Obligations and Contracts Cases

Insular Life Assurance Corp. vs. Young, 2002

Facts:
> Evaristo Feliciano filed an application with Insular Life upon the solicitation of one of its
agents.
> It appears that during that time, Evaristo was already suffering from tuberculosis. Such fact
appeared during the medical exam, but the examiner and the companys agent ignored it.
> After that, Evaristo was made to sign an application form and thereafter the blank spaces
were filled by the medical examiner and the agent making it appear that Evaristo was a fit
subject of insurance. (Evaristo could not read and understand English)
> When Evaristo died, Insular life refused to pay the proceeds because of concealment.

Issue:
Whether or not Insular Life was bound by their agents acts.

Held:
Yes.
The insurance business has grown so vast and lucrative within the past century. Nowadays,
even people of modest means enter into insurance contracts. Agents who solicit contracts are
paid large commissions on the policies secured by them. They act as general representatives
of insurance companies.

IN the case at bar, the true state of health of the insured was concealed by the agents of the
insurer. The insurers medical examiner approved the application knowing fully well that the
applicant was sick. The situation is one in which of two innocent parties must bear a loss for his
reliance upon a third person. In this case, it is the one who drafted and accepted the policy and
consummated the contract. It seems reasonable that as between the two of them, the one who
employed and gave character to the third person as its agent should be the one to bear the loss.
Hence, Insular is liable to the beneficiaries.

FT: http://www.lawphil.net/judjuris/juri1943/dec1943/gr_l-47593_1943.html

HERMOSA vs. LONGORA, Oct. 27, 1953

Facts: This is an appeal by way of certiorari against a decision of the Court of Appeals,
approving certain claims presented by Epifanio M. Longara against the testate estate of
Civil Law Obligations and Contracts Page 25
Fernando Hermosa, Sr. The claims are of three kinds, namely, P 2,341.41 representing credit
advances made to the intestate from 1932 to 1944, P 12,924.12 made to his son Francisco
Hermosa, and P 3,772.00 made to his grandson, Fernando Hermosa Jr. from 1945 to 11947,
after the death of the intestate, which occurred in December 1944. The claimant presented
evidence and the Court of Appeals found, that the intestate had asked for the said credit
advances for himself and for the members of his family on condition that their payment
should be made by Fernando Hermosa, Sr. as soon as he receives funds derived from the sale
of his property in Spain . Claimant had testified without opposition that the credit advances
were to be payable as soon as Fernando Hermosa. Sr.s property in Spain was sold and he
received money derived from the sale.

The Court of Appeals held that payment of the advances did not become due until
administratix received the sum of P 20,000.00 from the buyer of the property.

Issue: Whether or not the obligation contracted by the intestate was subject to a condition
exclusively dependent upon the will of the debtor (a condicion potestativa) and therefore null
and void.

Held: The judgment appealed from is hereby affirmed in so far as it approves the claims of
appellee in the amounts of P 2,341 and P 12,942.12, and reversed as to that P 3,772.00.
The condition upon which payment of the sums advanced was made to depend. as soon as he
(intestate) receive funds derived from the sale of his property in Spain, discloses the fact that
the condition in question does not depend exclusively upon the will of the debtor, but also
upon their circumstances beyond his power or control.

The condition is suspensive condition, upon the happening of which the obligation to pay is
made dependent and upon the happening of the condition, the debt became immediately due
and demandable only when the house was sold and the proceeds received in the islands, the
action to recover the same only accrued, within the meaning of the statute of limitations, on
date the money became available here hence the action to recover the advances has not yet
prescribed.

FT: http://www.lawphil.net/judjuris/juri1953/oct1953/gr_l-5267_1953.html

LAO LIM vs. CA, Oct. 31, 1990

Father Artelijo Palijo was investing with Premiere Investment House through the latters trader
Rosemarie Lachenal. Through the course of his business with Premiere Investment, he was
issued three Traders Royal Bank checks in the amounts of P150k, P150k, and P26k
respectively. These checks were eventually dishonored.

The checks, before they were issued to Palijo went through the normal procedure within
Premiere investment, to wit; First, the checks are required to be co-signed by Lina Lim Lao, a
junior officer of Premiere Investment. Second, the checks are then forwarded to her head office
to be co-signed by one Teodulo Asprec. Third, Asprec would then decide to whom the checks
were to be ultimately issued and delivered, in this case to Palijo.

Since the checks were dishonored, Palijo sent notices of dishonor to Premiere Investment but
he sent the same to the latters main office in Cubao (note that Lao and Asprec were holding
office in the Binondo Branch of Premiere Investment). Premiere Investment was only able to
pay P5k and no further payment was made. Apparently, Premiere Investment was going
insolvent and was subsequently placed under receivership.

Palijo filed a criminal case against Lao and Asprec for violation of Batas Pambansa Blg. 22.

ISSUE: Whether or not Lao is guilty of the crime charged.

HELD: No. The elements of violations against BP 22 are as follows:

1. That a person makes or draws and issues any check.

2. That the check is made or drawn and issued to apply on account or for value.

3. That the person who makes or draws and issues the check knows at the time of issue that he
does not have sufficient funds in or credit with the drawee bank for the payment of such check
in full upon its presentment.

4. That the check is subsequently dishonored by the drawee bank for insufficiency of funds or
credit, or would have been dishonored for the same reason had not the drawer, without any
valid reason, ordered the bank to stop payment.

In the present case, the fact alone that petitioner was a signatory to the checks that were
subsequently dishonored merely engenders the prima facie presumption that she knew of the
insufficiency of funds, but it does not render her automatically guilty under B.P. 22. After a
thorough review of the case at bar, the SC finds that Petitioner Lao did not have actual
knowledge of the insufficiency of funds in the corporate accounts at the time she affixed her
signature to the checks involved in this case, at the time the same were issued, and even at the
time the checks were subsequently dishonored by the drawee bank. The scope of Laos duties
and responsibilities did not encompass the funding of the corporations checks; her duties were
limited to the marketing department of the Binondo branch.

Further, there can be no prima facie evidence of knowledge of insufficiency of funds in the
instant case because no notice of dishonor was actually sent to or received by Lao. Pariljo sent
the notices of dishonor to Premiere Investments main branch. The main branch did not send
the notices to the Binondo branch because it deemed it futile because at that time it knows that
it does not have sufficient funds to cover the debt anyway. Notice to the main branch does not
serve as constructive notice to Lao. BP 22 is a personal crime hence notice should have been
sent to her personally if she were to be made liable.

FT: http://www.lawphil.net/judjuris/juri1990/oct1990/gr_87047_1990.html

ENCARNACION vs. BALDOMAR, 77 PHIL 470

FACTS:
Vicente Singson Encarnacion leased his house to
Jacinta Baldomar and her son, Lefrando Fernando upon a
month-to-month basis. After Manila was liberated in the
last war, Singson Encarnacio notified Baldomar and her
son Fernando to vacate the house because he needed it for
his office as a result of the destruction of the building
where he had his office before. Despite the demand, the
Baldomar and Fernando continued their occupancy.

The defense of Baldomar and Fernando was that the
contract with Singson Encarnacion authorized them to
continue occupancy indefinitely while they should
faithfully fulfill their obligation with respect to payment of
rentals. Singson Encarnacion contended that the lease had
always and since the beginning been upon a month-tomonth
basis.

ISSUE:
Was it tenable for Singson Encarnacion to discontinue
the lease of Baldomar and her son?

RULING:
The continuance and fulfillment of the contract of lease
cannot be made to depend solely and exclusively upon the
free and uncontrolled choice of the lessees between
continuing paying the rentals or not, completely depriving
the owner of all say in the matter. The defense of Baldomar
and Fernando would leave to the sole and exclusive will of
one of the contracting parties the validity and fulfillment of
the contract of lease, within the meaning of Article 1256 of
the Civil Code. For if this were allowed, so long as the
lessee elected to continue the lease by continuing the
payment of the rentals the owner would never be able to
discontinue the lease; conversely, although the owner
should desire the lease to continue, the lessee could
effectively thwart his purpose if he should prefer to
terminate the contract by the simple expedient of stopping
payment of the rentals.

FT: http://www.lawphil.net/judjuris/juri1946/oct1946/gr_l-264_1946.html

NAGA TEL CO., INC. vs. C.A. and CAMSURECO II, G.R. No. 107112

NAGA TELEPHONE CO., INC. (NATELCO) & Luciano Maggay, petitioners,
vs. COURT OF APEALS and Camarines Sur II Electric Cooperative, Inc.
(CASURECO II), respondents [1994]
NATELCO: telephone co. rendering local & long distance services in Naga
CASURECO II: private corporation w/c operates electric power service in
Naga
The 2 companies entered into a contract wherein NATELCO will be using
CASURECO electric light posts in Naga in operating its telephone services.
In return, former will install 10 phone connections for the use of the latter
free of charge. Term/period will be as long as former needs to use the
latters posts. Contract will be terminated if the latter will forced to stop,
abandon its operation as a public service & it becomes necessary to
remove the posts. Contract was prepared by Atty. Maggay, member of the
CASURECO Board of Directors & legal counsel of NATELCO.
1st cause of action: After 10 yrs of enforcing the contract, CASURECO filed
for reformation of the contract w/damages to abolish inequalities based on
the ff grounds:
1. it was too one-sided in favor of NATELCO
2. it was not in accordance w/the National Electrification Administration
(NEA) guidelines w/c provide that the reasonable compensation for the
use of posts should be P10/post/month.
3. telephone cables strung on the posts have become much heavier &
worsened by linemen who bore holes thru the posts w/c resulted into
posts broken during typhoons w/c posts cost P2,630.00 each.
2nd cause of action: CASURECO likewise alleged that since 1981,
NATELCO used 319 of their posts outside Naga w/o any contract and latter
company should pay P10.00/post amounting to P267,960.00 w/c the latter
refused to pay despite demands. 3rd cause of action: Former also
complained that the latter provided poor service causing great
inconvenience & damages amounting to not less than P100k.
NATELCOs answer prayed for the dismissal of the 1st cause of action since
it does not sufficiently state a cause of action, and its barred by estoppel &
prescription. They claim that they could not have caused the deterioration of
CASURECOs posts since theyve used them for 11 yrs. Also, their
expenses for the 10 free phones lines are far in excess of the amounts
claimed by CASURECO. They refused to pay the amount specified in the
2nd cause of action because what is due to them from CASURECO is more
than latters claim against them. WRT the 3rd cause of action, they claim
that the National Telecommunication Corporation (NTC) classified their
service as very high & of superior quality.
Both companies presented witnesses to support their allegation. Atty.
Magay testified supporting NATELCOs claims.
Trial Court: contract has become disadvantageous to CASURECO due to
increase in volume of NATELCOs subscribers. Contract should be
reformed to abolish the inequities. NATELCO should pay for the use of
CASURECOs posts at P10.00/post while the latter should pay the monthly
bills for the use of formers phone lines in Naga. Amount should be
computed from the date of filing of the complaint. Same has been held for
the 2nd cause of action. While the 3rd cause of action was not sufficiently
proven.
CA: affirmed trial court decision based on the ff grounds:
1. New Civil Code Art. 12671. Although the contract was fair to both
parties at the time of its execution (then, NATELCO still had very
limited capability), supervening circumstances (NATELCOs expansion)
have made the contract too one-sided in favor of NATELCO to the
great disadvantage of CASURECO. Continued enforcement of the
contract has gone beyond the contemplation of the latter, thus it should
be released therefrom. Equity demands certain economic equilibrium
between the prestation the counter-prestation & does not permit the
unlimited impoverishment of one party for the benefit of the other by
the excessive rigidity of the principle of the obligatory force of
contracts.
2. Contract was subject to a potestative condition w/ rendered the
condition void.
Issues & Ratio:
1. WON Art. 1267 is applicable. -YES
NATELCO claims its not since contract in this case doesnt involve
rendition of service/personal prestation and its not for future service
w/future unusual change. It invokes Occena vs. Jabson. And the article was
never raised by CASURECO.
The provision speaks of service (meaning performance of the obligation)
w/c has become so difficult. It doesnt require that the contract be for future
service w/future unusual change. Rather, it speaks of unforeseen events or
the discredited theory of rebus sic stantibus in public international law
wherein parties stipulate in the light of certain prevailing conditions & once
these conditions cease to exist the contract also ceases. Equity & good
faith demand that when basis of the contract disappears, the prejudiced
party has a right to relief.
Fact that this provision was not raised by the parties in their pleadings &
was never subject of trial is immaterial. Court has discretion to consider an
unassigned error that is closely related to an error properly assigned as
long as the consideration is necessary in arriving at a just decision. The
material allegations of fact in the complaint & not the legal conclusion made
or the prayer that determines the relief to w/c the plaintiff is entitled and
plaintiff is entitled to as much relief as the facts warrant although that relief
is not specifically prayed for. NATELCO was given the opportunity to
present its evidence WRT this matter when they were given the chance to
answer the issue of WON the contract has become too one-sided in its
favor & too iniquitous, unfair & disadvantageous to CASURECO.
2. WON the ruling in Occena is applicable. NO.
Case provides that Art. 1267 doesnt authorize the courts to remake, modify
or revise the contract or to fix the division of shares between the parties as
contractually stipulated w/the force of law between the parties. Complaint
for the modification of contract was dismissed for failure to state a cause of
action.
In this case, CASURECOs complaint & evidence it presented sufficiently
made out a cause of action under Art. 1267.
Parties are released from their correlative obligations under the contract.
But taking into account the possible consequences of merely releasing the
parties from the contract, the SC decided to uphold the trial court ruling
WRT payment for use of post and the phone lines so as not disrupt the
basic & essential services being rendered by both companies and to avoid
unjust enrichment by NATELCO at the expense of CASURECO.
3. Cause of action has not yet prescribed since CC Art. 1144 provides that
an action upon a written contract must be brought w/in 10yrs from the time
the rt of cause of action accrues. In this case, cause of action arose when
CASURECO asked its counsel to review the contract w/c was in 1982/83.
Case was filed in 1989, thus, 10 yrs has not lapsed.
4. Prestations are not purely potestative. Conditions do not depend solely
on the will of either party. CA, in ruling that the term/period (3rd bullet, Facts
part) of the contract is potestaive, overlooked the condition that the contract
will be terminated when CASURECO will be forced to stop, abandon its
operation as a public service & it becomes necessary to remove the electric
light post. They are actually casual conditions w/c depend on chance,
hazard or will of a 3rd person. The contract is subject to mixed conditions
w/c dont invalidate the contract stipulations.
Holding: Petition denied. CA decision affirmed.

http://www.lawphil.net/judjuris/juri1994/feb1994/gr_107112_1994.html

Country Bankers Ins. vs. CA

G.R. No. 85161, September 9, 1991 | 201 SCRA 458
FACTS
Oscar Ventanilla Enterprises Corporation (OVEC), as lessor, and the petitioner
Enrique F. Sy, as lessee, entered into a (6 years) lease agreement over the Avenue,
Broadway and Capitol Theaters and the land on which they are situated in
Cabanatuan City, including their air-conditioning systems, projectors and accessories
needed for showing the films or motion pictures.
After more than two (2) years of operation of the Avenue, Broadway and Capitol
Theaters, the lessor OVEC made demands for the repossession of the said leased
properties in view of the Sy's arrears in monthly rentals and non-payment of
amusement taxes.
By reason of Sy's request for reconsideration of OVECs demand for repossession of
the three (3) theaters, the former was allowed to continue operating the leased
premises upon his conformity to certain conditions imposed by the latter in a
supplemental agreement dated August 13, 1979.
In pursuance of their latter agreement, Sy's arrears in rental in the amount of
P125,455.76 (as of July 31, 1979) was reduced to P71,028.91 as of December 31,
1979.
o However, the accrued amusement tax liability of the three (3) theaters to the
City Government of Cabanatuan City had accumulated to P84,000.00 despite
the fact that Sy had been deducting the amount of P4,000.00 from his monthly
rental with the obligation to remit the said deductions to the city government.
o Hence, letters of demand dated January 7, 1980 and February 3, 1980 were sent
to Sy demanding payment of the arrears in rentals and amusement tax
delinquency.
o But notwithstanding the said demands and warnings SY failed to pay the abovementioned
amounts in full Consequently, OVEC padlocked the gates of the
three theaters under lease and took possession thereof in the morning of
February 11, 1980 by posting its men around the premises of the oId movie
houses and preventing the lessee's employees from entering the same.
Sy, through his counsel, filed the present action for reformation of the lease
agreement, damages and injunction and by virtue of a restraining order dated
February 12, 1980 followed by an order directing the issuance of a writ of
preliminary injunction issued in said case, Sy regained possession and operation of
the Avenue, Broadway and Capital theaters.
The trial court arrived at the conclusions that Sy is not entitled to the reformation of
the lease agreement; that the repossession of the leased premises by OVEC after the
cancellation and termination of the lease was in accordance with the stipulation of
the parties in the said agreement and the law applicable thereto and that the
consequent forfeiture of Sy's cash deposit in favor of OVEC was clearly agreed
upon by them in the lease agreement. The trial court further concluded that Sy was
not entitled to the writ of preliminary injunction issued in his favor after the
commencement of the action and that the injunction bond filed by Sy is liable for
whatever damages OVEC may have suffered by reason of the injunction.
From this decision of the trial court, Sy and (CBISCO) appealed the decision in toto
while OVEC appealed insofar as the decision failed to hold the injunction bond
liable for an damages awarded by the trial court.
The respondent Court of Appeals found no ambiguity in the provisions of the lease
agreement. It held that the provisions are fair and reasonable and therefore, should
be respected and enforced as the law between the parties. It held that the
cancellation or termination of the agreement prior to its expiration period is justified
as it was brought about by Sy's own default in his compliance with the terms of the
agreement and not "motivated by fraud or greed." It also affirmed the award to
OVEC of the amount of P100,000.00 chargeable against the injunction bond posted
by CBISCO which was soundly and amply justified by the trial court.
The respondent Court likewise found no merit in OVECS appeal and held that the
trial court did not err in not charging and holding the injunction bond posted by Sy
liable for all the awards as the undertaking of CBISCO under the bond referred only
to damages, which OVEC may suffer as a result of the injunction.
Hence, the present petition
ISSUES & ARGUMENTS
W/N the Court of Appeals erred in holding CBISCOs bond liable
HOLDING & RATIO DECIDENDI
NO.
A provision which calls for the forfeiture of the remaining deposit still in the
possession of the lessor, without prejudice to any other obligation still owing, in the
event of the termination or cancellation of the agreement by reason of the lessee's
violation of any of the terms and conditions of the agreement is a penal clause that
may be validly entered into.
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 presentation (generally consisting in the payment of a sum of
money) in case the obligation is not fulfilled or is irregularly or inadequately fulfilled
As a general rule, in obligations with a penal clause, the penalty shall substitute the
indemnity for damages and the payment of interests in case of non-compliance.
In such case, proof of actual damages suffered by the creditor is not necessary in
order that the penalty may be demanded (Article 1228, New Civil Code).
However, there are exceptions to the rule that the penalty shall substitute the
indemnity for damages and the payment of interests in case of non-compliance with
the principal obligation. They are first, when there is a stipulation to the contrary;
second, when the obligor is sued for refusal to pay the agreed penalty; and third,
when the obligor is guilty of fraud (Article 1226, par. 1, New Civil Code).

It is evident that in all said cases, the purpose of the penalty is to punish the obligor.
Therefore, the obligee can recover from the obligor not only the penalty but also the
damages resulting from the non-fulfillment or defective performance of the
principal obligation.
In the case at bar, inasmuch as the forfeiture clause provides that the deposit shall
be deemed forfeited, without prejudice to any other obligation still owing by the
lessee to the lessor, the penalty cannot substitute for the P100,000.00 supposed
damage resulting from the issuance of the injunction against the P290,000.00
remaining cash deposit. This supposed damage suffered by OVEC was the alleged
P10,000.00 a month increase in rental from P50,000.00 to P60,000,00), which
OVEC failed to realize for ten months from February to November, 1980 in the
total sum of P100,000.00.
This opportunity cost which was duly proven before the trial court, was correctly
made chargeable by the said court against the injunction bond posted by CBISCO.
There is likewise no merit to the claim of petitioners that respondent Court
committed serious error of law and grave abuse of discretion in not dismissing
private respondent's counterclaim for failure to pay the necessary docket fee, which
is an issue raised for the first time in this petition.
Petitioners rely on the rule in Manchester Development Corporation v. Court of
Appeals, G.R. No. 75919, May 7, 1987, 149 SCRA 562 to the effect that all the
proceedings held in connection with a case where the correct docket fees are not
paid should be peremptorily be considered null and void because, for all legal
purposes, the trial court never acquired jurisdiction over the case.
It should be remembered however, that in Davao Light and Power Co., Inc. v.
Dinopol, G.R. 75195, August 19, 1988, 164 SCRA 748, this Court took note of the
fact that the assailed order of the trial court was issued prior to the resolution in the
Manchester case and held that its strict application to the case at bar would therefore
be unduly harsh.
Thus, We allowed the amendment of the complaint by specifying the amount of
damages within a non-extendible period of five (5) days from notice and the reassessment
of the filing fees.
Then, in Sun Insurance Office, Ltd. v. Asuncion, G.R. 79937-38, February 3, 1989,
170 SCRA 274, We held that where the filing of the initiatory pleading is not
accompanied by payment of the docket fee, the court may allow payment of the fee
within a reasonable time but in no case beyond the applicable prescriptive or
reglementary period.
Nevertheless, OVEC's counterclaims are compulsory so no docket fees are required
as the following circumstances are present: (a) they arise out of or are necessarily
connected with the transaction or occurrence that is subject matter of the opposing
party's claim; (b) they do not require for their adjudication the presence of third
parties of whom the court cannot acquire jurisdiction; and (c) the court has
jurisdiction to entertain the claim (see Javier v. Intermediate Appellate Court, G.R.
75379, March 31, 1989, 171 SCRA 605).
Whether the respective claims asserted by the parties arise out of the same contract
or transaction within the limitation on counterclaims imposed by the statutes
depends on a consideration of all the facts brought forth by the parties and on a
determination of whether there is some legal or equitable relationship between the
ground of recovery alleged in the counterclaim and the matters alleged as the cause
of action by the plaintiff (80 C.J.S. 48).
As the counterclaims of OVEC arise from or are necessarily connected with the
facts alleged in the complaint for reformation of instrument of Sy, it is clear that said
counterclaims are compulsory.
ACCORDINGLY, finding no merit in the grounds relied upon by petitioners in their
petition, the same is hereby DENIED and the decision dated June 15, 1988 and the
resolution dated September 21, 1988, both of the respondent Court of Appeals are
AFFIRMED.
http://www.lawphil.net/judjuris/juri1991/sep1991/gr_85161_1991.html