A1174 [Fortuitous Event, and A1169’s Rules for Delays in Reciprocal Ruling:

Obligations]: Tanguilig v. CA 1.) The deep-well wasn’t part of the contract even though
deep-well and deep-well pumps were mentioned in the
Basic Story: Tanguilig was under a contract to build a windmill for contract, because, in their context, they were just used
Herce Jr., for 60K pesos with a one-year guarantee to account for descriptions for the specs of the windmill.
the windmill after its delivery and acceptance. After the delivery of 2.) Herce Jr. should’ve paid to Tanguilig, and not Pili. The
the windmill, Herce Jr. still had an outstanding balance of 15K deep-well was a separate agreement with Pili, not with
pesos. Moreover, the windmill was destroyed after a “strong Tanguilig.
wind” occurred (or a “typhoon” as alleged by Tanguilig). 3.) Tanguilig failed to prove that there was an actual typhoon.
4.) Tanguilig is still liable for repairing the windmill because
Herce Jr. said that he’s not obligated to pay the remaining 15K the contract contained a 1-year guarantee. Thus, Herce Jr.
because it was supposed to be credited when he paid Pili to cannot be said to be in default according to the last
construct a deep-well necessary for the windmill. Also, Herce paragraph of A1169: “neither party incurs in delay if the
should be made accountable for the broken windmill. other does not comply or is not ready to comply.” In his
case, Tanguilig still hasn’t complied with his obligation to
Tanguilig defended himself saying that it was not agreed upon in take care of the windmill as stipulated in the one-year
the contract that the deep-well was part of the 60K payment; and guarantee.
that the windmill broke because of a fortuitous event which
absolves him from liability after the windmill was already delivered Doctrine: Elements of a Fortuitous Event
(also stating that since Herce was in default, he should carry the four (4) requisites must concur:
liability of taking care of the windmill). a) the cause of the breach of the obligation must be
independent of the will of the debtor;
b) the event must be either unforeseeable or unavoidable;
c) the event must be such as to render it impossible for the
debtor to fulfill his obligation in a normal manner; and
d) the debtor must be free from any participation in or
aggravation of the injury to the creditor.

Note: In answering JSP’s tests prove the concurrence of each

element to prove a valid force majeure.

[Fortuitous Event, Force Majeure and Aggravating Negligence; Ruling:

A1723 Relation and Solidary Liability of Engineers and Architects to 1.) The totality of the inadequacies and deviations of the plan
Contractors]: Nakpil v. CA and specifications of the building go beyond are contrary
to general principles of engineering design for proper
Basic Story: United Construction Inc, and third-party Nakpil & Sons
who prepares the plans and specifications, constructed a building
in Manila for the Philippine Bar Association. After an earthquake in
1968, the front columns of the buildings collapsed, leading the
building to tilt dangerously. The building was temporarily closed
down. A second earthquake in 1970 eventually lead to the
voluntary demolition of the whole building. No other buildings in
Manila were destroyed or damaged. After investigation, a list of
defects in the building has been produced.
reinforcements. Not only did the defects tend to damage,
but they even aggravated the damages.
2.) A1723 make Nakpil & Sons solidary liable
3.) The payment of the entire building, and not just the
damage caused by the first earthquake before its eventual
demolition, should be paid for by United and Nakpil &
Sons.
4.) There is wanton recklessness resulting to bad faith from
the negligence of United and Nakpil & Sons.

PBA now are seeking relief against United and Nakpil & Sons for Doctrine:
the payment of the entire building and lost profit, stating that the It is not enough that an Act of God occurred. It must be shown
building wouldn’t have incurred such damages if it were not for that the debtor must be free from any participation in or
the inadequacies and deviations of the plans and specifications of aggravation of the injury to the creditor.
the building.
See Also: Article 1723 Liability of Contractors, Engineers, and
United and Nakpil defended themselves that there are no settled Architects.
practice in the field of engineering and architecture to determine
which plans and specifications could mitigate the eventuality of
earthquakes. The minor defects could not have been a proximate
cause of the damages.
[Fortuitous Event, Force Majeure merits either suspension of the Ruling:
enforceable obligation or Termination of Contract, Effect of 1.) Recognizing the attempts of Cosmos in allowing Ace-Agro
Suspension is not Extension of Period to Deliver Prestation; A1231 to continue its service, the Court agrees with the CA that
Extinguishing of Obligations]: Ace-Agro v. CA the facts of the case did not merit a Termination of
Contract since there were still wood shells left to be
Basic Facts: Cosmos Bottling Corporation entered a contract with repaired.
Ace-Agro Development Corporation to clean soft drink bottles and 2.) What actually occurred is a suspension of the enforceable
repair wooden shells for the period of January 1, 1990 to obligation; and Cosmos didn’t have the obligation to
December 31, 1990. Ace-Agro had its operations based inside extend the period of their original contract beyond
Cosmos’s plant. But on April 1990 a fire broke out in Ace-Agro’s December 31.
plant, destroying Ace-Agro’s place of work as well as the bottles 3.) It was actually the fault of Ace-Agro that it incurred losses
and wooden shells to be worked on. because of its insistent refusal to continue its obligation in
the service contract.
Alleging that the object of the prestation was essentially rendered
impossible to continue, Cosmos terminated its contract with Ace- Doctrine:
Agro.
The stipulation that in the event of a fortuitous event or force
Ace-Agro asked Cosmos to continue their contract. Since Cosmos majeure the contract shall be deemed suspended during the said
took much time before it could reply, Ace-Agro laid off its workers period does not stop the running of the period the contract has
in the meantime. Cosmos eventually agreed to continue their been agreed upon to run.
contract as previously stipulated, with the exemption that ace-
Agro operate outside the plant. This was refuted by Ace-Agro It only relieves the parties from the fulfillment of their respective
because basing their operations elsewhere would lead to obligations during that time.
transportation costs that diminish their already minute profits.
Finally, Cosmos agreed to continue their contract as previously For Example: If during six of the thirty years fixed as the duration
stipulated back in the plant. Still, Ace-Agro refused in hopes of of a contract, one of the parties is prevented by force majeure to
actually extending their contract beyond December 31, 1990. perform his obligation during those years, he cannot after the
expiration of the thirty-year period, be compelled to perform his
Ace-Agro eventually brought this case against Cosmos for a breach obligation for six more years to make up for what he failed to
of contract when it illegally and arbitrarily terminated its service perform during the said six years, because it would in effect be all
contract – stating that the force majeure wasn’t enough to merit extension of the term of the contract. The contract is stipulated to
the contract to be extinguished. Cosmos on the other hand, run for thirty years, and the period expires on the thirtieth year;
defended that the termination of contract was valid because the the period of six years during which performance by one of the
object of their agreement had already been lost and destroyed. parties is prevented by force majeure cannot be deducted from
the period stipulated.

See also: Art. 1231 – when Obligations are considered

Extinguished.

(Note: You can argue, after a force majeure, for an automatic

[Fortuitous Event, Force Majeure, You can stipulate a Waiver of
Exemption from Liability at times of Force Majeure, Risks is
Inherent in Business Ventures; A1201 Effectivity of Alternative
Remedies from a Right of Choice is effective only upon
Communication]: Mondragon Leisure v. CA
Mondragon Leisure entered into an Omnibus Loan and Security
extension of the fixed term of the contract if it’s from a TURNKEY
CONTRACT, wherein the prestation requires the COMPLETE
delivery and that such original length of the fixed period is the
least time necessary to complete it.)
Ruling:
1.) Although A1201 states that the choice of alternative
remedy shall produce no effect except from the time it has
been communicated, facts of the case show that
respondent banks have already notified Mondragon
Leisure several times in writing its demand and declaring
Mondragon to be in default. As such, Mondragon is validly
Agreement with respondent banks for the development of the
Mimosa Leisure Estate. The Omnibus Agreement stipulated that
the respondent banks had Alternative Remedies in case in the
event of a default, which is defined by the agreement to be when
payments of the borrower is “due at stated maturity, by
acceleration or otherwise, of any amount payable under the loan
documents.” One of such alternative remedies is to accelerate all
payments payable under the loan agreement.
Later on, Mondragon Leisure stopped the payment of its monthly
dues despite written demands by the respondent banks. As such,
respondent banks filed for a complaint in court for the foreclosure
of the leasehold rights against Mondragon Leisure. But Mondragon
Leisure defended that respondent banks do not have a cause of
action because Mondragon has not been validly declared at a
default yet due to the lack of notice to be given by the respondent
banks according to A1201 of the New Civil Code. Moreover, Doctrine:
Mondragon should be excused from liability due to the force Worthy of note, risk is an exception to the general rule on
majeure of the Asian Financial Crisis and the sudden closure of the fortuitous events. Under the law, these exceptions are:
Mimosa Regency Casino.
in default, and respondent banks have a cause of action for
their complaint.
2.) The Court finds that in the Omnibus Agreement, the
parties expressly agreed that any enactment, official
action, act of war, act of nature or other force majeure or
other similar circumstances shall in no way affect the
obligation of the borrowers to make payments.
a. Moreover, force majeure has no relevance to
Mondragon’s liability. The Omnibus Agreement was
entered into DURING the Asian Financial Crisis; and
Mondragon – being an established corporation –
should’ve already been aware of the financial
environment it was in. For the closure of the Casino,
such risks were not wholly unexpected since business
ventures inherently carries with it such risks of failure.
(1) when the law expressly so specifies;
(2) when it is otherwise declared by the parties; and
(3) when the nature of the obligation requires the assumption
of risks.

See also: A1201 Effectivity of Alternative Remedies

Class Notes:

“But don’t let this case confuse you. The AFC should’ve met all the
elements of a fortuitous event. But the Court didn’t want that to
be a precedent (which would then be available to other parties).

Right to Terminate is not automatic in a Fortuitous Event, unless

the ground for which is explicitly stipulated in the contract.
(Separate Topic altogether)
 Remember the case of Commodatum as an example of an
exception made by law to fortuitous event; For exceptions
granted by express stipulation in a contract, think insurance
policies;

Assumption of Risk: “the debtor created or engaged in an activity

that gave rise to the fortuitous event. Somehow created the
opportunity for the event to happen.” For example, the transport
of explosives business; if the truck suddenly exploded, the
company can’t claim fortuitous event. Because the truck wouldn’t
have exploded if it wasn’t transporting explosives.

Note that EXCEPTIONS is a different ground from NON-

FULFILLMENT of the ELEMENTS of a Fortuitous Event. Clarify your
ground when you make your arguments, but also use every
ground you can use in the “even-arguing-that” case.

Note also: “alternative remedies.”

1175 Class Notes:

The parties can still agree on a higher interest rate, the only
limitation is that the SC may declare the rate to be
“unconscionable “ (as long as it’s below 3% per month based on
jurisprudence)

Interest due is at the time the parties agreed to in WRITING

(otherwise it would be void).

1176 Certain (Annullable) Presumptions:

If there is a payment of the principal, then it is assumed that the
interests are fully paid as well
If the latest installment payment has been paid, then there’s a
 presumption that the latter installment payments were already
made.

You remind me of Proverbs: 3:15

1179 Remember: Makati Stock Exchange “An obligation is a juridical
and relation whereby a person (called the creditor) may demand
1181 from another (called the debtor) the observance of a
determinative conduct (the giving, doing or not doing), and in
case of breach, may demand satisfaction from the assets of
the latter. “

Nielsen Case: (compare with agro)

Should there be a fortuitous event preventing the parties from

fulfilling their obligations during such event, the period of the
contract shall be extended to the same extent the fortuitous event
happened.

1182 Spouses Rodriguez entered into a Conditional Deed of Sale over

the lot of Spouses Catungal for the price of 25M. The contract
stipulated that Rodriguez would first pay 500K as down payment,
and would pay the remaining balance upon a successful
negotiation of Rodriguez over securing a right of way over the lots
of third parties; furthermore, if no negotiations would be
successful, even despite the reassessments with Catungcal,
Spouses Rodriguez would have the right to rescind or cancel the
Contract. If Rodriguez chooses to rescind, he shall give written
notice, and will be reimbursed of the 500K when the Catungcals
have sold the same property to another party.
1190 UP v. De Los Angeles: [In this case there was a stipulation granting
the power to rescind extrajudicially] “(Usually to prevent abuse
and further damage) If there’s a stipulation for it, then a party can
rescind the contract extrajudicially. But he extrajudicial resolution
will remain contestable and subject to judicial invalidation, unless
attack thereon should become barred by acquiescence, estoppel
or prescription. The initiative of instituting a suit is thus
transferred to the other party (to question the extrajudicial
resolution)”

Tan v. CA: “You can’t rescind a contract extrajudicially unless

there’s a stipulation for it, even though power to rescind is
‘implied in reciprocal obligations.’” Also: “rescission will not be
permitted for a slight or casual breach of the contract but only for
such breaches as are so substantial and fundamental as to defeat
the object of the parties in making the agreement. (Also note that
when it’s a time is of the essence kind of obligation, a delay may
merit recession). However, under the third paragraph of Article
1191 of the Civil Code, the Court is given a discretionary power to
allow a period within which a person in default may be permitted
to perform his obligation [two things in issue: payment of
mortgage so that title can be transferred, and public land lots]”

EDS v. Healthcheck: “Ed had basis to resolve the contract because

Healthcheck failed to provide the medical services (there is
substantial breach by health check.) However, Ed could not validly
resolve because he did not return the card as per agreement.
Assuming Ed returned the card, Ed could not validly resolve
because who can resolve a reciprocal obligation? Who is entitled
to resolve?”

Co v. CA: “An option is a contract granting a privilege to buy or sell

within an agreed time and at a determined price. It is a separate
and distinct contract from which the parties may enter into upon
the consummation of the option. It must be supported by
consideration aka. earnest money (see: A1479).

The elements of a valid contract of sale under Article 1458 of the

Civil Code are
(1) consent or meeting of the minds;
(2) determinate subject matter; and
(3) price certain in money or its equivalent.
Under Article 1482 of the Civil Code, earnest money given in a sale
transaction is considered part of the purchase price and proof of
the perfection of the sale.

In this case, the COS were of the mistaken belief that CUSTODIO
had lost her "option" over the Beata property when she failed to
pay the remaining balance of $70,000.00 pursuant to their August
8, 1986 letter. In the absence of an express stipulation authorizing
the sellers to extrajudicially rescind the contract of sale, the COS
cannot unilaterally and extrajudicially rescind the contract of sale.

Under Article 1385 of the Civil Code, rescission creates the

obligation to return the things which were the object of the
contract but such rescission can only be carried out when the one
who demands rescission can return whatever he may be obliged
to restore.”

Nissan v. Lica: “Art. 1191 provides that the power to rescind is

implied in reciprocal obligations, in cases where one of the
obligors should fail to comply with what is incumbent upon him.
Otherwise stated, an aggrieved party is not prevented from
extrajudicially rescinding a contract to protect its interests, even
in the absence of any provision expressly providing for such
right.

We are aware of this Court's previous rulings in Tan v. Court of

Appeals , and EDS Manufacturing, Inc. v. Healthcheck
International, Inc. The seeming "conflict" between this and our
previous rulings, however, is more apparent than real.

Whether a contract provides for it or not, the remedy of rescission

is always available as a remedy against a defaulting party. When
done without prior judicial imprimatur , however, it may still be
subject to a possible court review.
This notwithstanding, jurisprudence still indicates that an
extrajudicial rescission based on grounds not specified in the
contract would not preclude a party to treat the same as
rescinded. The rescinding party, however, by such course of
action, subjects himself to the risk of being held liable for
damages when the extrajudicial rescission is questioned by the
opposing party in court. This was made clear in the case of U.P. v.
De los Angeles”

Suria v. IAC: “(Note the parties here had a Deed of Sale with
Mortgage.)

The Sellers have already parted with the title as evidenced by the
transfer certificate of title in the Buyer’s petitioners' name. The
buyer, in turn, fulfilled his end of the bargain when he executed
the deed of mortgage. The payments on an installment basis
secured by the execution of a mortgage took the place of a cash
payment.

In other words, the relationship between the parties is no longer

one of buyer and seller because the contract of sale has been
perfected and consummated. It is already one of a mortgagor and
a mortgagee. In consideration of the petitioners' promise to pay
on installment basis the sum they owe the respondents, the latter
have accepted the mortgage as security for the obligation.

The petitioners' breach of obligations is not with respect to the

perfected contract of sale but in the obligations created by the
mortgage contract. The remedy of rescission is not a principal
action retaliatory in character but becomes a subsidiary one which
by law is available only in the absence of any other legal remedy.
(Art. 1384, Civil Code).

1190 Basic Facts:
Victorio leased one of his units to Chua. An earlier ejectment case
lead to both parties having a compromise agreement. In the
compromi, the lessor has the right to increase the rent to no more
25% after proper survey every four months. Victorio increased the
rent by 25% after conducting a rental survey. Chua refused to pay
rentals. Ejectment case was filed by Victorio against Chua. The CA
ruled in favor of Victorio. A writ of execution was then secured to
have Chua ejected. Chua moved to quash the writ on the ground
that Chua started paying his new rent even during the pendency of
the case, to which Victorio accepts. The motion to quash was then
approved, and for a while the property of Victorio remained with
Chua.
Later on, Victorio decided to increase the rent from 6.5K to 15K.
Chua argued that this was against their compromi. Victorio said
that the compromi was already severed when Chua earlier refused Upon non-payment of rent by the lessee, the lessor may elect to
to pay. treat the contract as rescinded and thereby determine the right of
In the rescission by reason of lesion or economic prejudice (NOT
ON THE BREACH OF RECIPROCITY aka. breach of faith like in 1191),
the cause of action is subordinated to the existence of that
prejudice, because it is the raison d 'etre as well as the measure of
the right to rescind. Hence, where the defendant makes good the
damages caused, the action cannot be maintained or continued,
as expressly provided in Articles 1383 and 1384. But the operation
of these two articles is limited to the cases of rescission for lesion
enumerated in Article 1381 of the Civil Code of the Philippines,
and does not apply to cases under Article 1191.
Therefore, the subsidiary and equitable remedy of rescission is
NOT available in the presence of a remedy of foreclosure in (or
any other stipulated remedies) in the contract – taken under the
light of the express provision of Article 1383 of the civil code that:
'the action for rescission is subsidiary; it cannot be instituted
except when the party suffering damage has no other legal means
to obtain reparation for the same.
Chua v. Victorio: “Ordinarily, an obligee's remedies upon breach
of an obligation are judicial in nature. This is implicit in the third
paragraph of Article 1191, and in Article 1659 of the Civil Code.
Thus, the mere failure by the lessees to comply with the increased
rental did not ipso jure produce the rescission of the contract of
lease.
However, although the lessor did not resort to judicial action to
specifically avail of any of the three remedies in Article 1659, this
does not mean that the compromise agreement continues in
force. In certain exceptional cases, the law recognizes the
availability of extrajudicial remedies, which exist in addition to
the judicial remedies given above ex. A1673 (not “judicial
resolution”! “judicial EJECTMENT”) IN OTHER WORDS: For lease
agreements, preparatory for ejectment, extrajudicial resolution
is allowed!
 the lessee to continue in possession; and this right to recover
possession may be enforced in an action of unlawful detainer. It is
not necessary, in such situation, that an independent action for
the rescission of the lease should first be instituted (See A1659 in
rel A1673: Breach of Lease Agreements)

rescission of lease contracts under Article 1659 of the Civil Code is

not one that requires an independent action, unlike resolution of
reciprocal obligations under Article 1191 of said Code”
1190 Uy v. CA: Uy v. CA: [In re: A1318; CANCELATION] “Cause is the essential
There was a contract of sale between NHA and the owner of a land reason which moves the contracting parties to enter into it. In
for 8 lots for a housing project. NHA only paid for 5 lots, because other words, the cause is the immediate, direct and proximate
the other 3 lands were prone to landslide. NHA tried to cancel the reason which justifies the creation of an obligation through the
sale for the 3 parcels of land. will of the contracting parties. Cause, which is the essential reason
for the contract, should be distinguished from motive, which is the
particular reason of a contracting party which does not affect the
other party

In a contract of sale of a piece of land, such as in this case, the

cause of the vendor (petitioners' principals) in entering into the
contract is to obtain the price. For the vendee, NHA, it is the
acquisition of the land. The motive of the NHA, on the other hand,
is to use said lands for housing.

Ordinarily, a party's motives for entering into the contract do not

affect the contract. However, the motive may be regarded as
causa when it predetermines the purpose of the contract.

In this case, it is clear, and petitioners do not dispute, that NHA

would not have entered into the contract were the lands not
suitable for housing. In other words, the quality of the land was an
implied condition for the NHA to enter into the contract.
Accordingly, we hold that the NHA was justified in cancelling the
contract. The realization of the mistake as regards the quality of
the land resulted in the negation of the motive/cause thus
rendering the contract inexistent. Article 1318 of the Civil Code

Basic Facts:
PPC made representations with PAGCOR for the establishment of a
casino in Pryce Plaza Hotel in Cagayan de Oro City. After PAGCOR
determined that there would not be an unsurmountable aversion
coming from the locals and LGU officials, they entered into a
Contract of Lease with PPC for 3 years.
The public was enraged and rallied against the casino. The
Sanguniang Panglungsod of CDO released two ordinances asserting
a policy against casinos, and providing for the cancellation of
business permits for such with violations for non-compliance. The
Supreme Court later found these ordinances to be
unconstitutional.
Yet although PAGCOR still continued its operations for a while,
they eventually had to stop after the advice of the Office of the
President and the continuing rallies against the casino. After PPC “The termination of a contract is not equivalent to its rescission.
sent PAGOCR on its intent to collect the full payment of rentals,
PAGCOR replied on Sept 20 that PAGCOR was no longer
amendable for the full payment of rentals after it had no other
alternative but to TERMINATE the lease agreement due to the
vehement opposition to the casino – also they asked for a refund
on the reimbursable rental deposits and the permanent
improvement on the Hotel parking lots.
On Nov 25, PPC informed PAGCOR that PPC was terminating the
contract of lease due to PAGCOR's continuing breach of the
contract and further stated that it was exercising its rights under
states that:
There is no contract unless the following requisites concur: (1)
Consent of the contracting parties; (2) Object certain which is the
subject matter of the contract; and (3) Cause of the obligation
which is established.”
Pryce v. PAGCOR: (Note we first saw A1659 in the case of Chua v.
Victorio in holding that this article allows extrajudicial rescission)
MAIN ISSUE: Did the Honorable Court of Appeals commit grave
and reversible error by holding that Pryce was not entitled to
future rentals or lease payments for the unexpired period of the
Contract of Lease between Pryce and PAGCOR?
1. Were the provisions of Sections 20(a) and 20(c) of the
Contract of Lease relative to the right of PRYCE to
terminate the Contract for cause and to moreover collect
rentals from PAGCOR corresponding to the remaining
term of the lease valid and binding?
2. Did not Article 1659 of the Civil Code supersede Sections
20(a) and 20(c) of the Contract, PRYCE having 'rescinded'
the Contract of Lease?
1. When an agreement is terminated, it is deemed valid at
inception. Prior to termination, the contract binds the
parties, who are thus obliged to observe its provisions.
(Think Valid until Declared Void)
(i) However, when it is rescinded, it is deemed
inexistent, and the parties are returned to their
status quo ante. Hence, there is mutual restitution
of benefits received, in order to bring back the
parties to their original situation prior to the
inception of the contract. (Think Void ab Initio)
the contract of lease pursuant to Article 20 (a) and (c). (think: “no
no no, you’re not quiting, I’m firing you” kind of situation)
2. The consequences of termination may be anticipated and
provided for by the contract. As long as the terms of the
contract are not contrary to law, morals, good customs,
public order or public policy, they shall be respected by
courts. The judiciary is not authorized to make or modify
contracts; neither may it rescue parties from
disadvantageous stipulations.
(ii) Courts, however, are empowered to reduce
iniquitous or unconscionable liquidated damages,
indemnities and penalties agreed upon by the
parties.

The term "rescission" is found in:

1.) Article 1191 of the Civil Code, the general provision on
rescission of reciprocal obligations;
2.) Article 1659, which authorizes rescission as an alternative
remedy, insofar as the rights and obligations of the lessor
and the lessee in contracts of lease are concerned; and
3.) Article 1380 with regard to the rescission of contracts.

The provisions of Sections 20(a) and 20(c) of the Contract of Lease

leave no doubt that the parties have covenanted:
1. to give PPC the right to terminate and cancel the Contract in
the event of a default or breach by the lessee; and
2. to make PAGCOR fully liable for rentals for the remaining
term of the lease, despite the exercise of such right to
terminate.
(Note: Application of A1159)
For sure, these stipulations are valid and are not contrary to law,
morals, good customs, public order or public policy.

Mutual restitution is required in a rescission (or resolution), in

order to bring back the parties to their original situation prior to
the inception of the contract. Applying this principle to this case,
it WOULD mean that PPC would re-acquire possession of the
leased premises, and PAGCOR would get back the rentals it paid
the former for the use of the hotel space. (But this case is not
rescission!)

In contrast, the parties in a case of termination are not restored to

their original situation; neither is the contract treated as if it never
existed. Prior to its termination, the parties are obliged to comply
with their contractual obligations. Only after the contract has
been cancelled will they be released from their obligations.

GENERAL RULE: Future rentals cannot be claimed as

compensation for the use or enjoyment of another's property
after the termination of a contract. In this case, by abrogating the
Contract in the present case, PPC released PAGCOR from the
latter's future obligations, which included the payment of rentals.
To grant that right to the former is to unjustly enrich it at the
latter's expense.

EXEMPTION: A penal clause is "an accessory obligation which the

parties attach to a principal obligation for the purpose of insuring
the performance thereof by imposing on the debtor a special
prestation (generally consisting in the payment of a sum of
money) in case the obligation is not fulfilled or is irregularly or
inadequately fulfilled. This clause functions to strengthen the
coercive force of the obligation. There is nothing immoral or illegal
in such indemnity/penalty clause, ABSENT ANY SHOWING that it
was forced upon or fraudulently foisted on the obligor
A. GENERAL RULE IN OBLIGATIONS WITH A PENAL CLAUSE:
the penalty serves as a substitute for the indemnity for
damages and the payment of interests in case of
noncompliance; that is, if there is no stipulation to the
contrary, in which case proof of actual damages is not
necessary for the penalty to be demanded.
a. EXEMPTION: In some cases, the purpose of the
penalty is obviously to punish the obligor for the
 breach. Hence, the obligee can recover from the
former not only the penalty, but also other damages
resulting from the nonfulfillment of the principal
obligation. Article 1226, Paragraph 1 of the CC
i.) when there is a stipulation to the contrary,
ii.) when the obligor is sued for refusal to pay
the agreed penalty, and
iii.) when the obligor is guilty of fraud.

B. EXPANDED RULE: In certain cases, a stipulated penalty may

nevertheless be equitably reduced by the courts.
i.) Art. 1229: “The judge shall equitably
reduce the penalty when the principal
obligation has been partly or irregularly
complied with by the debtor. Even if there
has been no performance, the penalty may
also be reduced by the courts if it is
iniquitous or unconscionable."
ii.) Art. 2227: “Liquidated damages, whether
intended as an indemnity or a penalty,
shall be equitably reduced if they are
iniquitous or unconscionable.”
a. The question of whether a penalty is reasonable or
iniquitous is addressed to the sound discretion of
the courts. These are some of the factors to be
considered:
i.) Type, Extent, and Purpose of the Penalty;
ii.) Nature of the Obligation;
iii.) Mode of Breach and its Consequences;
iv.) Supervening Realities; and
v.) Standing and Relationship of the Parties

PENALTY RULES’ APPLICATION TO THE CASE: It appears that

Section XX (c) was intended to be a penalty clause. The first
exception applies because Article XX (c) provides that, aside from
the payment of the rentals corresponding to the remaining term

Basic Facts:
Solid Homes sold a subdivision lot to Spouses Tan. But when
Spouses Tan saw the land, there were a dire lack of basic utilities
and there were nearby squatters. They went to HLURB to ask for
the specific performance to Solid Homes for the development of
the subject lot. But the Spouses Tan were given an option as well
to have the Contract Resolved instead. If there was resolution,
there would be mutual restitution.
The contention is at what price should be used as the basis for the
mutual restitution – purchase price with interest, fair market
value, or current market value. Spouses Tan was contesting that
Article 1385 should be applied instead, rather than Article 1190 for
Resolutions. If you follow Article 1190, what’s supposed to be paid
is the Purchase Price – in which case Spouses Tan would be “lugi”.
of the lease, the lessee shall also be liable "for any and all
damages, actual or consequential, resulting from such default and
termination of this contract." BUT SINCE PAGCOR's casino
operations had to be suspended for days on end since their start,
interruptions and stoppages meant that PAGCOR suffered a
tremendous loss of expected revenues, not to mention the fact
that it had fully operated under the Contract only for a limited
time. The Court considers the claim for future rentals to the tune
of P7,037,835.40 to be highly iniquitous. The amount should be
equitably reduced. Under the circumstances, the advanced rental
deposits in the sum of P687,289.50 should be sufficient penalty.
Class Note: Pryce was smart for opting to go for Termination
rather than Resolution, because if they chose the latter, then their
penal clause would be void ab initio together with the whole
contract.
Solid Homes v. Tan:
See also Issue on Prescription for Specific Performance:
Article 1144 -- The following actions must be brought within ten
years from the time the right of action accrues:
1. (1)  Upon a written contract;
2. (2)  Upon an obligation created by law;
3. (3)  Upon a judgment (Emphasis supplied)
In law, a cause of action exists when the following requisites
concur, to wit:
1. ( 1 ) a right in favor of the plaintiff by whatever means and
under whatever law it arises or is created;
2. (2) an obligation on the part on the defendant to respect
such right; and
3. (3) an act or omission on the part of such defendant
violative of the right of the plaintiff
It is only upon the happening of the last element when it can be
said that a cause of action has arisen. Under Article 1169 of the
Code, a party who is under obligation to do something incurs
delay only from the time that the obligee demands, either
judicially or extrajudicially, for the fulfillment of the obligation.
Hence, absent any demand from the obligee, the obligor does
not incur delay. And so long as the obligor does not incur in delay,
he cannot be said to be guilty of some omission violative of the
obligee's rights. Consequently, as long as the obligor is not guilty
of some omission violative of the obligee's rights, the latter has no
cause of action against the former. As a result, the prescriptive
period within which the obligee may bring an action against the
obligor does not commence to run until a demand is made.

Here, it was only on December 18, 1995 when respondents made

a written demand upon petitioner to construct subdivision roads,
put up utility facilities and rid the premises of squatters,
obligations which are unquestionably in the nature of an
obligation to do.

Main Issue: In the event respondents opt to rescind the contract,

should petitioner pay them merely the price they paid for the lot
plus interest or the current market value thereof?

RULE: The Court says that ALTHOUGH Article 1190 should apply
with a rescission in Article 1191, …
EXEMPTION: … IT WILL NOT BE APPLIED WHEN it will operate
unjustly, lead to absurd results, or contradict the evident meaning
of the statute taken as a whole.

APPLICATION: Were we to follow the letter of Article 1190, we will

in effect be paving the way to an absurd situation whereby
subdivision developers who have reneged on their contractual
and legal obligation to provide utility systems and facilities for the
use of subdivision lot owners may themselves profit from their
very own wrongs and shortcomings.

[Note: this jurisprudence makes an exemption to the mutual

 restitution principle (A1190) when it comes to Resolution (A1191),
and thus limit the “void ab initio” effects to the same as A1385;
much like how penalties limit such as we’ve seen in the case of
Pryce v. PAGCOR]

Class Notes: The Court could’ve achieved the same fair ends
without breaking the rules of the Civil Code if they just awarded
the proper amount of Damages.

1197 Radiowealth v. Del Rosario: in re – Acceleration Clause

Issue: What is the

a. legal effect of the Demurrer to Evidence, and
b. the date when the obligation became due and
demandable.
A. In Re: Demurrer
a. defendants who present a demurrer to the plaintiff's
evidence retain the right to present their own
evidence, if the trial court disagrees with them;
b. if the court agrees with them, but on appeal, the
appellate court disagrees with both of them and
reverses the dismissal order, the defendants lose the
right to present their own evidence. The appellate
court shall, in addition, resolve the case and render
judgment on the merits, inasmuch as a demurrer aims
to discourage prolonged litigations.

B. In Re: Date Demandable

Promissory Note says: “[A] P11,579.00 payable for 12 consecutive
months starting on _____________ until the amount
ofP11,579.00 is fully paid. Each installment shall be due every
____ day of each month
 [C] A late payment penalty charge of two and a half (2.5%)
percent per month shall be added to each unpaid installment

[B] … if default be made in the payment of any of the installments

or late payment charges thereon… shall at once become due and
payable without need of notice or demand..”

Respondents argue that theorize that the action for immediate

enforcement of their obligation is premature because its
fulfillment is dependent on the sole will of the debtor. Hence, they
consider that the proper court should first fix a period for
payment.

This contention is untenable. The act of leaving blank the due date
of the first installment did not necessarily mean that the debtors
were allowed to pay as and when they could. On the contrary, the
(A) Note expressly stipulated that the debt should be amortized
monthly in installments of P11,579 for twelve consecutive
months. While the specific date on which each installment would
be due was left blank, the Note clearly provided that each
installment should be payable each month.

Furthermore, it also provided for an (C) acceleration clause and a

(B) late payment penalty, both of which showed the intention of
the parties that the installments should be paid at a definite date.
Had they intended that the debtors could pay as and when they
could, there would have been no need for these two clauses.

Basic Facts: Macasaet v. Macasaet (Illustrates the difference between a

Condition and a Period)
The Spouses Macasaet was letting their Children through a verbal
agreement to use their lot for their residence and business. A. Petitioners allege that they cannot be ejected from the lots,
because respondents based their Complaint regarding the
Class Notes added: nonpayment of rentals on a verbal lease agreement, which
the latter failed to prove. Petitioners contend that the
The Court said that the “lease” was based on the resolutory
condition of “parental love” (It’s not a Period cuz it’s not certain
that the parents would lose their love for their children).
The Children could’ve used the argument that the business was
just in its development phase, and the purpose of the lease was to
help them grow the business first.They could’ve asked the court to
fix a period as to what would be an appropriate time to have their
business properly grow.
A. The Petitioners dispute the lower courts' finding that they
lower courts erred in using another ground (tolerance of
possession) to eject them.
c. RULE: In actions for unlawful detainer, possession
that was originally lawful becomes unlawful upon
the expiration or termination of the defendant's
right to possess, arising from an express or implied
contract. To show a cause of action in an unlawful
detainer, an allegation that the defendant is
illegally withholding possession from the plaintiff is
sufficient.
occupied the subject lots on the basis of mere tolerance.
They argue that their occupation was not under such
condition, since respondents had invited, offered and
persuaded them to use those properties.
a. RULE: those who occupy the land of another at the
latter's tolerance or permission, without any
contract between them, are necessarily bound by
an implied promise that the occupants will vacate
the property upon demand. A summary action for
ejectment is the proper remedy to enforce this
implied obligation.
b. Toleration is defined as "the act or practice of
permitting or enduring something not wholly
approved of.” Even though this is continued for a
long time, no right will be acquired by prescription.
The question reduces itself to the existence or
non- existence of the permission
c. IN THIS CASE: We hold that the facts of the present
case RULE OUT the finding of possession by mere
tolerance. Petitioners were able to establish that
respondents had invited them to occupy the
subject lots in order that they could all live near
one other and help in resolving family problems.
By occupying those lots, petitioners demonstrated
their acceptance of the invitation. Hence, there
 was a meeting of minds, and an agreement
regarding possession of the lots impliedly arose
between the parties.
d. Thus, Ismael and Teresita had a right to occupy the
lots is therefore clear. The issue is the duration of
possession. Article 1197, however, applies to a
situation in which the parties intended a period.
Such qualification cannot be inferred from the
facts of the present case. To repeat, when Vicente
and Rosario invited their children to use the lots,
they did so out of parental love and a desire for
solidarity expected from Filipino parents. No
period was intended by the parties. Based on
respondents' reasons for gratuitously allowing
petitioners to use the lots, it can be safely
concluded that the agreement subsisted as long as
the parents and the children mutually benefited
from the arrangement. Effectively, there is a
resolutory condition in such an agreement.
e.
B.

Class Notes:

For tests, always know the magic words (“the stipulation would be
a purely potestative condition dependent solely to the will of the
debtor”)

In the case of UP, Tan, Co, and Nissan: the burden of the COST of
initial litigation is what’s important.

In a case where there’s a JVA between A (to give land) and B (to
 fund for development) to create a township. B defaults,
considered as substantial breach.
In

!!! In terms of the cases of Cannu (18% Threshold Obiter Dictum)

and Reyes (19% Threshold Clear Ratio), you have to check if the
payment already made is either for (1) PRINCIPAL , or (2) INTEREST
– not just the Total Amount – also if there’s any violation of any
non-monetary terms.

Perfection of the contract is different from the consummation of

the Contract (which is the fulfillment of the prestation in the
contract).

1207 – Marsman Drysdale v. Philippine Geoanalytics In re: Relativity of Contracts; A1207 and A1208; Joint Liability
1222 BASIC FACTS:
Marsman Drysdale entered into a joint venture with Gotesco. Under relativity of contracts, what governs this issues is NOT the
Marsman provides the property lot, while Gotesco pays for the Joint Venture Agreement between Drysdale and Gotesco, but the
cash contribution. The JV then employed Phil Geo under technical Technical Service Contract entered by them jointly with Phil Geo.
service contract to perform geotechnical engineering (subsurface Thus, A1207 and A1208 says that absent any specifications, it is
soil exploration drilling). But the drilling could not be completely presumed in joint liability that the obligations are divided equally.
done because Drysdale didn’t clear out the debris from the site.
See also: A1797 (Joint Venture; Partnership Liability in Loss)
Phil Geo demanded their payment, but the JV still refused.
Drysdale said that it was Gotesco who is responsible for the cash
contributions. Gotesco says that it was Drysdale’s fault that Phil
Geo couldn’t do its job properly.

Gonzales v. PCIB In re: Accommodation Party is Solidary Liable; A1207 Express

BASIC FACTS:
There are three loans here…
<Loan A>: Gonzales entered into a Credit-On-Hand Loan
Agreement (COHLA) with PCIB to acquire a credit line (issued via
check), with Gonzales’ aggregate account with PCIB of USD8,000
was made to be the collateral.
Stipulation of Solidary Liability
1.) An accommodation party is one who meets all the three
requisites, viz.:
a. must be a party to the instrument, signing as
maker, drawer, acceptor, or endorser;
 b. must not receive value therefor; and
<Loan B.1>: Gonzales and his spouse entered into a loan with PCIB c. must sign for the purpose of lending his name or
for P500,000 covered by a promissory note. credit to some other person.
<Loan B.2>: Gonzales and Spouses Panlilo entered into a loan with The accommodation party is liable on the instrument to a holder
PCIB for P100,000 and P300,000, covered by two promissory notes for value even though the holder, at the time of taking the
instrument, knew him or her to be merely an accommodation
The promissory notes wrote that Gonzales and Spouses Panlilo party, as if the contract was not for accommodation.
were solidary liable. To cover for the 3 promissory notes (totaling
P1.8M), Gonzales and Spouses Panlilo used a Real Estate The relation between an accommodation party and the
Mortgage. Only the Spouses Panlilo used the P1.8M. accommodated party is one of principal and surety — the
accommodation party being the surety. Although a contract of
Spouses Panlilo defaulted on their monthly interest in paying back suretyship is in essence accessory or collateral to a valid principal
the loan. Gonzales was notified by PCIB. obligation, the surety's liability to the creditor is immediate,
primary and absolute; he is directly and equally bound with the
Later on Gonzales used his credit line to pay Uson P250K. But his principal.
check was dishonored because PCIB cancelled his credit line in
light of the fact that his loan with Spouses Panlilo were not paid.
This caused drama llama with Gonzales and Uson, with 2.) The solidary liability of Gonzales is clearly stipulated in the
humiliation. promissory notes which uniformly begin, "For value received, the
undersigned (the "BORROWER") jointly and severally promise to
pay . . . ." Solidary liability cannot be presumed but must be
established by law or contract. Article 1207 of the Civil Code
pertinently states that "there is solidary liability only when the
obligation expressly so states, or when the obligation requires
solidarity."

3.) PCIB was negligent in dishonoring Gonzales’ check for P250K

There was no proper notice to Gonzales of the default and
delinquency of the PhP1,800,000 loan. Verily, it is not enough to
be merely informed to pay over a hundred thousand without
being formally apprised of the exact aggregate amount and the
corresponding dues pertaining to specific loans and the dates they
became due. No proper written notice given by the bank. The
record is bereft of any document showing that, indeed, Gonzales
was formally informed by PCIB about the past due periodic
interests. In business, more so for banks, the amounts demanded
 from the debtor or borrower have to be definite, clear, and
without ambiguity. It is not sufficient simply to be informed that
one must pay over a hundred thousand aggregate outstanding
interest dues without clear and certain figures.

Class Notes: General Rule – Any act by a debtor or creditor, will

only affect the creditor or debtor privy to such act.

General Rule – Obligations are presumed to be indivisible.

Always make sure that you take note of the words used in the
agreement. For example, using “I”, “each”, or “individually” would
indicate solidary liability (see p90)
Lafarge Cement v. Continental Cement In re: Obligations Arising from Tort; A1211
Basic Facts:
Continental filed for writ of attachment based on groundless Obligations may be classified as either joint or solidary. "Joint" or
claims, which compelled Lafarge to file a counterclaim (thereby "jointly" or "conjoint" means mancum or mancomunada or pro
spending money). Now Lafarge is seeking for damages. rata obligation; on the other hand, "solidary obligations" may be
used interchangeably with "joint and several" or "several." Thus,
petitioners' usage of the term "joint and solidary" is confusing and
ambiguous.

Nevertheless, respondents' liability, if proven, is solidary. This

characterization finds basis in Article 1207 of the Civil Code, which
provides that obligations are generally considered joint, except
when otherwise expressly stated or when the law or the nature of
the obligation requires solidarity. However, obligations arising
from tort are, by their nature, always solidary. Each joint tort
feasor is not only individually liable for the tort in which he
participates, but is also jointly liable with his tort feasors

The general rule is that joint tort feasors are all the persons who
command, instigate, promote, encourage, advise, countenance,
cooperate in, aid or abet the commission of a tort, or who
approve of it after it is done, if done for their benefit. They are
each liable as principals, to the same extent and in the same

Boston Equity Resources v. CA
BASIC FACTS:
The contract between petitioner, and respondent and
respondent's husband, states: FOR VALUE RECEIVED, I/We jointly
and severally (in solemn) promise to pay BOSTON EQUITY
RESOURCES, INC. the sum of (P1,400,000.00). The provisions and
stipulations of the contract were then followed by the respective
signatures of respondent as "MAKER" and her husband as "CO-
MAKER."
manner as if they had performed the wrongful act themselves.
Joint tort feasors are jointly and severally liable for the tort which
they commit. The persons injured may sue all of them or any
number less than all. Each is liable for the whole damages caused
by all, and all together are jointly liable for the whole damage.
In a "joint" obligation, each obligor answers only for a part of the
whole liability; in a "solidary" or "joint and several" obligation, the
relationship between the active and the passive subjects is so
close that each of them must comply with or demand the
fulfillment of the whole obligation. The fact that the liability
sought against the CCC is for specific performance and tort, while
that sought against the individual respondents is based solely on
tort does not negate the solidary nature of their liability for
tortuous acts alleged in the counterclaims.
Class Notes:
1. Tort is always solidary because Bad Faith is difficult to
apportion the degrees of liability between different
parties.
2. The defense of one solidary debtor can be used by the
other solidary debtors.
In re: Jurisdiction; A1216 – Death of one Solidary Debtor
Ruling:
1.) Motion to Dismiss was filed out of time. Lolita only filed
such 6 years and 5 months after submitting her Answer.
Moreover, such motion was filed already after the
presentation of evidence. Lastly, this was her second
motion to dismiss but on a different ground. In summary,
she is conducting dilatory tactics
2.) Yet, Lolita was not estopped from questioning the
jurisdiction of the court.
a. P: There are Four Aspects of Jurisdiction:
Boston Equity filed a complaint for Sum of Money and Preliminary
Attachment against Spouses Manuel and Lolita Toledo. At that
time, Manuel Toledo was already dead. So, the RTC granted
Boston’s plea to substitute Manuel with his children as heirs of his
estate. Lolita, however, filed to dismiss the case on the ground
that:
(1) petitioner failed to implead an indispensable party (Estate
of Manuel)
(2) the court did not acquire jurisdiction over Manuel
(3) the court erred in substituting Manuel with his children
RTC and CA granted the motion to dismiss, stating that: “courts
acquire jurisdiction over the person of the defendant . . . only
when the latter voluntarily appeared or submitted to the court or
by coercive process issued by the court to him” – in this case
Manuel was already dead by the time Boston filed its complaint;
Manuel’s Estate should’ve been the one impleaded, not just the
wife. Also, issues of jurisdiction can be raised at any time during
the proceedings.
(i) Jurisdiction over Subject Matter
(ii) Jurisdiction over the Parties
(iii) Jurisdiction over the Issues of the Case
(iv) Jurisdiction over the Thing subject of Litigation
b. R: Only issues of the (i) jurisdiction of subject matter
may be prone to estoppel.
c. A: In this case, what respondent was questioning in her
motion to dismiss was that court's jurisdiction over the
person of defendant Manuel. The principles relating to
(ii) jurisdiction over the person of the parties are
pertinent herein. Thus, she is not estopped.
3.) Jurisdiction over the person of a defendant is acquired
through a valid service of summons; trial court did not
acquire jurisdiction over the person of Manuel Toledo,
since there was no valid service of summons upon him,
precisely because he was already dead even before the
complaint against him and his wife was filed in the trial
court.
4.) R: An indispensable party is one who has such an interest
in the controversy or subject matter of a case that a final
adjudication cannot be made in his or her absence,
without injuring or affecting that interest.
a. C: The estate of Manuel is not an indispensable party
to the collection case, for the simple reason that the
obligation of Manuel and his wife, respondent herein,
is solidary.
b. F: The contract between petitioner, and respondent
and respondent's husband, states:
(i) FOR VALUE RECEIVED, I/We jointly and
severally 46 (in solemn) promise to pay
BOSTON EQUITY RESOURCES, INC. the sum of
(P1,400,000.00)
c. F: The provisions and stipulations of the contract were
then followed by the respective signatures of
respondent as "MAKER" and her husband as "CO-
MAKER."

Arco Pulp v. Lim
BASIC FACTS:
Dan Lim, under Quality Paper and Plastic Products Enterprises,
delivered scrap papers worth P7.2 Million to Arco Pulp and Paper
Company, Inc through its Chief Executive: Candida Santos. The
agreement between them said that Arco Pulp would either:
(A) Pay Lim the value of the raw materials; or
d. LEGAL BASIS: Pursuant to Article 1216 of the Civil
Code, petitioner may collect the entire amount of the
obligation from respondent only.
(i) “The creditor may proceed against any one of
the solidary debtors or some or all of them
simultaneously. The demand made against one
of them shall not be an obstacle to those which
may subsequently be directed against the
others, so long as the debt has not been fully
collected."
DOCTRINE:
Article 1216 of the New Civil Code gives the creditor the right to
"proceed against anyone of the solidary debtors or some or all of
them simultaneously." The choice is undoubtedly left to the
solidary creditor to determine against whom he will enforce
collection. In case of the death of one of the solidary debtors, he
(the creditor) may, if he so chooses, proceed against the surviving
solidary debtors without necessity of filing a claim in the estate of
the deceased debtors. It is not mandatory for him to have the
case dismissed as against the surviving debtors and file its claim
against the estate of the deceased solidary debtor.
Class Notes:
Under the Corporation Code, there’s solidary liability in grossly
neglectful, fraudulent, or countenanced an unlawful act by the
directors and officers.
s
In re: Novation; Solidary Liability in Piercing Corporate Veil
Ruling:
1.) The obligation between the parties was an Alternative
Obligation.
a. LEGAL BASIS: The rule on alternative obligations is
governed by Article 1199 of the Civil Code
(i) “A person alternatively bound by different
 (B) Deliver Lim the finished product of Arco Pulp of equivalent
value
Arco Pulp eventually issued a post-dated check worth P1.5 Million
to Lim as partial payment, assuring that it won’t bounce. The check
bounced.
Later on, Arco Pulp entered into a MEMORANDUM OF
AGREEMENT with Eric Sy (Megapack Container Corporation)
where:
1.) Arco Pulp would deliver its 600 tons of Test Liners to Sy for
P18.50 per kg.
2.) The Raw materials for the Test Liners would be supplied by
Lim at P6.50 per kg.
But, Lim still sent a written demand to Arco Pulp for the payment
of P7.2 Million. Arco Pulp refused saying that there was a Novation
of the original obligation via the Memorandum Agreement, and
thus made Eric Sy the new debtor for Dan Lim.
Lim filed for complaint for Sum of Money and Attachment, and the
Court of Appeals eventually:
1. decided that the case showed an alternative obligation;
and
2. to order Arco Pulp and Paper to jointly and severally pay
Dan T. Lim the amount of PhP7,220,968.31 with interest at
12% per annum from the time of demand; moral damages;
exemplary damages; and attorney's fees.
prestations shall completely perform one of
them. The creditor cannot be compelled to
receive part of one and part of the other
undertaking.”
(ii) Further, Article 1201 states that the right of
election is extinguished when the party who
may exercise that option categorically and
unequivocally makes his or her choice known.
b. A: The facts show that Arco Pulp already made a
choice:
(i) First, When petitioner Arco Pulp and Paper
tendered a check to the scrap papers, they
exercised their option to pay the price.
Respondent's receipt of the check and his
subsequent act of depositing it constituted his
notice of petitioner Arco Pulp and Paper's
option to pay.
(ii) Second, Arco Pulp extinguished the option to
deliver the finished products of equivalent
value to respondent, when it executed the
Memorandum of Agreement stating that such
finished products would be delivered to Eric Sy
for a price.
2.) The Memorandum of Agreement did not constitute a
Novation of the Original Contract.
a. LEGAL BASIS [1]: Article 1291 of the Civil Code
provides: “Obligations may be modified by…
i. (1) Changing their object or principal conditions
ii. (2) Substituting the Person of the Debtor
iii. (3) Subrogating a Third Person in the Rights of
the Creditor.”
b. LEGAL BASIS [2]: Article 1292 further provides:
i. “In order that an obligation may be
extinguished by another which substitute the
same, it is imperative that it be so declared in
unequivocal terms, or that the old and the new
 obligations be on every point incompatible
with each other.”
c. LEGAL BASIS [3]: Article 1293 further provides:
i. “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.”
d. A: The MoA merely shows that petitioner Arco Pulp
and Paper opted to deliver the finished products to a
third person instead. There is nothing that states:
i. that with its execution, the obligation of Arco
Pulp to Lim would be extinguished.
ii. that Sy substituted Arco Pulp as Lim's debtor.
e. C: Thus, novation did not take place. Arco Pulp's
obligation to Lim remains valid and existing.

3.) Arco Pulp is liable for Damages.

i. LB: Under Article 2220 of the Civil Code, moral
damages may be awarded in case of breach of
contract where the breach is due to fraud or bad
faith. But Breaches of contract become the basis of
moral damages, not only under Article 2220, but
also under Articles 19 and 20 in relation to Article
1159.
ii. A: Here, the injury suffered by respondent is the
loss of PhP7,220,968.31 from his business. This has
remained unpaid since 2007 due to the incessant
refusal of Arco Pulp despite demand.

4.) Candida Santos is Solidarily Liable with Arco Pulp

i. General Rule: Directors, officers, or employees of a
corporation cannot be held personally liable for
obligations incurred by the corporation.
 ii. Exemption [1]: This veil of corporate fiction may be
pierced if complainant is able to prove, as in this
case, that:
a. the officer is guilty of negligence or bad faith,
and
b. such negligence or bad faith was clearly and
convincingly proven.
iii. Application: Here, any obligation arising from these
acts would not, ordinarily, be petitioner Santos'
personal undertaking for which she would be
solidarily liable:
a. Santos entered into a contract with respondent
in her capacity as Chief Executive of Arco Pulp
b. Santos also issued the check in partial payment,
on the face of the check bearing the account
name, "Arco Pulp & Paper, Co., Inc.”
iv. Exemption [2]: The corporate existence may be
disregarded where the entity is formed or used for
non-legitimate purposes, such as to evade a just
and due obligation, or to justify a wrong, to shield
or perpetrate fraud or to carry out similar or
inequitable considerations, other unjustifiable aims
or intentions.
v. Application: Here, when petitioner Arco Pulp and
Paper's obligation to respondent became due and
demandable, Santos:
i. issued an unfunded check
ii. also contracted with a third party in an
effort to shift Arco Pulp's liability
iii. unjustifiably refused to honor Arco Pulp's
obligations to Lim

5.) The rate of interest due on the obligation must be

modified from 12% per annum, to 6% per annum because
of the ruling in Nacar v. Gallery Frames.
Doctrine:
I. Novation is a mode of extinguishing an obligation by changing its
objects or principal obligations, by substituting a new debtor in
place of the old one, or by subrogating a third person to the rights
of the creditor.

In general, there are two modes of substituting the person of the

debtor:
(1) Expromision
i. “the initiative for the change does not come from
— and may even be made without the knowledge
of — the debtor, since it consists of a third person's
assumption of the obligation. As such, it logically
requires the consent of the third person and the
creditor”
(2) Delegacion
i. “the debtor offers, and the creditor accepts, a third
person who consents to the substitution and
assumes the obligation; thus, the consent of these
three persons are necessary.”
Both modes of substitution by the debtor require the consent of
the creditor.
Novation may also be:
(1) Extinctive
i. “when an old obligation is terminated by the
creation of a new one that takes the place of the
former”
(2) Modificatory
i. “when the old obligation subsists to the extent that
it remains compatible with the amendatory
agreement.”

Novation may also be:

(1) Express
i. “when the new obligation declares in unequivocal
terms that the old obligation is extinguished”
 (2) Implied
i. “when the new obligation is incompatible with the
old one on every point.”
Because novation requires that it be clear and unequivocal, it is
never presumed.

For Novation to take place, the following requisites must concur:

1) There must be a previous valid obligation.
2) The parties concerned must agree to a new contract.
3) The old contract must be extinguished.
4) There must be a valid new contract.

II. Breaches of contract become the basis of moral damages, not

only under Article 2220, but also under Articles 19 and 20 in
relation to Article 1159.

III. General Rule: Directors, officers, or employees of a corporation

cannot be held personally liable for obligations incurred by the
corporation.
Exemption [1]: This veil of corporate fiction may be pierced if
complainant is able to prove, as in this case, that:
a. the officer is guilty of negligence or bad faith, and
b. such negligence or bad faith was clearly and convincingly
proven.
Exemption [2]: The corporate existence may be disregarded
where the entity is formed or used for non-legitimate purposes,
such as to evade a just and due obligation, or to justify a wrong, to
shield or perpetrate fraud or to carry out similar or inequitable
considerations, other unjustifiable aims or intentions.

1226- Filinvest Land v. CA In re: Penalty Clauses

1230 BASIC FACTS: Issue:

Filinvest entered into an agreement with Pacific Equipment W/N the liquidated damages agreed upon by the parties should
Corporation, to have the latter develop the former’s residential be reduced considering that:
subdivision consisting of two parcels of land. To ensure faithful
compliance, Pacific posted two Surety Bonds issued by Philippine
American General Insurance.
Pacific failed to finish the contracted works despite being given
three extensions. Filinvest wrote to Pacific that it intends to take
over the project itself, and that they will hold Pacific liable for
damages.
Thus, Filinvest submitted its claim from Philamgen the bonds, but
the latter refused to acknowledge liability because Pacific still has Ruling:
not acknowledged liability therefore.
Pacific claims that its failure to finish was:
1.) inclement weather
2.) refusal of Filinvest to accept and pay for some of the
finished works
Further, Pacific alleged that Filinvest has already waived its right to
claim damages when it gave extensions three times, and that it
was estopped since they themselves didn’t want to pay the
progressing bills.
After an ocular by an architect in the site, and review of the
construction documents, the court found that:
1.) The work by Pacific, already paid by Filinvest, amounted to
P11.8 Million
2.) The work left unpaid amounted to P1.94 Million, plus
additional work done left unpaid amounted to P475K (total
P2.4 Million)
3.) The work left to be done (repairs too) amounts to P532K
Thus Net Dues to Pacific is: P1.88 Million
Despite the dues, Pacific was still in delay. But the court however,
finds the claim of P3,990,000.00 in the form of penalty by reason
of delay (P15,000.00/day from April 25, 1979 to Jan. 15, 1980) to
be excessive.
a.) time is of the essence of the contract;
b.) the liquidated damages was fixed by the parties to serve
not only as penalty in case Pacific fails to fulfill its
obligation on time, but also as indemnity for actual and
anticipated damages which Filinvest may suffer by reason
of such failure; and
c.) the total liquidated damages sought is only 32% of the
total contract price (P12.47 Million) , and the same was
freely and voluntarily agreed upon by the parties.
1. A penal clause is an accessory undertaking to assume
greater liability in case of breach. It has a double function:
a. to provide for liquidated damages, and
b. to strengthen the coercive force of the obligation by
the threat of greater responsibility in the event of
breach.
2. Article 1226 of the Civil Code provides for such.
3. General Rule: Courts are not at liberty to ignore the
freedom of the parties to agree on such terms and
conditions as they see fit as long as they are not contrary
to law, morals, good customs, public order or public policy.
a. Exemption: Article 1229 of the Civil Code – courts may
equitably reduce a stipulated penalty in the contract in
two instances:
(i) if the principal obligation has been partly or
irregularly complied; and
(ii) even if there has been no compliance if the
penalty is iniquitous or unconscionable
4. Application: Reduction is warranted because…
a. The project was already 94.53% complete and
b. Filinvest did agree to extend the period three times for
completion of the project, which extensions Filinvest
included in computing the amount of the penalty
5. There are two types of Penalties in cases where there has

Thus, the court, the forfeiture of the amount due defendant from
plaintiff appears to be already a reasonable penalty for the delay –
considering:
1.) the amount of work already performed and
2.) the fact that plaintiff consented to three prior extensions.
3.) P15,000 per day is an unconscionable penalty
been neither partial nor irregular compliance with the
terms of the contract.
a. Penalty in case of Breach (Up to Court Adjustment)
b. Penalty imposed as Indemnity (Strict Enforcement of
Stipulation)
6. But…
Art. 2226. Liquidated damages are those agreed upon by
the parties to a contract to be paid in case of breach
thereof.
Art. 2227. Liquidated damages, whether intended as an
indemnity or a penalty, shall be equitably reduced if they
are iniquitous or unconscionable..

A1231- Go Cinco v. CA In re: Tender of Payment, and Consignment; Equivalents huhu

1233;
A1244; BASIC FACTS: Issue: W/N the loan due the MTLC has already been extinguished
A1246-
1248; Manuel Cinco obtained a loan from Maasin Traders Lending Ruling:
A1251 Corporation in the amount of P700K, secured by a mortgage of the 1. Under Article 1232 of the Civil Code, payment means not
building and lot of the Spouses Go Cinco. The annual interest rate only the delivery of money but also the performance, in
was at 36%. Cinco’s outstanding balance eventually amounted to any other manner, of an obligation
P1.0 Million. 2. In contracts of loan, the debtor is expected to deliver the
sum of money due the creditor. Yet under A1235-36;
To pay off this loan, Spouses Cinco went to the Philippine National A1244; A1246-48, rules impliedly require acceptance by
Bank to obtain another loan of P1.3 Million, secured by the same the creditor of the payment in order to extinguish the
properties as with the mortgage with MTLC. PNB approved, with obligation
the condition that they will release the funds only upon the
cancellation of the mortgage in favor of MTLC. Esther’s refusal of payment was without basis.
There is nothing legally objectionable in a mortgagor's act of
Cinco authorized the president of MTLC to collect the proceeds taking a second or subsequent mortgage on a property already
from PNB through Special Power of Attorney. But as the latter mortgaged; a subsequent mortgage is recognized as valid by law
went to PNB to collect, she was outraged when she was asked to and by commercial practice, subject to the prior rights of previous
sign the release of the mortgage in favor of MTLC. mortgages.

Now PNB instituted foreclosure proceedings against Cinco, given --

that their loan was already due. But Cinco argues that the
assignment of the PNB proceeds to MTLC should’ve amounted to In other words, MTLC and Ester in fact prevented the spouses Go
payment of the MTLC loan – and therefore, the foreclosure Cinco from the exercise of their right to secure payment of their
should’ve been improper. loan. No reason exists under this legal situation why we cannot
compel MTLC and Ester:
1. (1) to release the mortgage to MTLC as a condition to the
release of the proceeds of the PNB loan, upon PNB's
acknowledgment that the proceeds of the loan are ready
and shall forthwith be released; and
2. (2) to accept the proceeds, sufficient to cover the total
amount of the loan to MTLC, as payment for Manuel's loan
with MTLC
Since payment was available and was unjustifiably refused, justice
and equity demand that the spouses Go Cinco befreed from the
obligation to pay interest on the outstanding amount from the
time the unjust refusal took place;

Doctrine: (There’s more but just wait for class)

Unjust Refusal Cannot be equated as Payment
ARTICLE 1256. If the creditor to whom tender of payment has
been made refuses without just cause to accept it, the debtor
shall be released from responsibility by the consignation of the
thing or sum due.

Refusal without just cause is not equivalent to payment; to have

the effect of payment and the consequent extinguishment of the
obligation to pay, the law requires the companion acts of tender
of payment and consignation.

Tender of payment is the definitive act of offering the creditor

what is due him or her, together with the demand that the
creditor accept the same. When a creditor refuses the debtor's
tender of payment, the law allows the consignation of the thing or
the sum due.

(A sad twist in this case for Manuel was that he could not avail of
consignation to extinguish his obligation to MTLC, as PNB would
 not release the proceeds of the loan unless and until Ester had
signed the deed of release/cancellation of mortgage, which she
unjustly refused to do. Hence, to compel Ester to accept the loan
proceeds and to prevent their mortgaged properties from being
foreclosed, the spouses Go Cinco found it necessary to institute
the present case for specific performance and damages.)

A1234- International Hotel Corporation v. Joaquin
1235
BASIC FACTS:
Francisco Joaquin entered into an agreement with the
International Hotel Corporation for him to render technical
assistance in securing a foreign loan for the construction of a hotel,
to be guaranteed by the Development Bank of the Philippines.
In re: Sources of Obligation to Pay Partial Fulfillment of Debtor’s
Prestation; A1186, A1234, or Quantum Meruit?
IHC argues that it should not be held liable because:
a. (a) it was Joaquin who had recommended Barnes; and
b. (b) IHC's negotiation with Barnes had been neither
intentional nor willfully intended to prevent Joaquin from
complying with his obligations.

After DBP approved the IHC’s application, Joaquin asked the IHC Ruling/Doctrine:
for a P500,000 payment for the services he had rendered and will
render, or alternatively 17,000 shares of stocks. The latter option Article 1186 and Article 1234 of the Civil Code cannot be the
was approved, with a P90K payment for the past services. source of IHC's obligation to pay respondents

Joaquin recommended Materials Handling Corp (principal Barnes Article 1186. The condition shall be deemed fulfilled when the
International) to the IHC as a foreign financer. While negotiations obligor voluntarily prevents its fulfillment.
ensued with Barnes, Joaquin and the Executive Director of IHC
negotiated with Weston International for financing as well. Rule: This article talks about constructive fulfillment of a
suspensive condition, whose application calls for two requisites,
But since Barnes failed to deliver the needed loan, IHC told DBP namely:
would instead submit Weston. Thus, DBP cancelled its previous a. (a) the intent of the obligor to prevent the fulfillment of
guarantee. the condition, and
b. (b) the actual prevention of the fulfillment.
Due to Joaquin’s failure to secure Barnes, IHC opted to cancel the
17,000 stock supposed to be in favor to Joaquin. Joaquin argues Application: Evidently, IHC only relied on the opinion of its
that this is improper since he was unable to fulfill 70% (phases 1-5 consultant in deciding to transact with Materials Handling and,
of 6) of his obligations fully only because the IHC was intruding in later on, with Barnes. In negotiating with Barnes, IHC had no
the negotiations with Barnes; and that they opted to submit intention, willful or otherwise, to prevent Joaquin and Suarez from
Barnes instead of Weston. meeting their undertaking
Article 1234.If the obligation has been substantially performed in
good faith, the obligor may recover as though there had been a
strict and complete fulfillment, less damages suffered by the
obligee.

Rule: Article 1234 applies only when an obligor admits breaching

the contract after honestly and faithfully performing all the
material elements thereof except for some technical aspects that
cause no serious harm to the obligee. The provision refers to an
omission or deviation that is slight, or technical and unimportant,
and does not affect the real purpose of the contract.

A contractual breach is material if it will adversely affect the

nature of the obligation that the obligor promised to deliver, the
benefits that the obligee expects to receive after full compliance,
and the extent that the non-performance defeated the purposes
of the contract.

Application: The primary objective of the parties in entering into

the services agreement was to obtain a foreign loan to finance the
construction of IHC's hotel project. Needless to say, finding the
foreign financier that DBP would guarantee was the essence of
the parties' contract, so that the failure to completely satisfy such
obligation could not be characterized as slight and unimportant as
to have resulted in Joaquin and Suarez's substantial performance
that consequentially benefitted IHC. Whatever benefits IHC
gained from their services could only be minimal.

Nevertheless, IHC is nonetheless liable to pay under the rule on

constructive fulfillment of a mixed conditional obligation.

Rule: The prevailing rule in conditional obligations is that the

acquisition of rights, as well as the extinguishment or loss of those
already acquired, shall depend upon the happening of the event
that constitutes the condition. But, the existing rule in a mixed
conditional obligation is that when the condition was not
fulfilled but the obligor did all in his power to comply with the
obligation, the condition should be deemed satisfied.

Application: Joaquin’s obligation was subject to the suspensive

condition of successfully securing a foreign loan guaranteed by
DBP, before the obligation of IHC to pay them arises.

To secure a DBP-guaranteed foreign loan did not solely depend on

the diligence or the sole will of the respondents because it
required the action and discretion of third persons — an able and
willing foreign financial institution to provide the needed funds,
and the DBP Board of Governors to guarantee the loan. Their
obligation is a mixed conditional obligation.

Considering that the respondents were able to secure an

agreement with Weston, and subsequently tried to reverse the
prior cancellation of the guaranty by DBP, we rule that they
thereby constructively fulfilled their obligation.

The source of IHC’s obligation to pay Joaquin is Quantum meruit,

in the absence of an express agreement on the fees

The confusion on the amounts of compensation arose from the

parties' inability to agree on the fees that respondents should
receive. Considering the absence of an agreement, and in view of
respondents' constructive fulfillment of their obligation, the Court
has to apply the principle of quantum meruit in determining how
much was still due and owing to respondents.

Rule: Under the principle of quantum meruit, a contractor is

allowed to recover the reasonable value of the services rendered
despite the lack of a written contract. The measure of recovery
under the principle should relate to the reasonable value of the
services performed.

MIAA v. Ding Velayo
BASIC FACTS: Just check yer own notes
Application: P200,000 is sufficient for the payment.
Petitioner argues that the renewal of the Contract of Lease (par.
17) cannot be made to depend on the sole will of respondent for
the same would then be void for being a potestative condition.
i. Article 1308 of the Civil Code expresses what is
known in law as the principle of mutuality of
contracts. It provides that "the contract must
bind both the contracting parties; its validity or
compliance cannot be left to the will of one of
them.”
A. The Court does not agree.
B. RULE: An express agreement which gives the lessee the
sole option to renew the lease is frequent and subject to
statutory restrictions, valid and binding on the parties.
This option, which is provided in the same lease
agreement, is fundamentally part of the consideration in
the contract and is no different from any other provision of
the lease carrying an undertaking on the part of the lessor
to act conditioned on the performance by the lessee. The
fact that such option is binding only on the lessor and can
be exercised only by the lessee does not render it void for
lack of mutuality. After all, the lessor is free to give or not
to give the option to the lessee. And while the lessee has a
right to elect whether to continue with the lease or not,
once he exercises his option to continue and the lessor
accepts, both parties are thereafter bound by the new
lease agreement.
C. APP: Paragraph 17 of the Contract of Lease dated May 14,
1976 between petitioner and respondent solely granted to
respondent the option of renewing the lease of the subject
property, the only express requirement was for
respondent to notify petitioner of its decision to renew the
lease within 60 days prior to the expiration of the original
lease term.
Equally unmeritorious is the assertion of petitioner that paragraph
17 merely provides a procedural basis for a negotiation for
renewal of the lease and the terms thereof.
A. ANS: The exercise by respondent of its option to renew the
lease need no longer be subject to negotiations.
B. RULE: “[I]f we were to adopt the contrary theory that the
terms and conditions to be embodied in the renewed
contract were still subject to mutual agreement by and
between the parties, then the option — which is an
integral part of the consideration for the contract — would
be rendered worthless. For then, the lessor could easily
defeat the lessee's right of renewal by simply imposing
unreasonable and onerous conditions to prevent the
parties from reaching an agreement
C. RULE: “The rule is well-established that a general covenant
to renew or extend a lease which makes no provision as to
the terms of a renewal or extension implies a renewal or
extension upon the same terms as provided in the original
lease.”
D. APPLICATION: The phrase, i.e., "if desirous of continuing
his lease, may be simply restated, i.e., if he wants to go on
with his lease, considering the word 'CONTINUE' in its verb
form ordinarily means — to go on in present state, or even
restated in another way — if desirous of extending his
lease, because the word 'continue' in its verb form also
means — extend uniformly. If we are to adopt the
interpretation of [petitioner] that the stipulation merely
established the procedural basis for a negotiation for
renewal then the aforequoted phrase would be rendered a
mere surplusage.
E. SUPPORT: This must be so because based on the context
of their agreements and bolstered by the testimony of Mr.
Mariano Nocom of Salem Investment and particularly
Rosila Mabanag, one of the signatory witness to the
contract and a retired employee of CAA's Legal Division the
parties really intended a renewal for the same term as it
 was then the usual practice of CAA to have the term of
leases on lands where substantial amount will be involved
in the construction of the improvements to be undertaken
by the lessee to give a renewal.
F. CONCLUSION: In sum, the renewed contract of lease of the
subject property between petitioner and respondent shall
be based on the same terms and conditions as the original
contract of lease. The "original contract of lease" does not
pertain to the Contract of Lease dated May 14, 1976
between petitioner and respondent alone, but also to the
Contract of Lease dated February 15, 1967 between
petitioner (then still called CAA) and Salem, as well as the
Contract of Lease dated November 26, 1974 between
petitioner and Velayo Export — all three contracts being
inextricably connected. Since the Contract of Lease
between petitioner and Salem was for a term of 25 years,
then the renewed contract of lease of between petitioner
and respondent shall be for another term of 25 years.

We found no violations by the respondent of the Contract of

Lease.
1.) The prohibition on subleasing of the "premises," refers
only to the subject property – an idle piece of land with an
area of 8,481 square meters.
i. AND, being the builder of the improvements on the
subject property, said improvements are owned by
respondent until their turn-over to petitioner at the
end of the 25-year lease in 1992.
a. THUS, as respondent is not leasing the
improvements from petitioner, then it is not
subleasing the same to third parties.
2.) Article 1235 of the Civil Code states that "[w]hen the
obligee accepts the performance, knowing its
incompleteness or irregularity, and without expressing any
protest or objection, the obligation is deemed fully
 complied with."
i. Petitioner did not register any protest or objection
to the alleged incompleteness of or irregularity in
the performance by respondent of its obligation to
build and develop improvements on the subject
property.
ii. In fact, upon the expiration of the original 25-year
lease period in February 1992, petitioner was
already ready and willing to accept and appropriate
as its own the improvements built
3.) The Lease rentals were based on either the rates fixed by
AO No. 4, series of 1970, or 1% of the monthly gross
income of respondent, whichever is higher.
i. After requested, respondent submitted to
petitioner its gross income statements, so
petitioner could very well compute the 1% royalty.
a. However, petitioner continued to charge
respondent only P2,205.25 monthly lease
rental, which the latter faithfully paid.
ii. Petitioner later demanded an increase in lease
rentals based on subsequent administrative
issuances raising the rates for the rental of its
properties.
a. But the adverted administrative orders were
not published in full, thus, the same were
legally invalid.

Class Notes:
If you have an option that says, it is subject to negotiable terms
and conditions, then it’s not really a purely potestative stipulation.
The lessor cannot refuse the renewal of the term. The only thing
he can do is negotiate terms. But the exercise of option by the
lessor must follow the conditions to its exercise (ex. Periods to
exercise the right).
Rough Notes:

Effect of joint liability:

1. The demand by one creditor upon one debtor, produces
the effects of default only with respect to the creditor who
demanded and the debtor on whom the demand was
made, but not with respect to the others

2. The interruption of prescription by the judicial demand of

one creditor upon a debtor, does not benefit the other
creditors nor interrupt the prescription as to other creditor.
On the same principle, a partial payment or
acknowledgment made by one of several joint debtors
does not stop the running of the statute of limitations as to
the others

3. The vices of each obligation arising from the personal

defect of a particular debtor or creditor does not affect the
obligation or rights if the others

4. The insolvency of a debtor does not increase the

responsibility of his co-debtors, nor does it authorize a
creditor to demand anything from his co-creditors

5. In the joint divisible obligation, the defense of res judicata

is not extended from one debtor to another
Prescriptions:

“The following actions must be brought within ten (10) years from
the time the right of action accrues:
(1) Upon a written contract;
(2) Upon an obligation created by law;
(3) Upon a judgment.“ (Art. 1144.)

“The following actions must be commenced within six (6) years: (1)
Upon an oral contract;
 (2) Upon a quasi-contract.“ (Art. 1145.)
“The following actions must be instituted within four (4) years: (1)
Upon an injury to the rights of the plaintiff;
(2) Upon a quasi-delict.’’ (Art. 1146.)
The statute of limitations, however, may be superseded or
modified by a contract between the parties.
A1236 Carandang v. De Guzman
– 1.) The heirs expressly waived their right to substitute the
A1243 BASIC FACTS:
Arcadio and Luisa Carandang (Spouses Carandang) and De Guzman
are stockholders and corporate officers of Mabuhay Broadcasting
System, with 46% and 54% Equity respectively.
[A] When capital stock increased in December from 500K to 1.5M,
345K of this increase was subscribed to Spouses Carandang – 293K
of which paid by Spouses De Guzman.
[B] When capital stock increased in December from 1.5m to 3M,
93K of this increase was subscribed to Spouses Carandang – 43K of
which paid by Spouses De Guzman.
Thus, De Guzman sent a demand letter to Spouses Carandang for
the total of 336K dues. But Spouses Carandang refused because
they claim that they entered into an ORAL PRE-INCORPORATION
AGREEMENT with De Guzman, whereby the latter would pay stock
subscriptions to the former in exchange for technical expertise and
assistance, and wherein it was agreed that Carandang would
always maintain his 46% equity participation in the corporation
even if the capital structures were increased, and that De Guzman
would personally pay the equity shares/stock subscriptions of
Carandang with no cost to the latter.
De Guzman died before the RTC rendered its judgement in favor of
him.
Rulings:
dead, and embraced whatever judgment was to be
rendered in the proceedings they have not taken part in.
2.) The Petitioners erroneously interchange the terms "real
party in interest" and "indispensable party."
i. A real party in interest is the party who stands
to be benefited or injured by the judgment of
the suit, or the party entitled to the avails of
the suit.
ii. An indispensable party is a party in interest
without whom no final determination can be
had of an action.
iii. A necessary party, which is one who is not
indispensable but who ought to be joined as a
party if complete relief is to be accorded as to
those already parties, or for a complete
determination or settlement of the claim
subject of the action.
a. The credits loaned during the time of the marriage
are presumed to be conjugal property. As such,
assuming that the four checks created a debt for
which the Spouses Carandang are liable, such credits
are presumed to be conjugal property by Spouses De
Guzman. As such, Quirino de Guzman, being a co-
owner of specific partnership property, is certainly a
real party in interest. However, what dismissal on this
 ground entails is an examination of whether the
parties presently pleaded are interested in the
outcome of the litigation, and not whether all persons
interested in such outcome are actually pleaded. The
latter query is relevant in discussions concerning
indispensable and necessary parties, but not in
discussions concerning real parties in interest.
b. I In sum, in suits to recover properties, all co-owners
are real parties in interest. However, pursuant to
Article 487 of the Civil Code and relevant
jurisprudence, any one of them may bring an action,
any kind of action, for the recovery of co-owned
properties. Therefore, only one of the co-owners,
namely the co-owner who filed the suit for the
recovery of the co-owned property, is an
indispensable party thereto. The other co-owners are
not indispensable parties. They are not even
necessary parties, for a complete relief can be
accorded in the suit even without their participation,
since the suit is presumed to have been filed for the
benefit of all co-owners.

3.) If indeed a Mr. "A" decides to pay for a Mr. "B's"

obligation, the presumption is that Mr. "B" is indebted to
Mr. "A" for such amount that has been paid.
I. Art. 1236. The creditor is not bound to accept
payment or performance by a third person who
has no interest in the fulfillment of the
obligation, unless there is a stipulation to the
contrary.
Whoever pays for another may demand from
the debtor what he has paid, except that if he
paid without the knowledge or against the will
of the debtor, he can recover only insofar as the
payment has been bene􏰉cial to the debtor.
II. Art. 1237. Whoever pays on behalf of the
 debtor without the knowledge or against the
will of the latter, cannot compel the creditor to
subrogate him in his rights, such as those
arising from a mortgage, guarantee, or penalty.
a. The only consequences for the failure to inform or get
the consent of the debtor are the following:
(1) the third person can recover only insofar as the
payment has been beneficial to the debtor; and
(2) the third person is not subrogated to the rights of
the creditor, such as those arising from a mortgage,
guarantee or penalty
b. But this is merely a presumption. By virtue of the
parties' freedom to contract, the parties could stipulate
otherwise and thus, as suggested by the spouses
Carandang, there is indeed a possibility that such
payment by Mr. "A" was purely out of generosity or
that there was a mutual agreement between them.
c. APPLICATION: The de Guzmans have successfully
proven their payment of the spouses Carandang's
stock subscriptions. These payments were, in fact,
admitted by the spouses Carandang. Consequently, it is
now up to the spouses Carandang to prove the
existence of the pre-incorporation agreement that was
their defense to the purported loan.

Note: the “loan” here is (1) Carandang was not able to pay
plaintiff the agreed amount of the lease for a number of months
forcing the plaintiff to terminate lease; and (2) payment of
Carandang’s shares [The plaintiff owned the franchise, the radio
transmitter, the antenna tower, the building containing the radio
transmitter and other equipment. Verily, he would be placed in a
great disadvantage if he would still have to personally pay for the
shares of defendant Arcadio M. Carandang.]

His testimony was contradictory and Arcadio’s testimony was not

admitted since he didn’t want to be put up for crossexamination
 Class Notes:
Before you can have a broadcasting station, you need a
congressional franchise.
Republic v. De Guzman In re: A1231 rel to A1240

BASIC FACTS: Ruling:

Basta may payment pero yung receipt naka-issue sa ibang
company, and received by an unauthorized person named Cruz. The records will show that the petitioner had failed to establish its
case by a preponderance of evidence.

The petitioner admitted to the existence and validity of the

Contract of Agreement executed between the PNP and MGM. It
likewise admitted that respondent delivered the construction
materials subject of the Contract, not once, but several times
during the course of the proceedings.

The only matter petitioner assailed was respondent's allegation

that she had not yet been paid.

The RTC and the Court of Appeals correctly ruled that the
petitioner's obligation has not been extinguished. The petitioner's
obligation consists of payment of a sum of money. In order for
petitioner's payment to be effective in extinguishing its obligation,
it must be made to the proper person. When payment is made to
the wrong party the obligation is not extinguished as to the
creditor who is without fault or negligence even if the debtor
acted in utmost good faith and by mistake as to the person of
the creditor or through error induced by fraud of a third person.

Art. 1240. Payment shall be made to the person in whose favor

the obligation has been constituted, or his successor in interest, or
any person authorized to receive it.

The respondent was able to establish that the LBP check was not
received by her or by her authorized personnel. The PNP's own

A1249
Tibajia v. Court of Appeals
BASIC FACTS:
A suit for Collection of Sum of Money was rendered in favor of
Eden Tan against Spouses Tibajia for a total amount of Ratio:
P398,483.70, to which P442,750 was deposited as a bond with the
RTC (P300,000 of which was paid by Eden Tan). The latter then
delivered to the Deputy Sheriff the total money via:
1. P262,750 in cashier’s check of BPI, and
2. P135,483.70 in cash.
Eden Tan refused to accept the payment made by the Tibajia
spouses and instead insisted that the garnished funds deposited
with the cashier of the RTC be withdrawn to satisfy the judgment
obligation.
Spouses Tibajia filed a motion to lift the writ of execution on the
ground that the judgment debt had already been paid. The motion
was denied by the trial court on the ground:
1. that payment in cashier's check is not payment in legal
tender, and
2. that payment was made by a third party other than the
records show that it was claimed and signed for by Cruz.
Hence, absent any showing that the respondent agreed to the
payment of the contract price to another person, or that she
authorized Cruz to claim the check on her behalf, the payment, to
be effective must be made to her
Class Notes:
The lesson here is that the creditor has the option to go after
either the debtor for the payment, or the 3 rd party who received
the wrong payment
Issue:
W/N payment by means of check (even by cashier's check) is
considered payment in legal tender as required by the Civil Code,
Republic Act No. 529, and the Central Bank Act
1.) No. A check, whether a manager's check or ordinary check,
is not legal tender, and an offer of a check in payment of a
debt is not a valid tender of payment and may be refused
receipt by the obligee or creditor
a. LEGAL BASIS:
i. Article 1249.
…The delivery of promissory notes payable to
order, or bills of exchange or other mercantile
documents shall produce the effect of payment
only when they have been cashed, or when
through the fault of the creditor they have been
impaired…
ii. Section 1 of Republic Act No. 529
iii. Section 63 of Republic Act No. 265 (Central
Bank Act)
 defendant.
A1250 Citybank v. Sebiano
BASIC FACTS:
Sebiano is a client of Citybank, having the following accounts:
1.) Savings Account with CB-Manila
2.) Money Market with FNCB Finance
3.) Dollar Account with CB-Geneva
Despite repeated demands, Sebiano failed her outstanding loan
with CB-Manila in the principal amount of P1.92M when it was due
and demandable since May 1979. So Citybank used Sebiano’s
deposits to offset her dues:
1.) Outstanding: P2.2M (cuz of interest as of October 1979)
2.) Less:
a. P31K from CB-Manila
b. P1M from FNCB Finance
c. P1.1M from CB-Geneva
Citibank had already considered the loans paid or liquidated by
October 1979 after it had fully effected compensation thereof
using respondents deposits and money market placements
Sebiano instituted a complaint for <Accounting, Sum of Money,
and Damages> to recover her deposits and money market
placements –saying that:
1.) She didn’t have an outstanding loan
2.) She wasn’t properly notified of the offsetting
RTC rendered a decision:
1.) Declaring Sebiano to be INDEBTED to CB-Manila for P1M
since September 1979, and
2.) Declaring the offsetting to be NULL and VOID
______
Issue:
1.) W/N if a client obtains a loan from the foreign bank's
Philippine branch, absolutely and automatically make the
client a debtor, not just of the Philippine branch, but also
of the head office and all other branches of the foreign
bank around the world – NO
Ruling:
1.) No. the foreign and local branches of Citybank are not
taken to be under the same singular identity – only the
local ones are treated as a singular unit. Thus, the
promissory note and the stipulations of their contract that
said that Citybank can withdraw any account that Sebainao
has with “Citybank, NA” – is limited only to local banks.
Thus, CB cannot be withdraw from CB-Geneva.
a. LB: Section 25 of the United States Federal Reserve Act
states that — Every national banking association
operating foreign branches shall conduct the accounts
of each foreign branch independently of the accounts
of other foreign branches established by it…
2.) ..
a. R1: Article 1250 of the Civil Code becomes applicable
only when there is extraordinary inflation or deflation
of the currency.
i. 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.
b. Extraordinary Inflation exists when:
i. (1) there is a decrease or increase in the
purchasing power of the Philippine currency,
ii. (2) which is unusual or beyond the common
fluctuation in the value of said currency, and
iii. (3) such increase or decrease could not have
CA rendered a decision:
1.) Declaring that CB-Manila FAILED to establish the
indebtedness of Sebiano by competent evidence
2.) Declaring the offsetting to be NULL and VOID
3.) Granting Moral and Exemplary Damages, and Atty Fees
SC rendered a decision:
1.) Declaring Sebiano to be INDEBTED to CB-Manila for P1M
since September 1979, and
2.) Declaring the remittance of US$149,632.99 from Sebiano’s
account with CB-Geneva to be NULL and VOID.
a. CB is ORDERED to refund to respondent the said
amount, or its equivalent in Philippine currency using
the exchange rate at the time of payment, plus the
stipulated interest beginning October 1979
Citybank beseech this Court to adjust the nominal values of:
1. Sebiano’s dollar accounts, and/or
2. Sebiano’s overdue peso loans
by using the values of the currencies stipulated at the time the
obligations were established in 1979,
i. to address the alleged inequitable consequences
resulting from the extreme and extraordinary
devaluation of the Philippine currency that occurred in
the course of the Asian crisis of 1997.
been reasonably foreseen or was manifestly
beyond the contemplation of the parties at the
time of the establishment of the obligation.
c. A: "Erosion" is an accurate description of the trend of
decline in the value of the peso in the past three to
four decades. Unfortunate as this trend may be, it is
certainly distinct from the phenomenon contemplated
by Article 1250
d. R2: The burden of proving that there had been
extraordinary inflation or deflation of the currency is
upon the party that alleges it.
i. Such circumstance must be proven by
competent evidence, and it cannot be merely
assumed
ii. The existence of extraordinary inflation must
be officially proclaimed by competent
authorities, and the only competent authority
so far recognized by this Court to make such
an official proclamation is the BSP
e. R3: FUTHERMORE, Article 1250 of the Civil Code is
based on equitable considerations. Among the maxims
of equity are:
i. (1) he who seeks equity must do equity, and
ii. (2) he who comes into equity must come with
clean hands.
f. A: Citybank cannot invoke A1250 because it does not
come with clean hands
i. The delay in the recovery by Sebiano of her
dollar accounts with Citibank-Geneva was due
to the unlawful act of Citibank in using the
same to liquidate respondent's loans.
ii. Citibank even attempted to justify the off-
setting or compensation of respondent's loans
using her dollar accounts with Citibank-Geneva
by the presentation of a highly suspicious and
irregular, and even possibly forged,

Equitable PCI Bank v. Ng Sheung Ngor
BASIC FACTS:
Ng Sheung Ngor (NSN) filed an action for <Annulment and/or
Reformation of Documents and Contracts> against Equitable PCI
Bank because:
1. PCI induced them to avail of its peso and dollar credit
facilities by offering low interest rates,
i. so NSN accepted PCI’s proposal and signed the
bank's pre-printed promissory notes on various
dates beginning 1996
2. NSN, however, were unaware that the documents
contained identical escalation clauses granting PCI
authority to increase interest rates without their consent
The payments became due on July 2001.
On the other hand, PCI asserted that:
1. NSN knowingly accepted all the terms and conditions
contained in the promissory notes.
2. In fact, NSN continuously availed of and benefited from
PCI's credit facilities for five years
The RTC rendered a decision:
1. Upholding the validity of the Promissory Notes
2. Invalidating the Escalation Clause for violating the Principle
of Mutuality of Contracts
3. Took judicial notice of the Asian Financial Crisis and
Declaration of Pledge.
Citibank should refund to respondent the U.S. $149,632.99 taken
from her Citibank-Geneva accounts, or its equivalent in Philippine
currency using the exchange rate at the time of payment, plus the
stipulated interest for each of the fiduciary placements and
current accounts involved, beginning October 1979.
(Note: the obligation to REFUND began when Citybank considered
the loans paid.)
Ruling:
1. PCI was not guilty of forumn shopping
2. RTC committed GADALEJ on dismissing the appeal/MR,
enough to merit a certiorari
3. PCI raised a pure question of law when it assailed the
exorbitant amount for damages contrary to jurisprudence,
enough to merit certiorari
4. The Promissory Notes were valid.
a. R: A contract of adhesion becomes void only when the
dominant party takes advantage of the weakness of
the other party, completely depriving the latter of the
opportunity to bargain on equal footing.
b. A: If the terms and conditions offered by PCI had been
truly prejudicial to NSN, they would have walked out
and negotiated with another bank at the first available
instance. But they did not.
5. The RTC did not explain what its basis was for the
computation of damages. Since the SC is not a trier of
facts, it is ordered to be partially remanded.
6. The Escalation Clause violated the Principle of Mutuality of
Contracts
a. GR: Escalation clauses are not void per se
b. EXPT: However, one which grants the creditor an
unbridled right to adjust the interest independently
and upwardly, completely depriving the debtor of the
right to assent to an important modification in the
agreement is void. (A1308)
c. SR: a valid escalation clause provides:
 Declared the existence of Extraordinary Deflation.
i. Ordered the use of 1996 Dollar Exchange Rate in
computing NSN’s dollar-denominated loans
(P26.50 per Dollar)
4. Ordered PCI to pay damages worth P22.35M to NSN for
tainting its business reputation.
Judgement attained finality because PCI failed to show that it paid
the appeal fees, and lack of merit. But it went up on certiorari to
the CA.
A writ of execution was thereafter issued and three real
properties of Equitable were levied upon. Notwithstanding the
writ of injunction by the CA, the properties of Equitable previously
levied upon were sold in a public auction. NSN won the bid.
CA denied certiorari on the ground of forum shopping.
A1245 Luzon Development Bank v. Enriquez; and In re: PD 957 Protection of Tenants and Subdivision Buyers;
Delta Development and Management Services, Inc v. Enriquez and Dacion en Pago;
Luzon Development Bank Issues:
i. That the rate of interest will only be increased if
the applicable maximum rate of interest is
increased by law or by the Monetary Board;
and
ii. That the stipulated rate of interest will be
reduced if the applicable maximum rate of
interest is reduced by law or by the Monetary
Board (de-escalation clause)
d. A: Equitable dictated the interest rates if the term (or
period for repayment) of the loan was extended.
Respondents had no choice but to accept them. This
was a violation of Article 1308 of the Civil Code.
7. There was no Extraordinary Deflation
a. R: For extraordinary inflation (or deflation) to affect an
obligation, the following requisites must be proven:
i. (1) that there was an official declaration of
extraordinary inflation or deflation from the
BSP;
ii. (2) that the obligation was contractual in
nature; and
iii. (3) that the parties expressly agreed to consider
the effects of the extraordinary inflation or
deflation.
b. A: Despite the devaluation of the peso, the BSP never
declared a situation of extraordinary inflation.
Moreover, although the obligation in this instance
arose out of a contract, the parties did not agree to
recognize the effects of extraordinary inflation (or
deflation).
c. C: NSN should pay their dollar- denominated loans at
the exchange rate fixed by the BSP on the date of
maturity. [Note: July 2001, NOT back in 1996]

BASIC FACTS:
Luzon Development Bank (BANK) is a domestic financial
corporation that extends loans to subdivision developers/owners.
Delta Development and Management Services, Inc. (DELTA) is a Ruling:
domestic corporation engaged in the business of developing and
selling real estate properties in Delta Homes I in Cavite.
a. Ricardo De Leon (De Leon) is the owner of:
i. DELTA
ii. Lot 4 of Delta Homes I
In 1995, Spouses De Leon obtained a P8M loan from BANK for the
purpose of developing Delta Homes I.
a. To secure the loan, the Spouses De Leon executed in favor
of the BANK a real estate mortgage (REM) on several of
their properties, including Lot 4.
After securing a <License to Sell> from the HLURB, in 1997, DELTA
executed a <Contract to Sell> with respondent Angeles Catherine
Enriquez (Enriquez) over the house and Lot 4 for the purchase
price of P614,950.00.
a. Enriquez made a down payment of P114,950.00.
b. The Contract to Sell contained the following provisions:
“for failure to pay three (3) successive monthly installment
payments, the Owner may consider this Contract to Sell
null and void ab initio without further proceedings or
court action and all payments shall be forfeited in favor of
the Owner as liquidated damages and expenses”
When DELTA defaulted on its loan obligation, the BANK, instead of
foreclosing the REM, agreed to a dation in payment.
<The Deed of Assignment in Payment of Debt> stated:
a. that DELTA "assigns, transfers, and conveys and sets over
1.) W/N the Mortgage Contract is Valid – NO.
2.) W/N the Contract to Sell Conveys Ownership – NO.
3.) W/N the dacion en pago extinguished the loan obligation,
such that DELTA has no more obligations to the BANK
4.) W/N the BANK is entitled to damages
1.) The Mortgage Contract is VOID.
a. DELTA violated Section 18 of PD 957 in mortgaging the
properties in Delta Homes I (including Lot 4) to the
BANK without prior clearance from the HLURB.
Because of the nullity of the mortgage…
i. Although indebtedness remained AT THAT
TIME, Neither DELTA nor the BANK could assert
any right arising therefrom.
(i) The BANK's loan of P8 million to DELTA
has effectively become unsecured
ii. Nevertheless, DELTA and BANK agreed to
settle this indebtedness through dation
instead of the mortgage. [Note: the issue now
is whether this dation is valid given the earlier
execution of a contract to sell, which is now
discussed in #2]
2.) The Contract to Sell does not transfer ownership.
a. R: The full payment of the purchase price partakes of a
suspensive condition, the non-fulfillment of which
prevents the obligation to sell from arising.
b. A: Enriquez has not fully paid. Therefore, there’s no
transfer of ownership yet.
3.) GR: Since the Contract to Sell did not transfer ownership of
Lot 4 to Enriquez, said ownership remained with DELTA.
DELTA could then validly transfer such ownership (as it did)
to another person (the BANK).
a. EXPT: BUT the transferee BANK is bound by the
 [to] the assignee that real estate with the building and
improvements existing thereon . . . in payment of the total
obligation owing to [the Bank] . . . .”
b. Unknown to Enriquez, among the properties assigned to
the BANK was the house and lot of Lot 4
To recover the P301,063.42 and seek damages, Enriquez filed a
complaint against DELTA and the BANK before the HLURB alleging
that DELTA violated the terms of its <License to Sell> by:
1.) selling the house and lots for a price exceeding that
prescribed in BP220, and
2.) failing to get a clearance for the mortgage from the HLURB
HLURB Arbiter rendered its decision:
1. Upholding the validity of the purchase price
2. BUT ordered DELTA to accept payment of the balance of
P108,013.36 from Enriquez, and (upon such payment) to
deliver to Enriquez the title to the house and lot free from
liens and encumbrances.
3. Ordered DELTA to pay damages to Enriquez
HLURB Board of Commissioners and the OP rendered its decision:
1. Upheld the validity of the contract to sell between DELTA
and Enriquez despite the alleged violation of the price
ceilings in BP 220, and NOT the ownership of BANK over
the Lot 4.
2. Deleted the order for damages given that Enriquez herself
was also at fault for failing to pay her monthly
amortizations
The BANK argued that DELTA can no longer deliver Lot 4 to
Enriquez because:
1.) DELTA had sold the same to the BANK by virtue of the
dacion en pago (dation).
2.) As an alternative, should the CA find that DELTA retained
Contract to Sell and has to respect Enriquez's rights
protected by PD 957, which states that:
i. buyers such as Enriquez have the right to have
her Contract to Sell registered with the Register
of Deeds in order to make it binding on third
parties.
ii. The purpose of registration is:
(i) to protect the buyers from any future
unscrupulous transactions involving the
object of the sale or contract to sell,
whether the purchase price therefor has
been fully paid or not.
b. A: Despite the non-registration, the BANK cannot be
considered, under the circumstances, an innocent
purchaser for value of Lot 4 when it accepted the
latter as payment for DELTA’s obligation.
i. BANK knew that the loaned amounts were to
be used for the development of DELTA's
subdivision project (which are protected by PD
957).
(i) this was indicated in the corresponding
promissory notes
ii. As an entity engaged in the banking business,
the BANK is required to observe more care and
prudence when dealing with registered
properties.
4.) Dacion en pago extinguished the loan obligation
a. According to the BANK:
i. the dation in payment extinguished the loan
only to the extent of the value of the thing
delivered. Since Lot 4 would have no value to
the BANK if it will be delivered to Enriquez,
DELTA would remain indebted to that extent.
b. GR: The contractual intention determines whether the
property subject of the dation will be considered as
 ownership over Lot 4 and could convey the same to
Enriquez,
i. the BANK prayed that its REM over Lot 4 be
respected such that DELTA would have to redeem it
first before it could convey the same to Enriquez
a. “Should the dacion en pago over Lot 4 be
invalidated and the property ordered to be
delivered to Enriquez,
(i) the BANK contends that DELTA should
pay the corresponding value of Lot 4 to
the BANK.
b. It maintains that the loan obligation
extinguished by the dacion en pago only extends
to the value of the properties delivered; if Lot 4
cannot be delivered to the BANK, then the loan
obligation of DELTA remains to the extent of Lot
4's value
3.) The <Contract to Sell> contained a condition that
ownership shall only be transferred to Enriquez upon the
latter's full payment of the purchase price to DELTA.
CA rendered its decision:
1. Ruling against the validity of the dacion en pago executed
in favor of the BANK on the ground that
i. DELTA had earlier relinquished its ownership over
Lot 4 in favor of Enriquez via the Contract to Sell
2. Upholding the indebtedness of DELTA to BANK given that
the dation is rendered invalid
3. Ruling that BANK does not have a first lien on Lot 4 because
i. its real estate mortgage over the same had already
been extinguished by the dacion en pago.
the full equivalent of the debt and will therefore
serve as full satisfaction for the debt.
i. SR: The dation in payment extinguishes the
obligation to the extent of the value of the
thing delivered, either as agreed upon by the
parties or as may be proved, unless the parties
by agreement, express or implied, or by their
silence, consider the thing as equivalent to the
obligation, in which case the obligation is totally
extinguished.
ii. A: the Dacion en Pago executed by DELTA and
the BANK indicates a clear intention by the
parties that the assigned properties would
serve as full payment for DELTA's entire
obligation. It states:
(i) “THAT, the ASSIGNEE does hereby
accept this ASSIGNMENT IN PAYMENT
OF THE TOTAL OBLIGATION owing to
him by the ASSIGNOR”
iii. FURTHER: the BANK, in accepting the assigned
properties as full payment of DELTA's "total
obligation," has assumed the risk that some of
the assigned properties (such as Lot 4) are
covered by contracts to sell which it is bound to
honor under PD 957.
c. A dacion en pago is governed by the law of sales.
Contracts of sale come with warranties, either express
(if explicitly stipulated by the parties) or implied (under
Article 1547).
i. A: The BANK does not even point to any breach
of warranty by DELTA in connection with the
Dation in Payment.
(i) The Dation in Payment has no express
warranties relating to existing contracts
to sell over the assigned properties.
(ii) As to the implied warranty in case of

A1256- Far East Bank & Trust Company v. Diaz Realty, Inc.
A1261
BASIC FACTS:
[1973]: Diaz and Company got a loan from Pacific Banking
Corporation in the amount of P720,000.00 – with interest at 12%
per annum, later increased until 20%.
 This loan was secured by a real estate mortgage on two
parcels of land owned by Diaz Realty in Davao City.
[1981]: Allied Banking Corp rented an office space in a building
situated over one of the mortgaged lots.
 The parties, including PaBC agreed to have the monthly
rentals to be paid directly to PaBC for Diaz’s mortgage
indebtedness (partially or fully)
[1985, July]: The Central Bank closed PaBC, and placed it under
receivership.
[1986]: Far Eastern Bank and Trust Company purchased for P1.8M
the credit of Diaz and Company in favor of PaBC
 BUT despite such purchase,
PaBC Davao Branch continued to collect interests and
eviction, it is waivable and cannot be
invoked if the buyer knew of the risks or
danger of eviction and assumed its
consequences (in this case BANK did)
d. IN TERMS OF THE REAL EFFECTS OF THIS RULING:
a. For Enriquez:
i. She should pay the amount agreed upon in
the Contract to Sell.
b. For BANK:
i. Upon Enriquez's full payment of the balance
of the purchase price, the BANK is bound to
deliver the title over Lot 4 to her.
Note: Suwerte ni DELTA gago.
Issues:
1. W/N there was a valid tender of payment
2. W/N there is a significant effect from the transfer to FEBTC
of Diaz’s account with PaBC
3. W/N the 20% interest rate should be applicable
4. W/N the real estate mortgage should be cancelled
Ruling:
1.) YES, there was a valid tender of payment.
a. GR: Jurisprudence holds that, in general, a check does
not constitute legal tender, and that a creditor may
validly refuse it.
i. EXPT: But the creditor still has the option and
the discretion of refusing or accepting the
check.
b. A1: Although the petitioner argues that a check should
not be considered as a legal tender,
i. FEBTC nevertheless accepted it as a deposit,
and
ii. The check was subsequently cleared and
honored by Interbank, as evidenced by a
certificate dated 1992.
 penalty charges on the loan from 1987 to 1988
[1988, March]: When the president of Diaz went to the office of
PaBC, he was surprised to see that FEBTC has taken over, and he
was told that Diaz had an outstanding balance of P1,447,000.00.
[1988, December]: Diaz gave FEBTC the amount of P1,450,000.00
through an Interbank check with the notation "Re: Full Payment
of Pacific Bank Account now turn[ed] over to Far East Bank”
 FEBTC did not accept it as payment.
o Meanwhile, Diaz was asking if they could change the
interest rate from 20% to 12% -- But there was no
reply
o Instead, Diaz was asked to deposit the amount with
the defendant's Davao City Branch Office, pending
approval of the Central Bank Liquidator
 Again, instead, FEBTC told Diaz to change the
P1,450,000.00 deposit into a Money Market
Placement – which Diaz did.
[1989]: There was still no news from FEBTC on whether it [would]
accept Diaz’s tender of payment.
 Thus, Diaz filed a case with the RTC to compel FEBTC to
acknowledge the tender of payment, accept payment and
cancel the mortgage.
o The RTC rendered its judgement:
1.) There was a valid tender of payment
2.) Computing the interest due on the P1.16M loan
from 1985, April to 1988, November at 12%p.a.
3.) The result of the addition of the P1.67M principal
and the interests arrived at shall then be
compared with the P1,450,000.00 money market
placement put up by the plaintiff with the
defendant bank if the same is still existing or has
not yet matured.
4.) FEBTC shall cancel the mortgage
c. Doctrine Discussion:
i. Tender of payment is the definitive act of
offering the creditor what is due him or her,
together with the demand that the creditor
accept the same. (Note: practically speaking
this means that you already have the cash
AND SHOW THE CASH)
(i) More important, there must be a fusion
of intent, ability and capability to make
good such offer, which must be absolute
and must cover the amount due.
ii. Tender of payment presupposes not only that
the obligor is able, ready, and willing, but more
so, in the act of performing his obligation. In
essence, “a proof that an act could have been
done is no proof that it was actually done.”
d. A2: That Diaz intended to settle the obligation is
evident
i. (1) It issued a check to an amount covering the
debt, and even with the inscription saying “full
payment”
ii. (2) It even filed a case to have the obligation be
done
e. Other contentions by FEBTC:
1. Diaz subsequently withdrew the money from FEBTC
a. Court says: such withdrawal would not affect
the efficacy or the legal ramifications of the
tender of payment made on November, 1988.
i. The check was already accepted,
converted into money, and was kept by
the FEBTC for several months
2. Tender of payment only extinguishes the obligation
after proper consignation
a. GR: For a consignation to be necessary, the
creditor must have refused, without just cause,

o The CA rendered its judgement:
1.) There was a valid tender of payment
2.) The 20% interest stipulated should not apply,
because the account transfer was without the
knowledge and the consent of respondent-obligor
3.) FEBTC should not cancel the mortgage
[1992]: Interbank issued a certificate after clearing and honoring
the check.
to accept the debtor's payment.
b. A: FEBTC accepted, so this rule doesn’t apply.
By accepting the tendered check and converting
it into money, FEBTC is presumed to have
accepted it as payment
2.) No novation by conventional subrogation took place.
a. The transfer of Diaz's credit from PaBC to FEBTC was an
assignment of credit.
i. An assignment of credit is an agreement by
virtue of which the owner of a credit (known as
the assignor), without the need of the debtor's
consent, transfers that credit and its accessory
rights to another (known as the assignee), who
acquires the power to enforce it, to the same
extent as the assignor could have enforced it
against the debtor.
b. FEBTC's acquisition of Diaz's credit did not involve any
changes in the original agreement between PaBC and
respondent; neither did it vary the rights and the
obligations of the parties.
3.) Petitioner bank, as assignee of respondent's credit, is
entitled to the interest rate of 20 percent in the
computation of the debt of private respondent
i. Interest should be 20 percent per annum until
November 14, 1988, less interest payments given
to PaBC from December 1986 to July 8, 1988.
Thereafter, the interest shall be computed at 12
percent per annum until full payment.
4.) The real estate should subsist until full and final settlement
of such obligation pursuant to the guidelines set forth in
this Decision. Thereafter, the parties are free to negotiate

State Investment House, Inc. v. CA
BASIC FACTS:
Spouses RR Aquino are involved in three loans with State
Investment House, Inc:
1.) Spouses RR Aquino, as an accommodation party, with
Spouses JM Aquino signed an Agreement (Account No. IF- Ruling:
82-1375-AA) with State Investment House for the purchase
of Spouses JM Aquino of receivables amounting to
P375,000.00.
2.) Spouses RR Aquino pledged shares to State Investment
House to secure a loan of P120,000.00 (Account No. IF-82-
0631-AA)
a. When it became due, Spouses RR Aquino paid the same
partly with their own funds and partly from the
proceeds of another loan which they obtained also
from petitioner State designated as Account No. IF-82-
0904-AA.
i. This new loan was secured by the same pledge
agreement executed in relation to Account No.
IF-82-0631-AA.
ii. This new loan had three components:
(i) (a) principal of the loan in the amount of
P110,000.00;
(ii) (b) regular interest in the amount of 17%
per annum; and
(iii) (c) additional or penalty interest in case
of non-payment at maturity, at the rate
a renewal of either or both contracts, or to end any and all
of their contractual relations.
Class Note:
For a proper tender of payment, you should also (1) SHOW the
cash to (2) pay IMMEDIATELY.
In re: A2209; A1256; Monetary Interest runs until you properly
Consign
Issue:
1. W/N Spouses RR Aquino should pay the loan together
with its interest, penalties, and other charges.
1. It must be assumed that the lower court judge acted in
accordance with the law. Thus:
a. R1: A2209 of the Civil Code provides that the
appropriate measure for damages in case of delay in
discharging an obligation consisting of the payment of
a sum or money, is:
i. the payment of penalty interest at the rate
agreed upon; and in the absence of a
stipulation of a particular rate of penalty
interest,
then the payment of additional interest at a
rate equal to the regular monetary interest; and
if no regular interest had been agreed upon,
ii. then payment of legal interest
b. R2: A1256 of the Civil Code provides that where the
creditor unjustly refuses to accept payment, the
debtor desirous of being released from his obligation
must comply with two conditions in order to effect
payment:
i. (a) tender of payment; and
ii. (b) consignation of the sum due.
 of 2% per month or 24% per annum.
When the Account No. IF-82-0904-AA matured, State demanded
payment.
1.) Spouses RR Aquino expressed their willingness to pay, and
requested that upon payment, the pledged shares would
be released
a. State refused the request on the ground that Account
No. IF-82-1375-AA remains unpaid.
i. A notice was then sent to Spouses RR Aquino
that their pledged shares would be sold at a
public auction.
(i) Thus, Spouses RR Aquino filed a case
with the court alleging that the
foreclosure sale is illegal because:
1. State unjustly refused their payment
when they were able and willing to
pay
2. The pledged shares do not cover
Account No. IF-82-1375-AA
3. State should release the shares upon
payment of the Account No. IF-82-
0904-AA without any interest,
penalties or other charges, since
Spouses RR shouldn’t be said to have
been in delay
The lower courts rendered their decision affirming Spouses RR’s
contentions. But there was an ambiguity on what charges must be
paid based on the judge’s dispositive portion saying:
1.) “Ordering defendants to immediately release the pledge
on, and to deliver to plaintiffs, the shares of stocks… upon
payment of plaintiffs loan”
Note: No Consignment done by Aquino here.
Legaspi v. CA (1986)
c. A: The fact that the respondent Aquino spouses were
not in default DID NOT mean that they, as a matter of
law, were relieved from the payment not only of
penalty interest but also of monetary interest.
i. The monetary interest continued to accrue
under the terms of the relevant promissory
note until actual payment is effected.
While they are properly regarded as having made a
written tender of payment to petitioner State, failed
to consign in court the amount due at the time of the
maturity.
For the respondent spouses to continue in possession
of the principal of the loan amounting to P110,000.00
and to continue to use the same after maturity of the
loan without payment of regular or monetary interest,
would constitute unjust enrichment
d. C: Since Spouses RR Aquino were held NOT TO BE IN
DELAY, then they are only liable for:
i. (a) the principal of the loan or P110,000.00; and
ii. (b) regular or monetary interest in the amount
of 17% per annum.
iii. They ARE NOT liable for penalty interest
Class Note: Relate this to case about the mortgage thing na may
special power of attorney that allows the creditor to get the
payment of the loan if they release the mortgage – that case kasi
was PECULIAR. They said there that interest does not run – for
some reason.
In re: Right to Repurchase; Consignation not needed in Right to

BASIC FACTS:
[1965] Legaspi sold two parcels of land in Cavite to his son-in-law Issue:
Salcedo for the price of P25,000.00 with the right to repurchase
the same within 5 years.
Before the end of the period, Legaspi offered P25,000.00 again to Ruling/Doctrine:
repurchase the lots.
 The tender of payment was refused by Salcedo saying that
he should be paid a higher amount because of the
devaluation of the currency.
[1970] Legaspi consigned to the Court the sum of money on the
last day of the period (October 15). Still, Salcedo refuses.
Hulganza v. CA
BASIC FACTS:
[April 21, 1971] Spouses Hulganza sold a parcel of land in Negros
Occidental to Gemarino for P10,000.00. The property has been Issues:
with Gemarino ever since.
[April 13, 1972] Four days before the lapse of the redemption
period, Spouses Hulganza filed with the court a complaint for the
repurchase of the lot under S119 of Public Land Act 141 (5 year
period).
o Spouses Hulganza did not consign before filing this
complaint.
o Gemarino defended saying that:
Repurchase
1. W/N Legaspi validly exercised his right to repurchase the
properties within the five-year period – YES.
1. YES, Legaspi properly exercised his right to repurchase.
a. R: Consignation is not required to preserve the right of
repurchase. A mere valid tender of payment is enough
if made on time as a basis for an action to compel the
vendee to resell the property.
b. A: The facts show that the right of repurchase was
seasonably exercised.
i. (1) Legaspi was able to make a valid tender of
payment during the redemption period by
offering personally the amount of P25,000.00
to the Legaspi who refused to accept it claiming
that the money was devalued.
ii. (2) Legaspi informed Salcedo that he will be
depositing the sum to the court
In re: Right to Redeem; Tender of Payment not required if Right to
Redeem is exercised via Filing of Judicial Action (as prescribed by
law) within the Period of Redemption
1. W/N it is necessary that the formal offer to redeem the
land in question be accompanied by a bona fide tender of
the redemption price, or the repurchase price be
consigned in Court, within the period of redemption even
if the right is exercised through the filing of a judicial
action – NO.
Ruling:
1. NO, formal offer to redeem WITH TENDER OF PAYMENT
 1. The redemption period already lapsed (col. Consignment) is unnecessary.
2. Should the Court hold that the right of redemption a. R: Where the right to redeem is exercised through the
still exists, she should be paid the cost of filing of judicial action within the period of
improvements introduced on the land, estimated redemption prescribed by the law, the formal offer to
to be valued at P25,000.00. redeem, accompanied by a bona fide tender of the
The lower court held that: redemption price, might be proper, is only essential
o the act of merely filing the complaint on the part of the to preserve the right of redemption for future
plaintiffs-appellees without consignation of the proper enforcement for such period beyond redemption..
amount due within the period prescribed was an The filing of the action itself, within the period of
ineffective and incomplete redemption and to say redemption, is equivalent to a formal offer to redeem.
otherwise would in effect extend the period of redemption i. S: Holding otherwise, would be unfair on the
beyond that provided by law poor homesteaders who cannot be expected to
know the subtleties of the law, and would
Note: No tender of payment nor consignation. Also statute of defeat the evident purpose of the Public Land
limitation is 10 years. Law
__________________
Class Notes: You give value to the action to redeem, because
when you go to the court to file an action, you submit yourself to
the jurisdiction of the Court. Whatever the decision turns out to
be, the decision of the court will be binding to the parties. It
assumes that the parties will comply with whatever the decision
of the court would be.

Heirs of Bacus v. CA
BASIC FACTS:
Bacus leased to Duray a parcel of a 3000 sqm. agricultural land in reciprocal obligation.
Cebu. The lease stipulated that:
o The lease would last for six years
o The lessee had the right to purchase 2000 sqm. of the land
within 5 years for P200 per sqm, adjusted to peso rate
against US Dollar.
Bacus died.
Before the expiration of the period, Duray informed Heirs of Bacus
that they were willing and ready to purchase the property.
In re: Option to Buy; Reciprocal Obligations; Debt must be due,
before Consignment is required; Consignment not yet needed in
an Option to Buy where the other party is not ready to deliver his
Issue:
1. W/N there was a valid exercise of the option to buy the
subject property – YES
Ruling:
1. YES
a. R: Given a reciprocal obligation, in an option to buy,
the payment of the purchase price by the creditor is
 o Heirs of Bacus first asked Duray to pay the purchase price contingent upon the execution and delivery of a deed
in full of P700,000.00 before they execute a deed of sale of sale by the debtor.
 But Duray did not deposit the money i. SR1: When the lessee opts to buy the property,
 Instead, Duray presented a <Bank Certification> his obligation is only to advise the lessors of
from the manager of Standard Chartered Bank – his decision and his readiness to pay the price.
Cebu, showing that arrangements were already Only upon the lessor's (now seller) actual
being made to borrow funds for the full execution and delivery of the deed of sale is
purchase the lessee (now buyer) required to pay.
 THUS, Heirs of Bacus refused, saying that it ii. SR2: Consequently, since the obligation was not
was not legal tender. yet due (given that it’s a reciprocal obligation),
consignation in court of the purchase price was
THUS, Duray filed a complaint with the court for <Specific not yet required, nor would the prospective
Performance> against Heirs of Bacus asking that he be allowed to buyer be in delay.
purchase the lot specifically referred to in the lease contract with b. A: Duray already communicated his willingness to
option to buy. exercise the option to buy, and he even evidenced his
o Later on, Duray presented to the Court a cashier’s check for readiness to buy by showing the bank certificate. But
P650,000.00 ready upon demand Heirs of Bacus did not want to execute a deed of sale
before they receive payment. Thus, Duray had a valid
The lower courts rendered a decision: exercise of the option, and Heirs of Bacus cannot
1. That Duray validly and effectively exercised the option to require consignment first.
buy the subject property. The readiness and preparedness
of Duray is manifested by his cautionary letters and the Class Notes: An option is a complete outstanding offer. (D1) Offer
prepared bank certification. i.e. Stipulation of the option in the contract, (D2) Notice to accept
the offer i.e. Notice to exercise the option, (D3) Execute Deed of
Sale

Also Note: An option is different from right to first refusal,

because the latter would NOT stipulate the price – just the
property involved.
Dalton v. FGR Realty and Development Corp. In re: Prior and Subsequent Notice is Mandatory; Withdrawal by
Creditor with Reservations does NOT waive his claims
BASIC FACTS:
1. Dayrit leased her property in Cebu to Dalton and Sasam, et Issue:
al. to build up their houses. 1. W/N there was substantial compliance with the
2. Dayrit sold her property to FGR Realty and Development consignation even if there were no prior or subsequent
Corp. notice to the interested parties, given that the amounts
3. Dayrit and FGR stopped accepting rental payments because
they wanted to terminate the lease agreements with
Dalton and Sasam et al.
4. In a complaint, Dalton and FGR consigned their rental
payments with the court.
a. But they failed to notify Dayrit and FGR
i. Still, Dayrit and FGR withdrew the rental
payments, but reserved the right to question
the validity of the consignation.
5. Except for Dalton, all the parties entered into a
compromise agreement to abandon all claims they had
against each other.
6. The lower courts rendered the decision that:
a. There was no valid consignation by Dalton because she
failed to:
i. (1) Give prior notice to interested parties; and
ii. (2) Give subsequent notice to interested parties
7. Dalton retaliates saying that the lack of notice has already
been rendered moot because of the withdrawal by the
respondents of the amounts consigned
were withdrawn by the creditors anyway – NO
Ruling:
1. NO, full and strict compliance with Art. 1256 to 1261 of the
Civil Code is required.
a. R: Art. 1256 to 1261 of the Civil Code are mandatory.
Art. 1257 and 1258 specifically provides the necessity
of prior and subsequent notice to the interested
parties.
i. SR: When the creditor's acceptance of the
money consigned is conditional and with
reservations, he is not deemed to have waived
the claims he reserved against his debtor
(i) SR2: BUT STILL, consignation is
completed at the time:
(1) If the creditor accepts the same
without objections, or
(2) if the creditor objects, at the time
the court declares that it has been
validly made in accordance with
law.
b. A: No valid consignation was made by Dalton for she
did not give notice to Dayrit and FGR of her intention
to so consign her rental payments. Without any
announcement of the intention to resort to
consignation first having been made to persons
interested in the fulfillment of the obligation, the
consignation as a means of payment is void.
i. S: Also, in withdrawing the amounts consigned,
Dayrit and FGR expressly reserved the right to
question the validity of the consignation.
Class Notes: If there are monthly rentals, do you need to make a
valid consignation for each one? Yes. The rule is mandatory
because of the burden imposed (A1259) upon the creditor in case
of a valid consignation.
 The creditor is liable for the expense of the valid consignation
because he was given every chance to take the payment from
several points in the proceedings.

Also Note: The creditor takes the payment on the 2 nd notice, the
burden will be by agreement.

Also Note: The consignment retroacts to the ACTUAL

Consignment in Court; NOT upon filing of the action.

Also Note: You can’t stipulate that consignment can be waived. It

is mandatory.

A1262 Naga Telephone Co. v. CA In re: A1267, not creating a New Contract but merely Avoiding
– Unjust Enrichment; A1144 Prescription and Rise of Cause of
A1269 BASIC FACTS: Action; Potestative Condition
1. Naga Telephone Co. –
a telephone company rendering local as well as long Issues:
distance service in Naga City. 1. W/N Article 1267 should apply – YES
2. Camarines Sur II Electric Cooperative, Inc. – 2. W/N the period to file a complaint has passed – NO
a private corporation established for the purpose of 3. W/N the period of the contract is potestative – NO
operating an electric power service in Naga City.
Ruling:
NATELCO entered into a contract with CASURECO for the use of 1. Article 1267 should apply
the latter’s electric light posts (back then only) in Naga City for the a. The term “service” in A1267 means the performance of
former’s telephone service (think phone booths). the obligation, not simply a personal prestation or
o In exchange, NATELCO agreed to install, free of charge, ten rendition of service.
(10) telephone connections for the use by CASURECO in b. A bare reading of the article shows that it is not a
several areas. requirement that the contract be for future services.
o The contract also provided that: c. A1267 does not concern the modification of the terms
(1) the term or period of this contract shall be as long as of the contract, but rather the extinguishment of the
the NATELCO has need for the electric light posts obligation
(2) contract shall terminate when for any reason d. R: Article 1267 states in our law the doctrine of
whatsoever, CASURECO is forced to stop, abandoned unforeseen events.
its operation as a public service and it becomes i. This is said to be based on the discredited
 necessary to remove the electric light post
After 11 years of enforcement, CASURECO filed a complaint
against NATELCO for <Reformation of Contract, and Damages>, on
the ground that justice and equity demand that the contract be
reformed to abolish the inequities by the fact that:
(1) The contract is too one-sided to the benefit of NATELCO
(2) National Electrification Administration directs that the
reasonable compensation for the use of the post is P10 per
post per month
(3) The telephone cables have become heavier with the
increase in the volume of their subscribers,
a. worsened by the fact that their linemen bore holes
through the posts, at which points those posts were
broken during typhoons
(4) A post now costs as much as P2,630.00
(5) [2nd Cause of Action] NATELCO unduly extended its use to
319 posts outside of Naga City
(6) [3rd Cause of Action] The poor servicing by NATELCO of the
ten (10) telephone units which had caused it great
inconvenience and damages to the tune of not less than
P100,000.00
Several fucking witnesses testified to support the claims of
CASURECO that NATELCO is providing shitty service and that the
intent of the parties in drafting the contract was that the
operations of CASURECO would only be in Naga City – especially
given that the Board of Directors of CASURECO were
inexperienced with the business – and that there were huge
escalation of costs in the operations of CASURECO in maintaining
the posts (which would now outweigh the benefits of the already
faulty phone services of NATELCO).
The lower court held that the contract cannot be reconstituted,
but it is held to be void because:
1. Article 1267 of the Civil Code applies
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.
e. A: we agree with respondent court that the allegations
in private respondent's complaint and the evidence it
has presented sufficiently made out a cause of action
under Article 1267. We, therefore, release the parties
from their correlative obligations under the contract.
i. BUT, the disposition of the controversy does
not end there.
a. GIVEN THAT: There are possible adverse
consequences of merely releasing the
parties from the contract:
(1) Removal of the telephone wires/cables
in the posts of private respondent,
resulting in disruption of their essential
service to the public; and
(2) Return all the telephone units to
NATELCO, causing prejudice to its
business.
b. THEN: We FURTHER require, as ordered by
the trial court:
(1) NATELCO to pay CASURECO for the use
of its posts in Naga City and in the towns
where petitioners use CASURECO’s
posts;
(i) and the sum of ten (P10.00)
pesos per post, per month,
beginning January, 1989 (filing of
the complaint); and
 2. That the contract is potestative (2) CASURECO to pay NATELCO the
monthly dues of all its telephones at the
Still, NATELCO defended that: Article 1267 of the New Civil Code is same rate being paid by the public
not applicable primarily because the contract does not involve the beginning January, 1989 (filing of the
rendition of service or a personal prestation and it is not for future complaint)
service with future unusual change.
In affirming said ruling, we are not making a
new contract for the parties herein, but we
find it necessary to do so in order not to disrupt
the basic and essential services being rendered
by both parties herein to the public and to
avoid unjust enrichment by appellant at the
expense of plaintiff

2. NO, the action has not yet prescribed.

a. R: Article 1144 of the New Civil Code provides, inter
alia, that an action upon a written contract must be
brought within ten (10) years from the time the right of
the action accrues.
i. SR: Clearly, the ten (10) year period is to be
reckoned from the time the right of action
accrues which is not necessarily the date of
execution of the contract.
b. A: As correctly ruled by respondent court, private
respondent's right of action arose "sometime during
the latter part of 1982 or in 1983 when according to
Atty. Luis General, he was asked by Board of Directors
to study said contract as it already appeared
disadvantageous.

3. NO, the period is not potestative.

a. The contract is subject to mixed conditions, that is,
they depend partly on the will of the debtor (1 st part of
the provision) and partly on chance, hazard or the will
of a third person (2nd part of the provision), which do
not invalidate the aforementioned provision.
Philippine National Construction Corp. v. CA
Snap Elections.
BASIC FACTS:
[Nov 1985] The Raymundo-Abarra Group executed a leases Issues:
contract with PNCC to have the latter lease a 30K sqm parcel of
land, with the following conditions:
1. Good for 5 years starting on the date of issuance of the
industrial clearance by the Ministry of Human Settlements
2. P20K monthly rental fee with 5% interest p.a.
3. First annual rent shall be advanced for the amount of Ruling:
P240,000
4. The lease is only for the Rock Crushing Project
5. The lease will be sooner terminated by mutual agreement
of the parties
[Jan 1986] PNCC obtained from the Ministry of Human Settlements
a <Temporary Use Permit> valid for two years for its proposed
Rock Crushing Project.
[Jan 1986] Raymundo demanded the P240K from PNCC and told
them that they stopped entertaining other lease offers from third
parties because of their existing contract, to which PNCC:
1. objected saying that the period has not yet commenced;
and
2. expressed its intention to terminate the contract because it
would no longer pursue its Rock Crushing Project due to
“financial and technical difficulties” and the abrupt change
in the political climate because of the EDSA revolution that
brought prevailing uncertainties in government policies on
infrastructure projects.
Raymundo refused to accede to PNCC’s request and insisted on
the payment of the P250K. PNCC rebutted saying that they only
owe P20K. Thus, Raymundo filed a complaint for <Specific
Performance and Damages> against PNCC.
In re: A1266 and A1267; Ninoy Assassination, EDA Revolution;
1. W/N the <Temporary Use Permit> is equivalent to an
Industrial Clearance. – YES
2. W/N Art. 1266 is applicable – NO
3. W/N Art. 1267 is applicable – NO
1. YES, PNCC is estopped from arguing that the TUP is not an
industrial clearance, because it submitted several letters
during the pendency of the case terming such as an
industrial clearance which only obliged them to pay for the
periods between Jan 1986 to Feb 1896.
2. NO, Art. 1266 is applicable only to obligations “to do”, and
not obligations “to give”.
a. A: Payment of rentals is an obligation to give, thus
A1266 doesn’t apply
i. ASAR: the unforeseen event and causes
mentioned by petitioner are not the legal or
physical impossibilities contemplated in the said
article. Besides, petitioner failed to state
specifically the circumstances that brought
prevailing uncertainties in government policies
on infrastructure projects.
3. NO, Article 1267 is not applicable.
a. R: The parties stipulate in the light of certain prevailing
conditions, and once these conditions cease to exist,
the contract also ceases to exist
b. A: PNCC 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
 The lower courts rendered a decision in favor of Raymundo.
A1278 Mondragon v. Sola
–
A1290 BASIC FACTS:
[1993] Victoriano Sola’s wife had a <Franchise Distributorship
Agreement> with Mondragon Personal Sales, Inc.
[1994] Mondragon Personal Sales, Inc. entered into a <Contract of
Services> with Victoriano Sola:
1. for a period of 3 years (Oct 1994 – Oct 1997)
2. to have Sola provide a bodega cum office to Mondragon’s
products, employees, and customers in General Santos Ruling:
City.
3. Sola is entitled to a monthly commission fee
[January 1995] Through a letter, Sola confirmed his wife’s
indebtedness for P1.9M, and bound himself together with his wife
to pay the indebtedness on instalment basis.
(i) “[W]e we undertake to pay… [the] balance [to] be
covered by postdated checks of not less than
P100,000.00 per month starting February 28, 1995
and every end of the month thereafter… I fully
understand and voluntarily agree to the above
undertaking with full knowledge of the
consequences which may arise therefrom”
Sola did not make any such payments.
impractical and inimical to the corporate survival of the
petitioner.”
i. BUT: despite the Ninoy Assassination in 1983
and the Snap Elections in Nov 1985, PNCC still
decided to enter into a contract with Raymundo
ii. MOREOVER: mere pecuniary inability to fulfill
an engagement does not discharge the
contractual obligation.
In re: Application of Art 1257
Issues:
1. W/N Sola is a solidary debtor to his wife’s obligations to
Mondragon – YES
2. W/N Mondragon’s act of withholding Sola’s commission
fees ,and thereafter applying them as partial payment to
the obligation of Sola's wife with Mondragon was unlawful
– NO.
1.) YES, a reading of the letter shows that Sola becomes a
solidary co-debtor of his wife's accountabilities with
Mondragon, as evidenced by:
(1) the last paragraph of his letter which states "I
fully understand and voluntarily agree to the
above undertaking with full knowledge of the
consequences which may arise therefrom"; and
(2) the signature of Sola alone.
2.) NO, legal compensation was proper.
a. RULE: Legal compensation requires the concurrence of
the conditions found in A1279. 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
 1. Thus, Mondragon withheld the payment of Sola’s
commission fees from February to April 1995, to cover as
the partial payments of the Spouse Sola’s debts, stating:
a. [April 1995] Thus, Sola suspended the operation of his
bodega cum office.
i. [May 1995] Then, Sola then filed with the RPC
for an <Accounting and Rescission> against
Mondragon for:
(a) withholding portions of his commission fee
amounting to (P222K) – leaving him to
suspend his operations to minimize losses;
and
(b) that it was improper for Mondragon to
confuse Sola's transaction with that of his
wife as it was divergent in nature and terms
Insular Investment and Trust Corporation v. Capital One Equities In re: Application of A1278-79; Same Identity and Quality; Also,
Corp. and Planters Development Bank Interest Rates
BASIC FACTS: Issues:
[1994] Insular Investment and Trust Corporation purchased from
Capital One Equities Corp:
other. Legal compensation takes place by operation of
law when all the requisites are present.
b. APPLICATION: We find the presence of all the
requisites for legal compensation.
(1) Sola and Mondragon are both principal obligors
and creditors of each other.
(2) Their debts to each other consist in a sum of
money.
(3) Sola acknowledged and bound himself to pay
petitioner the amount of P1,973,154.73 which was
already due, while the service fees owing to Sola by
Mondragon become due every month.
(4) Sola's debt is liquidated and demandable, and
Mondragon's payments of service fees are
liquidated and demandable every month as they
fall due.
(5) Finally, there is no retention or controversy
commenced by third persons over either of the
debts.
c. CONCLUSION: 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.
(a) ALSO: As legal compensation took place in
this case, there is no basis for respondent
to ask for rescission since he was the first to
breach their contract.
1. W/N IITC acted as a conduit in the transaction between
COEC and PDB – NO
  For Treasury Bills worth P260M (the IITC T-Bills) 2. W/N COEC can set-off its obligation to IITC as against the
 IITC fully paid latter's obligation to it – YES
 But COEC only delivered P121M worth 3. W/N PDB has the obligation to deliver treasury bills to IITC
o Total: COEC owes IITC P139M worth of Treasury Bills – YES

[2nd May 1994] COEC purchased from IITC: Ruling:

 For Treasury Bills worth P186M (the COEC T-Bills) 1.) NO, IITC did not act as a conduit
 COECC fully paid, made payable to Planters a. MAIN RULING: There is nothing in the <Confirmations
Development Bank of Sale> or <Confirmation of Purchase> all clearly and
 But IITC did not deliver anything expressly indicate that IITC acted as a principal seller to
o Total: IITC owes COECC P186M worth of Treasury Bills COEC and as a principal buyer from PDB:
i. <Confirmation of Sale> IITC to COECC:
“As principal, we confirm having sold to ...”
[10th May 1994] COECC demanded IITC to deliver the COECC T-Bills.
ii. <Confirmation of Purchase> IITC to PDB:
a. [14th May 1994] So, in behalf of COECC, IITC demanded PDB
“As principal, we confirm having purchased
to deliver to the COECC T-Bills.
from you ...”
2.) YES, set-off is allowed.
[3rd June 1994] IITC demanded COECC to deliver the remainder of
a. R: Requisites of Legal Compensation are enumerated in
the IITC T-Bills.
Art. 1278 and Art. 1279 of the Civil Code; and the rule
a. [9th June 1995] COECC acknowledged the indebtedness, but
on effectivity of legal compensation by operation of
also demanded the remainder of the COECC T-Bills. Thus
law is stated in Art. 1290 of the same Code.
they recommended a set off of the two balances to have
b. A: The requisites are all present and thus legal
IITC owe COECC the amount of P47M worth of T-Bills.
compensation take effect by operation of law:
i. A1278 and A1279 (1) –
[1st July 1994] They entered into two special agreements:
IITC acted as a principal seller to COEC
1.) Tripartite Agreement
(a) See Ruling #1
i. PDB assigned to IITC Central Bank Bills worth
ii. A1279 (2) –
P50M
They are of the same kind and are capable of being
ii. IITC assigned to COEC the CB Bills worth P50M
subject to compensation
a. To have IITC waive its demand against PDB to deliver to
(a) The COEC T-Bills and the IITC T-Bills are
IITC – to the extent of P50M
both government securities which, while
b. To have COECC waive its demand against IITC to deliver
having differing interest rates and dates of
to it the COECC T-Bills to the extent of P50M
maturity, have each been assigned a
certain face value to determine their
2.) COECC-IITC Agreement
monetary equivalent.
i. COECC assigned to IITC CB Bills worth P20M
(b) In their special agreements, the parties
a. To have IITC waive its demand against COECC to deliver
 to it the COECC T-Bills to the extent of P20M
NEW TOTAL:
(A) COECC owes (P139M – P20M =) P119M to IITC
(B) IITC owes (P186M – P50M) P136M to COECC
FOR COMPENSATION BALANCE:
(P119M) – (P136M) =
|(P17M)| by IITC in favor of COECC
[1995] Yet despite repeated demands, PDB (in behalf of IITC) to
deliver the P136M T-Bills to COECC. Likewise, COECC would not
want to deliver to IITC the P119M T-Bills.
o This prompted IITC to file against COECC to prompt the
delivery of the T-Bills, with legal interest.
o COECC argued that there should be legal compensation, As per interest rates:
and thus it is only IITC that’s obligated to deliver P17M T- X. R: Eastern Shipping Lines v. CA
Bills
o PDB argued that it is not obligated to the delivery of the
said treasury bills because IITC did not remit payment to
PDB
IITC said that set-off is not allowed because:
1.) COEC did not become a creditor of IITC because COECC did
not pay IITC for the purchased treasury bills. Rather, it was
PDB which received the proceeds of the payment from
COEC. [i.e. IITC was merely a conduit]
2.) Their obligations do not consist of a sum or money.
3.) Their obligations are not of the same kind, because:
i. the obligations call for the delivery of specific
determinate things — treasury bills, with…
(a) specific maturity dates, and
(b) various interest rates
recognized the monetary value of the
treasury bills in question, and, in some
instances, treated them as sums of money
iii. A1279 (3 to 5) –
All of these are evident and not disputed.
3.) YES, PDB has an obligation to deliver the treasury bills to
IITC.
a. A: COEC clarified that the manager's checks payable to
PDB were issued by COEC upon the instructions of IITC
in payment for the COEC T-Bills. PDB's theory was
negated by COEC itself as the issuer of the checks.
Moreover, PDB already judicially admitted, through the
Partial Stipulation, that the checks were given by COEC
as payment for the COEC T-Bills
o (1) 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.
o (2) 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.
o (3) When the judgment of the court awarding a
sum of money becomes 􏰀􏰀nal and executory,
the rate of legal interest, whether the case falls
under paragraph 1 or paragraph 2, above, shall
be 12% per annum from such finality until its
satisfaction
XI. A: Because the obligation arose from a contract of sale
and purchase of government securities, and not from a
loan or forbearance of money, the applicable interest
rate is 6% from June 10, 1994, when IITC received the
demand letter from COEC. After the judgment
becomes final and executory, the legal interest rate
increases to 12% until the obligation is satisfied.