MAHINAY, Beya Ammahry

LE-104
Obligations and Contracts

Assignment No. 2

DEVELOPMENT BANK OF THE PHILIPPINES

vs.
GUARIÑA AGRICULTURAL AND REALTY DEVELOPMENT CORPORATION
G.R. No. 160758 January 15, 2014

FACTS:

                In July 1976, Guariña Corporation applied for a loan from DBP to finance the
development of its resort complex. The loan, in the amount of P3,387,000.00, was
approved on August 5, 1976. Guariña Corporation executed a promissory note that
would be due on November 3, 1988. On October 5, 1976, Guariña Corporation executed
a real estate mortgage over several real properties in favor of DBP as security for the
repayment of the loan. On May 17, 1977, Guariña Corporation executed a chattel
mortgage over the personal properties existing at the resort complex and those yet to be
acquired out of the proceeds of the loan, also to secure the performance of the
obligation. Prior to the release of the loan, DBP required Guariña Corporation to put up
a cash equity of P1,470,951.00 for the construction of the buildings and other
improvements on the resort complex.

                The loan was released in several installments, and Guariña Corporation used
the proceeds to defray the cost of additional improvements in the resort complex. In all,
the amount released totaled P3,003,617.49, from which DBP withheld P148,102.98 as
interest.

                Guariña Corporation demanded the release of the balance of the loan, but DBP
refused. Instead, DBP directly paid some suppliers of Guariña Corporation over the
latter’s objection. DBP found upon inspection of the resort project, its developments and
improvements that Guariña Corporation had not completed the construction works. In a
letter dated February 27, 1978, and a telegram dated June 9, 1978, DBP thus demanded
that Guariña Corporation expedite the completion of the project, and warned that it
would initiate foreclosure proceedings should Guariña Corporation not do so.10

                Unsatisfied with the non-action and objection of Guariña Corporation, DBP
initiated extrajudicial foreclosure proceedings

ISSUE:
                Whether or not Guarina was in delay in performing its obligation making DBP’s
action to foreclose the mortgage proper.

HELD:

                NO. The Court held that the foreclosure of a mortgage prior to the mortgagor’s
default on the principal obligation is premature, and should be undone for being void
and ineffectual. The mortgagee who has been meanwhile given possession of the
mortgaged property by virtue of a writ of possession issued to it as the purchaser at the
foreclosure sale may be required to restore the possession of the property to the
mortgagor and to pay reasonable rent for the use of the property during the intervening
period.

                The agreement between DBP and Guariña Corporation was a loan. Under the
law, a loan requires the delivery of money or any other consumable object by one party
to another who acquires ownership thereof, on the condition that the same amount or
quality shall be paid. Loan is a reciprocal obligation, as it arises from the same cause
where one party is the creditor, and the other the debtor. The obligation of one party in
a reciprocal obligation is dependent upon the obligation of the other, and the
performance should ideally be simultaneous. This means that in a loan, the creditor
should release the full loan amount and the debtor repays it when it becomes due and
demandable.

                The loan agreement between the parties is a reciprocal obligation. Appellant in
the instant case bound itself to grant appellee the loan amount of P3,387,000.00
condition on appellee’s payment of the amount when it falls due. The appellant did not
release the total amount of the approved loan. Appellant therefore could not have made
a demand for payment of the loan since it had yet to fulfil its own obligation. Moreover,
the fact that appellee was not yet in default rendered the foreclosure proceedings
premature and improper.

                By its failure to release the proceeds of the loan in their entirety, DBP had no
right yet to exact on Guariña Corporation the latter’s compliance with its own obligation
under the loan. Indeed, if a party in a reciprocal contract like a loan does not perform its
obligation, the other party cannot be obliged to perform what is expected of it while the
other’s obligation remains unfulfilled. In other words, the latter party does not incur
delay.
 MARIANO & MARINA RODRIGUEZ
vs.
PORFIRIO & EMMA BELGICA
GR No. L-10801 February 28, 1961

FACTS:

After a series of pleadings filed by the parties, and on one of the hearings held,
the defendants made a verbal offer to compromise. Pursuant to the said offer, the
plaintiffs, on August 27, 1955, filed a "Motion re Offer to Compromise." The terms and
conditions of said Compromise Agreement includes paragraph 1-A wherein the length of
time given to the defendants to pay the plaintiffs of P35,000.00 is thirty (30) days, it
was requested that said period be seventy (70) days counted from August 30, 1955. That
the plaintiffs agree to grant authority to defendant Rosario Belgica to negotiate the sale
or mortgage of the 36 per cent which is proposed to be conveyed to him, for the purpose
of raising the P35,000.00 to be paid to the plaintiffs. Parties agree that in the event the
defendants fail to pay to the plaintiffs said amount of P35,000.00 within the period
above fixed or stipulated, the plaintiffs will automatically be the owners of the 36 per
cent of the two parcels of land, and that the 14 per cent pertaining to the defendants will
be taken from the portion.

On November 19, 1955, after the lapse of the seventy (70) day period stipulated in
the compromise agreement, and upon the failure of the defendants to pay, the plaintiffs
presented a Motion praying that the defendants be ordered to deliver to the plaintiffs
the Certificates of Titles so that the 14 per cent of the property pertaining to the
defendants could be segregated. An opposition was registered by the defendants,
contending that the inability to meet the obligation to pay the P35,000.00 was due to
the deliberate refusal of the plaintiffs to grant the authority to defendant Porfirio Belgica
to negotiate the sale or mortgage of the 36 per cent; and that since the decision had
created reciprocal obligations, the refusal or failure on the part of one to comply did not
make the other in default.

ISSUE: Whether or not demand is necessary.

RULING: No. In the compromise agreement entered into by and between plaintiffs and
defendants, it was agreed, among others that plaintiffs would grant to defendants the
requisite authority to negotiate the sale or mortgage of the 36 percent which was
proposed to conveyed to defendants, for the purpose of raising the necessary amount to
be paid to plaintiffs. A reciprocal obligation had therefore been established by the
compromise agreement. The giving of the authority to sell or mortgage preceded the
obligation of defendants to pay plaintiffs. Until the authority was granted by plaintiffs,
the 70-day period for payment to plaintiffs of the amount stipulated, would not begin to
run. From the very nature of the obligation assumed by plaintiffs, demand by
defendants of the authority was not necessary. The compromise agreement being
onerous, any doubt should be resolved in favor of the greatest reciprocity of interests.
Hence, the lapse of the period in the agreement contained in the decision, within which
defendants should pay plaintiffs, did not result in the forfeiture of their right to
repurchase their 36 cent interest in the properties.

SOLAR HARVEST, INC.

vs.
DAVAO CORRUGATED CARTON CORPORATION
G.R. No. 176868 July 26, 2010

FACTS:
In the first quarter of 1998, petitioner, Solar Harvest, Inc., entered into an
agreement with respondent, Davao Corrugated Carton Corporation, for the purchase of
corrugated carton boxes, specifically designed for petitioner's business of exporting
fresh bananas. The agreement was not reduced into writing. To get the production
underway, petitioner deposited, on March 31, 1998, US$40,150.00 in respondent's US
Dollar Savings Account with Westmont Bank, as full payment for the ordered boxes.
Despite such payment, petitioner did not receive any boxes from respondent.
On January 3, 2001, petitioner wrote a demand letter for reimbursement of the amount
paid.
On February 19, 2001, respondent replied that the boxes had been completed as early as
April 3, 1998 and that petitioner failed to pick them up from the former's warehouse 30
days from completion, as agreed upon.
Respondent mentioned that petitioner even placed an additional order of 24,000
boxes, out of which, 14,000 had been manufactured without any... advanced payment
from petitioner. Respondent then demanded petitioner to remove the boxes from the
factory and to pay the balance of US$15,400.00 for the additional boxes and
P132,000.00 as storage fee.
On August 17, 2001, petitioner filed a Complaint for sum of money and damages
against respondent. The Complaint averred that the parties agreed that the boxes will be
delivered within 30 days from payment but respondent failed to manufacture and
deliver the boxes within such time. It further alleged that repeated follow-up was made
by the plaintiff for the immediate production of the ordered boxes, but every time,
defendant [would] only show samples of boxes and ma[k]e repeated promises to deliver
the said ordered boxes.
In its Answer with Counterclaim, respondent insisted that, as early as April 3, 1998,
it had already completed production of the 36,500 boxes, contrary to petitioner's
allegation. According to respondent, petitioner, in fact, made an additional order of
24,000 boxes, out of which, 14,000 had been completed without waiting for petitioner's
payment. Respondent stated that petitioner was to pick up the boxes at the factory as
agreed upon, but petitioner failed to do so.
Respondent claimed that the boxes were occupying warehouse space and that
petitioner should be made to pay storage fee at P60.00 per square meter for every
month from April 1998.During trial, petitioner presented Que as its sole witness. He
specifically stated that, when he visited respondent's factory, he saw that the boxes had
no print of petitioner's logo.
On cross-examination, Que further testified that China Zero Food, the Chinese
company that ordered the bananas, was sending a ship to Davao to get the bananas, but
since there were no cartons, the ship could not proceed. He said that, at that time,
bananas from Tagum Agricultural Development Corporation (TADECO)... were already
there. He denied that petitioner made an additional order of 24,000 boxes. He
explained that it took three years to refer the matter to counsel because respondent
promised to pay.[10]
For respondent, Bienvenido Estanislao (Estanislao) testified that he met Que in
Davao in October 1998 to inspect the boxes and that the latter  got samples of them.
Estanislao said that petitioner did not pick up the boxes because the ship did not arrive.
Jaime Tan (Tan), president of respondent, also testified that his company finished
production of the 36,500 boxes on April 3, 1998 and that petitioner made a second
order of 24,000 boxes.  He said that the agreement was for respondent to produce the
boxes and for petitioner to pick them up from the warehouse.
According to him, during the last visit of Que and Estanislao, he asked them to
withdraw the boxes immediately because they were occupying a big space in his plant,
but they, instead, told him to sell the cartons as rejects. He was able to sell 5,000 boxes
at P20.00 each for a total of P100,000.00. They then told him to apply the said amount
to the unpaid balance.
In its March 2, 2004 Decision, the Regional Trial Court (RTC) ruled that respondent
did not commit any breach of faith that would justify rescission of the contract and the
consequent reimbursement of the amount paid by petitioner.
It thus dismissed the complaint and respondent's counterclaims, hence, petitioner filed
a notice of appeal with the CA.

ISSUE:
Whether or not respondent is liable for breach of contract.
RULING:
In this petition, petitioner insists that respondent did not completely
manufacture the boxes and that it was respondent which was obliged to deliver the
boxes to TADECO. Petitioner's claim for reimbursement is actually one for rescission (or
resolution) of contract under Article 1191 of the Civil Code, which reads:
 Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case
one of the obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the
obligation, with the payment of damages in either case.  He may also seek rescission,
even after he has chosen fulfillment, if the latter should become impossible.
The right to rescind a contract arises once the other party defaults in the performance of
his obligation. In determining when default occurs, Art. 1191 should be taken in
conjunction with Art. 1169 of the same law, which provides:
Art. 1169. 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.
However, the demand by the creditor shall not be necessary in order that delay
may exist:
(1) When the obligation or the law expressly so declares; or
(2) When from the nature and the circumstances of the obligation it appears that
the designation of the time when the thing is to be delivered or the service is to be
rendered was a controlling motive for the establishment of the contract; or
(3) When demand would be useless, as when the obligor has rendered it beyond
his power to perform.
In reciprocal obligations, neither party incurs in delay if the other does not
comply or is not ready to comply in a proper manner with what is incumbent
upon him. From the moment one of the parties fulfills his obligation, delay by the
other begins.

In reciprocal obligations, as in a contract of sale, the general rule is that the

fulfillment of the parties' respective obligations should be simultaneous.  Hence, no
demand is generally necessary because, once a party fulfills his obligation and the other
party does not fulfill his, the latter automatically incurs in delay.  But when different
dates for performance of the obligations are fixed, the default for each obligation must
be determined by the rules given in the first paragraph of the present article,[19] that...
is, the other party would incur in delay only from the moment the other party demands
fulfillment of the former's obligation. Thus, even in reciprocal obligations, if the period
for the fulfillment of the obligation is fixed, demand upon the obligee is still necessary
before the obligor can be considered in default and before a cause of action for
rescission will accrue.
Evident from the records and even from the allegations in the complaint was the lack of
demand by petitioner upon respondent to fulfill its obligation to manufacture and
deliver the boxes.
The Complaint only alleged that petitioner made a "follow-up" upon respondent,
which,... however, would not qualify as a demand for the fulfillment of the obligation.
Without a previous demand for the fulfillment of the obligation, petitioner would not
have a cause of action for rescission against respondent as the latter would not yet be
considered in breach of its... contractual obligation.
Even assuming that a demand had been previously made before filing the present case,
petitioner's claim for reimbursement would still fail, as the circumstances would show
that respondent was not guilty of breach of contract.
As correctly observed by the CA, aside from the pictures of the finished boxes and the
production report thereof, there is ample showing that the boxes had already been
manufactured by respondent. There is the testimony of Estanislao who accompanied
Que to the factory, attesting that, during their first visit to the company, they saw the
pile of petitioner's boxes and Que took samples thereof.
In fact, we note that respondent's counsel manifested in court, during trial, that his
client was willing to shoulder expenses for a representative of the court to visit the plant
and see the boxes.[22] Had it been true that the boxes were not yet... completed,
respondent would not have been so bold as to challenge the court to conduct an ocular
inspection of their warehouse.
We also believe that the agreement between the parties was for petitioner to pick up the
boxes from respondent's warehouse, contrary to petitioner's allegation. Petitioner had
the burden to prove that the agreement was, in fact, for respondent to deliver the boxes
within 30 days from payment, as alleged in the Complaint.
Moreover, assuming that respondent was obliged to deliver the boxes, it could not have
complied with such obligation. Que admitted that he did not give respondent the
authority to deliver the boxes to TADECO. Surely, without such authority, TADECO
would not have allowed respondent to deposit the boxes within its premises.
In sum, the Court finds that petitioner failed to establish a cause of action for rescission,
the evidence having shown that respondent did not commit any breach of its contractual
obligation.
 SPS PAJARES v. REMARKABLE LAUNDRY
SPOUSES ROMEO PAJARES and IDA T. PAJARES
vs.
REMARKABLE LAUNDRY AND DRY CLEANING, represented by
ARCHEMEDES G. SOLIS
G.R. No. 212690 February 20, 2017

FACTS:

Remarkable Laundry and Dry Cleaning filed a Complaint denominated as

"Breach of Contract and Damages" against spouses Romeo and Ida Pajares before the
RTC of Cebu City. Respondent alleged that it entered into a Remarkable Dealer Outlet
Contract with petitioners whereby the latter, acting as a dealer outlet, shall accept and
receive items or materials for laundry which are then picked up and processed by the
former in its main plant or laundry outlet; that petitioners violated Article IV (Standard
Required Quota & Penalties) of said contract, which required them to produce at least
200 kilos of laundry items each week, when they ceased dealer outlet operations on
account of lack of personnel; that respondent made written demands upon petitioners
for the payment of penalties imposed and provided for in the contract, but the latter
failed to pay; and, that petitioners' violation constitutes breach of contract. The RTC
dismissed the case for lack of jurisdiction.

Respondent filed its Motion for Reconsideration to Court of Appeals. And the CA
rendered the assailed Decision setting aside the Order of the RTC and remanding the
case to the court a quo for further proceedings. 
Petitioners sought to reconsider, but were denied. Hence, appealed the Petition.

ISSUE:
Whether or not the CA erred in declaring that the RTC had jurisdiction over
respondent's Complaint which, although denominated as one for breach of contract, is
essentially one for simple payment of damages.

RULING:

The Court grants the Petition. The RTC was correct in categorizing Civil Case as
an action for damages seeking to recover an amount below its jurisdictional limit.

In ruling that respondent's Complaint is incapable of pecuniary estimation and

that the RTC has jurisdiction, the CA comported itself with the following ratiocination:
A case for breach of contract [sic] is a cause of action either for specific performance or
rescission of contracts. An action for rescission of contract, as a counterpart of an action
for specific performance, is incapable of pecuniary estimation, and therefore falls under
the jurisdiction of the RTC.

Then in Administrative Circular No. 09-94 this Court declared that "where the
claim for damages is the main cause of action, or one of the causes of action, the amount
of such claim shall be considered in determining the jurisdiction of the court." In other
words, where the complaint primarily seeks to recover damages, all claims for damages
should be considered in determining which court has jurisdiction over the subject
matter of the case regardless of whether they arose from a single cause of action or
several causes of action.

DELGADO BROTHERS, INC.

vs
HOME INSURANCE COMPANY and THE COURT OF APPEALS
G.R. No. L-16567 March 27, 1961

FACTS:

Respondent Home Insurance Company led with the Court of First Instance of Manila
a complaint against petitioner Delgado Brothers, Inc. alleging that Victor Bijou & Co. of
New York shipped at New York for Manila aboard the vessel S.S. Leoville, and
consigned to the Judy Philippines, Inc. of Manila, a shipment of 1 case Linen
Handkerchief and 2 cases cotton piece goods. Said shipment was insured with herein
respondent by the shipper and/or consignee and arrived at the Port of Manila.
thereafter, said shipment was unloaded complete and in good order from said vessel by
petitioner, but the latter delivered the same to the consignee with 1 case of Linen
Handkerchief in bad order.

The shipper and/or consignee led its claim with petitioner for said loss in the sum of
$713.08 (P1,436.86); and since respondent paid the amount to the shipper and/or
consignee, the former was subrogated to the shipper's and/or consignee's rights and
interests. Petitioner refused to pay shipper/consignee.

Petitioner alleged in its special answer that since no claim whatsoever was led by
respondent or the consignee, or their representatives against petitioner within the 15-
day period from the date of the arrival of the goods before they could le a suit in the
court of proper jurisdiction within 1 year from the date of said arrival at the Port of
Manila

RTC dismissed the case and absolving petitioner-defendant, but on the merits of the
special answer, while CA reversed the former’s ruling.
ISSUE:

Whether or not Petitioner's arrastre service is maritime in nature and, therefore,

actions against petitioner arrastre operator properly come under the jurisdiction of the
Court of First Instance of Manila.

RULING:

No, during the period while this agreement remains in force and effect, the
CONTRACTOR (herein petitioner Delgado Brothers, Inc.) shall be, and the sole
manager of the Arrastre Service at the Port of Manila, subject always, however, to the
terms, conditions, restrictions, subjections, supervisions, and provisions in this
agreement contained, with the exclusive right or privilege of receiving, handling,
carrying for, and delivering all merchandise, imported and exported, upon or passing
over, the Philippines Government-owned wharves an piers in the port of Manila; as also,
the recording or checking of all merchandise which may be delivered to the port of
Manila xxx

Petitioner's functions as arrastre operator are (1) to receive, handle, care for, and
deliver all merchandise imported and exported, upon or passing over Government-
owned wharves and piers in the Port of Manila, (2) as well as to record or check all
merchandise which may be delivered to said port at ship side, and in general (3) to
furnish light, and water services and other incidental services in order to undertake its
arrastre service.

Petitioner's services are clearly not maritime; they are no different from those of a
depositary or warehouseman.

"To give admiralty jurisdiction over a contract as maritime, such contract must
relate to the trade and business of the sea; it must be essentially and fully maritime in its
character; it must provide for maritime services, maritime transactions, or maritime
casualties."

Wherefore, the decision of the Court of Appeals appealed from is hereby reversed
and set aside, and case dismissed, with costs.
 PHILIPPINE REALTY AND HOLDINGS CORPORATION (PRHC)
vs.
LEY CONSTRUCTION AND DEVELOPMENT (LCDC) CORPORATION
G. R. No. 165548 & G. R. No. 167879 13 June 2011

FACTS:

Project contractor LCDC and project owner PRHC (with Engr. Dennis Abcede as
its project construction manager, and Joselito Santos, its general manager and vice-
president for operations) entered into several construction projects, including the
Tektite Building. LCDC president, Manuel Ley, met with Abcede to discuss the
unanticipated delay in construction due to sudden, unexpected hike in the prices of
cement and other construction materials. Abcede asked LCDC to advance the amount
necessary to complete construction. Ley acceded on condition that PRHC would allow
escalation of contract price and disregard the prohibition contained in the agreements.

The PRHC board of directors turned down the request, but it gave no notice to
LCDC of said denial. Instead, Abcede signed a letter and sent it to LCDC, asking for its
conformity, to the effect that should it infuse P36M into the project, a contract price
escalation for the same amount would be granted in LCDC’s favor.

However, the letter agreement revealed no signature above PRHC’s name.

Notwithstanding the absence of said signature, LCDC proceeded with the construction
of Tektite Building. It infused amounts amounting to P38.2M, and religiously submitted
to PRHC monthly reports on the same. But PRHC never replied to any of these monthly
reports.

When Ley inquired from Abcede and Santos why its requests for extension of
time were not granted in full, the two assured him that LCDC would not be penalized
with damages because the fact that it was working hard on the Tektite Building project
was known to PRHC. However, when 96.43% of Tektite Building had been completed
and LCDC requested the release of the P36M escalation price, PRHC did not reply.

After the construction of the building was completed, it conveyed its decision to
set off, in the form of liquidated damages, its claim to the supposed LCDC’s liability.
LCDC’s alleged liability included the corrective works to redo or repair the defective
waterproofing in one of the projects. LCDC denied the same by alleging that PRHC, as
the principal, forced LCDC, as the agent, into hiring Vulchem Corp., as sub-agent or
substitute, for the waterproofing works. It argued that under Art. 1892 of the Civil Code
1, “an agent is responsible for the acts of the substitute if he was given the power to
appoint a substitute. Conversely, if it is the principal and not the agent who appointed
the substitute, the agent bears no responsibility for the acts of the sub-agent”.

“Art. 1892. The agent may appoint a substitute if the principal has not prohibited
him from doing so; but he shall be responsible for the acts of the substitute: (1) When he
was not given the power to appoint one; (2) When he was given such power, but without
designating the person, and the person appointed was notoriously incompetent or
insolvent.”

LCDC filed a Complaint before the RTC in Makati City which ruled in its favor.
PRHC filed a Notice of Appeal. The Court of Appeals (CA) reversed RTC’s amended
Decision.

ISSUES:

1. Whether or not the signed letter of Abcede, without the signature above PRHC’s
name, could bind PRHC to the escalation agreement with LCDC.

2. Whether or not LCDC correctly applied Article 1892 on the principles of agency to the
case at bar.

RULING:

Yes, SC ruled that the signature of Abcede, as PRHC construction manager, on

the letter-agreement (contract) is sufficient to bind PRHC because it indicated authority
to make such representation on behalf of PRHC. SC further agreed with LCDC that the
actions of Abcede and Santos, assuming they were beyond the authority given to them
by PRHC which they were representing, still bound PRHC under the doctrine of
apparent authority.

Thus, the lack of authority on their part should not be used to prejudice it,
considering that the two were clothed with apparent authority to execute such
agreements.

2. No, SC ruled that LCDC’s reliance on Art. 1892 was misplaced. The principles of
agency could not to be applied to this case, since the legal relationship between PRHC
and LCDC was not one of agency, but was rather that between the owner of the project
and an independent contractor under a contract of service. Thus, it is the agreement
between the parties and not the Civil Code provisions on agency that should be applied
to resolve this issue. SC set aside CA’s decision and ruled to set off the respective
liabilities of the parties against each other, and PRHC was directed to pay LCDC the net
amount due.

“Athough an officer or agent acts without, or in excess of, his actual authority if he
acts within the scope of an apparent authority with which the corporation has clothed
him by holding him out or permitting him to appear as having such authority, the
corporation is bound thereby in favor of a person who deals with him in good faith in
reliance on such apparent authority, as where an officer is allowed to exercise a
particular authority with respect to the business, or a particular branch of it,
continuously and publicly, for a considerable time.”

Also, “if a private corporation intentionally or negligently clothes its officers or

agents with apparent power to perform acts for it, the corporation will be estopped to
deny that such apparent authority is real, as to innocent third persons dealing in good
faith with such officers or agents.” (Yao Ka Sin Trading v. Court of Appeals, et al. G.R.
No. 53820, 15 June 1992, 209 SCRA 763)

JIMMY CO
vs.
The Court of Appeals
G.R. No. 9124922 June 22, 1998

FACTS:
On July 18, 1990, petitioner entrusted his Nissan pick-up car 1988 model[1] to
private respondent - which is engaged in the sale, distribution and repair of motor
vehicles - for the following job repair services and supply of parts.
Private respondent undertook to return the vehicle on July 21, 1990 fully serviced
and supplied in accordance with the job contract. After petitioner paid in full the repair
bill in the amount of P1,397.00,[3] private respondent issued to him a gate pass for the
release of the vehicle on said date. But came July 21, 1990, the latter could not release
the vehicle as its battery was weak and was not yet replaced. Left with no option,
petitioner himself bought a new battery nearby and delivered it to private respondent
for installation on the same day.
However, the battery was not installed and the delivery of the car was
rescheduled to July 24, 1990 or three (3) days later. When petitioner sought to reclaim
his car in the afternoon of July 24, 1990, he was told that it was carnapped earlier that
morning while being road-tested by private respondent's employee along Pedro Gil and
Perez Streets in Paco, Manila. Private respondent said that the incident was reported to
the police.
ISSUE:
Whether or not private Respondent shall bear the loss of the vehicle.
RULING:
Yes, even assuming arguendo that carnapping was duly established as a
fortuitous event, still private respondent cannot escape liability. Article 1165[11] of the
New Civil Code makes an obligor who is guilty of delay responsible even for a
fortuitous... event until he has effected the delivery. In this case, private respondent was
already in delay as it was supposed to deliver petitioner's car three (3) days before it was
lost. Petitioner's agreement to the rescheduled delivery does not defeat his claim as
private respondent... had already breached its obligation. Moreover, such accession
cannot be construed as waiver of petitioner's right to hold private respondent liable
because the car was unusable and thus, petitioner had no option but to leave it.

FIL-ESTATE PROPERTIES, INC. AND FIL-ESTATE NETWORK INC.,

vs.
SPOUSES CONRADO AND MARIA VICTORIA RONQUILLO
G.R. No. 185798  January 13, 2014

FACTS:

                Petitioner Fil-Estate Properties, Inc. is the owner and developer of the Central
Park Place Tower while co-petitioner Fil-Estate Network, Inc. is its authorized
marketing agent. Respondent Spouses Conrado and Maria Victoria Ronquillo purchased
from petitioners an 82-square meter condominium unit for a pre-selling contract price
of P5,174,000.00. On 29 August 1997, respondents executed and signed a Reservation
Application Agreement wherein they deposited P200,000.00 as reservation fee. As
agreed upon, respondents paid the full downpayment of P1,552,200.00 and had been
paying the P63,363.33 monthly amortizations until September 1998.

                Upon learning that construction works had stopped, respondents likewise
stopped paying their monthly amortization. Claiming to have paid a total of
P2,198,949.96 to petitioners, respondents through two (2) successive letters, demanded
a full refund of their payment with interest. When their demands went unheeded,
respondents were constrained to file a Complaint for Refund and Damages before the
Housing and Land Use Regulatory Board (HLURB). Respondents prayed for
reimbursement/refund of P2,198,949.96 representing the total amortization payments,
P200,000.00 as and by way of moral damages, attorney’s fees and other litigation
expenses.

                On 13 June 2002, the HLURB in favor of herein respondents. The Arbiter
considered petitioners’ failure to develop the condominium project as a substantial
breach of their obligation which entitles respondents to seek for rescission with payment
of damages. The Arbiter also stated that mere economic hardship is not an excuse for
contractual and legal delay.

ISSUES:

1. Whether or not the Asian financial crisis constitute a fortuitous event which
would justify delay by petitioners in the performance of their contractual
obligation;
 2. Assuming that petitioners are liable, whether or not 12% interest was correctly
imposed on the judgment award

RULING

1:  NO, the Supreme Court held that the Asian financial crisis is not a fortuitous event
that would excuse petitioners from performing their contractual obligation.

            The Court ruled that “we cannot generalize that the Asian financial crisis in 1997
was unforeseeable and beyond the control of a business corporation. It is unfortunate
that petitioner apparently met with considerable difficulty e.g. increase cost of materials
and labor, even before the scheduled commencement of its real estate project as early as
1995. However, a real estate enterprise engaged in the pre-selling of condominium units
is concededly a master in projections on commodities and currency movements and
business risks. The fluctuating movement of the Philippine peso in the foreign exchange
market is an everyday occurrence, and fluctuations in currency exchange rates happen
every day, thus, not an instance of caso fortuito.”

2: No, the Court held that 6% is the proper legal interest rate.

                The resulting modification of the award of legal interest is, also, in line with our
recent ruling in Nacar v. Gallery Frames, embodying the amendment introduced by the
Bangko Sentral ng Pilipinas Monetary Board in BSP-MB Circular No. 799 which pegged
the interest rate at 6% regardless of the source of obligation.

                WHEREFORE, the petition is PARTLY GRANTED. The appealed Decision is

AFFIRMED with the MODIFICATION that the legal interest to be paid is SIX PERCENT
(6%) on the amount due computed from the time of respondents’ demand for refund on
8 October 1998.

ROSARIO VDA. DE LACSON, et. al

vs.
ABELARDO DIAZ
G.R. No. L-2837, August 04, 1950

FACTS:

Rosario Vda. De Lacson leased to the defendant lots nos. 429 and 1179 of the
Talisay Cadatre together with its sugar quota of about 5,728.5 piculs. The term of lease
was for 5 crop years beginning with the crop year 1940-1941; with an option in favor of
the defendant for another 2 years, after the expiration of the original period.
 The contract provided that the defendant was to pay to the plaintiffs an annual
rental of 1,000 piculs of export sugar, of which 500 piculs were to be paid in the month
of January of every year and the rest at the end of every milling season, The defendant
also obligated himself to pay to the plaintiff 20% of whatever alcohol he receives from
the Talisay-Silay Milling Co. Inc.

To guarantee the payment of the said annua; rentals, the defendant, Abelardo
Diaz, loaned to the plaintiffs the sum of 10,000 without interest, which was to be paid by
plaintiffs with the proceeds of the annual rentals in sugar provided however, that the
sum of PHP 7,000 was to be maintained as the permanent balance until the termination
of the lease period, as security for the payment by the defendant of said rentals.
On October 23, 1940, a supplemental agreement was entered by the parties
wherein the defendant, with the approval of the plaintiff, sold 400 piculs of said rentals
for the sum of Php 1,984.76, and this amount was applied on the loan of the plaintiffs
thereby leaving a balance of Php 8,015.24 against them and in favor of the defendant at
the beginning of the crop year 1941-1942.

On December 8, 1941, the war broke out. The defendant claims that due to the
unsettled conditions which follows, he was unable to mill all his sugar canes so that
during the crop year of 1941-1942 he produced only the total amount of 966.42 piculs of
sugar from the two haciendas, of which 579.86 piculs went to him as his planter’s share.
It appears that the defendant failed to pay the plaintiffs the rentals of 1,000 piculs of
export sugar and alcohol for said crop year.

The defendant also failed to pay the plaintiffs the stipulated rentals for the
remaining crop years. It was established that during the years 1943 and 1944 the
haciendas in question were worked and cultivated by the tenants of the defendant who
planted cereal crops thereon like corn and rice but there was no evidence as to how
much was really produced on the land.

The court below absolved the defendant, on the principle of fortuitous

circumstance, from any liability for rent for the crop years 1942-1943, 1943-1944, and
1944-45, although it allowed the plaintiffs “proportionate share of the War Damage
Compensation which the defendant may recover from the War Damage Commission for
the products of the afore-mentioned haciendas for the crop year 1941-42, on the basis of
Php 5,000, the total value of 1,000 piculs of sugar which is the corresponding rental of
said haciendas for the crop year 1941-42.”

ISSUE:
Whether or not the obligation of the defendant is extinguished by reason of war.

RULING:
No, in binding himself to deliver centrifugal sugar, the defendant promised a
generic thing. It could be any centrifugal sugar without regard to origin or how he
secured it. Hence, his inability to produce sugar, irrespective pf the cause,, did not
relieve him from his commitment. War, like floods and other catastrophes, was a
contingency, a collateral incident, which he could have provided for by proper
stipulation.

In reality, there was no fortuitous event which interfered with tye exploitation of
the leased property in the form and manner the defendant had intended. We refer to the
agricultural years 1945-46 and 1946-47. It should be observed that the defendant was
noy bound to keep the lands during those years; it was entirely optional on his part to
put an end to the lease after the 1944-45 crop year. When he decided to exercise option,
he was fully aware that there were no sugar mills in operation and he did not expect to
produce sugar. He must have had an object other than to plant sugar can when he chose
to retain the lands for two more years. His purpose was, beyond doubt, to plant other
crops, which he did. If those crops did not bring good return he cannot, under any
principle of law or equity, shift the loss to the lessor. Performance is not excused by the
fact that the contract turns out to be hard and improvident, unprofitable or
impracticable, ill-advised, or even foolish.

ROBERTO C. SICAM and AGENCIA de R.C. SICAM, INC.,

vs.
LULU V. JORGE and CESAR JORGE
GR NO. 159617 August 8, 2007

FACTS:

Lulu Jorge pawned several pieces of jewelry with Agencia de R. C. Sicam located
in BF Homes Parañaque, Metro Manila to secure a loan. On October 19, 1987, two
armed men entered the pawnshop and took away whatever cash and jewelry were found
inside the pawnshop vault. Sicam sent Lulu a letter informing her of the loss of her
jewelry due to the robbery incident in the pawnshop on the same date. Respondent Lulu
then wrote back expressing disbelief, then requested Sicam to prepare the pawned
jewelry for withdrawal on November 6, but Sicam failed to return the jewelry. Lulu,
joined by her husband Cesar, filed a complaint against Sicam with the RTC of Makati
seeking indemnification for the loss of pawned jewelry amounting to P272, 000.00, and
attorney’ fees (AF) of P27, 200.00. The RTC rendered its decision dismissing
respondents’ complaint as well as petitioners’ counterclaim. Respondents appealed the
RTC Decision to the CA which reversed the RTC, ordering the appellees to pay
appellants the actual value of the lost jewelry and AF. Petitioners denied, hence the
instant petition for review on Certiorari.

Issue:
 Whether or not the petitioners are liable for the loss of the pawned articles in their
possession.

Ruling:
Yes, Petitioners are liable for the loss of the pawned articles in their possession.
Article 1174 of the Civil Code provides: Except in cases expressly specified by the law, or
when it is otherwise declared by stipulation, or when the nature of the obligation
requires the assumption of risk, no person shall be responsible for those events which
could not be foreseen or which, though foreseen, were inevitable. 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, 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. Petitioners failed to show that they were free from any
negligence to the loss of the pawned jewelry. In order for a fortuitous event to exempt
one from liability, it is necessary that one has committed no negligence or misconduct
that may have occasioned the loss. The very measures which petitioners had allegedly
adopted show that to them the possibility of robbery was not only foreseeable, but
actually foreseen and anticipated.

In connection to Article 1173 of the Civil Code further provides: The fault or
negligence of the obligor consists in the omission of that diligence which is required by
the nature of the obligation and corresponds with the circumstances of the persons, of
time and of the place. When negligence shows bad faith, the provisions of Articles 1171
and 2201, paragraph 2 shall apply. If the law or contract does not state the diligence
which is to be observed in the performance, that which is expected of a good father of a
family shall be required. The records show that the petitioners failed to exercise
reasonable care and caution that an ordinarily prudent person would have used in the
same situation. Sicam’s testimony revealed that there were no security measures
adopted by petitioners in the operation of the pawnshop. It was also established that
there is no sufficient precaution and vigilance that were adopted by petitioners to
protect the pawnshop from the robbery because Sicam admits that the vault was open at
the time of robbery. Hence, Petitioners were guilty of negligence in the operation of
their pawnshop business.
 DARIO NACAR
vs.
GALLERY FRAMES AND/OR FELIPE BORDEY, JR.
G.R. No. 189871 August 13, 2013

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. No, 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. Yes, 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 -Yes, 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.
 JUAN F. NAKPIL
vs.
THE COURT OF APPEALS, UNITED CONSTRUCTION COMPANY, INC.,
JUAN J. CARLOS, and the PHILIPPINE BAR ASSOCIATION
GR No. L-47851 October 3, 1986

FACTS:
The plaintiff, Philippine Bar Association, a civic-non-profit association,
incorporated under the Corporation Law, decided to construct an office building on its
840 square meters lot located at the corner of Aduana and Arzobispo Streets,
Intramuros, Manila. The construction was undertaken by the United Construction, Inc.
on an "administration" basis, on the suggestion of Juan J. Carlos, the president and
general manager of said corporation.
The proposal was approved by plaintiff's board of directors and signed by its
president, Roman Ozaeta, a third-party defendant in this case. The plans and
specifications for the building were prepared by the other third-party defendants Juan
F. Nakpil & Sons.  The building was completed in June, 1966.
In the early morning of August 2, 1968 an unusually strong earthquake hit
Manila and its environs and the building in question sustained major damage.  The front
columns of the building buckled, causing the building to tilt forward dangerously. The
tenants vacated the building in view of its precarious condition.  As a temporary
remedial measure, the building was shored up by United Construction, Inc. at the cost of
P13,661.28.
On November 29, 1968, the plaintiff commenced this action for the recovery of damages
arising from the partial collapse of the building against United Construction, Inc. and its
President and General Manager Juan J. Carlos as defendants.
Defendants in turn filed a third-party complaint against the architects who prepared the
plans and specifications, alleging in essence that the collapse of the building was due to
the defects in the said plans and specifications.
ISSUE:
Whether or not an act of God, - an unusually strong earthquake - which caused the
failure of the building, exempts from liability, parties who are otherwise liable because
of their negligence.

RULING:
The applicable law governing the rights and liabilities of the parties herein is Article
1723 of the New Civil Code, which provides:
"Art. 1723.  The engineer or architect who drew up the plans and specifications for a
building is liable for damages if within fifteen years from the completion of the structure
the same should collapse by reason of a defect in those plans and specifications, or due
to the defects in the ground.  The contractor is likewise responsible for the damage if the
edifice falls within the same period on account of defects in the construction or the use
of materials of inferior quality furnished by him, or due to any violation of the terms... of
the contract.  If the engineer or architect supervises the construction, he shall be
solidarily liable with the contractor.
On the other hand, the general rule is that no person shall be responsible for events
which could not be foreseen or which, though foreseen, were inevitable
There is no dispute that the earthquake of August 2, 1968 is a fortuitous event or an act
of God.
The principle embodied in the act of God doctrine strictly requires that the act must be
one occasioned exclusively by the violence of nature and all human agencies are to be
excluded from creating or entering into the cause of the mischief.
The negligence of the defendant and the third-party defendants petitioners was
established beyond dispute both in the lower court and in the Intermediate Appellate
Court.  Defendant United Construction Co., Inc. was found to have made substantial
deviations from the plans... and specifications, and to have failed to observe the
requisite workmanship in the construction as well as to exercise the requisite degree of
supervision; while the third-party defendants were found to have inadequacies or
defects in the plans and specifications prepared by them.
In any event, the relevant and logical observations of the trial court as affirmed by the
Court of Appeals that "while it is not possible to state with certainty that the building
would not have collapsed were those defects not present, the fact remains that several
buildings in the same area withstood the earthquake to which the building of the
plaintiff was similarly subjected", cannot be ignored.
There should be no question that the NAKPILS and UNITED are liable for the damage
resulting from the partial and eventual collapse of the PBA building as a result of the
earthquakes.
Thus it has been held that when the negligence of a person concurs with an act of God in
producing a loss, such person is not exempt from liability by showing that the
immediate cause of the damage was the act of God.  To be exempt from liability for loss
because of an act of God, he must be free from any previous negligence or misconduct by
which that loss or damage may have been occasioned.

ADVOCATES FOR TRUTH IN LENDING, INC.

vs.
BANGKO SENTRAL NG PILIPINAS
G.R. No. 192986 January 15, 2013
FACTS:
Advocates for Truth in Lending, Inc. and its President, Eduardo Olaguer claim that they
are raising issues of transcendental importance to the public and so they filed Petition
for Certiorari under Rule 65 ROC seeking to declare that the Bangko Sentral ng Pilipinas
Monetary Board (BSP-MB), replacing the Central Bank Monetary Board (CB-MB) by
virtue of R.A. No. 7653, has no authority to continue enforcing Central Bank Circular
No. 905, issued by the CB-MB in 1982, which "suspended" the Usury Law of 1916 (Act
No. 2655).

R.A. No. 265, which created the Central Bank (CB) of the Philippines, empowered the
CB-MB to, among others, set the maximum interest rates which banks may charge for
all types of loans and other credit operations, within limits prescribed by the Usury Law.

In its Resolution No. 2224, the CB-MB issued CB Circular No. 905, Series of 1982.
Section 1 of the Circular, under its General Provisions, removed the ceilings on interest
rates on loans or forbearance of any money, goods or credits.

On June 14, 1993, President Fidel V. Ramos signed into law R.A. No. 7653 establishing
the Bangko Sentral ng Pilipinas (BSP) to replace the CB.

ISSUES: 
1.    Whether the CB-MB exceeded its authority when it issued CB Circular No. 905,
which removed all interest ceilings and thus suspended Act No. 2655 as regards
usurious interest rates.
2. Whether under R.A. No. 7653, the BSP-MB may continue to enforce CB Circular No.
905.

RULING:

1. No, the CB-MB merely suspended the effectivity of the Usury Law when it issued CB
Circular No. 905.
The power of the CB to effectively suspend the Usury Law pursuant to P.D. No. 1684 has
long been recognized and upheld in many cases. As the Court explained in the landmark
case of Medel v. CA, citing several cases, CB Circular No. 905 "did not repeal nor in
anyway amend the Usury Law but simply suspended the latter’s effectivity;" that "a CB
Circular cannot repeal a law, [for] only a law can repeal another law;" that "by virtue of
CB Circular No. 905, the Usury Law has been rendered ineffective;" and "Usury has
been legally non-existent in our jurisdiction. Interest can now be charged as lender and
borrower may agree upon." 

By lifting the interest ceiling, CB Circular No. 905 merely upheld the parties’ freedom of
contract to agree freely on the rate of interest. It cited Article 1306 of the New Civil
Code, under which 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.

2.  Yes, the BSP-MB has authority to enforce CB Circular No. 905.
Section 1 of CB Circular No. 905 provides that, "The rate of interest, including
commissions, premiums, fees and other charges, on a loan or forbearance of any money,
goods, or credits, regardless of maturity and whether secured or unsecured, that may be
charged or collected by any person, whether natural or juridical, shall not be subject to
any ceiling prescribed under or pursuant to the Usury Law, as amended." It does not
purport to suspend the Usury Law only as it applies to banks, but to all lenders.

Petitioners contend that, granting that the CB had power to "suspend" the Usury Law,
the new BSP-MB did not retain this power of its predecessor, in view of Section 135 of
R.A. No. 7653, which expressly repealed R.A. No. 265. The petitioners point out that
R.A. No. 7653 did not reenact a provision similar to Section 109 of R.A. No. 265.

A closer perusal shows that Section 109 of R.A. No. 265 covered only loans extended by
banks, whereas under Section 1-a of the Usury Law, as amended, the BSP-MB may
prescribe the maximum rate or rates of interest for all loans or renewals thereof or the
forbearance of any money, goods or credits, including those for loans of low priority
such as consumer loans, as well as such loans made by pawnshops, finance companies
and similar credit institutions. It even authorizes the BSP-MB to prescribe different
maximum rate or rates for different types of borrowings, including deposits and deposit
substitutes, or loans of financial intermediaries. Act No. 2655, an earlier law, is much
broader in scope, whereas R.A. No. 265, now R.A. No. 7653, merely supplemented it as
it concerns loans by banks and other financial institutions. Had R.A. No. 7653 been
intended to repeal Section 1-a of Act No. 2655, it would have so stated in unequivocal
terms.

Further, the lifting of the ceilings for interest rates does not authorize stipulations
charging excessive, unconscionable, and iniquitous interest. It is settled that nothing in
CB Circular No. 905 grants lenders a carte blanche authority to raise interest rates to
levels which will either enslave their borrowers or lead to a hemorrhaging of their assets.
Stipulations authorizing iniquitous or unconscionable interests have been invariably
struck down for being contrary to morals, if not against the law.

NUNELON MARQUEZ
VS.
ELISAN CREDIT CORPORATION
 GR NO. 194642 APRIL 6, 2015

FACTS:

Marquez obtained from Elisan Credit Corporation a first loan payable in weekly
installments and subject to annual interest with monthly penalties and attorney’s in case
of nonpayment. A chattel mortgage was also executed stipulating that “the motor vehicle
shall stand as a security for all other obligations of every kind already incurred or which
hereafter may be incurred”. The payment of that loan was acknowledged by both parties.
Subsequently, Marquez obtained another loan evidenced by a promissory note with the
same terms and conditions as the first loan. When the second loan matured, there still
remained an unpaid balance.

Marquez requested the creditor to pay the unpaid balance by daily installments
until the loan is paid; the creditor agreed. Thus, several months after the maturity of the
loan, Marquez had already paid a total amount which is greater than the amount of the
principal. Despite such, the creditor filed a complaint for foreclosure of the CM on the
ground that Marquez allegedly failed to pay the principal of the second loan despite
demand. It was also prayed that the unpaid balance plus accrued penalties and interests
be paid because, allegedly, Marquez’ failure to pay upon maturity triggered the
imposition of monthly penalties and attorney’s fees.

Marquez, citing Art 1176 and 1235 of the Civil Code, insists that his daily
payments should be deemed to have been credited against the principal, as the official
receipts issued by the creditor were silent with respect to the payment of interest and
penalties.

ISSUES:

1: Whether or not the creditor waived the payment of the interest.

2: Whether or not the daily payments made by the debtor be applied to the interest.

3: Whether or not an order for foreclosure is proper.

RULING:

1: No. The fact that the official receipts did not indicate whether the payments were
made for the principal or the interest does not prove that the creditor waived the
interest. There is no presumption of waiver of interest without any evidence showing
that the creditor accepted the daily instruments as payments for the principal.

2: Yes. Notwithstanding the fact it was not indicated in the receipts whether the
payments were applied to the principal or the interest, such failure should not be taken
against the creditor. Under Article 1253 of the Civil Code, if the debt produces interest,
payment of the principal shall not be deemed to have been made until the interests have
been covered. Thus, the creditor in this case has a right to credit the payments to the
interest first.

3: No. Foreclosure in this case is without legal and factual basis because the chattel
mortgage was already extinguished when the obligation under the first loan was duly
paid. A CM can only cover obligations existing at the time the mortgage is constituted.
For a CM to cover debts yet to be contracted, a fresh chattel mortgage may be executed
or the old contract be amended conformably to the form prescribed by the CM Law.
Here, since there was no showing that a new agreement was executed, the security can
no longer apply to the second loan. The chattel mortgage was already extinguished
because being merely an accessory in nature, it cannot exist independently of the
principal obligation.

Although a promise expressed in a chattel mortgage to include debts that are yet
to be contracted can be a binding commitment that can be compelled upon, the security
itself, however, does not come into existence or arise until after a chattel mortgage
agreement covering the newly contracted debt is executed either by concluding a fresh
chattel mortgage or by amending the old contract conformably with the form prescribed
by the Chattel Mortgage Law.

Refusal on the part of the borrower to execute the agreement so as to cover the
after incurred obligation can constitute an act of default on the part of the borrower of
the financing agreement whereon the promise is written, but the remedy of foreclosure
can only cover the debts extant at the time of constitution and during the life of the
chattel mortgage sought to be foreclosed.

The Chattel Mortgage Law requires the parties to the contract to attach an
affidavit of good faith and execute an oath that – “… the mortgage is made for the
purpose of securing the obligation specified in the conditions thereof, and for no other
purposes, and that the same is a just and valid obligation, and one not entered into for
the purposes of fraud.”

It is obvious therefore that the debt referred in the law is a current, not an
obligation that is yet merely contemplated. The only obligation specified in the chattel
mortgage contract was the first loan which the petitioner later fully paid. By virtue of
Section 3 of the Chattel Mortgage Law, the payment of the obligation automatically
rendered the chattel mortgage terminated; the chattel mortgage had ceased to exist
upon full payment of the first loan.

Being merely an accessory in nature, it cannot exist independently of the

principal obligation. The parties did not execute a fresh chattel mortgage nor did they
amend the chattel mortgage to comply with the Chattel Mortgage Law which requires
that the obligation must be specified in the affidavit of good faith. Simply put, there no
longer was any chattel mortgage that could cover the second loan upon full payment of
the first loan. The order to foreclose the motor vehicle therefore had no legal basis.
 Relevant Laws Article 1176, Civil Code: The receipt of the principal by the
creditor, without reservation with respect to the interest, shall give rise to the
presumption that said interest has been paid. Article 1235, Civil Code: When the obligee
accepts the performance of an obligation, knowing its incompleteness or irregularity,
and without expressing any protest or objection, the obligation is deemed fully complied
with. Article 1253, Civil Code: If the debt produces interest, payment of the principal
shall not be deemed to have been made until the interests have been covered.

ESTATE OF K. H. HEMADY, DECEASED

vs.
LUZON SURETY CO., INC.
G.R. No. L-8437 November 28, 1956

FACTS:

Luzon Surety Co. filed a claim against the Estate of Hemady based on twenty
different indemnity agreements, or counter bonds, each subscribed by a distinct
principal and by the deceased K. H. Hemady, a surety solidary guarantor. All of these
were in consideration of the Luzon Surety Co.’s having guaranteed the various principals
in favour of different creditors. Luzon Surety prayed for allowance, as a contingent
claim, of the value of the twenty bonds it had executed in consideration of the
counterbonds, and further asked for judgment for the unpaid premiums and
documentary stamps affixed to the bonds, with 12 per cent interest thereon .

The lower court dismissed the claims of Luzon on the ground that whatever
losses may occur after Hemady's death, .are not chargeable to his estate, because upon
his death he ceased to be guarantor. The administratrix also contends that upon the
death of Hemady, his liability as a guarantor terminated, and therefore, in the absence
of a showing that a loss or damage was suffered, the claim cannot be considered
contingent. They also added that since a new requirement has been added for a person
to qualify as a guarantor, that is: integrity- something purely personal and is not
transmissible. Upon the death of Hemady, his integrity was not transmitted to his estate
or successors. Whatever loss therefore, may occur after Hemady's death, are not
chargeable to his estate because upon his death he ceased to be a guarantor.
ISSUE:

Whether or not the obligations of Hemady to Luzon Surety were transmitted to his
heirs.

RULING:

Yes, under Art. 1311 of the New Civil Code, the rule is that: Contracts take effect
only as between the parties, their assigns and heirs, except in the case where the rights
and obligations arising from the contract are not transmissible by their nature, or by
stipulation or by provision of law. While in our successional system the responsibility of
the heirs for the debts of their decedent cannot exceed the value of the inheritance they
receive from him, the principle remains intact that these heirs succeed not only to the
rights of the deceased but also to his obligations. Articles 774 and 776 of the New Civil
Code expressedly so provide, thereby confirming Article 1311 already qouted. "Art. 774.
Succession is a mode of acquisition by virtue of which the property, rights and
obligations to the extent of the value of the inheritance, of a person are transmitted
through his death to another or others either by his will or by operation of law.”

Although Art. 1311 admits of 3 exceptions: a. nature of the obligation; b.

intransmissibility by stipulation of the parties; c. intransmissibilty by operation of law,
these exceptions do not apply in the case. First, the surety or guarantor does not warrant
the conclusion that his peculiar individual qualities are contemplated as a principal
inducement for the contract. Creditor Luzon Surety Co. only expect of K. H. Hemady
reimbursement of the moneys that the Luzon Surety Co. might have to disburse on
account of the obligations of the principal debtors. It was indifferent that the
reimbursement should be made by Hemady himself or by someone else in his behalf, so
long as the money was paid to it. Second, the text of the agreements sued upon nowhere
indicate that they are non-transferable. Because under the law (Article 1311), a person
who enters into a contract is deemed to have contracted for himself and his heirs and
assigns, it is unnecessary for him to expressly stipulate to that effect.

Lastly, by contract, the articles of the Civil Code that regulate guaranty or
suretyship (Articles 2047 to 2084) contain no provision that the guaranty is
extinguished upon the death of the guarantor or the surety. That integrity, capacity to
bind himself, and sufficient property to answer for the obligation are purely personal is
of no merit. The law requires these qualities to be present only at the time of the
perfection of the contract of guaranty. Once the contract has become perfected and
binding, the supervening incapacity of the guarantor would not operate to exonerate
him of the eventual liability he has contracted. Thus, the solidary guarantor's liability is
not extinguished by his death, and that in such event, the Luzon Surety Co., had the
right to file against the estate a contingent claim for reimbursement.