OBLIGATIONS AND CONTRACTS CASE DIGESTS BATCH 3

51. St. Paul Fire & Marine Insurance Co. vs. Macondray

Facts:

Wilhelm Wilhelmsen a foreign owner and operator of a cargo ship containing cartons and drums of
medicine,owned by Winthrop Products Inc., discharged its shipment in the port of Manila and in the
custody of Manila Port Service . Barber Steamship Lines., an agent of Wilhelm issued Bill of Lading,
with Winthrop Products Inc., as shipper and Winthrop-Strearns. Manila as consignee. The shipment
was insured by the shipper against loss and/or damage with the St. Paul Fire & Marine Insurance
Company under its insurance Special Policy.

The said shipment was discharged complete and in good order with the exception of one (1) drum
and several cartons which were in bad order condition. Because of this, consignee filed a claim for
damages. Defendants, argue that their liability is only limited, pursuant to contract of sea carriage
embodied in the bill of lading.

Issue:

Whether or not the liability of the carrier to the consignee as stipulated in the bill of lading is valid and
binding.

Ruling:

Yes. The stipulation in the bill of lading limiting the common carrier’s liability to the value of the goods
appearing in the bill, unless the shipper or owner declares a greater value, is valid and binding. This
limitation of the carrier’s liability is sanctioned by the freedom of the contracting parties to establish
such stipulations, clauses, terms, or conditions as they may deem convenient, provided they are not
contrary to law, morals, good customs and public policy.

52. Kalalo vs Luz

Facts:

Octavio Kalalo is an engineer whose services were contracted by Alfredo Luz, an architect in 1961. Luz
contracted Kalalo to work on ten projects across the country, one of which was an in the International
Rice Research Institute (IRRI) Research Center in Los Baños, Laguna. Luz was to be paid $140,000.00
for the entire project. For Kalalo’s work, Luz agreed to pay him 20% of what IRRI is going to pay or
equivalent to $28,000.00.

ISSUE: Whether or not Kalalo should be paid in US currency.

HELD: No.Under Republic Act No. 529, if the obligation was incurred prior to the enactment in a
particular kind of coin or currency other than the Philippine currency the same shall be discharged in
Philippine currency measured at the prevailing rate of exchange at the time the obligation was
incurred. Republic Act 529 does not provide for the rate of exchange for the payment of obligation
OBLIGATIONS AND CONTRACTS CASE DIGESTS BATCH 3

incurred after the enactment of said Act. The logical conclusion is that the rate of exchange should be
that prevailing at the time of payment for such contracts.

53. Reparations Commission vs. Universal Deep-Sea Fishing

Facts:

The Reparations Commission awarded six (6) trawl boats to the Universal Deep-Sea Fishing
Corporation which were delivered two at a time, each delivery being covered by Contract of
Conditional Purchase and Sale providing for identical schedules of payments the first installment
representing 10% of the total cost was to be paid 24 months after delivery and the balance of the
total cost to be paid in ten (10) equal installments. The first of which was due one year after the first
installment. The Reparations Commission sued Universal recovery of sum of money that due under
the contracts. Universal claimed that the amounts were not yet due and demandable. Universal also
allege that there is an obscurity in the schedule of payments which allegedly indicated two dues dates.

Issue:

WON the amounts were already due and demandable.

Ruling:

Yes. The Court found the terms of the contracts clear and left no doubt as to the intent of the
contracting parties that the first installment due 24 months after delivery was different from the first
ten (10) equal yearly installment of the balance of the price.

54. Filivest Credit Corporation vs. Philippine Acetylene

Facts: Philippine Acetylene Co., Inc., purchased a motor vehicle, the balance is payable under the
terms and conditions of the promissory note thirty-four (34) monthly installments. As security for the
payment, the appellant executed a chattel mortgage. Subsequently, the seller of the motor vehicle
assigned to the Filinvest all his rights in the promissory note and chattel mortgage by virtue of a Deed
of Assignment. Upon failing to pay, the mortgaged property was returned to Filinvest upon issuing a
demand letter.
OBLIGATIONS AND CONTRACTS CASE DIGESTS BATCH 3

Issue:

WON the return of the vehicle bars the foreclosure of the chattel mortgage

Held:

No. The fact that the mortgaged motor vehicle was delivered to Filinvest does not necessarily mean
that ownership thereof, as juridically contemplated by dacionenpago, was transferred from appellant
to appellee.The mere return of the mortgaged motor vehicle by the mortgagor does not constitute
dation in payment in the absence, express or implied of the true intention of the parties.
Dacionenpago is the transmission of the ownership of a thing by the debtor to the creditor as an
accepted equivalent of the performance of obligation.

55. DE GUZMAN VS CA
FACTS: Respondent(Cendana) was a junk dealer, he was engaged in buying up used bottles and
scrap metal in Pangasinan and brings those to Manila for resale using 2 six-wheeler trucks. On the
return trip to Pangasinan, respondent would load his vehicle with cargo which various merchants
wanted delivered, charging fee lower than the commercial rates. Petitioner (de Guzman) contracted
with respondent for the delivery of 750 cartons of Liberty Milk. Only 150 boxes of Liberty filled milk
were delivered to petitioner. The other 600 boxes never reached petitioner, since the truck which
carried these boxes was hijacked.
Petitioner commenced an action claiming the value of the lost merchandise. Petitioner argues that
respondent, being a common carrier, is bound to exercise extraordinary diligence, which it failed to
do. Private respondent denied that he was a common carrier, and so he could not be held liable for
force majeure.

ISSUE:
Whether or not private respondent is a common carrier? YES
Whether private respondent is liable for the loss of the goods? NO
HELD:
1. Under Art. 1732 of the Civil Code makes no distinctions between a person or enterprise offering
transportation service on a regular or scheduled basis and such service on an occasional, episodic or
unscheduled basis.The Civil Code defines common carriers in the following terms: Article 1732.
Common carriers are persons, corporations, firms, or associations engaged in the business of carrying
or transporting passengers or goods or both, by land, water, or air for compensation, offering their
services to the public. The above article makes no distinction between one whose principal business
activity is the carrying of persons or goods or both, and one who does such carrying only as an
ancillary activity (in local idiom, as a sideline ). Article 1732 also carefully avoids making any
distinction between a person or enterprise offering transportation service on a regular or
scheduledbasis and one offering such service on an occasional, episodic or unscheduled basis Neither
does Article 1732 distinguish between a carrier offering its services to the general public, i.e., the
general community or population, and one who offers services or solicits business only from a narrow
segment of the general population. We think that Article 1733 deliberately refrained from making such
distinctions.
OBLIGATIONS AND CONTRACTS CASE DIGESTS BATCH 3

2. Art. 1745(6), a common carrier is held responsible even for acts of strangers like thieves or robbers
except where such thieves or robbers acted with grave or irresistible threat, violence or force. force.
We believe and so hold that the limits of the duty of extraordinary diligence in the vigilance over the
goods carried are reached where the goods are lost as a result of a robbery which is attended by
grave or irresistible threat, violence or force.
Common carriers are not made absolute insurers against all risks of travel and of transport of goods
and are not liable for fortuitous events; In these circumstances, we hold that the occurrence of the
loss must reasonably be regarded as quite beyond the control of the common carrier and properly
regarded as a fortuitous event. It is necessary to recall that even common carriers are not made
absolute insurers against all risks of travel and of transport of goods, and are not held liable for acts
or events which cannot be foreseen or are inevitable, provided that they shall have complied with the
rigorous standard of extraordinary diligence. We, therefore, agree with the result reached by the
Court of Appeals that private respondent Cendana is not liable for the value of the undelivered
merchandise which was lost because of an event entirely beyond private respondent control.

56. TLG vs Flores

FACTS:
an action for declaratory relief involving the rights of Bearcon Trading Co., Inc. as lessee of the
premises of the aforesaid defendants. Petitioner intervened as sub-lessee of Bearcon over the
property, and the purpose of its intervention was to protect its rights as such sub-lessee and to enable
it, during pendency of the case, to make a consignation of the monthly rentals as it was "at a loss as
to who is lawfully and rightfully entitled to receive payments of the monthly" rentals. petitioner
deposited a total of 3,750 pesos with the Clerk of Court.
Petitioner, later filed its Motion to withdraw the sums it deposited, as "the order dismissing the ...
case as well as the complaint in intervention without a resolution having been made as to the right of
the plaintiff or the defendants to the rentals deposited by the intervenor, left the intervenor without
any recourse but to apply for authority to withdraw the ... amount ... and turn over the same to the
defendants in accordance with the understanding arrived at between the parties hereto". Which was
denied by the respondent judge

ISSUE: w/n the espondent could authorize the withdrawal of the deposits considering that according
to Respondent, the Court "has not ordered the intervenor to make any deposit in connection" with the
case?
HELD:
There is no question that in cases of consignation the debtor is entitled as a matter of right to
withdraw the deposit made with the court, before the consignation is accepted by the creditor or prior
to the judicial approval of such consignation. This is explicit from the second paragraph of Article 1260
of the new Civil Code which states that: "Before the creditor has accepted the consignation, or before
a judicial declaration that the consignation has been properly made, the debtor may withdraw the
thing or the sum deposited, allowing the obligation to remain in force".
When court bound to allow withdrawal of consignated sum.In the case at bar, the case was dismissed
before the amount deposited was either accepted by the creditor or a declaration made by the Court
approving such consignation. Such dismissal rendered the consignation ineffectual (Bravo v. Barreras,
OBLIGATIONS AND CONTRACTS CASE DIGESTS BATCH 3

92 Phil. 679, 681). Under such circumstances it was incumbent upon the judge to have allowed the
withdrawal by petitioner of the sums of money deposited by it with the court
Court has authority to allow withdrawal of money placed in consignation. The money received by the
Clerk of Court pursuant to Section 6 of the Judiciary Act (Republic Act 296, as amended) remained
under the control and jurisdiction of the court and the depositor could not recover it without an
express order of restitution. Thus, there can be no justification for a judge to withhold authority for
the withdrawal of the money by the depositor where the consignation has been rendered ineffectual
by subsequent events.

57. YAM vs CA

FACTS:

This is a petition for review of the decision of the Court of Appeals, ordering petitioners to pay
private respondent the amount of P266,146.88 plus interest, service charge, penalty fees, and
attorneys fees and the costs, otherwise the chattel mortgage given to secure payment of the loan
would be foreclosed.

The parties in this case entered into a Loan Agreement with Assumption of Solidary Liability
whereby petitioners were given a loan of P500,000.00 by private respondent. The contract provided
for the payment of 12% annual interest, 2% monthly penalty, 1 1/2% monthly service charge, and 10%
attorneys fees.Petitioners subsequently obtained a second IGLF loan of P300,000.00 evidenced by two
promissory notes.

On said date, petitioners paid P410,854.47 by means of a Pilipinas Bank check. The
corresponding voucher for the check bears the following notation: “full payment of IGLF LOAN.”The
private respondent sent two demand letters to petitioners, seeking payment of the balance of
P266,146.88. As petitioners did not respond, private respondent filed this case for the collection of
P266,146.88 plus interests, penalties, and service charges or, in the alternative, for the foreclosure of
the mortgaged machineries.

In their Answer, petitioners claimed that they had fully paid their obligation to private
respondent. They contended that some time after receiving private respondent’s letter (concerning
the conditional offer to reduce their penalty charges), petitioner Victor Yam and his wife, ElenaYam,
met with Carlos Sobrepeñas, president of respondent corporation, during which the latter agreed to
waive the penalties and service charges, provided petitioners paid the principal and interest,
computed as of less the earlier payment of P50,000.00. This is the reason why according to them they
only paid P410,854.47. Petitioners added that this fact of full payment is reflected in the voucher
accompanying the Pilipinas Bank check they issued, which bore the notation “full payment of IGLF
loan.”
OBLIGATIONS AND CONTRACTS CASE DIGESTS BATCH 3

ISSUE:

Whether or not the petitioners are liable for the payment of the penalties and service charges
on their loan as an express condonation?

HELD:

No. Art. 1270, par. 2 of the Civil Code provides that express condonation must comply with the
forms of donation.Art. 748, par. 3 provides that the donation and acceptance of a movable, the value
of which exceeds P5,000.00, must be made in writing, otherwise the same shall be void. In this
connection, under Art. 417, par. 1, obligations, actually referring to credits,13 are considered movable
property. In the case at bar, it is undisputed that the alleged agreement to condone P266,146.88 of
the second IGLF loan was not reduced in writing.The notation in “full payment of IGLF loan” merely
states petitioners’ intention in making the payment, but in no way does it bind private
respondent.Indeed, if private respondent really condonedthe amount in question, petitioners should
have asked for a certificate of full payment from respondent corporation, as they did in the case of
their first IGLF loan of P500,000.00.

Moreover, it is to be noted that the alleged agreement to condone the amount in question was
supposedly entered into by the parties sometime in July 1986, that is, after respondent corporation
had been placed under receivership on November 4, 1985. As held in Villanueva v. Court of
Appeals1“the appointment of a receiver operates to suspend the authority of a [corporation] and of its
directors and officers over its property and effects, such authority being reposed in the receiver.”Thus,
Sobrepeñas had no authority to condone the debt.
OBLIGATIONS AND CONTRACTS CASE DIGESTS BATCH 3

58. GAN TION vs CA

FACTS:

Ong Wan Sieng was a tenant in certain premises owned by GanTion. In 1961 the latter filed an
ejectment case against the former, alleging non-payment of rents for August and September of that
year, at P180 a month. The defendant denied the allegation and said that the agreed monthly rental
was only P160, which he had offered to but was refused by the plaintiff.Upon appeal the Court of First
Instance, on July 2, 1962, reversed the judgment and dismissed the complaint, and ordered the
plaintiff to pay the defendant the sum of P500 as attorney's fees.

On October 10, 1963 GanTion served notice on Ong Wan Sieng that he was increasing the
rent to P180 a month, effective November 1st, and at the same time demanded the rents in arrears at
the old rate in the aggregate amount of P4,320.00, corresponding to a period from August 1961 to
October 1963.Ong Wan Sieng was able to obtain a writ of execution of the judgment for attorney's
fees in his favor. GanTion went on certiorari to the Court of Appeals, where he pleaded legal
compensation, claiming that Ong Wan Sieng was indebted to him in the sum of P4,320 for unpaid
rents. The appellate court accepted the petition but eventually decided for the respondent, holding
that although "respondent Ong is indebted to the petitioner for unpaid rentals in an amount of more
than P4,000.00," the sum of P500 could not be the subject of legal compensation, it being a "trust
fund for the benefit of the lawyer, which would have to be turned over by the client to his counsel."

ISSUE:

Whether or not there has been legal compensation between petitioner GanTion and
respondent Ong Wan Sieng.

HELD:
OBLIGATIONS AND CONTRACTS CASE DIGESTS BATCH 3

Yes. In the opinion of said Court, the requisites of legal compensation, namely, that the parties
must be creditors and debtors of each other in their own right (Art. 1278, Civil Code) and that each
one of them must be bound principally and at the same time be a principal creditor of the other (Art.
1279), are not present in the instant case, since the real creditor with respect to the sum of P500 was
the defendant's counsel.

The award is made in favor of the litigant, not of his counsel, and is justified by way of
indemnity for damages recoverable by the former in the cases enumerated in Article 2208 of the Civil
Code.1 It is the litigant, not his counsel, who is the judgment creditor and who may enforce the
judgment by execution. Such credit, therefore, may properly be the subject of legal compensation.
Quite obviously it would be unjust to compel petitioner to pay his debt f or P500 when admittedly his
creditor is indebted to him for more than P4,000.

59. BPI vs. Reyes, 255 scra 571

Facts:

on September 25, 1985, private respondent Edvin F. Reyes opened Savings Account at petitioner Bank
of the Philippine Islands. It is a joint account with his wife, Sonia S. Reyes.

Private respondent also held a joint Savings Account with his grandmother, Emeteria M. Fernandez, at
the same BPI branch. Emeteria M. Fernandez died on December 28, 1989 without the knowledge of
the U.S. Treasury Department. Two months after or on March 8, 1990, private respondent closed
Savings Account with his grandmother and transferred its funds amounting to P13,112.91 to Savings
Account with his wife.

On January 16, 1991, U.S. Treasury Warrant was dishonored as it was discovered that Fernandez died
three (3) days prior to its issuance. The U.S. Department of Treasury requested petitioner bank for a
refund. For the first time petitioner bank came to know of the death of Fernandez.

On February 19, 1991, private respondent received a PT & T urgent telegram from petitioner bank
requesting him to contact theManager or Assistant Manager. When he called up the bank, he was
informed that the treasury check was the subject of a claim by Citibank NA, correspondent of
petitioner bank. He assured petitioners that he would drop by the bank to look into the matter. He
also verbally authorized them to debit from his other joint account the amount stated in the
dishonored U.S. Treasury Warrant. On the same day, petitioner bank debited the amount of
P10,556.00 from private respondent’s Savings Account.

On February 21, 1991, private respondent with his lawyer Humphrey Tumaneng visited the petitioner
bank and the refund documents were shown to them. Surprisingly, private respondent demanded
from petitioner bank restitution of the debited amount. He claimed that because of the debit, he failed
to withdraw his money when he needed them.

Issue:

WON the verbal authorization is valid?

OBLIGATIONS AND CONTRACTS CASE DIGESTS BATCH 3

Held:

Yes, Compensation shall take place when two persons, in their own right, are creditors and debtors of
each other. Article 1290 of the Civil Code provides that “when all the requisites mentioned in Article
1279 are present, compensation takes effect by operation of law, and extinguishes both debts to the
concurrent amount, even though the creditors and debtors are not aware of the compensation.” Legal
compensation operates even against the will of the interested parties and even without the consent of
them. Since this compensation takes place ipso jure, its effects arise on the very day on which all its
requisites concur. When used as a defense, it retroacts to the date when its requisites are fulfilled.

60. California Bus Line Vs. State Investment

Facts:
Delta Motors Corporation applied for financial assistance from respondent State Investment House,
Inc., a domestic corporation engaged in the business of quasi-banking. SIHI agreed to extend a credit
line to Delta which eventually became indebted to SIHI. Meanwhile, petitioner purchased on
installment basis several buses to Delta. To secure the payment of the obligation petitioner executed
promissory notes in favor of Delta. When petitioner defaulted on the payments of the debts, it entered
into an agreement with delta to cover its due obligations. However, petitioner still had trouble meeting
its obligations with delta. Pursuant to the memorandum of agreement delta executed a deed of sale
assigning to respondent, the promissory notes from petitioner. Respondent subsequently sent a
demand letter to petitioner requiring remitting payments due on the promissory notes. Petitioner
replied informing respondent of the fact that delta had taken over its management and operations.

Issue:
WON there is Novation?

Held:
The attendant facts do not make out a case of novation. The restructuring agreement between Delta
and CBLI executed on October 7, 1981, shows that the parties did not expressly stipulate that the
restructuring agreement novated the promissory notes. Absent an unequivocal declaration of
extinguishment of the pre-existing obligation, only a showing of complete incompatibility between the
old and the new obligation would sustain a finding of novation by implication. However, our review of
its terms yields no incompatibility between the promissory notes and the restructuring agreement.

61. Chester Babst vs. CA (GR 99398, Jan. 26, 2001,350 SCRA 341)

FACTS:

 8 June 1973- ELISCON obtained from Commercial Bank and Trust Company (CBTC) a loan in
the amount of P8,015,900.84, with interest at the rate of 14% per annum, evidenced by a
promissory note.
 Elizalde Steel Consolidated, Inc. (ELISCON) defaulted in its payments, leaving an outstanding
indebtedness in the amount of P2,795,240.67 as of 31 October 1982. The letters of credit, on
the other hand, were opened for ELISCON by CBTC using the credit facilities of Pacific Multi-
Commercial Corporation (MULTI) with the said bank, pursuant to the Resolution of the Board
of Directors of MULTI adopted on 31 August 1977.
OBLIGATIONS AND CONTRACTS CASE DIGESTS BATCH 3

 26 September 1978 - Antonio Roxas Chua and Chester G. Babst executed a Continuing
Suretyship, whereby they bound themselves jointly and severally liable to pay any existing
indebtedness of MULTI to CBTC to the extent of P8,000,000.00 each.
 October 1978, CBTC opened for ELISCON in favor of National Steel Corporation (NSC) 3
domestic letters of creditwhich ELISCON used to purchase tin black plates from NSC. ELISCON
defaulted in its obligation to pay the amounts of the letters of credit.
 On 22 December 1980, the Bank of the Philippine Islands (BPI) and CBTC entered into a
merger, wherein BPI, as the surviving corporation, acquired all the assets and assumed all the
liabilities of CBTC.
 ELISCON encountered financial difficulties and became heavily indebted to the Development
Bank of the Philippines (DBP). In order to settle its obligations, ELISCON proposed to convey
to DBP by way of dacion en pago all its fixed assets mortgaged with DBP, as payment for its
total indebtedness.
 On 28 December 1978, ELISCON and DBP executed a Deed of Cession of Property in Payment
of Debt. In June 1981, ELISCON called its creditors to a meeting to announce the take-over by
DBP of its assets. In October 1981, DBP formally took over the assets of ELISCON, including its
indebtedness to BPI.
 Thereafter, DBP proposed formulas for the settlement of all of ELISCON's obligations to its
creditors, but BPI expressly rejected the formula submitted to it for not being acceptable.
 17 January 1983, BPI, as successor-in-interest of CBTC, instituted with the Regional Trial Court
of Makati, Branch 147, a complaint for sum of money against ELISCON, MULTI and Babst (Civil
Case 49226).
 20 February 1987, the trial court rendered its Decision in favor of BPI. In due time, ELISCON,
MULTI and Babst filed their respective notices of appeal.
 29 April 1991, the Court of Appeals rendered a Decision modifying the judgment of the trial
court. ELISCON filed a Motion for Reconsideration of the Decision of the Court of Appeals
which was, however, denied in a Resolution dated 9 March 1992.
 Subsequently, ELISCON filed a petition for review on certiorari (GR. 104625). Meanwhile,
Babst also filed a petition for review with the Court (GR 99398).

ISSUE: whether or not BPI consented to the assumption by DBP of the obligations of ELISCON
therefore constitute a valid novation.

HELD: YES

Article 1293 of the Civil Code provides:

Novation which consists in substituting a new debtor in the place of the original one, may be made
even without the knowledge or against the will of the latter, but not without the consent of the
creditor. Payment by the new debtor gives him the rights mentioned in articles 1236 and 1237. BPI
contends that in order to have a valid novation, there must be an express consent of the creditor. This
Court reiterated the rule that there can be implied consent of the creditor to the substitution of
debtors.

In the case at bar, Babst, MULTI and ELISCON all maintain that due to the failure of BPI to register
OBLIGATIONS AND CONTRACTS CASE DIGESTS BATCH 3

its objection to the takeover by DBP of ELISCON’s assets, at the creditors’ meeting held in June 1981
and thereafter, it is deemed to have consented to the substitution of DBP for ELISCON as debtor.

62. Occeña v. CA, 73 SCRA 637 (1976)

FACTS:

 On February 25, 1975 private respondent Tropical Homes, Inc. filed a complaint for
modification of the terms and conditions of its subdivision contract with petitioners
(landowners of a 55,330 square meter parcel of land in Davao City), making the following
allegations:
1. “That due to the increase in price of oil and its derivatives and the concomitant
worldwide spiralling of prices, which are not within the control of plaintiff, of all
commodities including basis raw materials required for such development work, the
cost of development has risen to levels which are unanticipated, unimagined and not
within the remotest contemplation of the parties at the time said agreement was
entered into and to such a degree that the conditions and factors which formed the
original basis of said contract have been totally changed;
2. “That further performance by the plaintiff under the contract will result in situation
where defendants would be unjustly enriched at the expense of the plaintiff will cause
an inequitous distribution of proceeds from the sales of subdivided lots in manifest
contravention of the original essence of the agreement; and will actually result in the
unjust and intolerable exposure of plaintiff to implacable losses, all such situations
resulting in an unconscionable, unjust and immoral situation contrary to and in
violation of the primordial concepts of good faith, fairness and equity which should
pervade all human relations.”

 Under the subdivision contract, respondent “guaranteed (petitioners as landowners) as the

latter’s fixed and sole share and participation an amount equivalent to forty (40%) percent
ofall cash receipts from the sale of the subdivision lots”.

ISSUE: WON the obligation is extinguished when its performance has become so difficult as to be
manifestly beyond the contemplation of the parties.

HELD: YES
OBLIGATIONS AND CONTRACTS CASE DIGESTS BATCH 3

“The general rule is that impossibility of performance releases the obligor. However, it is submitted
that when the service has become so difficult as to be manifestly beyond the contemplation of the
parties, the court should be authorized to release the obligor in whole or in part. The intention of the
parties should govern and if it appears that the service turns out to be so difficult as have been
beyond their contemplation, it would be doing violence to that intention to hold the obligor still
responsible. xxx,”

Notes.( no need to write this) Difficulty of service.—It is elemental that the law requires parties
to do what they have agreed to do. If a party charges himself with an obligation possible to be
performed, he must abide by it unless performance is rendered impossible by the act of God, the law,
or the other party. A showing of mere inconvenience, unexpected impediments, or increased
expenses is not enough. Equity cannot relieve from bad bargains simply because they are such. So
one must answer in damages where the impossibility is only so in fact. The foregoing are familiar
principles to be found in the American and English law of contracts. The Civil law in the subject of
obligations is not essentially different. Article 1272 of the Civil Code provides “Impossible things or
services cannot be the subject matter of contracts.” And article 1184 of the Code provides: “The
debtor shall also be relieved from obligations which consist in the performance of an act if fulfillment
of the undertaking becomes legally or physically impossible.” May one obligate himself to do
something which, when accomplished, will prove to be dangerous to life and property? We doubt it.
Take the contract in question as an example. It was a general contract of the form used by the
central and various proprietors of sugar cane fields. It was intended to be limited in particular
application to haciendas where not impeded by physical impossibility.The contract was qualified by an
implied condition which, if given practical effect, results in absolving the central from its promise Not
to sanction an execution to the general rule would run counter to public policy and law by forcing the
performance of a contract undesirable and harmful.

63. Naga Telephone Co., vs. Court of Appeals

Facts:

The petitioner Naga Telephone Co., and The private respondents entered into a contract for the use
by petitioners in the operation of its telephone service the electric light posts of the respondent in
Naga City. The petitioners agreed to install free of charge 10 telephone connections for the use of the
respondents. The contract stated that “ the term of period of this contract shall be as long as the part
of the first part has need for the electric light posts” and once it is terminated “the party of the
second part is forced to stop, abandon its operation as a public service and it becomes necessary to
remove the electric light posts”. After the contract has been enforced for over 10 years, the private
respondent filed a case in RTC Naga against the petitioners for reformation of the contract with
damages. Stating that the contract is too one-sided in favor of the petitioners; and at 1981, the
petitioners had used 319 posts outside Naga City without a contract; and that the petitioner's poor
service of 10 telephone units which had caused it great inconvenience and damages. The petitioners
sought to dismiss the complaint for insufficient cause of action, lapse of prescription period for answer
and estoppel. The lower court ruled in favor of the respondent due to increase in volume of
OBLIGATIONS AND CONTRACTS CASE DIGESTS BATCH 3

petitioner's subscribers, and that the contract should be reformed to abolish the inequities. The Court
of Appeals agreed on the RTC's ruling but upheald that Article 1267 should be applicable. Hence this
case.

Issue:

Whether or not Article 1267 of the New Civil Code is applicable in the case at bar?

Ruling:

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

64. PNCC vs CA
272 SCRA 183

FACTS: On 18 November 1985, private respondents and petitioner entered into a contract of lease of
a parcel of land owned by the former. The terms and conditions of said contract of lease are as
follows: a) the lease shall be for a period of five (5) years which begins upon the issuance of permit
by the Ministry of Human Settlement and renewable at the option of the lessee under the terms and
conditions, b) the monthly rent is P20, 000.00 which shall be increased yearly by 5% based on the
monthly rate, c) the rent shall be paid yearly in advance, and d) the property shall be used as
premises of a rock crushing plan.

On January 7, 1986, petitioner obtained permit from the Ministry which was to be valid for two (2)
years unless revoked by the Ministry. Later, respondent requested the payment of the first annual
rental. But petitioner alleged that the payment of rental should commence on the date of the issuance
of the industrial clearance not on the date of signing of the contract. It then expressed its intention to
terminate the contract and decided to cancel the project due to financial and technical difficulties.
However, petitioner refused to accede to respondent’s request and reiterated their demand for the
payment of the first annual rental. But the petitioner argued that it was only obligated to pay P20,
000.00 as rental for one month prompting private respondent to file an action against the petitioner
for specific performance with damages before the RTC of Pasig. The trial court rendered decision in
favor of private respondent. Petitioner then appealed the decision of the trial court to the Court of
OBLIGATIONS AND CONTRACTS CASE DIGESTS BATCH 3

Appeals but the later affirmed the decision of the trial court and denied the motion for
reconsideration.

ISSUE: Whether or not petitioner can avail of the benefit of Article 1267 of the New Civil Code.

RULING: NO. The petitioner cannot take refuge of the said article. Article 1267 of the New Civil Code
provides that when the service has become so difficult as to manifestly beyond the contemplation of
the parties, the obligor may also be released therefrom, in whole or in part. This article, which
enunciates the doctrine of unforeseen events, is not, however an absolute application of the principle
of rebus sic stantibus, which would endanger the security of contractual relations. The parties to the
contract must be presumed to have assumed the risks of unfavorable developments. It is therefore
only in absolutely exceptional chances of circumstances that equity demands assistance for the debtor.
The principle of rebus sic stantibus neither fits in with the facts of the case. Under this theory, the
parties stipulate in the light of certain prevailing conditions, and once these conditions cease to exist,
the contract also ceases to exist.

In this case, petitioner averred that three (3) abrupt change in the political climate of the country
after the EDSA Revolution and its poor financial condition rendered the performance of the lease
contract impractical and inimical to the corporate survival of the petitioner. However, as held in
Central Bank v. CA, mere pecuniary inability to fulfill an engagement does not discharge a contractual
obligation, nor does it constitute a defense of an action for specific performance.