MEANING OF PAYMENT / PERFORMANCE (ART.

1232-1261, CC)
SONNY LO, petitioner, vs. KJS ECO-FORMWORK SYSTEM PHIL., INC.,
respondent
2003 Oct 8
G.R. No. 149420
413 SCRA 182
FACTS:
Respondent KJS ECO-FORMWORK System Phil., Inc. is a corporation engaged
in the sale of steel scaffoldings, while petitioner Sonny L. Lo, doing business under the
name and style Sans Enterprises, is a building contractor. On February 22, 1990,
petitioner ordered scaffolding equipments from respondent worth P540,425.80. He paid
a downpayment in the amount of P150,000.00. The balance was made payable in ten
monthly installments.
Respondent delivered the scaffoldings to petitioner. Petitioner was able to pay
the first two monthly installments. His business, however, encountered financial
difficulties and he was unable to settle his obligation to respondent despite oral and
written demands made against him.
On October 11, 1990, petitioner and respondent executed a Deed of
Assignment, whereby petitioner assigned to respondent his receivables in the amount of
P335,462.14 from Jomero Realty Corporation.
However, when respondent tried to collect the said credit from Jomero Realty
Corporation, the latter refused to honor the Deed of Assignment because it claimed that
petitioner was also indebted to it. On November 26, 1990, respondent sent a letter to
petitioner demanding payment of his obligation, but petitioner refused to pay claiming
that his obligation had been extinguished when they executed the Deed of Assignment.
Consequently, on January 10, 1991, respondent filed an action for recovery of a
sum of money against the petitioner before the Regional Trial Court of Makati, Branch
147, which was docketed as Civil Case No. 91-074. During the trial, petitioner argued
that his obligation was extinguished with the execution of the Deed of Assignment of
credit. Respondent, for its part, presented the testimony of its employee, Almeda
Baaga, who testified that Jomero Realty refused to honor the assignment of credit
because it claimed that petitioner had an outstanding indebtedness to it.
On August 25, 1994, the trial court rendered a decision dismissing the complaint
on the ground that the assignment of credit extinguished the obligation. Respondent
appealed the decision to the Court of Appeals. On April 19, 2001, the appellate court
rendered a decision reversing the appealed Decision and enters judgment ordering
defendant-appellee Sonny Lo to pay the plaintiff-appellant KJS ECO-FORMWORK
SYSTEM PHILIPPINES, INC. Three Hundred Thirty Five Thousand Four Hundred
Sixty-Two and 14/100 (P335,462.14) with legal interest of 6% per annum from January
10, 1991 (filing of the Complaint) until fully paid and attorneys fees equivalent to 10% of
the amount due and costs of the suit.
In finding that the Deed of Assignment did not extinguish the obligation of the
petitioner to the respondent, the Court of Appeals held that (1) petitioner failed to
comply with his warranty under the Deed; (2) the object of the Deed did not exist at the
time of the transaction, rendering it void pursuant to Article 1409 of the Civil Code; and
(3) petitioner violated the terms of the Deed of Assignment when he failed to execute
and do all acts and deeds as shall be necessary to effectually enable the respondent to
recover the collectibles.
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Petitioner filed a motion for reconsideration of the said decision, which was
denied by the Court of Appeals. Hence, this petition for review.
ISSUE:
Whether or not the Court Of Appeals erred in holding that the deed of
assignment did not extinguish petitioners obligation on the wrong notion that petitioner
failed to comply with his warranty thereunder.

RULING:
The petition is without merit.
An assignment of credit is an agreement by virtue of which the owner of a credit,
known as the assignor, by a legal cause, such as sale, dacion en pago, exchange or
donation, and without the consent of the debtor, transfers his credit and accessory
rights to another, known as the assignee, who acquires the power to enforce it to the
same extent as the assignor could enforce it against the debtor.
Corollary thereto, in dacion en pago, as a special mode of payment, the debtor
offers another thing to the creditor who accepts it as equivalent of payment of an
outstanding debt. In order that there be a valid dation in payment, the following are the
requisites: (1) There must be the performance of the prestation in lieu of payment
(animo solvendi) which may consist in the delivery of a corporeal thing or a real right or
a credit against the third person; (2) There must be some difference between the
prestation due and that which is given in substitution (aliud pro alio); (3) There must be
an agreement between the creditor and debtor that the obligation is immediately
extinguished by reason of the performance of a prestation different from that due. The
undertaking really partakes in one sense of the nature of sale, that is, the creditor is
really buying the thing or property of the debtor, payment for which is to be charged
against the debtors debt. As such, the vendor in good faith shall be responsible, for the
existence and legality of the credit at the time of the sale but not for the solvency of the
debtor, in specified circumstances.
Hence, it may well be that the assignment of credit, which is in the nature of a
sale of personal property, produced the effects of a dation in payment which may
extinguish the obligation. However, as in any other contract of sale, the vendor or
assignor is bound by certain warranties. More specifically, the first paragraph of Article
1628 of the Civil Code provides:
The vendor in good faith shall be responsible for the existence and legality of the credit
at the time of the sale, unless it should have been sold as doubtful; but not for the
solvency of the debtor, unless it has been so expressly stipulated or unless the
insolvency was prior to the sale and of common knowledge.
From the above provision, petitioner, as vendor or assignor, is bound to warrant
the existence and legality of the credit at the time of the sale or assignment. When
Jomero claimed that it was no longer indebted to petitioner since the latter also had an
unpaid obligation to it, it essentially meant that its obligation to petitioner has been
extinguished by compensation. In other words, respondent alleged the non-existence of
the credit and asserted its claim to petitioners warranty under the assignment.
Therefore, it behooved on petitioner to make good its warranty and paid the obligation.
Furthermore, the Court found that petitioner breached his obligation under the
Deed of Assignment, to wit:
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And the ASSIGNOR further agrees and stipulates as aforesaid that the said
ASSIGNOR, his heirs, executors, administrators, or assigns, shall and will at times
hereafter, at the request of said ASSIGNEE, its successors or assigns, at his cost and
expense, execute and do all such further acts and deeds as shall be reasonably
necessary to effectually enable said ASSIGNEE to recover whatever collectibles said
ASSIGNOR has in accordance with the true intent and meaning of these presents.
The decision of the Court of Appeals was affirmed with modification that upon
finality of the Decision, the rate of legal interest shall be 12% per annum, inasmuch as
the obligation shall thereafter become equivalent to a forbearance of credit. The award
of attorneys fees is DELETED for lack of evidentiary basis.
REQUISITES OF PAYMENT/PERFORMANCE
PHILIPPINE NATIONAL BANK, petitioner,
VS. COURT OF APPEALS and LORETO TAN, respondents
April 02, 1996
G.R. No. 108630
256 SCRA 44
FACTS:
Private respondent Loreto Tan is the owner of a parcel of land in Bacolod City.
Expropriation proceedings were instituted by the government against private respondent
Tan and other property owners before a trial court in Negros Occidental. Tan filed a
motion requesting issuance of an order for the release to him of the expropriation price
of P32,480.00.
The trial court required petitioner PNB-Bacolod Branch to release to Tan the
amount of P32,480.00 deposited with it by the government. Through its Assistant
Branch Manager Juan Tagamolila, PNB issued a manager's check for P32,480.00 and
delivered the same to one Sonia Gonzaga without Tan's knowledge, consent or
authority. Sonia Gonzaga deposited it in her account with Far East Bank and Trust Co.
(FEBTC) and later on withdrew the said amount.
Private respondent Tan subsequently demanded payment in the amount of
P32,480.00 from petitioner, but the same was refused on the ground that petitioner had
already paid and delivered the amount to Sonia Gonzaga on the strength of a Special
Power of Attorney (SPA) allegedly executed in her favor by Tan.
When he failed to recover the amount from PNB, private respondent filed a
motion with the court to require PNB to pay the same to him. Petitioner filed an
opposition contending that Sonia Gonzaga presented to it a copy of the May 22, 1978
order and a special power of attorney by virtue of which petitioner delivered the check to
her. The petitioner was directed by the court to produce the said special power of
attorney thereat. However, petitioner failed to do so.
The court decided that there was need for the matter to be ventilated in a
separate civil action and thus private respondent filed a complaint with the Regional
Trial Court in Bacolod City against petitioner and Juan Tagamolila, PNB's Assistant
Branch Manager, to recover the said amount. In its defense, petitioner contended that
private respondent had duly authorized Sonia Gonzaga to act as his agent. Tagamolila,
in his answer, stated that Sonia Gonzaga presented a Special Power of Attorney to him
but borrowed it later with the promise to return it, claiming that she needed it to encash
the check.
The petitioner likewise filed a third-party complaint against the spouses Nilo and
Sonia Gonzaga praying that they be ordered to pay private respondent the amount of
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P32,480.00. However, for failure of petitioner to have the summons served on the
Gonzagas despite opportunities given to it, the third-party complaint was dismissed.
The trial court rendered judgment ordering petitioner and Tagamolila to pay
private respondent jointly and severally the amount of P32,480.00 with legal interest,
damages and attorney's fees. Both petitioner and Tagamolila appealed the case to the
Court of Appeals. However, the appellate court dismissed Tagamolila's appeal for
failure to pay the docket fee within the reglementary period.
The appellate court
subsequently affirmed the trial courts decision.
ISSUE:
Whether or not payment was made to Loreto Tan.
RULING:
There is no question that no payment had ever been made to private respondent
as the check was never delivered to him. When the court ordered petitioner to pay
private respondent the amount of P32,480.00, it had the obligation to deliver the same
to him. Under Art. 1233 of the Civil Code, a debt shall not be understood to have been
paid unless the thing or service in which the obligation consists has been completely
delivered or rendered, as the case may be.
The burden of proof of such payment lies with the debtor. In the instant case,
neither the SPA nor the check issued by petitioner was ever presented in court. The
testimonies of petitioner's own witnesses regarding the check were conflicting.
Tagamolila testified that the check was issued to
the order of "Sonia Gonzaga as attorney-in-fact of Loreto Tan," while Elvira Tibon,
assistant cashier of PNB, stated that the check was issued to the order of "Loreto Tan."
Furthermore, contrary to petitioner's contention that all that is needed to be
proved is the existence of the SPA, it is also necessary for evidence to be presented
regarding the nature and extent of the alleged powers and authority granted to Sonia
Gonzaga; more specifically, to determine whether the document indeed authorized her
to receive payment intended for private respondent.
Considering that the contents of the SPA are also in issue here, the best
evidence rule applies. Hence, only the original document, which has not been presented
at all, is the best evidence of the fact as to whether or not private respondent indeed
authorized Sonia Gonzaga to receive the check from petitioner. In the absence of such
document, petitioner's arguments regarding due payment must fail.
Decision affirmed with the modification that the award by the trial court of
P5,000.00 as attorney's fees is reinstated.
OBLIGATIONS TO PAY MONEY: EFFECTS OF INFLATION
1.
2.
3.
4.
5.
6.

CITIBANK VS. SABENIANO, 504 S 378

TELENGTON BROS VS. US LINES, 583 S 458
CF SHARP VS. NORTHWEST AIRLINES, 381 S 314
PADILLA VS. PAREDES, 328 SCRA 434
TIBAJIA VS. CA, 223 S 163
DBP VS CA, 494 S 25

CITIBANK vs. SABENIANO

G.R.No. 156132, October 16, 2006
FACTS:
Petitioner Citibank is a banking corporation duly authorized under the laws
of the USA to do commercial banking activities n the Philippines. Sabeniano was
a client of both Petitioners Citibank and FNCB Finance. Respondent filed a
complaint against petitioners claiming to have substantial deposits, the proceeds
of which were supposedly deposited automatically and directly to respondents
account with the petitioner Citibank and that allegedly petitioner refused to
despite repeated demands. Petitioner alleged that respondent obtained several
loans from the former and in default, Citibank exercised its right to set-off
respondents outstanding loans with her deposits and money. RTC declared the
act illegal, null and void and ordered the petitioner to refund the amount plus
interest, ordering Sabeniano, on the other hand to pay Citibank her
indebtedness. CA affirmed the decision entirely in favor of the respondent.
ISSUE:
Whether petitioner may exercise its right to set-off respondents loans with her
deposits and money in Citibank-Geneva
RULING:
Petition is partly granted with modification.
1. Citibank is ordered to return to respondent the principal amount of
P318,897.34 and P203,150.00 plus 14.5% per annum
2. The remittance of US $149,632.99 from respondents Citibank-Geneva
account is declared illegal, null and void, thus Citibank is ordered to refund
said amount in Philippine currency or its equivalent using exchange rate at
the time of payment.
3. Citibank to pay respondent moral damages of P300,000, exemplary damages
for P250,000, attorneys fees of P200,000.
4. Respondent to pay petitioner the balance of her outstanding loans of
P1,069,847.40 inclusive off interest.

OBLIGATIONS TO PAY MONEY: EFFECTS OF INFLATION

TELENGTAN BROTHERS and SONS vs. UNITED STATES LINES G.R.No.

132284,February 28,2006
FACTS:
Petitioner is a domestic corporation while US Lines is a foreign corporation
engaged in overseas shipping. It was made applicable that consignees who fail to take
delivery of their containerized cargo within the 10-day free period are liable to pay
demurrage charges. On June 22, 1981, US Lines filed a suit against petitioner seeking
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payment of demurrage charges plus interest and damages. Petitioner incurred P94,000
which the latter refused to pay despite repeated demands. Petitioner disclaims liability
alleging that it has never entered into a contract nor signed an agreement to be bound
by it. RTC ruled that petitioner is liable to respondent and all be computed as of the date
of payment in accordance with Article 1250 of the Civil Code. CA affirmed the decision.
ISSUE:
Whether the re-computation of the judgment award in accordance with Article
1250 of the Civil Code proper
RULING:
The Supreme Court found as erroneous the trial courts decision as affirmed y
the Court of Appeals. The Court holds that there has been an extraordinary inflation
within the meaning of Article 1250 of the Civil Code. There is no reason for ordering the
payment of an obligation in an amount different from what has been agreed upon
because of the purported supervention of an extraordinary inflation.
The assailed decision is affirmed with modification that the order for recomputation as of the date of payment in accordance with the provisions of Article 1250
of New Civil Code is deleted.

OBLIGATIONS TO PAY MONEY: EFFECTS OF INFLATION

CF SHARP VS. NORTHWEST AIRLINES

381 SCRA 314
FACTS:
On May 9, 1974, respondent, through its Japan Branch, entered an International
Passenger Sales Agency Agreement with petitioner, authorizing the latter to sell its air
transport tickets. Petitioner, however, failed to remit the proceeds of the ticket sales, for
which reason the respondent filed a collection suit against petitioner before the Tokyo
District Court.
The said court ordered petitioner to pay respondent including damages for the
delay. Unable to execute the decision in Japan, respondent filed a case to enforce said
judgment with the regional trial court of Manila which dismissed the case. This was
affirmed by the Court of Appeals, and was subsequently partly affirmed by the Supreme
Court. CF Sharp was then ordered to pay Northwest so that the RTC issued a writ of
execution of decision ruling that Sharp is to pay Northwest the sum of 83,158,195 yen at
the exchange rate prevailing on the date of the foreign judgment plus 6% per annum
until fully paid, 6% damages and 6% interest.
An appeal, the Court of Appeals reduced the interest and it ruled that the basis of
the conversion of petitioners liability in its peso equivalent should be the prevailing rate
at the time of payment and not the rate on the date of the foreign judgment.
ISSUE:
Whether or not the basis for the payment of the amount due is the value of the
currency at the time of the establishment of the obligation.
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RULING:
NO, the rule that the value of currency at the time of the establishment of the
obligation shall be the basis of payment finds application only when there is an official
pronouncement or declaration of the existence of an extraordinary inflation or deflation.
Hence, petitioners contention that Article 1250 of the Civil Code which provides that in
case of an extra ordinary inflation or deflation of the currency stipulated should
supervene, the value of the currency at the time of establishment of the obligation shall
be the basis of payment, unless there is an agreement to the contrary shall apply in this
case is untenable.

OBLIGATIONS TO PAY MONEY

ALBERT R. PADILLA
VS. SPOUSES FLORESCO PAREDES and ADELINA PAREDES, and THE
HONORABLE COURT OF APPEALS
G.R. No. 124874
March 17, 2000
328 SCRA 434
FACTS:
On October 20, 1988, petitioner Albert R. Padilla and private respondents
Floresco and Adelina Paredes entered into a contract to sell involving a parcel of land in
San Juan, La Union. At that time, the land was untitled although private respondents
were paying taxes thereon. Under the contract, petitioner undertook to secure title to
the property in private respondents' names. Of the P312,840.00 purchase price,
petitioner was to pay a downpayment of P50,000.00 upon signing of the contract, and
the balance was to be paid within ten days from the issuance of a court order directing
issuance of a decree of registration for the property.
On December 27, 1989, the court ordered the issuance of a decree of land
registration for the subject property. The property was titled in the name of private
respondent Adelina Paredes. Private respondents then demanded payment of the
balance of the purchase price.
Petitioner then made several payments to private respondents, some even
before the court issued an order for the issuance of a decree of registration and they
also offered to pay the land through a check. Still, petitioner failed to pay the full
purchase price even after the expiration of the period set. In a letter dated February 14,
1990, private respondents, through counsel, demanded payment of the remaining
balance, with interest and attorney's fees, within five days from receipt of the letter.
Otherwise, private respondents stated they would consider the contract rescinded.
On February 28, 1990, petitioner made a payment of P100,000.00 to private
respondents, still insufficient to cover the full purchase price. Shortly thereafter, in a
letter dated April 17, 1990 private respondents offered to sell to petitioner one-half of the
property for all the payments the latter had made, instead of rescinding the contract. If
petitioner did not agree with the proposal, private respondents said they would take
steps to enforce the automatic rescission of the contract. Petitioner did not accept
private respondents' proposal. Instead, in a letter dated May 2, 1990, he offered to pay
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the balance in full for the entire property, plus interest and attorney's fees. Private
respondents refused the offer.
On May 14, 1990, petitioner instituted an action for specific performance against
private respondents, alleging that he had already substantially complied with his
obligation under the contract to sell. He also averred that he had already spent
P190,000.00 in obtaining title to the property, subdividing it, and improving its right-ofway. The lower court decided in favor of the petitioners stating that the breach
committed was only casual and slight but the Court of Appeals reversed the ruling and
favored respondents rescission of the contract to sell.
ISSUE:
Whether or not the payment made by petitioner is one which is contemplated on
the contract.
RULING:
Petitioners offer to pay is clearly not the payment contemplated in the contract.
While he might have tendered payment through a check, this is not considered payment
until the check is encashed. Besides, a mere tender of payment is not sufficient.
Consignation is essential to extinguish petitioner's obligation to pay the purchase price.
The Supreme Court also affirmed the decision of the Court of Appeals where the
respondents have the right to rescind the contract on the ground that there is failure on
the part of the petitioners to pay the balance within ten days upon the conveyance of the
Court of the Title of Land to respondents. Thus, private respondents are under no
obligation, and may not be compelled, to convey title to petitioner and receive the full
purchase price.

OBLIGATIONS TO PAY MONEY

SPOUSES TIBAJIA v. COURT OF APPEALS and EDEN TAN
G. R. No. 100290, June 4, 1993
FACTS:
A suit of collection of sum of money was filed by Eden Tan against the spouses.
A writ of attachment was issued, the Deputy Sheriff filed a return stating that a deposit
made by Tibajia in the amount of P442,750 in another case, had been garnished by
him. RTC ruled in favor of Eden Tan and ordered the spouses to pay her an amount in
excess of P3,000,000. Court of Appeals modified the decision by reducing the amount
for damages. Tibajia Spouses delivered to Sheriff Bolima the total money judgment of
P398483.70. Tan refused to accept the payment and insisted that the garnished funds
be withdrawn to satisfy the judgment obligation.
ISSUE:
Whether or not payment by means of check is considered payment in legal
tender
RULING:
The ruling applies the statutory provisions which lay down the rule that a check is
not legal tender and that a creditor may validly refuse payment by check, whether it be a
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managers check, cashiers or personal check. The decision of the court of Appeals is
affirmed.
OBLIGATIONS TO PAY MONEY
DEVELOPMENT BANK OF THE PHILIPPINES
v. COURT OF APEEALS
G.R.No. 138703,June 30, 2006
FACTS:
In March 1968, DBP granted to private respondents an industrial loan in the
amount of P2,500,000 P500,000 n cash and P2,000,000 in DBP Progress Bank. It
was evidenced by a promissory note and secured by a mortgage executed by
respondents over their present and future properties. Another loan was granted by DBP
in the for of a 5-year revolving guarantee to P1,700,000. In 1975, the outstanding
accounts wth DBP was restructured in view of failure to pay. Amounting to
P4,655,992.35 were consolidated into a single account. On the other hand, all accrued
interest and charges due amounting to P3,074,672.21 were denominated as Notes
Taken for Interests and evidenced by a separate promissory note. For failure to comply
with its obligation, DBP initiated foreclosure proceedings upon its computation that
respondents loans were arrears by P62,954,473.68. Respondents contended that the
collection was unconscionable if not unlawful or usurious . RTC, as affirmed by the CA,
ruled in favor of the respondents.
ISSUE:
Whether the prestation to collect by the DBP is unconscionable or usurious
RULING:
It cannot be determined whether DBP in fact applied an interest rate higher than
what is prescribed under the law. Assuming it did exceed 12% in addition to the other
penalties stipulated in the note, this should be stricken out for being usurious.
The petition is partly granted. Decision of the court of Appeals is reversed and
set aside. The case is remanded o the trial court for the determination of the total
amount of the respondents obligation based on the promissory notes, according to the
interest rate agreed upon by the parties on the interest rate of 12% per annum,
whichever is lower.
INSTRUMENTS/EVIDENCES OF CREDIT
METROBANK v. CABLZO
G.R. No. 154469 December 6, 2006
FACTS:
Respondent Cabilzo was one of the Metrobanks client who maintained a current
account. On November 12, 199, Cabilzo issued a Metrobank check payable to cash in
the amount of P1,000 and was paid to a certain Mr. Marquez. The check was oresented
to Westmont Bank or payment and in turn indorsed to etrobank for appropriate clearing.
It was discovered that the amount withdrawn wa P91,000, thus, the check was altered.
Cabilzo re-credit the amount of P91,000 to his account but Metrobank refused to comply
despite demands. RTC ordered Metrobank to pay the sum of P90,000 to Cabilzo. Court
of Appeals affirmed the decision with modification.
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ISSUE:
Whether holding Metrobank, as drawee bank, liable for the alternations on the
subject check bearing the authentic signature of the drawer thereof
RULING:
The degree of diligence in the exercise of his tasks and the performance of his
duties have been faithfully complied with by Cabilzo. It is obvious that Metrobank was
remiss in the duty and violated that fiduciary relationship with its clients as it appeared
that there are material alterations on the check that are visble to the naked eye but the
bank failed to detect such.
Petition is denied. Court of Appeals decision is affirmed with modification that
exemplary damages in the amount of P50,000 be awarded.
OBLIGATIONS TO PAY MONEY: EFFECTS OF INFLATION
1. ALMEDA VS. BATHALA MKTNG., 542 S 470
2. PCI VS. NG SHEUNG NGOR, 541 S 223

EUFEMIA and ROMEL ALMEDA v.

BATHALA MARKETING
G.R.No. 150806, January 28, 2008
FACTS:
In May 1997, Bathala Marketng, renewed its Contract of Lease with
Ponciano Almeda. Under the contract, Ponciano agreed to lease a porton of Almeda
Compound for a monthly rental of P1,107,348.69 for four years. On January 26, 1998,
petitioner informed respondent that its monthly rental be increased by 73% pursuant to
the condition No. 7 of the contract and Article 1250. Respondent refused the demand
and insisted that there was no extraordinary inflation to warrant such application.
Respondent refused to pay the VAT and adjusted rentals as demanded by the
petitioners but continually paid the stipulated amount. RTC ruled in favor of the
respondent and declared that plaintiff is not liable for the payment of VAT and the
adjustment rental, there being no extraordinary inflation or devaluation. CA affirmed the
decision deleting the amounts representing 10% VAT and rental adjustment.
ISSUE:
Whether the amount of rentals due the petitioners should be adjusted by reason
of extraordinary inflation or devaluation
RULING:
Petitioners are stopped from shifting to respondent the burden of paying the VAT.
6th Condition states that respondent can only be held liable for new taxes imposed after
the effectivity of the contract of lease, after 1977, VAT cannot be considered a new
tax. Neither can petitioners legitimately demand rental adjustment because of
extraordinary inflation or devaluation. Absent an official pronouncement or declaration
by competent authorities of its existence, its effects are not to be applied.
Petition is denied. CA decision is affirmed.
OBLIGATIONS TO PAY MONEY: EFFECTS OF INFLATION
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EQUITABLE PCI BANK, YU and APASv. NG SHEUNG NGOR

G.R.NO. 171545, December 19, 2007
FACTS:
On October 7, 2001, respondents Ngor and Go filed an action for
amendment and/or reformation of documents and contracts against Equitable and its
employees. They claimed that they were induced by the bank to avail of its peso and
dollar credit facilities by offering low interests so they accepted and signed Equitables
proposal. They alleged that they were unaware that the documents contained escalation
clauses granting Equitable authority to increase interest without their consent. These
were rebutted by the bank. RTC ordered the use of the 1996 dollar exchange rate in
computing respondents dollar-denominated loans. CA granted the Banks application
for injunction but the properties were sold to public auction.
ISSUE:
Whether or not there was an extraordinary deflation
RULING:
Extraordinary inflation exists when there is an unusual decrease in the
purchasing power of currency and such decrease could not be reasonably foreseen or
was beyond the contemplation of the parties at the time of the obligation. Deflation is an
inverse situation.
Despite the devaluation of the peso, BSP never declared a situation of
extraordinary inflation. Respondents should pay their dollar denominated loans at the
exchange rate fixed by the BSP on the date of maturity.
Decision of lower courts are reversed and set aside.

INTEGRITY OF PRESTATION / SUBSTANTIAL PAYMENT

SIMPLICIO PALANCA
VS. ULYSSIS GUIDES joined by her husband LORENZO GUIDES
February 28, 2005
452 SCRA 461
FACTS:
On August 23, 1983, Simplicio Palanca executed a Contract to Sell a parcel of
land on installment with a certain Josefa Jopson for P11, 250.00. Jopson paid the
petitioner in the amount of P1, 650 as her down payment, leaving a balance of P9,
600.00. Sometime in December 1983, Jopson assigned and transferred all her rights
and interests over the property in question in favor of the respondent Ulyssis Guides.
In the deed of transfer, respondent undertook to assume the balance of Jopsons
account and to pay the same in accordance with the terms and conditions of the
Contract to Sell. After reimbursing Jopson P1,650.00, respondent acquired possession
of the lot and paid petitioner the stipulated amortizations which were in turn
acknowledged by petitioner through receipts issued in the name of respondent.
Believing that she had fully paid the purchase price of the lot, respondent verified the
status of the lot with the Register of Deeds, only to find out that title thereto was not in
the name of the petitioner as it was covered by Transfer Certificate of Title No. 105742
issued on 26 September 1978 in the name of a certain Carissa T. de Leon.
Respondent went to petitioners office to secure the title to the lot, but petitioner
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informed her that she could not as she still had unpaid accounts. Thereafter,
respondent, through a lawyer, sent a letter to petitioner demanding compliance with his
obligation and the release of the title in her name.
As petitioner did not heed her demands, respondent, joined by her husband, filed
a Complaint for specific performance with damages. Petitioner sought the dismissal of
the complaint on the ground of respondents alleged failure to comply with the
mandatory requirement of Presidential Decree (P.D.) No. 1508.
Respondent alleged
that she paid petitioner P14,880.00, which not only fully settled her obligation to him, but
in fact overpaid it by P3,620.00. In addition, she claimed that petitioner charged her
devaluation charges and illegal interest. At the pre-trial in 1989, both parties admitted
that Jopson assigned her rights over the property in favor of respondent and respondent
paid petitioner the subsequent monthly amortizations on installments. Petitioner
likewise acknowledged the payments made by respondent as stated in the statement of
accounts initiated by its manager, Oscar Rivera. On November 1996, the trial court
rendered its decision ordering the petitioner to execute in favor of the respondent a
Deed of Sale. The petitioner appealed to the Court of Appeals; however, it affirmed the
decision of the lower court.
ISSUE:
Whether or not the petitioner has a right to claim for unpaid charges as stipulated
in the contract from the private respondent.
RULING:
The Supreme Court held that primarily preventing petitioner from recovering the
amounts claimed from respondent is the effective waiver of these charges. Assuming
that said charges are due, petitioner waived the same when he accepted respondents
payments without qualification, without any specific demand for the individual charges
he now seeks to recover. The same goes true for the alleged forfeiture of the down
payment made by Jopson. From its own Statements of Accounts and Payments Made,
petitioner credited to respondents account the P1,650.00 down payment paid by
Jopson at the commencement of the contract. There is no indication that he informed
respondent of the alleged forfeiture, much more demanded the payment again of the
amount previously paid by Jopson. Art. 1235 of the Civil Code which provides that
When the obligee accepts the performance, knowing its incompleteness or irregularity,
and without expressing any protest or objection, the obligation is deemed fully complied
with, is in point. Thus, when petitioner accepted respondents installment payments
despite the alleged charges incurred by the latter, and without any showing that he
protested the irregularity of such payment, nor demanded the payment of the alleged
charges, respondents liability, if any for said charges, is deemed fully satisfied. The
petition is denied.

WHO MAY DEMAND PAYMENT

1.
2.
3.

PCIB VS. CA, 481 S 127

LAGON VS. HOOVEN COMALCO, 349 SCRA 363
BPI VS. CA, 232 SCRA 302

PCIB v. COURT OF APPEALS

G.R. NO. 121989 January 31, 2006

12

FACTS:
PCIB and MBC were joint bidders in a foreclosure sale held of assorted mining
machinery and equipment previously mortgaged to them by Philippine Iron Mines. Atlas
agreed to purchase some of these properties and the sale was evidenced by a Deed of
Sale with a downpayment of P12,000,000 and the balance of P18,000,000 payable in 6
monthly installments. In compliance with the contract, Atlas issued HongKong and
shanghai Bank check amounting to P12,000,000. Atlas paid to NAMAWU the amount of
P4,298,307.77 in compliance with the writ of garnishment issued against Atlas to satisfy
the judgment in favor of NAMAWU. Atlas alleged that there was overpayment, hence
the suit against PCIB to obtain reimbursement. PCIB contended that Atlas still owed
P908,398.75 because NAAWU had been partially paid in the amount of P601,260.00.
RTC ruled against Atlas to pay P908,398.75 to PCIB. CA reversed the decision.
ISSUE:
Whether atlas had complied with its obligation to PCIB
RULING:
While the original amount sought to be garnished was P4,298,307,77, the partial
payment of P601,260 naturally reduced it to P3,697,047.77 Atlas overpaid NAMAWU,
thus the remedy if Atlas would be to proceed against NAAWU nut not against PCIB in
relation to article 1236 of the Civil Code
The petition is partly granted.CA decision is reversed and set aside and in lieu
thereof Atlas is ordered to pay PCIB the sum of P146,058.96, with the legal interest
commencing from the time of first demand on August 22, 1985.

WHO MAY DEMAND PAYMENT,

CREDITORS RIGHT OF PAYMENT (Art. 1240, CC)
JOSE V. LAGON, petitioner,
vs. HOOVEN COMALCO INDUSTRIES, INC., respondent
G.R. No. 135657
January 17, 2001
349 SCRA 363
FACTS:
Petitioner Jose V. Lagon is a businessman and owner of a commercial building in
Tacurong, Sultan Kudarat. Respondent HOOVEN on the other is a domestic
corporation known to be the biggest manufacturer and installer of aluminum materials in
the country with branch office at E. Quirino Avenue, Davao City.
Sometime in April 1981 Lagon and HOOVEN entered into two (2) contracts, both
denominated Proposal, whereby for a total consideration of P104, 870.00 HOOVEN
agreed to sell and install various aluminum materials in Lagons commercial building in
Tacurong, Sultan Kudarat. Upon execution of the contracts, Lagon paid HOOVEN
P48,000.00 in advance.
Lagon, in his answer, denied liability and averred that HOOVEN was the party
guilty of breach of contract by failing to deliver and install some of the materials
specified in the proposals; that as a consequence he was compelled to procure the
undelivered materials from other sources; that as regards the materials duly delivered
and installed by HOOVEN, they were fully paid. He counterclaimed for actual, moral,
13

exemplary, temperate and nominal damages, as well as for attorneys fees and
expenses of litigation.
ISSUE:
Whether or not all the materials specified in the contracts had been delivered and
installed by respondent in petitioners commercial building in Tacurong, Sultan Kudarat.
RULING:
Firstly, the quantity of materials and the amounts sated in the delivery receipts do
not tally with those in the invoices covering them, notwithstanding that, according to
HOOVEN OIC Alberto Villanueva, the invoices were based merely on the delivery
receipts.
Secondly, the total value of the materials as reflected in all the invoices is P117,
329.00 while under the delivery receipts it is only P112, 870.50, or a difference of
P4,458.00
Even more strange is the fact that HOOVEN instituted the present action for
collection of sum of money against Lagon only on 24 February 1987, or more than five
(5) years after the supposed completion of the project. Indeed, it is contrary to common
experience that a creditor would take its own sweet time in collecting its credit, more so
in this case when the amount involved is not miniscule but substantial.
All the delivery receipts did not appear to have been signed by petitioner or his
duly authorized representative acknowledging receipt of the materials listed therein. A
closer examination of the receipts clearly showed that the deliveries were made to a
certain Jose Rubin, claimed to be petitioners driver, Armando Lagon, and a certain
bookkeeper. Unfortunately for HOOVEN, the identities of these persons were never
been established, and there is no way of determining now whether they were indeed
authorized representatives of petitioner.
WHEREFORE, the assailed Decision of the Court of Appeals dated 28 April 1997
is MODIFIED. Petitioner Jose V. Lagon is ordered to pay respondent Hooven Comalco
Industries, Inc., P6, 377.66 representing the value of the unpaid materials admittedly
delivered to him. On the other hand, respondent is ordered to pay petitioner
P50,000.00 as moral damages, P30,000.00 as attorneys fees and P46,554.50 as
actual damages and litigation expenses.
WHO MAY DEMAND PAYMENT,
CREDITORS RIGHT OF PAYMENT (Art. 1240, CC)
BANK OF THE PHILIPPINE ISLANDS VS. COURT OF APPEALS
232 SCRA302
G.R. NO. 104612
MAY 10, 1994
FACTS:
Private respondents Eastern Plywood Corporation and Benigno Lim as officer of
the corporation, had an AND/OR joint account with Commercial Bank and Trust Co
(CBTC), the predecessor-in-interest of petitioner Bank of the Philippine Islands. Lim
withdraw funds from such account and used it to open a joint checking account (an
AND account) with Mariano Velasco. When Velasco died in 1977, said joint checking
account had P662,522.87. By virtue of an Indemnity Undertaking executed by Lim and
as President and General Manager of Eastern withdrew one half of this amount and
deposited it to one of the accounts of Eastern with CBTC.
14

Eastern obtained a loan of P73,000.00 from CBTC which was not secured.
However, Eastern and CBTC executed a Holdout Agreement providing that the loan
was secured by the Holdout of the C/A No. 2310-001-42 referring to the joint checking
account of Velasco and Lim.
Meanwhile, a judicial settlement of the estate of Velasco ordered the withdrawal
of the balance of the account of Velasco and Lim.
Asserting that the Holdout Agreement provides for the security of the loan
obtained by Eastern and that it is the duty of CBTC to debit the account of respondents
to set off the amount of P73,000 covered by the promissory note, BPI filed the instant
petition for recovery. Private respondents Eastern and Lim, however, assert that the
amount deposited in the joint account of Velasco and Lim came from Eastern and
therefore rightfully belong to Eastern and/or Lim. Since the Holdout Agreement covers
the loan of P73,000, then petitioner can only hold that amount against the joint checking
account and must return the rest.
ISSUE:
Whether BPI can demand the payment of the loan despite the existence of the
Holdout Agreement and whether BPI is still liable to the private respondents on the
account subject of the withdrawal by the heirs of Velasco.
RULING:
Yes, for both issues. Regarding the first, the Holdout Agreement conferred on
CBTC the power, not the duty, to set off the loan from the account subject of the
Agreement. When BPI demanded payment of the loan from Eastern, it exercised its
right to collect payment based on the promissory note, and disregarded its option under
the Holdout Agreement. Therefore, its demand was in the correct order.
Regarding the second issue, BPI was the debtor and Eastern was the creditor
with respect to the joint checking account. Therefore, BPI was obliged to return the
amount of the said account only to the creditor. When it allowed the withdrawal of the
balance of the account by the heirs of Velasco, it made the payment to the wrong party.
The law provides that payment made by the debtor to the wrong party does not
extinguish its obligation to the creditor who is without fault or negligence. Therefore,
BPI was still liable to the true creditor, Eastern.

PAYMENT WHO MUST PAY: DEBTOR

AUDION ELECTRIC CO., INC.,
VS. NATIONAL LABOR RELATIONS COMMISSION and NICOLAS MADOLID
1999 Jun 17
G.R. No. 106648
FACTS:
From the position paper and affidavit corroborated by oral testimony, it appears
that complainant was employed by respondent Audion Electric Company on June 30,
1976 as fabricator and continuously rendered service assigned in different offices or
projects as helper electrician, stockman and timekeeper. He has rendered thirteen (13)
years of continuous, loyal and dedicated service with a clean record. On August 3,
complainant was surprised to receive a letter informing him that he will be considered
terminated after the turnover of materials, including respondents tools and equipments
not later than August 15, 1989.

15

Complainant claims that he was dismissed without justifiable cause and due
process and that his dismissal was done in bad faith which renders the dismissal illegal.
For this reason, he claims that he is entitled to reinstatement with full backwages. He
also claims that he is entitled to moral and exemplary damages. He includes payment
of his overtime pay, project allowance, minimum wage increase adjustment,
proportionate 13th month pay and attorneys fees.
ISSUES:
Whether or not the respondent NLRC committed grave abuse of discretion
amounting to lack or excess of jurisdiction when it ruled that private respondent was a
regular employee and not a project employee;
Whether or not petitioner was denied due process when all the money claims of
private respondent, i.e. overtime pay, project allowances, salary differential,
proportionate 13th month pay, moral and exemplary damages as well as attorneys
fees, were granted.
RULING:
Respondents assigning complainant to its various projects did not make
complainant a project worker. As found by the Labor Arbiter, it appears that
complainant was employed by respondent as fabricator and or projects as helper
electrician, stockman and timekeeper. Simply put, complainant was a regular nonproject worker.
Private respondents employment status was established by the Certification of
Employment dated April 10, 1989 issued by petitioner which certified that private
respondent is a bonafide employee of the petitioner from June 30, 1976 up to the time
the certification was issued on April 10, 1989. The same certificate of employment
showed that private respondents exposure to their field of operation was as fabricator,
helper/electrician, stockman/timekeeper. This proves that private respondent was
regularly and continuously employed by petitioner in various job assignments from 1976
to 1989, for a total of 13 years. The alleged gap in employment service cited by
petitioner does not defeat private respondents regular status as he was rehired for
many more projects without interruption and performed functions which are vital,
necessary and indispensable to the usual business of petitioner.
Petitioner failed to present such employment contract for a specific project signed
by private respondent that would show that his employment with the petitioner was for
the duration of a particular project.
Moreover, notwithstanding petitioners claim in its reply that in taking interest in
the welfare of its workers, petitioner would strive to provide them with more continuous
work by successively employing its workers, in this case, private respondent, petitioner
failed to present any report of termination. Petitioner should have submitted or filed as
many reports of termination as there were construction projects actually finished,
considering that private respondent had been hired since 1976. The failure of petitioner
to submit reports of termination supports the claim of private respondent that he was
indeed a regular employee.
The Court finds no grave abuse of discretion committed by NLRC in finding that
private respondent was not a project employee.
Private respondent clearly specified in his affidavit the specific dates in which he
was not paid overtime pay, that is, from the period March 16, 1989 to April 3, 1989
amounting to P765.63, project allowance from April 16, 1989 to July 31, 1989 in the
total amount of P255.00, wage adjustment for the period from August 1, 1989 to August
14, 1989 in the amount of P256.50 and the proportionate 13th month pay for the period
16

covering January to May 1988, November-December 1988, and from January to August
1989. This same affidavit was confirmed by private respondent in one of the scheduled
hearings where he moved that he be allowed to present his evidence ex-parte for failure
of petitioner or any of his representative to appear thereat. On the other hand,
petitioner submitted its unverified Comment to private respondents complaint stating
that he had already satisfied the unpaid wages and 13th month pay claimed by private
respondent, but this was not considered by the Labor Arbiter for being unverified.
Petitioner failed to rebut the claims of private respondent. It failed to show proof
by means of payroll or other evidence to disprove the claim of private respondent.
Petitioner was given the opportunity to cross-examine private respondent yet petitioner
forfeited such chance when it did not attend the hearing, and failed to rebut the claims
of private respondent.
However, the award of moral and exemplary damages must be deleted for being
devoid of legal basis. Moral and exemplary damages are recoverable only where the
dismissal of an employee was attended by bad faith or fraud, or constituted an act
oppressive to labor, or was done in a manner contrary to morals, good customs or
public policy. The person claiming moral damages must prove the existence of bad
faith by clear and convincing evidence for the law always presumes good faith. It is not
enough that one merely suffered sleepless nights, mental anguish, serious anxiety as
the result of the actuations of the other party. Invariably, such action must be shown to
have been willfully done in bad faith or with ill-motive, and bad faith or ill motive under
the law cannot be presumed but must be established with clear and convincing
evidence. Private respondent predicated his claim for such damages on his own
allegations of sleepless nights and mental anguish, without establishing bad faith, fraud
or ill motive as legal basis therefor.
Private respondent not being entitled to award of moral damages, an award of
exemplary damages is likewise baseless. Where the award of moral and exemplary
damages is eliminated, so must the award for attorneys fees be deleted. Private
respondent has not shown that he is entitled thereto pursuant to Art. 2208 of the Civil
Code.
WHEREFORE, the challenged resolutions of the respondent NLRC are hereby
AFFIRMED with the MODIFICATION that the awards of moral and exemplary damages
and attorneys fees are DELETED.

WHERE PAYMENT MUST BE MADE

LORENZO SHIPPING VS. BJ MARTHEL
443 S 163
November 19, 2004
FACTS:
Petitioner Lorenzo Shipping is engaged in coastwise shipping and
owns the cargo M/V Dadiangas Express. BJ Marthel is engaged in trading,
marketing an dselling various industrial commodities. Lorenzo Shipping ordered
for the second time cylinder lines from the respondent stating the term of
payment to be 25% upon delivery, the balance payable in 5 bi-monthly equal
installments, no again stating the date of the cylinders delivery. It was allegedly
paid through post dated checks but the same was dishonored due to
insufficiency of funds. Despite due demands by the respondent, petitioner falied
17

contending that time was of the essence in the delivery of the cylinders and that
there was a delay since the respondent committed said items within two months
after receipt of fir order. RTC held respondents bound to the quotation with
respect to the term of payment, which was reversed by the Court of appeals
ordering appellee to pay appellant P954,000 plus interest. There was no delay
since there was no demand.
ISSUE:
Whether or not respondent incurred delay in performing its obligation
under the contract of sale
RULING:
By accepting the cylinders when they were delivered to the warehouse,
petitioner waived the claimed delay in the delivery of said items. Supreme Court
geld that time was not of the essence. There having been no failure on the part of
the respondent to perform its obligations, the power to rescind the contract is
unavailing to the petitioner.
Petition is denied. Court of appeals decision is affirmed.

SPECIAL FORMS OF PAYMENT:

A. DACION EN PAGO / DATION IN PAYMENT
1.
2.
3.
4.

ESTANISLAO VS. EAST-WEST BANKING CORP., 544 S 369

AQUINTEY VS. TIBONG, 511 S 414
VDA. DE JAYME VS. CA, 390 SCRA 380
CALTEX VS. IAC, NOV. 13, 1992

SPOUSES RAFAEL ESTANISLAO v. EASTWEST BANKING CORPORATION

G.R. No. 178537,February 11, 2008
FACTS:
On July 24,1997, petitioner obtained a loan fro the respondent in the
amount of P3,925,000 evidenced by a promissory note and secured by two
deeds of chattel mortgage covering two dump trucks and a bull dozer . Petitioner
defaulted entire obligation became due and demandable. A deed of assignment
was drafted by the respondent on October 6, 2000 and March 8, 2001
respectively. Petitioners completed the delivery of heavy equipment mentioned in
the deed of assignment to respondent which accepted the same without protest
or objection. Respondent manifested to admit an amended complaint for the
seizure and delivery of two more heavy equipment which are covered under the
second deed of the chattel mortgage. RTC ruled that the deed of assignment and
the petitioners delivery of the heavy equipment effectively extinguished the
petitioners obligation and respondent as stopped. CA reversed the decision
ordering the petitioner the outstanding debt of P4,275,919.69 plus interests.
ISSUE:
18

Did the Deed of Assignment operate to extinguish petitioners debt to the

respondent such that the replevin suit could no longer prosper?
RULING:
The deed of assignment was a perfected agreement which extinguished
petitioners total outstanding obligation to the respondent. The nature of the
assignment was a dacion en pago whereby property is alienated to the creditor
in the satisfaction of a debt in money. Since the agreement was consummated by
the delivery of the last unit of heavy equipment under the deed, petitioners are
deemed to have been released from all their obligations from the respondents.
SPECIAL FORMS OF PAYMENT: DATION EN PAGO/ DATION IN PAYMENT
AQUINTEY v. SPOUSES TIBONG
G.R. No. 166704,December 20, 2006
FACTS:
On May 6, 1999, petitioner Aquintey filed before RTC Baguio, a complaint
for sum of money and damages against respondents. Agrifina alleged that
Felicidad secured loans from her on several occasions at monthly interest rates
of 6% to 7%. Despite demands, spouses Tibong failed to pay their outstanding
loans of P773,000,00 exclusive of interests. However, spouses Tiong alleged
that they had executed deeds of assignment in favor of Agrifina amounting to
P546,459 and that their debtors had executed promissory notes in favor of
Agrifina. Spouses insisted that by virtue of these documents, Agrifina became the
new collector of their debts. Agrifina was able to collect the total amount of
P301,000 from Felicdads debtors. She tried to collect the balance of Felicidad
and when the latter reneged on her promise, Agrifina filed a complaint in the
office of the barangay for the collection of P773,000.00. There was no
settlement. RTC favored Agrifina. Court of Appeals affirmed the decision with
modification ordering defendant to pay the balance of total indebtedness in the
amount of P51,341,00 plus 6% per month.
ISSUE:
Whether or not the deeds of assignment in favor of petitioner has the
effect of payment of the original obligation that would partially
extinguish the same
RULING:
Substitution of the person of the debtor ay be affected by delegacion.
Meaning, the debtor offers, the creditor accepts a third person who consent of
the substitution and assumes the obligation. It is necessary that the old debtor be
released fro the obligation and the third person or new debtor takes his place in
the relation . Without such release, there is no novation. Court of Appeals
correctly found that the respondents obligation to pay the balance of their
account with petitioner was extinguished pro tanto by the deeds of credit. CA
decision is affirmed with the modification that the principal amount of the
respondents is P33,841.
SPECIAL FORMS OF PAYMENT: DATION EN PAGO/ DATION IN PAYMENT

VDA. DE JAYME VS. CA

19

390 SCRA 380

2002 Oct 4
FACTS:
On January 8, 1973, the spouses Graciano and Mamerta Jayme entered into a
Contract of Lease with George Neri, president of Airland Motors Corporation (now Cebu
Asiancars Inc.), covering one-half of Lot 2700 owned and registered to the former. The
lease was for twenty (20) years. The terms and conditions of the lease contract
stipulated that Cebu Asiancars Inc. may use the leased premises as a collateral to
secure payment of a loan which Asiancars may obtain from any bank, provided that the
proceeds of the loan shall be used solely for the construction of a building which, upon
the termination of the lease or the voluntary surrender of the leased premises before the
expiration of the contract, shall automatically become the property of the Jayme
spouses (the lessors).
In October 1977, Asiancars obtained a loan of P6,000,000 from the Metropolitan
Bank and Trust Company. The entire Lot 2700 was offered as one of several properties
given as collateral for the loan. As mortgagors, the spouses signed a Deed of Real
Estate Mortgage dated November 21, 1977 in favor of MBTC. It stated that the deed
was to secure the payment of a loan obtained by Asiancars from the bank. Meeting
financial difficulties and incurring an outstanding balance on the loan, Asiancars
conveyed ownership of the building on the leased premises to MBTC, by way of "dacion
en pago." The building was valued at P980,000 and the amount was applied as partial
payment for the loan. There still remained a balance of P2,942,449.66, which
Asiancars failed to pay. Eventually, MBTC extrajudicially foreclosed the mortgage.
A public auction was held on February 4, 1981. MBTC was the highest bidder for
P1,067,344.35. A certificate of sale was issued and was registered with the Register of
Deeds on February 23, 1981. Meanwhile, Graciano Jayme died, survived by his widow
Mamerta and their children. As a result of the foreclosure, Gracianos heirs filed a civil
complaint, in January of 1982, for Annulment of Contract with Damages with Prayer for
Issuance of Preliminary Injunction, against respondent Asiancars, its officers and
incorporators and MBTC. Later, in 1999, Mamerta Jayme also passed away.
The trial court ruled that the REM is valid and binding upon the Jaymes. The CA
affirmed with modifications. Both the trial and appellate courts found that no fraud
attended the execution of the deed of mortgage. The Motion for Reconsideration was
denied.
ISSUE:
Whether or not the dacion en pago by Asiancars in favor of MBTC is valid and
binding despite the stipulation in the lease contract that ownership of the building will
vest on the Jaymes at the termination of the lease.
RULING:
YES. The alienation of the building by Asiancars in favor of MBTC for the partial
satisfaction of its indebtedness is valid.
The ownership of the building had been effectively in the name of the lesseemortgagor (Asiancars), though with the provision that said ownership be transferred to
the Jaymes upon termination of the lease or the voluntary surrender of the premises.
The lease was constituted on January 8, 1973 and was to expire 20 years thereafter, or
on January 8, 1993. The alienation via dacion en pago was made by Asiancars to
MBTC on December 18, 1980, during the subsistence of the lease. At this point, the
mortgagor, Asiancars, could validly exercise rights of ownership, including the right to
alienate it, as it did to MBTC.
20

Dacion en pago is the delivery and transmission of ownership of a thing by the

debtor to the creditor as an accepted equivalent of the performance of the obligation. It
is a special mode of payment where the debtor offers another thing to the creditor who
accepts it as equivalent of payment of an outstanding debt. The undertaking really
partakes in one sense of the nature of sale, that is the creditor is really buying the thing
or property of the debtor, payment for which is to be charged against
the debtors debt. As such, the essential elements of a contract of sale, namely,
consent, object certain, and cause or consideration must be present. In its modern
concept, what actually takes place in dacion en pago is an objective novation of the
obligation where the thing offered as an accepted equivalent of the performance of an
obligation is considered as the object of the contract of sale, while the debt is
considered as the purchase price. In any case, common consent is an essential
prerequisite, be it sale or novation, to have the effect of totally extinguishing the debt or
obligation. Private respondent MBTC is ordered to pay petitioners rentals in the total
amount of P602,083.33, with six (6) percent interest per annum until fully paid.

SPECIAL FORMS OF PAYMENT: DATION EN PAGO/ DATION IN PAYMENT

CALTEX (PHILIPPINES), INC., petitioner, VS. The INTERMEDIATE APPELLATE
COURT and ASIA PACIFIC AIRWAYS, INC., respondents
November 13, 1992
G.R. No. 72703
FACTS:
On January 12, 1978, private respondent Asia Pacific Airways Inc. entered into
an agreement with petitioner Caltex (Philippines) Inc., whereby petitioner agreed to
supply private respondent's aviation fuel requirements for two (2) years, covering the
period from January 1, 1978 until December 31, 1979. Pursuant thereto, petitioner
supplied private respondent's fuel supply requirements.
As of June 30, 1980, private respondent had an outstanding obligation to
petitioner in the total amount of P4,072,682.13, representing the unpaid price of the fuel
supplied. To settle this outstanding obligation, private respondent executed a Deed of
Assignment dated July 31, 1980, wherein it assigned to petitioner its receivables or
refunds of Special Fund Import Payments from the National Treasury of the Philippines
to be applied as payment of the amount of P4,072,683.13 which private respondent
owed to petitioner. On February 12, 1981, pursuant to the Deed of Assignment,
Treasury Warrant No. B04708613 in the amount of P5,475,294.00 representing the
refund to respondent of Special Fund Import Payment on its fuel purchases was issued
by the National Treasury in favor of petitioner. Four days later, on February 16, 1981,
private respondent, having learned that the amount remitted to petitioner exceeded the
amount covered by the Deed of Assignment, wrote a letter to petitioner, requesting a
refund of said excess.
Petitioner, acting on said request, made a refund in the amount of P900,000.00
plus in favor of private respondent. The latter, believing that it was entitled to a larger
amount by way of refund, wrote petitioner anew, demanding the refund of the remaining
amount. In response thereto, petitioner informed private respondent that the amount
not returned (P510,550.63) represented interest and service charges at the rate of 18%
per annum on the unpaid and overdue account of respondent from June 1, 1980 to July
31, 1981.
Thus, on September 13, 1982, private respondent filed a complaint against
petitioner in the Regional Trial Court of Manila, to collect the sum of P510,550.63.00.
21

Petitioner (defendant in the trial court) filed its answer, reiterating that the amount
not returned represented interest and service charges on the unpaid and overdue
account at the rate of 18% per annum. It was further alleged that the collection of said
interest and service charges is sanctioned by law, and is in accordance with the terms
and conditions of the sale of petroleum products to respondent, which was made with
the conformity of said private respondent who had accepted the validity of said interest
and service charges.
On November 7, 1983, the trial court rendered its decision dismissing the
complaint, as well as the counterclaim filed by defendant therein. Private respondent
(plaintiff) appealed to the Intermediate Appellate Court (IAC). On August 27, 1985, a
decision was rendered by the said appellate court reversing the decision of the trial
court, and ordering petitioner to return the amount of P510,550.63 to private
respondent.
ISSUE:
Whether or not there is a valid dation in payment in this case.
RULING:
The Supreme Court ruled that the Deed of Assignment executed by the parties
on July 31, 1980 is not a dation in payment and did not totally extinguish respondent's
obligations as stated therein.
The then Intermediate Appellate Court ruled that the three (3) requisites of
dacion en pago are all present in the instant case, and concluded that the Deed of
Assignment of July 31, 1980) constitutes a dacion in payment provided for in Article
1245 of the Civil Code which has the effect of extinguishing the obligation, thus
supporting the claim of private respondent for the return of the amount retained by
petitioner.
The Supreme Court, speaking of the concept of dation in payment, in the case of
Lopez vs. Court of Appeals, among others, stated:
"'The dation in payment
extinguishes the obligation to the extent of the value of the thing delivered, either as
agreed upon by the parties or as may be proved, unless the parties by agreement,
express or implied, or by their silence, consider the thing as equivalent to the obligation,
in which case the obligation is totally extinguished."
From the above, it is clear that a dation in payment does not necessarily mean
total extinguishment of the obligation. The obligation is totally extinguished only when
the parties, by agreement, express or implied, or by their silence, consider the thing as
equivalent to the obligation. In the instant case, the then Intermediate Appellate Court
failed to take into account the express recitals of the Deed of Assignment.
"That Whereas, ASSIGNOR has an outstanding obligation with ASSIGNEE in the
amount of P4,072,682.13 as of June 30, 1980, plus any applicable interest on overdue
account. Now therefore in consideration of the foregoing premises, ASSIGNOR by
virtue of these presents, does hereby irrevocably assign and transfer unto ASSIGNEE
any and all funds and/or Refund of Special Fund Payments, including all its rights and
benefits accruing out of the same, that ASSIGNOR might be entitled to, by virtue of and
pursuant to the decision in BOE Case No. 80-123, in payment of ASSIGNOR's
outstanding obligation plus any applicable interest charges on overdue account and
other avturbo fuel lifting and deliveries that ASSIGNOR may from time to time receive
from the ASSIGNEE, and ASSIGNEE does hereby accepts such assignment in its
favor."
22

Hence, it could easily be seen that the Deed of Assignment speaks of three (3)
obligations (1) the outstanding obligation of P4,072,682.13 as of June 30, 1980; (2)
the applicable interest charges on overdue accounts; and (3) the other avturbo fuel
lifting and deliveries that assignor (private respondent) may from time to time receive
from assignee (Petitioner). As aptly argued by petitioner, if it were the intention of the
parties to limit or fix respondent's obligation to P4,072.682.13, they should have so
stated and there would have been no need for them to qualify the statement of said
amount with the clause "as of June 30, 1980 plus any applicable interest charges on
overdue account" and the clause "and other avturbo fuel lifting and deliveries that
ASSIGNOR may from time to time receive from the ASSIGNEE".
The terms of the Deed of Assignment being clear, the literal meaning of its
stipulations should control. In the construction of an instrument where there are several
provisions or particulars, such a construction is, if possible, to be adopted as will give
effect to all.
Likewise, the then Intermediate Appellate Court failed to take into consideration
the subsequent acts of the parties which clearly show that they did not intend the Deed
of Assignment to totally extinguish the obligation: (1) After the execution of the Deed of
Assignment on July 31, 1980, petitioner continued to charge respondent with interest on
its overdue account up to January 31, 1981. This was pursuant to the Deed of
Assignment which provides for respondent's obligation for "applicable interest charges
on overdue account". The charges for interest were made every month and not once
did respondent question or take exception to the interest; and (2) In its letter of February
16, 1981, respondent addressed the following request to petitioner:
In order to judge the intention of the contracting parties, their contemporaneous
and subsequent acts shall be principally considered (Art. 1253, Civil Code). The
foregoing subsequent acts of the parties clearly show that they did not intend the Deed
of Assignment to have the effect of totally extinguishing the obligations of private
respondent without payment of the applicable interest charges on the overdue account.
Finally, the payment of applicable interest charges on overdue account, separate
from the principal obligation of P4,072,682.13 was expressly stipulated in the Deed of
Assignment. The law provides that "if the debt produces interest, payment of the
principal shall not be deemed to have been made until the interests have been
covered." (Art. 1253, Civil Code).

PAYMENT BY CESSION OR ASSIGNMENT

ANTONIO LO, petitioner,

VS. THE HON. COURT OF APPEALS AND NATIONAL ONIONS GROWERS
COOPERATIVE MARKETING ASSOCIATION, INC., respondents
FACTS:
At the core of the present controversy are two parcels of land measuring a total
of 2,147 square meters, with an office building constructed thereon. Petitioner acquired
the subject parcels of land in an auction sale on November 9, 1995 for P20,170,000
from the Land Bank of the Philippines (Land Bank). Private respondent National Onion
Growers Cooperative Marketing Association, Inc., an agricultural cooperative, was the
occupant of the disputed parcels of land under a subsisting contract of lease with Land
Bank. The lease was valid until December 31, 1995. Upon the expiration of the lease
23

contract, petitioner demanded that private respondent vacate the leased premises and
surrender its possession to him. Private respondent refused on the ground that it was,
at the time, contesting petitioners acquisition of the parcels of land in question in an
action for annulment of sale, redemption and damages.
Petitioner filed an action for ejectment before the MTC. He asked, inter alia, for
the imposition of the contractually stipulated penalty of P5,000 per day of delay in
surrendering the possession of the property to him. On September 3, 1996, the trial
court decided the case in favor of petitioner. On appeal to the RTC, the MTC decision
was affirmed in toto. The CA rendered its assailed decision affirming the decision of the
trial court, with the modification that the penalty imposed upon private respondent for
the delay in turning over the leased property to petitioner was reduced from P 5,000 to
P 1000 per day.
ISSUE:
Whether or not the Court of Appeals erred in reducing the penalty awarded by
the trial court, the same having been stipulated by the parties.
RULING:
No. Generally, courts are not at liberty to ignore the freedom of the parties to
agree on such terms and conditions as they see fit as long as they are not contrary to
law, morals, good customs, public order or public policy. Nevertheless, courts may
equitably reduce a stipulated penalty in the contract if it is iniquitous or unconscionable,
or if the principal obligation has been partly or irregularly complied with. This power of
the courts is explicitly sanctioned by Article 1229 of the Civil Code which provides:
Article 1229. The judge shall equitably reduce the penalty when the principal obligation
has been partly or irregularly complied with by the debtor. Even if there has been no
performance, the penalty may also be reduced by the courts if it is iniquitous or
unconscionable.
The question of whether a penalty is reasonable or iniquitous is addressed to the
sound discretion of the court and depends on several factors, including, but not limited
to, the following: the type, extent and purpose of the penalty, the nature of the
obligation, the mode of breach and its consequences, the supervening realities, the
standing and relationship of the parties.
In this case, the stipulated penalty was reduced by the appellate court for being
unconscionable and iniquitous. Petition denied; CA decision affirmed.
APPLICATION OF PAYMENTS
1.
2.
3.
4.

ASI CORP., VS. EVANGELISTA, 545 S 300

PACULDO VS. REGALADO, 345 SCRA 134
CBC VS. CA, 265 SCRA 327
MOBIL VS. CA, 272 SCRA 523

ASI CORP and ANTONIO SAN JUAN v. SPOUSES EFREN EVANGELISTA

FACTS:
Respondents are engaged in the large-scale business of buying broiler
eggs, hatching and selling them and egg by-products. For incubation and hatchings,
respondents availed of the hatching services of ASJ Corp. They agreed o service fees
24

of 80 centavos per egg. Service fees were paid upon release. Fro consecutive times the
respondents failed to pay the fee until such time that ASJ retained the chicks
demanding full payment from the respondent. ASJ received P15,000 for partial payment
but the chicks were still not released. RTC ruling, which was affirmed by the Court of
Appeals holding that ASJ Corp and Antonio San Juan be solidarily liable to the
respondents.
ISSUE:
Was petitioners retention of the chicks and by-products, on account of
respondents failure to pay the corresponding fees unjustified?
RULING:
Respondents offer to partially satisfy their accounts is not enough to
extinguish their obligation. Respondents cannot substitute or apply as their payment the
value of the chicks and by-products they expect to derive because it is necessary that
all the debts be paid for the same kind. The petition is partly granted. The Court of
Appeals decision is modified.

APPLICATION OF PAYMENTS
PACULDO VS. REGALADO
345 SCRA 134
FACTS:
On December 27, 1990, petitioner Nereo Paculdo and respondent Bonifacio
Regalado entered into a contract of lease over a parcel of land with a wet market
building, located at Fairview Park, Quezon City. The contract was for twenty five (25)
years, commencing on January 1, 1991 and ending on December 27, 2015. For the
first five (5) years of the contract beginning December 27, 1990, Nereo would pay a
monthly rental of P450,000, payable within the first five (5) days of each month with a
2% penalty for every month of late payment.
Aside from the above lease, petitioner leased eleven (11) other property from the
respondent, ten (10) of which were located within the Fairview compound, while the
eleventh was located along Quirino Highway Quezon City. Petitioner also purchased
from respondent eight (8) units of heavy equipment and vehicles in the aggregate
amount of Php 1, 020,000.
On account of petitioners failure to pay P361, 895.55 in rental for the month of
May, 1992, and the monthly rental of P450, 000.00 for the months of June and July
1992, the respondent sent two demand letters to petitioner demanding payment of the
back rentals, and if no payment was made within fifteen (15) days from the receipt of
the letter, it would cause the cancellation of the lease contract.
Without the knowledge of petitioner, on August 3, 1992, respondent mortgaged
the land subject of the lease contract, including the improvements which petitioner
introduced into the land amounting to P35, 000,000.00, to Monte de Piedad Savings
Bank, as a security for a loan.
On August 12, 1992, and the subsequent dates thereafter, respondent refused to
accept petitioners daily rental payments.
25

Subsequently, petitioner filed an action for injunction and damages seeking to

enjoin respondents from disturbing his possession of the property subject of the lease
contract. On the same day, respondent also filed a complaint for ejectment against
petitioner.
The lower court rendered a decision in favor of the respondent, which was
affirmed in toto by the Court of Appeals.
ISSUE:
Whether or not the petitioner was truly in arrears in the payment of rentals on the
subject property at the time of the filing of the complaint for ejectment.
RULING:
NO, the petitioner was not in arrears in the payment of rentals on the subject
property at the time of the filing of the complaint for ejectment.
As found by the lower court there was a letter sent by respondent to herein
petitioner, dated November 19, 1991, which states that petitioners security deposit for
the Quirino lot, be applied as partial payment for his account under the subject lot as
well as to the real estate taxes on the Quirino lot. Petitioner interposed no objection, as
evidenced by his signature signifying his conformity thereto.
Meanwhile, in an earlier letter, dated July 15, 1991, respondent informed
petitioner that the payment was to be applied not only to petitioners accounts under the
subject land and the Quirino lot but also to heavy equipment bought by the latter from
respondent. Unlike in the November letter, the July letter did not contain the signature
of petitioner.
Petitioner submits that his silence is not consent but is in fact a rejection.
As provided in Article 1252 of the Civil Code, the right to specify which among his
various obligations to the same creditor is to be satisfied first rest with the debtor.
In the case at bar, at the time petitioner made the payment, he made it clear to
respondent that they were to be applied to his rental obligations on the Fairview wet
market property. Though he entered into various contracts and obligations with
respondent, all the payments made, about P11,000,000.00 were to be applied to rental
and security deposit on the Fairview wet market property. However, respondent applied
a big portion of the amount paid by petitioner to the satisfaction of an obligation which
was not yet due and demandable- the payment of the eight heavy equipments.
Under the law, if the debtor did not declare at the time he made the payment to
which of his debts with the creditor the payment is to be applied, the law provided the
guideline; i.e. no payment is to be applied to a debt which is not yet due and the
payment has to be applied first to the debt which is most onerous to the debtor.
The lease over the Fairview wet market is the most onerous to the petitioner in
the case at bar.
Consequently, the petition is granted.

APPLICATION OF PAYMENTS
CHINA BANKING CORPORATION, ATTYS. REYNALDO M. CABUSORA and
RENATO C. TAGUIAM, petitioners,
26

VS. COURT OF APPEALS, HON. PEDRO T. SANTIAGO, SPS. SO CHING and

CRISTINA SO, and NATIVE WEST INTERNATIONAL TRADING CORP.,
respondents
1996 December 05
G.R. No. 121158
FACTS:
China Banking Corporation (China Bank) extended several loans to Native West
International Trading Corporation (Native West) and to So Ching, Native West's
president. Native West in turn executed promissory notes in favor of China Bank. So
Ching, with the marital consent of his wife, Cristina So, additionally executed two
mortgages over their properties, viz., a real estate mortgage executed on July 27, 1989
covering a parcel of land situated in Cubao, Quezon City, under TCT No. 277797, and
another executed on August 10, 1989 covering a parcel of land located in Mandaluyong,
under TCT No. 5363. The promissory notes matured and despite due demands by
China Bank neither private respondents Native West nor So Ching paid. Pursuant to a
provision embodied in the two mortgage contracts, China Bank filed petitions for the
extra-judicial foreclosure of the mortgaged properties before Notary Public Atty. Renato
E. Taguiam for TCT No. 277797, and Notary Public Atty. Reynaldo M. Cabusora for
TCT No. 5363, copies of which were given to the spouses So Ching and Cristina So.
After due notice and publication, the notaries public scheduled the foreclosure sale of
the spouses' real estate properties on April 13, 1993. Eight days before the foreclosure
sale, however, private respondents filed a complaint with the Regional Trial Court for
accounting with damages and with temporary restraining order against petitioners
alleging several grounds, including Violation of Article 1308 of the Civil Code. On April
7, 1993, the trial court issued a temporary restraining order to enjoin the foreclosure
sale.
Petitioners moved for reconsideration, but it was denied in an Order dated
September 23, 1993. To annul the trial court's Orders of April 28, 1993 and September
23, 1993, petitioners elevated the case through certiorari and prohibition before public
respondent Court of Appeals. In a decision dated January 17, 1995, respondent Court
of Appeals held that Administrative Circular No. 3 is the governing rule in extra-judicial
foreclosure of mortgage, which circular petitioners however failed to follow, and with
respect to the publication of the notice of the auction sale, the provisions of P.D. No.
1079 is the applicable statute, which decree petitioners similarly failed to obey.
Respondent Court of Appeals did not pass upon the other issues and confined its
additional lengthy discussion on the validity of the trial court's issuance of the
preliminary injunction, finding the same neither capricious nor whimsical exercise of
judgment that could amount to grave abuse of discretion. The Court of Appeals
accordingly dismissed the petition, as well as petitioners' subsequent motion for
reconsideration. Hence, the instant petition under Rule 45 of the Rules of Court
reiterating the grounds raised before respondent court.
ISSUE:
Whether or not there was a correct application of payment in this case.
RULING:
An important task in contract interpretation is the ascertainment of the intention of
the contracting parties which is accomplished by looking at the words they used to
project that intention in their contract, i.e., all the words, not just a particular word or two,
and words in context, not words standing alone. Indeed, Article 1374 of the Civil Code,
states 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." Applying
the rule, we find that the parties intent is to constitute the real estate properties as
continuing securities liable for future obligations beyond the amounts of P6.5 million and
27

P3.5 million respectively stipulated in the July 27, 1989 and August 10, 1989 mortgage
contracts. Thus, while the "whereas" clause initially provides that "the mortgagee has
granted, and may from time to time hereafter grant to the mortgagors . . . credit facilities
not exceeding six million five hundred thousand pesos only (P6,500,000.00)" yet in the
same clause it provides that "the mortgagee had required the mortgagor(s) to give
collateral security for the payment of any and all obligations heretofore
contracted/incurred and which may thereafter be contracted/incurred by the
mortgagor(s) and/or debtor(s), or any one of them, in favor of the mortgagee" which
qualifies the initial part and shows that the collaterals or real estate properties serve as
securities for future obligations. The first paragraph which ends with the clause, "the
idea being to make this deed a comprehensive and all embracing security that it is"
supports this qualification.
Similarly, the second paragraph provides that "the mortgagee may take further
advances and all sums whatsoever advanced by the mortgagee shall be secured by this
mortgagee . . ." And although it was stated that "[t]he said credit shall extend to any
account which shall, within the said limit of P6,500,000.00 exclusive of interest", this
part of the second sentence is again qualified by its succeeding portion which provides
that "this mortgage shall stand as security for all indebtedness of the mortgagor(s)
and/or debtor(s), or any one of them, at any and all times outstanding . . ." Again, under
the third paragraph, it is provided that "the mortgagee may from time to time grant the
mortgagor(s)/debtor(s) credit facilities exceeding the amount secured by this mortgage .
. ." The fourth paragraph, in addition, states that ". . . all such withdrawals, and
payments, whether evidenced by promissory notes or otherwise, shall be secured by
this mortgage" which manifestly shows that the parties principally intended to constitute
the real estate properties as continuing securities for additional advancements which
the mortgagee may, upon application, extend. It is well settled that mortgages given to
secure future advancements or loans are valid and legal contracts, and that the
amounts named as consideration in said contracts do not limit the amount for which the
mortgage may stand as security if from the four corners of the instrument the intent to
secure future and other indebtedness can be gathered.
The allegations stated are a clear admission that they were unable to settle to the
fullest their obligation. Foreclosure is valid where the debtors, as in this case, are in
default in the payment of their obligation. The essence of a contract of mortgage
indebtedness is that a property has been identified or set apart from the mass of the
property of the debtor-mortgagor as security for the payment of money or the fulfillment
of an obligation to answer the amount of indebtedness, in case of default of payment. It
is a settled rule that in a real estate mortgage when the obligation is not paid when due,
the mortgagee has the right to foreclose the mortgage and to have the property seized
and sold in view of applying the proceeds to the payment of the obligation. In fact, aside
from the mortgage contracts, the promissory notes executed to evidence the loans also
authorize the mortgagee to foreclose on the mortgages. Thus: . . . CHINA BANKING
CORPORATION is hereby authorized to sell at public or private sales such securities or
things of value for the purpose of applying their proceeds to such payments.
And while private respondents aver that they have already paid ten million pesos,
an allegation which has still to be settled before the trial court, the same cannot be
utilized as a shield to enjoin the foreclosure sale. A mortgage given to secure
advancements, is a continuing security and is not discharged by repayment of the
amount named in the mortgage, until the full amount of the advancements are paid.

28

APPLICATION OF PAYMENTS
MOBIL OIL PHILIPPINES, INC., and CALTEX (PHILS.), INC., petitioners
VS. HON. COURT OF APPEALS and
CONTINENTAL CEMENT CORPORATION, respondents
G.R. No. 103052
23 May 2003
FACTS:
The petition for review on certiorari in the case at bar seeks the reversal of the
decision of the Court of Appeals, affirming that 2 of the Regional Trial Court (RTC),
Branch 101, of Quezon City, which found herein petitioners Mobil Oil Philippines, Inc.,
and Caltex Philippines, Inc., jointly and severally liable to private respondent Continental
Cement Corporation in the amount of eight million pesos (P8,000,000.00) for actual
damages, plus ten percent (10%) thereof by way of attorneys fees, for having delivered
water-contaminated bunker fuel oil to the serious prejudice and damage of the cement
firm.
Sometime in May 1982, petitioner Mobil Oil Philippines, Inc. (MOPI), a firm
engaged in the marketing of petroleum products to industrial users, entered into a
supply agreement with private respondent Continental Cement Corporation (CCC), a
cement producer, under which the former would supply the latters industrial fuel oil
(IFO) or bunker fuel oil (BFO) requirements. MOPI extended to CCC an unsecured
credit line of P2,000,000.00 against which CCCs purchases of oil could initially be
charged.
MOPI had a hauling contract with Century Freight Services (CFS) whereby CFS
undertook the delivery of Mobil products to designated consignees of MOPI. During the
period starting from 12 July to 07 October 1982, MOPI made a total of sixty-seven
deliveries of BFO, each delivery consisting of 20,000 liters, to CCCs cement factory in
Norzagaray, Bulacan. On 08 October 1982, CCC discovered that what should have
been MOPIs 20,000 BFO delivery to CCCs Norzagaray plant, through CFSs lorry
truck, was, in fact, pure water. CCC at once informed MOPI of this anomaly and of its
intention to meanwhile hold in abeyance all payments due to MOPI on its previous
deliveries until such time as the parties would have ascertained that those deliveries
were not themselves adulterated. CCC suggested that MOPIs storage tank in the
Norzagaray plant be likewise investigated for possible contamination.
Alleging in the complaint it ultimately filed with the RTC that its factory equipment
broke down from 19 to 22 September 1982 due to the utilization of the watercontaminated BFO supplied by MOPI; that on 23 September 1982, its plant operations
had to be stopped completely; and that it was able to resume operations only after
essential repairs had been undertaken on 02 October 1982; CCC sought to recover
consequential damages from MOPI. In answer, MOPI averred that CCC had accepted
each delivery of BFO in accordance with the procedure for testing and acceptance of
BFO deliveries; that it was only on 08 October 1982 that CCC brought to its attention
the alleged anomalous delivery of 20,000 liters of BFO under invoice No. 47587 through
Mariano Riveras lorry truck; that when the delivery was being inspected by CCCs
representatives, the truck driver and helper fled; that Rivera acknowledged full liability
for such delivery; that Rivera promised to pay the amount of P42,730.00 for the 20,000
liters of BFO delivered; and that MOPI agreed to the water draining activity solely for the
purpose of maintaining good business relations with CCC but not to admit any liability
therefore. In its compulsory counterclaim, MOPI claimed that CCC had an outstanding
obligation to it, as of 30 November 1982, in the amount of P1,096,238.51, and that as a
consequence of the frivolous and malicious suit: which besmirched MOPIs reputation,
29

it suffered moral damages of not less than P10,000,000.00, exemplary damages of the
same amount, and the incurrence of attorneys fees.
ISSUES:
Whether or not Petitioner Mobil is stopped from claiming that no Mobil BFO
remained unused by Continental on 22 October 1982; and that the deliveries of BFO
made by Mobil to Continental before 8 October 1982 were not contaminated with water.
Whether or not Petitioners can be held liable for the contaminated BFO delivered
on 8 October 1982 on the ground that Country Freight Service, as carrier-hauler, was
an agent of Mobil.
RULING:
The claim that the Court of Appeals conveniently made an inference that the
subject Continental storage tank contained Mobil BFO deliveries only because Mobil
and Continental agreed to jointly examine the same, and that the appellate court had
so misapprehended the facts, is unacceptable. The factual finding that deliveries
previous to 08 October 1982 were adulterated BFO was supported by the 22 October
1982 joint undertaking. This document, witnessed and signed by representatives of
both MOPUI and CCC, clearly showed that a detailed verification of water contained on
all BFO delivered by MOBIL OIL PHILS., INC., except those that have already been
used in cement operation by CCC,: was undertaken. Implicit from this statement was
that there still was at the time an availability of BFO in the storage tank designated by
CCC for past Mobil deliveries. The same could be said of the second water draining
process, evidence by the second joint undertaking. Although done without the
participation of MOPI, the latter, nonetheless, was notified of the counting thrice, the
last of which had indicated that failure on MOPIs part to send a representative would be
tantamount to a waiver of its right to participate therein.
The appellate court may not thus be faulted for holding that petitioners and
barred from questioning the results of water draining processes conducted on the MOPI
tank in the CCC plant site, in the same manner that MOPI may not belatedly question
the testing procedure theretofore adopted. MOPI cannot be allowed to turn its back to
its own acts (or inactions) to the prejudice of CCC, which, in good faith, relied upon
MOPIs conduct.
CFS was the contractor of MOPI, not CCC, and the contracted price of the BFO
that CCC paid to MOPI included hauling charges. The presumption laid down under
Article 1523 of the Civil Code that delivery to the carrier should be deemed to be
delivery to the buyer would have no application where, such as in this case, the sale
itself specifically called for delivery by the seller to the buyer at the latters place of
business.
WHEREFORE, the herein questioned decision of the Court of Appeals in
AFFIRMED in toto. Costs against petitioners.

TENDER OF PAYMENT OR CONSIGNATION

1.
2.
3.
4.
5.
6.

BENOS VS. LAWILAO, 509 S 549

PEOPLES INDUSTRIAL VS. CA, OCT. 24, 1997
ETERNAL GARDENS VS. CS, DEC. 9, 1997
RAYOS VS. REYES, 398 SCRA 24
CEBU INTERNATIONAL VS. CA, 316 SCRA 488
DE MESA VS. CA, OCT. 19, 1999
30

SPOUSES JAIME BENOS

v. SPOUSES GREGORIO LAWILAO
G.R. No. 172259, December 5, 2006
FACTS:
On February 11,1999, petitioner-spouses Benos and respondent
Lawilao executed a Pacto de Retro Sale where Benos sold their lot and the
building erected thereon for P300,000, one-half of which to be paid in cash to the
Benos and the other half to be paid to the bank to pay off the loans of the Benos
which was secured by the same lot and building. Under the contract, Benos
could redeem the property within 18 months from the date of execution by
returning the contract price, otherwise, the sale would become irrevocable. After
paying the P150,000, Lawilao took possession of the property, restructured it
twicw, eventually the loan become due and demandable. On August 14, 2000, a
son of Benos and Lawilao paid the bankl but the bank refused. Lawilao filed for
consignation against the bank and deposited the amount of P159,000.00. RTC
declared Lawilao of the ownership of the subject property, which was affirmed by
the Court of Appeals.
ISSUE:
Whether or not the contract of Pacto de Retro Sale be rescinded by
the petitioner
RULING:
In the instant case, records show that Lawilao filed the petition for
consignation against the bank in Civil Case without notifying the Benos. Hence,
Lawilao failed to prove their offer to pay the balance, even before the filing of the
consignation case. Lawilao never notified the Benos. Thus, as far as the Benos
are concerned, there was no full and complete payment of the contract price
which gives them the right to rescind.
Petition is granted. Court of Appeals decision is reversed and set
aside, that the Pacto de Retro Sale is rescinded and petitioner are ordered to
return the amount of P150,000 to respondents.

TENDER OF PAYMENT OR CONSIGNATION

PEOPLE'S INDUSTRIAL AND COMMERCIAL CORPORATION, petitioner
VS. COURT OF APPEALS and MAR-ICK INVESTMENT CORPORATION,
respondents.
Oct 24, 1997
G.R. No. 112733
FACTS:
Private respondent Mar-ick Investment Corporation is the exclusive and
registered owner of Mar-ick Subdivision in Barrio Buli, Cainta, Rizal. On May 29, 1961,
private respondent entered into six agreements with petitioner People's Industrial and
Commercial Corporation sell to petitioner six subdivision lots. Five of the agreements,
31

involving similarly stipulate that the petitioner agreed to pay private respondent for each
lot, the amount of P7,333.20 with a down payment of P480.00. The balance of
P6,853.20 shall be payable in 120 equal monthly installments of P57.11 every 30th of
the month, for a period of ten years. With respect to Lot No. 8, the parties agreed to the
purchase price of P7,730.00 with a down payment of P506.00 and equal monthly
installments of P60.20.
After ten years, however, petitioner still had not fully paid for the six lots; it had
paid only the down payment and eight installments, even after private respondent had
given petitioner a grace period of four months to pay the arrears. As of May 1, 1980,
the total amount due to private respondent under the contract was P214,418.00.
In his letter of March 30, 1980 to Mr. Tomas Siatianum, who signed the
agreements for petitioner, private respondent's counsel protested petitioner's
encroachment upon a portion of its subdivision. It added that petitioner had failed to
abide by its promise to remove the encroachment, or to purchase the lots involved "at
the current price or pay the rentals on the basis of the total area occupied, all within a
short period of time." It also demanded the removal of the illegal constructions on the
property that had prejudiced the subdivision and its neighbors.
After a series of negotiations between the parties, they agreed to enter into a
new contract to sell 8 involving seven lots. The contract stipulates that the previous
contracts involving the same lots "have been cancelled due to the failure of the
purchaser to pay the stipulated installments." It states further that the new contract was
entered into "to avoid litigation, considering that the purchaser has already made use of
the premises since 1981 to the present without paying the stipulated installments." The
parties agreed that the contract price would be P423,250.00 with a down payment of
P42,325.00 payable upon the signing of the contract and the balance of P380,925.00
payable in forty-eight equal monthly amortization payments of P7,935.94. The new
contract bears the date of October 11, 1983 but neither of the parties signed it.
Thereafter, Tomas Siatianum issued the checks in the total amount of P37,642.72 to
private respondent.
Private respondent received but did not encash those checks. Instead filed in the
trial court a complaint for accion publiciana de posesion against petitioner and Tomas
Siatianum, as president and majority stockholder of petitioner.
The lower court rendered a decision finding that the original agreements of the
parties were validly cancelled in accordance with provision No. 9 of each agreement.
The parties did not enter into a new they did not sign the draft contract. Receipt by
private respondent of the five checks could not amount to perfection of the contract
because private respondent never encashed and benefited from those checks, they
represented the deposit under the new contract because petitioner failed to prove that
those were monthly installments that private respondent refused to accept. Thus, the
fact that the parties tried to negotiate a new Contract indicated that they considered the
first contract as "already cancelled." This decision was affirmed by the Court of
Appeals.
ISSUE:
Whether there was a tender of payment and consignation in the case.
RULING:
The parties' failure to agree on a fundamental provision of the contract was
aggravated by petitioner's failure to deposit the installments agreed upon. Neither did it
attempt to make a consignation of the installments. As held in the Adelfa Properties
case:
32

"The mere sending of a letter by the vendee expressing the intention to pay, without the
accompanying payment, is not considered a valid tender of payment. Besides, a mere
tender of payment is not sufficient to compel private respondents to deliver the property
and execute the deed of absolute sale. It is consignation which is essential in order to
extinguish petitioner's obligation to pay the balance of the purchase price. The rule is
different in case of an option contract or in legal redemption or in a sale with right to
repurchase, wherein consignation is not necessary because these cases involve an
exercise of a right or privilege (to buy, redeem or repurchase) rather than the discharge
of an obligation, hence tender of payment would be sufficient to preserve the right or
privilege. This is because the provisions on consignation are not applicable when there
is no obligation to pay. A contract to sell, as in the case before us, involves the
performance of an obligation, not merely the exercise of a privilege or a right.
Consequently, performance or payment may be effected not by tender of payment
alone but by both tender and consignation."
In the case, petitioner did not lift a finger towards the performance of the contract
other than the tender of down payment. There is no record that it even bothered to
tender payment of the installments or to amend the contract to reflect the true intention
of the parties as regards the number of lots to be sold. Indeed, by petitioner's inaction,
private respondent may not be judicially enjoined to validate a contract that the former
appeared to have taken for granted. As in the earlier agreements, petitioner ignored
opportunities to resuscitate a contract to sell that were rendered moribund and
inoperative by its inaction.
Petition denied. Decision affirmed.
TENDER OF PAYMENT OR CONSIGNATION
ETERNAL GARDENS MEMORIAL PARK CORPORATION
VS. COURT OF APPEALS and NORTH PHILIPPINE UNION MISSION OF THE
SEVENTH DAY ADVENTIST
1997 Dec 9
G.R. No. 124554
FACTS:
Petitioner EGMPC and private respondent NPUM entered into a Land
Development Agreement dated October 6, 1976. Under the agreement, EGMPC was to
develop a parcel of land owned by NPUM into a memorial park subdivided into lots.
The parties further agreed that EGMPC had the obligation to remit monthly to NPUM
forty percent (40%) of its net gross collection from the development of a memorial park
on property owned by NPUM.
It also provides for the designation of a
depository/trustee bank to act as the depository/trustee for all funds collected by
EGMPC.
Later, two claimants of the parcel of land surfaced Maysilo Estate and the heirs
of a certain Vicente Singson Encarnacion. EGMPC thus filed an action for interpleader
against Maysilo Estate and NPUM. The Singson heirs in turn filed an action for quieting
of title against EGMPC and NPUM.
From these two cases, several proceedings ensued. One such case, from the
interpleader action, EGMPC assailed the appellate court's resolution requiring
"petitioner Eternal Gardens [to] deposit whatever amounts are due from it under the
Land Development Agreement with a reputable bank to be designated by the
respondent court."
33

The trial court dismissed the cases and the appellate court affirmed insofar as it
dismissed the claims of the intervenors, including the Maysilo Estate, and the titles of
NPUM to the subject parcel of land were declared valid; and the trial court's decision
favor of the Singson heirs was reversed and set aside. Through the resolution issued by
the Supreme Court resolution, the Court of Appeals proceeded with the disposition of
the case and required the parties to appear at a scheduled hearing on June 16, 1994,
"with counsel and accountants, as well as books of accounts and related records,' to
determine the remaining accrued rights and liabilities of said parties."
The accounting of the parties' respective obligations was referred to the Court's
Accountant, Mrs. Carmencita Angelo, with the concurrence of the parties, to whom the
documents were to be submitted. NPUM prepared and submitted a Summary of Sales
and Total Amounts Due based on the following documents it likewise submitted to the
court. However, EGMPC did not submit any document whatsoever to aid the appellate
court in its mandated task. Thus, the appellate court declared that EGMPC has waived
its right to present the records and documents necessarily for accounting, and that it will
now proceed "to the mutual accounting required to determine the remaining accrued
rights and liabilities of the said partiesand that the Court will proceed to do what it is
required to do on the basis of the documents submitted by the NPUMC. Ms. Angelo
submitted her Report dated January 31, 1995, to which the appellate court required the
parties to comment on. EGMPC took exception to the appellate court's having
considered it to have waived its right to present documents. Considering EGMPC's
arguments, the court set a hearing date where NPUM would present its documents
"according to the Rules [of Court], and giving the private respondent [EGMPC] the
opportunity to object thereto."
ISSUE:
Whether or not EGMPC is liable for interest because there was still the
unresolved issue of ownership over the property subject of the Land Development
Agreement of October 6, 1976.
RULING:
The Supreme Court held that the argument is without merit. EGMPC under the
agreement had the obligation to remit monthly to NPUM forty percent (40%) of its net
gross collection from the development of a memorial park on property owned by NPUM.
It also provides for the designation of a depository/trustee bank to act as the
depository/trustee for all funds collected by EGMPC. There was no obstacle, legal or
otherwise, to the compliance by EGMPC of this provision in the contract, even on the
affectation that it did not know to whom payment was to be made.
Even disregarding the agreement, EGMPC cannot "suspend" payment on the
pretext that it did not know who among the subject property's claimants was the rightful
owner. It had a remedy under the New Civil Code of the Philippines to give in
consignation the amounts due, as these fell due.
Consignation produces the effect of payment. The rationale for consignation is to
avoid the performance of an obligation becoming more onerous to the debtor by reason
of causes not imputable to him. For its failure to consign the amounts due, EGMPCs
obligation to NPUM necessarily became more onerous as it became liable for interest
on the amounts it failed to remit.
Thus, the Court of Appeals correctly held Eternal Gardens liable for interest at
the rate of twelve percent (12%). The withholding of the amounts due under the
agreement was tantamount to a forbearance of money.

34

TENDER OF PAYMENT OR CONSIGNATION

SPOUSES TEOFILO and SIMEONA RAYOS, and GEORGE RAYOS
VS. DONATO REYES, SATURNINO REYES, TOMASA R. BUSTAMANTE and
TORIBIA R. CAMELO
G.R. No. 150913
February 20, 2003
398 SCRA 25
FACTS:
At stake in this petition for review is the ownership of 3 parcels of unregistered
land with an area of approximately 130,947 square meters situated in Brgy. Sapa,
Burgos, Pangasinan, the identities of which are not disputed.
The 3 parcels were formerly owned by the spouses Francisco and Asuncion
Tazal who on 1 September 1957 sold them for P724.00 to respondents predecessor-ininterest, one Mamerto Reyes, with right to repurchase within 2 years from date thereof
by paying to the vendee the purchase price and all expenses incident to their
reconveyance. After the sale the vendee a retro took physical possession of the
properties and paid the taxes thereon.
The otherwise inconsequential sale became controversial when 2 of the 3
parcels were again sold on 24 December 1958 by Francisco Tazal for P420.00 in favor
of petitioners predecessor-in-interest Blas Rayos without first availing of his right to
repurchase the properties.
In the meantime, on 1 September 1959 the conventional right of redemption in
favor of spouses Francisco and Asuncion Tazal expired without the right being
exercised by either the Tazal spouses or the vendee Blas Rayos.
After the expiration of the redemption period, Francisco Tazal attempted to
repurchase the properties from Mamerto Reyes by asserting that the 1 September 1957
deed of sale with right of repurchase was actually an equitable mortgage and offering
the amount of P724.00 to pay for the alleged debt. But Mamerto Reyes refused the
tender of payment and vigorously claimed that their agreement was not an equitable
mortgage.
On 9 May 1960 Francisco Tazal filed a complaint with the Court of First Instance
of Pangasinan against Mamerto Reyes for the declaration of the 1 September 1957
transaction as a contract of equitable mortgage. He also prayed for an order requiring
defendant Mamerto Reyes to accept the amount of P724.00 which he had deposited on
31 May 1960 with the trial court as full payment for his debt, and canceling the
supposed mortgage on the 3 parcels of land with the execution of the corresponding
documents of reconveyance in his favor. Defendant denied plaintiffs allegations and
maintained that their contract was a sale with right of repurchase that had long expired.
On 22 June 1961 Francisco Tazal again sold the third parcel of land previously
purchased by Mamerto Reyes to petitioner-spouses Teofilo and Simeona Rayos for
P400.00. On 1 July 1961 petitioner-spouses bought from Blas Rayos for P400.00 the 2
lots that Tazal had sold at the first instance to Mamerto Reyes and thereafter to Blas
Rayos. Curiously, these contracts of sale in favor of petitioner-spouses were perfected
while the aforementioned case was pending before the trial court.
ISSUE:
Whether or not the consignation made by the petitioners is valid.
35

RULING:
In order that consignation may be effective the debtor must show that (a) there
was a debt due; (b) the consignation of the obligation had been made because the
creditor to whom a valid tender of payment was made refused to accept it; (c) previous
notice of the consignation had been given to the person interested in the performance of
the obligation; (d) the amount due was placed at the disposal of the court; and, (e) after
the consignation had been made the person interested was notified thereof.
In the instant case, petitioners failed, first, to offer a valid and unconditional
tender of payment; second, to notify respondents of the intention to deposit the amount
with the court; and third, to show the acceptance by the creditor of the amount
deposited as full settlement of the obligation, or in the alternative, a declaration by the
court of the validity of the consignation. The failure of petitioners to comply with any of
these requirements rendered the consignation ineffective.
Mamerto Reyes was therefore within his right to refuse the tender of payment
offered by petitioners because it was conditional upon his waiver of the two (2)-year
redemption period stipulated in the deed of sale with right to repurchase.
Wherefore, the petition for review is denied.

TENDER OF PAYMENT OR CONSIGNATION

CEBU INTERNATIONAL FINANCE CORPORATION VS. COURT of APPEALS
G. R. No. 123031. October 12, 1999
316 SCRA 488
FACTS:
Cebu International Finance Corporation (CIFC) is a quasi-banking institution
engaged in money market operations. On April 25, 1991, private respondent Vicente
Alegre invested with CIFC P500, 000.00 in cash. Petitioner issued a promissory note to
mature on May 27, 1991. The note for P516, 238. 67 covered private respondents
placement plus interest at 20.5% for 32 days. On May 27, 1991, CIFC issued BPI
Check No. 513397 for P514, 390.94 in favor of the private respondent as proceeds of
his mature investment plus interest. The check was drawn from petitioners current
account maintained with Bank of the Philippine Islands (BPI) main branch at Makati
City. On June 17, 1991, private respondents wife deposited the check with Rizal
Commercial Banking Corp. (RCBC) in Puerto Princesa, Palawan. BPI dishonored the
check, that the check is subject of an investigation. BPI took custody of the check
pending an investigation of several counterfeit checks drawn against CIFCs checking
account. BPI used the check to trace the perpetrators of the forgery. Immediately,
private respondent notified CIFC of the dishonored check and demanded that he be
paid in cash. CIFC denied the request and instead instructed private respondent to wait
for its ongoing bank reconciliation with BPI. Private respondent made a formal demand
of his money market placement. In turn, CIFC promised to replace the check but
required an impossible condition that the original check must first be surrendered.
On February 25, 1992, Alegre filed a complaint for recovery of sum of money
against petitioner. On July 13, 1992, CIFC sought to recover its lost funds and formally
filed against BPI a separate civil action for collection of a sum of money with RTCMakati Branch. It alleged that BPI unlawfully deducted from CIFCs checking account,
counterfeit checks amounting to P1, 724, 364. 58. The action included the prayer to
collect the amount of the check paid to Alegre but dishonored by BPI. CIFC in its
response to Alegres complaint filed for leaver of court and impleaded BPI to enforce a
right, for contribution and indemnity. The court granted CIFCs motion but upon the
36

motion to dismiss the third-party complaint filed by BPI, the court dismissed the thirdparty complaint. During the hearing, BPI through its Manager, testified that on July 16,
1993, BPI encashed and deducted the said amount from the account of CIFC, but the
proceeds, as well as the check remained in BPIs custody. This was alleged in
accordance with the Compromise Agreement it entered with CIFC to end the litigation in
RTC-Makati Branch. On July 27, 1993, BPI filed a separate collection suit against
Alegre, alleging that he had connived with other persons to forge several checks of
BPIs client, amounting to P1, 724, 364.58. On September 27, 1993, RTC-Makati
Branch rendered its judgment in favor of private respondent. CIFC appealed from the
said decision, but the appellate court affirmed in toto the decision of the lower court.
ISSUE:
Whether or not the petitioner is still liable for the payment of check even though
BPI accepted the instrument
RULING:
The Supreme Court held that the money market transaction between the
petitioner and private respondent is in the nature of loan. In a loan transaction, the
obligation to pay a sum certain in money may be paid in money, which is the legal
tender or, by the use of a check. A check is not a legal tender, and therefore cannot
constitute valid tender of payment. In effect, CIFC has not yet tendered a valid payment
of its obligation to the private respondent. Tender of payment involves a positive and
unconditional act by the obligor of offering legal tender currency as payment to the
obligee for the formers obligation and demanding that the latter accept the same.
Tender of payment cannot be presumed by a mere inference from surrounding
circumstances. Hence, CIFC is still liable for the payment of the check.
Wherefore, the assailed decision is affirmed and the petition is denied.
TENDER OF PAYMENT OR CONSIGNATION
DOLORES LIGAYA DE MESA, petitioner, vs. THE COURT OF APPEALS, OSSA
HOUSE, INC. AND DEVELOPMENT BANK OF THE PHILIPPINES,respondents
G.R. No. 106467-68
October 19, 1999
FACTS:
Petitioner Dolores Ligaya de Mesa owns several parcels of land in Makati, Pasay
City, Cavite, and General Santos City which were mortgaged to the Development Bank
of the Philippines (DBP) as security for a loan she obtained from the bank. Failing to
pay her mortgage debt, all her mortgaged properties were foreclosed and sold at public
auction held on different days.
On April 30, 1977, the Makar property was sold and the corresponding certificate
of sale inscribed on March 10, 1978. On August 25, 1977, the Naic, Cavite property
was sold and the certificate of sale registered on the same day. On August 30, 1977,
the two (2) parcels of land in Makati were sold at public auction and the certificate of
sale was inscribed on November 25, 1977. And on January 12, 1978, the three (3)
parcels of land in Pasay City were also sold and the certificate of sale was recorded on
the same date. In all the said auction sales, DBP was the winning bidder.
On October 23, 1978, Mrs. de Mesa, under a Deed of Sale with Assumption of
Mortgage, sold the foreclosed properties to private respondent OSSA under the
condition that the latter was to assume the payment of the mortgage debt by the
repurchase of all the properties mortgaged on installment basis, with an initial payment
of P90,000.00 representing 20% of the total obligation.
On March 11, 1981, petitioner de Mesa notified private respondent OSSA that she
37

was rescinding the Deed of Sale with Assumption of Mortgage she executed in favor of
the latter on the ground that OSSA failed to comply with the terms and conditions of
their agreement, particularly the payment of installments to the Development Bank of
the Philippines, the discharge and cancellation of the mortgage on the property listed in
item IV of the first whereas clause, and the payment of the balance of more or less
P45,000.00 to petitioner, representing the difference between the purchase price of
subject properties and the actual obligation to the DBP.
On August 5, 1981, DBP refused to accept the 9th quarterly installment paid by
OSSA, prompting the latter to file against DBP and the petitioner, on August 11, 1981,
Civil Case No. 42381 for specific performance and consignation, with the then Court of
First Instance of Pasig, Rizal, depositing in said case the amount of P15,824.92.
After trial, the lower court came out with a Decision for the private respondent
OSSA. The petitioner appealed to the Court of Appeals which handed down on March
31, 1992, its decision modifying the challenged decision.
ISSUE:
Whether or not the Court erred in ruling that the mandatory requirements of the
Civil Code on consignation can be waived by the trial court or whether or not the
requirements of Articles 1256 to 1261 can be 'relaxed' or 'substantially complied with'.
RULING:
Petitioner argues that there was no notice to her regarding OSSA's consignation
of the amounts corresponding to the 12th up to the 20th quarterly installments. The
records, however, show that several tenders of payment were consistently turned down
by the petitioner, so much so that the respondent OSSA found it pointless to keep on
making formal tenders of payment and serving notices of consignation to petitioner.
Moreover, in a motion dated May 7, 1987, OSSA prayed before the lower court that it be
allowed to deposit by way of consignation all the quarterly installments, without
making formal tenders of payment and serving notice of consignation, which prayer was
granted by the trial court in the Order dated July 3, 1982. The motion and the
subsequent court order served on the petitioner in the consignation proceedings
sufficiently served as notice to petitioner of OSSA's willingness to pay the quarterly
installments and the consignation of such payments with the court. For reasons of
equity, the procedural requirements of consignation are deemed substantially complied
with in the present case.

Petitioner also insists that there was no valid tender of payment because the
amount tendered was P34,363.08, not P51,243.26, and assuming ex gratia argumenti
that it was the correct amount, the tender thereof was still not valid, the same having
been made by check. This claim, however, does not accord with the records on hand.
Thus, the Court of Appeals ratiocinated:
"The 'Deed of Sale with Assumption of Mortgage', was for a consideration of
P500,000.00, from which shall be deducted de Mesas's outstanding obligation, with the
DBP pegged as of May 10, 1978, by the parties themselves, at P455,636.92. This
amount of P455,636.92 owing DBP, is what OSSA agreed to assume. What remained
to be paid de Mesa was P44,636.08, but OSSA made an advance payment of
P10,000.00, hence the remaining amount payable to de Mesa is P34,363.08, which
OSSA tendered in cash. It is thus beyond cavil that the respondent OSSA tendered the
correct amount, the tender of which was in cash and not by check, as theorized by
petitioner.
38

The Court of Appeals erred not in affirming the decision of the trial court of origin.
The petition is DENIED and the assailed Decision of the Court of Appeals in CAG.R. Nos. 19145 and 19156 dated March 31, 1992 AFFIRMED.

LOSS OF THE PRESTATION: KINDS OF LOSS

1.
2.

OCCENA VS. CA, OCT. 29, 1976

ORTIGAS VS. FEATI BANK, 94 SCRA 533

OCCENA VS. JABSON, COURT OF APPEALS AND TROPICAL HOMES, INC

73 SCRA 637
NO. L-44349, OCTOBER 29, 1976
FACTS:
Private respondent Tropical Homes, Inc had a subdivision contract with
petitioners who are the owners of the land subject of subdivision development by private
respondent. The contract stipulated that the petitioners fixed and sole share and
participation is the land which is equivalent to forty percent of all cash receipts from the
sale of the subdivision lots. When the development costs increased to such level not
anticipated during the signing of the contract and which threatened the financial viability
of the project as assessed by the private respondent, respondent filed at the lower court
a complaint for the modification of the terms and conditions of the contract by fixing the
proper shares that should pertain to the parties therein out of the gross proceeds from
the sales of the subdivision lots. Petitioners moved for the dismissal of the complaint for
lack of cause of action. The lower court denied the motion for dismissal which was
upheld by the CA based on the civil code provision that when the service has become
so difficult as to be manifestly beyond the contemplation of the parties, the obligor may
also be released therefrom, in whole or in part. Insisting that the worldwide increase in
prices cited by private respondent does not constitute a sufficient cause of action for the
modification of the terms and conditions of the contract, petitioners filed the instant
petition.
ISSUE:
Whether or not private respondent may demand modification of the terms of the
contract on the ground that the prestation has manifestly come beyond the
contemplation of the parties.
RULING:
If the prayer of the private respondent is to be released from its contractual
obligations on account of the fact that the prestation has become beyond the
contemplation of the parties, then private respondent can rely on said provision of the
civil code. But the prayer of the private respondent was for the modification of their
valid contract. The above-cited civil code provision does not grant the court the power
to remake, modify, or revise the contract or to fix the division of the shares between the
parties as contractually stipulated with the force of law between the parties. Therefore,
private respondents complaint for modification of its contract with petitioner must be
dismissed. The decision of respondent court is reversed.
LOSS OF THE PRESTATION: KINDS OF LOSS
ORTIGAS & CO., LIMITED PARTNERSHIP VS. FEATI BANK AND TRUST CO.
G.R. No. L-24670
39

December 14, 1979

FACTS:
Plaintiff is a limited partnership and defendant Feati Bank and Trust Co., is a
corporation duly organized and existing in accordance with the laws of the Philippines.
Plaintiff is engaged in real estate business, developing and selling lots to the public,
particularly the Highway Hills Subdivision along EDSA, Mandaluyong, Rizal. On March
4, 1952, plaintiff, as vendor, and Augusto Padilla and Natividad Angeles, as vendees,
entered into separate agreements of sale on installments over two parcels of land. On
July 19, 1962, the said vendees transferred their rights and interests over the aforesaid
lots in favor of one Emma Chavez. Upon completion of payment of the purchase price,
the plaintiff executed the corresponding deeds of sale in favor of Emma Chavez. Both
the agreements (of sale on installment) and the deeds of sale contained some
stipulations or restrictions which were later annotated in TCT Nos. 101509 and 101511
of the Register of Deeds of Rizal, covering the said lots and issued in the name of
Emma Chavez. Eventually, defendant-appellee acquired Lots Nos. 5 and 6, with TCT
Nos. 101613 and 106092 issued in its name, respectively and the building restrictions
were also annotated therein. Defendant-appellee bought Lot No. 5 directly from Emma
Chavez, "free from all liens and encumbrances as stated in Annex 'D', 5 while Lot No. 6
was acquired from Republic Flour Mills through a "Deed of Exchange," Annex "E". TCT
No. 101719 in the name of Republic Flour Mills likewise contained the same restrictions,
although defendant-appellee claims that Republic Flour Mills purchased the said Lot No.
6 "in good faith. free from all liens and encumbrances," as stated in the Deed of Sale,
Annex "F" between it and Emma Chavez.
Plaintiff-appellant claims that the restrictions annotated on TCT Nos. 101509,
101511, 101719, 101613, and 106092 were imposed as part of its general building
scheme designed for the beautification and development of the Highway Hills
Subdivision which forms part of the big landed estate of plaintiff-appellant where
commercial and industrial sites are also designated or established.
Defendant-appellee, upon the other hand, maintains that the area along the
western part of EDSA from Shaw Boulevard to Pasig River, has been declared a
commercial and industrial zone, per Resolution No. 27, dated February 4, 1960 of the
Municipal Council of Mandaluyong, Rizal. It alleges that plaintiff-appellant 'completely
sold and transferred to third persons all lots in said subdivision facing EDSA" and the
subject lots thereunder were acquired by it "only on July 23, 1962 or more than two (2)
years after the area ... had been declared a commercial and industrial zone. On or
about May 5, 1963, defendant-appellee began laying the foundation and commenced
the construction of a building on Lots Nos. 5 and 6, to be devoted to banking purposes,
but which defendant-appellee claims could also be devoted to, and used exclusively for,
residential purposes. The following day, plaintiff-appellant demanded in writing that
defendant-appellee stop the construction of the commerical building on the said lots.
The latter refused to comply with the demand, contending that the building was being
constructed in accordance with the zoning regulations, defendant-appellee having filed
building and planning permit applications with the Municipality of Mandaluyong, and it
had accordingly obtained building and planning permits to proceed with the
construction.
ISSUE:
Whether or not Resolution No. 27 s-1960 is a valid exercise of police power; and
whether or not the said Resolution can nullify or supersede the contractual obligations
assumed by defendant-appellee.
RULING:
The validity of the resolution was admitted at least impliedly, in the stipulation of
facts below when plaintiff-appellant did not dispute the same. Granting that Resolution
40

No. 27 is not an ordinance, it certainly is a regulatory measure within the intendment or

ambit of the word "regulation" under the provision. As a matter of fact the same section
declares that the power exists "(A)ny provision of law to the contrary notwithstanding ...
"

With regard to the contention that said resolution cannot nullify the contractual
obligations assumed by the defendant-appellee referring to the restrictions incorporated
in the deeds of sale and later in the corresponding Transfer Certificates of Title issued
to defendant-appellee, it should be stressed, that while non-impairment of contracts is
constitutionally guaranteed, the rule is not absolute, since it has to be reconciled with
the legitimate exercise of police power.
Resolution No. 27, s-1960 declaring the western part of highway , now EDSA,
from Shaw Boulevard to the Pasig River as an industrial and commercial zone, was
obviously passed by the Municipal Council of Mandaluyong, Rizal in the exercise of
police power to safeguard or promote the health, safety, peace, good order and general
welfare of the people in the locality. Judicial notice may be taken of the conditions
prevailing in the area, especially where lots Nos. 5 and 6 are located. The lots
themselves not only front the highway; industrial and commercial complexes have
flourished about the place. EDSA, a main traffic artery which runs through several cities
and municipalities in the Metro Manila area, supports an endless stream of traffic and
the resulting activity, noise and pollution are hardly conducive to the health, safety or
welfare of the residents in its route. Having been expressly granted the power to adopt
zoning and subdivision ordinances or regulations, the municipality of Mandaluyong,
through its Municipal 'council, was reasonably, if not perfectly, justified under the
circumstances, in passing the subject resolution.
The motives behind the passage of the questioned resolution being reasonable,
and it being a " legitimate response to a felt public need," not whimsical or oppressive,
the non-impairment of contracts clause of the Constitution will not bar the municipality's
proper exercise of the power.
It is, therefore, clear that even if the subject building restrictions were assumed
by the defendant-appellee as vendee of Lots Nos. 5 and 6, in the corresponding deeds
of sale, and later, in Transfer Certificates of Title Nos. 101613 and 106092, the
contractual obligations so assumed cannot prevail over Resolution No. 27, of the
Municipality of Mandaluyong, which has validly exercised its police power through the
said resolution. Accordingly, the building restrictions, which declare Lots Nos. 5 and 6
as residential, cannot be enforced.

REBUS SIC STANTIBUS

1.
2.
3.

MAGAT VS. CA, 337 SCRA 298

PNCC VS. CA, 272 SCRA 183
NATELCO VS. CA, 230 SCRA 351
MAGAT VS. COURT OF APPEALS
337 SCRA 298

FACTS:
Private respondent Santiago A. Guerrero was President and Chairman of
"Guerrero Transport Services", a single proprietorship. Sometime in 1972, Guerrero
41

Transport Services won a bid for the operation of a fleet of taxicabs within the Subic
Naval Base, in Olongapo. As highest bidder, Guerrero was to "provide radio-controlled
taxi service within the U.S. Naval Base, Subic Bay, utilizing as demand requires . . . 160
operational taxis consisting of four wheel, four-door, four passenger, radio controlled,
meter controlled, sedans, not more than one year . . . "
On September 22, 1972, with the advent of martial law, President Ferdinand E.
Marcos issued Letter of Instruction No. 1.
On September 25, 1972, pursuant to the aforequoted Letter of Instruction, the
Radio Control Office issued Administrative Circular No. 4: Subject: Suspending the
acceptance and processing of applications for radio station construction permits and for
permits to own and/or possess radio transmitters or transceivers.
On September 25, 1972, Guerrero and Victorino D. Magat, as General Manager
of Spectrum Electronic Laboratories, a single proprietorship, executed a letter-contract
for the purchase of transceivers at a quoted price of US$77,620.59, FOB Yokohoma.
Victorino was to deliver the transceivers within 60 to 90 days after receiving notice from
Guerrero of the assigned radio frequency, "taking note of Government Regulations.
The contract was signed and Victorino contacted his Japanese supplier, Koide & Co.,
Ltd. and placed an order for the transceivers.
On September 29, 1972, Navy Exchange Officer, A. G. Mason confirmed that
Guerrero won the bid for the commercial transportation contract. On October 4, 1972,
middle man and broker Isidro Q. Aligada of Reliance Group Engineers, Inc. , wrote
Victorino, informing him that a radio frequency was not yet assigned to Guerrero and
that government regulations might complicate the importation of the transceivers.
However, in the same letter, Victorino was advised to advise his supplier "to proceed
(with) production pending frequency information." Victorino was also assured of
Guerrero's financial capability to comply with the contract. On October 6, 1972,
Guerrero informed Aligada of the frequency number assigned by Subic Naval Base
authorities. Aligada was instructed to "proceed with the order thru Spectrum Electronics
Laboratories." On October 7, 1972, Aligada informed Magat of the assigned frequency
number. Aligada also advised Victorino to "proceed with the order upon receipt of letter
of credit." On January 10, 1973, Guerrero applied for a letter of credit with the
Metropolitan Bank and Trust Company. This application was not pursued.
On March 27, 1973, Victorino, represented by his lawyer, Atty. Sinesio S.
Vergara, informed Guererro that the order with the Japanese supplier has not been
canceled. Should the contract be canceled, the Japanese firm would forfeit 30% of the
deposit and charge a cancellation fee in an amount not yet known, Guerrero to bear the
loss. Further, should the contract be canceled, Victorino would demand an additional
amount equivalent to 10% of the contract price.
Unable to get a letter of credit from the Central Bank due to the refusal of the
Philippine government to issue a permit to import the transceivers, Guerrero
commenced operation of the taxicabs within Subic Naval Base, using radio units
borrowed from the U.S. government. Victorino thus canceled his order with his
Japanese supplier.
On May 22, 1973, Victorino filed with the Regional Trial Court, Makati a
complaint for damages arising from breach of contract against Guerrero. On June 7,
1973, Guerrero moved to dismiss the complaint on the ground that it did not state a
cause of action. On June 16, 1973, the trial court granted the motion and dismissed the
complaint. On July 11, 1973, Victorino filed a petition for review on certiorari with this
Court assailing the dismissal of the complaint.
42

On April 20, 1983, the Supreme Court ruled that the complaint sufficiently
averred a cause of action. The Court set aside the order of dismissal and remanded the
case to the trial court for further proceedings. On November 27, 1984, the trial court
ordered that the case be archived for failure of Victorino to prosecute. On March 11,
1985, petitioners, Olivia, Dulce, Ma. Magnolia, Ronald and Dennis Magat, moved to
reinstate the case and to substitute Victorino in its prosecution. Apparently, Victorino
died on February 18, 1985. On April 29, 1985, the trial court granted the motion.
On July 12, 1991, the trial court decided in favor of the heirs of Victorino and
ordered Guerrero to pay temperate, moral and exemplary damages, and attorney's
fees. On August 21, 1991, Guerrero appealed to the Court of Appeals. However it was
dismissed. On October 26, 1995, the heirs of Victorino filed with the Court of Appeals a
motion for reconsideration. On March 12, 1996, the Court of Appeals denied the motion
for reconsideration.
ISSUES:
Whether or not the transceivers were contraband items prohibited by the LOI and
Administrative Circular to import; hence, the contract is void.
Whether or not the contract was breached.
RULING:
Anent the 1st issue, NO. The contract was not void ab initio. Nowhere in the LOI
and Administrative Circular is there an express ban on the importation of transceivers.
The LOI and Administrative Circular did not render radios and transceivers illegally per
se. The Administrative Circular merely ordered the Radio Control Office to suspend the
acceptance and processing of application for permits to possess, own, transfer,
purchase and sell radio transmitters and transceivers therefore; possession and
importation of the radio transmitters and transceivers was legal provided one had the
necessary license for it. The LOI and Administrative Circular did not render the
transceivers outside the commerce of man. They were valid objects of the contract.
Anent the 2nd issue, NO. The contract was not breached. Affirming the validity of
the contract, the law provides that when the service (required by the contract) has
become so manifestly beyond the contemplation of the parties, the obligor may also be
released there from in whole or in parts. Here, Guerreros inability to secure a letter of
credit and to comply with his obligation was a direct consequence of the denial of the
permit to import. For this, he cannot be faulted. Even if the Court assumes that there
was a breach of contract, damages cannot be awarded. Damnum absque injuria comes
into the fore.

REBUS SIC STANTIBUS

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)
43

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 respondents 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 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.
REBUS SIC STANTIBUS
NAGA TELEPHONE CO., INC. (NATELCO) AND LUCIANO M. MAGGAY,
petitioners, VS. THE COURT OF APPEALS AND CAMARINES SUR II ELECTRIC
COOPERATIVE, INC. (CASURECO II), respondents
1994 Feb 24
230 SCRA 351
FACTS:
Petitioner Naga Telephone Co., Inc. (NATELCO) is a telephone company
rendering local as well as long distance service in Naga City while private respondent
Camarines Sur II Electric Cooperative, Inc. (CASURECO II) is a private corporation
established for the purpose of operating an electric power service in the same city.

44

On November 1, 1977, the parties entered into a contract for the use by
petitioners in the operation of its telephone service the electric light posts of private
respondent in Naga City. In consideration therefor, petitioners agreed to install, free of
charge, ten (10) telephone connections for the use by private respondent. After the
contract had been enforced for over ten (10) years, private respondent filed with the
Regional Trial Court against petitioners for reformation of the contract with damages, on
the ground that it is too one-sided in favor of petitioners; that it is not in conformity with
the guidelines of the National Electrification Administration (NEA); that after eleven (11)
years of petitioners' use of the posts, the telephone cables strung by them thereon have
become much heavier with the increase in the volume of their subscribers; that a post
now costs as much as P2,630.00; so that justice and equity demand that the contract be
reformed to abolish the inequities thereon.
As second cause of action, private respondent alleged that starting with the year
1981, petitioners have used 319 posts outside Naga City, without any contract with it;
that at the rate of P10.00 per post, petitioners should pay private respondent for the use
thereof the total amount of P267,960.00 from 1981 up to the filing of its complaint; and
that petitioners had refused to pay private respondent said amount despite demands.
And as third cause of action, private respondent complained about the poor servicing by
petitioners.
The trial court ruled, as regards private respondents first cause of action, that
the contract should be reformed by ordering petitioners to pay private respondent
compensation for the use of their posts in Naga City, while private respondent should
also be ordered to pay the monthly bills for the use of the telephones also in Naga City.
And taking into consideration the guidelines of the NEA on the rental of posts by
telephone companies and the increase in the costs of such posts, the trial court opined
that a monthly rental of P10.00 for each post of private respondent used by petitioners
is reasonable, which rental it should pay from the filing of the complaint in this case on
January 2, 1989. And in like manner, private respondent should pay petitioners from
the same date its monthly bills for the use and transfers of its telephones in Naga City at
the same rate that the public are paying.
On private respondent's second cause of action, the trial court found that the
contract does not mention anything about the use by petitioners of private respondent's
posts outside Naga City. Therefore, the trial court held that for reason of equity, the
contract should be reformed by including therein the provision that for the use of private
respondent's posts outside Naga City, petitioners should pay a monthly rental of P10.00
per post, the payment to start on the date this case was filed, or on January 2, 1989,
and private respondent should also pay petitioners the monthly dues on its telephone
connections located outside Naga City beginning January, 1989. And with respect to
private respondent's third cause of action, the trial court found the claim not sufficiently
proved.
The Court of Appeals affirmed the decision of the trial court, but based on
different grounds to wit: (1) that Article 1267 of the New Civil Code is applicable and (2)
that the contract was subject to a potestative condition which rendered said condition
void.
ISSUE:
Whether or not the principle of Rebus Sic Stantibus is applicable in the case at
bar.
RULING:
45

No. 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 consists 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 unforseen
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 exist the contract also ceases
to exist. Considering practical needs and the demands of equity and good faith, the
disappearance of the basis of a contract gives rise to a right to relief in favor of the party
prejudiced.
The allegations in private respondent's complaint and the evidence it has
presented sufficiently made out a cause of action under Article 1267. The Court,
therefore, release the parties from their correlative obligations under the contract.
However, the disposition of the present controversy does not end here. The Court has
to take into account the possible consequences of merely releasing the parties
therefrom: petitioners will remove the telephone wires/cables in the posts of private
respondent, resulting in disruption of their essential service to the public; while private
respondent, in consonance with the contract will return all the telephone units to
petitioners, causing prejudice to its business.
The Court shall not allow such eventuality. Rather, the Court requires, as
ordered by the trial court: 1) petitioners to pay private respondent for the use of its
posts in Naga City and in the towns of Milaor, Canaman, Magarao and Pili, Camarines
Sur and in other places where petitioners use private respondent's posts, the sum of ten
(P10.00) pesos per post, per month, beginning January, 1989; and 2)private respondent
to pay petitioner the monthly dues of all its telephones at the same rate being paid by
the public beginning January, 1989. The peculiar circumstances of the present case, as
distinguished further from the Occea case, necessitates exercise of a equity
jurisdiction. By way of emphasis, the Court reiterates the rationalization of respondent
court that:
". . . In affirming said ruling, we are not making a new contract for the parties herein, but
we find it necessary to do so in order not to disrupt the basic and essential services
being rendered by both parties herein to the public and to avoid unjust enrichment by
appellant at the expense of plaintiff . . . "
Decision affirmed.

REQUISITES OF CONDONATION NOT INOFFICIOUS

TRANS-PACIFIC INDUSTRIAL SUPPLIES, INC., petitioner,
VS. THE COURT OF APPEALS and ASSOCIATED BANK, respondents
1994 Aug 19
235 SCRA 494
FACTS:
46

Sometime in 1979, petitioner applied for and was granted several financial
accommodations amounting to P1,300,000.00 by respondent Associated Bank. The
loans were evidence and secured by four (4) promissory notes, a real estate mortgage
covering three parcels of land and a chattel mortgage over petitioner's stock and
inventories. Unable to settle its obligation in full, petitioner requested for, and was
granted by respondent bank, a restructuring of the remaining indebtedness which then
amounted to P1,057,500.00, as all the previous payments made were applied to
penalties and interests.
To secure the re-structured loan of P1,213,400.00, three new promissory notes
were executed by Trans-Pacific. The mortgaged parcels of land were substituted by
another mortgage covering two other parcels of land and a chattel mortgage on
petitioner's stock inventory. The released parcels of land were then sold and the
proceeds amounting to P1,386,614.20, according to petitioner, were turned over to the
bank and applied to Trans-Pacific's restructured loan. Subsequently, respondent bank
returned the duplicate original copies of the three promissory notes to Trans-Pacific with
the word "PAID" stamped thereon. Despite the return of the notes, or on December 12,
1985, Associated Bank demanded from Trans-Pacific payment of the amount of
P492,100.00 representing accrued interest on PN No. TL-9077-82. According to the
bank, the promissory notes were erroneously released.
Initially, Trans-Pacific
expressed its willingness to pay the amount demanded by respondent bank. Later, it
had a change of heart and instead initiated an action before the Regional Trial Court for
specific performance and damages. There it prayed that the mortgage over the two
parcels of land be released and its stock inventory be lifted and that its obligation to the
bank be declared as having been fully paid. After trial, the court a quo rendered
judgment in favor of Trans-Pacific. The appellate court which, as aforesaid, reversed
the decision of the trial court.
ISSUE:
Whether or not petitioner has indeed paid in full its obligation to respondent bank.
RULING:
No. The Court found no reversible error committed by the appellate court in
disposing of the appealed decision. As gleaned from the decision of the court a quo,
judgment was rendered in favor of petitioner on the basis of presumptions. The above
disquisition finds no factual support, however, per review of the records. The
presumption created by the Art. 1271 of the Civil Code is not conclusive but merely
prima facie. If there be no evidence to the contrary, the presumption stands.
Conversely, the presumption loses its legal efficacy in the face of proof or evidence to
the contrary.
In the case at bar, the Court finds sufficient justification to overthrow the
presumption of payment generated by the delivery of the documents evidencing
petitioners indebtedness.
It may not be amiss to add that Article 1271 of the Civil Code raises a
presumption, not of payment, but of the renunciation of the credit where more
convincing evidence would be required than what normally would be called for to prove
payment. The rationale for allowing the presumption of renunciation in the delivery of a
private instrument is that, unlike that of a public instrument, there could be just one copy
of the evidence of credit. Where several originals are made out of a private document,
the intendment of the law would thus be to refer to the delivery only of the original rather
than to the original duplicate of which the debtor would normally retain a copy.
Petition denied

47

IMPLIED CONDONATION PRESUMPTION OF DELIVERY

1.
2.

DALUPAN VS. HARDEN, NOV. 27, 1951

LOPEZ LISO VS. TAMBUNTING, 33 PHIL. 226
DALUPAN VS. HARDEN
1951 Nov 27

FACTS:
The case is an appeal taken from an order of the First Instance of Manila dated
May 19, 1950, setting aside the writs of execution and garnishment issued to the sheriff
of Manila commanding him to levy on two (2) checks, one for P9,028.50, and another
for P24,546.00, payable to Fred M. Harden which were then in possession of the
receiver appointed in case involving the liquidation of the conjugal partnership of the
spouses Fred M. Harden and Esperanza P. de Harden.
On August 26, 1948, plaintiff filed an action against the defendant for the
collection of P113,837.17, with interest thereon from the filing of the complaint, which
represents fifty (50) per cent of the reduction plaintiff was able to secure from the
Collector of Internal Revenue in the amount of unpaid taxes claimed to be due from the
defendant. Defendant acknowledged this claim and prayed that judgment be rendered
accordingly. The receiver in the liquidation of case No. R-59634 and the wife of the
defendant, Esperanza P. de Harden, filed an answer in intervention claiming that the
amount sought by the plaintiff was exorbitant and prayed that it be reduced to 10 per
cent of the rebate. By reason of the acquiescence of the defendant to the claim on one
hand, and the opposition of the receiver and of the wife on the other, an amicable
settlement was concluded by the plaintiff and the intervenor whereby it was agreed that
the sum of P22,767.43 be paid to the plaintiff from the funds under the control of the
receiver "and the balance of P91,069.74 shall be charged exclusively against the
defendant Fred M. Harden from whatever share he may still have in the conjugal
partnership between him and Esperanza P. de Harden after the final liquidation and
partition thereof, without pronouncement as to costs and interests." The court rendered
judgment in accordance with this stipulation.
Almost one year thereafter, plaintiff filed a motion for the issuance of a writ of
execution to satisfy the balance of P91, 069.74, which was favorably acted upon. At
that time the receiver had in his possession two (2) checks payable to Fred M. Harden
amounting to P33,574.50, representing part of the proceeds of the sale of two (2) lots
belonging to the conjugal partnership which was ordered by the court upon the joint
petition of the spouses in order that they may have funds with which to defray their living
and other similar expenses. One-half of the proceeds was given to Mrs. Harden. The
sheriff attempted to garnish these two (2) checks acting upon the writ of execution
secured by the plaintiff, but the receivership court quashed the writ, stating however in
the order that it will be without prejudice to the right of Francisco Dalupan to attach the
money of the defendant Fred M. Harden, after the same has been delivered to the
latter. When said checks were delivered to the latter.
ISSUE:
Whether or not the proffer made by the plaintiff to the defendant is binding.
RULING:
YES, the proffer made by the plaintiff to the defendant to the effect that in the
event you lose your case with your wife, Mrs. Esperanza P. de Harden, and that after
adjudication of the conjugal property what is left with you will not be sufficient for your
livelihood. I shall be pleased to write off as bad debt the balance of your account in the
sum of P42, 069.74. This proffer was contained in a letter sent by the plaintiff to the
48

defendant on March 23, 1949, which was accepted expressly by Fred M. Harden.
Harden regarded this proffer as a binding obligation and acted accordingly, and for
plaintiff to say now that proffer is but a mere gesture of generosity or an act of Christian
charity without any binding legal effect is unfair to say at least. This is an added
circumstance, which confirms the Courts view that the understanding between the
plaintiff and the defendant is really to defer payment of the balance of the claim until
after the final liquidation of the conjugal partnership.
IMPLIED CONDONATION PRESUMPTION OF DELIVERY
LEONIDES LOPEZ LISO, plaintiff-appellee,
VS. MANUEL TAMBUNTING, defendant-appellant
1916 January 19
G.R. No. 9806
33 PHIL 226
FACTS:
These proceedings were brought to recover from the defendant the sum of
P2,000, amount of the fees, which, according to the complaint, are owing for
professional medical services rendered by the plaintiff to a daughter of the defendant
from March 10 to July 15, 1913, which fees the defendant refused to pay,
notwithstanding the demands therefor made upon him by the plaintiff. The defendant
denied the allegations of the complaint, and furthermore alleged that the obligation
which the plaintiff endeavored to compel him to fulfill was already extinguished.
The Court of First Instance of Manila, after hearing the evidence introduced by
both parties, rendered judgment on December 17, 1913, ordering the defendant to pay
to the plaintiff the sum of P700, without express finding as to costs. The defendant,
after entering a motion for a new trial, which was denied, appealed from said judgment
and forwarded to this court the proper bill of exceptions.
ISSUE:
Whether or not the obligation alleged in the complaint has already been
extinguished.
RULING:
No, the Supreme Court ruled that the obligation has not been extinguished. The
receipt signed by the plaintiff, for P700, the amount of his fees he endeavored to collect
from the defendant after he had finished rendering the services in question was in the
latter's possession, and this fact was alleged by him as proof that he had already paid
said fees to the plaintiff. The court, after hearing the testimony, reached the conclusion
that, notwithstanding that the defendant was in possession of the receipt, the said P700
had not been paid to the plaintiff.
Number 8 of section 334 of the Code of Civil Procedure provides as a legal
presumption "that an obligation delivered up to the debtor has been paid." Article 1188
of the Civil Code also provides that the voluntary surrender by a creditor to his debtor, of
a private instrument proving a credit, implies the renunciation of the right of action
against the debtor; and article 1189 prescribes that whenever the private instrument
which evidences the debt is in the possession of the debtor, it will be presumed that the
creditor delivered it of his own free will, unless the contrary is proven.
But the legal presumption established by the foregoing provisions of law cannot
stand if sufficient proof is adduced against it. In the case at bar the trial court correctly
held that there was sufficient evidence to the contrary, in view of the preponderance
thereof in favor of the plaintiff and of the circumstances connected with the defendant's
49

possession of said receipt. Furthermore, in order that such a presumption may be

taken into account, it is necessary, as stated in the laws cited, that the evidence of the
obligation be delivered up to the debtor and that the delivery of the instrument proving
the credit be made voluntarily by the creditor to the debtor. In the present case, it
cannot be said that these circumstances concurred, inasmuch as when the plaintiff sent
the receipt to the defendant for the purpose of collecting his fee, it was not his intention
that that document should remain in the possession of the defendant if the latter did not
forthwith pay the amount specified therein.
By reason of the foregoing, the Court affirmed the judgment appealed from, with
the costs of this instance against the appellant.

CONFUSION OR MERGER OR RIGHTS

1.
2.

ESTATE OF MOTA VS. SERRA, 47 PHIL 464

YEK TN LIN VS. YUSINGCO, 64 PHIL 1062
ESTATE OF MOTA VS. SERRA
47 PHIL. 464

FACTS:
On February 1, 1919, plaintiffs and defendant entered into a contract of
partnership, for the construction and exploitation of a railroad line from the "San Isidro"
and "Palma" centrals to the place known as "Nandong." The original capital stipulated
was P150, 000. It was covenanted that the parties should pay this amount in equal
parts and the plaintiffs were entrusted with the administration of the partnership. The
agreed capital of P150,000, however, did not prove sufficient, as the expenses up to
May 15, 1920, had reached the amount of P226,092.92, presented by the administrator
and O.K.'d by the defendant.
January 29, 1920, the defendant entered into a contract of sale with Venancio
Concepcion, Phil. C. Whitaker, and Eusebio R. de Luzuriaga, whereby he sold to the
latter the estate and central known as "Palma" with its running business, as well as all
the improvements, machineries and buildings, real and personal properties, rights,
choices in action and interests, including the sugar plantation of the harvest year of
1920 to 1921, covering all the property of the vendor. This contract was executed
before a notary public of Iloilo.
Before the delivery to the purchasers of the hacienda thus sold, Eusebio R. de
Luzuriaga renounced all his rights under the contract of January 29, 1920, in favor of
Messrs. Venancio Concepcion and Phil. C. Whitaker. This gave rise to the fact that on
July 17, 1920, Venancio Concepcion and Phil. C. Whitaker and the herein defendant
executed before Mr. Antonio Sanz, a notary public in and for the City of Manila, another
deed of absolute sale of the said "Palma" Estate for the amount of P1,695,961.90, of
which the vendor received at the time of executing the deed the amount of
P945,861.90, and the balance was payable by installments in the form and manner
stipulated in the contract. The purchasers guaranteed the unpaid balance of the
purchase price by a first and special mortgage in favor of the vendor upon the hacienda
and the central with all the improvements, buildings, machineries, and appurtenances
then existing on the said hacienda.
Afterwards, on January 8, 1921, Venancio Concepcion and Phil. C. Whitaker
bought from the plaintiffs the one-half of the railroad line pertaining to the latter,
executing therefore the document. The price of this sale was P237,722.15, excluding
50

any amount which the defendant might be owing to the plaintiffs. Of the purchase price,
Venancio Concepcion and Phil. C. Whitaker paid the sum of P47,544.43 only. In the
Deed, the plaintiffs and Concepcion and Whitaker agreed, among other things, that the
partnership "Palma" and "San Isidro," formed by the agreement of February 1, 1919,
between Serra, Lazaro Mota, now deceased, and Juan J. Vidaurrazaga for himself and
in behalf of his brother, Felix and Dionisio Vidaurrazaga, should be dissolved upon the
execution of this contract, and that the said partnership agreement should be totally
cancelled and of no force and effect whatever.
Since the defendant Salvador Serra failed to pay one-half of the amount
expended by the plaintiffs upon the construction of the railroad line, that is,
P113,046.46, as well as Phil. C. Whitaker and Venancio Concepcion, the plaintiffs
instituted the present action praying: 1) that the deed of February 1, 1919, be declared
valid and binding; 2) that after the execution of the said document the defendant
improved economically so as to be able to pay the plaintiffs the amount owed, but that
he refused to pay either in part or in whole the said amount notwithstanding the several
demands made on him for the purpose; and 3) that the defendant be sentenced to pay
plaintiffs the aforesaid sum of
P113, 046.46, with the stipulated interest at 10 per cent per annum beginning June 4,
1920, until full payment thereof, with the costs of the present action.
Defendant set up three special defenses: 1) the novation of the contract by the
substitution of the debtor with the conformity of the creditors; 2) the confusion of the
rights of the creditor and debtor; and 3) the extinguishment of the contract.
The court a quo in its decision held that there was a novation of the contract by
the substitution of the debtor, and therefore absolved the defendant from the complaint
with costs against the plaintiffs. With regard to the prayer that the said contract be
declared valid and binding, the court held that there was no way of reviving the contract
which the parties themselves in interest had spontaneously and voluntarily
extinguished.
ISSUES:
Whether or not there was a novation of the contract by the substitution of the
debtor with the consent of the creditor, as required by Article 1205 of the Civil Code;
and
Whether or not there was a merger of rights of debtor and creditor under Article
1192 of the Civil Code.
RULING:
1.
NO, there was no novation of the contract. It should be noted that in order to
give novation its legal effect, the law requires that the creditor should consent to the
substitution of a new debtor. This consent must be given expressly for the reason that,
since novation extinguishes the personality of the first debtor who is to be substituted by
new one, it implies on the part of the creditor a waiver of the right that he had before the
novation which waiver must be express under the principle that renuntiatio non
praesumitur, recognized by the law in declaring that a waiver of right may not be
performed unless the will to waive is indisputably shown by him who holds the right.
The fact that Phil. C. Whitaker and Venancio Concepcion were willing to assume the
defendant's obligation to the plaintiffs is of no avail, if the latter have not expressly
consented to the substitution of the first debtor. As has been said, in all contracts of
novation consisting in the change of the debtor, the consent of the creditor is
indispensable, pursuant to Article 1205 of the Civil Code which reads as follows:
Novation which consists in the substitution of a new debtor in the place of the original
one may be made without the knowledge of the latter, but not without the consent of the
creditor.
51

2.
NO, there was no merger of Rights. Another defense urged by the defendant is
the merger of the rights of debtor and creditor, whereby under Article 1192 of the Civil
Code, the obligation, the fulfillment of which is demanded in the complaint, became
extinguished. It is maintained in appellee's brief that the debt of the defendant was
transferred to Phil. C. Whitaker and Venancio Concepcion by the document. These in
turn acquired the credit of the plaintiffs by virtue of the debt; thus, the rights of the
debtor and creditor were merged in one person. The argument would at first seem to
be incontrovertible, but if we bear in mind that the rights and titles which the plaintiffs
sold to Phil. C. Whitaker and Venancio Concepcion refer only to one-half of the railroad
line in question, it will be seen that the credit which they had against the defendant for
the amount of one-half of the cost of construction of the said line was not included in the
sale. That the plaintiffs sold their rights and titles over one-half of the line. The
purchasers, Phil. C. Whitaker and Venancio Concepcion, to secure the payment of the
price, executed a mortgage in favor of the plaintiffs on the same rights and titles that
they had bought and also upon what they had purchased from Mr. Salvador Serra. In
other words, Phil. C. Whitaker and Venancio Concepcion mortgaged unto the plaintiffs
what they had bought from the plaintiffs and also what they had bought from Salvador
Serra. If Messrs. Phil. C. Whitaker and Venancio Concepcion had purchased
something from Mr. Salvador Serra, the herein defendant, regarding the railroad line, it
was undoubtedly the one-half thereof pertaining to Mr. Salvador Serra. This clearly
shows that the rights and titles transferred by the plaintiffs to Phil. C. Whitaker and
Venancio Concepcion were only those they had over the other half of the railroad line.
Therefore, as already stated, since there was no novation of the contract between the
plaintiffs and the defendant, as regards the obligation of the latter to pay the former onehalf of the cost of the construction of the said railroad line, and since the plaintiffs did
not include in the sale, the credit that they had against the defendant, the allegation that
the obligation of the defendant became extinguished by the merger of the rights of
creditor and debtor by the purchase of Messrs. Phil. C. Whitaker and Venancio
Concepcion is wholly untenable.
CONFUSION OR MERGER OR RIGHTS
YEK TONG LIN VS. YUSINGCO
64 PHIL 473
FACTS:
The defendant Pelagio Yusingco was the owner of the steamship Yusingco and,
as such, he executed, on November 19, 1927, a power of attorney in favor of Yu
Seguios to administer, lease, mortgage and sell his properties, including his vessels or
steamships. Yu Seguios, acting as such attorneys in fact of Pelagio Yusingco,
mortgaged to the plaintiff Yek Tong Lin Fire & Marine Insurance Co., Ltd., with the
approval of the Bureau of Customs, the steamship Yusingco belonging to the
defendant, to answer for any amount that said plaintiff might pay in the name of the
defendant on account of a promissory note for P45, 000 executed by it.
One year and some months later, or in February, 1930, and in April, 1931, the
steamship Yusingco needed some repairs which were made by the Earnshaw Docks &
Honolulu Iron Works upon petition of A. Yusingco Hermanos which, according to
documentary evidence of record, was co-owner of Pelagio Yusingco. The repairs were
made upon the guaranty of the defendant and appellant Vicente Madrigal at a cost of
P8,244.66.
When neither A. Yusingco Hermanos nor Pelagio Yusingco could pay said sum
to the Earnshaw Docks & Honolulu Iron Works, the defendant and appellant Vicente
Madrigal had to make payment thereof with the stipulated interest thereon, which was at
the rate of 9 per cent per annum, on March 9, 1932, because he was bound thereto by
52

reason of the bond filed by him, the payment then made by him having amounted to
P8,777.60. Some days later, when said defendant discovered that he was not to be
reimbursed for the repairs made on the steamship Yusingco, he brought an action
against his co-defendant Pelagio Yusingco and A. Yusingco Hermanos to compel them
to reimburse him, which resulted in a judgment favorable to him and adverse to the
Yusingcos, as the latter were ordered to pay him the sum of P3,269.66 plus interest
thereon at said rate of 9 per cent per annum from May 6, 1931, with the costs of the
suit. It was provided in the judgment that upon failure of the Yusingcos to pay the
above-stated amounts to Vicente Madrigal, a writ of execution would be issued in order
to have the steamship Yusingco sold at public auction for the purpose of satisfying said
amounts with the proceeds thereof.
Inasmuch as neither the defendant Pelagio Yusingco nor A. Yusingco Hermanos
paid the amount of the judgment rendered in civil case No. 41654, in favor of the
defendant and appellant Vicente Madrigal, the latter sought and obtained from the Court
of First Instance, which tried the case, the issuance of the corresponding writ of
execution. However, before the sale of the steamship Yusingco, by virtue of the writ of
execution so issued, was carried out, the plaintiff and appellant filed with the defendant
sheriff a third party claim demanding said ship for himself, alleging that it had been
mortgaged to him long before the issuance of said writ and, therefore, he was entitled to
the possession thereof. The defendant sheriff then informed the defendant and
appellant Vicente Madrigal that if he wished to have the execution sought by him carried
out, he should file the indemnity bond required by section 451 of Act No. 190. This was
done by Vicente Madrigal, but in order to prevent him and the sheriff from proceeding
with the execution, the plaintiff and appellant instituted this case in the court of origin
and asked for the issuance of a writ of preliminary injunction addressed to said two
defendants to restrain them from selling the steamship Yusingco at public auction. The
writ of preliminary injunction, which was issued on August 19, 1932, was later dissolved,
the defendant and appellant Vicente Madrigal having filed a bond of P5,000. This left
the preliminary injunction unimpaired and valid for the sale of the steamship Yusingco at
public auction. For this reason, said ship was sold at public auction on September 19,
1932, and was purchased, under the circumstances, by the plaintiff and appellant itself,
which was the highest bidder, having made the highest bid of P12,000. Of said amount,
the defendant sheriff turned over P10,195 to Vicente Madrigal in payment of his
judgment credit. It is said sum of P10,195 which the lower court ordered Vicente
Madrigal to turn over to the plaintiff.
ISSUE:
Whether or not the credit of the plaintiff, as mortgaged creditor of Pedagio
Yusingco, is superior to that of Vicente Madrigal, as judgment creditor of said Pelagio
Yusingco and A. Yusingco Hermones.

RULING:
NO, the defendant and appellant Vicente Madrigal enjoy preference in the
payment of his judgment credit.
After the steamship Yusingco had been sold by virtue of the judicial writ issued in
civil case No. 41654 for the execution of the judgment rendered in favor of Vicente
Madrigal, the only right left to the plaintiff was to collect its mortgage credit from the
purchaser thereof at public auction, inasmuch as the rule is that a mortgage directly and
immediately subjects the property on which it is imposed, whoever its possessor may
be, to the fulfillment of the obligation for the security of which it was created (Article
1876, Civil Code); but it so happens that it can not take such steps now because it was
53

the purchaser of the steamship Yusingco at public auction, and it was so with full
knowledge that it had a mortgage credit on said vessel. Obligations are extinguished by
the merger of the rights of the creditor and debtor (Articles 1156 and 1192, Civil Code).
COMPENSATION REQUISITES
1.
2.
3.

EGV REALTY VS. CA, 20 JULY 1999

AEROSPACE CHEMICAL VS. CA, 23 SEPTEMBER 1999
APODCA VS. NLRC, 172 S 442
E.G.V. REALTY V CA
G.R.No. 120236 July 20, 1999

FACTS
Petitioner E.G.V. Realty Development Corporation is the owner/developer of a
seven-storey condominium building known as Cristina Condominium. Cristina
Condominium Corporation holds title to all common areas of Cristina Condominium and
is in charge of managing, maintaining and administering the condominiums common
areas and providing for the buildings security. Respondent Unisphere International, Inc.
(hereinafter referred to as Unisphere) is the owner/occupant of Unit 301 of said
condominium. On November 28, 1981, respondent Unispheres Unit 301 was allegedly
robbed of various items valued at P6,165.00. The incident was reported to petitioner
CCC. On July 25, 1982, another robbery allegedly occurred at Unit 301 where the items
carted away were valued at P6,130.00, bringing the total value of items lost to
P12,295.00. This incident was likewise reported to petitioner CCC. On October 5, 1982,
respondent Unisphere demanded compensation and reimbursement from petitioner
CCC for the losses incurred as a result of the robbery. On January 28, 1987, petitioners
E.G.V. Realty and CCC jointly filed a petition with the Securities and Exchange
Commission (SEC) for the collection of the unpaid monthly dues in the amount of
P13,142.67 against respondent Unisphere.
ISSUE
Whether or not set-off or compensation has taken place in the instant case.
RULING
Compensation or offset under the New Civil Code takes place only when two
persons or entities in their own rights, are creditors and debtors of each other. (Art.
1278).
A distinction must be made between a debt and a mere claim. A debt is an
amount actually ascertained. It is a claim which has been formally passed upon by the
courts or quasi-judicial bodies to which it can in law be submitted and has been
declared to be a debt. A claim, on the other hand, is a debt in embryo. It is mere
evidence of a debt and must pass thru the process prescribed by law before it develops
into what is properly called a debt. Absent, however, any such categorical admission by
an obligor or final adjudication, no compensation or off-set can take place. Unless
admitted by a debtor himself, the conclusion that he is in truth indebted to another
cannot be definitely and finally pronounced, no matter how convinced he may be from
the examination of the pertinent records of the validity of that conclusion the
indebtedness must be one that is admitted by the alleged debtor or pronounced by final
judgment of a competent court or in this case by the Commission.
There can be no doubt that Unisphere is indebted to the Corporation for its
unpaid monthly dues in the amount of P13,142.67. This is admitted.
54

COMPENSATION REQUISITES
AEROSPACE CHEMICAL V CA
g.r.no. 108129 september 23, 1999
FACTS
On June 27, 1986, petitioner Aerospace Industries, Inc. (Aerospace) purchased
five hundred (500) metric tons of sulfuric acid from private respondent Philippine
Phosphate Fertilizer Corporation (Philphos). Initially set beginning July 1986, the
agreement provided that the buyer shall pay its purchases in equivalent Philippine
currency value, five days prior to the shipment date. Petitioner as buyer committed to
secure the means of transport to pick-up the purchases from private respondent's
loadports. Per agreement, one hundred metric tons (100 MT) of sulfuric acid should be
taken from Basay, Negros Oriental storage tank, while the remaining four hundred
metric tons (400 MT) should be retrieved from Sangi, Cebu. On December 18, 1986,
M/T Sultan Kayumanggi docked at Sangi, Cebu, but withdrew only 157.51 MT of sulfuric
acid. Again, the vessel tilted. Further loading was aborted. Two survey reports
conducted by the Societe Generale de Surveillance (SGS) Far East Limited, dated
December 17, 1986 and January 2, 1987, attested to these occurrences. Later, on a
date not specified in the record, M/T Sultan Kayumanggi sank with a total of 227.51 MT
of sulfuric acid on board. Petitioner chartered another vessel, M/T Don Victor, with a
capacity of approximately 500 MT.6 [TSN, September 1, 1989, pp. 28-29.] On January
26 and March 20, 1987, Melecio Hernandez, acting for the petitioner, addressed letters
to private respondent, concerning additional orders of sulfuric acid to replace its sunken
purchases.
ISSUE
Should expenses for the storage and preservation of the purchased fungible
goods, namely sulfuric acid, be on seller's account pursuant to Article 1504 of the Civil
Code?
RULING
Petitioner tries to exempt itself from paying rental expenses and other damages
by arguing that expenses for the preservation of fungible goods must be assumed by
the seller. Rental expenses of storing sulfuric acid should be at private respondent's
account until ownership is transferred, according to petitioner. However, the general rule
that before delivery, the risk of loss is borne by the seller who is still the owner, is not
applicable in this case because petitioner had incurred delay in the performance of its
obligation. Article 1504 of the Civil Code clearly states: "Unless otherwise agreed, the
goods remain at the seller's risk until the ownership therein is transferred to the buyer,
but when the ownership therein is transferred to the buyer the goods are at the buyer's
risk whether actual delivery has been made or not, except that: (2) Where actual
delivery has been delayed through the fault of either the buyer or seller the goods are at
the risk of the party at fault."
On this score, we quote with approval the findings of the appellate court, thus:
The defendant [herein private respondent] was not remiss in reminding the plaintiff that
it would have to bear the said expenses for failure to lift the commodity for an
unreasonable length of time.But even assuming that the plaintiff did not consent to be
so bound, the provisions of Civil Code come in to make it liable for the damages sought
by the defendant.

55

COMPENSATION REQUISITES
APODACA V NLRC
G.R.No. 80039 April1 8, 1989
FACTS
Petitioner was employed in respondent corporation. On August 28, 1985,
respondent Jose M. Mirasol persuaded petitioner to subscribe to P1,500 shares of
respondent corporation it P100.00 per share or a total of P150,000.00. He made an
initial payment of P37,500.00. On September 1, 1975, petitioner was appointed
President and General Manager of the respondent corporation. However, on January 2,
1986, he resigned.
On December 19, 1986, petitioner instituted with the NLRC a complaint against private
respondents for the payment of his unpaid wages, his cost of living allowance, the
balance of his gasoline and representation expenses and his bonus compensation for
1986. Petitioner and private respondents submitted their position papers to the labor
arbiter. Private respondents admitted that there is due to petitioner the amount of
P17,060.07 but this was applied to the unpaid balance of his subscript in the amount of
P95,439.93. Petitioner questioned the set-off alleging that there was no call or notice for
the payment of unpaid subscription and that, accordingly, the alleged obligation is not
enforceable.
ISSUE
Does the National Labor Relations Commission (NLRC) have jurisdiction to
resolve a claim for non-payment of stock subscriptions to a corporation? Assuming that
it has, can an obligation arising therefrom be offset against a money claim of an
employee against the employer?
RULING
Firstly, the NLRC has no jurisdiction to determine such intra-corporate dispute
between the stockholder and the corporation as in the matter of unpaid subscriptions.
This controversy is within the exclusive jurisdiction of the Securities and Exchange
Commission.
Secondly, assuming arguendo that the NLRC may exercise jurisdiction over the
said subject matter under the circumstances of this case, the unpaid subscriptions are
not due and payable until a call is made by the corporation for payment. Private
respondents have not presented a resolution of the board of directors of respondent
corporation calling for the payment of the unpaid subscriptions. It does not even appear
that a notice of such call has been sent to petitioner by the respondent corporation.

COMPENSATION LEGAL; WHEN PROHIBITED (Art. 1287-1288)

1.
2.
3.
4.

PNB MANAGEMENT VS. R & R METAL, 373 SCRA 1

SILAHIS MARKETING VS. IAC, DEC. 7, 1989
FRANCIA VS. CA, JUNE 28, 1988
TRINIDAD VS. ACAPULCO, 494 S 179

56

PNB MANAGEMENT and DEVELOPMENT CORP. (PNB MADECOR), petitioner,

VS. R&R METAL CASTING and FABRICATING, INC., respondent
January 2, 2002
G. R. No. 132245
FACTS:
On November 19, 1993, respondent R&R Metal Casting and Fabricating, Inc.
(R&R) obtained a judgment in its favor against Pantranco North Express, Inc. (PNEI).
PNEI was ordered to pay respondent P213,050 plus interest as actual damages,
P50,000 as exemplary damages, 25 percent of the total amount payable as attorneys
fees, and the costs of suit. However, the writ of execution was returned unsatisfied
since the sheriff did not find any property of PNEI recorded at the Registries of Deeds of
the different cities of Metro Manila. Neither did the sheriff receive a reply to the notice of
garnishment he sent to PNB-Escolta.
On March 27, 1995, respondent filed with the trial court a motion for the issuance
of subpoenae duces tecum and ad testificandum requiring petitioner PNB Management
and Development Corp. (PNB MADECOR) to produce and testify on certain documents
pertaining to transactions between petitioner and PNEI from 1981 to 1995. From the
testimony of the representative of PNB MADECOR, it was discovered that NAREDECO,
petitioners forerunner, executed a promissory note in favor of PNEI for P7.8 million, and
that PNB MADECOR also had receivables from PNEI in the form of unpaid rentals
amounting to more than P7.5 million. On the basis of said testimony, respondent filed
with the trial court a motion for the application of funds or properties of PNEI, its
judgment debtor, in the hands of PNB MADECOR for the satisfaction of the judgment in
favor of respondent.
The trial court issued an order garnishing the amount owed by petitioner to PNEI
under the promissory note, to satisfy the judgment against PNEI and in favor of
respondent. On appeal, the Court of Appeals affirmed the decision. The appellate
court also denied petitioners motion for reconsideration.
ISSUE:
Whether or not the Court of Appeals erred when it ruled that the requisites for
legal compensation as set forth under articles 1277 and 1278 of the civil code do not
concur in the case at bar.
RULING:
NO. Legal compensation could not have occurred because of the absence of
one requisite in this case - that both debts must be due and demandable.
As observed by the Court of Appeals, under the terms of the promissory note,
failure on the part of NAREDECO (PNB MADECOR) to pay the value of the instrument
after due notice has been made by PNEI would entitle PNEI to collect an 18% interest
per annum from date of notice of demand. Petitioner makes a similar assertion in its
petition. Petitioners obligation to PNEI appears to be payable on demand. Petitioner is
obligated to pay the amount stated in the promissory note upon receipt of a notice to
pay from PNEI. If petitioner fails to pay after such notice, the obligation will earn an
interest of 18 percent per annum. Respondent alleges that PNEI had already
demanded payment.
The Court agrees with petitioner that this letter was not one demanding payment,
but one that merely informed petitioner of (1) the conveyance of a certain portion of its
obligation to PNEI per a dacion en pago arrangement between PNEI and PNB, and (2)
the unpaid balance of its obligation after deducting the amount conveyed to PNB. The
import of this letter is not that PNEI was demanding payment, but that PNEI was
57

advising petitioner to settle the matter of implementing the earlier arrangement with
PNB.
Since petitioners obligation to PNEI is payable on demand, and there being no
demand made, it follows that the obligation is not yet due. Therefore, this obligation
may not be subject to compensation for lack of a requisite under the law. Without
compensation having taken place, petitioner remains obligated to PNEI to the extent
stated in the promissory note. This obligation may undoubtedly be garnished in favor of
respondent to satisfy PNEIs judgment debt.
There is another alleged demand letter on record, dated January 24, 1990. It
was addressed to Atty. Domingo A. Santiago, Jr., Senior Vice President and Chief Legal
Counsel of PNB, and signed by Manuel Vijungco, chairman of the Board of Directors of
PNEI. In said letter, PNEI requested offsetting of accounts between petitioner and
PNEI. However, PNEIs own Assistant General Manager for Finance at that time, Atty.
Loreto N. Tang, testified that the letter was not a demand letter. THUS, Petition denied.
Decision affirmed

COMPENSATION LEGAL; WHEN PROHIBITED

SILAHIS MARKETING CORPORATION, petitioner,
VS. INTERMEDIATE APPELLATE COURT and GREGORIO DE LEON, doing
business under the name and style of "MARK INDUSTRIAL SALES", respondents.
1989 December 07
G.R. No. 74027
FACTS:
On various dates in October, November and December, 1975, Gregorio de Leon
doing business under the name and style of Mark Industrial Sales sold and delivered to
Silahis Marketing Corporation various items of merchandise covered by several invoices
in the aggregate amount of P22,213.75 payable within thirty (30) days from date of the
covering invoices.
Allegedly due to Silahis' failure to pay its account upon maturity despite repeated
demands, de Leon filed a complaint for the collection of the said accounts including
accrued interest thereon in the amount of P661.03 and attorney's fees of P5,000.00 plus
costs of litigation.
The answer admitted the allegations of the complaint insofar as the invoices
were concerned but presented as affirmative defenses; [a] a debit memo for P22,200.00
as unrealized profit for a supposed commission that Silahis should have received from
de Leon for the sale of sprockets in the amount of P111,000.00 made directly to Dole
Philippines, Incorporated by the latter sometime in August 1975; and [b] Silahis' claim
that it is entitled to return the stainless steel screen which was found defective by its
client, Borden International, Davao City, and to have the corresponding amount
cancelled from its account with de Leon.
ISSUE:
Whether or not private respondent is liable to the petitioner for the commission or
margin for the direct sale which the former concluded and consummated with Dole
Philippines, Incorporated without coursing the same through herein petitioner.
RULING:
58

It must be remembered that compensation takes place when two persons, in

their own right, are creditors and debtors to each other. Article 1279 of the Civil Code
provides that: "In order that compensation may be proper, it is necessary: [1] that each
one of the obligors be bound principally, and that he be at the same time a principal
creditor of the other; [2] that both debts consist in a sum of money, or if the things due
are consumable, they be of the same kind, and also of the same quality if the latter has
been stated; [3] that the two debts be due; [4] that they be liquidated and demandable;
[5] that over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor."
Undoubtedly, petitioner admits the validity of its outstanding accounts with private
respondent in the amount of P22,213.75 as contained in its answer. But whether
private respondent is liable to pay the petitioner a 20% margin or commission on the
subject sale to Dole Philippines, Inc. is vigorously disputed. This circumstance prevents
legal compensation from taking place.
The Court agrees with respondent appellate court that there is no evidence on
record from which it can be inferred that there was any agreement between the
petitioner and private respondent prohibiting the latter from selling directly to Dole
Philippines, Incorporated. Definitely, it cannot be asserted that the debit memo was a
contract binding between the parties considering that the same, as correctly found by
the appellate court, was not signed by private respondent nor was there any mention
therein of any commitment by the latter to pay any commission to the former involving
the sale of sprockets to Dole Philippines, Inc. in the amount of P111,000.00.
Indeed, such document can be taken as self-serving with no probative value
absent a showing or at the very least an inference, that the party sought to be bound
assented to its contents or showed conformity thereto. Thus the questioned decision of
respondent appellate court is hereby affirmed.
COMPENSATION LEGAL; WHEN PROHIBITED
ENGRACIO FRANCIA
VS. INTERMEDIATE APPELLATE COURT and HO FERNANDEZ
G.R. No. L-67649
June 28, 1988
162 SCRA 753
FACTS:
Engracio Francia is the registered owner of a residential lot, 328 square meters,
and a two-story house built upon it situated at Barrio San Isidro, now District of Sta.
Clara, Pasay City, Metro Manila. On October 15, 1977, a 125 square meter portion of
Francia's property was expropriated by the Republic of the Philippines for the sum of
P4,116.00 representing the estimated amount equivalent to the assessed value of the
aforesaid portion. Since 1963 up to 1977 inclusive, Francia failed to pay his real estate
taxes. Thus, on December 5, 1977, his property was sold at public auction pursuant to
Section 73 of Presidential Decree No. 464 known as the Real Property Tax Code in
order to satisfy a tax delinquency of P2,400.00. Ho Fernandez was the highest bidder
for the property. On March 20, 1979, Francia filed a complaint to annul the auction sale.
He later amended his complaint on January 24, 1980. The petitioner seeks to set aside
the auction sale of his property which took place on December 5, 1977, and to allow him
to recover a 203 square meter lot which was sold at public auction to Ho Fernandez and
ordered titled in the latter's name. He further averred that his tax delinquency of
P2,400.00 has been extinguished by legal compensation since the government owed
him P4, 116.00 when a portion of his land was expropriated.

59

The lower court rendered a decision in favor Fernandez which was affirmed by
the Intermediate Appellate Court . Hence, this petition for review.
ISSUE:
Whether or not the tax delinquency of Francia has been extinguished by legal
compensation.
RULING:
There is no legal basis for the contention. By legal compensation, obligations of
persons, who in their own right are reciprocally debtors and creditors of each other, are
extinguished (Art. 1278, Civil Code). The circumstances of the case do not satisfy the
requirements provided by Article 1279, to wit: (1) that each one of the obligors be
bound principally and that he be at the same time a principal creditor of the other; (2)
that the two debts be due.
The Court had consistently ruled that there can be no off-setting of taxes against
the claims that the taxpayer may have against the government. A person cannot refuse
to pay a tax on the ground that the government owes him an amount equal to or greater
than the tax being collected. The collection of a tax cannot await the results of a lawsuit
against the government. In addition, a taxpayer cannot refuse to pay his tax when
called upon by the collector because he has a claim against the governmental body not
included in the tax levy.
There are also other factors which compelled the Court to rule against the
petitioner. The tax was due to the city government while the expropriation was effected
by the national government. Moreover, the amount of P4,116.00 paid by the national
government for the 125 square meter portion of his lot was deposited with the Philippine
National Bank long before the sale at public auction of his remaining property. Notice of
the deposit dated September 28, 1977 was received by the petitioner on September 30,
1977. The petitioner admitted in his testimony that he knew about the P4,116.00
deposited with the bank but he did not withdraw it. It would have been an easy matter
to withdraw P2,400.00 from the deposit so that he could pay the tax obligation thus
aborting the sale at public auction.
The petition for review was dismissed.
COMPENSATION REQUISITES
TRINIDAD V ACAPULCO
G.R.No. 147477 June 27, 2006
FACTS
On May 6, 1991, respondent Estrella Acapulco filed a Complaint before the RTC
seeking the nullification of a sale she made in favor of petitioner Hermenegildo M.
Trinidad. She alleged: Sometime in February 1991, a certain Primitivo Caete
requested her to sell a Mercedes Benz for P580,000.00. Caete also said that if
respondent herself will buy the car, Caete was willing to sell it for P500,000.00.
Petitioner borrowed the car from respondent for two days but instead of returning the
car as promised, petitioner told respondent to buy the car from Caete for P500,000.00
and that petitioner would pay respondent after petitioner returns from Davao. Following
petitioners instructions, respondent requested Caete to execute a deed of sale
covering the car in respondents favor for P500,000.00 for which respondent issued
three checks in favor of Caete. Respondent thereafter executed a deed of sale in
favor of petitioner even though petitioner did not pay her any consideration for the sale.
When petitioner returned from Davao, he refused to pay respondent the amount of
60

P500,000.00 saying that said amount would just be deducted from whatever
outstanding obligation respondent had with petitioner. Due to petitioners failure to pay
respondent, the checks that respondent issued in favor of Caete bounced, thus
criminal charges were filed against her.[3] Respondent then prayed that the deed of
sale between her and petitioner be declared null and void; that the car be returned to
her; and that petitioner be ordered to pay damages.
ISSUE
Whether or not petitioners claim for legal compensation was already too late
RULING
The court ruled in favor of the petitioner. Compensation takes effect by operation
of law even without the consent or knowledge of the parties concerned when all the
requisites mentioned in Article 1279 of the Civil Code are present.[26] This is in
consonance with Article 1290 of the Civil Code which provides that: Article 1290. 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. Since it takes place ipso
jure,[27] when used as a defense, it retroacts to the date when all its requisites are
fulfilled.
Petitioners stance is that legal compensation has taken place and operates even
against the will of the parties because: (a) respondent and petitioner were personally
both creditor and debtor of each other; (b) the monetary obligation of respondent was
P566,000.00 and that of the petitioner was P500,000.00 showing that both
indebtedness were monetary obligations the amount of which were also both known
and liquidated; (c) both monetary obligations had become due and demandable
petitioners obligation as shown in the deed of sale and respondents indebtedness as
shown in the dishonored checks; and (d) neither of the debts or obligations are subject
of a controversy commenced by a third person.
NOVATION: SUBJECTIVE NOVATION; SUBSTITUION OF DEBTOR (Art. 1293)
(EXPROMISION VS. DELEGACION)
AQUINTEY V. TIBONG
G.R. No. 166704 December 20, 2006
FACTS
On May 6, 1999, petitioner Agrifina Aquintey filed before the RTC of Baguio City,
a complaint for sum of money and damages against the respondents, spouses Felicidad
and Rico Tibong. Agrifina alleged that Felicidad had secured loans from her on several
occasions, at monthly interest rates of 6% to 7%. Despite demands, the spouses
Tibong failed to pay their outstanding loan, amounting to P773,000.00 exclusive of
interests.
In their Answer with Counterclaim, spouses Tibong admitted that they had
secured loans from Agrifina. The proceeds of the loan were then re-lent to other
borrowers at higher interest rates. They, likewise, alleged that they had executed deeds
of assignment in favor of Agrifina, and that their debtors had executed promissory notes
in Agrifinas favor. According to the spouses Tibong, this resulted in a novation of the
original obligation to Agrifina. They insisted that by virtue of these documents, Agrifina
became the new collector of their debtors; and the obligation to pay the balance of their
loans had been extinguished.
ISSUE
61

Whether or not there is valid novation in the instant case?

RULING
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. Substitution of the person of the debtor may be
effected by delegacion, meaning, the debtor offers, and the creditor, accepts a third
person who consents to the substitution and assumes the obligation. Thus, the consent
of those three persons is necessary. In this kind of novation, it is not enough to extend
the juridical relation to a third person; it is necessary that the old debtor be released
from the obligation, and the third person or new debtor take his place in the relation.
Without such release, there is no novation; the third person who has assumed the
obligation of the debtor merely becomes a co-debtor or a surety. If there is no
agreement as to solidarity, the first and the new debtor are considered obligated jointly.
In the case at bar, the court found that respondents obligation to pay the balance
of their account with petitioner was extinguished, pro tanto, by the deeds of assignment
of credit executed by respondent Felicidad in favor of petitioner. As gleaned from the
deeds executed by respondent Felicidad relative to the accounts of her other debtors,
petitioner was authorized to collect the amounts of P6,000.00 from Cabang, and
P63,600.00 from Cirilo. They obliged themselves to pay petitioner. Respondent
Felicidad, likewise,unequivocably declared that Cabang and Cirilo no longer had any
obligation to her.
NOVATION: SUBJECTIVE NOVATION; SUBROGATION OF THE RIGHTS OF
THE CREDITOR (LEGAL VS. CONVENTIONAL)
1.
2.
3.
4.
5.
6.
7.

SWAGMAN VS. CA, 455 S 175

AZOLLA FARMS VS. CA, 11 NOVEMBER 2004
CALIFORNIA BUS LINES VS. STATE INVVESTMENT, 418 S 297
OCAMPO-PAULE VS. CA, 4 FEBRUARY 2002
REYES VS. CA, 383 S 471
BAUTISTA VS. PILAR DEVELOPMENT, 312 S 611
EVADEL REALTY VS. SORIANO, 357 S 395
SWAGMAN V CA
G.R.No. 161135 April 8, 2005

FACTS
Sometime in 1996 and 1997, petitioner Swagman Hotels and Travel, Inc., through Atty.
Leonor L. Infante and Rodney David Hegerty, its president and vice-president,
respectively, obtained from private respondent Neal B. Christian loans evidenced by
three promissory notes dated 7 August 1996, 14 March 1997, and 14 July 1997. Each
of the promissory notes is in the amount of US$50,000 payable after three years from
its date with an interest of 15% per annum payable every three months. In a letter
dated 16 December 1998, Christian informed the petitioner corporation that he was
terminating the loans and demanded from the latter payment in the total amount of
US$150,000 plus unpaid interests in the total amount of US$13,500. On 2 February
1999, private respondent Christian filed with the Regional Trial Court of Baguio City,
Branch 59, a complaint for a sum of money and damages against the petitioner
corporation, Hegerty, and Atty. Infante. The petitioner corporation, together with its
president and vice-president, filed an Answer raising as defenses lack of cause of
action and novation of the principal obligations. According to them, Christian had no
cause of action because the three promissory notes were not yet due and demandable.
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ISSUE
Where there is a valid novation, may the original terms of contract which has been
novated still prevail?
HELD
The receipts, as well as private respondents summary of payments, lend credence to
petitioners claim that the payments were for the principal loans and that the interests on
the three consolidated loans were waived by the private respondent during the
undisputed renegotiation of the loans on account of the business reverses suffered by
the petitioner at the time.
There was therefore a novation of the terms of the three promissory notes in that the
interest was waived and the principal was payable in monthly installments of US$750.
Alterations of the terms and conditions of the obligation would generally result only in
modificatory novation unless such terms and conditions are considered to be the
essence of the obligation itself.[25] The resulting novation in this case was, therefore,
of the modificatory type, not the extinctive type, since the obligation to pay a sum of
money remains in force.
Thus, since the petitioner did not renege on its obligation to pay the monthly
installments conformably with their new agreement and even continued paying during
the pendency of the case, the private respondent had no cause of action to file the
complaint. It is only upon petitioners default in the payment of the monthly
amortizations that a cause of action would arise and give the private respondent a right
to maintain an action against the petitioner.
NOVATION: SUBJECTIVE NOVATION; SUBROGATION OF THE RIGHTS OF THE
CREDITOR (LEGAL VS. CONVENTIONAL)
AZOLLA FARMS V CA
G.R.No. 138085 November 11, 2004
FACTS
Petitioner Francis R. Yuseco, Jr., is the Chairman, President and Chief Operating
Officer of petitioner Azolla Farms International Philippines. In 1982, Azolla Farms
undertook to participate in the National Azolla Production Program wherein it will
purchase all the Azolla produced by the Azolla beneficiaries in the amount not
exceeding the peso value of all the inputs provided to them. The project also involves
the then Ministry of Agriculture, the Kilusang Kabuhayan at Kaunlaran, and the Kiwanis.
To finance its participation, petitioners applied for a loan with Credit Manila, Inc., which
the latter endorsed to its sister company, respondent Savings Bank of Manila (Savings
Bank). The Board of Directors of Azolla Farms, meanwhile, passed a board resolution
on August 31, 1982, authorizing Yuseco to borrow from Savings Bank in an amount not
exceeding P2,200,000.00.
The loan having been approved, Yuseco executed a promissory note on
September 13, 1982, promising to pay Savings Bank the sum of P1,400,000.00 on or
before September 13, 1983. the Azolla Farms project collapsed. Blaming Savings
Bank, petitioners Yuseco and Azolla Farms filed on October 3, 1983 with the Regional
Trial Court of Manila (Branch 25), a complaint for damages. In essence, their complaint
alleges that Savings Bank unjustifiably refused to promptly release the remaining
P300,000.00 which impaired the timetable of the project and inevitably affected the
viability of the project resulting in its collapse, and resulted in their failure to pay off the
loan. Thus, petitioners pray for P1,000,000.00 as actual damages, among others.
ISSUE
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Whether the trial court erred in admitting petitioners amended complaint

RULING
SEC. 5. Amendment to conform to or authorize presentation of evidence .
When issues not raised by the pleadings are tried by express or implied consent of the
parties, they shall be treated in all respects, as if they had been raised in the pleadings.
Such amendment of the pleadings as may be necessary to cause them to conform to
the evidence and to raise these issues may be made upon motion of any party at any
time, even after judgment; but failure so to amend does not affect the result of the trial
of these issues. If evidence is objected to at the trial on the ground that it is not within
the issues made by the pleadings, the court may allow the pleadings to be amended
and shall do so freely when the presentation of the merits of the action will be
subserved thereby and the objecting party fails to satisfy the court that the admission of
such evidence would prejudice him in maintaining his action or defense upon the merits.
As can be gleaned from the records, it was petitioners belief that respondents
evidence justified the amendment of their complaint. The trial court agreed thereto and
admitted the amended complaint. On this score, it should be noted that courts are
given the discretion to allow amendments of pleadings to conform to the evidence
presented during the trial.
NOVATION: SUBJECTIVE NOVATION; SUBROGATION OF THE RIGHTS OF THE
CREDITOR (LEGAL VS. CONVENTIONAL)
CALIFORNIA BUS LINES V STATE INVESMENTS
G.R.No. 147950 December 11, 2003
FACTS
Sometime in 1979, Delta Motors CorporationM.A.N. Division (Delta) applied for
financial assistance from respondent State Investment House, Inc.
SIHI agreed to extend a credit line to Delta for P25,000,000.00 in three separate credit
agreements dated May 11, June 19, and August 22, 1979. Delta eventually became
indebted to SIHI to the tune of P24,010,269.32
From April 1979 to May 1980, petitioner California Bus Lines, Inc. (hereafter
CBLI), purchased on installment basis 35 units of M.A.N. Diesel Buses and two (2) units
of M.A.N. Diesel Conversion Engines from Delta. To secure the payment of the
purchase price of the 35 buses, CBLI and its president, Mr. Dionisio O. Llamas,
executed sixteen (16) promissory notes in favor of Delta on January 23 and April 25,
1980.[5] In each promissory note, CBLI promised to pay Delta or order, P2,314,000
payable in 60 monthly installments starting August 31, 1980, with interest at 14% per
annum. CBLI further promised to pay the holder of the said notes 25% of the amount
due on the same as attorneys fees and expenses of collection, whether actually
incurred or not, in case of judicial proceedings to enforce collection. In addition to the
notes, CBLI executed chattel mortgages over the 35 buses in Deltas favor. When CBLI
defaulted on all payments due, it entered into a restructuring agreement with Delta on
October 7, 1981, to cover its overdue obligations under the promissory notes.CBLI
continued having trouble meeting its obligations to Delta. This prompted Delta to
threaten CBLI with the enforcement of the management takeover clause.
ISSUE
Whether the Restructuring Agreement dated October 7, 1981, between petitioner
CBLI and Delta Motors, Corp. novated the five promissory notes Delta Motors, Corp.
assigned to respondent SIHI.
RULING
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Novation has been defined as the extinguishment of an obligation by the

substitution or change of the obligation by a subsequent one which terminates the first,
either by changing the object or principal conditions, or by substituting the person of the
debtor, or subrogating a third person in the rights of the creditor.For novation to take
place, four essential requisites have to be met, namely, (1) a previous valid obligation;
(2) an agreement of all parties concerned to a new contract; (3) the extinguishment of
the old obligation; and (4) the birth of a valid new obligation.
In this case, 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 preexisting obligation, only a showing of complete incompatibility between the old and the
new obligation would sustain a finding of novation by implication.
NOVATION: SUBJECTIVE NOVATION; SUBROGATION OF THE RIGHTS OF THE
CREDITOR (LEGAL VS. CONVENTIONAL)

OCAMPO-PAULE V CA
G.R.No. 145872 February 4, 2002
FACTS
During the period August, 1991 to April, 1993, petitioner received from private
complainant Felicitas M. Calilung several pieces of jewelry with a total value of One
hundred Sixty Three Thousand One hundred Sixty Seven Pesos and Ninety Five
Centavos (P163,167.95). The agreement between private complainant and petitioner
was that the latter would sell the same and thereafter turn over and account for the
proceeds of the sale, or otherwise return to private complainant the unsold pieces of
jewelry within two months from receipt thereof. Since private complainant and petitioner
are relatives, the former no longer required petitioner to issue a receipt acknowledging
her receipt of the jewelry.When petitioner failed to remit the proceeds of the sale of the
jewelry or to return the unsold pieces to private complainant, the latter sent petitioner a
demand letter. Notwithstanding receipt of the demand letter, petitioner failed to turn over
the proceeds of the sale or to return the unsold pieces of jewelry. Private complainant
was constrained to refer the matter to the barangay captain of Sta. Monica, Lubao,
Pampanga.
ISSUE
Whether or not there was a novation of petitioners criminal liability when she and
private complainant executed the Kasunduan sa Bayaran.
RULING
It is well-settled that the following requisites must be present for novation to take
place: (1) a previous valid obligation; (2) agreement of all the parties to the new
contract; (3) extinguishment of the old contract; and (4) validity of the new one.
Novation, in its broad concept, may either be extinctive or modificatory. It is extinctive
when an old obligation is terminated by the creation of a new obligation that takes the
place of the former; it is merely modificatory when the old obligation subsists to the
extent it remains compatible with the amendatory agreement.
The execution of the Kasunduan sa Bayaran does not constitute a novation of
the original agreement between petitioner and private complainant. Said Kasunduan did
not change the object or principal conditions of the contract between them. The change
in manner of payment of petitioners obligation did not render the Kasunduan
65

incompatible with the original agreement, and hence, did not extinguish petitioners
liability to remit the proceeds of the sale of the jewelry or to return the same to private
complainant.
An obligation to pay a sum of money is not novated, in a new instrument wherein
the old is ratified, by changing only the terms of payment and adding other obligations
not incompatible with the old one, or wherein the old contract is merely supplemented
by the new one.
In any case, novation is not one of the grounds prescribed by the Revised Penal
Code for the extinguishment of criminal liability.
NOVATION: SUBJECTIVE NOVATION; SUBROGATION OF THE RIGHTS OF THE
CREDITOR (LEGAL VS. CONVENTIONAL)

REYES V CA
june 26, 2002
FACTS
This petition arose from a civil case for collection of a sum of money with
preliminary attachment filed by respondent Pablo V. Reyes against his first cousin
petitioner Arsenio R. Reyes and spouse Nieves S. Reyes. According to private
respondent, petitioner-spouses borrowed from him P600,000.00 with interest at five
percent (5%) per month, which totalled P1,726,250.00 at the time of filing of the
Complaint. The loan was to be used supposedly to buy a lot in Paraaque. It was
evidenced by an acknowledgment receipt dated 15 July 1990 signed by the petitionerspouses Arsenio R. Reyes and Nieves S. Reyes and witness Romeo Rueda.
In their Answer petitioners admitted their loan from respondent but averred that there
was a novation so that the amount loaned was actually converted into respondent's
contribution to a partnership formed between them on 23 March 1990.
ISSUE
Whether or not there was novation in the instant case?
RULING
For novation to take place, the following requisites must concur: (a) there must
be a previous valid obligation; (b) there must be an agreement of the parties concerned
to a new contract; (c) there must be the extinguishment of the old contract; and, (d)
there must be the validity of the new contract.
In the case at bar, the third requisite is not present. The parties did agree that the
amount loaned would be converted into respondent's contribution to the partnership, but
this conversion did not extinguish the loan obligation. The date when the
acknowledgment receipt/promissory note was made negates the claim that the loan
agreement was extinguished through novation since the note was made while the
partnership was in existence.
Significantly, novation is never presumed. It must appear by express agreement
of the parties, or by their acts that are too clear and unequivocal to be mistaken for
anything else. An obligation to pay a sum of money is not novated in a new instrument
wherein the old is ratified by changing only the terms of payment and adding other
obligations not incompatible with the old one, or wherein the old contract is merely
supplemented by the new one.
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NOVATION: SUBJECTIVE NOVATION; SUBROGATION OF THE RIGHTS OF THE

CREDITOR (LEGAL VS. CONVENTIONAL)

BAUTISTA V PILAR DEVELOPMENT

g.r.no. 135046 august 17, 1999
FACTS
In 1978, petitioner spouses Florante and Laarni Bautista purchased a house and
lot in Pilar Village, Las Pinas, Metro Manila. To partially finance the purchase, they
obtained from the Apex Mortgage & Loan Corporation a loan in the amount of
P100,180.00. They executed a promissory note on December 22, 1978 obligating
themselves, jointly and severally, to pay the "principal sum of P100,180.00 with interest
rate of 12% and service charge of 3%" for a period of 240 months, or twenty years, from
date, in monthly installments of P1,378.83. Late payments were to be charged a penalty
of one and one-half per cent (1 1/2%) of the amount due. In the same promissory note,
petitioners authorized Apex to "increase the rate of interest and/or service charges"
without notice to them in the event that a law, Presidential Decree or any Central Bank
regulation should be enacted increasing the lawful rate of interest and service charges
on the loan. Payment of the promissory note was secured by a second mortgage on the
house and lot purchased by petitioners.Petitioner spouses failed to pay several
installments. On September 20, 1982, they executed another promissory note in favor
of Apex. This note was in the amount of P142,326.43 at the increased interest rate of
twenty-one per cent (21%) per annum with no provision for service charge but with
penalty charge of 1 1/2% for late payments.
ISSUE
Whether or not there was valid novation in the case at bar?
RULING
Novation has four (4) essential requisites: (1) the existence of a previous valid
obligation; (2) the agreement of all parties to the new contract; (3) the extinguishment of
the old contract; and (4) the validity of the new one. In the instant case, all four
requisites have been complied with. The first promissory note was a valid and
subsisting contract when petitioner spouses and Apex executed the second promissory
note. The second promissory note absorbed the unpaid principal and interest of
P142,326.43 in the first note which amount became the principal debt therein, payable
at a higher interest rate of 21% per annum. Thus, the terms of the second promissory
note provided for a higher principal, a higher interest rate, and a higher monthly
amortization, all to be paid within a shorter period of 16.33 years. These changes are
substantial and constitute the principal conditions of the obligation. Both parties
voluntarily accepted the terms of the second note; and also in the same note, they
unequivocally stipulated to extinguish the first note. Clearly, there was animus novandi,
an express intention to novate. The first promissory note was cancelled and replaced by
the second note. This second note became the new contract governing the parties'
obligations.
NOVATION: SUBJECTIVE NOVATION; SUBROGATION OF THE RIGHTS OF THE
CREDITOR (LEGAL VS. CONVENTIONAL)

EVADEL REALTY V SORIANO

G.R.No. 144291 April 20, 2001
67

FACTS
On April 12, 1996, the spouses Antero and Virginia Soriano (respondent
spouses), as sellers, entered into a "Contract to Sell " with Evadel Realty and
Development Corporation (petitioner), as buyer, over a parcel of land denominated as
Lot 5536-C of the Subdivision Plan of Lot 5536 covered by Transfer Certificate of Title
No. 125062 which was part of a huge tract of land known as the Imus Estate. Upon
payment of the first installment, petitioner introduced improvements thereon and fenced
off the property with concrete walls. Later, respondent spouses discovered that the area
fenced off by petitioner exceeded the area subject of the contract to sell by 2,450
square meters. Upon verification by representatives of both parties, the area
encroached upon was denominated as Lot 5536-D-1 of the subdivision plan of Lot
5536-D of Psd-04-092419 and was later on segregated from the mother title and issued
a new transfer certificate of title, TCT No. 769166, in the name of respondent spouses.
Respondent spouses successively sent demand letters to petitioner on February 14,
March 7, and April 24, 1997, to vacate the encroached area. Petitioner admitted
receiving the demand letters but refused to vacate the said area.
ISSUE
Whether or not there was novation of contract?
RULING
Petitioner's claim that there was a novation of contract because there was a
"second" agreement between the parties due to the encroachment made by the national
road on the property subject of the contract by 1,647 square meters, is unavailing.
Novation, one of the modes of extinguishing an obligation, requires the concurrence of
the following: (1) there is a valid previous obligation; (2) the parties concerned agree to
a new contract; (3) the old contract is extinguished; and (4) there is valid new contract.
Novation may be express or implied. In order that an obligation may be extinguished by
another which substitutes the same, it is imperative that it be so declared in unequivocal
terms (express novation) or that the old and the new obligations be on every point
incompatible with each other (implied novation).
In the instant case, there was no express novation because the "second"
agreement was not even put in writing. Neither was there implied novation since it was
not shown that the two agreements were materially and substantially incompatible with
each other. We quote with approval the following findings of the trial court: Since the
alleged agreement between the plaintiffs [herein respondents] and defendant [herein
petitioner] is not in writing and the alleged agreement pertains to the novation of the
conditions of the contract to sell of the parcel of land subject of the instant litigation, ipso
facto, novation is not applicable in this case since, as stated above, novation must be
clearly proven by the proponent thereof and the defendant in this case is clearly barred
by the Statute of Frauds from proving its claim.

68