3rd Exam Compiled Cases PDF

WILLIAM
GOLANGCO
CONSTRUCTION
CORPORATION vs PHILIPPINE COMMERCIAL
INTERNATIONAL BANK
Facts: In 1989, William Golangco Construction

Corporation (WGCC) and the Philippine Commercial
International Bank (PCIB) entered into a contract for the
construction of the extension of PCIB Tower II. The
project included, among others, the application of a
granitite wash-out finish on the exterior walls of the
building.
In a letter, PCIB, with the concurrence of its consultant
TCGI Engineers (TCGI), accepted the turnover of the
completed work by WGCC. To answer for any defect
arising within a period of one year, WGCC submitted a
guarantee bond dated July 1, 1992 in compliance with
the construction contract (Defects liability period).
The controversy between the parties arose when
portions of the granitite wash-out finish of the exterior of
the building began peeling off and falling from the walls
in 1993. WGCC made minor repairs after PCIB
requested it to rectify the construction defects.
In 1994, PCIB entered into another contract with Brains
and Brawn Construction and Development Corporation
to re-do the entire granitite wash-out finish after WGCC
manifested that it was "not in a position to do the new
finishing work," though it was willing to share part of the
cost. PCIB incurred expenses amounting to P11,
665,000 for the repair work.
PCIB filed a request for arbitration with the Construction
Industry Arbitration Commission (CIAC) for the
reimbursement of its expenses for the repairs made by
another contractor. It complained of WGCCs alleged
non-compliance with their contractual terms on materials
and workmanship.
The CIAC declared WGCC liable for the construction
defects in the project.
On appeal, the CA affirmed the CIAC decision.
Hence, this present petition.
Issue: Whether or not petitioner WGCC is liable for
defects in the granitite wash-out finish that occurred after
the lapse of the one-year defects liability period provided
in Art. XI of the construction contract.
xxx
the CONTRACTOR hereby guarantees the work
stipulated in this Contract, and shall make good any
defect in materials and workmanship which becomes
evident within one (1) year after the final acceptance of
the work.
Article 1306 of the Civil Code
autonomous nature of contracts.
enunciates
the
Article 1306. The contracting parties may establish such

stipulations, clauses, terms and conditions as they may
deem convenient, provided they are not contrary to law,
morals, good customs, public order, or public policy.
Obligations arising from contracts have the force of law
between the parties and should be complied with in good
faith. In characterizing the contract as having the force of
law between the parties, the law stresses the obligatory
nature of a binding and valid agreement.
In the present case, the provision in the construction
contract providing for a defects liability period was not
shown as contrary to law, morals, good customs, pubic
order or public policy. By the nature of the obligation in
such contract, the provision limiting liability for defects
and fixing specific guaranty periods was not only fair and
equitable; it was also necessary. Without such limitation,
the contractor would be expected to make a perpetual
guarantee on all materials and workmanship.
The contract further did not specify a different period for
defects in the granitite wash-out finish; hence, any defect
therein should have been brought to WGCCs attention
within the one-year defects liability period in the contract.
We cannot countenance an interpretation that
undermines a contractual stipulation freely and validly
agreed upon. The courts will not relieve a party from the
effects of an unwise or unfavorable contract freely
entered into.
Further, it must be noted that this kind of stipulation is of
particular importance to the contractor, for as a general
rule, after the lapse of the period agreed upon therein,
he may no longer be held accountable for whatever
defects, deficiencies or imperfections that may be
discovered in the work executed by him.
Held: No.
The controversy pivots on a provision in the construction
contract referred to as the defects liability period. Article
XI of the construction contract provides:
Buniel_Donguila_Encabo_Lim (BDEL 1Estrellado)
Page 1
SPOUSES FLORENTINO T. MALLARI and AUREA V.

MALLARI vs. PRUDENTIAL BANK (now BANK OF
THE PHILIPPINE ISLANDS),
FACTS:
December 11, 1984, when petitioner Florentino T.
Mallari obtained from respondent Prudential Bank-Tarlac
Branch, a loan in the amount of P300,000.00 as
evidenced by Promissory Note No. BD 84-055. Under
the promissory note, the loan was subject to an interest
rate of 21% per annum (p.a.), attorney's fees equivalent
to 15% of the total amount due but not less
than P200.00 and, in case of default, a penalty and
collection charges of 12% p.a. of the total amount due.
The loan had a maturity date of January 10, 1985, but
was renewed up to February 17, 1985. Petitioner
Florentino executed a Deed of Assignment wherein he
authorized the respondent bank to pay his loan with his
time deposit with the latter in the amount ofP300,000.00.
On December 22, 1989 Spouses Mallari obtained again
from Prudential Bank another loan of P1.7 million as
evidenced by PN No. BDS 606-89 They stipulated that
the loan will bear 23% interest p.a., attorney's fees
equivalent to 15% p.a. of the total amount due, but not
less than P200.00, and penalty and collection charges of
12% p.a. The Mallaris executed a Deed of Real Estate
Mortgage in favor of respondent bank covering their in
Tarlac to answer for the said loan.
Petitioners failed to settle their loan obligations with
respondent bank, thus, the latter, through its lawyer, sent
a demand letter to the former for them to pay their
obligations,
which
amounted
to P571,218.54.
Respondent bank filed with the Regional Trial Court of
Tarlac, a petition for the extrajudicial foreclosure of
petitioners' mortgaged property for the satisfaction of the
latter's obligation ofP1,700,000.00 secured by such
mortgage, thus, the auction sale was set by the
Provincial Sheriff on April 23, 1992.
On April 10, 1992, respondent bank's Assistant Manager
sent petitioners two (2) separate Statements of Account
as of April 23, 1992, i.e., the loan of P300,000.00 was
increased to P594,043.54, while the P1,700,000.00 loan
was already P3,171,836.18.
On April 20, 1992, petitioners filed a complaint for
annulment of mortgage, deeds, injunction, preliminary
injunction, temporary restraining order and damages
claiming, among others, that:
(1) the P300,000.00 loan obligation should have been
considered paid, because the time deposit with the same
amount under Certificate of Time Deposit No. 284051
had already been assigned to respondent bank;
(2) respondent bank still added theP300,000.00 loan to
the P1.7 million loan obligation for purposes of applying
the proceeds of the auction sale; and
(3) they realized that there were onerous terms and

conditions imposed by respondent bank when it tried to
unilaterally increase the charges and interest over and
above those stipulated. Petitioners asked the court to
restrain respondent bank from proceeding with the
scheduled foreclosure sale.
Respondent bank filed its Answer with counterclaim
arguing that:
(1) the interest rates were clearly provided in the
promissory notes, which were used in computing for
interest charges;
(2) as early as January 1986, petitioners' time deposit
was made to apply for the payment of interest of
their P300,000.00 loan; and
(3) the statement of account as of April 10, 1992
provided for a computation of interest and penalty
charges only from May 26, 1989, since the proceeds of
petitioners' time deposit was applied to the payment of
interest and penalty charges for the preceding period.
Respondent bank also claimed that petitioners were fully
apprised of the bank's terms and conditions; and that the
extrajudicial foreclosure was sought for the satisfaction
of the second loan in the amount of P1.7 million covered
by PN No. BDS 606-89 and the real estate mortgage,
and not the P300,000.00 loan covered by another PN
No. 84-055.
Subsequently, respondent bank filed a Motion to Dismiss
Complaint for failure
to prosecute
action
for
unreasonable length of time to which petitioners filed
their Opposition. On November 19, 1998, the RTC
issued its Order denying respondent bank's Motion to
Dismiss Complaint.
Trial thereafter followed. Petitioner Florentino was
presented as the lone witness for the plaintiffs.
Subsequently, respondent bank filed a Demurrer to
Evidence.
RTC: Granted respondent's demurrer to evidence and
dismissed the case.
RTC: Petitioners had assigned petitioner Florentino's
time deposit in the amount of P300,000.00 in favor of
respondent bank, which maturity coincided with
petitioners' loan maturity. Respondent bank should had
just applied the time deposit to the loan. However,
respondent bank did not, and allowed the loan interest to
accumulate reaching the amount of P594,043.54 as of
April 10, 1992, hence, the amount of P292,600.00 as
penalty charges was unjust and without basis. The 23%
interest rate p.a., which was then the prevailing loan rate
of interest could not be considered unconscionable,
since banks are not hospitable or equitable institutions
but are entities formed primarily for profit.
CA: Denied the appeal and affirmed the decision of
RTC.
Page 2
Issue: Whether the 23% p.a. interest rate and the 12%
p.a. penalty charge on petitioners'P1,700,000.00 loan to
which they agreed upon is excessive or unconscionable
under the circumstances.
Ruling: Parties are free to enter into agreements and
stipulate as to the terms and conditions of their contract,
but such freedom is not absolute. As Article 1306 of the
Civil Code provides, "The contracting parties may
establish such stipulations, clauses, terms and
conditions as they may deem convenient, provided they
are not contrary to law, morals, good customs, public
order, or public policy." Hence, if the stipulations in the
contract are valid, the parties thereto are bound to
comply with them, since such contract is the law
between the parties. In this case, petitioners and
respondent bank agreed upon on a 23% p.a. interest
rate on the P1.7 million loan.
Parties are free to enter into agreements and stipulate
as to the terms and conditions of their contract, but such
freedom is not absolute. As Article 1306 of the Civil
Code provides, "The contracting parties may establish
such stipulations, clauses, terms and conditions as they
may deem convenient, provided they are not contrary to
law, morals, good customs, public order, or public
policy." Hence, if the stipulations in the contract are
valid, the parties thereto are bound to comply with them,
since such contract is the law between the parties. In
this case, petitioners and respondent bank agreed upon
on a 23% p.a. interest rate on the P1.7 million loan.
Based on the above jurisprudence, the Court finds that

the 24% per annum interest rate, provided for in the
subject mortgage contracts for a loan of P225,000.00,
may not be considered unconscionable. Moreover,
considering that the mortgage agreement was freely
entered into by both parties, the same is the law
between them and they are bound to comply with the
provisions contained therein.
Regarding the penalty charge, the Supreme court cited

Ruiz v. CA, which held:
The 1% surcharge on the principal loan for every month
of default is valid. It partakes the nature of liquidated
damages:
x x x The enforcement of the penalty can be demanded
by the creditor only when the non-performance is due to
the fault or fraud of the debtor.
Here, petitioners defaulted in the payment of
their loan obligation with respondent bank and their
contract provided for the payment of 12% p.a. penalty
charge, and since there was no showing that petitioners'
failure to perform their obligation was due to force
majeure or to respondent bank's acts, petitioners cannot
now back out on their obligation to pay the penalty
charge. A contract is the law between the parties and
they are bound by the stipulations therein.
WHEREFORE, the petition for review is DENIED. The
Decision of the Court of Appeals are hereby AFFIRMED.
Petitioner: interest rate of 23% p.a. imposed by

respondent bank is excessive or unconscionable,
invoking our ruling in Medel v. Court of Appeals,18
Toring v. Spouses Ganzon-Olan,19 and Chua v. Timan.
>Medel vs CA: 66% p.a. or a 5.5% per month on a
P500,000.00 loan excessive, unconscionable and
exorbitant, hence, contrary to morals if not against the
law and declared such stipulation void
>In Toring v. Spouses Ganzon-Olan: the stipulated
interest rates involved were 3% and 3.81% per month on
a P10 million loan under the circumstances excessive
and reduced the same to 1% per month
> Chua v. Timan: where the stipulated interest rates
were 7% and 5% a month, which are equivalent to 84%
and 60% p.a., respectively, we had reduced the same to
1% per month or 12% p.a
In this case, the interest rate agreed upon by the parties

was only 23% p.a., or less than 2% per month, which are
much lower than those interest rates agreed upon by the
parties in the above-mentioned cases. Thus, there is no
similarity of factual milieu for the application of those
cases.
Page 3
HEIRS OF MANUEL UY EK LIONG, represented by

BELEN LIM VDA. DE UY
vs.MAURICIA MEER
CASTILLO, HEIRS OF BUENAFLOR C. UMALI,
represented by NANCY UMALI, VICTORIA H.
CASTILLO, BERTILLA C. RADA, MARIETTA C.
CAVANEZ, LEOVINA C. JALBUENA and PHILIP M.
CASTILLO, Respondents.
Facts:
On September 1976, respondents and Buenaflor
instituted a civil case before the then Court of First
Instance (CFI) of Quezon, for the purpose of seeking the
annulment of the transactions and/or proceedings
involving the parcels of land situated in Lucena City
which was sold at a public auction. Encountering
financial difficulties in the prosecution of the case,
respondents and Buenaflor entered into an Agreement
whereby they procured the legal services of Atty.
Edmundo Zepeda and the assistance of Manuel Uy Ek
Liong who, as financier, agreed to underwrite the
litigation expenses entailed by the case. In exchange, it
was stipulated in the notarized Agreement that, in the
event of a favorable decision "a share of forty (40%)
percent of all the realties and/or monetary benefits,
gratuities or damages" which may be adjudicated in
favor of respondents.
On the same date, respondents and Buenaflor entered
into another notarized agreement denominated as a
Kasunduan whereby they agreed to sell their remaining
sixty (60%) percent share in the subject parcels in favor
of Manuel for the sum of P180,000.00. The parties
likewise agreed to further enter into such other
stipulations as would be necessary to ensure that the
sale would push through and/or in the event of illegality
or impossibility of any part of the Kasunduan.
With his death, Manuel was survived by petitioners,
Heirs of Manuel Uy Ek Liong. The record also shows
that the proceedings in Civil Case culminated on 13
September 1990 in favor of respondents and Buenaflor.
Subsequently, the subject parcels were subdivided in
accordance with the Agreement, with sixty (60%)
percent thereof equally apportioned among and
registered in the names of respondents and Buenaflor.
Supposedly acting on the advice of Atty. Zepeda,
respondents wrote petitioners a letter informing
petitioners that respondents were willing to sell their sixty
(60%) percent share in the subject parcels for the
consideration of P500.00 per square meter. Insisting on
the price agreed upon in the Kasunduan, however,
petitioners sent a letter dated 19 May 1993, requesting
respondents to execute within 15 days from notice the
necessary Deed of Absolute Sale over their 60% share
as aforesaid.
On 6 October 1993, petitioners commenced the instant

suit with the filing of their complaint for specific
performance and damages against the respondents and
respondent Heirs of Buenaflor. Faulting respondents
with unjustified refusal to comply with their obligation
under the Kasunduan, petitioners prayed that the former
be ordered to execute the necessary Deed of Absolute
Sale over their shares in the subject parcels.
Respondents filed their Answer with Counterclaim and
Motion to File Third Party Complaint maintaining that the
Agreement and the Kasunduan were illegal for being
unconscionable and contrary to public policy,
respondents averred that Atty. Zepeda was an
indispensable party to the case.
RTC rendered a decision finding the Kasunduan
valid and binding between respondents and petitioners
who had the right to demand its fulfillment as Manuels
successors-in-interest. Brushing aside Philips testimony
that respondents were forced to sign the Kasunduan, the
RTC ruled that said contract became effective upon the
finality of this Courts Decision which served as a
suspensive condition therefor. Having benefited from the
legal services rendered by Atty. Zepeda and the financial
assistance extended by Manuel, respondents were also
declared estopped from questioning the validity of the
Agreement and Kasunduan and TCT No. T-72026.
CA: reversed the RTCs decision, upon the following
findings and conclusions, to wit: (a) the Agreement and
Kasunduan are byproducts of the partnership between
Atty. Zepeda and Manuel who, as a non-lawyer, was not
authorized to practice law; (b) the Agreement is void
under Article 1491 (5) of the Civil Code of the Philippines
which prohibits lawyers from acquiring properties which
are the objects of the litigation in which they have taken
part; (c) jointly designed to completely deprive
respondents of the subject parcels, the Agreement and
the Kasunduan are invalid and unconscionable; and (d)
without prejudice to his liability for violation of the
Canons of Professional Responsibility, Atty. Zepeda can
file an action to collect attorneys fees based on quantum
meruit.39
Issue: W/N THE AGREEMENT AND KASUNDUAN
VOID AB INITIO FOR BEING CONTRARY TO LAW
AND PUBLIC POLICY FOR BEING VIOLATIVE OF
ART. 1491 OF THE NEW CIVIL CODE AND THE
CANONS OF PROFESSIONAL RESPONSIBILITY.40
Sc: Found that the petition was impressed with partial
merit.
CA reversibly erred in ruling on the validity of the
Agreement which respondents executed not only with
petitioners predecessor-in-interest, Manuel, but also
with Atty. Zepeda. Article 1491 (5)45 of the Civil Code
prohibits lawyers from acquiring by purchase or
assignment the property or rights involved which are the
Page 4
object of the litigation in which they intervene by virtue of

their profession. The CA lost sight of the fact, however,
that the prohibition applies only during the pendency of
the suit46 and generally does not cover contracts for
contingent fees where the transfer takes effect only after
the finality of a favorable judgment.47
Although executed on the same day, the Agreement
and the Kasunduan are independent contracts, with
parties, objects and causes different from that of the
other. Executed in exchange for the legal services of
Atty. Zepeda and the financial assistance to be extended
by Manuel, the Agreement concerned respondents
transfer of 40% of the avails of the suit, in the event of a
favorable judgment in the case. While concededly
subject to the same suspensive condition, the
Kasunduan was, in contrast, concluded by respondents
with Manuel alone, for the purpose of selling in favor of
the latter 60% of their share in the subject parcels for the
agreed price of P180,000.00.
that courts cannot supply material stipulations or read

into the contract words it does not contain. Indeed,
courts will not relieve a party from the adverse effects of
an unwise or unfavorable contract freely entered into.
SC: CAs Decision is REVERSED and SET ASIDE. In
lieu thereof, the RTC's 27 January 2005 Decision is
REINSTATED
subject
to
the
following
MODIFICATIONS: (a) the exclusion of a 1,750-square
meter portion from the 60% share in the subject parcel
respondents were ordered to convey in favor of
petitioners; and (b) the deletion of the awards of moral
and exemplary damages. The rights of the parties under
the Agreement may be determined in a separate
litigation.
SO ORDERED.
Viewed in the light of the autonomous nature of

contracts enunciated under Article 1306 of the Civil
Code, on the other hand, we find that the Kasunduan
was correctly found by the RTC to be a valid and binding
contract between the parties. Already partially executed
with respondents receipt of P1,000.00 from Manuel
upon the execution thereof, the Kasunduan simply
concerned the sale of the formers 60% share in the
subject parcel, for the agreed consideration of
P180,000.00.
Although Philip had repeatedly claimed that respondents
had been forced to sign the Agreement and the
Kasunduan, his testimony does not show such vitiation
of consent as would warrant the avoidance of the
contract.
Rather than claiming vitiation of their consent in the
answer they filed a quo, respondents, in fact, distinctly
averred that the Kasunduan was tantamount to unjust
enrichment and "a clear source of speculative profit" at
their expense since their remaining share in said
properties had "a current market value of P9,594,900.00,
more or less.
In the absence of any showing, however, that the parties
were able to agree on new stipulations that would modify
their agreement, we find that petitioners and
respondents are bound by the original terms embodied
in the Kasunduan. Obligations arising from contracts,
after all, have the force of law between the contracting
parties who are expected to abide in good faith with their
contractual commitments, not weasel out of
them.Moreover, when the terms of the contract are clear
and leave no doubt as to the intention of the contracting
parties, the rule is settled that the literal meaning of its
stipulations should govern. In such cases, courts have
no authority to alter a contract by construction or to
make a new contract for the parties. It has been ruled
Page 5
PHILIPPINE NATIONAL BANK vs. COURT OF

APPEALS, REMEDIOS JAYME-FERNANDEZ and
AMADO FERNANDEZ
Facts:
April 7, 1982- private respondents, as owners of

a NACIDA-registered enterprise, obtained a loan under
the Cottage Industry Guaranty Loan Fund (CIGLF) from
petitioner, PNB, in the amount of P50,000 as evidenced
by a Credit Agreement. The loan was to be amortized
over a period of 3 years to end on March 20, 1985 at
12% interest annually. The said loan was secured by a
Real Estate Mortgage over an agricultural land and
Chattel Mortgage over a thermo plastic-forming
machine.
The credit agreement provided that:

o
The BANK reserves the right to increase the
interest rate within the limits allowed by law at any time
depending on whatever policy it may adopt in the future;
Provided, that the interest rate on this accommodation
shall be correspondingly decreased in the event that the
applicable maximum interest is reduced by law or by the
Monetary Board. In either case, the adjustment in the
interest rate agreed upon shall take effect on the
effectivity date of the increase or decrease in the
maximum interest rate.
The promissory note, in turn, authorized PNB to

raise the interest, at any time without notice, beyond the
stipulated rate of 12% but only within the limits allowed
by law.
February 17, 183- private respondents were

granted an additional NACIDA loan of P50,000. PNB
executed another promissory note which is to mature on
April 1, 1985. It contained the same terms specified in
the previous note. The parties also executed a new
Credit Agreement, changing the amount from P50,000 to
P100,000, with the same stipulations as the previous
one.
August 1, 1984- petitioner sent a letter to

respondents informing them that the interest rate of their
CIGLF loan account was raised to 25% per annum plus
a penalty of 6% per annum on past dues. PNB further
increased the interest rate to 30% and 42 % a few
months later.
Thereafter, private respondents exerted efforts

to get PNB to re-adopt the 12% interest and to condone
the present interest and penalties due, but to no avail.
December 15, 1987- private respondents filed a

suit for specific performance against petitioner PNB and
NACIDA praying to release the mortgage; pay damages
and other relief which the court may find just and
equitable.
The trial court dismissed the case. CA reversed

the decision in favor of private respondents and
disallowed the increases in interest rates.
Petitioners Contention: The increase in interest rates is
authorized by the escalation clause specified in the
Credit Agreement.
Issue: Whether or not the increase in interest rates

made by petitioner is valid.
Held: No. The increase in interest rates made by
petitioner is invalid.
It is basic that there can be no contract in the true sense
in the absence of the element of agreement, or of mutual
assent of the parties. If this assent is wanting on the part
of the one who contracts, his act has no more efficacy
than if it had been done under duress or by a person of
unsound mind.
Similarly, contract changes must be made with the
consent of the contracting parties. The minds of all the
parties must meet as to the proposed modification,
especially when it affects an important aspect of the
agreement. In the case of loan contracts, it cannot be
gainsaid that the rate of interest is always a vital
component, for it can make or break a capital venture.
Thus, any change must be mutually agreed upon,
otherwise, it is bereft of any binding effect.
The Court disagrees with petitioners argument that the
escalation clause gives it the unbridled right to
unilaterally upwardly adjust the interest on private
respondents' loan. That would completely take away
from private respondents the right to assent to an
important modification in their agreement, and would
negate the element of mutuality in contracts. In
Philippine National Bank v. Court of Appeals, et al., 196
SCRA 536, 544-545 (1991) the Court held
. . . The unilateral action of the PNB in increasing the
interest rate on the private respondent's loan violated the
mutuality of contracts ordained in Article 1308 of the Civil
Code:
Art. 1308. The contract must bind both contracting
parties; its validity or compliance cannot be left to the will
of one of them.
In order that obligations arising from contracts may have
the force or law between the parties, there must be
mutuality between the parties based on their essential
equality. A contract containing a condition which makes
its fulfillment dependent exclusively upon the
uncontrolled will of one of the contracting parties, is void
. . . . Hence, even assuming that the . . . loan agreement
between the PNB and the private respondent gave the
PNB a license (although in fact there was none) to
increase the interest rate at will during the term of the
loan, that license would have been null and void for
being violative of the principle of mutuality essential in
contracts. It would have invested the loan agreement
with the character of a contract of adhesion, where the
parties do not bargain on equal footing, the weaker
party's (the debtor) participation being reduced to the
alternative "to take it or leave it" . . . . Such a contract is
Page 6
a veritable trap for the weaker party whom the courts of

justice must protect against abuse and imposition.
(Citation omitted.)
Private respondents are not also estopped from
assailing the unilateral increases in interest rate made by
petitioner bank. No one receiving a proposal to change a
contract to which he is a party, is obliged to answer the
proposal, and his silence per se cannot be construed as
an acceptance. In the case at bench, the circumstances
do not show that private respondents implicitly agreed to
the proposed increases in interest rate which by any
standard were too sudden and too stiff.
Page 7
ALLIED BANKING VS CA
FACTS:
Spouses Tanqueco owned a 512-square meter which
they leased to petitioner Allied Banking Corporation
(ALLIED). The lease contract specifically provide that
the term of this lease shall be fourteen (14) years
commencing from April 1, 1978 and may be renewed for
a like term at the option of the lessee."
thereafter bound by the new lease agreement. Their

rights and obligations become mutually fixed, and the
lessee is entitled to retain possession of the property for
the duration of the new lease, and the lessor
may hold him liable for the rent therefor. The lessee
cannot thereafter escape liability even if he
should subsequently decide to abandon the premises.
Mutuality obtains in such a contract and equality exists
between the lessor and the lessee since they remain
[7]
with the same faculties in respect to fulfillment.
10 years after the said contract of lease, the Tanqueco

spouses executed a deed of donation over the subject
property in favor of their four (4) children, herein private
respondents.
A year before the expiration of the contract of lease, the
Tanquecos notified petitioner ALLIED that they were no
longer
interested
in
renewing
the
[2]
lease. ALLIED however rejecter their proposal and
insisted on exercising its option to renew their lease
under the same terms with additional proposals.
When the lease contract expired in 1992 private
respondents demanded that ALLIED vacate the
premises. But the latter asserted its sole option to renew
the lease.
ISSUE:
Whether a stipulation in a contract of lease to the effect
that the contract "may be renewed for a like term at the
option of the lessee" is void for being potestative or
violative of the principle of mutuality of contracts under
Art. 1308 of the Civil Code. No.
RULING:
Article 1308 of the Civil Code expresses 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."
This binding effect of a contract on both parties is based
on the principle that the obligations arising from
contracts have the force of law between the contracting
parties, and there must be mutuality between them
based essentially on their equality under which it is
repugnant
to
have
one
party
bound
by the contract while leaving the
other
free
therefrom.
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.
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
Page 8
[17]
In
a
Letter dated October
18,
1986,
respondent opposed the implementation of any increase
in its lease rental for the subject property.
MANILA INTERNATIONAL AIRPORT VS VELAYO

SPORTS CENTER
FACTS:
On February 15, 1967, petitioner and Salem Investment
Corporation (Salem) entered into a Contract of Lease
whereby petitioner leased in favor of Salem a parcel of
land known as Lot 2-A, with an area of 76,328 square
meters, located in front of the Manila International Airport
(MIA) in Pasay City, and registered under Transfer
Certificate of Title (TCT) No. 6735 in the name of the
Republic (Lot 2-A).
Subsequently, in a Transfer of Lease Rights and
Existing Improvements dated September 30, 1974,
Salem conveyed in favor of Ding Velayo Export
Corporation (Velayo Export), for the consideration
of P1,050,000.00, its leasehold rights over a portion of
Lot 2-A, measuring about 15,534 square meters, with
the improvements thereon, consisting of an unfinished
cinema-theater. Accordingly, petitioner and Velayo
Export executed a Contract of Lease dated November
26, 1974 pertaining to the aforementioned leased portion
of Lot 2-A.
In turn, Velayo Export executed a Transfer of
Lease Rights dated April 27, 1976 by which it conveyed
to respondent, for the consideration of P500,000.00, its
leasehold rights over an 8,481-square meter area
(subject property) out of the 15,534-square meter portion
it was leasing from petitioner. As a result, petitioner and
respondent
executed
another
Contract
of
[5]
Lease dated May 14, 1976 covering the subject
property.
The Contract of Lease prohibits respondent from
transferring its leasehold rights, engaging in any other
business outside those mentioned in said Contract, and
subletting the premises whether in whole or in part, thus:
Respondent began occupying the subject
property and paying petitioner the amount of P2,205.25
per month as rental fee. Respondent then constructed a
multi-million plaza with a three-storey building on said
property. Respondent leased spaces in the building to
various business proprietors.
Petitioner, through a letter dated September 23,
1986, required respondent to pay a moratorium rental at
the rate of P5.00 per square meter rate per month or a
total of P42,405.00 every month.
More than 60 days prior to the expiration of the

lease between petitioner and respondent, the latter,
through its President, Conrado M. Velayo (Velayo), sent
[18]
the former a Letter dated December 2, 1991 stating
that respondent was interested in renewing the lease for
another 25 years.
Petitioner, through its General Manager,
[19]
Eduardo O. Carrascoso, in a Letter dated February
24, 1992, declined to renew the lease, ordered
respondent to vacate the subject property within five
days, and demanded respondent to pay arrears in lease
rentals
as
of
January 1992
in
the
sum
of P15,671,173.75.
[21]
In Letters all dated March 10, 1992, Velayo informed

petitioner that he already sent individual letters to Manila
Electric Company, Philippine Long Distance Telephone
Company, and Manila Waterworks and Sewerage
System, instructing the said utility companies that
succeeding billings for electric, telephone, and water
consumptions should already be transferred to the
account of petitioner in light of the expected turn-over of
the subject property and improvements thereon from
respondent to petitioner.
Respondent expressed its interest in continuing
the lease of the subject property for another 25 years
and tendered to petitioner a managers check in the
amount of P8,821.00 as payment for the lease rentals
for the subject property from December 1991 until March
1992.
Petitioner entirely disregarded the claims of
respondent and threatened to take-over the subject
property.
On March 30, 1992, respondent filed against
petitioner before the RTC a Complaint for Injunction,
Consignation, and Damages with a Prayer for a
[23]
Temporary Restraining Order. Respondent essentially
prayed for the RTC to order the renewal of the Contract
of Lease between the parties for another 25-year term
counted from February 15, 1992
[25]
In its Answer, petitioner contended that its

Contract of Lease with respondent was already
terminated on February 15, 1992, the expiration date
explicitly stated under paragraph 4 of the same
Contract. Petitioner was not bound to renew the
Contract of Lease with respondent. The renewal
provision under paragraph 17 of the Contract was not
automatic but merely directory and procedural and that,
in any event, Velayo, the former President of
Page 9
respondent, already conceded to the non-renewal of the

Contract.
Petitioner likewise invoked paragraph 15 of the
Contract of Lease, i.e., its right to revoke the said
Contract in case of violation of any of the provisions
thereof
by
respondent. Petitioner
averred
that
respondent committed the following violations: (1)
respondent failed to fulfill the conditions set forth under
paragraphs 2 and 3 of the Contract as it did not establish
a shopping center on the subject property and did not
help ease the problems of parking congestion at the
Domestic Airport; (2) respondent sub-leased the
subject property in defiance of the prohibition under
paragraph 16 of the Contract; and (3) respondent did not
pay the lease rentals in accordance with paragraphs 5
and 13 of the Contract, thus, incurring a total outstanding
balance of P15,671,173.75 as of February 1992.
By way of counter-claim, petitioner demanded
that respondent pay the total outstanding balance of its
lease rentals for the subject property and turn-over lease
rentals it had collected from sub-lessees beginning
February 15, 1992.
RTC- in favor of [respondent] and
against [petitioner]. CA- affirmed RTCs
decision
ISSUE:
WON renewal of the Contract of Lease cannot
be made to depend on the sole will of respondent for the
same would then be void for being a potestative
condition.
RULING:
NO. Renewal is possible in this case.
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." This binding effect of a
contract on both parties is based on the principle that the
obligations arising from contracts have the force of law
between the contracting parties, and there must be
mutuality between them based essentially on their
equality under which it is repugnant to have one party
bound by the contract while leaving the other free
therefrom. The ultimate purpose is to render void a
contract containing a condition which makes its
fulfillment dependent solely upon the uncontrolled will of
one of the contracting parties.
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.
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. Their
rights and obligations become mutually fixed, and the
lessee is entitled to retain possession of the property for
the duration of the new lease, and the lessor may hold
him liable for the rent therefor. The lessee cannot
thereafter escape liability even if he should subsequently
decide to abandon the premises. Mutuality obtains in
such a contract and equality exists between the lessor
and the lessee since they remain with the same faculties
[48]
in respect to fulfillment.
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. It has not been disputed that said
Contract of Lease was willingly and knowingly entered
into by petitioner and respondent. Thus, petitioner freely
consented to giving respondent the exclusive right to
choose whether or not to renew the lease.
Equally unmeritorious is the assertion of petitioner that
paragraph 17 of the Contract of Lease dated May 14,
1976 merely provides a procedural basis for a
negotiation for renewal of the lease and the terms
thereof. The exercise by respondent of its option to
renew the lease need no longer be subject to
negotiations.
In case the lessee chooses to renew the lease but there
are no specified terms and conditions for the new
contract of lease, the same terms and conditions as the
original contract of lease shall continue to govern.
In the lease contract under consideration, there is no
provision to indicate that the renewal will be subject to
new terms and conditions that the parties may yet agree
upon.
The settled rule is that in case of uncertainty as to
the meaning of a provision granting extension to a
contract of lease, the tenant is the one favored and
not the landlord
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
Page 10
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. This construction of the renewal
clause under paragraph 17 of the Contract of Lease
dated May 14, 1976 between petitioner and respondent
is most consistent with the intent of the parties at the
time of the execution of said Contract and most effectual
in implementing the same.
Just as the RTC adjudged, no fault could be

attributed to respondent for deficient payment of lease
rentals. 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. At the
very beginning of the lease, respondent had been paying
monthly lease rentals based on the rates fixed by AO
No. 4, series of 1970, which amounted to P2,205.25 per
month. When requested, respondent submitted to
petitioner its gross income statements, so petitioner
could very well compute the 1% royalty. However,
petitioner
continued
to
charge
respondent
only P2,205.25 monthly lease rental, which the latter
faithfully paid.
In addition to challenging the exclusive right of

respondent to renew the Contract of Lease over the
subject property, petitioner insists on its right to refuse
the renewal because of purported violations of the said
Contract by respondent.
We find no violations by the respondent of the
Contract of Lease dated May 14, 1976 as to justify the
revocation or refusal to renew of said Contract by
petitioner.
While the Contract of Lease expressly obligated
respondent to build certain improvements, such as
parking, shopping mall, and sports facilities, the belated
insistence by petitioner on compliance with the same
appears to be a mere afterthought.
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.
As aptly observed by the RTC, paragraphs 9
and 10 of the Contract of Lease likewise expressly
require respondent to submit, for prior approval by
petitioner, all construction plans on the subject property;
and to complete the contemplated improvements
thereon within a year. The Contract of Lease was
executed on May 14, 1976, and the one-year period
expired on May 14, 1977. Yet, 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. 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 on the subject
property in 1992. Petitioner only raised the issue of the
purported incompleteness/irregularity of the said
improvements when it was brought to court by
respondent for refusing to renew the lease.
Page 11
8,901,776.63, the amount of deficiency after applying the

proceeds of the foreclosure sale to the mortgage debt.
In their Answer, the Juicos admitted their debt but
claimed that the principal of the loan was already paid
when the mortgaged property was extrajudicially
foreclosed and sold for Php 10,300,000. They contended
that should they be held liable for any deficiency, it
should be only for Php 55,000 representing the
difference between the total outstanding obligation of
Php 10,355,000 and the bid price of Php 10,300,000.
At the trial, China Bank presented Ms. Annabelle Cokai
Yu, its Senior Loans Assistant, as witness. She testified
that she handled the account of the Juicos and assisted
them in processing their loan application. She called
them monthly to inform them of the prevailing rates to be
used in computing interest due on their loan.
JUICO VS CHINA BANKING

FACTS:
Spouses Ignacio and Alice Juico got a loan from China
Banking Corporation as evidenced by 2 promissory
notes. The loan was secured by a Real Estate Mortgage
over the Juico couples property located at White Plains,
Quezon City. The notes contained the following
escalation clause stating that the interest rate would
change every month based on the prevailing market
rate:
I/We hereby authorize the CHINA BANKING
CORPORATION to increase or decrease as the case
may be, the interest rate/service charge presently
stipulated in this note without any advance notice to
me/us in the event a law or Central Bank regulation is
passed or promulgated by the Central Bank of the
Philippines or appropriate government entities,
increasing or decreasing such interest rate or service
charge.
On cross-examination, Ms. Yu reiterated that the interest

rate changes every month based on the prevailing
market rate and she notified the Juicos of the prevailing
rate by calling them monthly before their account
becomes past due. When asked if there was any written
authority from the Juicos to increase the interest rate
unilaterally, Ms. Yu answered that they signed a
promissory note indicating that they agreed to pay
interest
at
the
prevailing
rate.
In defense, Ignacio Juico testified that before the loans
release, he was required to sign a blank promissory note
and was informed that the interest rate on the loan will
be based on prevailing market rates. On crossexamination, Ignacio testified that he is a Doctor of
Medicine and also engaged in the business of
distributing medical supplies. Ignacio admitted having
read the promissory notes and that he is aware of his
obligation under them before he signed them.
The RTC rules against the Juicos

The
trial
court
held
that:
(1) Ignacios claim that he signed the promissory notes

in blank cannot negate or mitigate his liability since he
admitted reading the Promissory Notes before signing
them.
The Juicos failed to pay the monthly amortizations

due. As of February 23, 2001, the amount due on the
two
promissory
notes
totaled
P19,201,776.63
representing the principal, interests, penalties and
attorneys fees. The mortgaged property was sold at
public auction, with China Bank as the highest bidder for
the
amount
of
Php
10,300,000.
(2) Considering the substantial amount involved, it is

unbelievable that the Juicos threw all caution to the wind
and simply signed the documents without reading and
understanding
the
contents.
After the auction, China Bank filed a collection case with

the Regional Trial Court (RTC) of Makati City for Php
The CA recognized China Banks right to claim the

deficiency because the proceeds of the foreclosure sale
The Court of Appeals affirms RTC ruling
Page 12
were insufficient to cover the amount of the debt.

Also, the CA found as valid the stipulation in the
promissory notes that interest will be based on the
prevailing rate. It noted that the parties agreed on the
interest rate which was not unilaterally imposed by the
bank but was the rate offered daily by all commercial
banks as approved by the Monetary Board. Having
signed the promissory notes, the Juicos are bound by
the stipulations.
ISSUE:
WON the parties agreed on the interest rate
RULING:
Supreme Court rules partly for the Juicos and partly for
China Bank
(5) China Bank should have given a detailed billing

statementbased on the new imposed interest with
corresponding computation of the total debt. The
statement would have enabled the Juicos to make an
informed decision. China Bank should also have
provided an appropriate form to be signed by the Juicos
to indicate their conformity to the new rates.
The
Courts
ruling
in
favor
of
China
Bank:
The Court ordered the Juicos to pay China Bank Php

4,761 ,865. 79 (instead of Php 8,901,776.63, the amount
originally claimed) representing the amount of deficiency
inclusive of interest, penalty charge and attorneys fees.
The Juico couple appealed to the Supreme

Court. According to the Juicos, the issues are:
(1) The interest rates imposed by China Bank are not
valid as they were not by virtue of any law or Bangko
Sentral ng Pilipinas regulation or any regulation that was
passed by an appropriate government entity. They insist
that the interest rates were unilaterally imposed by the
bank and thus violate the principle of mutuality of
contracts.
(2) The escalation clause in the promissory notes does
not give China Bank the unbridled authority to increase
the interest rate unilaterally. Any change must be
mutually
agreed
upon.
The
Courts
ruling
in
favor
of
the
Juicos:
(1) Escalation clauses are not necessarily void. These

clauses are valid stipulations in commercial contracts to
maintain fiscal stability and to retain the value of money
in
long
term
contracts.
(2) The Juicos were not coerced into signing the
promissory notes and they did not protest the new rates
imposed on their loan. Nevertheless, an escalation
clause granting 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. A stipulation of
this nature violates the principle of mutuality of contracts
under Article 1308 of the New Civil Code.
(3) An escalation clause is void where the creditor
unilaterally determines and imposes an increase in the
stipulated rate of interest without the express conformity
of
the
debtor.
(4) Changes in the rate of interest for loans under an
escalation clause must be the result of an agreement
between
the
parties.
Page 13
It was agreed upon that the Spouses Manalo would

make monthly payments on the interest. However, PNB
claimed that their last recorded payment was made on
December, 1997. Thus, PNB sent a demand letter to
them on their overdue account and required them to
settle the account. PNB sent another demand letter
3
because they failed to heed the first demand.
After the Spouses Manalo still failed to settle their unpaid
account despite the two demand letters, PNB foreclose
the mortgage. During the foreclosure sale, PNB was the
highest bidder for P15,127,000.00 of the mortgaged
properties of the Spouses Manalo. The sheriff issued to
4
PNB the Certificate of Sale dated November 13, 2000.
After more than a year after the Certificate of Sale had
been issued to PNB, the Spouses Manalo instituted this
action for the nullification of the foreclosure proceedings
and damages. They alleged that they had obtained a
loan for P1,000,000.00 from a certain Benito Tan upon
arrangements made by Antoninus Yuvienco, then the
General Manager of PNBs Bangkal Branch where they
had transacted; that they had been made to understand
and had been assured that the P1,000,000.00 would be
used to update their account, and that their loan would
be restructured and converted into a long-term
5
loan; that they had been surprised to learn, therefore,
that had been declared in default of their obligations, and
that the mortgage on their property had been foreclosed
and their property had been sold; and that PNB did not
6
comply with Section 3 of Act No. 3135, as amended.
PNB VS MANALO
FACTS:
Respondent Spouses Enrique Manalo and Rosalinda
Jacinto (Spouses Manalo) applied for an All-Purpose
Credit Facility in the amount of P1,000,000.00 with
Philippine National Bank (PNB) to finance the
construction of their house. After PNB granted their
application, they executed a Real Estate Mortgage on
November 3, 1993 in favor of PNB over their property
covered by Transfer Certificate of Title No. S- 23191 as
1
security for the loan. The credit facility was renewed
and increased several times over the years. On
September 20, 1996, the credit facility was again
renewed for P7,000,000.00. As a consequence, the
parties executed a Supplement to and Amendment of
Existing Real Estate Mortgage whereby the property
covered by TCT No. 171859 was added as security for
the loan.
The additional security was registered in the names of
respondents Arnold, Arnel, Anthony, and Arma, all
2
surnamed Manalo, who were their children.
PNB and Antoninus Yuvienco countered that

the P1,000,000.00 loan obtained by the Spouses Manalo
from Benito Tan had been credited to their account; that
they did not make any assurances on the restructuring
and conversion of the Spouses Manalos loan into a
7
long-term one; that PNBs right to foreclose the
mortgage had been clear especially because the
Spouses Manalo had not assailed the validity of the
loans and of the mortgage; and that the Spouses Manalo
8
did not allege having fully paid their indebtedness.
RTC: in favor of PNB
The RTC held, however, that the Spouses Manalos
"contract of adhesion" argument was unfounded
because they had still accepted the terms and conditions
of their credit agreement with PNB and had exerted
10
efforts to pay their obligation; that the Spouses Manalo
were now estopped from questioning the interest rates
unilaterally imposed by PNB because they had paid at
11
those rates for three years without protest; and that
their allegation about PNB violating the notice and
publication requirements during the foreclosure
proceedings was untenable because personal notice to
12
the mortgagee was not required under Act No. 3135.
Page 14
The Spouses Manalo reiterated their arguments,

insisting that: (1) the credit agreements they entered into
14
with PNB were contracts of adhesion; (2) no interest
was due from them because their credit agreements with
PNB did not specify the interest rate, and PNB could not
unilaterally increase the interest rate without first
15
informing them; and (3) PNB did not comply with the
notice and publication requirements under Section 3 of
16
Act 3135. On the other hand, PNB and Yuvienco did
17
not file their briefs despite notice.
CA: Affirmed RTCs decision
The CA further held that PNB could not unilaterally
increase the rate of interest considering that the credit
agreements specifically provided that prior notice was
required before an increase in interest rate could be
effected. It found that PNB did not adduce proof showing
that the Spouses Manalo had been notified before the
increased interest rates were imposed; and that PNBs
unilateral imposition of the increased interest rate was
null and void for being violative of the principle of
mutuality of contracts enshrined in Article 1308 of the
Civil Code. Reinforcing its "contract of adhesion"
conclusion, it added that the Spouses Manalos being in
dire need of money rendered them to be not on an equal
footing with PNB. Consequently, the CA, relying on
19
Eastern Shipping Lines, v. Court of Appeals, fixed the
interest rate to be paid by the Spouses Manalo at 12%
per annum, computed from their default.
ISSUE:
WON spouses Manalo consented to the interest rate
imposed by PNB
RULING:
The validity of the interest rates and their increases, and
the lack of mutuality between the parties were issues
validly raised in the RTC, giving the Spouses Manalo
every right to raise them in their appeal to the CA. PNBs
contention was based on its wrong appreciation of what
transpired during the trial. It is also interesting to note
that PNB did not itself assail the RTCs ruling on the
issues obviously because the RTC had decided in its
favor. In fact, PNB did not even submit its appellees
brief despite notice from the CA.
The Court has declared that a contract where there is no

mutuality between the parties partakes of the nature of a
33
contract of adhesion, and any obscurity will be
construed against the party who prepared the contract,
the latter being presumed the stronger party to the
34
agreement, and who caused the obscurity. PNB should
then suffer the consequences of its failure to specifically
indicate the rates of interest in the credit agreement. We
spoke clearly on this in Philippine Savings Bank v.
35
Castillo, to wit:
The unilateral determination and imposition of the

increased rates is violative of the principle of mutuality of
contracts under Article 1308 of the Civil Code, which
provides that [t]he contract must bind both contracting
parties; its validity or compliance cannot be left to the will
of one of them. A perusal of the Promissory Note will
readily show that the increase or decrease of interest
rates hinges solely on the discretion of petitioner. It does
not require the conformity of the maker before a new
interest rate could be enforced. Any contract which
appears to be heavily weighed in favor of one of the
parties so as to lead to an unconscionable result, thus
partaking of the nature of a contract of adhesion, is void.
Any stipulation regarding the validity or compliance of
the contract left solely to the will of one of the parties is
likewise invalid. (Emphasis supplied)
PNB could not also justify the increases it had effected
on the interest rates by citing the fact that the Spouses
Manalo had paid the interests without protest, and had
renewed the loan several times. We rule that the CA,
citing Philippine National Bank v. Court of
36
Appeals, rightly concluded that "a borrower is not
estopped from assailing the unilateral increase in the
interest made by the lender since no one who receives a
proposal to change a contract, to which he is a party, is
obliged to answer the same and said partys silence
37
cannot be construed as an acceptance thereof."
Lastly, the CA observed, and properly so, that the credit
agreements had explicitly provided that prior notice
would be necessary before PNB could increase the
interest rates. In failing to notify the Spouses Manalo
before imposing the increased rates of interest,
therefore, PNB violated the stipulations of the very
contract that it had prepared. Hence, the varying interest
rates imposed by PNB have to be vacated and declared
null and void, and in their place an interest rate of 12%
per annum computed from their default.
Baluyot vs CA
FACTS:
On March 13, 1992 petitioners as resident of Barangay
Cruz represented by petitioner TimoteoBaluyot et.al filed
for specific performance and damages against UP
respondent contending that they have been in open,
peaceful, adverse and continuous possession in the
concept of an owner of that parcel of land in Quezon City
In 1979, UP approved the donation directly to the said
residents for about 9.2 hectares and that UP backed out
to proceed with the donation and the execution of the
legal instrument was not formalized.
Afterwards, the negotiation of donation was resumed
thru the defendant Quezon City government under the
Page 15
terms contrary to the right of the bonafide residents of

the said barrio.
Petitioners apply for writ of injunction that was issued to
restrain defendant UP from ejecting plaintiffs and
demolishing their improvements on the Riceland. Also,
petitioners seek enforcement of the Deed of donation
made by UP defendant to the Quezon City government.
Under the said Deed of Donation the donee shall after
lapse of 3 years transfer to the qualified residents by
way of donation the individual lots occupied by them.
However, UP President had failed to deliver the CTC to
enable Quezon City government to register the Deed of
Donation.
3.
The intent of the parties to the deed of donation
was to confer a favour upon petitioners by transferring
lots occupied by them.
4.
Conference were held between the parties to
convince UP to surrender CTC to the city government
which donation had been accepted by petitioners by
demanding fulfilment and that private respondents were
aware of such acceptance.
5.
All allegations can be fairly inferred that neither
of private respondents acted in representation of the
other, each private respondents had its own obligation in
view of conferring a favor upon petitioners.
The defendant UP had continuously, unlawfully refused

to comply the obligation to deliver the title despite
several requests and conferences.
Revocation and reversion of a Deed of Donation without
Judicial declaration is illegal and prejudicial to the rights
of the bonafide residents in Barangay Cruz naLigas
Quezon City.
By reason of deception, the residents reiterate the claim
of ownership of 42 hectares which are included in the tax
declaration under the name of UP.
The plaintiff prayed for the declaration of the Deed of
Donation as valid and subsisting.
The trial court rendered its decision that petitioners did
not have a cause of action for specific performance on
the ground that the Deed of donation had already been
revoked denying the injunction.
However CA ruled in favor of UP
Issue:Whether petitioners has the right to seek
enforcement of the Deed of Donation.
RULING:
The Supreme Court ruled in the affirmative, because
there is a stipulation pour autrui
Under the Civil Code Art 1311
(READ ART. 1311 ON REQUISITES OF STIPULATION
POUR AUTRUI)
That if a contract should contain, some stipulation in
favour of a 3rd person. He may demand its fulfilment
provided that he communicated his acceptance to the
obligor before its revocation.
The contracting parties must have clearly and
deliberately conferred a favor upon a 3rd person.
Allegations are sufficient to bring the petitioners action
within 2nd paragraph of Art. 1311 on stipulation pour
autrui
1.
That the Deed of donation contains some
stipulation that Quezon city government is required to
transfer donation to the barrio residents.
2.
Its stipulation is part of conditions and
obligations imposed by UP as donor upon Quezon City
government donee.
Page 16
INTEGRATED PACKAGING CORP vs COURT OF

APPEALS
G.R. No. 115117 June 8, 2000
ISSUE: Whether or not private respondent, FilAnchor Paper Co. Inc., is liable for petitioners
breach of contract with Philacor.
(RELATIVITY OF CONTRACTS)
FACTS:
RULING:
On May 5, 1978, petitioner and private respondent, FilAnchor Paper Co., Inc, executed an order agreement
whereby private respondent bound itself to deliver to
petitioner 3,450 reams of printing paper worth
P1,040,060.00. The materials were to be paid within a
minimum of thirty days and maximum of ninety days
from delivery.
On June 7, 1978, petitioner entered into a contract with
Philippine Appliance Corporation (Philacor) to print three
volumes of "Philacor Cultural Books" for a total of
P3,000,000.00.
On July 30, 1979, private respondent delivered to
petitioner only 1,097 reams of printing paper out of the
total 3,450 reams stated in the agreement. Petitioner
alleged it wrote private respondent to immediately
deliver the balance because further delay would greatly
prejudice petitioner.
From June 5, 1980 and until July 23, 1981, private
respondent delivered again to petitioner various
quantities of printing paper amounting to P766,101.70.
However, petitioner encountered difficulties paying
private respondent said amount. Private respondent
made a formal demand upon petitioner to settle the
outstanding account. Petitioner made partial payments
totaling P97,200.00 which was applied to its back
accounts.
Meanwhile, petitioner entered into an additional printing
contract with Philacor. Unfortunately, petitioner failed to
fully comply its contract with Philacor for the printing of
books VIII, IX, X and XI. Thus, Philacor demanded
compensation from petitioner for the delay and damage
it suffered on account of petitioners failure.
On August 14, 1981, private respondent filed with the
RTC of Caloocan City a collection suit against petitioner
for the sum of P766,101.70, representing the unpaid
purchase price of printing paper bought by petitioner on
credit.
Petitioner contends that private respondent should be

held liable for petitioners breach of contract with
Philacor. This claim is manifestly devoid of merit.
Private respondent cannot be held liable under the
contracts entered into by petitioner with Philacor. Private
respondent is not a party to said agreements. It is also
not a contract pour autrui. Aforesaid contracts could not
affect third persons like private respondent because of
the basic civil law principle of relativity of contracts which
provides that contracts can only bind the parties who
entered into it, and it cannot favor or prejudice a third
person, even if he is aware of such contract and has
acted with knowledge thereof.
Indeed, the order agreement entered into by petitioner
and private respondent has not been shown as having a
direct bearing on the contracts of petitioner with Philacor.
As pointed out by private respondent and not refuted by
petitioner, the paper specified in the order agreement
between petitioner and private respondent are markedly
different from the paper involved in the contracts of
petitioner with Philacor. Furthermore, the demand made
by Philacor upon petitioner for the latter to comply with
its printing contract is dated February 15, 1984, which is
clearly made long after private respondent had filed its
complaint on August 14, 1981. This demand relates to
contracts with Philacor dated April 12, 1983 and May 13,
1983, which were entered into by petitioner after private
respondent filed the instant case.
To recapitulate, private respondent did not violate the
order agreement it had with petitioner. Likewise, private
respondent could not be held liable for petitioners
breach of contract with Philacor. It follows that there is
no basis to hold private respondent liable for damages.
Petitioner denied the allegations of the complaint. By

way of counterclaim, petitioner alleged that private
respondent was able to deliver only 1,097 reams of
printing paper out of 3,450 reams stipulated in their
agreement. Petitioner also contended that private
respondent failed to deliver the balance of the printing
paper despite demand therefore, hence, petitioner
suffered actual damages and failed to realize expected
profits.
Page 17
Page 18
A&C Minimart vs. Villareal

Facts:
Subject property is a one-storey commercial

building constructed on a parcel of land lcoated at BF
Homes, Paranaque.
Petitioner A&C leased six stalls of said property

from Joaquin Bonifacio under a lease agreement which
expired on Aug. 3, 1997.
A lease contract dated January 22, 1993 was

executed between petitioner and the wife of Bonifacio,
Teresita renewing the earlier contract for another five
years.
However, ownership of the property was under

dispute. Respondents Villareal and the spouses
Bonifacio were both claiming ownership of such
property.
Villareals claim that they obtained it based on a

sale of property upon execution pending appeal on a
separate case. The case was based on a civil action for
damages filed by respondents against SevillaVillareal.
The RTC awarded the damages against the spouses
Sevilla and issued a writ of execution pending appeal to
which the sheriff levied some of Sevillas properties
including the subject property. The sheriff sold the
property to public auction where, respondent Patricia
Villareal was the sole and highest bidder. The spouses
Sevilla filed an appeal questioning the award for
damages and execution.
The Bonifacios, on the other hand claim that

they obtained it through purchase from the spouses
Sevilla however they were not able to transfer ownership
because they discovered later that there was a notice of
levy on the execution annotated. However, the RTC
declared that such sale was null and void.
It is a well-known rule that contractual

obligations must be founded upon a contract, oral or
written, either express or implied. If there is no contract,
there is no corresponding liablity and no cause of action
may arise therefrom.
Article 1311 states that contracts take effect only

between parties, their assigns, heirs, except in case
where the rights and obligations arising from the contract
are not transmissible by their nature, or by the stipulation
or by the provision of law. The heir is not liable beyond
the value of the property he received from the decedent.
A lease contract was entered into between

petitioner and the Bonifacios. It is undisputed that no of
the respondents had taken part, directly or indirectly, in
the contract in question. Respondents also did not enter
into contract with either the lessee or the lessor, as to an
assignment of any right under the lease contract in
question.
The lease contract was bilateral between the

parties.
Respondents claim ownership over the property,

but not as successors-in-interest of spouses Bonifacio.
They purchased the property in an execution sale from
the spouses Sevilla. Thus, they cannot succeed to any
contractual rights which may accrue to spouses
Bonifacio.
Contracts produce an effect as between the

parties who execute them. A contract cannot be binding
upon and cannot be enforced by one who is not a party
to it.
Petitioner A&C, upon learning that Bonifacios

claim of onwership over said property had been denied,
it stopped paying its rentals.
Respondents filed for a case for unlawful

detainer with damages against petitioner. They claimed
that they be entitled to monthly rentals to the property.
RTC ruled that the Bonifacios did not obtain

ownership; further petitioner had the obligation to pay
rentals.
Issue: WON respondents are entitled to the benefits of
the contract of lease entered into between petitioner and
the Bonifacios.
Held:
No.
Page 19
Page 20
Llenado v Llenado
---Art. 1311 (1) Relativity Principle applies to a contract
of lease being a property right and to a right or option to
renew a lease=both rights are transmissible to the heirs,
assigns and successors-in-interest of the contracting
parties
Facts:
In 1978, Cornelio Llenado leased a parcel of land to his
nephew Orlando. Orlandos lease over the land was
subsequently extended multiple times, culminating in a
Supplementary agreement where the parties agreed that
Orlado would be given the option to renew the lease at
5/10 year intervals to comply with the requirements of
Mobil Philippines, which built a gasoline station on the
property thereafter. Orlando died in 1983 and his wife
Wenifreda took over the operations in the gas station.
duties and obligations, which said covenants conferred

and imposed on the original parties.
While it is true that the heirs of the deceased lessee may
validly enforce the right/option to renew the lease, the
existence of siad right does not automatically mean that
the lease subsisted at the time of the sale by Cornelio to
his son eduardo and Jorge. The court held in the case of
Dioquino v. IAC, "A lessors covenant or agreement to
renew gives a privilege to the tenant but is nevertheless,
is an executory contract, and until the tenant exercised
the privilege by way of an affirmative act, the lessor
CANNOT be held for the additnal term."
In the case at bar, the right to renew the lease although
transmitted to Orlandos heirs, they failed to exercise the
right when the lease expired on 1983. Thus, there was
no legal obstacle to Cornelios sale of the land to his
children to render the sale null and void.
Before Cornelio died in 1987, he sold the lot to his

children. Eduardo, one of the sons, informed Wenifreda
his intention to take over the lot. Wenifreda refused to
vacate the land, prompting Eduardo to file a case of
unlawful detainer against her. Wenifreda contended that
Cornelios conveyance to his children was in bad faith,
considering among other stipulations, that the March 31,
1978 Agreement provided that while the lease is in force,
the subject lot cannot be sold, transferred or conveyed to
any third party, and that Cornelio promised Orlando that
they would have first priority in case Cornelio decides to
sell
the
land.
Issue: whether the sale of the subject lot by Cornelio to
his sons, respondents Eduardo and Jorge, is invalid for
(1) violating the prohibitory clause in the lease
agreement between Cornelio, as lessor-owner, and
Orlando, as lessee; and (2) contravening the right of first
refusal of Orlando over the subject lot. NO to both.
Reasoning:
Under Article 1311 of the Civil Code, the heirs are bound
by the contracts entered into by their predecessors-ininterest except when the rights and obligations therein
are not transmissible by their nature, by stipulation or by
provision of law. A contract of lease is, therefore,
generally transmissible to the heirs of the lessor or
lessee. It involves a property right and, as such, the
death of a party does not excuse non-performance of the
contract. The rights and obligations pass to the heirs of
the deceased and the heir of the deceased lessor is
bound to respect the period of the lease. The same
principle applies to the option to renew the lease. As a
general rule, covenants to renew a lease are not
personal but will run with the land. Consequently, the
successors-in-interest of the lessee are entitled to the
benefits, while that of the lessor are burdened with the
Page 21
PHILIPPINE
NATIONAL
BANK, Petitioner,
vs.TERESITA TAN DEE, ANTIPOLO PROPERTIES,
INC., (now PRIME EAST PROPERTIES, INC.) and
AFP-RSBS, INC., Respondents.
Facts:
in July 1994, respondent Teresita Tan Dee (Dee) bought
5
from respondent Prime East Properties Inc. (PEPI) on
an installment basis a residential lot located in
Binangonan, Rizal, with an area of 204 square meters.
Subsequently, PEPI assigned its rights over a 213,093sq m property on August 1996 to respondent Armed
Forces of the Philippines-Retirement and Separation
Benefits System, Inc. (AFP-RSBS), which included the
property purchased by Dee.
September 10, 1996, PEPI obtained a P205,000,000.00
loan from petitioner Philippine National Bank (petitioner),
secured by a mortgage over several properties,
including Dees property
After Dees full payment of the purchase price, a deed of
sale was executed by respondents PEPI and AFP-RSBS
on July 1998 in Dees favor. Consequently, Dee sought
from the petitioner the delivery of the owners duplicate
title over the property, to no avail.
she filed with the HLURB a complaint for specific
performance to compel delivery of TCT by the petitioner,
PEPI and AFP-RSBS
HLURB ordered the cancellation/release of mortgage
and ordered PEPI and AFP-RSBS to deliver the title
The decision was affirmed by the Commissioners are the
Office of the President.
PNB Contention
1. petitioner claims that it has a valid mortgage over
Dees property, which was part of the property
mortgaged by PEPI to it to secure its loan obligation, and
that Dee and PEPI are bound by such mortgage. The
petitioner also argues that it is not privy to the
transactions between the subdivision project buyers and
PEPI, and has no obligation to perform any of their
respective undertakings under their contract.
2. petitioner also maintains that Presidential Decree
15
(P.D.) No. 957 cannot nullify the subsisting agreement
between it and PEPI, and that the petitioners rights over
16
the mortgaged properties are protected by Act 3135 . If
at all, the petitioner can be compelled to release or
cancel the mortgage only after the provisions of P.D. No.
957 on redemption of the mortgage by the
owner/developer (Section 25) are complied with.
3.The petitioner also objects to the denomination by
the CA of the provisions in the Affidavit of
17
Undertaking as stipulations pour autrui, arguing
that the release of the title was conditioned on Dees
direct payment to it
Respondent AFP-RSBS, meanwhile, contends that it

cannot be compelled to pay or settle the obligation under
the mortgage contract between PEPI and the petitioner
as it is merely an investor in the subdivision project and
19
is not privy to the mortgage.
Respondent PEPI, on the other hand, claims that the title
over the subject property is one of the properties due for
release by the petitioner as it has already been the
subject of a Memorandum of Agreement and dacion en
pago entered into between them
Issue: Whether or not the COURT OF APPEALS
ERRED
IN
ORDERING
CANCELLATION
OF
MORTGAGE/RELEASE OF TITLE IN FAVOR OF
RESPONDENT DEE DESPITE THE LACK OF
PAYMENT OR SETTLEMENT BY THE MORTGAGOR
Ruling:
petitioner is correct in arguing that it is not obliged to
perform any of the undertaking of respondent PEPI and
AFP-RSBS in its transactions with Dee because it is not
a privy thereto. The basic principle of relativity of
contracts is that contracts can only bind the parties
23
who entered into it, and cannot favor or prejudice a
third person, even if he is aware of such contract
24
and has acted with knowledge thereof. "Where
there is no privity of contract, there is likewise no
obligation or liability to speak about."
petitioner, however, is not being tasked to undertake the
obligations of PEPI and AFP-RSBS.1avvphi1 In this
case, there are two phases involved in the transactions
between respondents PEPI and Dee the first phase is
the contract to sell, which eventually became the second
phase, the absolute sale, after Dees full payment of the
purchase price
There is nothing in the decision of the HLURB, as
affirmed by the OP and the CA, which shows that the
petitioner is being ordered to assume the obligation of
any of the respondents. There is also nothing in the
HLURB decision, which validates the petitioners claim
that the mortgage has been nullified. The order of
cancellation/release of the mortgage is simply a
consequence of Dees full payment of the purchase
price, as mandated by Section 25 of P.D. No. 957, to wit:
Sec. 25. Issuance of Title. The owner or
developer shall deliver the title of the lot or unit
to the buyer upon full payment of the lot or unit.
No fee, except those required for the registration
of the deed of sale in the Registry of Deeds,
shall be collected for the issuance of such title.
In the event a mortgage over the lot or unit is
outstanding at the time of the issuance of the
title to the buyer, the owner or developer shall
redeem the mortgage or the corresponding
portion thereof within six months from such
issuance in order that the title over any fully paid
Page 22
lot or unit may be secured and delivered to the

buyer in accordance herewith.
It must be stressed that the mortgage contract
between PEPI and the petitioner is merely an
accessory contract to the principal three-year loan
takeout from the petitioner by PEPI for its expansion
project.
Note that at the time PEPI mortgaged the property to the
petitioner, the prevailing contract between respondents
PEPI and Dee was still the Contract to Sell, as Dee was
yet to fully pay the purchase price of the property. On
this point, PEPI was acting fully well within its right when
it mortgaged the property to the petitioner, for in a
contract to sell, ownership is retained by the seller and is
30
not to pass until full payment of the purchase price. In
other words, at the time of the mortgage, PEPI was still
the owner of the property
Nevertheless, despite the apparent validity of the
mortgage between the petitioner and PEPI, the former is
still bound to respect the transactions between
respondents PEPI and Dee. The petitioner was well
aware that the properties mortgaged by PEPI were also
the subject of existing contracts to sell with other
buyers. While it may be that the petitioner is protected
by Act No. 3135, as amended, it cannot claim any
superior right as against the installment buyers. This is
because the contract between the respondents is
protected by P.D. No. 957, a social justice measure
enacted primarily to protect innocent lot buyers
JASMIN
SOLER, petitioner,
vs.COURT OF APPEALS, COMMERCIAL BANK OF
MANILA, and NIDA LOPEZ
Jazmin Soler is a Fine Arts graduate of the University of
Sto. Tomas, Manila. She is a well known licensed
professional interior designer. In November 1986, her
friend Rosario Pardo asked her to talk to Nida Lopez,
who was manager of the COMBANK Ermita Branch for
they were planning to renovate the branch offices.
Even prior to November 1986, petitioner and Nida Lopez
knew each other because of Rosario Pardo, the latter's
sister.
During their meeting, petitioner was hesitant to accept
the job because of her many out of town commitments,
and also considering that Ms. Lopez was asking that the
designs be submitted by December 1986, which was
such a short notice. Ms. Lopez insisted, however,
because she really wanted petitioner to do the design for
renovation. Petitioner acceded to the request. Ms. Lopez
assured her that she would be compensated for her
services. Petitioner even told Ms. Lopez that her
professional fee was ten thousand pesos (P10,000.00),
to which Ms. Lopez acceded
meeting between petitioner and Ms. Lopez, there were

discussions as to what was to be renovated, which
included a provision for a conference room, a change in
the carpeting and wall paper, provisions for bookshelves,
a clerical area in the second floor, dressing up the
kitchen, change of the ceiling and renovation of the
tellers booth. Ms. Lopez again assured petitioner that the
bank would pay her fees.
Petitioner requested for the blueprint of the building so
that the proper design, plans and specifications could be
given to Ms. Lopez in time for the board meeting in
December 1986. So she hired an Engineer to make the
electrical layout, an architect, engineer, contacted
suppliers for the wallpaper and so on.
petitioner repeatedly demanded payment for her
services but Ms. Lopez just ignored the demands. In
February 1987, by chance petitioner and Ms. Lopez saw
each other in a concert at the Cultural Center of the
Philippines. Petitioner inquired about the payment for her
services, Ms. Lopez curtly replied that she was not
entitled to it because her designs did not conform to the
bank's policy of having a standard design, and that there
was no agreement between her and the bank
She filed for collection of professional fees and
damages
COMBANK Contention
COMBANK stated that there was no contract between
9
COMBANK and petitioner; that Ms. Lopez merely
invited petitioner to participate in a bid for the
renovation of the COMBANK Ermita Branch; that any
proposal was still subject to the approval of the
COMBANK's head office
Solers Contention
Petitioner maintained that there was a perfected contract
between her and the bank which was facilitated through
Nida Lopez. According to petitioner there was an offer
and an acceptance of the service she rendered to the
bank
RTC: favored Soler
CA: Reversed the decision based on this: "The
defendant bank never gave its imprimatur or consent to
the contract considering that the bidding or the question
of renovating the ceiling of the branch office of defendant
bank was deferred because the commercial bank is for
sale. It is under privatization
Issue: Whether or not Lopez had authority to bind the
bank in the transaction.
Whether or not respondent merely invited petitioner to
present her proposal.
Page 23
Ruling:
The discussions between petitioner and Ms. Lopez was
to the effect that she had authority to engage the
services of petitioner. During their meeting, she even
gave petitioner specifications as to what was to be
renovated in the branch premises and when petitioners
requested for the blueprints of the building, Ms. Lopez
supplied the same.
Ms. Lopez was aware that petitioner hired the services
of people to help her come up with the designs for the
December, 1986 board meeting of the bank. Ms. Lopez
even insisted that the designs be rushed in time for
presentation to the bank. With all these discussion and
transactions, it was apparent to petitioner that Ms. Lopez
indeed had authority to engage the services of petitioner
"A contract is a meeting of the minds between two
persons whereby one binds himself to give something or
to render some service to bind himself to give something
to render some service to another for consideration.
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.
19
Cause of the obligation which is established.
"A contract undergoes three stages:
"(a) preparation, conception, or generation,
which is the period of negotiation and
bargaining, ending at the moment of agreement
of the parties;
"(b) perfection or birth of the contract, which is
the moment when the parties come to agree on
the terms of the contract; and
"(c) consummation or death, which is the
fulfillment or performance of the terms agreed
20
upon in the contract."
In the case at bar, there was a perfected oral contract.
When Ms. Lopez and petitioner met in November 1986,
and discussed the details of the work, the first stage of
the contract commenced. When they agreed to the
payment of the ten thousand pesos (P10,000.00) as
professional fees of petitioner and that she should give
the designs before the December 1986 board meeting of
the bank, the second stage of the contract proceeded,
and when finally petitioner gave the designs to Ms.
Lopez, the contract was consummated.
Petitioner believed that once she submitted the designs
she would be paid her professional fees. Ms. Lopez
assured petitioner that she would be paid.
It is familiar doctrine that if a corporation knowingly
permits one of its officers, or any other agent, to act
within the scope of an apparent authority, it holds him
out to the public as possessing the power to do those
acts; and thus, the corporation will, as against anyone
who has in good faith dealt with it through such agent,
be estopped from denying the agent's authority
Page 24
ELENA
JANE
DUARTE, Petitioner,
vs.MIGUEL SAMUEL A.E. DURAN, Respondent.
Suit for collection of sum of money
According to respondent Miguel Duran, on February 14,
2002, he offered to sell a laptop computer for the sum
of P15,000.00 to petitioner thru the help of a common
7
friend, Josephine Dy (Dy). Since petitioner was
undecided, respondent left the laptop with petitioner for
8
two days. On February 16, 2002, petitioner told
respondent that she was willing to buy the laptop on
9
installment. Respondent agreed; thus, petitioner
gave P5,000.00 as initial payment and promised to
pay P3,000.00 on February 18, 2002 and P7,000.00 on
10
March 15, 2002. On February 18, 2002, petitioner gave
her second installment of P3,000.00 to Dy, who signed
11
the handwritten receipt allegedly made by petitioner as
12
proof of payment. But when Dy returned to get the
remaining balance on March 15, 2002, petitioner offered
to pay only P2,000.00 claiming that the laptop was only
13
worth P10,000.00. Due to the refusal of petitioner to
pay the remaining balance, respondent thru counsel sent
14
petitioner a demand letter dated July 29, 2002.
Petitioner, however, denied writing the receipt dated
15
February 18, 2002, and receiving the demand letter
16
dated July 29, 2002. Petitioner claimed that there was
17
no contract of sale. Petitioner said that Dy offered to
sell respondents laptop but because petitioner was not
interested in buying it, Dy asked if petitioner could
instead
lend
respondent
the
amount
18
of P5,000.00. Petitioner agreed and in turn, Dy left the
19
laptop with petitioner. On February 18, 2002, Dy came
to get the laptop but petitioner refused to give it back
20
because the loan was not yet paid. Dy then asked
petitioner to lend an additional amount of P3,000.00 to
respondent who allegedly was in dire need of
21
money. Petitioner gave the money under agreement
that the amounts she lent to respondent would be
considered as partial payments for the laptop in case
22
she decides to buy it. Sometime in the first week of
March 2002, petitioner informed respondent that she has
23
finally decided not to buy the laptop. Respondent,
however, refused to pay and insisted that petitioner
24
purchase the laptop instead.
Elena Duarte Contention (buyer)
Petitioner denies the existence of a contract of sale,
insisting that the laptop was not sold to her but was
given as a security for respondents debt. To prove that
there was no contract of sale, petitioner calls attention to
respondents failure to present a written contract of sale
Issue: Whether there was a contract of sale? Whether or

not the contract of sale must be written?
There was a contract of sale between the parties
As to whether there was a contract of sale
between the parties, we hold that there was, and
the absence of a written contract of sale does
not mean otherwise. A contract of sale is
perfected the moment the parties agree upon
the object of the sale, the price, and the terms of
60
payment. Once perfected, the parties are
bound by it whether the contract is verbal or in
61
writing because no form is required.
Contrary to the view of petitioner, the Statute of Frauds
does not apply in the present case as this provision
applies only to executory, and not to completed,
62
executed or partially executed contracts. In this case,
the contract of sale had been partially executed because
the possession of the laptop was already transferred to
petitioner and the partial payments had been made by
her. Thus, the absence of a written contract is not fatal to
respondents case.
Respondent only needed to show by a preponderance of
evidence that there was an oral contract of sale, which
he did by submitting in evidence his own affidavit, the
affidavit of his witness Dy, the receipt dated February 18,
2002 and the demand letter dated July 29, 2002.
the evidence submitted by respondent weigh more than
petitioners bare denials. Other than her denials, no
other evidence was submitted by petitioner to prove that
the laptop was not sold but was only given as security
for respondents loan. What adds doubt to her story is
the fact that from the first week of March 2002, the time
she allegedly decided not to buy the laptop, up to the
time the instant case was filed against her, she did not
exert any effort to recover from respondent the payment
of the alleged loan. Her inaction leads us to conclude
that the alleged loan was a mere afterthought.
MTCC- favored respondent. Dy and the receipt are

sufficient proof that there was a contract of sale
RTC- Reversed the decision. Receipt was a product of
machination
CA- Reversed the decision of RTC.
Page 25
ROBERN DEVELOPMENT CORPORATION and

RODOLFO
M.
BERNARDO,
JR., Petitioners,
vs.PEOPLE'S LANDLESS ASSOCIATION represented
by
FLORIDA
RAMOS
and
NARDO
LABORA, Respondent.
Facts:
Al-Amanah owned a 2000-square meter lot located in
Magtu-od, Davao City and covered by Transfer
4
Certificate of Title (TCT) No. 138914. On December 12,
1992, Al-Amanah Davao Branch, thru its officer-in5
charge Febe O. Dalig (OIC Dalig), asked some of the
6
members of PELA to desist from building their houses
on the lot and to vacate the same, unless they are
interested to buy it. The informal settlers thus
expressed their interest to buy the lot at P100.00 per
square meter, which Al-Amanah turned down for
being far below its asking price
March 18, 1993, the informal settlers together with other
members comprising PELA offered to purchase the lot
for P300,000.00, half of which shall be paid as down
payment and the remaining half to be paid within one
year. In the lower portion of the said letter, Al-Amanah
made the following annotation:
Note:
Subject offer has been acknowledged/received but
processing to take effect upon putting up of the partial
amt. of P150,000.00 on or before April 15, 1993.
By May 3, 1993, PELA had deposited P150,000.00 as
10
evidenced by four bank receipts. For the first three
receipts, the bank labelled the payments as "Partial
deposit on sale of TCT No. 138914", while it noted the
4th receipt as "Partial/Full payment on deposit on sale of
A/asset TCT No. 138914."
In the meantime, the PELA members remained in the
property and introduced further improvements.
Al-Amanah, thru Davao Branch Manager Abraham D.
Ututalum-Al Haj, wrote then PELA President Bonifacio
Cuizon, Sr. informing him of the Head Offices
disapproval of PELAs offer to buy the said 2,000square (way below the selling price)
According to Mr. Cuizon the present occupants of the lot
covered by T.C.T. No. T-138914 with an area of 2,000
square meters, had a definite agreement with the Islamic
Bank through its previous Manager or
Officer-in-Charge to buy this foreclosed property
at P300,000.00. It would be most unfair if the Bank
would now renege on its commitment and eject
these occupants.
Robern bought the property
15
Al-Amanah issued a Recommendation Sheet dated
December 27, 1993 addressed to its Board Operations
Committee, indicating therein that Robern is interested
to buy the lot for P400,000.00; that it has already

deposited 20% of the offered purchase price; that it is
buying the lot on "as is" basis; and, that it is willing to
shoulder the relocation of all informal settlers therein.
Al-Amanah stressed that it is Roberns responsibility to
eject the occupants in the subject lot, if any, as well as
the payment of the remaining amount within 15 days;
otherwise, the P80,000.00 deposit shall be forfeited
Robern expressed to Al-Amanah its uncertainty on
the status of the subject lot,
PELA bringing with them copies of official receipts
totalling P150,000.00 issued by your bank which
stated---"PARTIAL PAYMENT/DEPOSIT on sale
, please consider the 15-day period for us to pay the
amount of P320,000.00 imposed by your bank
suspended until such time that the legal problem with the
lot occupants is settled
To convince Robern that it has no existing contract with
PELA, Al-Amanah furnished it with copies of the Head
Offices rejection letter of PELAs bid, the demand letters
to vacate, and the proof of consignment of
PELAsP150,000.00 deposit to the Regional Trial Court
(RTC) of Davao City that PELA refused to
19
withdraw. Thereafter, on February 2, 1994, it informed
Robern that should the latter fail to pay the balance by
February 9, 1994, itsP80,000.00 deposit will be forfeited
and the lot shall be up for sale to other prospective
buyers
Robern paid the balance of the purchase price
A week later, PELA consigned P150,000.00 in the RTC
26
27
of Davao City. Then on April 14, 1994, it wrote AlAmanah asking the latter to withdraw the amount
consigned
PELA filed a suit for Annulment and Cancellation of Void
29
Deed of Sale against Al-Amanah, its Director Engr.
Farouk Carpizo (Engr. Carpizo), OIC Dalig, Robern, and
Roberns President and General Manager, petitioner
Rodolfo Bernardo (Bernardo) before the RTC of Davao
City. It insisted that as early as March 1993 it has a
perfected contract of sale with Al-Amanah. However, in
an apparent act of bad faith and in cahoots with Robern,
Al-Amanah proceeded with the sale of the lot despite the
prior sale to PELA.
Al-AMANAHs CONTENTION
The respondents in the annulment case filed their
33
respective Answers. Al-Amanah and Engr. Carpizo
claimed that the bank has every right to sell its lot to any
interested buyer with the best offer and thus they chose
Robern
Page 26
RTC dismissed PELAs notion. PELA has been

relying upon as proof of a perfected contract of sale
was a mere offer which was already rejected
words of a party recognizing the existence of the

57
contract of sale.
CA- there was perfected contract
There is no perfected contract of sale between PELA

and Al-Amanah for want of consent and agreement
on the price.
Petitioners stress that there was no sale between PELA

and Al-Amanah, for neither a deed nor any written
agreement was executed. They aver that Dalig was a
mere OIC of Al-Amanahs Davao Branch, who was
never vested with authority by the board of directors of
Al-Amanah to sell the lot. With regard to the notation on
the March 18, 1993 letter and the four bank receipts,
Robern contends that these are only in connection with
PELAs offer.
ISSUE: Whether there was a perfected contract of sale
between PELA and Al-Amanah, the resolution of which
will decide whether the sale of the lot to Robern should
be sustained or not.
Essential Elements of a Contract of Sale
A contract of sale is perfected at the moment there is a
meeting of minds upon the thing which is the object of
48
the contract and upon the price. Thus, for a contract of
sale to be valid, all of the following essential elements
must concur: "a) consent or meeting of the minds; b)
determinate subject matter; and c) price certain in
49
money or its equivalent."
In the case at bench, there is no controversy anent the
determinate subject matter, i.e., the 2,000-square meter
lot. This leaves us to resolve whether there was a
concurrence of the remaining elements.
As for the price, fixing it can never be left to the decision
50
of only one of the contracting parties. "But a price fixed
by one of the contracting parties, if accepted by the
51
other, gives rise to a perfected sale."
It is undisputed, and PELA even acknowledges, that OIC

Dalig made it clear that the acceptance of the offer,
notwithstanding the deposit, is subject to the approval of
the Head Office. Recognizing the corporate nature of the
bank and that the power to sell its real properties is
65
lodged in the higher authorities, she never falsely
represented to the bidders that she has authority to sell
the banks property. And regardless of PELAs insistence
that she execute a written agreement of the sale, she
refused and told PELA to wait for the decision of the
Head Office, making it clear that she has no authority to
execute any deed of sale.
Contracts undergo three stages: "a) negotiation which
begins from the time the prospective contracting parties
indicate interest in the contract and ends at the moment
of their agreement[; b) perfection or birth, x x x which
takes place when the parties agree upon all the essential
elements of the contract x x x; and c) consummation,
which occurs when the parties fulfill or perform the terms
agreed upon, culminating in the extinguishment
66
thereof."
In the case at bench, the transaction between AlAmanah and PELA remained in the negotiation stage.
The offer never materialized into a perfected sale, for no
oral or documentary evidence categorically proves that
Al-Amanah
expressed
amenability
to
the
offered P300,000.00 purchase price.
As regards consent, "when there is merely an offer by

one party without acceptance of the other, there is no
52
contract." The decision to accept a bidders proposal
53
must be communicated to the bidder. However, a
binding contract may exist between the parties whose
minds have met, although they did not affix their
54
signatures to any written document, as acceptance
55
may be expressed or implied. It "can be inferred from
the contemporaneous and subsequent acts of the
56
contracting parties." Thus, we held:
x x x The rule is that except where a formal acceptance
is so required, although the acceptance must be
affirmatively and clearly made and must be evidenced by
some acts or conduct communicated to the offeror, it
may be made either in a formal or an informal manner,
and may be shown by acts, conduct, or words of the
accepting party that clearly manifest a present intention
or determination to accept the offer to buy or sell. Thus,
acceptance may be shown by the acts, conduct, or
Page 27
SAN MIGUEL PROPERTIES vs. HUANG

(G.R. No. 137290, July 31, 2000)
Facts:
Petitioner San Miguel Properties owns two parcels of
land which were offered to Atty Dauz who was acting in
behalf of respondent spouses Huang. The subject
properties were offered for sale in cash; however, Atty.
Dauz gave a counter-offer to pay the purchase price in 8
monthly installments instead, which San Miguel refused.
So on March 29, 1994, Atty. Dauz sent another proposal
and gave P1,000,000.00 representing earnest-deposit
money, so that his clients may be given the exclusive
option to purchase the property within the 30 days from
date of the acceptance of the said proposal.
San Miguel manifested their acceptance and
negotiations commenced afterwards. However, the
parties were not able to agree on the terms of the
payment. And so on July 7, 1994, the petitioner informed
the respondents that they are returning the earnestdeposit as they failed to come into an agreement.
Issue/s:
Whether or not the acceptance of the proposal dated
March 29 merely resulted in an option contract. Yes.
WON the failure to come into an agreement as to the
mode of payment was fatal to the perfection of the
contract of sale.
Ruling:
1. With regard to the alleged payment and acceptance of
earnest money, the Court holds that respondents did not
give the P1 million as "earnest money" as provided by
Art. 1482 of the Civil Code. They presented the amount
merely as a deposit of what would eventually become
the earnest money or downpayment should a contract of
sale be made by them. The amount was thus given not
as a part of the purchase price and as proof of the
perfection of the contract of sale but only as a guarantee
that respondents would not back out of the sale. The P1
million "earnest-deposit" could not have been given as
earnest money as contemplated in Art. 1482 because, at
the time when petitioner accepted the terms of
respondents offer of March 29, 1994, their contract had
not yet been perfected.
Equally compelling as proof of the absence of a
perfected sale is the second condition that, during the
option period, the parties would negotiate the terms and
conditions of the purchase. The stages of a contract of
sale are as follows: (1) negotiation, covering the period
from the time the prospective contracting parties indicate
interest in the contract to the time the contract is
perfected; (2) perfection, which takes place upon the
concurrence of the essential elements of the sale which
are the meeting of the minds of the parties as to the
object of the contract and upon the price; and (3)
consummation, which begins when the parties perform

their respective undertakings under the contract of sale,
culminating in the extinguishment thereof.[12] In the
present case, the parties never got past the negotiation
stage.
2. In Navarro v. Sugar Producers Cooperative Marketing
Association, Inc.,[14] we laid down the rule that the
manner of payment of the purchase price is an essential
element before a valid and binding contract of sale can
exist. Although the Civil Code does not expressly state
that the minds of the parties must also meet on the
terms or manner of payment of the price, the same is
needed, otherwise there is no sale.
Notes:
An obligation is a juridical necessity to give, to do or not
to do (Art. 1156, Civil Code).
The obligation is constituted upon the concurrence of the
essential elements thereof, viz:
(a) The vinculum juris or juridical tiewhich is the efficient
cause established by the various sources of obligations
(law, contracts, quasi-contracts, delicts and quasidelicts);
(b) the object which is the prestation or conduct; required
to be observed (to give, to do or not to do); and
(c) the subject-persons who, viewed from the
demandability of the obligation, are the active (obligee)
and the passive (obligor) subjects.
Among the sources of an obligation is a contract (Art.
1157, Civil Code), which is a meeting of minds between
two persons whereby one binds himself, with respect to
the other, to give something or to render some service
(Art. 1305, Civil Code).
A contract undergoes various stages that include its
negotiation or preparation, its perfection and, finally, its
consummation.
1. Negotiation covers the period from the time the
prospective contracting parties indicate interest in the
contract to the time the contract is concluded
(perfected).
2. The perfection of the contract takes place upon the
concurrence of the essential elements thereof. A
contract which is consensual as to perfection is so
established upon a mere meeting of minds, i.e., the
concurrence of offer and acceptance, on the object and
on the cause thereof. A contract which requires, in
addition to the above, the delivery of the object of the
agreement, as in a pledge or commodatum, is commonly
referred to as a realcontract. In a solemn contract,
compliance with certain formalities prescribed by law,
such as in a donation of real property, is essential in
order to make the act valid, the prescribed form being
thereby an essential element thereof.
Page 28
3. The stage of consummation begins when the parties

perform their respective undertakings under the contract
culminating in the extinguishment thereof.
Until the contract is perfected, it cannot, as an
independent source of obligation, serve as a binding
juridical relation.
Art. 1458. By the contract of sale one of the contracting
parties obligates himself to transfer the ownership of and
to deliver a determinate thing, and the other to pay
therefor a price certain in money or its equivalent.
A contract of sale (absolute or conditional) vs. Perfected
Contract of Option:
a. Conditional sale - in a "Contract to Sell" the ownership
of the thing sold is retained until the fulfillment of a
positive suspensive condition (normally, the full payment
of the purchase price), the breach of the condition will
prevent the obligation to convey title from acquiring an
obligatory force. 2
b. Absolute sale - where the contract is devoid of any
proviso that title is reserved or the right to unilaterally
rescind is stipulated, e.g., until or unless the price is
paid. Ownership will then be transferred to the buyer
upon actual or constructive delivery (e.g., by the
execution of a public document) of the property sold.
c. Perfected contract of Option - An accepted unilateral
promise which specifies the thing to be sold and the
price to be paid, coupled with a valuable consideration
distinct and separate from the price (Art. 1479)
Observe that the option is not the contract of sale itself.
The optionee has the right, but not the obligation, to buy.
Once the option is exercised timely, i.e., the offer is
accepted before a breach of the option, a bilateral
promise to sell and to buy ensues and both parties are
then reciprocally bound to comply with their respective
undertakings.
Policitation - An imperfect promise which is merely an
offer. Public advertisements or solicitations and the like
are ordinarily construed as mere invitations to make
offers or only as proposals. These relations, until a
contract is perfected, are not considered binding
commitments. Thus, at any time prior to the perfection of
the contract, either negotiating party may stop the
negotiation. The offer, at this stage, may be withdrawn;
the withdrawal is effective immediately after its
manifestation, such as by its mailing and not necessarily
when the offeree learns of the withdrawal Where a
period is given to the offeree within which to accept the
offer, the following rules generally govern:
(1) If the period is not itself founded upon or supported
by a consideration, the offeror is still free and has the
right to withdraw the offer before its acceptance, or, if an
acceptance has been made, before the offeror's coming
to know of such fact, by communicating that withdrawal

to the offeree (see Art. 1324).
The right to withdraw, however, must not be exercised
whimsically or arbitrarily; otherwise, it could give rise to a
damage claim under Article 19 of the Civil Code which
ordains that "every person must, in the exercise of his
rights and in the performance of his duties, act with
justice, give everyone his due, and observe honesty and
good faith."
(2) If the period has a separate consideration, a contract
of "option" is deemed perfected, and it would be a
breach of that contract to withdraw the offer during the
agreed period. The option, however, is an independent
contract by itself, and it is to be distinguished from the
projected main agreement (subject matter of the option)
which is obviously yet to be concluded. If, in fact, the
optioner-offeror withdraws the offer before its
acceptance(exercise of the option) by the optioneeofferee, the latter may not sue for specific performance
on the proposed contract ("object" of the option) since it
has failed to reach its own stage of perfection. The
optioner-offeror, however, renders himself liable for
damages for breach of the option. In these cases, care
should be taken of the real nature of the consideration
given, for if, in fact, it has been intended to be part of the
consideration for the main contract with a right of
withdrawal on the part of the optionee, the main contract
could be deemed perfected; a similar instance would be
an "earnest money" in a contract of sale that can
evidence its perfection (Art. 1482, Civil Code).
Option vs. Right of First Refusal
a.) An option (1479 par. 2) or an offer (Art. 1319) would
require, among other things, a clear certainty on both the
object and the cause or consideration of the envisioned
contract. Governed by laws on contracts.
b.) In a right of first refusal, while the object might be
made determinate, the exercise of the right, however,
would be dependent not only on the grantor's eventual
intention to enter into a binding juridical relation with
another but also on terms, including the price, that
obviously are yet to be later firmed up. Governed not by
laws of contract but of other general laws and those
governing human conduct.
Page 29
TAYAG vs. LACSON

2004)
(G.R. No. 134971. March 25,
Facts:
Respondents Lacson,3 and her children were the
registered owners of subject parcels of land.
tenants could not legally grant to the petitioner the

option, much less the "exclusive right" to buy the
property. As the Latin saying goes, "NEMO DAT QUOD
NON HABET."
On March 17, 1996, a group of original farmers/tillers of

respondent Lacsons land executed in favor of the
petitioner separate Deeds of Assignment6 in which the
assignees assigned to the petitioner their respective
rights as tenants/tillers of the landholdings possessed
and tilled by them for and in consideration of P50.00 per
square meter. The petitioner in turn gave varied sums of
money to the tenants as partial payments.
However, on August 8, 1996, the defendants-tenants,
wrote the petitioner stating their collective decision to sell
all their rights and interests, as tenants/lessees, over the
landholding to the respondents. So the petitioner filed a
complaint against the defendants-tenants, as well as the
respondents Lacson, for the fixing of the period within
which to pay the agreed purchase price of P50.00 per
square meter to the defendants, as provided for in the
Deeds of Assignment.
Issue/s: WON there was a perfected contract of option
between Tayag and Lacson. NO.
Ruling:
We do not agree with the contention of the petitioner that
the deeds of assignment executed by the defendantstenants are perfected option contracts.
An option is a contract by which the owner of the
property agrees with another person that he shall have
the right to buy his property at a fixed price within a
certain time. It is a condition offered or contract by which
the owner stipulates with another that the latter shall
have the right to buy the property at a fixed price within a
certain time, or under, or in compliance with certain
terms and conditions, or which gives to the owner of the
property the right to sell or demand a sale. It imposes no
binding obligation on the person holding the option,
aside from the consideration for the offer. Until accepted,
it is not, properly speaking, treated as a contract. The
second party gets in praesenti, not lands, not an
agreement that he shall have the lands, but the right to
call for and receive lands if he elects. An option contract
is a separate and distinct contract from which the parties
may enter into upon the conjunction of the option.
In this case, the defendants-tenants-subtenants, under
the deeds of assignment, granted to the petitioner not
only an option but the exclusive right to buy the
landholding. But the grantors were merely the
defendants-tenants, and not the respondents, the
registered owners of the property. Not being the
registered owners of the property, the defendants-
Page 30
LIMSON vs. CA
(G.R. No. 135929. April 20, 2001)
Consequently, there was no perfected contract to sell

between the parties.
Facts:
Petitioner Limson alleged that respondent spouses de
Vera offered to sell to petitioner a specific parcel of land
and that on 31 July 1978 she agreed to buy it at P34.00
per square meter and gave P20, 000.00 to respondent
spouses as "earnest money;" for which, the respondent
spouses gave her a 10-day option period to purchase
the property.
On 11 August 1978 the option period expired and the

exclusive right of petitioner to buy the property of
respondent spouses ceased.
Notes:
Option - is a continuing offer or contract by which the
owner stipulates with another that the latter shall have
the right to buy the property at a fixed price within a time
certain, or under, or in compliance with, certain terms
and conditions, or which gives to the owner of the
property the right to sell or demand a sale. It is also
sometimes called an "unaccepted offer." An option is not
itself a purchase, but merely secures the privilege to
buy. It is not a sale of property but a sale of right to
purchase.
On 5 September 1978 petitioner learned that the

property was already being sold to SUNVAR Corp and
ultimately on September 15, 1978, a deed of sale
between respondent spouses and SUNVAR was
executed. Petitioner now claim that when respondent
spouses sold the property in dispute to SUNVAR, her
valid and legal right to purchase it was violated.
Issue:
At issue is the nature of the contract entered into
between petitioner Limson and respondent spouses de
Vera. And WON there was a perfected contract to sell
between her and respondent spouses.
Ruling:
A scrutiny of the facts as well as the evidence of the
parties overwhelmingly leads to the conclusion that the
agreement between the parties was a contract of option
and not a contract to sell.
Its distinguishing characteristic is that it imposes no

binding obligation on the person holding the option,
aside from the consideration for the offer. Until
acceptance, it is not, properly speaking, a contract, and
does not vest, transfer, or agree to transfer, any title to,
or any interest or right in the subject matter, but is
merely a contract by which the owner of the property
gives the optionee the right or privilege of accepting the
offer and buying the property on certain terms.
The consideration of P20,000.00 paid by petitioner was

designated as an earnest money, however a careful
examination of the words indicate that it is really an
option money.
A contract - like a contract to sell, involves the meeting

of minds between two persons whereby one binds
himself, with respect to the other, to give something or to
render some service.12Contracts, in general, are
perfected by mere consent, which is manifested by the
meeting of the offer and the acceptance upon the thing
and the cause which are to constitute the contract. The
offer must be certain and the acceptance absolute.
In the interpretation of contracts, the ascertainment of

the intention of the contracting parties is to be
discharged by looking to the words they used to project
that intention in their contracts. The Receipt readily
shows that respondent spouses and petitioner only
entered into a contract of option; a contract by which
respondent spouses agreed with petitioner that the latter
shall have the right to buy the former's property at a
fixed price of P34.00 per square meter within ten (10)
days from 31 July 1978.
"Earnest money" and "option money" are not the same

but distinguished thus; (a) earnest money is part of the
purchase price, while option money is the money given
as a distinct consideration for an option contract; (b)
earnest money given only where there is already a sale,
while option money applies to a sale not yet perfected;
and, (c) when earnest money is given, the buyer is
bound to pay the balance, while when the would-be
buyer gives option money, he is not required to buy, but
may even forfeit it depending on the terms of the option.
Also, there is nothing in the Receipt which indicates that

the P20,000.00 was part of the purchase price. And
when petitioner gave the "earnest money" the Receipt
did not reveal that she was bound to pay the balance of
the purchase price.
On or before 10 August 1978, the last day of the option
period, no affirmative or clear manifestation was made
by petitioner to accept the offer. Certainly, there was no
concurrence of private respondent spouses offer and
petitioners acceptance thereof within the option period.
Page 31
G.R. No. 155043

September 30, 2004
ARTURO
R.
ABALOS, petitioner,
vs.
DR. GALICANO S. MACATANGAY, JR., respondent.
Spouses Arturo and Esther Abalos are the registered
owners of a parcel of land with improvements located at
2
Azucena St., Makati City consisting of about 327m ,
covered by TCT No. 145316 of the Registry of Deeds of
Makati.
Armed with a SPA dated June 2, 1988, purportedly
issued by his wife, Arturo executed a Receipt and
Memorandum of Agreement (RMOA) dated October 17,
1989, in favor of respondent, binding himself to sell to
respondent the subject property and not to offer the
same to any other party within 30 days from date. Arturo
acknowledged receipt of a check from respondent in the
amount of 5,000.00 representing earnest money for the
subject property, the amount of which would be
deducted from the purchase price of 1,300,000.00.
Further, the RMOA stated that full payment would be
effected as soon as possession of the property shall
have been turned over to respondent.
Subsequently, Arturos wife, Esther, executed a Special
Power of Attorney dated October 25, 1989, appointing
her sister, Bernadette Ramos, to act for and in her behalf
relative to the transfer of the property to respondent.
Ostensibly, a marital squabble was brewing between
Arturo and Esther at the time and to protect his interest,
respondent caused the annotation of his adverse claim
on the title of the spouses to the property on November
14, 1989.
On November 16, 1989, respondent sent a letter to
Arturo and Esther informing them of his readiness and
willingness to pay the full amount of the purchase price.
The letter contained a demand upon the spouses to
comply with their obligation to turn over possession of
the property to him. On the same date, Esther, through
her attorney-in-fact, executed in favor of respondent, a
Contract to Sell the property to the extent of her conjugal
interest therein for the sum of 650,000.00 less the sum
already received by her and Arturo. Esther agreed to
surrender possession of the property to respondent
within 20 days from November 16, 1989, while the latter
promised to pay the balance of the purchase price in the
amount of 1,290,000.00 after being placed in possession
of the property. Esther also obligated herself to execute
and deliver to respondent a deed of absolute sale upon
full payment.
In a letter dated December 7, 1989, respondent informed
the spouses that he had set aside the amount of
1,290,000.00 as evidenced by Citibank Check No.
278107 as full payment of the purchase price. He
reiterated his demand upon them to comply with their
obligation to turn over possession of the property. Arturo

and Esther failed to deliver the property which prompted
respondent to cause the annotation of another adverse
claim on TCT No. 145316. On January 12, 1990,
respondent filed a complaint for specific performance
with damages against petitioners. Arturo filed his answer
to the complaint while his wife was declared in default.
RTC - dismissed the complaint for specific performance.
It ruled that the SPA ostensibly issued by Esther in favor
of Arturo was void as it was falsified. Hence, the court
concluded that the SPA could not have authorized Arturo
to sell the property to respondent. The trial court also
noted that the check issued by respondent to cover the
earnest money was dishonored due to insufficiency of
funds and while it was replaced with another check by
respondent, there is no showing that the second check
was issued as payment for the earnest money on the
property.
CA - reversed the decision of the trial court. It ruled that
the SPA in favor of Arturo, assuming that it was void,
cannot affect the transaction between Esther and
respondent. The appellate court ratiocinated that it was
by virtue of the SPA executed by Esther, in favor of her
sister, that the sale of the property to respondent was
effected. On the other hand, the appellate court
considered the RMOA executed by Arturo in favor of
respondent valid to effect the sale of Arturos conjugal
share in the property.
Petitioners contentions:
1. He asserts that the sale between him and
respondent is void for lack of consent because
the SPA purportedly executed by his wife Esther
is a forgery and therefore, he could not have
validly sold the subject property to respondent.
2. the RMOA he executed in favor of respondent
was not perfected because the check
representing
the
earnest
money
was
dishonored. He adds that there is no evidence
on record that the second check issued by
respondent was intended to replace the first
check representing payment of earnest money.
ISSUE:
Whether petitioner may be compelled to convey the
property to respondent under the terms of the RMOA
and the Contract to Sell
RULING:
Contracts, in general, require the presence of three
essential elements: (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.
Until the contract is perfected, it cannot, as an
independent source of obligation, serve as a binding
Page 32
juridical relation. In a contract of sale, the seller must

consent to transfer ownership in exchange for the price,
the subject matter must be determinate, and the price
must be certain in money or its equivalent. Being
essentially consensual, a contract of sale is perfected at
the moment there is a meeting of the minds upon the
thing which is the object of the contract and upon the
price. However, ownership of the thing sold shall not be
transferred to the vendee until actual or constructive
delivery of the property.
On the other hand, an accepted unilateral promise which
specifies the thing to be sold and the price to be paid,
when coupled with a valuable consideration distinct and
separate from the price, is what may properly be termed
a perfected contract of option. An option merely grants a
privilege to buy or sell within an agreed time and at a
determined price. It is separate and distinct from that
which the parties may enter into upon the consummation
of the option. A perfected contract of option does not
result in the perfection or consummation of the sale; only
when the option is exercised may a sale be
perfected. The option must, however, be supported by a
consideration distinct from the price.
The nullity of the RMOA as a contract of sale emanates
not only from lack of Esthers consent thereto but also
from want of consideration and absence of respondents
signature thereon. Such nullity cannot be obliterated by
Esthers subsequent confirmation of the putative
transaction as expressed in the Contract to Sell. Under
18
the law, a void contract cannot be ratified and the
action or defense for the declaration of the inexistence of
19
a contract does not prescribe. A void contract produces
no effect either against or in favor of anyoneit cannot
create, modify or extinguish the juridical relation to which
20
it refers.
True, in the Contract to Sell, Esther made reference to
the earlier RMOA executed by Arturo in favor of
respondent. However, the RMOA which Arturo signed is
different from the deed which Esther executed through
her attorney-in-fact. For one, the first is sought to be
enforced as a contract of sale while the second is
purportedly a contract to sell only. For another, the terms
and conditions as to the issuance of title and delivery of
possession are divergent.
The congruence of the wills of the spouses is essential
for the valid disposition of conjugal property. Where the
conveyance is contained in the same document which
bears the conformity of both husband and wife, there
could be no question on the validity of the transaction.
But when there are two (2) documents on which the
signatures of the spouses separately appear, textual
concordance of the documents is indispensable. Hence,
in this case where the wifes putative consent to the sale
of conjugal property appears in a separate document
which does not, however, contain the same terms and
conditions as in the first document signed by the

husband, a valid transaction could not have arisen.
Arturo and Esther appear to have been married before
the effectivity of the FC. There being no indication that
they have adopted a different property regime, their
property relations would automatically be governed by
the regime of conjugal partnership of gains.
The subject land which had been admittedly acquired
during the marriage of the spouses forms part of their
22
conjugal partnership.
Under the CC, the husband is the administrator of the
conjugal partnership. This right is clearly granted to him
23
by law. More, the husband is the sole administrator.
The wife is not entitled as of right to joint administration.
The husband, even if he is statutorily designated as
administrator of the conjugal partnership, cannot validly
alienate or encumber any real property of the conjugal
partnership without the wifes consent. Similarly, the wife
cannot dispose of any property belonging to the conjugal
partnership without the conformity of the husband. The
law is explicit that the wife cannot bind the conjugal
partnership without the husbands consent, except in
cases provided by law.
More significantly, it has been held that prior to the
liquidation of the conjugal partnership, the interest of
each spouse in the conjugal assets is inchoate, a mere
expectancy, which constitutes neither a legal nor an
equitable estate, and does not ripen into title until it
appears that there are assets in the community as a
result of the liquidation and settlement. The interest of
each spouse is limited to the net remainder or
"remanente liquido" (haber ganancial) resulting from the
liquidation of the affairs of the partnership after its
dissolution. Thus, the right of the husband or wife to onehalf of the conjugal assets does not vest until the
dissolution and liquidation of the conjugal partnership, or
after dissolution of the marriage, when it is finally
determined that, after settlement of conjugal obligations,
there are net assets left which can be divided between
the spouses or their respective heirs.
In not a few cases, we ruled that the sale by the
husband of property belonging to the conjugal
partnership without the consent of the wife when there is
no showing that the latter is incapacitated is void ab
initio because it is in contravention of the mandatory
requirements of Article 166 of the Civil Code. Since
Article 166 of the Civil Code requires the consent of the
wife before the husband may alienate or encumber any
real property of the conjugal partnership, it follows that
acts or transactions executed against this mandatory
provision are void except when the law itself authorizes
30
their validity.
Page 33
As an exception, the husband may dispose of conjugal

property without the wifes consent if such sale is
necessary to answer for conjugal liabilities mentioned in
Articles 161 and 162 of the Civil Code.
Inescapably, herein petitioners action for specific
performance must fail. Even on the supposition that the
parties only disposed of their respective shares in the
property, the sale, assuming that it exists, is still void for
as previously stated, the right of the husband or the wife
to one-half of the conjugal assets does not vest until the
liquidation of the conjugal partnership. Nemo dat qui non
habet. No one can give what he has not.
Page 34
ARTICLE 1330: DEFECTS OF THE WILL

FONTANA RESORT AND COUNTRY CLUB, INC. vs.
SPOUSES TAN, G.R. No. 154670, January 30, 2012
Sometime in March 1997, spouses Roy S. Tan
and Susana C. Tan bought from RN Development
Corporation (RNDC) two class D shares of stock in
Fontana Resort and Country Club, Inc. (FRCCI),
worth P387,300.00. It was planned that Fontana would
construct a park with first-class leisure facilities in Clark
Field, Pampanga, to be called Fontana Leisure Park.
Two years later, respondents filed before the
SEC a Complaint for refund. Respondents alleged that
they had been deceived into buying FRCCI shares
because
of
petitioners
fraudulent
misrepresentations. Construction of FLP turned out to
be still unfinished and the policies, rules, and regulations
of the country club were obscure. Respondents narrated
that they were able to book and avail themselves of free
accommodations on two instances but were refused to
upon the date requested.
Petitioners clarified that respondents were only
entitled to free accommodations at FLP for one week
annually consisting of five (5) ordinary days, one (1)
Saturday and one (1) Sunday[,] and that respondents
had already exhausted their free Saturday pass for the
year.
Petitioners filed their Answer in which they
asserted that respondents had been duly informed of the
privileges given to them as shareholders of FRCCI class
D shares of stock since these were all explicitly
provided in the promotional materials for the country
club, the Articles of Incorporation, and the By-Laws of
FRCCI. In addition, they averred that when respondents
were first accommodated at FLP, only minor or finishing
construction works were left to be done and that facilities
of the country club were already operational.
SEC and SEC en banc (upon appeal)- ruled in
favor respondents and order petitioners to pay them the
purchase price plus damages.
CA - brushed aside the finding of the SEC that
petitioners were guilty of fraudulent misrepresentation in
inducing respondents to buy FRCCI shares of stock.
Nonetheless, the Court of Appeals agreed with the SEC
that the sale of the two FRCCI class D shares of stock
by petitioners to respondents should be rescinded.
Issue:
Whether or not petitioners committed fraud or
defaulted on their promises as would justify the
annulment or rescission of their contract of sale with
respondents
Ruling:
The respondents Complaint sufficiently alleged
a cause of action for the annulment or rescission of the
contract of sale of FRCCI class D shares by petitioners
to respondents; however, respondents were unable to
establish by preponderance of evidence that they are

entitled to said annulment or rescission.
There are contradictory findings as to the
existence of fraud: while Hearing Officer Bacalla and the
SEC en banc found that there is fraud on the part of
petitioners in selling the FRCCI shares to respondents,
the Court of Appeals found none.
There is fraud when one party is induced by the
other to enter into a contract, through and solely
because of the latters insidious words or
machinations. But not all forms of fraud can vitiate
consent.
Under Article 1330, fraud refers to dolo
causante or causal fraud, in which, prior to or
simultaneous with the execution of a contract, one
party secures the consent of the other by using
deception, without which such consent would not
have been given.
Simply stated, the fraud must be the
determining cause of the contract, or must have
caused the consent to be given.
[T]he general rule is that he who alleges fraud
or mistake in a transaction must substantiate his
allegation as the presumption is that a person takes
ordinary care for his concerns and that private dealings
have been entered into fairly and regularly. One who
alleges defect or lack of valid consent to a contract by
reason of fraud or undue influence must establish by full,
clear and convincing evidence such specific acts that
vitiated a partys consent, otherwise, the latters
presumed consent to the contract prevails.
In this case, respondents have miserably failed
to prove how petitioners employed fraud to induce
respondents to buy FRCCI shares. It can only be
expected that petitioners presented the FLP and the
country club in the most positive light in order to attract
investor-members. There is no showing that in their
sales talk to respondents, petitioners actually used
insidious words or machinations, without which,
respondents would not have bought the FRCCI
shares. Respondents appear to be literate and of
above-average means, who may not be so easily
deceived into parting with a substantial amount of
money. What is apparent to us is that respondents
knowingly and willingly consented to buying FRCCI
shares, but were later on disappointed with the actual
FLP facilities and club membership benefits.
Similarly, SC found no evidence on record that
petitioners defaulted on any of their obligations that
would have called for the rescission of the sale of the
FRCCI shares to respondents.
The right to rescind a contract arises once the
other party defaults in the performance of his
obligation. Rescission of a contract will not be
Page 35
permitted for a slight or casual breach, but only such

substantial and fundamental breach as would defeat the
]
very object of the parties in making the agreement. In
the same case as fraud, the burden of establishing the
default of petitioners lies upon respondents, but
respondents once more failed to discharge the same.
Page 36
ARTICLE 1331: MISTAKE

THE ROMAN CATHOLIC CHURCH, represented by the
Archbishop of Caceres - versus REGINO PANTE, G.R.
No. 174118, April 11, 2012
The Church, represented by the Archbishop of
Caceres, owned a 32-square meter in Barangay Dinaga,
Canaman, Camarines Sur.
On 1992, the Church contracted with Regino
Pante for the sale of the lot (thru a Contract to Sell and
to Buy) on the belief that the latter was an actual
occupant of the lot.
On June 28, 1994, the Church sold in favor of the
spouses Nestor and Fidela Rubi (spouses Rubi) a 215square meter lot that included the lot previously sold to
Pante.
The spouses Rubi asserted their ownership by
erecting a concrete fence over the lot sold to Pante,
effectively blocking Pante and his familys access from
their family home to the municipal road.
Pante instituted with the RTC an action to annul
the sale between the Church and the spouses Rubi on
the land they allegedly owned.
The Church filed its answer with a counterclaim,
seeking the annulment of its contract with Pante. The
Church alleged that its consent to the contract was
obtained by fraud when Pante, in bad faith,
misrepresented that he had been an actual occupant of
the lot sold to him, when in truth, he was merely using
the 32-square meter lot as a passageway from his house
to the town proper. It contended that it was its policy to
sell its lots only to actual occupants.
RTC -ruled in favor of the Church, finding that
the Churchs consent to the sale was secured through
Pantes misrepresentation that he was an occupant of
the 32-square meter lot. RTC annulled the contract
between the Church and Pante, pursuant to Article 1390
of the Civil Code.
CA - granted Pantes appeal and reversed the
RTCs ruling. The CA characterized the contract
between Pante and the Church as a contract of sale,
since the Church made no express reservation of
ownership until full payment of the price is made
Even assuming that the contract had been a
contract to sell, the CA declared that Pante fulfilled the
condition precedent when he consigned the balance
within the three-year period allowed under the parties
agreement; upon full payment, Pante fully complied with
the terms of his contract with the Church.
Issue:
Whether or not there was sufficient ground/s to rescind
the contract between the Church and Pante
Ruling:
No, there was no misrepresentation to sufficiently
invalidate the contract.
Consent is an essential requisite of contract as it
pertains to the meeting of the offer and the acceptance
upon the thing and the cause which constitute the

contract.
Where consent, however, is given through
mistake, violence, intimidation, undue influence, or fraud,
the contract is deemed voidable. However, not every
mistake renders a contract voidable. The Civil Code
clarifies the nature of mistake that vitiates consent:
Article 1331. In order that
mistake may invalidate consent, it
should refer to the substance of the
thing which is the object of the contract,
or to those conditions which have
principally moved one or both parties to
enter into the contract.
Mistake as to the identity or
qualifications of one of the parties
will vitiate consent only when such
identity or qualifications have been
the principal cause of the contract.
A simple mistake of account
shall give rise to its correction.
[Emphasis ours.]
For mistake as to the qualification of one of the parties to
vitiate consent, two requisites must concur:
1. the mistake must be either with regard to the
identity or with regard to the qualification of one
of the contracting parties; and
2. the identity or qualification must have been the
principal consideration for the celebration of the
]
contract
In this case, there could not have been a deliberate,
willful, or fraudulent act committed by Pante that
misled the Church into giving its consent to the sale
of the subject lot in his favor. That Pante was not an
actual occupant of the lot he purchased was a fact that
the Church either ignored or waived as a
requirement. In any case, the Church was by no means
led to believe or do so by Pantes act; there had been
no vitiation of the Churchs consent to the sale of
the lot to Pante.
In the absence of any vitiation of consent, the
contract between the Church and Pante stands valid and
existing. Any delay by Pante in paying the full price
could not nullify the contract, since (as correctly
observed by the CA) it was a contract of sale.
By its terms, the contract did not provide a
stipulation that the Church retained ownership until full
payment of the price. The right to repurchase given to
the Church in case Pante fails to pay within the grace
period provided would have been unnecessary had
ownership not already passed to Pante.
Page 37
Page 38
ARTICLE 1332: ONE OF THE PARTIES IS UNABLE

TO READ
Feliciano vs. Zaldivar G.R. No. 162593
Facts:
Remigia Feliciano filed a complaint against the
spouses Zaldivar for the declaration of nullity of TCT No.
T-17993 and reconveyance of the property covered
therein. The said title is registered in the name of Aurelio
Zaldivar. Remigia alleged that she was the registered
owner of a lot, part of which is that covered by both the
above TCT and TCT No. 8502. It was originally leased to
Pio Dalman, Aurelios father-in-law. She attempted to
mortgage the lot to Ignacio Gil, but the mortgage did not
push through. She vehemently denies ever executing a
joint affidavit confirming the sale to Gil and insists that
TCT No. 8502 was never lost.
The Zaldivars, on the other hand, claimed that
Aurelio bought the property from Dalman who, in turn,
bought the same from Gil in 1951. Gil allegedly
purchased the property from Remegia, the sale of which
was evidenced by the joint affidavit of confirmation of
sale that Remegia and her uncle purportedly executed
before a notary public in 1965.
Issue:
Whether or not the fraud or mistake attended the
execution of the joint affidavit of confirmation of sale.
Ruling:
Remegia stated in the witnesss stand that she
can read Visayan, but cannot understand well idiomatic
visayan terms (laglom nga visayan). Considering her
limited educational attainment, Regemia did not
understand the full import of the joint affidavit of
confirmation of sale and, consequently, fraud or mistake
attended its execution. The spouses Zaldivar tried to
discharge this presumption by presenting Atty. Francisco
Velez who notarized the said document. Atty. Velez
testified that he "read and interpreted" the document to
the affiants and he asked them whether the contents
were correct before requiring them to affix their
signatures thereon. The bare statement of Atty. Velez
that he "read and interpreted" the document to the
affiants and that he asked them as to the correctness of
its contents does not necessarily establish that Remegia
actually comprehended or understood the import of the
joint affidavit of confirmation of sale. Nowhere is it stated
in the affidavit itself that its contents were fully explained
to Remegia in the language that she understood before
she signed the same. Thus, to the mind of the Court, the
presumption of fraud or mistake attending the execution
of the joint affidavit of confirmation of sale was not
sufficiently overcome.
Page 39
Page 40
[G.R. No. 146222] Dela Cruz vs. Dela Cruz

Paciencia dela Cruz was the owner of a parcel
[4]
of land with an area of two (2) ares and ninety
[5]
(90) centares, located at Lolomboy, Bocaue, Bulacan.
Said parcel was registered in her name under Transfer
Certificate of Title (TCT) No. T-14.585 (M). A flea
market (talipapa) with fifty or so vendors was located on
the property and Paciencia collected from them their
daily stall rentals. Paciencia had six (6) children.
On
September1980,
Paciencia
allegedly
executed a Deed of Sale whereby for and in
consideration of P21,000, she conveyed said parcel in
favor of her son, Fortunato dela Cruz.
Sometime between August 1985 to September
1988, Fortunato mortgaged the property three (3) times
to one Erlinda de Guzman for the sums
[9]
of P25,000, P50,000 andP100,000. Fortunato was
unable to pay these loans.
On January 11, 1989, Fortunato executed
[10]
a Kasulatan ng Bilihang Patuluyan in favor of Clark
and Divina Gutierrez, the children of Claudio and
Adoracion Gutierrez, to whom he earlier offered to sell
the property. That same day, the sale was registered,
leading to the cancellation of TCT No. T-34.723 (M) in
the name of Fortunato. Seven days later, a new
certificate of title, TCT No. T-101011 (M) was issued in
the name of Clark and Divina Gutierrez. Thereafter, the
Gutierrezes took possession of the property, had
thetalipapa repaired, and collected the daily stall rentals
from the vendors.
On 1989, Paciencia instituted an action for
reconveyance of property with preliminary injunction
against Fortunato and the spouses Claudio and
Adoracion Gutierrez, before the RTC .
Paciencia alleged that the sale of the property to
the Gutierrezes was null and void and fraudulently made
as Fortunato had neither right nor authority from her to
sell or convey the subject property, as he only held it in
trust for her.
In his Answer, Fortunato averred that he lawfully
acquired the subject property from Paciencia, who
absolutely conveyed the same to him, delivered to him
the owners duplicate of the title, and upon her
instructions, caused the registration of the property in his
name.
RTC - ruled dismissing the case and declaring
defendants Clark and Divina Gutierrez as the lawful
owners of the property.
On January 22, 1997, Paciencia dela Cruz died and
was substituted by her children, namely: petitioners
Erlinda dela Cruz, Priscilla de Mesa y dela Cruz,
Zenaida Lamberto y dela Cruz, Flora Driskell y dela Cruz
and Angelita dela Cruz.
Court of Appeals affirmed the trial courts decision.
ISSUE:
Whether the Deed of Absolute Sale executed by the
mother, Paciencia dela Cruz, in favor of her son
respondent Fortunato dela Cruz is simulated and must
be declared void.
Ruling:
SC affirmed the decisions of the CA and the RTC
As a rule, when the terms of a contract are clear
and unambiguous as to the intention of the contracting
parties, the literal meaning of its stipulations shall
control. It is only when the words appear to contravene
the evident intention of the parties that the latter shall
prevail over the former. The real nature of a contract
may be determined from the express terms of the
agreement and from the contemporaneous and
[16]
subsequent acts of the parties thereto. When they
have no intention to be bound at all, the purported
contract is absolutely simulated and void. Hence, the
parties may recover what they gave under the simulated
contract. If, on the other hand, the parties state a false
cause in the contract to conceal their real agreement,
the contract is relatively simulated and the parties real
agreement may be held binding between them.
In the present case, it is not disputed that Paciencia
dela Cruz executed a Deed of Sale in favor of her son,
respondent Fortunato dela Cruz. However, petitioners
insist that the said document does not reflect the true
intention and agreement of the parties. According to
petitioners, Fortunato was to merely hold the property in
trust for their mother and that ownership thereof would
remain with the mother.
Petitioners, however, failed to produce even one
credible witness who could categorically testify that such
was the intent of Paciencia and Fortunato. There is
nothing on record to support sufficiently petitioners
contention. Instead, the evidence is unclear on whether
Paciencia in her lifetime, or later the petitioners
themselves, actually asserted or attempted to assert
rights of ownership over the subject property after the
alleged sale thereof to Fortunato. The lot in dispute was
thrice mortgaged by Fortunato with nary a protest or
complaint from petitioners.
For Article 1332 to apply, it must first be
convincingly established that the illiterate or
disadvantaged party could not read or understand the
[21]
language in which the contract was written, or that the
contract was left unexplained to said party. Petitioners
failed to discharge this burden.
The Deed of Absolute Sale dated September 25,
1980 was duly acknowledged before a notary public. As
a notarized document, it has in its favor the presumption
of regularity and it carries the evidentiary weight
conferred upon it with respect to its due execution. It is
admissible in evidence without further proof of its
authenticity and is entitled to full faith and credit upon its
face
The Gutierrezes did not simply rely upon the face of
Fortunatos Certificate of Title to the property. They also
employed the services of counsel Atty. Crisanta
Abarrientos, who verified the title with the Registry of
Deeds. Thus, they took all the necessary precautions to
ascertain the true ownership of the property, even
engaging the services of legal counsel for that specific
purpose, and it was only after said counsel assured
Page 41
them that everything was in order did they finalize the

arrangements to purchase the property. Hence, we
entertain no doubt that the respondent Gutierrezes were
purchasers for value and in good faith.
Page 42
G.R. No. 174240 March 20, 2013

SPOUSES LEHNER and LUDY MARTIRES, Petitioners,
vs. MENELIA CHUA, Respondent.
Subject of the instant controversy are twenty-four
memorial lots located at the Holy Cross Memorial Park in
Barangay Bagbag, Novaliches, Quezon City. The
property, more particularly described as "Lot: 24 lots,
Block 213, Section: Plaza of Heritage-Reg.," is covered
by Transfer Certificate of Title (TCT) No. 342914.
Respondent, together with her mother, Florencia R.
Calagos, own the disputed property. Their co-ownership
is evidenced by a Deed of Sale and Certificate of
Perpetual Care, denominated as Contract No. 31760,
which was executed on June 4, 1992.
On December 18, 1995, respondent borrowed from
petitioner spouses the amount of P150,000.00. The loan
was secured by a real estate mortgage over the
abovementioned property. Respondent committed to pay
a monthly interest of 8% and an additional 10% monthly
interest in case of default.
Respondent failed to fully settle her obligation.
Subsequently, without foreclosure of the mortgage,
ownership of the subject lots were transferred in the
name of petitioners via a Deed of Transfer.
On June 23, 1997, respondent filed with the RTC of
Quezon City a Complaint against petitioners, Manila
Memorial Park Inc., the company which owns the Holy
Cross Memorial Park, and the Register of Deeds of
Quezon City, praying for the annulment of the contract of
mortgage between her and petitioners on the ground
that the interest rates imposed are unjust and exorbitant.
Respondent also sought accounting to determine her
liability under the law. She likewise prayed that the
Register of Deeds of Quezon City and Manila Memorial
Park, Inc. be directed to reconvey the disputed property
to her.
On November 20, 1998, respondent moved for the
amendment of her complaint to include the allegation
that she later discovered that ownership of the subject
lots was transferred in the name of petitioners by virtue
of a forged Deed of Transfer and Affidavit of Warranty.
Respondent prayed that the Deed of Transfer and
Affidavit of Warranty be annulled. In their Manifestation
dated January 25, 1999, petitioners did not oppose
respondent's motion. Trial ensued.
RTC rendered a decision in favor of the petitioners.
CA affirmed with modification the judgment of the
RTC. The CA ruled that respondent voluntarily entered
into a contract of loan and that the execution of the Deed
of Transfer is sufficient evidence of petitioners'
acquisition of ownership of the subject property.
MFR (Respondent) - The CA reconsidered its findings

and concluded that the Deed of Transfer which, on its
face, transfers ownership of the subject property to
petitioners, is, in fact, an equitable mortgage. The CA
held that the true intention of respondent was merely to
provide security for her loan and not to transfer
ownership of the property to petitioners.
nd
2 MFR (Petitioners) denied
ISSUE:
1. Whether reformation is allowed YES
2. Whether the Deed of Transfer is valid NO
1.Perfection of an appeal within the reglementary period
is not only mandatory but also jurisdictional. For this
reason, petitioners' failure to file this petition within the
15-day period rendered the assailed Amended CA
Decision and Resolutions final and executory, thus,
depriving this Court of jurisdiction to entertain an appeal
Therefrom. On this ground alone, the instant petition
should be dismissed.
In any case, even granting, arguendo, that the present
petition is timely filed, the Court finds no cogent reason
to depart from the findings and conclusions of the CA in
its disputed Amended Decision.
Anent the first assigned error, petitioners are correct in
pointing out that notarized documents carry evidentiary
weight conferred upon them with respect to their due
execution and enjoy the presumption of regularity which
may only be rebutted by evidence so clear, strong and
convincing as to exclude all controversy as to falsity.
However, the presumptions that attach to notarized
documents can be affirmed only so long as it is beyond
dispute that the notarization was regular. A defective
notarization will strip the document of its public character
and reduce it to a private instrument. Consequently,
when there is a defect in the notarization of a document,
the clear and convincing evidentiary standard normally
attached to a duly-notarized document is dispensed with,
and the measure to test the validity of such document is
preponderance of evidence.
In the present case, the CA has clearly pointed out the
dubious circumstances and irregularities attendant in the
alleged notarization of the subject Deed of Transfer, to
wit: (1) the Certification issued by the Clerk of Court of
the Notarial Section of the RTC of Makati City which
supposedly attested that a copy of the subject Deed of
Transfer is on file with the said court, was contradicted
by the Certification issued by the Administrative Officer
of the Notarial Section of the same office as well as by
the testimony of the court employee who prepared the
Certification issued by the Clerk of Court, to the effect
that the subject Deed of Transfer cannot, in fact, be
found in their files; (2) respondent's categorical denial
that she executed the subject Deed of Transfer; and (3)
Page 43
the subject document did not state the date of execution

and lacks the marital consent of respondent's husband.
Indeed, petitioners' heavy reliance on the Certification
issued by the notary public who supposedly notarized
the said deed, as well as the Certification issued by the
Clerk of Court of the Notarial Section of the RTC of
Makati City, is misplaced for the following reasons: first,
the persons who issued these Certifications were not
presented as witnesses and, as such, they could not be
cross-examined with respect to the truthfulness of the
contents of their Certifications; second, as mentioned
above, these Certifications were contradicted by the
Certification issued by the Administrative Officer of the
Notarial Section of the RTC of Makati City as well as by
the admission, on cross-examination, of the clerk who
prepared the Certification of the Clerk of Court, that their
office cannot, in fact, find a copy of the subject Deed of
Transfer in their files; and third, the further admission of
the said clerk that the Certification, which was issued by
the clerk of court and relied upon by petitioners, was not
based on documents existing in their files, but was
simply based on the Certification issued by the notary
public who allegedly notarized the said Deed of Transfer.
Assuming further that the notarization of the disputed
Deed of Transfer was regular, the Court, nonetheless, is
not persuaded by petitioners' argument that such Deed
is a sufficient evidence of the validity of the agreement
between petitioners and respondent.
While indeed a notarized document enjoys the
presumption of regularity, the fact that a deed is
notarized is not guarantee of the validity of its contents.
The presumption is not absolute and may be rebutted by
clear and convincing evidence to the contrary. In the
present case, the presumption cannot be made to apply,
because aside from the regularity of its notarization, the
validity of the contents and execution of the subject
Deed of Transfer was challenged in the proceedings
below where its prima facie validity was subsequently
overthrown by the questionable circumstances attendant
in its supposed execution. These circumstances include:
(1) the alleged agreement between the parties that the
ownership of the subject property be simply assigned to
petitioners instead of foreclosure of the contract of
mortgage which was earlier entered into by them; (2) the
Deed of Transfer was executed by reason of the loan
extended by petitioners to respondent, the amount of the
latter's outstanding obligation being the same as the
amount of the consideration for the assignment of
ownership over the subject property; (3) the inadequacy
of the consideration; and (4) the claim of respondent that
she had no intention of transferring ownership of the
subject property to petitioners.
fact, an equitable mortgage. An equitable mortgage has

been defined as one which, although lacking in some
formality, or form or words, or other requisites demanded
by a statute, nevertheless reveals the intention of the
parties to charge real property as security for a debt,
there being no impossibility nor anything contrary to law
in this intent.
One of the circumstances provided for under Article
1602 of the Civil Code, where a contract shall be
presumed to be an equitable mortgage, is "where it may
be fairly inferred that the real intention of the parties is
that the transaction shall secure the payment of a debt
or the performance of any other obligation." In the
instant case, it has been established that the intent of
both petitioners and respondent is that the subject
property shall serve as security for the latter's obligation
to the former. As correctly pointed out by the CA, the
circumstances surrounding the execution of the disputed
Deed of Transfer would show that the said document
was executed to circumvent the terms of the original
agreement and deprive respondent of her mortgaged
property without the requisite foreclosure.
2. In the present case, petitioners must be reminded that
one of the main issues raised by respondent in her
appeal with the CA is the validity and due execution of
the Deed of Transfer which she supposedly executed in
petitioners' favor. The Court agrees with respondent
that, under the factual circumstances obtaining in the
instant case, the determination of the validity of the
subject Deed of Transfer would necessarily entail or
involve an examination of the true nature of the said
agreement. In other words, the matter of validity of the
disputed Deed of Transfer and the question of whether
the agreement evidenced by such Deed was, in fact, an
equitable mortgage are issues which are closely related,
which can, thus, be resolved jointly by the CA.
Based on the foregoing, the Court finds no cogent

reason to depart from the findings of the CA that the
agreement between petitioners and respondent is, in
Page 44
G.R. No. 141733

February 8, 2007
SECURITY BANK CORPORATION (SBC), Petitioner,
vs. HON. COURT OF APPEALS, LIBERTY INSURANCE
CORPORATION (LIC) and PHILIPPINE INDUSTRIAL
SECURITY AGENCY CORPORATION (PISA), Respondents.
On October 23, 1991, SBC and PISA entered into a "Contract
of Security Services" (CSS) wherein PISA undertook to
secure, guard, and protect the personnel and property of SBC
through the deployment of qualified and properly equipped
guards in SBCs premises and branches. Paragraph 9 of the
CSS provides:
PISA shall be liable for any loss, damage or injury suffered by
SBC, its officers, employees, clients, guests, visitors and
other persons allowed entry into [SBCs] premises where such
loss, damage or injury is due to the negligence or willful act
of the guards or representatives of PISA. If such loss, damage
or injury is caused by a party other than the guards or
representatives of PISA, PISA shall be jointly and severally
liable with said party if PISA failed to exercise due [diligence]
in preventing such loss, damage or injury.
Paragraph 12 of the CSS also provides:
12. SBC obliges itself to inform PISA in writing through [the]
Guard-in-Charge assigned to the former, the existence of any
loss or damage to [SBCs] properties within Forty-Eight (48)
hours after its discovery by SBC; otherwise, SBC shall be
considered to have waived its right to proceed against PISA
by reason of such loss or damage. Such written notice is not
required if PISA took part in the investigation of the loss or
damage or in case the loss or damage is caused by [PISAs]
guard/s or representative/s, in which case SBC may assert
the claim for reimbursement at any time. x x x (Emphasis
added)
On March 12, 1992, the Taytay Branch Office of SBC was
robbed PHP12,927,628.01. Among the suspects in the
robbery were two regular security guards of PISA.
At the time, SBC Taytay Branch was covered by a "Money,
Securities and Payroll Robbery Policy" with LIC, wherein the
latter endeavored to indemnify the former against "loss of
money, payroll and securities that may result from robbery or
any attempt thereof within the premises of SBCs Taytay
Branch
Office,
up
to
the
maximum
amount
of
PHP9,900,000.00." The insurance policy provided, however,
that LIC would not be liable if the loss was caused by any
dishonest, fraudulent or criminal act of SBC officers,
employees or by its authorized representative.
On June 23, 1992, SBC and PISA entered into a Post-Robbery
Agreement (PRA) whereby PISA paid PHP3,027,728.01, which
was the difference between the total amount lost and the
maximum amount insured. PISA made the payment in the
interest of maintaining good relations, without necessarily
admitting its liability for the loss suffered by SBC by reason of
the Taytay robbery.
Paragraph 5 of the PRA specifically states that PISAs
payment was subject to express terms and conditions, one of
which was the following:
(e) The parties hereto further agree that this agreement
and/or payment of the whole amount of P3,027,728.01, shall
not affect or prejudice, directly or indirectly, whatever cause
of action SBC may have against PISA and whatever claim or
defense the latter may have against SBC, if the maximum
recoverable proceeds of the insurance covering the loss
suffered by SBC could not be recovered from the
insurer. Further, it is agreed that should Security Guards
Wilson Taca and Ernesto Mariano be absolved from the charge
of robbery in band and/or are found by the proper court not

to have been involved at all in the alleged conspiracy, and
that it is duly established through legal action before the
competent court that their failure to prevent the robbery was
not due to their, or their PISA co-guards negligence and/or
willful act, whatever installments may have been paid by PISA
under this Agreement shall be reimbursed with legal interest
to be computed from the time of actual payment, the same to
be amortized in eighteen (18) equally monthly installments,
with the interest thereto being based on the diminishing
balance. (Emphasis added)
SBC filed a claim with LIC based on its existing insurance
policy. LIC denied the claim for indemnification on August 5,
1992, on the ground that the loss suffered by SBC fell under
the general exceptions to the policy, in view of the alleged
involvement of PISAs two security guards.
In its letter dated August 28, 1992, SBC informed PISA of the
denial of the formers insurance claim with LIC and thereafter
sought indemnification of the unrecovered amount of
PHP9,900,000.00. PISA denied the claim in a letter written by
its counsel, dated September 17, 1992, to wit:
We have advised our client that your letter of demand
appears to be premature, in light of the following
circumstances:
(a) precisely under par. 5(e) of the [PRA], upon which your
demand letter is based, it is too early in the day to impute to
our client any responsibility for the loss suffered by the bank.
(b) The mere rejection by the insurer of the Banks claim does
not really seal the fate of said claim, for the Bank can very
ably show that the insurer erred in rejecting the claim.
(c) In any case, the question of criminal involvement of
PISAs guards has not been resolved as yet by a competent
court as called for by par. 5(e) of the [PRA], let alone with
any degree of finality.
On November 16, 1992, SBC filed a complaint for a sum of
money against LIC based on the "Money, Securities and
Payroll Robbery Policy," and against PISA as an alternative
defendant based on the CSS. SBC prayed that it be
indemnified by either one of the defendants for
PHP9,900,000.00 plus 15% as attorneys fees and cost of
suit.
Instead of filing an answer, PISA filed a motion to dismiss, on
the ground that the complaint failed to state a cause of action
and/or the supposed cause of action was premature. PISA,
noting that it was being sued by SBC under an alternative
cause of action, invoked paragraph 5(e) of the PRA and
claimed that SBCs right of action against PISA was subject to
at least two suspensive conditions. First, SBC could not
recover the PHP9.9-million from the insurer, defendant LIC;
and second, the two security guards facing criminal
prosecution for robbery in band must first be convicted and
found to have been involved in the robbery or otherwise
found by a competent court to have been negligent.
According to PISA, SBCs complaint made no averment that
(a) there had been a final judgment rejecting SBCs claim
against the insurer; or (b) that the two PISA guards had been
convicted of the charge of robbery in band, or had been found
by a competent court to have been involved in the alleged
conspiracy or to have been negligent in connection with the
robbery. Hence, PISA concluded that SBCs complaint against
it was premature and should be dismissed.
SBC opposed PISAs motion to dismiss, arguing that the
latters interpretation of the PRA was erroneous. According to
SBC, the CSS was expressly made an integral part of the PRA,
Page 45
so their provisions "should be used hand in hand" in

determining the respective rights and obligations of the
parties. Thus, the PRA "does not, to the exclusion of [the
CSS], control or govern the determination of the right or
accrual of the right" of SBC to sue PISA. Invoking paragraph
12 of the CSS, SBC asserted that it could pursue its claim for
reimbursement against PISA at any time, without regard to
the fulfillment or non-fulfillment of the supposed suspensive
conditions.
SBC also denied that the PRA had suspensive conditions. It
claimed that the interim non-recovery of the insured amount
may only be an occasion for SBC to suspend the collection of
PISAs liability, but does not operate to prevent SBC from
pursuing its claim against PISA anytime. SBC pointed out that
the insurance contract was not intended for PISAs benefit, as
the latter was not privy to the contract and hence, could not
avail itself of the benefits thereby given to SBC. As for the
second alleged suspensive condition, SBC disagreed that the
conviction or acquittal of the guards (from the robbery
charge) would preclude SBC from recovering against PISA, as
the former could still prove the other security guards
negligence, for which PISA may be made liable. SBC then
stressed that the main issue in the criminal case was the guilt
of the accused guards, whereas the issue in its civil complaint
pertains to the negligence of the same, or that of the other
guards of PISA, and PISAs liability therefor. SBC thus posits
that it was not necessary for it to make averments as to the
fulfillment of these two alleged suspensive conditions.
RTC - granted PISAs motion, dismissed the case pro tanto as
against PISA and denied SBCs MFR. The trial court sustained
PISAs interpretation of the PRA, i.e., that the latters liability
to SBC for the losses incurred from the March 12, 1992
robbery was dependent upon the occurrence of two events:
(1) SBCs claim for indemnity against LIC is resolved by final
judgment against the bank; and (2) the two security guards
of PISA facing criminal charges for robbery are found guilty,
or declared to have been negligent in the performance of their
guard duties. Since SBCs complaint made no averment as to
the fulfillment of these suspensive conditions, the RTC held
that the suit by SBC against PISA was premature.
CA - affirmed the dismissal.
ISSUE: Whether:
(1) A suspensive condition exists in paragraph 5 of the PRA
bars SBC from impleading PISA as an alternative defendant in
civil case No. 92-337 until after the final adjudication of the
suit instituted by SBC against LIC for payment of indemnity
RULING:
NO. At the outset, it should be noted that at the heart of this
controversy is the proper interpretation of paragraph 5(e) of
the PRA.
Prior to the robbery, the right of SBC to claim indemnity from
PISA for the damage done by the willful or negligent acts of
the formers guards could be asserted at any time, under
paragraphs 9 and 12 of the CSS. But after the robbery and
the execution of the PRA, the question now raised is whether
SBCs right of action against PISA accrues only upon the nonrecovery of indemnity from LIC; and if so, whether the nonrecovery should be the result of a final adjudication by a
court.
It is the thrust of PISAs arguments that while the CSS
governs generally the question of PISAs liability to SBC (for
the loss, damage or injury that is due to the negligence or
willful act of PISAs guards or representatives), SBCs
complaint deals with a specific situation arising from a

distinct, particular event of robbery, for which PISA and SBC
have executed a new special "Agreement" (the PRA) to
govern their rights and obligations. Invoking the maxim
generalia specialibus non derogant (general provisions do not
derogate special or specific ones), PISA asserts that the PRA
precisely governs the question of whether SBCs right to sue
PISA for an alleged liability arising from robbery has accrued
and become enforceable. Thus, it is alleged that SBCs right
to sue PISA is no longer unrestricted, as the clear import of
paragraph 5(e) of the PRA is that recovery of the insurance
proceeds would affect or prejudice SBCs claim against PISA.
PISA argues, therefore, that it is only upon the failure of SBC
to recover from the insurance proceeds, by final judgment,
that the latter would have recourse against PISA.
SBC, on the other hand, argues that the legal effect of a
contract (the PRA) is not to be determined alone by any
particular provision taken separately and independently from
other provisions thereof. The contract must be taken as a
whole, inclusive of all annexes that have been made an
integral part. SBC argues that there was no intention to make
the PRA a separate and independent agreement that would
take precedence over other agreements between the parties
because of the following reasons:
(a) paragraph 1 of the PRA explicitly states that "the
respective rights and obligations of the parties x x x with
respect to the security services being performed by PISA is
embodied in x x x the Contract of Security Services;"
(b) the contract of security services was explicitly attached
and made an integral part of the PRA; and
(c) it is in paragraph 9 of the CSS that PISAs liability is
determined for the loss, damage or injury due to the
negligence or willful act of the guards or representative of
PISA, or when such loss, damage or injury is caused by
another party if PISA failed to exercise due diligence in
preventing such loss, damage or injury.
SBC, therefore, denies that paragraph 5(e) made the nonrecovery from LIC a condition precedent before SBC could file
a case against PISA.
SBC also asserts that even if it could be argued that the PRA
governs the liability of PISA as to the robbery, this liability
would only be for the amount of PHP3,027,728.01 which the
latter has paid, and not the PHP9,900,000.00, which is the
balance of the loss suffered by SBC from the robbery. This
balance, SBC said it could pursue against PISA at any time,
pursuant to the CSS.
SBC also objects to the interpretation of paragraph 5(e) that
there must be a finality of denial by LIC before SBC can
pursue its claim against PISA. SBC argues that this paragraph
only provides the availability of recourse against PISA in the
event of non-recovery from LIC, and is not a suspensive
condition.
Finally, SBC claims that nowhere in the PRA is the liability of
PISA made dependent on and subsidiary to LIC, and points
out that PISA and LIC have no privity of contract between
them. According to SBC, the sole reason for impleading PISA
in the civil suit was pursuant to Rule 3 of the Rules of Court
on alternative defendants. SBC thus stresses that inasmuch
as the liabilities of LIC and PISA are primary under their
respective contracts, and both have denied the claim of SBC,
the latter has properly impleaded LIC and PISA in order to be
afforded complete relief in one instance.
To start with, we agree with the Court of Appeals that SBCs
right of action against PISA was modified by the PRA, insofar
as the PISAs liability for the Taytay robbery is concerned,
Page 46
particularly through paragraph 5(e). The Court of Appeals

stated:
While it cannot be gainsaid that the terms and conditions in
the CSS were incorporated to the PRA (sic) as integral parts
thereof, nevertheless, We conform to the finding of the court
of origin that the 2nd contract (PRA) precisely and particularly
dealt with the mode of resolving PISAs liability resulting, if
any, from [the] March 12, 1992 robbery. (Order dated July
12, 1993, p.1; Records, p.113). It distinctively provides a
clear cut manner by which the right of action against PISA
may be exercised by SBC pertaining to a specific robbery
incidenta matter visibly non-existent in the CSS. Indeed,
this special provision controls and prevails over the general
terms and conditions extant on the CSS. (Yatco v. El Hogar
Filipino, 67 Phil. 610) When a general and a particular
provision are inconsistent, the latter is paramount to the
former. Ergo, a particular intent, as in this case reflected in
letter e, paragraph 5 of the PRA will control a general intent
embodied in paragraph 9 of the Contract of Security Services.
(Section 12, Rule 130, Revised Rules of Court) Thus, the PRA
is paramount to and prevails over the terms and stipulations
in the first contract (CSS) on matters relevant and material to
PISAs liability relating to the robbery.
Indeed, the clear import of paragraph 5(e) of the PRA is that
recovery of the insurance proceeds would affect or prejudice
SBCs claim against PISA. If LIC had granted SBCs claim for
indemnity, then SBC could no longer claim the same amount
from PISA. As a corollary, it is only upon LICs denial of SBCs
claim that SBCs right of action against PISA could accrue. To
rule otherwise would be to countenance SBCs double
recovery from its loss and lead to its unjust enrichment.
The more important question is whether the written letter of
LIC, rejecting SBCs claim for indemnity, satisfied this
condition.
PISA claims that the condition "could not be recovered from
the insurer" requires a final judgment against SBCs claim for
indemnity against LIC, because only then would the nonrecovery be "a final, immutable fact." Since SBC has only just
filed a case against LIC, and recovery is still possible, the
action against PISA is allegedly premature as the fact of nonrecovery is not yet in esse. That SBC may be able to prove
the negligence of the other security guards of PISA in the
event of the acquittal of the two accused security guards is of
no moment; PISA posits that the condition requires that
recovery from the insurer be impossible, i.e., upon a final
adjudication by a court, and not merely a denial by LIC of the
claim. Only in such event may suit be brought and proof of
the other guards negligence adduced, otherwise, paragraph
5(e) of the PRA would be rendered nugatory.
We hold that reading the clause as requiring a final judgment
is a strained interpretation and contrary to settled rules of
interpretation of contracts. Paragraph 5(e) only requires that
the proceeds "could not be recovered from the insurer," and
does not state that it should be so declared by a court, or
even with finality. In determining the signification of terms,
words are presumed to have been used in their primary and
general acceptance, and there was no evidence presented to
show that the words used signified a judicial adjudication.
Indeed, if the parties had intended the non-recovery to be
through a judicial and final adjudication, they should have
stated so. In its primary and general meaning, paragraph
5(e) would cover LICs extrajudicial denial of SBCs claim.
In sustaining PISA, the Court of Appeals relied on the
argument that paragraph 5(e) of the PRA was intended to
benefit PISA. The appellate court held that the phrase "could
not be recovered from the insurer" gives rise to doubt as to

the intention of the parties, as it is capable of two
interpretations: either (1) the insurer rejects the written
demand for indemnification by the insured; or (2) a court
adjudges that the insurer is not liable under the policy. The
Court of Appeals then interpreted the antecedent
circumstances prior to the institution of Civil Case No. 923337 as manifesting SBCs agreement to suspend the filing of
the suit against PISA until after the case against LIC has been
decisively terminated.
We have gone over the records and are unable to agree with
the Court of Appeals findings on this matter. Even if we are
to agree with the Court of Appeals that paragraph 5(e) is
susceptible of two interpretations, the stipulations in the PRA
and the parties acts contemporaneous with and subsequent
to the execution of the PRA belie any intent of SBC to delay
its suit against PISA until a judicial declaration of nonrecovery against LIC.
It should be noted that the PRA was entered into as a result
of the robbery, in which two of PISAs security guards were
implicated. The PRA expressly stated that the agreement was
entered into with respect to certain facts, among which were
that (a) PISA was providing security guards for SBC pursuant
to the CSS, the said contract being attached to the PRA and
forming an integral part thereof; and (b) pursuant to
paragraph nine (9) of the CSS, PISA "shall be liable for any
loss, damage or injury suffered by SBC, its officers,
employees, clients, guests, visitors and other persons allowed
entry into [SBCs] premises where such loss, damage or
injury is due to the negligence or willful act of the guards or
representatives of PISA." Moreover, "if such loss, damage or
injury is caused by a party other than the guards or
representatives of PISA, PISA shall be jointly and severally
liable with said party if PISA failed to exercise due diligence in
preventing such loss, damage or injury."
The express inclusion of these provisionsparticularly those
relating to the liability of PISA for the willful or negligent acts
of its guards, or its failure to exercise diligence, and the right
of SBC to hold PISA liable speaks of SBCs diligence in
ensuring that notwithstanding the PRA and the partial
payment by PISA, SBCs right of action against PISA for its
liabilities under the CSS is preserved. SBC may have agreed
to delay the suit against PISA until after the formers claim for
indemnity against LIC has been decided, but it is far-fetched
to believe that SBC agreed to hold such right of action in
abeyance until after a legal claim against LIC had been
adjudicated. This conclusion is further bolstered by the
following material events:
1. The Taytay robbery was committed on March 12, 1992.
2. SBC made a written demand on April 10, 1992 against
PISA for the losses sustained by SBC from the robbery.
3. SBC and PISA executed the PRA on June 23,
1992.1awphi1.net
4. LIC rejected SBCs claim for indemnity under the insurance
on August 5, 1992.
5. SBC protested the LIC rejection in a letter dated August
28, 1992.
6. On the same date, August 28, 1992, SBC informed PISA of
the denial by LIC of SBCs insurance claim, and demanded
from PISA indemnification based on paragraph 5(e) of the
PRA.
7. On September 17, 1992, PISA denied the letter of demand
of SBC.
8. On November 16, 1992, SBC sued LIC and PISA.
From the above events, it seems clear that SBCs suit against
LIC was not a mere afterthought after LIC had rejected its
Page 47
claim. Rather, SBC exercised its right of action against PISA

pursuant to paragraph 5(e) of the PRA. This interpretation is
consistent with settled canons of contract interpretation, has
the import that would make SBCs right of action effectual,
and would yield the greatest reciprocity of interests. Indeed,
we agree with SBC that PISAs interpretation of the clause
would lead to an effective waiver of SBCs right of action,
because to await the judicial determination of the LIC suit
may lead to the prescription of SBCs right of action against
PISA.
If some stipulations of any contract should admit of several
meanings, it shall be understood as bearing that import which
is most adequate to render it effectual. The various
stipulations of a contract shall be interpreted together,
attributing to the doubtful ones that sense which may result
from all of them taken jointly. When it is impossible to settle
doubts by the rules established in the preceding articles, and
the doubts refer to incidental circumstances of an onerous
contract, the doubt shall be settled in favor of the greatest
reciprocity of interests.
1370 1379 INTERPRETATION OF CONTRACTS

REDONDO VS. JIMENEZ OCTOBER 2007
Adoracion Redondo, with her siblings, were the registered
co-owners of a 282 square-meter residential lot situated
in Mabolo, Bacoor, Cavite.
Adoracions interest in the lot consisting of 70 square
meters, appears in the title. This had been sold and
conveyed
to
Angelina
Jimenez,
the
widow
of Efren Redondo.
The sale was evidenced by a notarized Deed of Absolute
Sale of a Portion of Land dated February 17, 1981, showing
a consideration of P3,000
On November 27, 1992, Adoracion filed with the RTC a
Complaintfor annulment of sale and recovery of ownership
with damages. She contends that the alleged sale was in
fact an equitable mortgage since (1) the consideration was
grossly inadequate; (2) she paid the realty taxes on the
property; (3) she remained in possession of the property;
and (4) she was in financial distress at the time of the
transaction. She cites her low educational attainment,
inability to speak English, advanced age, and sickness, as
reasons for her weakness of mind.
Respondent counters that Adoracion failed to adduce
convincing evidence to rebut the presumption of regularity
of the notarization of the deed of sale. Adoracion failed to
prove by competent evidence her alleged weakness of
mind. She also maintains she was the one who had been
paying the realty taxes on the property.
The trial court dismissed the complaint. The Court of
Appeals affirmed the courts decision.
Issues:
1. Is the transaction between Adoracion and Angelina
an equitable mortgage or a valid sale? The
contract entered into by Adoracion and Angelina in
2.
1981 was indeed a sale, not an equitable

mortgage.
Is the said sale nevertheless voidable on account
of alleged fraud? The action to annul had already
prescribed
Ruling:
As to the first issue, Article 1602 of the Civil Code states:
ART. 1602. The contract shall be presumed to be an
equitable mortgage, in any of the following cases:
(1) When the price of a sale with right to repurchase
is unusually inadequate;
(2) When the vendor remains in possession as lessee
or otherwise;
(3) When upon or after the expiration of the right to
repurchase another instrument extending the period
of redemption or granting a new period is executed;
(4) When the purchaser retains for himself a part of
the purchase price;
(5) When the vendor binds himself to pay the taxes
on the thing sold;
(6) In any other case where it may be fairly inferred
that the real intention of the parties is that the
transaction shall secure the payment of a debt or the
performance of any other obligation.
In this case, none of the instances enumerated above
attended the assailed transaction between Adoracion and
Angelina.
Adoracions claim that the consideration of P3,000 for the
absolute sale of a 70-square meter residential lot was
grossly inadequate is untenable. Records show that the
market value in 1981 of the entire property, consisting of
282 square meters, was only P22,560. The sale should be
viewed in light of Adoracions own admission that she was
in dire financial straits at the time of the transaction.
Adoracion also claims that she paid the real estate taxes on
the property. It is true that payment of realty taxes is a
usual burden attached to ownership of real property
However, the Tax Receipts on record clearly indicate that it
was Angelina who had been paying the realty taxes on the
property from the time of the sale until the filing
by Adoracion of the Complaint for its annulment.
At the time of the controversy, Adoracion was already
advanced in age and ailing, with no husband or children to
look after her. Angelina, on the other hand, already had a
comfortable place to live in and was faring better
than Adoracion.
At the time of the sale, Angelina had just received a hefty
sum of money following the death of her husband. A subtle
interplay of complex family issues(being sister-in-laws)
explains why Angelina opted not to assert her superior right
to possession of the said property. Such mere tolerated
possession is not enough to prove that the transaction
between the parties was an equitable mortgage.
As to the second issue, Article 1390 of the Civil Code
provides:
Page 48
ART. 1390. The following contracts are voidable or

annullable, even though there may have been no
damage to the contracting parties:
xxxx
(2) Those where the consent is vitiated by mistake,
violence, intimidation, undue influence or fraud.
These contracts are binding, unless they are
annulled by a proper action in court.
Based on the foregoing, when the consent of one of the
contracting parties is vitiated by fraud, the contract
is voidable. However,
even
granting
that Adoracions consent to the sale was indeed obtained
through fraud, the action to annul the contract is subject to
a prescriptive period of four years from the time of the
discovery of the fraud. The time of discovery is the date
when the deed of sale was registered with the Register of
Deeds because registration constitutes constructive notice
to the world.
extinguished since Mabunay made 31.39% progress,

beyond the 20% (8.4 million) ceiling of their liability. CIAC
favored petitioner; CA agreed with CIAC that pursuant to
Article 1377 of the Civil Code, the Construction Agreement
must be construed in favor of petitioner as Mabunay and
UTASSCO caused the obscurity, but ruled that there was
no delay on the part of Mabunay. Hence, the termination of
the contract by Petitioner was premature and the filing of
the Complaint against him was baseless, malicious and in
bad faith.
On February 2, 2010, CIAC rendered its Decision and
made Awards in favor of Petitioner. CIAC ruled that
Mabunay had incurred delay which entitled Petitioner to the
stipulated liquidated damages and unrecouped down
payment. Dissatisfied, Respondent filed in the CA a Petition
for Review under Rule 43 of the 1997 Rules of Civil
Procedure, as amended, which reversed the CIACs ruling.
Issues:
In the instant case, records show that the deed of sale was
registered on July 5, 1988. Hence, Adoracions action to
annul the sale on the ground of fraud prescribed on July 5,
1992.
1.
2.
Is Mabunay (Seven Shades of Blue) in delay?

Assuming that there is delay, can UTASSCO still
be held liable for the non-fulfilliment of Mabunays
(contractor) full obligation?
J Plus Asia Development Corporation v. Utility

Assurance Corporation 700 SCRA 134 June 26, 2013
Ruling: Petition GRANTED; CAs decision REVERESED

AND SET ASIDE; CIACs decision REINSTATED.
Facts:
FIRST ISSUE: There is delay. CAs interpretation is

inconsistent with the Construction Agreement. Pursuant to
Article 1374 xxx various stipulations of a contract shall be
interpreted together. The work schedule approved by
petitioner was intended not only to serve as its basis for the
payment of monthly progress billings, but also for
evaluation of the progress of work by the contractor. This is
in line with Article 13.01 (g) (iii) of the Construction
Agreement. This is likewise supported by records of several
notices and demand letters sent by petitioner to Mabunay
signifying delay and non-compliance with the monthly
schedule. Delay is based on failure to comply with
monthly schedule, not the failure of fully complying the
obligation - to construct the 72-room condotel - as
stated in the construction agreement.
On December 2007, J Plus Asia Development Corporation

entered into a Construction Agreement with Seven Shades
of Blue Trading and Services, represented by Mr. Martin
Mabunay. The latter was bound to construct a 72-room
condotel for 42 million pesos, within 365 days starting on
the first calendar day after the receipt of 20% (8.4 million
pesos) downpayment. Said 20% downpayment was
secured by a performance bond through respondent United
Assurance Corporation (UTASSCO). The payment of
balance shall be based on the actual work finished within
15 days from receipt of monthly payment billings. Pursuant
to the agreed work schedule, December 2008 is the date of
completion.
Respondent Mabunay failed to keep with the work
schedule, despite notices by petitioner. According to the
joint evaluation, as of November 14, 2008, Mabunay only
made 31.39% completion of said condotel. On November
19, 2008, Petitioner terminated the contract and
sent Demand Letters to Mabunay and Respondent
surety. As its demands went unheeded, Petitioner filed
a Request for Arbitrationbefore the Construction Industry
Arbitration Commission (CIAC).
Petitioner subsequently terminated the contract, and sought
before the Construction Industry Arbitration Commission
(CIAC) for payment of damages.
Mabunay argued that the delay was due to the retrofitting
and other revision works ordered by petitioner, and that the
petition is premature as they still have until April 30, 2009 to
finish. UTASSCO argued that their obligation as surety is
SECOND ISSUE: UTASSCO is still liable to the entire

obligation. The performance bond is to guarantee the full
and faithful compliance of Mabunays obligation under the
Construction
Agreement;
nowhere
in
law
or
jurisprudence does it state that the obligation or
undertaking by a surety may be apportioned. The rule is
that if the language of the bond is ambiguous or uncertain
[as in this case], it will be construed most strongly against a
compensated surety and in favor of the obligees or
beneficiaries under the bond, in this case petitioner as the
project owner, for whose benefit it was ostensibly executed.
A performance bond guarantees that the contractor will
perform the contract, and usually provides that if the
contractor defaults and fails to complete the contract, the
surety can itself complete the contract or pay damages up
to the limit of the bond. Yes, UTASSCO is liable only to
the extent of 20% or 8.4 million pesos, but it is not yet
Page 49
extinguished as
Mabunay which
Mabunay failed
apportion, as to
applied.
it pertains to the entire obligation of

is to construct the building which
to do. UTASSCO cannot select, or
where and how its obligation will be
Page 50

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WILLIAM

Facts: In 1989, William Golangco Construction

Article 1306. The contracting parties may establish such

Buniel_Donguila_Encabo_Lim (BDEL 1Estrellado)

SPOUSES FLORENTINO T. MALLARI and AUREA V.

Buniel_Donguila_Encabo_Lim (BDEL 1Estrellado)

(3) they realized that there were onerous terms and

Based on the above jurisprudence, the Court finds that

Regarding the penalty charge, the Supreme court cited

Petitioner: interest rate of 23% p.a. imposed by

In this case, the interest rate agreed upon by the parties

Buniel_Donguila_Encabo_Lim (BDEL 1Estrellado)

HEIRS OF MANUEL UY EK LIONG, represented by

Buniel_Donguila_Encabo_Lim (BDEL 1Estrellado)

On 6 October 1993, petitioners commenced the instant

object of the litigation in which they intervene by virtue of

that courts cannot supply material stipulations or read

Viewed in the light of the autonomous nature of

Buniel_Donguila_Encabo_Lim (BDEL 1Estrellado)

PHILIPPINE NATIONAL BANK vs. COURT OF

April 7, 1982- private respondents, as owners of

The credit agreement provided that:

The promissory note, in turn, authorized PNB to

February 17, 183- private respondents were

August 1, 1984- petitioner sent a letter to

Thereafter, private respondents exerted efforts

December 15, 1987- private respondents filed a

The trial court dismissed the case. CA reversed

Buniel_Donguila_Encabo_Lim (BDEL 1Estrellado)

Issue: Whether or not the increase in interest rates

a veritable trap for the weaker party whom the courts of

Buniel_Donguila_Encabo_Lim (BDEL 1Estrellado)

thereafter bound by the new lease agreement. Their

10 years after the said contract of lease, the Tanqueco

Buniel_Donguila_Encabo_Lim (BDEL 1Estrellado)

MANILA INTERNATIONAL AIRPORT VS VELAYO

Buniel_Donguila_Encabo_Lim (BDEL 1Estrellado)

More than 60 days prior to the expiration of the

In Letters all dated March 10, 1992, Velayo informed

In its Answer, petitioner contended that its

respondent, already conceded to the non-renewal of the

Buniel_Donguila_Encabo_Lim (BDEL 1Estrellado)

The fact that such option is binding only on the

Paragraph 17 of the Contract of Lease dated May 14,

not pertain to the Contract of Lease dated May 14, 1976

Just as the RTC adjudged, no fault could be

In addition to challenging the exclusive right of

Buniel_Donguila_Encabo_Lim (BDEL 1Estrellado)

8,901,776.63, the amount of deficiency after applying the

JUICO VS CHINA BANKING

On cross-examination, Ms. Yu reiterated that the interest

The RTC rules against the Juicos

(1) Ignacios claim that he signed the promissory notes

The Juicos failed to pay the monthly amortizations

(2) Considering the substantial amount involved, it is

After the auction, China Bank filed a collection case with

The CA recognized China Banks right to claim the

Buniel_Donguila_Encabo_Lim (BDEL 1Estrellado)

The Court of Appeals affirms RTC ruling

were insufficient to cover the amount of the debt.

(5) China Bank should have given a detailed billing

The Court ordered the Juicos to pay China Bank Php

The Juico couple appealed to the Supreme