the Obligation (A. 1236)


    Payment by Third Person as agent of debtor without knowledge / against consent of debtor (A. 1236 par. 2, 1237-1238) with knowledge/
    consent of debtor

    PSE, Inc. v. Litonjua, G.R. No. 204014, 5 December 2016


    Facts
    On 20 April 1999, the Litonjua Group wrote a letter-agreement to Trendline Securities, Inc. (Trendline) through its President Priscilla D.
    Zapanta (Zapanta), confirming a previous agreement for the acquisition of the 85% majority equity of Trendline's membership seat in PSE.
    In a letter-confirmation dated 21 April 1999, the Litonjua Group undertook to pay the amount of Pl8,547,643.81 directly to PSE within three
    working days upon confirmation that it will be for the full settlement of all claims and outstanding obligations including interest of Trendline
    to lift its membership suspension and the resumption to normal trading operation. Further in the letter, Trendline was obligated to secure
    the approval and written confirmation of PSE for a new corporation to be incorporated that will own a seat.

    On 29 April 1999, the PSE, through Atty. Ruben L. Almadro (Atty. Almadro), Vice-President for Compliance and Surveillance Department,
    sent a letter to Trendline advising the latter that PSE has resolved to accept the amount of Pl9,000,000.00 as full and final settlement of its
    outstanding obligation. In compliance, the Litonjua Group in a letter dated 12 May 1999, delivered to PSE through Atty. Almadro three check
    payments, all dated 13 May 1999 and payable to PSE, totaling to an amount of Pl9,000,000.00.

    Despite several exchange of letters of conformity and delivery of checks representing payment of full settlement of Trendline's obligations,
    PSE failed to lift the suspension imposed on Trendline's seat. On 30 July 2006, the Litonjua Group, through a letter, requested PSE to
    reimburse the P19,000,000.00 it had paid with interest, upon knowledge that the specific performance by PSE of transferring the
    membership seat under the agreement will no longer be possible. PSE, however, refused to refund the claimed amount as without any legal
    basis. As a result, the Litonjua Group on 10 October 2006 filed a Complaint for Collection of Sum of Money with Damages against PSE before
    the RTC of Pasig City.

    Declining reimbursement, PSE in its Answer Ad Cautelam raised primarily that it received the amount not from the Litonjua Group but from
    Trendline as a settlement of its obligation. It insisted that the cause of action of the Litonjua Group is against Trendline and not the exchange,
    the latter being a non-party to the letter agreement.

    After conclusion of trial, the trial court rendered a decision granting that the Litonjua Group is entitled to claim a refund from PSE based on
    the principle of solutio indebiti as defined in Article No. 2154 of the New Civil Code.

    On 23 May 2012, the CA affirmed, in the result, the challenged decision of the trial court. The appellate court principally relied on the
    principle of constructive trust instead of solutio indebiti as an appropriate remedy against the unjust enrichment of PSE.

    Before this Court, PSE posits the following issues: ( 1) The contemporaneous and subsequent acts of the PSE are not tantamount to
    rendering the PSE a party to the letter-agreement; (2) the case of Smith, Bell and Co. is not applicable to the present case; (3) the provision of
    Article 1236 should not be read together with Article 1293; (4) Trendline should be considered as an indispensable party; (5) PSE was not
    unjustly enriched by its receipt of the amount of P19,000,000.00; (6) no constructive trust exists between the PSE and the Litonjua Group;
    and finally (7) the Litonjua Group is not entitled to exemplary damages.

    Issues:
    Whether PSE is considered a party to the letter-agreement.
    Whether PSE is liable to return the payment received.
    Whether the PSE is liable to pay exemplary damages.

    Rulings:
    1. No. PSE asserts that it is not a party in the letter-agreement due to the absence of any board resolution authorizing the corporation to be
    bound by the terms of the contract between Trendline and the Litonjua Group. In essence, it avers that no consent was given to be bound by
    the terms of the letter-agreement. We agree.
    According to Article 1305 of the Civil Code, "a contract is a meeting of minds between two persons whereby one binds himself, with respect
    to the other, to give something or render some service." For a contract to be binding: there must be consent of the contracting parties; the
    subject matter of the contract must be certain; and the cause of the obligation must be established. Admittedly in this case, no board
    resolution was issued to authorize PSE to become a party to the letter-agreement. From the foregoing, PSE is not considered as a party to the
    letter-agreement.

    2. Yes. This is pursuant to the principles of unjust enrichment and estoppel; it is only but rightful to return the money received since PSE has
    no intention from the beginning to be a party to the agreement. There is unjust enrichment when a person unjustly retains a benefit to the
    loss of another, or when a person retains money or property of another against the fundamental principles of justice, equity and good
    conscience. The principle of unjust enrichment requires two conditions: ( 1) that a person is benefited without a valid basis or justification,
    and (2) that such benefit is derived at the expense of another. The main objective of the principle against unjust enrichment is to prevent one
    from enriching himself at the expense of another without just cause or consideration. Applying law and jurisprudence, the principle of unjust
    enrichment requires PSE to return the money it had received at the expense of the Litonjua Group since it benefited from the use of it
    without any valid justification.
    3. Yes. In contracts and quasi-contracts, the court may award exemplary damages if the defendant acted in a wanton, fraudulent, reckless,
    oppressive, or malevolent manner. Exemplary damages cannot be recovered as a matter of right; the court will decide whether or not they
    should be adjudicated. While the amount of the exemplary damages need not be proven, the plaintiff must show that he is entitled to moral,
    temperate or compensatory damages before the court may consider the question of whether or not exemplary damages should be awarded.

    PSE, despite demands by the Litonjua Group, continuously refused to return the money received despite the fact that it received it without
    any legal right to do so. This conduct, as found by the trial court, falls within the purview of wanton, oppressive and malevolent in nature.
    Thus, absent any other compelling reason to overturn the findings, we uphold the award of exemplary damages.

    9. Where Payment Must Be Made (A. 1251)


    • Binalbagan v. CA, G.R. No. 100594, March 10, 1993
    GR. No. 100594, March 10, 1993

    BINALBAGAN TECH, INC., and HERMILO J. NAVA, petitioners, vs. THE COURT OF APPEALS, MAFDALENA L. PUENTEVELLA, ANGELINA P.
    ECHAUS, ROMULO L. PUENTEVELLA, RENATO L. PUETEVELLA, NOLI L. PUENTEVELLA and NELIA LOURDES P. JACINTO, respondents

    FACTS
    On May 11, 1967, private respondents executed a Contract to Sell and a Deed of Sale of 42 subdivision lots, conveying and transferring said
    lots to Binalbagan Tech, Inc. In turn, Binalbagan executed an Acknowledgement of Debt with Mortgage Agreement, mortgaging said lots in
    favour of the estate of Puentebella. On June 10, 1967, first instalment became due but Binalbagan was not able to pay.

    There was a pending case involving said lots. Petitioner was evicted from the subject subdivision lots in 1974 and reinstated to the
    possession thereof only in 1982. Upon reinstatement of possession of petitioner, respondent demanded payment through a demand letter
    with a statement of account as of September 1982, showing Php367,509.92, representing the price of the land and accrued interest as of that
    date. Binalbagan failed to effect payment, prompting respondent to file case against the former.

    Trial court ruled in favour of Binalbagan, saying there is no fraud and that the period within which to institute action upon a written contract
    (which is 10 years) has long prescribed. Court of Appeals reversed and set aside the trial court’s decision; hence the petition for review on
    certiorari.

    ISSUE
    Whether or not the period to institute action upon a written contract has prescribed.

    HELD
    The prescriptive period within which to institute an action upon a written contract is 10 years (Art 1144, CC). The cause of action of
    respondent is based on deed of sale executed in 1967, whereby ownership of the lots was transferred to Binalbagan. Respondent filed civil
    case for recovery of title and damages only in 1982.

    Deducting 8 years (1974 to 1982) from the period 1967 to 1982, only 7 years have elapsed. The case filed by the respondent was within the
    10-year prescriptive period.

    Working against petitioner’s position too is the principle against unjust enrichment which would certainly be the result if petitioner is
    allowed to own the 42 lots without full payment thereof.

    Petition is denied. Decision of Court of Appeals is affirmed.


    10. When Payment Must be Made 11. Special Forms of Payment
    a. Dacion En Pago /Dation in Payment (A. 1245)

    • Dacquel v. Sps Sotelo, G.R. No. 203946, August 04, 2021

    • Aquintey v. Tibong, G.R. No. 166704, December 20, 2006

    FACTS: On May 6, 1999, petitioner Aquintey filed before RTC Baguio, a complaint for sum of money and damages against respondents.
    Agrifina alleged that Felicidad secured loans from her on several occasions at monthly interest rates of 6% to 7%. Despite demands, spouses
    Tibong failed to pay their outstanding loans of P773,000,00 exclusive of interests.

    However, spouses Ting alleged thatthey had executed deeds of assignment in favor of Agrifina amounting to P546,459 and that their
    debtors had executed promissory notes in favor of Agrifina. Spouses insisted that by virtue of these documents, Agrifina became the new
    collector of their debts. Agrifina was able to collect the total amount of P301.000 from Felicdad's debtors. She
    tried to collect the balance of Felicidad and when the latter reneged on her promise, Agrifina filed a complaint in the office of the barangay
    for the collection of P773,000.00. There was no settlement. RTC favored Agrifina. Court of Appeals affirmed the decision with modification
    ordering defendant to pay the balance of total indebtedness in the amount of P51,341,00 plus 6% per month.

    ISSUE: Whether or not the deeds of assignment in favor of petitioner has the effect of payment of the original obligation that would partially
    extinguish the same
    RULING: YES. Substitution of the person of the debtor may be affected by delegacion. Meaning, the debtor offers, the creditor accepts a third
    person who consent of the substitution and assumes the obligation. It is necessary that the old debtor be released fro the obligation and the
    third person or new debtor takes his place in the relation . Without such release, there is no novation. Court of Appeals correctly found that
    the respondent's obligation to pay the balance of their account with petitioner was extinguished pro tanto by the deeds of credit. CA decision
    is affirmed with the modification that the principal amount of the respondents is P33,841. In its modern concent what actually takes lace in

    Payment by Cession or Assignment (A. 1255 in rel to R.A 10142 or the


    Financial Rehabilitation and Insolvency Act)
    Application of Payments (A. 1252-1254 in rel. to A. 1176)

    Paculdo v. Regalado, G.R. No. 123855, November 20, 2000


    ACTS:
    NEREO PACULDO v. BONIFACIO REGALADO G. R. No. 123855,November 20, 2000
    On December 27, 1990, petitioner Paculdo and respondent Regalado entered into a contract of lease over a parcel of land for 25 years. For
    the first 5 years, Paculdo would pay monthly rental of P450,000 payable within 5 days of each month, with 2% penalty for very month of
    delay. Aside from the above lease, petitioner leased 11 other property from respondent. Petitioner failed to pay. Without the knowledge of
    petitioner, respondent ortgaged the land subject of the lease contract including the improvements to Monte de Piedad. On August 12, 1995,
    and on subsequent dates thereafter, respondent refused to accepr petitioner’s daily rental payments. Petitioner filed an action for injunction
    to enjoin respondent from disturbing his possession while respondent filed a complaint for ejectment attaching the demand letters. MTC
    held in favor of the plaintiff which was affired by the RTC. CA found that the petitioner impliedly consented to respondent’s application of
    payment to his obligations, thus, dismissed the petition for lack of merit.
    ISSUE:
    Whether petitioner was truly in arrears in the payment of rentals on the subject property at the time of the filing of the complaint of
    ejectment
    RULING:
    The lease over the Fairview wet market property is the most onerous among all the obligations of petitioner to respondent. It was
    established that the wet market is a going concern and that petitioner has invested about P35,000,000 in form of improvements, over the
    property. Hence, petitioner would stand to lose more if the lease would not proceed. CA decision was based on a misapprehension of the
    facts and the law on the application of payment. Hence, the ejectment case must be dismissed. CA decision is set aside.

    d. Tender of Payment and Consignation (A. 1256-1261)

    PNB v. Chan, G.R. No. 206037, 13 March 2017


    FACTS:
    Respondent Lilibeth S. Chan owns a three-story commercial building which she leased to petitioner Philippine National Bank (PNB) for a
    period of five years from December 15, 1999 to December 14, 2004. When the lease expired, PB continued to occupy the property on a
    month- to-month basis. PNB vacated the premises on March 23, 2006. Meanwhile, on January 22, 2002, respondent obtained a
    P1,500,000.00 loan from PNB which was secured by a Real Estate Mortgage constituted over the leased property. In addition, respondent
    executed a Deed of Assignment over the rental payments in favor of PNB. The amount of the respondent's loan was subsequently
    increased to P7,500,000.00. Consequently, PNB and the respondent executed an "Amendment to the Real Estate Mortgage by Substitution of
    Collateral" on March 31, 2004, where the mortgage over the leased property was released and substituted by a mortgage over another
    parcel of land.

    On August 26, 2005, respondent filed a Complaint for Unlawful Detainer before the Metropolitan Trial Court (MeTC) alleging that the latter
    failed to pay its monthly rentals from October 2004 until August 2005. In its defense, PNB claimed that it applied the rental proceeds from
    October 2004 to January 15, 2005 as payment for respondent's outstanding loan which became due and demandable in October 2004. As for
    the monthly rentals from January 16, 2005 to February 2006, PB explained that it received a demand letter from a certain Lamberto Chua
    (Chua) who claimed to be the new owner of the leased property and requested that the rentals be paid directly to him. PB thus deposited the
    rentals in a separate non-drawing savings account for the benefit of the rightful party. PB consigned the amount of P1,348,643.92,
    representing the rentals due from January 16, 2005 to February 2006, with the court on May 31, 2006.

    ISSUE:
    Whether or not there was proper consignment done by PNB to make it not liable to pay interest due to delay?

    RULING:
    NO. PNB's deposit of the subject monthly rentals in a non-drawing savings account is not the consignation contemplated by law, precisely
    because it does not place the same at the disposal of the court. Consignation is necessarily judicial; it is not allowed in venues other than the
    courts. Consequently, PNB's obligation to pay rent for the period of January 16, 2005 up to March 23, 2006 remained subsisting, as the
    deposit of the rentals cannot be considered to have the effect of payment. It is important to point out that PNB's obligation to pay the subject
    monthly rentals had already fallen due and demandable before PB consigned the rental proceeds with the MeTC on
    May 31, 2006. Although it is true that consignment has a retroactive effect, such payment is deemed to have been made only at the time of
    the deposit of the thing in court or when it was placed at the disposal of the judicial authority. Based on these premises, PNB's payment of
    the monthly rentals can only be considered to have been made not earlier than May 31, 2006. Given its belated consignment of the rental
    proceeds in court, PNB clearly defaulted in the payment of monthly rentals to the respondent for the period January 16, 2005 up to March
    23, 2006, when it finally vacated the leased property. As such, it is liable to pay interest in accordance with Article 2209 of the Civil Code.

    Cacayorin v. Armed Forces and Police Mutual Benefit Association, Inc., G.R. No. 171298, April 15, 2013
    Facts: Oscar Cacayorin filed an application with AFPMBAI to purchase a property which the latter owned through a loan facility. Oscar and
    his wife, Thelma, and the Rural Bank of San Teodoro executed a Loan and Mortgage Agreement with the former as borrowers and the Rural
    Bank as lender, under the auspices of PAG-IBIG. On the basis of the Rural Bank's letter of guaranty, AFPMBAI executed in petitioners' favor a
    Deed of Absolute Sale, and a new title was issued in their name. Then, the PAG-IBIG loan facility did not push through and the Rural Bank
    closed. Meanwhile, AFPMBAI somehow was able to take possession of petitioners' loan documents and the TCT, while petitioners were
    unable to pay the loan for the property. AFPMBAI made written demands for petitioners to pay the loan for the property. Then, petitioners
    filed with the RTC a complaint for consignation of loan payment, recovery of title and cancellation of mortgage annotation against AFPMBAI,
    PDIC and the Register of Deeds of Puerto Princesa City. AFPMBAI filed a motion to dismiss claiming that petitioners' Complaint falls within
    the jurisdiction of the Housing and Land Use Regulatory Board (HLURB), as it was filed by petitioners in their capacity as buyers of a
    subdivision lot and it prays for specific performance of contractual and legal obligations decreed under Presidential Decree No. 957(PD 957).
    It added that since no prior valid tender of payment was made by petitioners, the consignation case was fatally defective and susceptible to
    dismissal.

    Issue: Whether or not the case falls within the exclusive jurisdiction of the HLURB.

    Ruling: No. Unlike tender of payment which is extrajudicial, consignation is necessarily judicial; hence, jurisdiction lies with the RTC, not
    with the HLURB. Under Article 1256 of the Civil Code, the debtor shall be released from responsibility by the consignation of the thing or
    sum due, without need of prior tender of payment, when the creditor is absent or unknown, or when he is incapacitated to receive the
    payment at the time it is due, or when two or more persons claim the same right to collect, or when the title to the obligation has been lost.
    The said provision clearly precludes consignation in venues other than the courts.

    Del Carmen v. Sabordo, G.R. No. 181723, August 11, 2014


    FACTS: In 1961, spouses Toribio and Eufrocina Suico (Suico spouses), with other business partners, entered into a business venture of rice
    and corn mill at Mandaue City, Cebu. They loaned from Development Bank of the Philippines (DBP) and mortgaged four parcels of land
    owned by Suico spouses, Lots 506, 512, 513 and 514, and another lot owned by their business partner, Juliana Del Rosario. They failed to pay
    their loan obligations so DBP foreclosed the properties to which they did not also redeem so the latter consolidated its ownership over the
    same. However, DBP later allowed the Suico spouses and Flores spouses (substitute for Del Rosario) to repurchase the subject lots by way of
    a conditional sale for P240,571. The Suico and Flores spouses were able to pay the downpayment and first monthly amortization but no
    monthly installments were made thereafter. Threatened with the cancellation of the conditional sale, both spouses sold their rights over the
    properties to respondents Restituto and Mima Sabordo, subject to the condition that the latter shall pay the balance of the sale price. In
    addition to this, Suico and Flores spouses executed a supplemental agreement whereby they affirmed that what was actually sold to
    respondents were Lots 512 and 513, while Lots 506 and 514 were given as usufructuaries. DBP approved of the sale of rights. Subsequently,
    respondents were able to repurchase the foreclosed properties. Then, Restituto Sabordo filed with the CFI of Negros Occidental an original
    action for declaratory relief with damages and prayer for a writ of preliminary injunction raising the issue of whether or not the Suico
    spouses have the right to recover from respondents Lots 596 and 514. The trial court ruled the Suico spouses have the right to redeem or
    buy back until August 31, 1987. On appeal, the CA affirmed the CFI's decision and modified that right of repurchase would be until October
    31, 1990. Furthermore, in a resolution dated February 13, 1991, the CA granted the Suico spouses an additional period of 90 days from
    notice within which to exercise their option to repurchase. Toribio Suico died leaving his widow, Eufrocina, and others as legal heirs. Later,
    they discovered that respondents mortgaged Lots 506 and 514 with Republic Planters Bank (RPB) as security for loan which, subsequently,
    became delinquent. Thereafter, alleging that they are ready to pay P127,500 but cannot determine as to whom payment shall be made,
    petitioner and co-heirs filed a Complaint with the RTC San Carlos City seeking to compel respondents and RPB to interplead and litigate
    between themselves their interests on the sum of money. Also, they prayed that respondents be directed to substitute Lots 506 and 514 with
    other properties as collateral for their outstanding obligation with RPB and that the latter be ordered to accept the substitute collateral and
    release of the mortgage on the said lots. Upon filing of the complaint, the heirs of Toribio deposited the said amount with the RTC. Both
    respondents and RPB filed a Motion to Dismiss on the ground that there is no cause of action as RPB has no legal right nor claim over the
    lots. The RTC dismissed the complaint to which the CA affirmed.

    ISSUE: Whether or not Interpleader is the right remedy.

    HELD: No. There was no valid consignation made by the petitioner. Consignation is the act of of depositing the thing due with the court or
    judicial authorities whenever the creditor cannot accept or refuses to accept payment, and it generally requires a prior tender of payment or
    the manifestation by the debtor to the creditor of his desire to comply with his obligation, with the offer of immediate performance. In the
    case, petitioners, upon making the deposit with the RTC, did not ask the trial court that respondents be notified to receive the amount that
    they have deposited. In fact, there was no tender of payment. Instead, what petitioners prayed for is that respondents and RPB be directed to
    interplead with one another to determine their alleged respective rights over the consigned amount; that respondents be likewise directed
    to substitute the subject lots with other

    real properties as collateral for their loan and that RPB be also directed to accept the substitute real properties as collateral. Nonetheless, the
    trial court correctly ruled that interpleader is not the proper remedy because RPB did not make any claim whatsoever over the amount
    consigned by petitioners with the court.

    B. Loss of the Prestation / Impossibility of Performance (A. 1262-1269)


    Kinds of Loss/ Impossibility: Physical, Civil or Legal (A. 1189 [2])

    • Comglasco Corporation/Aguila Glass v. Santos Car Check Center Corporation, G.R. No. 202989, March 25, 2015

    FACTS: On August 16, 2000, respondent Santos Car Check Center Corporation (Santos), owner of a showroom located at 75 Delgado Street,
    in Iloilo City, leased out the said space to petitioner Comglasco Corporation (Comglasco). On October 4, 2001, Comglasco advised Santos
    through a letter2 that it was preterminating their lease contract effective December 1, 2001. Santos refused to accede to the pre-termination,
    reminding Comglasco that their contract was for five years. On January 15, 2002, Comglasco vacated the leased premises and stopped paying
    any further rentals. Santos sent several demand letters, which Comglasco completely ignored. On September 15, 2003, Santos sent its final
    demand letter, which Comglasco again ignored. On October 20, 2003, Santos filed suit for breach of contract. On August 18, 2004, the trial
    court rendered its judgment in favor of Santos. On February 14, 2005, Santos moved for execution pending Comglasco’s appeal, which the
    trial court granted on May 12, 2005. In its Decision9 dated August 10, 2011, the Court of Appeals (CA) affirmed the judgment of the RTC.

    ISSUE: Whether or not a lessee may pre-terminate lease agreement under Art. 1267 of the Civil Code.

    HELD: NO. In Philippine National Construction Corporation v. CA (PNCC), which also involves the termination of a lease of property by the
    lessee “due to financial, as well as technical, difficulties,” the Court ruled:

    The obligation to pay rentals or deliver the thing in a contract of lease falls within the prestation “to give”; hence, it is not covered within the
    scope of Article 1266. At any rate, the unforeseen event and causes mentioned by petitioner are not the legal or physical impossibilities
    contemplated in said article.

    Besides, petitioner failed to state specifically the circumstances brought about by “the abrupt change in the political climate in the country”
    except the alleged prevailing uncertainties in government policies on infrastructure projects. The principle of rebus sic stantibus neither fits
    in with the facts of the case. Under this theory, the parties stipulate in the light of certain prevailing conditions, and once these conditions
    cease to exist, the contract also ceases to exist. This theory is said to be the basis of Article 1267 of the Civil Code, which provides: Art. 1267.
    When the service has become so difficult as to be manifestly beyond the contemplation of the parties, the obligor may also be released
    therefrom, in whole or in part. This article, which enunciates the doctrine of unforeseen events, is not, however, an absolute application of
    the principle of rebus sic stantibus, which would endanger the security of contractual relations. The parties to the contract must be
    presumed to have assumed the risks of unfavorable developments.

    It is therefore only in absolutely exceptional changes of

    circumstances that equity demands assistance for the debtor. In this case, petitioner wants this Court to believe that the abrupt change in the
    political climate of the country after the EDSA Revolution and its poor financial condition “rendered the performance of the lease contract
    impractical and inimical to the corporate survival of the petitioner.”

    This Court cannot subscribe to this argument. As pointed out by private respondents: xxxx Anent petitioner’s alleged poor financial
    condition, the same will neither release petitioner from the binding effect of the contract of lease. As held in Central Bank v. Court of Appeals,
    cited by private respondents, mere pecuniary inability to fulfill an engagement does not discharge a contractual obligation, nor does it
    constitute a defense to an action for specific performance. Relying on Article 1267 of the Civil Code to justify its decision to preterminate its
    lease with Santos, Comglasco invokes the 1997 Asian currency crisis as causing it much difficulty in meeting its obligations. But in PNCC, the
    Court held that the payment of lease rentals does not involve a prestation “to do” envisaged in Articles 1266 and 1267 which has been
    rendered legally or physically impossible without the fault of the obligor-lessor. Article 1267 speaks of a prestation involving service which
    has been rendered so difficult by unforeseen subsequent events as to be manifestly beyond the contemplation of the parties. To be sure, the
    Asian currency crisis befell the region from July 1997 and for sometime thereafter, but Comglasco cannot be permitted to blame its
    difficulties on the said regional economic phenomenon because it entered into the subject lease only on August 16, 2000, more than three
    years after it began, and by then Comglasco had known what business risks it assumed when it opened a new shop in Iloilo City.

    When Obligation Extinguished (A. 1262, 1266-1267)

    • Delfin Gonzalez, Jr. vs. Magdaleno M. Peña, G.R. No. 214303, 30 January 2017
    Facts: In its Decision, the RTC of Bago City adjudged petitioner liable to respondent Magdaleno M. Peñ a for the payment of the agency’s fees
    and damages amounting to ₱28.5 million. Petitioner, together with his co-petitioners in that case, appealed the Decision, while Peñ a moved
    for execution pending appeal of this ruling. The grant of that motion resulted in the sale to Peñ a of petitioner’s ACCI shares. Through a
    private sale, he was able to sell and transfer the subject shares to respondent Arsenia Vera.

    This Court issued a Decision entitled Urban Bank, Inc. v. Peñ a which vacated with finality the Decision of the RTC of Bago City. Considering
    that the Decision of the RTC of Bago City had been completely vacated and declared null and void, this Court held that the concomitant
    execution pending appeal was likewise null and without effect. Thus, we held that Urban Bank and its officers and directors, including
    petitioner herein, were entitled to the full restoration of their ownership and possession of all properties that were executed pending appeal,
    such as the subject shares.

    The restitution proceedings were raffled to the RTC of Makati City, Branch 65. Thereafter, petitioner moved for execution, seeking
    restoration of his actual ACCI shares. The ACCI countered that the club shares petitioner was claiming could no longer be returned to him,
    because they had already been transferred by Peñ a to Vera.

    In its Omnibus Resolution, the RTC concluded that Peñ a’s private sale of the shares to Vera was valid, given that the latter was an innocent
    purchaser for value. As such, Vera could not be charged with knowledge of the controversy involving the ACCI shares. Considering the
    validity of the sale, the trial court held that the actual restitution of the property to petitioner was no longer possible. Applying paragraph (b)
    of the above-quoted dispositive portion of the Decision, it directed Peñ a to pay for the value of the property instead.

    Aggrieved, petitioner came directly to this Court and asked for the reversal of the ruling of the trial court’s ruling, as well as for the
    cancellation of the shares in the name of Vera. Petitioner points out that Peñ a obtained the property at a public auction that has been
    declared void by this Court. He then asserts that Vera, as successor-in-interest, has no right over those shares.

    Issue: Whether or not the RTC faithfully complied with our directive to restore to Urban Bank and the latter’s officers their properties
    illegally obtained by Peñ a.
    Ruling: No. Indeed, the RTC did not comply with our ruling in Urban Bank when it refused to restore to petitioner the actual ownership of his
    club shares on the mere pretext that these had already been sold by Peñ a to his successor-in-interest.

    There is no factual dispute that Peñ a acquired the ACCI shares of petitioner by virtue of a winning bid in an execution sale that had already
    been declared by this Court, with finality, as null and void. In no uncertain terms, we declared that the “concomitant execution pending
    appeal is likewise without any effect. x x x. Consequently, all levies, garnishment and sales executed pending appeal are declared null and
    void, with the concomitant duty of restitution x x x.”

    Void transactions do not produce any legal or binding effect, and any contract directly resulting from that illegality is likewise void and
    inexistent. Therefore, Peñ a could not have been a valid transferee of the property. As a consequence, his successor-in-interest, Vera, could
    not have validly acquired those shares.

    Neither was the RTC correct in its characterization of the actual restitution of the ACCI shares to petitioner as “impossible.” For the
    obligation to be considered impossible under Article 1266 of the Civil Code, its physical or legal impossibility must first be proven.

    Here, the RTC did not make any finding on whether or not it was physically impossible to effect the actual restitution of the property. On the
    other hand, petitioner correctly points out that since the shares are movable by nature, the same can be transferred back to Gonzalez, Jr. by
    recording the transaction in the stock and transfer book of the club.

    As regards legal impossibility, the RTC appears to have jumped to the conclusion that because of the perfected sale of the shares to Vera,
    petitioner can no longer claim actual restitution of the property.

    The Court itself settled that Peñ a acquired the properties by virtue of a null and void execution sale. In effect, his buyers acquired no better
    title to the goods than he had. By virtue of Article 1505, the true owners of the goods are definitely not legally precluded from claiming the
    ownership of their actual properties.

    Consequently, pursuant to our final ruling in Urban Bank. petitioner must be restored as owner of the actual ACCl shares, and not just be
    paid the full value of the property.

    Doctrine of Unforeseen Events/Rebus Sic Stantibus (A. 1267)

    • COMGLASCO v. Santos Car, G.R. No. 202989, March 25, 2015


    TOPIC: Rebus sic stantibus CASE LAW/ DOCTRINE: REBUS SIC STANTIBUS - agreement is valid only if the same conditions prevailing at time
    of contracting continue to exist at the time of performance EFFECT OF DIFFICULTY BEYOND PARTIES � CONTEMPLATION Rule: Obligor
    may be released in whole or in part REQUISITES:
    (a) The event or change could not have been forseen at the time of the execution of the contract
    (b) The performance is extremely difficult, but not impossible (because if it is impossible, it is extinguished by impossibility)
    (c) The event was not due to the act of any of the parties
    (d) The contract is for a future prestation

    FACTS:

    On August 16, 2000, respondent Santos Car Check Center Corporation (Santos), owner of a showroom located at 75 Delgado Street, in Iloilo
    City, leased out the said space to petitioner Comglasco Corporation (Comglasco), an entity engaged in the sale, replacement and repair of
    automobile windshields, for a period of five years at a monthly rental of P60,000.00 for the first year, P66,000.00 on the second year, and
    P72,600.00 on the third through fifth years.

    On October 4, 2001, Comglasco advised Santos through a letter that it was pre- terminating their lease contract effective December 1, 2001.
    Santos refused to accede to the pre-termination, reminding Comglasco that their contract was for five years. On January 15, 2002, Comglasco
    vacated the leased premises and stopped paying any further rentals. Santos sent several demand letters, which Comglasco completely
    ignored. On September 15, 2003, Santos sent its final demand letter, which Comglasco again ignored. On October 20, 2003, Santos filed suit
    for breach of contract.

    ISSUE: Whether or not there was a valid cause for the plaintiff to pre-terminate the lease HELD: 

    NO. In Philippine National Construction Corporation v. CA (PNCC), which also involves the termination of a lease of property by the lessee
    “due to financial, as well as technical, difficulties,” the Court ruled: 

    The obligation to pay rentals or deliver the thing in a contract of lease falls within the prestation “to give”; hence, it is not covered within the
    scope of Article 1266. At any rate, the unforeseen event and causes mentioned petitioner contemplates not the legal or physical
    impossibilities in said article. Besides, petitioner failed to state specifically the circumstances brought about by “the abrupt change in the
    political climate in the country” except the alleged prevailing uncertainties in government policies on infrastructure projects.

    The principle of rebus sic stantibus neither fits in with the facts of the case. Under this theory, the parties stipulate in the light of certain
    prevailing conditions, and once these conditions cease to exist, the contract also ceases to exist. This theory is said to be the basis of Article
    1267 of the Civil Code, which provides: Art. 1267. When the service has become so difficult as to be manifestly beyond the contemplation of
    the parties, the obligor may also be released therefrom, in whole or in part.
    This article, which enunciates the doctrine of unforeseen events, is not, however, an absolute application of the principle of rebus sic
    stantibus, which would endanger the security of contractual relations. The parties to the contract must be presumed to have assumed the
    risks of unfavorable developments. It is therefore only in absolutely exceptional changes of circumstances that equity demands assistance
    for the debtor.

    In this case, petitioner wants this Court to believe that the abrupt change in the political climate of the country after the EDSA Revolution and
    its poor financial condition “rendered the performance of the lease contract impractical and inimical to the corporate survival of the
    petitioner.”

    Relying on Article 1267 of the Civil Code to justify its decision to pre-terminate its lease with Santos, Comglasco invokes the 1997 Asian
    currency crisis as causing it

    Much difficulty in meeting its obligations. But in PNCC, the Court held that the payment of lease rentals does not involve a prestation “to do”
    envisaged in Articles 1266 and 1267 which has been rendered legally or physically impossible without the fault of the obligor-lessor. Article
    1267 speaks of a prestation involving service, which has been rendered so difficult by unforeseen subsequent events as to be manifestly
    beyond the contemplation of the parties. To be sure, the Asian currency crisis befell the region from July 1997 and for sometime thereafter,
    but Comglasco cannot be permitted to blame its difficulties on the said regional economic phenomenon because it entered into the subject
    lease only on August 16, 2000, more than three years after it began, and by then Comglasco had known what business risks it assumed when
    it opened a new shop in Iloilo City.

    • Magat v. CA, G.R. No. 124221, August 4, 2000


    FACTS:
    Private respondent Santiago A. Guerrero (hereinafter referred to as "Guerrero") was President and Chairman of[4] "Guerrero Transport
    Services", a single proprietorship.
    Sometime in 1972, Guerrero Transport Services won a bid for the operation of a fleet of taxicabs within the Subic Naval Base, in Olongapo. As
    highest bidder, Guerrero was to "provide radio- controlled taxi service within the U. S. Naval Base, Subic Bay, utilizing as demand requires...
    160 operational taxis consisting of four wheel, four-door, four passenger, radio controlled, meter controlled, sedans, not more than one year.
    On September 22, 1972, with the advent of martial law, President Ferdinand E. Marcos issued Letter of Instruction No. 1. SEIZURE AND
    CONTROL OF ALL PRIVATELY OWNED NEWSPAPERS, MAGAZINES, RADIO AND TELEVISION FACILITIES AND ALL OTHERMEDIA OF
    COMMUNICATION.
    ISSUE:
    Whether the contract between Victorino and Guerrero for the purchase of radio transceivers was void.
    RULING:
    The contract was not void ab initio. Nowhere in the LOI and Admin. Circular is there an express ban on the importation of transceivers.
    The LOI and Administrative Circular did not render "radios and transceivers" illegal per se. The Administrative Circular merely ordered the
    Radio Control Office to suspend the "acceptance and processing .... of applications... for permits to possess, own, transfer, purchase and sell
    radio transmitters and transceivers..."[41] Therefore, possession and importation of the radio transmitters and transceivers was legal
    provided one had the necessary license for it.[42] Transceivers were not prohibited but merely regulated goods. The LOI and Administrative
    Circular did not render the transceivers outside the commerce of man. They were valid objects of the contract.

    • Philippine National Construction Corporation v. Court of Appeals, G.R. No. 116896, May 5, 1997
    FACTS
    Petitioner and private respondents entered into a Lease Agreement commencing on the date of issuance of the industrial clearance by the
    Ministry of Human Settlements and that rental shall be paid yearly amounting to Php 240,000.00. Upon obtaining of Temporary Use Permit,
    private respondents wrote a letter requesting the petitioner to pay the first annual rental. However, petitioner expressed its intention to
    terminate the contract due to financial as well as technical difficulties. It also argued that it was only obligated to pay for one-month period
    of lease. This prompted the respondent to file an action against the petitioner for specific performance with damages before the RTC of Pasig.
    The trial court and the CA favored the respondents, hence this
    petition.
    ISSUE
    WON the petitioner is entitled to avail the benefit of Articles 1266 and 1267 of the New Civil

    RULING
    It is a fundamental rule that contracts, once perfected, bind both contracting parties, and obligations arising therefrom have the force of law
    between the parties and should be complied with in good faith. But the law recognizes exceptions to the principle of the obligatory force of
    contracts. One exception is laid down in Article 1266 of the Civil Code, which reads: "The debtor in obligations to do shall also be released
    when the prestation becomes legally or physically impossible without the fault of the obligor." Petitioner cannot, however, successfully take
    refuge in the said article, since it is applicable only to obligations "to do," and not to obligations "to give." An obligation "to do" includes all
    kinds of work or service; while an obligation "to give" is a prestation which consists in the delivery of a movable or an immovable thing in
    order to create a real right or for the use of the recipient, or for its simple possession, or in order to return it to its owner.

    The obligation to pay rentals or deliver the thing in a contract of lease falls within the prestation "to give;" hence, it is not covered within the
    scope of Article 1266. At any rate, the unforeseen event and causes mentioned by the petitioner are not the legal or physical impossibilities
    contemplated in the said article. Besides, petitioner failed to state specifically the circumstances brought about by the "abrupt change in the
    political climate" except the alleged prevailing uncertainties in government policies on infrastructure projects. The principle of rebus sic
    stantibus neither fits in with the facts of the case. Under this theory, the parties stipulate in the light of certain prevailing conditions, and
    once these conditions cease to exist, the contract also ceases to exist.
    • Naga Telephone Co., Inc. v. Court of Appeals, G.R. No. 107112, February 24, 1994

    Petitioner Naga Telephone Co., Inc. (NATELCO) is a telephone company rendering local as well as long distance service in Naga City while
    private respondent Camarines Sur II Electric Cooperative, Inc. (CASURECO II) is a private corporation established for the purpose of
    operating an electric power service in the same city. On November 1, 1977, the parties entered into a contract (Exh. "A") for the use by
    petitioners in the operation of its telephone service the electric light posts of private respondent in Naga City. In consideration therefor,
    petitioners agreed to install, free of charge, ten (10) telephone connections for the use by private respondent
    After the contract had been enforced for over ten (10) years, private respondent filed on January 2, 1989 with the Regional Trial Court of
    Naga City (Br. 28) C.C. No. 89-1642 against petitioners for reformation of the contract with damages, on the ground that it is too one-sided in
    favor of petitioners; that it is not in conformity with the guidelines of the National Electrification Administration (NEA) which direct that the
    reasonable compensation for the use of the posts is P10.00 per post, per month; that after eleven (11) years of petitioners' use of the posts,
    the telephone cables strung by them thereon have become much heavier with the increase in the volume of their subscribers, worsened by
    the fact that their linemen bore holes through the posts at which points those posts were broken during typhoons.

    ISUUE:
    Whether respondent court erred in making a contract for the parties by invoking Article 1267 of the New Civil Code.
    RULING:
    Article 1267 speaks of "service" which has become so difficult. Taking into consideration the rationale behind this provision, 9 the term
    "service" should be understood as referring to the "performance" of the obligation. In the present case, the obligation of private respondent
    consists in allowing petitioners to use its posts in Naga City, which is the service contemplated in said article. Furthermore, a bare reading of
    this article reveals that it is not a requirement thereunder that the contract be for future service with future unusual change. According to
    Senator Arturo M. Tolentino, 10 Article 1267 states in our law the doctrine of unforseen events. This is said to be based on the discredited
    theory of rebus sic stantibus in public international law; under this theory, the parties stipulate in the light of certain prevailing conditions,
    and once these conditions cease to exist the contract also ceases to exist. Considering practical needs and the demands of equity and good
    faith, the disappearance of the basis of a contract gives rise to a right to relief in favor of the party prejudiced.

    Remedies of Creditor in Case of Loss (A. 1269)


    Liability In Case of Loss (A. 1262 par, 2; A. 1265, 1268 in rel. to A. 1174, A. 1165)
    Partial Loss: Effects (A. 1264 in rel. to A. 1189 [3] [4])
    C. Condonation / Remission of the Debt (A. 1270-1274)
    • Dizon v. Court of Tax Appeals, G.R. No. 140944, April 30, 2008
    1. On November 7, 1987, Jose P. Fernandez died.
    2. Thereafter, a petition for the probate of his will was filed.
    3. The probate court then appointed retired Supreme Court Justice Arsenio P. Dizon and petitioner, Atty. Rafael Arsenio P. Dizon as Special
    and Assistant Special Administrator.
    4. Justice Dizon authorized Atty. Jesus M. Gonzales (Atty. Gonzales) to sign and file on behalf of the Estate the required estate tax return
    and to represent the same in securing a Certificate of Tax Clearance.
    5. On April 27, 1990, BIR Regional Director issued Certification stating that the taxes due on the transfer of real and personal properties of
    Jose had been fully paid and said properties may be transferred to his heirs.
    6. Petitioner requested the probate court's authority to sell several properties forming part of the Estate, for the purpose of paying its
    creditors.
    7. Petitioner manifested that Manila Bank, a major creditor of the Estate was not included, as it did not file a claim with the probate court
    since it had security over several real estate properties forming part of the Estate.
    8. However, on November 26, 1991, the Assistant Commissioner for Collection of the BIR, issued Estate Tax Assessment Notice demanding
    the payment of P66,973,985.40 as deficiency estate tax.

    Issue:
    Whether the actual claims of the creditors may be fully allowed as deductions from the gross estate of Jose despite the fact that the
    said claims were reduced or condoned through compromise agreements entered into by the Estate with its creditors

    Ruling:
    It is admitted that the claims of the Estate's aforementioned creditors have been condoned - mode of extinguishing an obligation.
    The U.S. court ruled that the appropriate deduction is the value that the claim had at the date of the decedent's death. Also, as held in
    Propstra v. U.S., where a lien claimed against the estate was certain and enforceable on the date of the decedent's death, the fact that the
    claimant subsequently settled for lesser amount did not preclude the estate from deducting the entire amount of the claim for estate tax
    purposes. These pronouncements essentially confirm the general principle that post-death developments are not material in determining
    the amount of the deduction.
    The court expresses its agreement with the date-of-death valuation rule.
    First. There is no law, nor do we discern any legislative intent in our tax laws, which disregard the date-of-death valuation principle and
    particularly provide that post-death developments must be considered in determining the net value of the estate. It bears emphasis that tax
    burdens are not to be imposed, nor presumed to be imposed, beyond what the statute expressly and clearly imports, tax statutes being
    construed strictissimi juris against the government. Any doubt on whether a person, article or activity is taxable is generally resolved against
    taxation.
    Second. Such construction finds relevance and consistency in our Rules on Special Proceedings wherein the term "claims" required to be
    presented against a decedent's estate is generally construed to mean debts or demands of a pecuniary nature which could have been
    enforced against the deceased in his lifetime, or liability contracted by the deceased before his death.
    Therefore, the claims existing at the time of death are significant to, and should be made the basis of, the determination of allowable
    deductions.
    Meaning and Nature
    • Reyna v. Commission on Audit, G.R. No. 167219, February 8, 2011
    FACTS:
    REYNA V. COA FEBRUARY 8, 2011
    The Land Bank of the Philippines (Land Bank) was engaged in a cattle-financing program wherein loans were granted to various
    cooperatives. Pursuant thereto, Land Bank's Ipil, Zamboanga del Sur Branch (Ipil Branch) went into a massive information campaign
    offering the program to cooperatives.Cooperatives who wish to avail of a loan under the program must fill up a Credit Facility Proposal (CFP)
    which will be reviewed by the Ipil Branch. The Ipil Branch approved the applications of four cooperatives.One of the conditions stipulated in
    the CFP is that prior to the release of the loan, a Memorandum of Agreement (MOA) between the supplier of the cattle, Remad Livestock
    Corporation (REMAD), and the cooperative, shall have been signed. As alleged by petitioners, the terms of the CFP allowed for pre-payments
    or advancement of the payments prior to the delivery of the cattle by the supplier REMAD but such was not stipulated in the contracts.
    Three checks were issued by the Ipil Branch to REMAD to serve as advanced payment for the cattle. REMAD, however, failed to supply the
    cattle on the dates agreed upon.
    In post audit, the Land Bank Auditor disallowed the amount of P3,115,000.00 under CSB No. 95-005 dated December 27, 1996 and Notices of
    Disallowance Nos. 96-014 to 96-019 in view of the non-delivery of the cattle. Also made as the basis of the disallowance was the fact that
    advanced payment was made in violation of bank policies and COA rules and regulations. Petitioners were made liable for the amount
    ISSUE:
    Whether or not the writing off of a loan is considered as condonation
    RULING:
    This Court rules that writing-off a loan does not equate to a condonation or release of a debt by the creditor.
    As an accounting strategy, the use of write-off is a task that can help a company maintain a more accurate inventory of the worth of its
    current assets. In general banking practice, the write-off method is used when an account is determined to be uncollectible and an
    uncollectible expense is recorded in the books of account. If in the future, the debt appears to be collectible, as when the debtor becomes
    solvent, then the books will be adjusted to reflect the amount to be collected as an asset. In turn, income will be credited by the same amount
    of increase in the accounts receivable.
    Write-off is not one of the legal grounds for extinguishing an obligation under the Civil Code. It is not a compromise of liability. Neither is it a
    condonation, since in condonation gratuity on the part of the obligee and acceptance by the obligor are required. In making the write-off,
    only the creditor takes action by removing the uncollectible account from its books even without the approval or participation of the debtor.

    Requisites (A. 1270)


    a. Legal Capacity
    b. Gratuitousness, defined c. Acceptance
    d. Form
    e. Not Inofficious (A. 1271)
    • Trans-Pacific Industrial Supplies, Inc. v. Court of Appeals, G.R. No. 109172, Aug. 19, 1994
    FACTS:
    TRANS PACIFIC V CA G.R.No. 109172 August 19, 1994
    Sometime in 1979, petitioner applied for and was granted several financial accommodations amounting to P1,300,000.00 by respondent
    Associated Bank. The loans were evidence and secured by four (4) promissory notes, a real estate mortgage covering three parcels of land
    and a chattel mortgage over petitioner's stock and inventories.
    Unable to settle its obligation in full, petitioner requested for, and was granted by respondent bank, a restructuring of the remaining
    indebtedness which then amounted to P1,057,500.00, as all the previous payments made were applied to penalties and interests.
    The mortgaged parcels of land were substituted by another mortgage covering two other parcels of land and a chattel mortgage on
    petitioner's stock inventory. The released parcels of land were then sold and the proceeds amounting to P1,386,614.20, according to
    petitioner, were turned over to the bank and applied to Trans-Pacific's restructured loan. Subsequently, respondent bank returned the
    duplicate original copies of the three promissory notes to Trans- Pacific with the word "PAID" stamped thereon. Despite the return of the
    notes, or on December 12, 1985, Associated Bank demanded from Trans-Pacific payment of the amount of P492,100.00 representing
    accrued interest on PN No. TL-9077-82. According to the bank, the promissory notes were erroneously released.
    ISSUE :
    Whether or not petitioner has indeed paid in full its obligation to respondent bank.
    RULING:
    Art. 1271. The delivery of a private document evidencing a credit, made voluntarily by the creditor to the debtor, implies the renunciation of
    the action which the former had against the latter."
    The surrender and return to plaintiffs of the promissory notes evidencing the consolidated obligation as restructured, produces a legal
    presumption that Associated had thereby renounced its actionable claim against plaintiffs (Art. 1271, NCC). The presumption is fortified by a
    showing that said promissory notes all bear the stamp "PAID", and has not been otherwise overcome. Upon a clear perception that
    Associated's record keeping has been less than exemplary . . . , a proffer of bank copies of the promissory notes without the "PAID" stamps
    thereon does not impress the Court as sufficient to overcome presumed remission of the obligation vis-a-vis the return of said promissory
    notes. Indeed, applicable law is supportive of a finding that in interest bearing obligations-as is the case here, payment of principal (sic) shall
    not be deemed to have been made until the interests have been covered (Art. 1253, NCC). Conversely, competent showing that the principal
    has been paid, militates against postured entitlement to unpaid interests.

    3. Kinds
    a. Inter Vivos (A. 725, et. seq.) v. Mortis Causa (A. 935-937) b. Complete v. Partial (A. 1273-1274)
    c. Express v. Implied (A. 1270)
    d. Implied Condonation
    Presumption of Condonation / Remission (A. 1271)
    Presumption of Delivery (A. 1272)
    Dalupan v. Harden, G.R. No. L-3975 27 November 1951 Lopez Vito v. Tambunting, G.R. No. L-9806 January 19, 1916
    FACTS:
    DALUPAN V HARDEN G.R.No. L-3975 November 27, 1951
    On August 26, 1948, plaintiff filed an action against the defendant for the collection of P113,837.17, with interest thereon from the filing of
    the complaint, which represents 50 per cent of the reduction plaintiff was able to secure from the Collector of Internal Revenue in the
    amount of unpaid taxes claimed to be due from the defendant. Defendant acknowledged this claim and prayed that judgment be rendered
    accordingly. In the meantime, the receiver in the liquidation case No. R-59634 and the wife of the defendant, Esperanza P. de Harden, filed an
    answer in intervention claiming that the amount sought by the plaintiff was exorbitant and prayed that it be reduced to 10 per cent of the
    rebate. By reason of the acquiescence of the defendant to the claim on one hand, and the opposition of the receiver and of the wife on the
    other, an amicable settlement was concluded by the plaintiff and the intervenor whereby it was agreed that the sum of P22,767.43 be paid to
    the plaintiff from the funds under the control of the receiver "and the balance of P91,069.74 shall be charged exclusively against the
    defendant Fred M. Harden from whatever share he may still have in the conjugal partnership between him and Esperanza P. de Harden.
    ISSUE :
    Whether or not the writ of execution asked for by the plaintiff on the two checks is premature.
    RULING:
    Examining the terms the court finds that the stipulation limits the right of the plaintiff to ask for the execution of the judgment to whatever
    share Fred M. Harden may still have in the conjugal partnership between him and his wife after the final liquidation and partition thereof.
    The execution of the judgment is premised upon a condition precedent, which is the final liquidation and partition of the conjugal
    partnership. Note that the condition does not refer to the liquidation of a particular property of the partnership. It refers to the over-all and
    final liquidation of the partnership. Such being the stipulation of the parties which was sanctioned and embodied by the Court in its decision,
    it is clear that the writ of execution asked for by the plaintiff on the two checks is premature.
    Confusion or Merger of Rights (A. 1275-1277)
    Meaning and Definition (A. 1275)
    • Valmonte v. Court of Appeals, G.R. No. L-41621, February 18, 1999
    • Mota v. Serra, G.R. No. 22825, Feb. 14, 1925
    FACTS:
    ESTATE OF MOTA V SERRA G.R.No. 22825 February 14, 1925
    On February 1, 1919, plaintiffs and defendant entered into a contract of partnership, marked Exhibit A, for the construction and exploitation
    of a railroad line from the "San Isidro" and "Palma" centrals to the place known as "Nandong". The original capital stipulated was P150,000.
    It was covenanted that the parties should pay this amount in equal parts and the plaintiffs were entrusted with the administration of the
    partnership.
    January 29, 1920, the defendant entered into a contract of sale with Venancio Concepcion, Phil. C. Whitaker, and Eusebio R. de Luzuriaga,
    whereby he sold to the latter the estate and central known as "Palma" with its running business, as well as all the improvements,
    machineries and buildings, real and personal properties, rights, choses in action and interests, including the sugar plantation of the harvest
    year of 1920 to 1921, covering all the property of the vendor. Before the delivery to the purchasers of the hacienda thus sold, Eusebio R. de
    Luzuriaga renounced all his rights under the contract of January 29, 1920, in favor of Messrs. Venancio Concepcion and Phil. C. Whitaker.
    Afterwards, on January 8, 1921, Venancio Concepcion and Phil. C. Whitaker bought from the plaintiffs the one half of the railroad line
    pertaining to the latter executing therefor the document Exhibit 5. The price of this sale was P237,722.15, excluding any amount which the
    defendant might be owing to the plaintiffs.
    ISSUE:
    Whether or not there was confusion of the rights of the creditor and debtor
    RULING:
    The purchasers, Phil. C. Whitaker and Venancio Concepcion, to secure the payment of the price, executed a mortgage in favor of the plaintiffs
    on the same rights and titles that they had bought and also upon what they had purchased from Mr. Salvador Serra. In other words, Phil C.
    Whitaker and Venancio Concepcion mortgaged unto the plaintiffs what they had bought from the plaintiffs and also what they had bought
    from Salvador Serra. If Messrs. Phil. C. Whitaker and Venancio Concepcion had purchased something from Mr. Salvador Serra, the herein
    defendant, regarding the railroad line, it was undoubtedly the one-half thereof pertaining to Mr. Salvador Serra. This clearly shows that the
    rights and titles transferred by the plaintiffs to Phil. C. Whitatker and Venancio Concepcion were only those they had over the other half of
    the railroad line. Therefore, as already stated, since there was no novation of the contract between the plaintiffs and the defendant, as
    regards the obligation of the latter to pay the former one-half of the cost of the construction of the said railroad line, and since the plaintiffs
    did not include in the sale, evidenced by Exhibit 5, the credit that they had against the defendant, the allegation that the obligation of the
    defendant became extinguished by the merger of the rights of creditor and debtor by the purchase of Messrs. Phil. C. Whitaker and Venancio
    Concepcion is wholly untenable.

    • Yek Tong Lin Fire & Marine Insurance Co., Ltd. v. Yusingco, G.R.
    Facts:
    Defendant Pelagio Yusingco was the owner of the steamship Yusingco and, as such, he executed, on November 19, 1927, a power of attorney
    in favor of Yu Seguioc to administer, lease, mortgage and sell his properties, including his vessels or steamship. Yu Seguioc mortgaged to the
    plaintiff Yek Tong Lin Fire & Marine Insurance Co., Ltd., with the approval of the Bureau of Customs, the steamship Yusingco belonging to the
    defendant. One year and some months later, the steamship Yusingco needed some repairs which were made by the Earnshaw Docks &
    Honolulu Iron Works. The repairs were made upon the guaranty of the defendant and appellant Vicente Madrigal at a cost of P8,244.66.
    When neither A. Yusingco Hermanos nor Pelagio Yusingco could pay said sum to the Earnshaw Docks & Honolulu Iron Works, the defendant
    and appellant Vicente Madrigal had to make payment thereof with the stipulated interest thereon, which was at the rate of 9 per cent per
    annum, on March 9, 1932, because he was bound thereto by reason of the bond filed by him, the payment then made by him having
    amounted to P8,777.60. When said defendant discovered that he was not to be reimbursed for the repairs made on the steamship Yusingco,
    he brought an action against his codefendant Pelagio Yusingco and A. Yusingco Hermanos to compel them to reimburse, thereby giving rise
    to civil case No. 41654 of the Court of First Instance of Manila, entitled "Vicente Madrigal, plaintiff, vs. Pelagio Yusingco and A. Yusingco
    Hermanos, defendants" which resulted in a judgment favorable to him and adverse to the Yusingcos.
    ISSUE:
    Whether or not obligations were extinguished by reason of the merger of the rights of the debt or and creditor?
    RULING:
    After the steamship Yusingco had been sold by virtue of the judicial writ issued in civil case No. 41654 for the execution of the judgment
    rendered in favor of Vicente Madrigal, the only right left to the plaintiff was to collect its mortgage credit from the purchaser thereof at
    public auction, inasmuch as the rule is that a mortgage directly and immediately subjects the property on which it is imposed, whoever its
    possessor may be, to the fulfillment of the obligation for the security of which it was created (article 1876, Civil code); but it so happens that
    it can not take such steps now because it was the purchaser of the steamship Yusingco at public auction, and it was so with full knowledge
    that it had a mortgage credit on said vessel. Obligations are extinguished by the merger of the rights of the creditor and debtor (articles 1156
    and 1192, Civil Code).
    Requisites (A. 1276-1277)
    Effects
    Compensation (A. 1278-1290)
    Meaning and Definition (A. 1278)
    • Soriano v. People, G.R. No. 181692, Aug. 14, 2013
    TOPIC: Legal Compensation
    Adelaida Soriano v. People of the Philippines
    G.R. No. 181692, August 14, 2013

    Facts: Evelyn Alagao (Evelyn), daughter of private complainant Consolacion Alagao (Alagao), as borrower-mortgagor, executed a “Contract
    of Loan Secured by Real Estate Mortgage with Special Power hn.h
    np0 q11qqqsscto Sell Mortgage Property without Judicial Proceedings” in favor of petitioner as lender-mortgagee. The instrument provides
    for a P40,000 loan secured by a parcel of land registered in Evelyn’s name. It likewise provides that the loan was to be paid two years from
    the date of execution of the contract and that Evelyn agrees to give petitioner ¼ of every harvest from her cornland until the full amount of
    the loan has been paid, starting from the first harvest. Based on Alagao’s testimony, the first harvest was made only in September 1994.
    Petitioner on the other hand claims that from the time the loan was obtained until September 1994, there were already four harvests. During
    pre-trial, it was admitted by Alagao that she did not only receive P40,000 as provided in the contract of loan but P51,730 in the form of
    fertilizers and cash advances.

    Alagao and some companions delivered 398 sacks of corn grains to petitioner. Petitioner prepared a voucher indicating that Alagao had
    received the amount of P85,607 as full payment for the 398 sacks of corn grains. Alagao signed said voucher even if she only received
    P3,000. According to Alagao, 64 of the 398 sacks will serve as partial payment of her P40,000 loan with petitioner while the remaining
    balance will come from the P85,607 cash she was supposed to receive as payment for the corn grains delivered so she can redeem her
    daughter’s land title.

    The Regional Trial Court (RTC) of Misamis Oriental, Branch 40, rendered a decision finding petitioner guilty beyond reasonable doubt of the
    crime of estafa. However, the CA set petitioner’s conviction aside in the assailed decision. The CA ruled that the prosecution failed to
    establish that petitioner made false pretenses, fraudulent acts or fraudulent means to induce Alagao to deliver to her the 398 sacks of corn
    grains. In fact, in Alagao’s testimony, she admitted that she delivered the corn grains to petitioner because the latter was demanding
    payment from her and she wanted to pay her obligation of P40,000 to petitioner so that she could get back the title of her daughter’s
    mortgaged property and the balance of the total cash value of the 398 sacks of corn. Thus, the CA held, in the absence of deceit, petitioner’s
    liability is only civil. Unsatisfied, petitioner is now before the Supreme Court questioning her civil liability.

    Issue: Whether legal compensation is proper.

    Held: Yes. Compensation is a mode of extinguishing to the concurrent amount, the debts of persons who in their own right are creditors and
    debtors of each other. The object of compensation is the prevention of unnecessary suits and payments through the mutual extinction by
    operation of law of concurring debts. Article 1279 of the Civil Code provides for the requisites for compensation to take effect and the Court
    ruled that all the requisites for compensation are present in the instant case.

    First, petitioner and Alagao are debtors and creditors of each other. It is undisputable that petitioner and Alagao owe each other sums of
    money. Petitioner owes P85,607 for the value of the corn grains delivered to her by Alagao in September 1994 while Alagao owes petitioner
    P51,730 by virtue of a loan extended by the latter in February 1994. Second, both debts consist in a sum of money. There is no issue as to the
    P85,607 debt by petitioner that it consists a sum of money. As to the P51,730 received by Alagao from petitioner, though what was extended
    by petitioner consists of cash advances and fertilizers, there is no dispute that said amount is payable in money. Third, both debts are due.
    Upon delivery of the 398 sacks to petitioner, she was under the obligation to pay for the value thereof as buyer. As to Alagao’s debt, the
    contract of loan provided that it is payable in February 1996. Though it was not yet due in September 1994 when she delivered the 398
    sacks of corn grains to petitioner, it eventually became due at the time of trial of the instant case. Fourth, both debts are liquidated and
    demandable. A debt is liquidated when the amount is known or is determinable by inspection of the terms and conditions of relevant
    documents. There is no dispute that the value of the 398 sacks of corn grains is P85,607. And lastly, neither of the debts are subject of a
    controversy commenced by a third person. There are no third-party claims with respect to Alagao’s P51,730 loan. As to petitioner’s P85,607
    debt representing the 398 sacks of corn grains, the alleged other owners have not commenced any action to protect their claim over it. Thus,
    the P85, 607 debt cannot be considered subject of a controversy by a third person.

    With respect to the 1/4 share in the harvest due to petitioner as provided in the contract of loan, the same cannot be considered in the legal
    compensation of the debts of the parties since it does not consist in a sum of money, said share being in the form of harvests. More
    importantly, it is not yet liquidated. There is still a dispute as to how many harvests were made from the time of the execution of contract of
    loan up to the time the action was commenced against petitioner and even when the principal obligation became due in February 1996.
    Thus, the harvests due petitioner is not capable of determination.

    • Mondragon Personal Sales, Inc. v. Sola, Jr.; G.R. No. 174882, Jan. 21, 2013
    Facts:
    Petitioner Mondragon Personal Sales entered into a Contract of Services with respondent Sola whereby the latter would provide
    service facilities (bodega cum office) to petitioner’s products, sales force and customers for a consideration of commission or service fee
    which at a certain rate of the monthly sales of Mondragon.

    Prior to the execution of the said contract, respondent’s wife had an existing obligation with petitioner. Such obligation was
    acknowledged and confirmed by the respondent and made himself (with his wife) liable to pay such debt on installment basis. By virtue of
    which, the petitioner withheld the payment of the respondent’s service fees and applied the same as partial payments to the debt which he
    obligated to pay. Thereafter, respondent closed and suspended the operation of his office cum bodega and subsequently filed for an action
    for accounting and rescission against the petitioner.

    The RTC ruled in favor of the petitioner Mondragon and held that there was no fraud on the part of the latter that would rescind
    their contract and that it is correct when it deducted the service commission of Sola to his wife’s account. The CA reversed the RTC’s
    decision.

    Issue:
    Whether legal compensation under Art. 1279 of the Civil Code would apply in this case.

    Held:
    Yes. The petitioner's act of withholding respondent's service fees/commissions and applying them to the latter's outstanding
    obligation with the former is merely an acknowledgment of the legal compensation that occurred by operation of law between the parties.
    Compensation is a mode of extinguishing to the concurrent amount the obligations of persons who in their own right and as principals are
    reciprocally debtors and creditors of each other. Legal compensation takes place by operation of law when all the requisites are present, as
    opposed to conventional compensation which takes place when the parties agree to compensate their mutual obligations even in the
    absence of some requisites. Legal compensation requires the concurrence of the following conditions:

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

    All the requisites for legal compensation are present in this case. Petitioner and respondent are both principal obligors and creditors of each
    other. Their debts to each other consist in a sum of money. Respondent acknowledged and bound himself to pay petitioner the amount of
    P1,973,154.73 which was already due, while the service fees owing to respondent by petitioner become due every month. Respondent's debt
    is liquidated and demandable, and petitioner's payments of service fees are liquidated and demandable every month as they fall due. Finally,
    there is no retention or controversy commenced by third persons over either of the debts. Thus, compensation is proper up to the
    concurrent amount where petitioner owes respondent P125,040.01 for service fees, while respondent owes petitioner P1,973,154.73.

    Requisites (A. 1279)


    • Banco de Oro v. Ypil, G.R. No. 226144. October 14, 2020
    • Trinidad v. Acapulco, G.R. No. 147477, June 27, 2006

    FACTS:
    TRINIDAD V ACAPULCO G.R.No. 147477 June 27, 2006
    On May 6, 1991, respondent Estrella Acapulco filed a Complaint before the RTC seeking the nullification of a sale she made in favor of
    petitioner Hermenegildo M. Trinidad. She alleged: Sometime in February 1991, a certain Primitivo Cañ ete requested her to sell a Mercedes
    Benz for P580,000.00. Cañ ete also said that if respondent herself will buy the car, Cañ ete was willing to sell it for P500,000.00. Petitioner
    borrowed the car from respondent for two days but instead of returning the car as promised, petitioner told respondent to buy the car from
    Cañ ete for P500,000.00 and that petitioner would pay respondent after petitioner returns from Davao. Following petitioner’s instructions,
    respondent requested Cañ ete to execute a deed of sale covering the car in respondent’s favor for P500,000.00 for which respondent issued
    three checks in favor of Cañ ete. Respondent thereafter executed a deed of sale in favor of petitioner even though petitioner did not pay her
    any consideration for the sale. When petitioner returned from Davao, he refused to pay respondent the amount of P500,000.00 saying that
    said amount would just be deducted from whatever outstanding obligation respondent had with petitioner. Due to petitioner’s failure to pay
    respondent, the checks that respondent issued in favor of Cañ ete bounced, thus criminal charges were filed against her.[3] Respondent then
    prayed that the deed of sale between her and petitioner be declared null and void; that the car be returned to her; and that petitioner be
    ordered to pay damages.
    ISSUE:
    Whether or not petitioner’s claim for legal compensation was already too late
    RULING:
    The court ruled in favor of the petitioner. Compensation takes effect by operation of law even without the consent or knowledge of the
    parties concerned when all the requisites mentioned in Article 1279 of the Civil Code are present.[26] This is in consonance with Article
    1290 of the Civil Code which provides that: Article 1290. When all the requisites mentioned in article 1279 are present, compensation takes
    effect by operation of law, and extinguishes both debts to the concurrent amount, even though the creditors and debtors are not aware of the
    compensation. Since it takes place ipso jure,[27] when used as a defense, it retroacts to the date when all its requisites are fulfilled.

    • EGV Realty v. CA, G.R. No. 120236 July 20, 1999


    FACTS:
    E.G.V. REALTY V CA G.R.No. 120236 July 20, 1999
    Petitioner E.G.V. Realty Development Corporation is the owner/developer of a seven- storey condominium building known as Cristina
    Condominium. Cristina Condominium Corporation holds title to all common areas of Cristina Condominium and is in charge of managing,
    maintaining and administering the condominium’s common areas and providing for the building’s security. Respondent Unisphere
    International, Inc. (hereinafter referred to as Unisphere) is the owner/occupant of Unit 301 of said condominium. On November 28, 1981,
    respondent Unisphere’s Unit 301 was allegedly robbed of various items valued at P6,165.00. The incident was reported to petitioner CCC. On
    July 25, 1982, another robbery allegedly occurred at Unit 301 where the items carted away were valued at P6,130.00, bringing the total
    value of items lost to P12,295.00. This incident was likewise reported to petitioner CCC. On October 5, 1982, respondent Unisphere
    demanded compensation and reimbursement from petitioner CCC for the losses incurred as a result of the robbery. On January 28, 1987,
    petitioners E.G.V. Realty and CCC jointly filed a petition with the Securities and Exchange Commission (SEC) for the collection of the unpaid
    monthly dues in the amount of P13,142.67 against respondent Unisphere.
    ISSUE :
    Whether or not set-off or compensation has taken place in the instant case.
    RULING:
    Compensation or offset under the New Civil Code takes place only when two persons or entities in their own rights, are creditors and
    debtors of each other. (Art. 1278).
    A distinction must be made between a debt and a mere claim. A debt is an amount actually ascertained. It is a claim which has been formally
    passed upon by the courts or quasi- judicial bodies to which it can in law be submitted and has been declared to be a debt. A claim, on the
    other hand, is a debt in embryo. It is mere evidence of a debt and must pass thru the process prescribed by law before it develops into what
    is properly called a debt. Absent, however, any such categorical admission by an obligor or final adjudication, no compensation or off-set can
    take place. Unless admitted by a debtor himself, the conclusion that he is in truth indebted to another cannot be definitely and finally
    pronounced, no matter how convinced he may be from the examination of the pertinent records of the validity of that conclusion the
    indebtedness must be one that is admitted by the alleged debtor or pronounced by final judgment of a competent court or in this case by the
    Commission.
    There can be no doubt that Unisphere is indebted to the Corporation for its unpaid monthly dues in the amount of P13,142.67. This
    is admitted.
    Total v. Partial (A. 1281)
    Voluntary (A. 1282)
    Judicial (A. 1283-1284)
    Legal Compensation (A. 1290 in rel. to A. 1279)
    Requisites (A. 1280, 1282)
    • Lao v. Special Plans, Inc., G.R. No. 164791, June 29, 2010
    FACTS:
    SELWIN LAO V. SPECIAL PLANS, INC. GR No. 164729; June 29, 2010
    Petitioners Selwyn F. Lao and Edgar Manansala (Manansala), together with Benjamin Jim (Jim), entered into a Contract of Lease with
    respondent Special Plans, Inc. (SPI) for the period January 16, 1993 to January 15, 1995 over SPI’s building at No. 354 Quezon Avenue,
    Quezon City. Petitioners intended to use the premises for their karaoke and restaurant business known as “Saporro Restaurant”.
    Upon expiration of the lease contract, it was renewed for a period of eight months at a monthly rate of P23, 000.00. On June 3, 1996, SPI sent
    a Demand Letter to the petitioners asking for full payment of rentals in arrears.Receiving no payment, SPI filed on July 23, 1996 a Complaint
    for sum of money with the MeTC of Quezon City, claiming unpaid rentals of P118, 000.00 covering the period March 16, 1996 to August 16,
    1996.
    Petitioners answered faulting SPI for making them believe that it owns the leased property and that SPI did not deliver the leased premises
    in a condition fit for petitioners’ intended use. Thus, petitioners claimed that they were constrained to incur expenses for necessary repairs
    as well as expenses for the repair of structural defects, which SPI failed and refused to reimburse. Petitioners prayed that the complaint be
    dismissed and judgment on their counterclaims be rendered ordering SPI to pay them the sum of P422, 920.40 as actual damages, as well as
    moral damages, attorney’s fees and exemplary damages.
    ISSUE:
    Whether or not the cost of repairs incurred by the petitioners should be compensated against the unpaid rentals.
    RULING:
    Petitioners failed to properly discharge their burden to show that the debts are liquidated and demandable. Consequently, legal
    compensation is inapplicable.

    The petitioners attempted to prove that they spent for the repair of the roofing, ceiling and flooring, as well as for waterproofing. However,
    they failed to appreciate that, as per their lease contract, only structural repairs are for the account of the lessor, herein respondent SPI. In
    which case, they overlooked the need to establish that aforesaid repairs are structural in nature, in the context of their earlier agreement. It
    would have been an altogether different matter if the lessor was informed of the said structural repairs and he implicitly or expressly
    consented and agreed to take responsibility for the said expenses. Such want of evidence on this respect is fatal to this appeal. Consequently,
    their claim remains unliquidated and, legal compensation is
    inapplicable.

    How Established
    When Prohibited (A. 1287-1288)
    • Apodaca v. NLRC, G.R. No. 80039 April 18, 1989
    FACTS:
    APODACA V NLRC G.R.No. 80039 April1 8, 1989
    Petitioner was employed in respondent corporation. On August 28, 1985, respondent Jose M. Mirasol persuaded petitioner to subscribe to
    P1,500 shares of respondent corporation it P100.00 per share or a total of P150,000.00. He made an initial payment of P37,500.00. On
    September 1, 1975, petitioner was appointed President and General Manager of the respondent corporation. However, on January 2, 1986,
    he resigned.
    On December 19, 1986, petitioner instituted with the NLRC a complaint against private respondents for the payment of his unpaid wages, his
    cost of living allowance, the balance of his gasoline and representation expenses and his bonus compensation for 1986. Petitioner and
    private respondents submitted their position papers to the labor arbiter. Private respondents admitted that there is due to petitioner the
    amount of P17,060.07 but this was applied to the unpaid balance of his subscript in the amount of P95,439.93. Petitioner questioned the set-
    off alleging that there was no call or notice for the payment of unpaid subscription and that, accordingly, the alleged obligation is not
    enforceable.
    ISSUE :
    Does the National Labor Relations Commission (NLRC) have jurisdiction to resolve a claim for non-payment of stock subscriptions to a
    corporation? Assuming that it has, can an obligation arising therefrom be offset against a money claim of an employee against the employer?
    RULING:
    Firstly, the NLRC has no jurisdiction to determine such intra-corporate dispute between the stockholder and the corporation as in the matter
    of unpaid subscriptions. This controversy is within the exclusive jurisdiction of the Securities and Exchange Commission.
    Secondly, assuming arguendo that the NLRC may exercise jurisdiction over the said subject matter under the circumstances of this case, the
    unpaid subscriptions are not due and payable until a call is made by the corporation for payment. Private respondents have not presented a
    resolution of the board of directors of respondent corporation calling for the payment of the unpaid subscriptions. It does not even appear
    that a notice of such call has been sent to petitioner by the respondent corporation.

    • Francia v. CA, G.R. No. L-67649 June 28, 1988

    FACTS:
    FRANCIA V CA G.R.No. 67649 June 28, 1998
    Engracio Francia is the registered owner of a residential lot and a two-story house built upon it situated at Barrio San Isidro, now District of
    Sta. Clara, Pasay City, Metro Manila. On October 15, 1977, a 125 square meter portion of Francia's property was expropriated by the
    Republic of the Philippines for the sum of P4,116.00 representing the estimated amount equivalent to the assessed value of the aforesaid
    portion.Since 1963 up to 1977 inclusive, Francia failed to pay his real estate taxes. Thus, on December 5, 1977, his property was sold at
    public auction by the City Treasurer of Pasay City pursuant to Section 73 of Presidential Decree No. 464 known as the Real Property Tax
    Code in order to satisfy a tax delinquency of P2,400.00. Ho Fernandez was the highest bidder for the property. Francia was not present
    during the auction sale since he was in Iligan City at that time helping his uncle ship bananas. On March 3, 1979, Francia received a notice of
    hearing of LRC Case No. 1593-P "In re: Petition for Entry of New Certificate of Title" filed by Ho Fernandez, seeking the cancellation of TCT
    No. 4739 (37795) and the issuance in his name of a new certificate of title. On March 20, 1979, Francia filed a complaint to annul the auction
    sale. He later amended his complaint on January 24, 1980.
    ISSUE:
    Whether or not francia’s tax delinquency of P2,400.00 has been extinguished by legal compensation.
    RULING:
    There is no legal basis for the contention. By legal compensation, obligations of persons, who in their own right are reciprocally debtors and
    creditors of each other, are extinguished (Art. 1278, Civil Code). The circumstances of the case do not satisfy the requirements provided by
    Article 1279, to wit:
    "(1) that each one of the obligors be bound principally and that he be at the same time a principal creditor of the other;
    We have consistently ruled that there can be no off-setting of taxes against the claims that the taxpayer may have against the government. A
    person cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax being collected.
    The collection of a tax cannot await the results of a lawsuit against the government.
    A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set- off under the statutes of set-off, which are
    construed uniformly, in the light of public policy, to exclude the remedy in an action or any indebtedness of the state or municipality to one
    who is liable to the state or municipality for taxes. Neither are they a proper subject of recoupment since they do not arise out of the contract
    or transaction sued on. "The general rule based on grounds of public policy is well-settled that no set-off admissible against demands for
    taxes levied for general or local governmental purposes. The reason on which the general rule is based, is that taxes are not in the nature of
    contracts between the party and party but grow out of duty to, and are the positive acts of the government to the making and enforcing of
    which, the personal consent of individual taxpayers is not required

    Effects:
    a. Upon Principal or Upon Several Debts (A. 1289) b. Upon Guarantor (A. 1280)
    c. Of Assignment of Rights (A. 1285)
    Novation (A. 1291-1304)
    Meaning and Definition; How Effected (A. 1291)
    • The Wellex Group, Inc. v. U-Land Airlines, Co., Ltd, G.R. No. 167519, January 14, 2015

    FACTS:

    DOCTRINCE: For Article 1191 to be applicable, there must be reciprocal prestations as distinguished from mutual obligations between or
    among the parties. A prestation is the object of an obligation, and it is the conduct required by the parties to do or not to do, or to give.
    Parties may be mutually obligated to each other, but the prestations of these obligations are not necessarily reciprocal. The reciprocal
    prestations must necessarily emanate from the same cause that gave rise to the existence of the contract. Reciprocity arises from identity of
    cause, and necessarily the two obligations are created at the same time.
    The failure of one of the parties to comply with its reciprocal prestation allows the wronged party to seek the remedy of Art.1191. The
    injured party is entitled to rescission or resolution under Art. 1191, and even the payment of damages. It is a principal action precisely
    because it is a violation of the original reciprocal prestation.
    Article 1381 and 1383, on the other hand, pertain to rescission where creditors or even third persons not privy to the contract can file an
    action due to lesion or damage as a result of the contract. When a party seeks the relief of rescission as provided in Article 1381, there is no
    need for reciprocal prestations to exist between or among the parties. All that is required is that the contract should be among those
    enumerated in Article 1381 for the contract to be considered rescissible.
    Unlike Article 1191, rescission under Art. 1381 must be a subsidiary action because of Article 1383.
    Article 1381(3) pertains in particular to a series of fraudulent actions on the part of the debtor who is in the process of transferring or
    alienating property that can be used to satisfy the obligation of the debtor to the creditor.

    Wellex is a corporation established under Philippine law and it maintains airline operations in the Philippines. It owns shares of stock in
    several corporations including Air Philippines International Corporation(APIC), Philippine Estates Corporation (PEC), and Express Savings
    Bank(ESB).

    Wellex alleges that it owns all shares of stock of Air Philippines Corporation (APC). While U-Land Airlines Co. Ltd. (U-Land) “is a corporation
    duly organized and existing under the laws of Taiwan, registered to do business in the Philippines. It is engaged in the business of air
    transportation in Taiwan and in other Asian countries.
    Wellex and U-land entered into a Memorandum of Agreement (MOA) by virtue of which as provided they both agreed to develop a long-term
    business relationship through the creation of joint interest in (1) airline operations and (2) property development projects in the
    Philippines. The MOA would be implemented through (1) the acquisition of shares by the U-Land from the Wellex, of the shares of stocks of
    APC and PEC ; (2) by another joint development agreement between U-Land and PEC; (3) Option for U-Land to acquire shares of ESB.

    Part of the agreement provides that within 40 days from the date of said agreement unless extended by mutual agreement, U-Land and
    WELLEX shall execute a Share Holder Purchase Agreement (SHPA) covering the acquisition by U-Land of the APIC and PEC shares.

    Accordingly, Wellex and U-Land agreed that if they were unable to agree on the terms of the SPHA and the joint development agreement
    within 40 days from the signing, then the first MOA would cease to be effective. And if in case no agreements were executed, the parties
    would be released from their respective undertakings, except that Wellex would be required to refund within three days the $3 Million given
    as initial funding by U-Land for their development projects. If Wellex was unable to refund the $3 Million dollars to U-Land, then U-Land
    would have the right to recover on
    the 57,000,000 PEC shares that would be delivered to it.

    The 40-day period lapsed. Wellex and U-Land were not able to enter into any SHPA although drafts were exchanged between the twoDespite
    the absence of a SHPA, U-Land remitted to Wellex $7.5 Million Dollars which was acknowledged by Wellex.

    According to Wellex, the parties agreed to enter into a security arrangement. If the sale of the shares of stock failed to push through, the
    partial payments or remittances U-Land made were to be secured by these shares of stock and parcels of land.50 This meant that U-Land
    could recover the amount it paid to Wellex by selling these shares of stock of 60,770,000 and 72,601,000 and land titles or using them to
    generate income. Despite these transactions, Wellex and U-Land still failed to enter into the SHPA and the Joint Development Agreement. So
    10 months after the last formal communication between the two parties, U-Land demanded the refund for the amount it remitted.

    Due to failure of Wellex to heed the demand, U-Land filed a complaint for rescission of the First Memorandum of Agreement and damages
    against Wellex.

    ISSUE:

    Whether or not U-Land is praying for rescission or resolution under Art.1191, and not rescission under Article 1381.

    RULING:

    The Court ruled that rescission under 1191(also known as resolution), and not under 1381, is proper in this case.

    For Article 1191 to be applicable, there must be reciprocal prestations as distinguished from mutual obligations between or among the
    parties. A prestation is the object of an obligation, and it is the conduct required by the parties to do or not to do, or to give. Parties may be
    mutually obligated to each other, but the prestations of these obligations are not necessarily reciprocal. The reciprocal prestations must
    necessarily emanate from the same cause that gave rise to the existence of the contract. Reciprocity arises from identity of cause, and
    necessarily the two obligations are created at the same time.

    The failure of one of the parties to comply with its reciprocal prestation allows the wronged party to seek the remedy of Art.1191. The
    injured party is entitled to rescission or resolution under Art. 1191, and even the payment of damages. It is a principal action precisely
    because it is a violation of the original reciprocal prestation.

    Article 1381 and 1383, on the other hand, pertain to rescission where creditors or even third persons not privy to the contract can file an
    action due to lesion or damage as a result of the contract. When a party seeks the relief of rescission as provided in Article 1381, there is no
    need for reciprocal prestations to exist between or among the parties. All that is required is that the contract should be among those
    enumerated in Article 1381 for the contract to be considered rescissible.

    Unlike Article 1191, rescission under Art. 1381 must be a subsidiary action because of Article 1383.
    Contrary to petitioner Wellex’s argument, this is not rescission under Article 1381 of the Civil Code. This case does not involve prejudicial
    transactions affecting guardians, absentees, or fraud of creditors.

    Article 1381(3) pertains in particular to a series of fraudulent actions on the part of the debtor who is in the process of transferring or
    alienating property that can be used to satisfy the obligation of the debtor to the creditor.
    There is no allegation of fraud for purposes of evading obligations to other creditors. The actions of the parties involving the terms of the
    First Memorandum of Agreement do not fall under any of the enumerated contracts that may be subject of rescission.

    Moreover, the desire of both parties to enter into a share purchase agreement that could allow both parties to expand their respective airline
    operations in the Philippines and other neighboring countries give raise to a reciprocal prestation,
    Hence, respondent U-Land correctly sought the principal relief of rescission or resolution under Article 1191.

    • Bank of the Philippine Islands v. Domingo, G.R. No. 169407, March 25, 2015

    ACTS: Respondent Amador Domingo and his wife, the late Mercy Maryden Domingo executed a Promissory Note in favor of Makati Auto
    Center, Inc. payable in 48 successive monthly installments. They simultaneously executed a Deed of Chattel Mortgage over a 1993 Mazda
    323 to secure the payment of their Promissory Note. Makati Auto Center, Inc. then assigned all its rights and interests over the said
    Promissory Note and chattel mortgage to Far East Bank and Trust Company (FEBTC).
    On April 7, 2000 FEBTC and BPI merged with BPI as the surviving corporation, FEBTC the absorbed corporation. By virtue of said merger, all
    the assets and liabilities of FEBTC were transferred to and absorbed by BPI.

    The spouses Domingo failed to pay 21 monthly installments from January 15, 1996 to September 15, 1997. BPI, being the surviving
    corporation after the merger, demanded that the spouses Domingo pay the balance of the Promissory Note including accrued late payment
    charges/interests or to return the possession of the subject vehicle for the purpose of foreclosure in accordance with the undertaking stated
    in the chattel mortgage. When the spouses Domingo still failed to comply with its demands, BPI filed on November 14, 2000 a Complaint for
    Replevin and Damages. BPI included a John Doe as defendant because at the time of filing of the Complaint, BPI was already aware that the
    subject vehicle was in the possession of a third person but did not yet know the identity of said person.

    MeTC rendered a Decision in favor of BPI as the bank was able to establish by preponderance of evidence a valid cause of action against the
    spouses Domingo. According to the MeTC, novation is never presumed and must be clearly shown by express agreement or by acts of equal
    import. To effect a subjective novation by a change in the person of the debtor, it is necessary that the old debtor be released expressly from
    the obligation and the third person or new debtor assumes his place.

    Without such release, there is no novation and the third person who assumes the debtor's obligation merely becomes a co-debtor or surety.
    On appeal the RTC held that in novation, consent of the creditor to the substitution of the debtor need not be by express agreement, it can be
    merely implied.

    ISSUE: Whether or not, there is novation on the loan obligation of the spouses Domingo to BPI that would release the obligation and for
    Carmelita to be substituted as a debtor?

    HELD: NO. Article 1293 of the New Civil Code provides: Novation which consists in substituting a new debtor in the place of the original one,
    may be made even without the knowledge or against the will of the latter, but not without the consent of the creditor.

    Under this provision, there are two forms of novation by substituting the person of the debtor, and they are: (1) expromision and (2)
    delegacion. In the former, the initiative for the change does not come from the debtor and may even be made without his knowledge, since it
    consists in a third person assuming the obligation. As such, it logically requires the consent of the third person and the creditor. In the latter,
    the debtor offers and the creditor accepts a third person who consents to the substitution and assumes the obligation, so that the
    intervention and the consent of these three persons are necessary. In these two modes of substitution, the consent of the creditor is an
    indispensable requirement. Both the RTC and the Court of Appeals found that there was novation by delegacion in the case at bar. The Deed
    of Sale with Assumption of Mortgage was executed between Mercy and Carmelita, thus, their consent to the substitution as debtors and third
    person, respectively, are deemed undisputed.

    It should be noted that in order to give novation its legal effect, the law requires that the creditor should consent to the substitution of a new
    debtor. This consent must be given expressly for the reason that, since novation extinguishes the personality of the first debtor who is to be
    substituted by a new one, it implies on the part of the creditor a waiver of the right that he had before the novation, which waiver must be
    express under the principle that renuntiatio non praesumitor, recognized by the law in declaring that a waiver of right may not be
    performed unless the will to waive is indisputably shown by him who holds the right.

    Effects (A. 1296)


    Kinds (A. 1292)
    • Rivas v. Bacotoc, G.R. No. 228704, 2 December 2020

    4. Objective Novation (A. 1297-1298)


    • Hernandez-Nievera. v. Hernandez, G.R. No. 171165, February 14, 2011

    FACTS:
    a Memorandum of Agreement (MOA) whereby it was given the option to buy pieces of land owned by petitioners Carolina Hernandez-
    Nievera, Margarita H. Malvar and Demetrio P. Hernandez, Jr. Demetrio, under authority of a Special Power of Attorney to Sell or Mortgage,
    signed the MOA also in behalf of Carolina and Margarita. In the aggregate, the realty measured 4,580,451 square meters
    and was segregated by agreement into Area I and Area II.
    PMRDC delivered to petitioners certain checks representing the money, the same however allegedly bounced. Hence, on January 8, 1999,
    petitioners demanded the return of the corresponding TCTs over the land but PMRDC said that
    the
    Pool.
    ISSUE:
    Whether or not the novation of the MOA is valid.
    RULING:
    Project Movers Realty & Development Corporation (PMRDC) is a duly organized domestic corporation engaged in real estate development.
    It entered into On March 23, 1998, the PMRDC entered with LBP and Demetrio - the latter purportedly acting under authority of the same
    special power of attorney as in the MOA - into a Deed of Assignment and Conveyance (DAC).
    TCTs could no longer be delivered back to petitioners as the covered properties had already
    been conveyed and assigned to the Asset Pool pursuant to the March 23, 1998 DAC. Petitioner contended that Demetrio could not have
    entered into the said agreement as his power of attorney was limited only to selling or mortgaging the properties and not conveying the
    same to the Asset

    Thus, it becomes clear that Demetrio's special power of attorney to sell is sufficient to enable him to make a binding commitment under the
    DAC in behalf of Carolina and Margarita. In particular, it does include the authority to extinguish PMRDC's obligation under the MOA to
    deliver option money and agree to a more flexible term by agreeing instead to receive shares of stock in lieu thereof and in consideration of
    the assignment and conveyance of the properties to the Asset Pool. Indeed, the terms of his special power of attorney allow much leeway to
    accommodate not only the terms of the MOA but also those of the subsequent agreement in the DAC which, in this case, necessarily and
    consequently has resulted in a novation of PMRDC's integral obligations. There are two ways which could indicate, in fine, the presence of
    novation and thereby produce the effect of extinguishing an obligation by another which substitutes the same. The first is when novation has
    been explicitly stated and declared in unequivocal terms. The second is when the old and the new obligations are incompatible on every
    point. The test of incompatibility is whether the two obligations can stand together, each one having its independent existence. If they
    cannot, they are incompatible, and the latter obligation novates the first.

    5. Subjective Novation
    a. Substitution of the Debtor (A. 1293): Expromision (A. 1236-1237, 1294)
    v. Delegacion (A. 1236-1237, 1295)
    • Mindanao Savings and Loan Association, Inc., v. Willkom, G.R. No. 178618, October 20, 2010
    FACTS:
    The First Iligan Savings and Loan Association, Inc. (FISLAI) and the Davao Savings and Loan Association, Inc. (DSLAI) banks that entered into
    a merger, with DSLAI as the surviving corporation. The articles of merger were not registered with the SEC but when DSLAI changed its
    corporate name to MSLAI the amendment was approved by the SEC.Meanwhile, the Board of Directors of FISLAI passed a resolution,
    assigning its assets in favor of DSLAI which in turn assumed the former’s liabilities.The business of MSLAI, however, failed was ordered its
    closure and placed under receivership.
    Prior to the closure of MSLAI, Uy filed an action for collection of sum of money against FISLAI. The RTC issued a summary decision in favor of
    Uy, directing defendants therein (which included FISLAI) to pay the former the sum of P136, 801.70. Therafter,sheriff Bantuas levied on six
    (6) parcels of land owned by FISLAI and Willkom was the highest bidder. New certificates of title covering the subject properties were issued
    in favor of Willkom who sold one of the subject parcels of land to Go.
    MSLAI, represented by PDIC, filed a complaint forAnnulment of Sheriff’sSale, Cancellation of Title and Reconveyance of Properties against
    respondents. Therespondents averred that MSLAI had no cause of action against them or the right to recover the subject properties because
    MSLAI is a separate and distinct entity from FISLAI as the merger did not take effect.
    ISSUE:
    Whether or not there was novation of the obligation by substituting the person of the debtor
    RULING:
    It is a rule that novation by substitution of debtor must always be made with the consent of the creditor. Article 1293 of the Civil Code is
    explicit, thus:
    Art. 1293. Novation which consists in substituting a new debtor in the place of the original one, may be made even without the knowledge or
    against the will of the latter, but not without the consent of the creditor. Payment by the new debtor gives him the rights mentioned in
    Articles 1236 and 1237.
    In this case, there was no showing that Uy, the creditor, gave her consent to the agreement that DSLAI (now MSLAI) would assume the
    liabilities of FISLAI. Such agreement cannot prejudice Uy. Thus, the assets that FISLAI transferred to DSLAI remained subject to execution to
    satisfy the judgment claim of Uy against FISLAI. The subsequent sale of the properties by Uy to Willkom, and of one of the properties by
    Willkom to Go, cannot, therefore, be questioned by MSLAI.
    The consent of the creditor to a novation by change of debtor is as indispensable as the creditor’s consent in conventional subrogation in
    order that a novation shall legally take place. Since novation implies a waiver of the right which the creditor had before the novation, such
    waiver must be express.

    b. Subrogation to the Rights of the Creditor (A. 1300, 1303-1304): Legal v. Conventional (A. 1301)

    Asian Terminals, Inc. v. Philam Insurance Co., Inc., G.R. No. 181163, July 24, 2013

    FACTS:
    On April 15, 1995, Nichimen Corporation shipped to Universal Motors Corporation (Universal Motors) 219 packages containing 120 units of
    brand new Nissan Pickup Truck Double Cab 4x2 model, without engine, tires and batteries, on board the vessel S/S "Calayan Iris" from Japan
    to Manila. The shipment, which had a declared value of US$81,368 or P29,400,000, was insured with Philam against all risks under Marine
    Policy No. 708-8006717-4.
    The carrying vessel arrived at the port of Manila on April 20, 1995, and when the shipment was unloaded by the staff of ATI, it was found
    that the package marked as 03-245-42K/1 was in bad order. The Turn Over Survey of Bad Order Cargoes dated April 21, 1995 identified two
    packages, labeled 03-245-42K/1 and 03/237/7CK/2, as being dented and broken. Thereafter, the cargoes were stored for temporary
    safekeeping inside CFS Warehouse in Pier No. 5.
    On May 11, 1995, the shipment was withdrawn by R.F. Revilla Customs Brokerage, Inc., the authorized broker of Universal Motors, and
    delivered to the latter’s warehouse in Mandaluyong City. Upon the request of Universal Motors, a bad order survey was conducted on the
    cargoes and it was found that one Frame Axle Sub without LWR was deeply dented on the buffle plate while six Frame Assembly with Bush
    were deformed and misaligned. Owing to the extent of the damage to said cargoes, Universal Motors declared them a total loss.
    On August 4, 1995, Universal Motors filed a formal claim for damages in the amount of P643,963.84 against Westwind, ATI and R.F. Revilla
    Customs Brokerage, Inc. When Universal Motors’ demands remained unheeded, it sought reparation from and was compensated in the sum
    of P633,957.15 by Philam. Accordingly, Universal Motors issued a Subrogation Receipt dated November 15, 1995 in favor of Philam.
    On January 18, 1996, Philam, as subrogee of Universal Motors, filed a Complaint for damages against Westwind, ATI and R.F. Revilla Customs
    Brokerage, Inc. before the RTC of Makati City. .

    ISSUE:
    Who is liable for the damages sustained by the cargo?

    HELD:
    The Court holds that petitioner Philam has adequately established the basis of its claim against petitioners ATI and Westwind. Philam, as
    insurer, was subrogated to the rights of the consignee, Universal Motors Corporation, pursuant to the Subrogation Receipt executed by the
    latter in favor of the former. The right of subrogation accrues simply upon payment by the insurance company of the insurance claim.
    We have held that payment by the insurer to the insured operates as an equitable assignment to the insurer of all the remedies that the
    insured may have against the third party whose negligence or wrongful act caused the loss. The right of subrogation is not dependent upon,
    nor does it grow out of, any privity of contract. It accrues simply upon payment by the insurance company of the insurance claim. The
    doctrine of subrogation has its roots in equity. It is designed to promote and accomplish justice; and is the mode that equity adopts to
    compel the ultimate payment of a debt by one who, in justice, equity, and good conscience, ought to pay.
    Neither do we find support in petitioner Westwind’s contention that Philam’s right of action has prescribed. The Carriage of Goods by Sea
    Act (COGSA) or Public Act No. 521 of the 74th US Congress, was accepted to be made applicable to all contracts for the carriage of goods by
    sea to and from Philippine ports in foreign trade by virtue of Commonwealth Act (C.A.) No. 65. The prescriptive period for filing an action for
    the loss or damage of the goods under the COGSA is found in paragraph (6), Section 3, thus:
    (6) Unless notice of loss or damage and the general nature of such loss or damage be given in writing to the carrier or his agent at the port of
    discharge before or at the time of the removal of the goods into the custody of the person entitled to delivery thereof under the contract of
    carriage, such removal shall be prima facie evidence of the delivery by the carrier of the goods as described in the bill of lading. If the loss or
    damage is not apparent, the notice must be given within three days of the delivery.
    Common carriers, from the nature of their business and for reasons of public policy, are bound to observe extraordinary diligence in the
    vigilance over the goods transported by them. Subject to certain exceptions enumerated under Article 1734 of the Civil Code, common
    carriers are responsible for the loss, destruction, or deterioration of the goods. The extraordinary responsibility of the common carrier lasts
    from the time the goods are unconditionally placed in the possession of, and received by the carrier for transportation until the same are
    delivered, actually or constructively, by the carrier to the consignee, or to the person who has a right to receive them.
    The court a quo, however, found both petitioners Westwind and ATI, jointly and severally, liable for the damage to the cargo. It observed that
    while the staff of ATI undertook the physical unloading of the cargoes from the carrying vessel, Westwind’s duty officer exercised full
    supervision and control over the entire process. The appellate court affirmed the solidary liability of Westwind and ATI, but only for the
    damage to one Frame Axle Sub without Lower.
    It is settled in maritime law jurisprudence that cargoes while being unloaded generally remain under the custody of the carrier. The Damage
    Survey Report of the survey conducted by Phil. Navtech Services, Inc. from April 20-21, 1995 reveals that Case No. 03-245-42K/1 was
    damaged by ATI stevedores due to overtightening of a cable sling hold during discharge from the vessel’s hatch to the pier. Since the damage
    to the cargo was incurred during the discharge of the shipment and while under the supervision of the carrier, the latter is liable for the
    damage caused to the cargo.
    This is not to say, however, that petitioner ATI is without liability for the damaged cargo. The functions of an arrastre operator involve the
    handling of cargo deposited on the wharf or between the establishment of the consignee or shipper and the ship’s tackle. Being the custodian
    of the goods discharged from a vessel, an arrastre operator’s duty is to take good care of the goods and to turn them over to the party
    entitled to their possession.
    Handling cargo is mainly the arrastre operator’s principal work so its drivers/operators or employees should observe the standards and
    measures necessary to prevent losses and damage to shipments under its custody.
    While it is true that an arrastre operator and a carrier may not be held solidarily liable at all times, the facts of these cases show that apart
    from ATI’s stevedores being directly in charge of the physical unloading of the cargo, its foreman picked the cable sling that was used to hoist
    the packages for transfer to the dock. Moreover, the fact that 218 of the 219 packages were unloaded with the same sling unharmed is telling
    of the inadequate care with which ATI’s stevedore handled and discharged Case No. 03-245-42K/1.
    With respect to petitioners ATI and Westwind’s liability, we agree with the CA that the same should be confined to the value of the one piece
    Frame Axle Sub without Lower.
    However, there is nothing in the records to show conclusively that the six Frame Assembly with Bush were likewise contained in and
    damaged inside Case No. 03-245-42K/1. In the Inspection Survey Report of Chartered Adjusters, Inc., it mentioned six pieces of chassis
    frame assembly with deformed body mounting bracket. However, it merely noted the same as coming from two bundles with no identifying
    marks.
    Lastly, we agree with petitioner Westwind that the CA erred in imposing an interest rate of 12% on the award of damages. Under Article
    2209 of the Civil Code, when an obligation not constituting a loan or forbearance of money is breached, an interest on the amount of
    damages awarded may be imposed at the discretion of the court at the rate of 6% per annum.

    Loadmasters Customs Services, Inc. v. Glodel Brokerage Corporation and R & B Insurance Corporation, G.R. No. 179446, January
    10, 2011
    FACTS:

    The case is a petition for review on certiorari under Rule 45 of the Revised Rules of Court assailing the August 24, 2007 Decision of the
    Court of Appeals (CA) in CA-G.R. CV No. 82822.
    On August 28, 2001, R&B Insurance issued Marine Policy No. MN-00105/2001 in favor of Columbia to insure the shipment of 132
    bundles of electric copper cathodes against All Risks. On August 28, 2001, the cargoes were shipped on board the vessel "Richard Rey" from
    Isabela, Leyte, to Pier 10, North Harbor, Manila. They arrived on the same date.
    Columbia engaged the services of Glodel for the release and withdrawal of the cargoes from the pier and the subsequent delivery to its
    warehouses/plants. Glodel, in turn, engaged the services of Loadmasters for the use of its delivery trucks to transport the cargoes to
    Columbia’s warehouses/plants in Bulacan and Valenzuela City.
    The goods were loaded on board twelve (12) trucks owned by Loadmasters, driven by its employed drivers and accompanied by its
    employed truck helpers. Of the six (6) trucks route to Balagtas, Bulacan, only five (5) reached the destination. One (1) truck, loaded with 11
    bundles or 232 pieces of copper cathodes, failed to deliver its cargo.
    Later on, the said truck, was recovered but without the copper cathodes. Because of this incident, Columbia filed with R&B Insurance a
    claim for insurance indemnity in the amount ofP1,903,335.39. After the investigation, R&B Insurance paid Columbia the amount
    ofP1,896,789.62 as insurance indemnity.
    R&B Insurance, thereafter, filed a complaint for damages against both Loadmasters and Glodel before the Regional Trial Court, Branch
    14, Manila (RTC), It sought reimbursement of the amount it had paid to Columbia for the loss of the subject cargo. It claimed that it had been
    subrogated "to the right of the consignee to recover from the party/parties who may be held legally liable for the loss."
    On November 19, 2003, the RTC rendered a decision holding Glodel liable for damages for the loss of the subject cargo and dismissing
    Loadmasters’ counterclaim for damages and attorney’s fees against R&B Insurance.
    Both R&B Insurance and Glodel appealed the RTC decision to the CA.
    On August 24, 2007, the CA rendered that the appellee is an agent of appellant Glodel, whatever liability the latter owes to appellant
    R&B Insurance Corporation as insurance indemnity must likewise be the amount it shall be paid by appellee Loadmasters. Hence,
    Loadmasters filed the present petition for review on certiorari.

    ISSUE:
    Whether or not Loadmasters and Glodel are common carriers to determine their liability for the loss of the subject cargo.
    RULING:

    The petition is PARTIALLY GRANTED. Judgment is rendered declaring petitioner Loadmasters Customs Services, Inc. and respondent Glodel
    Brokerage Corporation jointly and severally liable to respondent
    Under Article 1732 of the Civil Code, common carriers are persons, corporations, firms, or associations engaged in the business of carrying
    or transporting passenger or goods, or both by land, water or air for compensation, offering their services to the public. Loadmasters is a
    common carrier because it is engaged in the business of transporting goods by land, through its trucking service. It is a common carrier as
    distinguished from a private carrier wherein the carriage is generally undertaken by special agreement and it does not hold itself out to
    carry goods for the general public. Glodel is also considered a common carrier within the context of Article 1732. For as stated and well
    provided in the case of Schmitz Transport & Brokerage Corporation v. Transport Venture, Inc., a customs broker is also regarded as a
    common carrier, the transportation of goods being an integral part of its business.
    Loadmasters and Glodel, being both common carriers, are mandated from the nature of their business and for reasons of public policy, to
    observe the extraordinary diligence in the vigilance over the goods transported by them according to all the circumstances of such case, as
    required by Article 1733 of the Civil Code. When the Court speaks of extraordinary diligence, it is that extreme measure of care and caution
    which persons of unusual prudence and circumspection observe for securing and preserving their own property or rights. With respect to
    the time frame of this extraordinary responsibility, the Civil Code provides that the exercise of extraordinary diligence lasts from the time
    the goods are unconditionally placed in the possession of, and received by, the carrier for transportation until the same are delivered,
    actually or constructively, by the carrier to the consignee, or to the person who has a right to receive them.
    The Court is of the view that both Loadmasters and Glodel are jointly and severally liable to R & B Insurance for the loss of the subject cargo.
    Loadmasters’ claim that it was never privy to the contract entered into by Glodel with the consignee Columbia or R&B Insurance as
    subrogee, is not a valid defense.
    For under ART. 2180. The obligation imposed by Article 2176 is demandable not only for one’s own acts or omissions, but also for those of
    persons for whom one is responsible.
    xxxx
    Employers shall be liable for the damages caused by their employees and household helpers acting within the scope of their assigned tasks,
    even though the former are not engaged in any business or industry.
    It is not disputed that the subject cargo was lost while in the custody of Loadmasters whose employees (truck driver and helper) were
    instrumental in the hijacking or robbery of the shipment. As employer, Loadmasters should be made answerable for the damages caused by
    its employees who acted within the scope of their assigned task of delivering the goods safely to the warehouse.
    Glodel is also liable because of its failure to exercise extraordinary diligence. It failed to ensure that Loadmasters would fully comply with the
    undertaking to safely transport the subject cargo to the designated destination. Glodel should, therefore, be held liable with Loadmasters. Its
    defense of force majeure is unavailing.
    For the consequence, Glodel has no one to blame but itself. The Court cannot come to its aid on equitable grounds. "Equity, which has been
    aptly described as ‘a justice outside legality,’ is applied only in the absence of, and never against, statutory law or judicial rules of procedure."
    The Court cannot be a lawyer and take the cudgels for a party who has been at fault or negligent.

    Metropolitan Bank and Trust Company v. Rural Bank of Gerona, Inc., G.R. No. 159097, July 5, 2010
    n the 1970s - the Central Bank and RBG entered into agreement where RBG shall facilitate the loan applications of farmers under the
    “Reconstruction and Development Rural Credit Project (IBRD Project).” o The agreement required RBG to open a separate bank account
    where IBRD loan proceeds shall be deposited. RBG accordingly opened a special savings account with Metrobank. As depository bank of
    RBG, Metrobank was designated to receive credit advice released by Central Bank representing the proceeds of the IBRD loan of farmers;
    Metrobank, in turn, credited the amounts to RBG’s special savings account for RBG’s release to farmers. In 1978 - Central Bank released a
    credit advice, and accordingly credited (deposited?) Metrobank with the ff amounts for the savings account of RBG --o P178,652,
    represented approved loan application of farmer de Jesus. o P189,052, for farmer Panopio o P220,000, for farmer Lagman o RBG withdrew
    the first two amounts. o For the 3rd amount, RBG only withdrew P75,375 out of the P220,000. Now, more than a month after RBG had made
    the above withdrawals, the Central Bank issued debit advices, reversing all the approved loans. Central Bank debited from Metrobank’s
    demand deposit account the amount corresponding to all three loans. Metrobank, in turn, debited the following amounts from RBG’s special
    savings account: P189,052, P115,000, and P8,000. Metrobank, however, claimed that these amounts were insufficient to cover all the credit
    advices that were reversed by Central Bank. It demanded payment from RBG. Metrobank claimed that RBG still had an outstanding balance
    of P334,220. To collect this amount, Metrobank filed complaint for collection of money against RBG. RTC: ruled for Metrobank, finding that
    legal subrogation had ensued; ordered RBG to pay Metrobank the sum of P334,200, plus interest at 14% per annum. Metrobank’s demand
    deposit reserves diminished correspondingly, Metrobank suffers prejudice in which case legal subrogation has ensued. (ELAM: There is legal
    subrogation > ergo, RBG has to pay Metrobank) CA: noted that this was not a case of legal subrogation under Art 1302 of Civil Code.
    Nevertheless, CA recognized that Metrobank had right to be reimbursed of what it paid and failed to recover. It clarified, however, that a
    determination still had to be made on who should reimburse Metrobank. CA declared that the Central Bank should be impleaded as a
    necessary party so it could shed light on the IBRD loan reversals; remanded case to RTC after the Central Bank is impleaded as a necessary
    party. (ELAM: There is NO legal subrogation > ergo, Metrobank cannot debit from RBG; Central Bank has to be impleaded to know who is
    liable to reimburse Metrobank) Metrobank elevated case with SC thru petition for review under Rule 45 --1 - Metrobank disagrees with the
    CA’s ruling to implead the Central Bank. It argues that inclusion of the Central Bank as party to the case is unnecessary since RBG has already
    admitted its liability for the amount Metrobank failed to recover. 2 - Metrobank contends that a remand would delay proceedings.
    Transactions took place in 1978, and case was commenced more than 20 years ago. (ELAM: Metrobank is saying that no need to implead
    Central Bank; and that there is legal subrogation.)

    ISSUE: WON Metrobank was subrogated to the rights of Central Bank after Central Bank pulled from its demand deposit account. –YES
    (ELAM: Is this a novation in terms of change in creditor?)

    RULING: Court ruled (with ): The petition is impressed with merit.  The first step in resolving case is to determine who the liable parties
    are on the IBRD loans that Central Bank extended. The Terms and Conditions of the Credit Project shows that the farmers to whom credits
    have been extended, are primarily liable for payment of borrowed amounts. The loans were extended through RBG which handles collection
    and remittance. While the farmers were the principal debtors, RBG assumed liability under the Project Terms and Conditions by solidarily
    binding itself with principal debtors to fulfill obligation.  As per the Terms and Conditions, if RBG delays in remitting, Central Bank imposed
    a 14% per annum penalty on RBG until amount is actually remitted. Central Bank was further authorized to deduct the amount due from
    RBG’s demand deposit reserve should the latter become delinquent in payment.
    This are reflected in Par5 and 6 of the Project Terms and Conditions read:

    Based on these arrangements, Central Bank’s immediate recourse, therefore should have been against the farmers-borrowers and RBG; thus,
    it erred when it deducted the amounts from Metrobank’s demand deposit account. Metrobank had no responsibility over proceeds of IBRD
    loans other than serving as a conduit for their transfer from the Central Bank to RBG once credit advice has been issued. (ELAM: Central
    Bank is such a bitch!) o Metrobank was an outsider to the agreement. However, Court disagrees with CA in its conclusion that no legal
    subrogation took place. The present case, in fact, exemplifies the legal subrogation as contemplated in Par 2 of Art 1302 of Civil Code which
    provides: Art. 1302. It is presumed that there is legal subrogation: (1) When a creditor pays another creditor who is preferred, even without
    the debtor’s knowledge; (2) When a third person, not interested in the obligation, pays with the express or tacit approval of the debtor; (3)
    When, even without the knowledge of the debtor, a person interested in the fulfillment of the obligation pays, without prejudice to the effects
    of confusion as to the latter’s share. (ELAM: Meaning that because of item2 MetroB can claim rmbursmnt from RBG; subrogated to rights of
    Central Bank) o In this case, Metrobank was a 3rd party to Central Bank-RBG agreement, had no interest except as a conduit, and was not
    legally answerable for loans. o Was there express or tacit approval by RBG of payment enforced against Metrobank? YES--- After Metrobank
    received the Central Bank’s debit advices, Metrobank accordingly debited the amounts from RBG’s special savings account W/O OBJECTION
    from RBG. RBG’s Pres and Mngr even wrote Metrobank regarding possible means of settling amounts debited by Central Bank from
    Metrobank’s demand deposit account. These are indicative of RBG’s approval of Metrobank’s payment of the IBRD loans. o Also, fact that
    RBG’s tacit approval came after payment does not completely negate the legal subrogation that had taken place. Art 1303 states that
    subrogation transfers to the person subrogated the credit with all the rights thereto appertaining, either against the debtor or against third
    persons. As the entity against which the collection was enforced, Metrobank was subrogated to the rights of Central Bank and has a cause of
    action to recover from RBG the amounts it paid to the Central Bank, plus 14% per annum interest. Ergo, because of this subrogation thingy
    impleading Central Bank as party is unnecessary. As this Court is not a trier of facts, we deem it proper to remand the factual issue to RTC for
    computation of actual amount RBG owes to Metrobank. o Metrobank contends that it credited RBG’s account with 3 amounts P178,652.00
    for Dominador de Jesus; the P189,052.00 for Basilio Panopio; and the P220,000.00 for Ponciano Lagman. Metrobank claims that all of the
    three credit advices were subsequently reversed by the Central Bank, evidenced by three debit advices. The records, however, contained
    only the credit and debit advices for the amounts set aside for de Jesus and Lagman. Nothing in findings referred to amount set aside for
    Panopio. o Thus, what were proven as credited and debited from Metrobank’s demand deposit account were only the amounts of
    P178,652.00 and P189,052.00. With these amounts combined, RBG’s liability would amount to P398,652.00 – the same amount RBG
    acknowledged as due to Metrobank. o RBG asserts that it made partial payments amounting to P145,197.40, but neither the RTC nor the CA
    made a conclusive finding as to the accuracy of this claim. Although Metrobank admitted that RBG indeed made partial payments, it never
    mentioned the actual amount paid; neither did it state that the P145,197.40 was part of theP312,052.41 that, it admitted, it debited from
    RBG’s special savings account. Deducting P312,052 (representing the amounts debited from RBG’s special savings account, as admitted by
    Metrobank) from P398,652.00 amount due to Metrobank from RBG, the difference would only be P86,599.59. We are, therefore, at a loss on
    how Metrobank computed the amount of P334,220.00 it claims as the balance of RBG’s loan. (ELAM: In short – there is discrepancy in
    amounts claimed for reimbursement by Metrobank, and amount owed claim by RBG. Proper recourse is remand despite lengthy case.)

    DISPOSITION: WHEREFORE, we GRANT the petition for review on certiorari, and REVERSE the decision and the resolution of the Court of
    Appeals, in CAG.R. CV No. 46777, promulgated on December 17, 2002 and July 14, 2003, respectively. We AFFIRM the decision of the
    Regional Trial Court, Branch 65, Tarlac, promulgated on July 7, 1994, insofar as it found respondent liable to the petitioner Metropolitan
    Bank and Trust Company, but order the REMAND of the case to the trial court to determine the actual amounts due to the petitioner. Costs
    against respondent Rural Bank of Gerona, Inc. SO ORDERED.

    G. Prescription (A. 1106-1116) 1. Definition (A. 1106)


    2. Right to Prescription
    In favor of / Against (A. 1107-1108, 1110-1111; 1114)
    Prohibited (A. 1108-1109;1113)
    Who May Renounce ; How (A. 1112)
    3. Extinctive Prescription (A. 1139-1155) .
    Meaning and Effects (A. 1139)
    As a Defense; Rationale
    Statute of Limitations/Prescriptive Periods (A. 1140-1149; A. 1577, 1542-1543; 1571; Family Code)
    Computation of the Period ( A. 1150-1154)

    Banco Filipino Savings and Mortgage Bank v. Court of Appeals, G.R. No. 129227. May 30, 2000
    FACTS

    Elsa and Calvin Arcilla secured, on 3 occassions, loan from petitioner as evidenced by promissory note. REM was also executed. Under
    said deeds, Banco Filipino may increase rate of interest on said loans, within the limits allowed by law. at that time, under Usury Law, the
    maximum rate of interest for loans secured by REM was 12% pa. later, the Central bank issued Circular No. 494 provinding for the maximum
    interest of 19%pa. meanwhile, Skyli Builders, thru President Calvin Arcilla secured loans from BPI with FGU Insurance as surety. Banco
    Filipino issued an account statement with 17% pa as interest. The Arcillas filed for annulment of the loan contracts because the rate of
    interests charged were usurious.

    ISSUE

    Whether or not respondents are entitled to refund of the alleged interest overpayments.

    HELD

    Yes. Private respondents aver that they are entitled to the refund inasmuch as the escalation clause incorporated in the loan contracts
    do not have a corresponding de-escalation clause and is therefore, illegal.

    In Banco Filipino Savings & Mortgage Bank vs Navarro, the Court ruled that Central Bank Circular 494, although it has the force and
    effect of law, is not a law and is not the law contemplated by the parties which authorizes the petitioner to unilaterally raise the interest rate
    of loan. The reliance on the circular was without any legal basis.

    Vda. De Delgado v. Court of Appeals, G.R. No. 125728, August 28, 2001

    DA. DE DEL GADO vs. COURT OF APPEALS 363 SCRA 58


    Carlos Delgado was the absolute owner of a parcel of land with an area of 692,549 square meter situated in the Municipality of Catarman
    Samar. Carlos Delgado granted and conveyed by way of donation with quitclaim all rights, title, interest claim and demand over a portion of
    land with an area of 165,000 square meter in favor of the Commonwealth of the Philippines. The acceptance was then made to President
    Quezon in his capacity as Commander-in-Chief. The Deed of Donation was executed with a condition that the said land will be used for the
    formation of the National Defense of the Philippines. The said parcel of land then covered by the Torrens System of the Philippines and was
    registered in the name of Commonwealth of the Philippines for a period of 40 years. The land was registered under TCT 0-2539-160 in favor
    of the Commonwealth however without any annotation.
    Upon declaration of independence, the Commonwealth was replaced by Republic of the Philippines which took over the subject land and
    turned over to Civil Aeronautics Administration, later named Bureau of Air Transportation Office. The said agency utilizes the said land a
    domestic airport.
    Jose Delgado filed a petition for reconveyance for a violation of the condition. The RTC ruled in favor of the plaintiff Delgado. But the CA
    reversed the said decision because of prescription. The petitioner filed only before 24 years o discovery which the law only requires 10
    years of filing.
    ISSUE:
    Whether or not the petitioner’s action for reconveyance is already barred by prescription.
    RULING:
    The Supreme Court denied the petition and affirmed the decision of the Court of Appeals because the time of filing has been prescribed.
    Under Article 1144 of the Civil Code on Prescription based on written contracts, the filing of action for reconveyance is within 10 years from
    the time the condition in the Deed of Donation was violated. The petitioner herein filed only 24 years in the first action and 43 years in the
    second filing of the 2nd action.
    The action for reconveyance on the alleged excess of 33, 607 square meter mistakenly included in the title was also prescribed Article 1456
    of the Civil Code states, if property is acquired through mistake or fraud, the person obtaining it is, by force of law, considered a trustee of an
    implied trust for the benefits of the person from whom the property comes, if within 10 years such action for reconveyance has not been
    executed.
    Interruption (A. 1155), vs. Tolling of Prescriptive Period
    • Ledesma v. CA, G.R. No. 106646. June 30, 1993

    FACTS:

    On August 21, 1980, private respondent Rizal Commercial Banking Corporation filed Case No. 38287 in the then Court of First Instance of
    Rizal against petitioner to enforce the terms of Trust Receipt Agreement No. 7389 executed by them on April 1, 1974 but which petitioner
    had failed to comply with. As summons could not be served on the latter, said case was dismissed without prejudice on March 3, 1981.

    On December 2, 1988, private respondent bank instituted Civil Case No. 88-2572 in the Regional Trial Court of Makati, Metro Manila, Branch
    133, against petitioner on the same cause of action and subject matter.

    Petitioner's motion to dismiss on the ground of prescription which was denied and judgment was rendered in favor of private respondent.
    Said judgment was affirmed by respondent Court and petitioner's motion for reconsideration thereof was denied.

    Petitioner's petition for review on certiorari of the said judgment was denied its present motion for reconsideration contending that the
    second action filed by private respondent bank had already prescribed.

    ISSUE:

    Whether the second action filed by private respondent bank had already prescribed.

    RULING:

    No. The Court ruled that the filing of the first action interrupted the running of the period, and then declared that at any rate, the second
    action was filed within the balance of the period remaining.
    Article 1155 of the Civil. Code provides that the prescription of an action, involving in the present case the 10-year prescriptive period for
    filing an action on a written contract under Article 1144(1) of the Code, is interrupted by (a) the filing of an action, (b) a written extrajudicial
    demand by the creditor, and (c) a written acknowledgment of the debt by the debtor.

    The correct interpretations of Article 1155 of the Civil Code are reflected in and furnished by the doctrinal pronouncements in the case of
    Overseas Bank of Manila and Philippine National Railways Company.

    Article 1155 has been interpreted in both case to mean that upon the cessation of the suspension of the prescriptive period, the full period of
    prescription commences to run anew.

    Petitioner is wrong in insisting that in case of the filing of an action, the prescriptive period is merely tolled and continues to run again, with
    only the balance of the remaining period available for the filing of another action. This postulation of petitioner, if we are to adopt it, would
    result in an absurdity wherein Article 1155 would be interpreted in two different ways, i.e., the prescriptive period is interrupted in case of
    an extrajudicial demand and a written acknowledgment of a debt, but it is merely tolled where an action is filed in court.

    Hence, the present motion is hereby DENIED with FINALITY.

    H. Estoppel (A. 1431-1439)

    1. Definition and Meaning (A. 1431) 2. Kinds


    Estoppel by Record; Estoppel by Judgment v. Res Judicata
    Estoppel by Deed (A. 1436)
    Estoppel in Pais : Meaning and Requisites
    i. by Representation/ Positive Acts (A. 1434-1435; A. 1437)
    • Calubad v. Ricarcen Devt, G.R. No. 202364, August 30, 2017
    SUMMARY
    Si Marilyn (president ng Ricarcen) nag-loan kay Calubad on behalf of Ricarcen with real estate mortgage over the property sa QC. Nag-
    increase ng loan twice. Para ma-prove yung authority niya, nagpakita siya ng Board Resolution and 2 Secretary's Certificate a gawa ni
    Elizabeth. Dina nakabayad ang Ricarcen so nag extrajudicial foreclosure. Nalaman lang ng Ricarcen noong July 2003. Tinanggal si Marilyn as
    president at pinalitan ni Josefelix. Nag-file ng complaint ang Ricarcen para ma-annul yung REM and extrajudicial foreclosure. Sabi nila di
    naman authorized si Marilyn. TC and CA ruled in favor of Ricarcen. Sabi g SC may apparent authority si Marilyn.
    DOCTRINE
    Actual authority can either be express or implied. Express actual authority refers to the power delegated to the agent by
    the corporation, while an agent's implied authority can be measured by his or her prior acts which have been ratified by
    the corporation or whose benefits have been accepted by the corporation. On the other hand, apparent authority is
    based on the principle of estoppel. The doctrine of apparent authority provides that even if no actual authority has been
    conferred on an agent, his or her acts, as long as they are within his or her apparent scope of authority, bind the principal.
    However, the principal's liability is limited to third persons who are reasonably led to believe that the agent was
    authorized to act for the principal due to the principal's conduct.
    Nature of the case: Petition for Review on Certiorari
    FACTS
    Ricarcen Development Corp. (Ricarcen) was a domestic corporation engaged in renting out real estate. It was the registered owner of a
    parcel of land in Sta. Mesa Heights, Quezon City. It is a family corporation. Marilyn R. Soliman (Marilyn) was the president from 2001 to
    August 2003. The other members of the board of directors during that time were Marilyn's mother, Erlinda Villanueva (Erlinda), her brother,
    Josefelix R. Villanueva (Josefelix), her aunt, Maura Rico, and her sisters, Ma. Elizabeth V. Chamorro (Elizabeth), Ma. Theresa R. Villanueva,
    and Annabelle R. Villanueva.
    On October 15, 2001, Marilyn, acting on Ricarcen's behalf, took out a P4,000,000 loan from Calubad which was secured by a real estate
    mortgage over Ricarcen's QC property. The loan was later increased to P5,000,000. Marilyn took out an additional loan of P2,000,000. To
    prove her authority to execute the 3 mortgage contracts, Marilyn presented Calubad with a Board Resolution and 2 Secretary's Certificates.
    Sometime in 2003, Calubad initiated extrajudicial foreclosure proceedings after Ricarcen failed to pay its loan. Calubad was the highest
    bidder in the auction sale and was issued a Certificate of Sale.
    Ricarcen only learned of Marilyn's transactions with Calubad in July 2003. The board of directors removed her as president and appointed
    Josefelix as its new president. Ricarcen filed its Complaint for Annulment of Real Estate Mortgage and Extrajudicial Foreclosure of Mortgage
    and Sale with Damages against Marilyn, Calubad, and employees of the Registry of Deeds and of the TC of QC. It claimed that it never
    authorized its former president Marilyn to obtain loans from Calubad or use the QC property as collateral. The TC granted the complaint and
    annulled the mortgage contracts, extrajudicial foreclosure, and sale by public auction. It held that Marilyn failed to present a special power of
    attorney as evidence of her authority. It also ruled that the Board Resolution and the Secretary's Certificates were fabricated. It dismissed
    the complaint against the Registry of Deeds. Calubad appealed the TC decision to the CA. The CA dismissed the appeal and affirmed the TC
    decision. Calubad filed this Petition. Calubad claims that Ricarcen is barred by estoppel from denying Marilyn's authority to enter into a
    contract of loan and mortgage. He argues that Ricarcen clothed Marilyn in apparent authority to act in its behalf, that it benefited from the
    proceeds, and that it impliedly agreed to the loans by paying the monthly interest payments.

    ISSUE/S
    Is Ricarcen estopped from denying or disowning the authority of its former president, Marilyn, from entering into a contract of loan and
    mortgage with Calubad?
    RATIO
    Yes, Ricarcen is stopped from denying Marilyn's authority to enter into a contract of loan and mortgage. As a corporation, Ricarcen exercises
    its powers and conducts its business through its board of directors. However, the board of directors may validly delegate its functions and
    powers to its officers or agents. Nonetheless, law and jurisprudence recognize actual authority and apparent authority as the two (2) types
    of authorities conferred upon a corporate officer or agent in dealing with third persons. Actual authority can either be express or implied.
    Express actual authority refers to the power delegated to the agent by the corporation, while an agent's implied authority can be measured
    by his or her prior acts which have been ratified by the corporation or whose benefits have been accepted by the corporation. On the other
    hand, apparent authority is based on the principle of estoppel. The doctrine of apparent authority provides that even if no actual authority
    has been conferred on an agent, his or her acts, as long as they are within his or her apparent scope of authority, bind the principal. However,
    the principal's liability is limited to third persons who are reasonably led to believe that the agent was authorized to act for the principal due
    to the principal's conduct.
    As the former president of Ricarcen, it was within Marilyn's scope of authority to act for and enter into contracts in Ricarcen's behalf. Her
    broad authority from Ricarcen can be seen with how the corporate secretary entrusted her with blank yet signed sheets of paper to be used
    at her discretion. She also had possession of the owner's duplicate copy of the land title covering the property mortgaged to Calubad, further
    proving her authority from Ricarcen. Calubad could not be faulted for continuing to transact with Marilyn, even agreeing to give out
    additional loans, because Ricarcen clearly clothed her with apparent authority. Likewise, it reasonably appeared that Ricarcen's officers
    knew of the mortgage contracts entered into by Marilyn in Ricarcen's behalf as proven by the issued Banco De Oro checks as payments for
    the monthly interest and the principal loan. Hence, Ricarcen cannot deny the apparent authority of its former president in contracting the
    said loan and mortgage.
    by Admission
    by Promise (Promissory Estoppel)
    • Mendoza v. CA, G.R. No. 116710 June 25, 2001
    FACTS:
    MENDOZA vs. COURT OF APPEALS June 25, 2001
    Petitioner Danilo D. Mendoza is engaged in the domestic and international trading of raw materials and chemicals. He operates under the
    business name Atlantic Exchange Philippines (Atlantic), a single proprietorship registered with the Department of Trade and Industry (DTI).
    Sometime in 1978 he was granted by respondent Philippine National Bank (PNB) a Five Hundred Thousand Pesos (P500,000.00) credit line
    and a One Million Pesos (P1,000,000.00) Letter of Credit/Trust Receipt (LC/TR) line.
    As security for the credit accommodations and for those which may thereinafter be granted, petitioner mortgaged to respondent PNB the
    following: 1) three (3) parcels of land with improvements in F. Pasco Avenue, Santolan, Pasig; 2) his house and lot in Quezon City; and 3)
    several pieces of machinery and equipment in his Pasig coco-chemical plant.
    Petitioner executed in favor of respondent PNB three (3) promissory notes covering the Five Hundred Thousand Pesos (P500,000.00) credit
    line, one dated March 8, 1979 for Three Hundred Ten Thousand Pesos (P310,000.00); another dated March 30, 1979 for Forty Thousand
    Pesos (P40,000.00); and the last dated September 27, 1979 for One Hundred Fifty Thousand Pesos (P150,000.00).
    Petitioner made use of his LC/TR line to purchase raw materials from foreign importers. He signed a total of eleven (11) documents
    denominated as "Application and Agreement for Commercial Letter of Credit," on various dates
    In a letter dated January 3, 1980 and signed by Branch Manager Fil S. Carreon Jr., respondent PNB advised petitioner Mendoza that effective
    December 1, 1979, the bank raised its interest rates to 14% per annum, in line with Central Bank's Monetary Board Resolution No. 2126
    dated November 29, 1979.
    On March 9, 1981, he wrote a letter to respondent PNB requesting for the restructuring of his past due accounts into a five-year term loan
    and for an additional LC/TR line of Two Million Pesos (P2,000,000.00). According to the letter, because of the shut-down of his end-user
    companies and the huge amount spent for the expansion of his business, petitioner failed to pay to respondent bank his LC/TR accounts as
    they became due and demandable.
    Ceferino D. Cura, Branch Manager of PNB Mandaluyong replied on behalf of the respondent bank and required petitioner to submit the
    following documents before the bank would act on his request: 1) Audited Financial Statements for 1979 and 1980; 2) Projected cash flow
    (cash in - cash out) for five (5) years detailed yearly; and 3) List of additional machinery and equipment and proof of ownership thereof.
    Cura also suggested that petitioner reduce his total loan obligations to Three Million Pesos (P3,000,000.00).
    On September 25, 1981, petitioner sent another letter addressed to PNB Vice-President Jose Salvador, regarding his request for
    restructuring of his loans. He offered respondent PNB the following proposals: 1) the disposal of some of the mortgaged properties, more
    particularly, his house and lot and a vacant lot in order to pay the overdue trust receipts; 2) capitalization and conversion of the balance into
    a 5-year term loan payable semi-annually or on annual installments; 3) a new Two Million Pesos (P2,000,000.00) LC/TR line in order to
    enable Atlantic Exchange Philippines to operate at full capacity; 4) assignment of all his receivables to PNB from all domestic and export
    sales generated by the LC/TR line; and 5) maintenance of the existing Five Hundred Thousand Pesos (P500,000.00) credit line.
    The petitioner testified that respondent PNB Mandaluyong Branch found his proposal favorable and recommended the implementation of
    the agreement. However, Fernando
    Maramag, PNB Executive Vice-President, disapproved the proposed release of the mortgaged properties and reduced the proposed new
    LC/TR line to One Million Pesos (P1,000,000.00). Petitioner claimed he was forced to agree to these changes and that he was required to
    submit a new formal proposal and to sign two (2) blank promissory notes.
    In a letter dated July 2, 1982, petitioner offered the following revised proposals to respondent bank: 1) the restructuring of past due
    accounts including interests and penalties into a 5-year term loan, payable semi-annually with one year grace period on the principal; 2)
    payment of Four Hundred Thousand Pesos (P400,000.00) upon the approval of the proposal; 3) reduction of penalty from 3% to 1%; 4)
    capitalization of the interest component with interest rate at 16% per annum; 5) establishment of a One Million Pesos (P1,000,000.00)
    LC/TR line against the mortgaged properties; 6) assignment of all his export proceeds to respondent bank to guarantee payment of his
    Petitioner failed to pay the subject two (2) Promissory Notes Nos. 127/82 and 128/82 as they fell due. Respondent PNB extra-judicially
    foreclosed the real and chattel mortgages, and the mortgaged properties were sold at public auction to respondent PNB, as highest bidder,
    for a total of Three Million Seven Hundred Ninety Eight Thousand Seven Hundred Nineteen Pesos and Fifty Centavos (P3,798,719.50).
    The petitioner filed a complaint for specific performance, nullification of the extra- judicial foreclosure and damages against respondents
    PNB. He alleged that the Extrajudicial Foreclosure Sale of the mortgaged properties was null and void since his loans were restructured to a
    five-year term loan; hence, it was not yet due and demandable. On March 16, 1992, the trial court rendered judgment in favor of the
    petitioner and ordered the nullification of the extrajudicial foreclosure of the real estate mortgage, the Sheriff’s sale of the mortgaged real
    properties by virtue of consolidation thereof and the cancellation of the new titles issued to PNB; that PNB vacate the subject premises in
    Pasig and turn the same over to the petitioner; and also the nullification of the extrajudicial foreclosure and sheriff's sale of the mortgaged
    chattels, and that the chattels be returned to petitioner Mendoza if they were removed from his Pasig premises or be paid for if they were
    lost or rendered unserviceable.
    The trial court decided for the petitioner. Upon appeal, the Court of Appeals reversed the decision of the trial court and dismissed the
    complaint.
    ISSUE:
    Whether or not respondent promised to be bound by the proposal of the petitioner for a five-year restructuring of his overdue loan.
    RULING:
    No. Respondent Court of Appeals held that there is no evidence of a promise from respondent PNB, admittedly a banking corporation, that it
    had accepted the proposals of the petitioner to have a five-year restructuring of his overdue loan obligations. It found and held, on the basis
    of the evidence adduced, that "appellee's (Mendoza) communications were mere proposals while the bank's responses were not categorical
    that the appellee's request had been favorably accepted by the bank."
    Nowhere in those letters presented by the petitioner is there a categorical statement that respondent PNB had approved the petitioner’s
    proposed five-year restructuring plan. It is stretching the imagination to construe them as evidence that his proposed five-year restructuring
    plan has been approved by the respondent PNB which is admittedly a banking corporation. Only an absolute and unqualified acceptance of a
    definite offer manifests the consent necessary to perfect a contract. If anything, those correspondences only prove that the parties had not
    gone beyond the preparation stage, which is the period from the start of the negotiations until the moment just before the agreement of the
    parties.

    The doctrine of promissory estoppel is an exception to the general rule that a promise of future conduct does not constitute an estoppel. In
    some jurisdictions, in order to make out a claim of promissory estoppel, a party bears the burden of establishing the following elements: (1)
    a promise reasonably expected to induce action or forebearance; (2) such promise did in fact induce such action or forebearance, and (3) the
    party suffered detriment as a result.
    It is clear from the forgoing that the doctrine of promissory estoppel presupposes the existence of a promise on the part of one against
    whom estoppel is claimed. The promise must be plain and unambiguous and sufficiently specific so that the Judiciary can understand the
    obligation assumed and enforce the promise according to its terms. For petitioner to claim that respondent PNB is estopped to deny the five-
    year restructuring plan, he must first prove that respondent PNB had promised to approve the plan in exchange for the submission of the
    proposal. As discussed earlier, no such promise was proven, therefore, the doctrine does not apply to the case at bar. A cause of action for
    promissory estoppel does not lie where an alleged oral promise was conditional, so that reliance upon it was not reasonable. It does not
    operate to create liability where it does not otherwise exist.

    iv. bySilence
    • Pasion v. Melegrito, G.R. No. 166558 March 28, 2007
    v. by Acquiescence / by Acceptance of Benefits (A. 1438)
    • Board of Liquidators v. Kalaw, G.R. No. L-18805 August 14, 1967
    d. Estoppel by Laches: Doctrine of Stale Demands
    Prescription v. Laches
    Salandanan v. CA, G.R. No. 127783 June 5, 1998
    De Vera-Cruz v. Miguel, G.R. NO. 144103 : August 31, 2005

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