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Title II. CONTRACTS IS LANDBANK BOUND TO SHARE THE PROPERTIES
Chapter 1. General Provisions
A. Definition – Art. 1305
Gateway v. Land Bank G.R. 155217, July 30, 2003
FACTS:
In 1995, petitioner Gateway Electronics Corporation applied for
a loan in the amount of one billion pesos with respondent
Landbank to finance the construction and acquisition of
machineries and equipment for a semi-conductor plant at
Gateway Business Park in Javalera, General Trias, Cavite.
However, Landbank was only able to extend petitioner a loan in
the amount of six hundred million pesos
(P600,000,000.00). Hence, it offered to assist petitioner in
securing additional funding through its investment banking
services, which offer petitioner accepted.
Thereafter, Landbank released to petitioner the initial amount of
P250,000,000.00, with the balance of P350,000,000.00 to be
released in June 1996. As security for the said loans, petitioner
mortgaged in favor of Landbank two parcels of land, the
movable properties as well as the machineries to be installed
therein.
In case of failure of syndication of the loan, allow the banks that
have granted loans to GEC [Gateway Electronics Corporation],
the intention being that all banks, including Landbank, shall be
on equal footing where the aforesaid collateral is concerned.
Consequently, PCIB, UBP, RCBC, and Asia Trust joined the loan
syndication and released various loans to petitioner.
On October 10, 1996, a Memorandum of Understanding (MOU)
was executed by Landbank, PCIB, UBP, RCBC, Asiatrust and the
petitioner, with RCBC as the trustee of the loan syndication.
Meanwhile, the negotiations for the execution of an MTI failed
because Landbank and the petitioner were unable to agree on
the valuation of the equipment and machineries to be acquired
by the latter.
To break the impasse, PCIB, RCBC, UBP, and Asiatrust
proposed, subject to the approval of their respective Executive
Committees or Board of Directors, to execute a Joint Real Estate
Mortgage (JREM) as the new mode to secure [their] respective
loan vis--vis [petitioners] collaterals.
On February 27, 1998, Land Bank informed petitioner of its
intention not to share collaterals with the other banks. In the
meantime, petitioners loan with PCIB became due because of
its failure to comply with the collateral requirement under the
Mortgage Trust Indenture (MTI) or Joint Real Estate Mortgage
(JREM)
JREM, or to provide acceptable substitute collaterals. Hence,
petitioner filed with the Regional Trial Court of Makati City,
Branch 133, a complaint against Land Bank for specific
performance and damages with prayer for the issuance of
preliminary mandatory injunction.
RTC: Defendant is hereby directed to accede to the terms of the
draft MTI and/or to agree to share collaterals under a joint real
estate mortgage [JREM] with long-term creditors of plaintiff
(including PCIB) as joint mortgagees and with defendant as
custodian of the titles.
CA: Respondent cannot be compelled to accede to the terms of
the MTI and/or JREM which was supposed to cover the
syndicated loan of petitioner inasmuch as the said schemes were
never executed nor approved by the petitioner and the
participating banks.
ISSUE:
MORTGAGED TO IT BY RESPONDENT WITH THE OTHER
CREDITOR BANKS IN THE LOAN SYNDICATION?
IF THE ANSWER IS IN THE AFFIRMATIVE, CAN LANDBANK BE
COMPELLED AT THIS POINT TO AGREE WITH THE TERMS OF
THE MTI OR JREM?
HELD:
1st ISSUE
The Court finds that Landbank is bound by a perfected contract
to share petitioners collateral with the participating banks in the
loan syndication
Article 1315 of the Civil Code, provides that a contract is
perfected by mere consent, which is manifested by the meeting
of the offer and the acceptance upon the thing and the cause
which are to constitute the contract.
In the case at bar, a perfected contract for the sharing of
collaterals is evident from the exchange of communications
between Landbank and petitioner and the participating banks,
as well as in the Memorandum of Understanding executed by
petitioner and the participating banks, including Landbank.
There was an acceptance by petitioner and by PCIB, RCBC, UBP,
and Asiatrust of Lanbanks offer to share collaterals, culminating
in the execution of the Memorandum of Understanding.
The MTI and/or the JREM belong to the realm of consummation
of said Memorandum of Understanding, being the proposed
vehicles or modes to effect the sharing agreement. Thus, in the
JREM which was approved by Landbank, except for its loan
security coverage, the participating banks expressly
acknowledged that [t]he Joint Real Estate Mortgage [is] pursued
by [them] as a new mode to secure [their] respective loans
vis--vis GECs collateral.
2nd ISSUE
Writ of preliminary mandatory injunction directing Landbank to
agree with the terms of the MTI or JREM by trial court was
premature.
This is so because the MTI and/or JREM that were supposed to
consummate the perfected collateral sharing agreement have
not yet come into existence.
As correctly held by the Court of Appeals, Landbank cannot be
compelled to agree with the terms of the MTI considering that
no such terms were finalized and approved by the petitioner and
the participating banks
Notably, the JREM expressly stated that we hereby appeal to
the GECs senior management to decide swiftly and to favorably
approve our humble requests so that, in turn, we can seek
respective approvals from our senior management to culminate
this long term project financing deal of ours. No such approval,
however, appears in the records.
While it is true that Landbank informed petitioner in its letter
dated July 30, 1996 that the participating banks in the loan
syndication will have equal security position, and that on August
20, 1996, Landbank confirmed to PCIB that the participating
banks, shall be on equal footing where the aforesaid collateral
is concerned, no such stipulation was embodied in the
Memorandum of Understanding executed by petitioner,
Landbank, PCIB, RCBC, UBP, and Asiatrust on October 10, 1996.
Petition GRANTED. CA decision SET ASIDE. RTC decision
MODIFIED: respondent Landbank is directed to implement its
agreement under the Memorandum of Understanding dated
October 10, 1996 to share with Philippine Commercial
International Bank (PCIB), Union Bank of the Philippines, (UBP),
Rizal Commercial Banking Corporation-Trust Investment

Division (RCBC), and Asia Trust Bank (Asia Trust) the properties
mortgaged to it by petitioner Gateway Electronics Corporation,
as collaterals for the syndicated loan.
C. Characteristics
2. Mutuality – Arts. 1308-1310 (see also Art. 1473)
GSIS v. CA
G.R. No. 105567, 25 November 1993
FACTS:
The petitioner GSIS conducted a lottery draw for the allocation
of lots and housing units in Project 8-C of GSIS Village. Private
respondent Esperanza Leuterio won and was issued a Certificate
of Acknowledgment to purchase the subject house and lot. The
parties entered into a Deed of Conditional Sale evidencing the
conveyance of the subject property and all improvements
thereon to the Leuterio spouses for the purchase price of
P19,740.00, payable over a fifteen-year period, in 180 equal
monthly installments.
Paragraph 11 of the Deed of Conditional Sale provides that upon
the full payment by the Vendee of the purchase price of the lot,
the Vendor agrees to execute in favor of the Vendee, or his/their
heirs and successors-in-interest a final Deed of Sale.
After the land development and housing construction of Project
8-C were completed, petitioner’s Board of Trustees increased
the purchase price indicated in the Deeds of Conditional Sale
covering houses and lots therein. The new price was based on
the alleged final cost of construction of the GSIS Village. It is
noted that, on the face of the Leuterio’s Conditional Deed of Sale
is the marginal notation “subject to adjustment pending
approval of the Board of Trustees.” The Leuterio spouses alleged
that this notation was not in the Deed when they signed the
same in 1965. Resolving this factual issue, the trial court found
that the appended words were inserted into the document
without the knowledge or consent of the Leuterio spouses.
Meanwhile, after years of diligently paying the monthly
amortizations 6 and real estate taxes on the subject property,
the private respondents spouses informed 7 petitioner that the
payments 8 for the property had been completed, and hence,
the execution of an absolute deed of sale in their favor was in
order. No action on the matter was taken by petitioner.
ISSUE:
WHETHER OR NOT the spouses Leuterio agreed to the notation
“subject to adjustment pending approval of the Board of
Trustees” appearing on the margin of the parties’ Conditional
Deed of Sale.
RULING:
No. The purchase price agreed upon by the parties was
P19,740.00 and this agreement was not made subject to any
posterior event or condition. This finding of fact was based on
the explicit testimony of private respondent Raul Leuterio that
when he and his wife signed the Deed of Conditional Sale in
1965, the notation “subject to adjustment pending approval of
the Board of Trustees” was not in the Deed. Likewise, the
Answer of petitioner to the Complaint of the private respondents
admitted the non-existence of this notation at the time the Deed
of Conditional Sale was signed, albeit, it called the omission an
honest mistake.
Quite clearly, therefore, the purchase price mutually agreed
upon by the parties was P19,740.00. The spouses Leuterio did
not give their consent for petitioner to make a unilateral upward
adjustment of this purchase price depending on the final cost of
construction of the subject house and lot.
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PROFESSIONAL ACADEMIC PLANS, INC., FRANCISCO
COLAYCO AND BENJAMIN DINO, PETITIONERS, VS.
DINNAH L. CRISOSTOMO, RESPONDENT.
FACTS:
Respondent Dinnah L. Crisostomo was the PAPI District Manager
for Metro Manila. As such officer, she did not receive any salary
but was entitled to a franchise commission equivalent to 10%
of the payments on remittances of clients whose contracts or
agreements had been negotiated by her, for and in behalf of
PAPI. She was later promoted as Regional Manager.
On May 17, 1988, petitioner PAPI wrote Col. Noe S. Andaya, the
President of the Armed Forces of the Philippines Savings and
Loan Association, Inc. (AFPSLAI) offering an Academic
Assistance Program for its members, their children and
dependents.
Noel Rueda, a sales consultant of petitioner PAPI, initiated
negotiations for the sale of pre-need educational plans under
the said program with the AFPSLAI. However, before an
agreement was reached, Rueda's services were terminated.
Respondent Crisostomo, as the district manager and the
immediate supervisor of Rueda, continued the negotiation of the
account together with Guillermo R. Macariola, the Assistant Vice-
President for Sales.[2] The AFPSLAI agreed to the proposal.
On November 9, 1988, the AFPSLAI and PAPI executed a
Memorandum of Agreement (MOA)[3] in connection with
scholarship funding agreements to be entered into by PAPI and
the AFPSLAI members. These agreements shall then embody
the provisions of the Professional Academic Program
Agreement. The parties agreed that all support services would
be provided by PAPI and that any amendments and/or
modifications to the MOA would be effective only upon approval
of the parties thereto.
By then, Rueda was no longer connected with the petitioner
corporation, hence, was disqualified to receive the franchise
commission. Thus, the said commission was offered to Macariola
who, however, declined and waived his right thereto in favor of
respondent Crisostomo, Rueda's immediate supervisor. The
Executive Committee of petitioner PAPI agreed to give the
franchise commission to respondent Crisostomo.[4]
Initially, respondent Crisostomo received the 10% franchise
commission from December 1988 until April 1989. Later, upon
the instance of petitioner Benjamin Dino, then Assistant Vice-
President for Marketing, respondent Crisostomo's franchise
commission was reduced to 5% to support the operational
expenses of PAPI. After a few months, the said commission was
again reduced to 4%. Two months later, petitioner PAPI asked
for another .25% reduction; hence, respondent Crisostomo's
franchise commission was further reduced to 3.75%. Finally, in
January 1991, petitioner PAPI again asked for a final reduction
of the commission to 2% to which respondent Crisostomo
agreed, on the condition that it be reduced into writing.
ISSUE:
WHETHER OR NOT THE OLD MEMORANDUM OF AGREEMENT
HAD BEEN CANCELLED AND RESCINDED BY AFPSLAI
RULING:
A reading of the letter of Col. Punzalan to the petitioner
corporation indicates that it merely signified the suspension of
the acceptance of new applications under the first MOA, until
such time that a thorough study was undertaken, and a new
agreement mutually beneficial to both parties was entered into.
By his letter, Col. Punzalan did not unilaterally cancel or rescind
the first MOA. Indeed, the petitioners failed to adduce a morsel
of evidence to prove that AFPSLAI had agreed to such
cancellation or rescission of the first MOA. It bears stressing that

abandonment of contract rights requires proof of actual intent
to abandon. [35]
Once a contract is entered into, no party can renounce it
unilaterally or without the consent of the other.[36] This is the
essence of the principle of mutuality of contracts entombed in
Article 1308[37] of the Civil Code. To effectuate abandonment
of a contract, mutual assent is always required.[38] The mere
fact that one has made a poor bargain may not be a ground for
setting aside the agreement.[39]
As can be gleaned from the second MOA, the parties merely
made substantial modifications to the first MOA, and agreed that
only those provisions inconsistent with those of the second were
considered rescinded, modified and/or superseded.
3. Relativity
a) Contracts take effect only between the parties, their
assigns and heirs - Art. 1311
MANILA RAILROAD CO. VS. COMPANIA
TRANSATLANTICA
FACTS:
SS/Alicante, belonging to Compania Transatlantica de Barcelona
was transporting two locomotive boilers for the Manila Railroad
Company. The equipment of the ship for discharging the heavy
cargo was not strong enough to handle the boilers. Compania
Transatlantica contracted the services of Atlantic gulf and Pacific
Co., which had the best equipment to lift the boilers out of the
ship’s hold. When Alicante arrived in Manila, Atlantic company
sent out its floating crane under the charge of one Leyden.
When the first boiler was being hoisted out of the ship’s hold,
the boiler could not be brought out because the sling was not
properly placed and the head of the boiler was caught under the
edge of the hatch. The weight on the crane was increased by a
strain estimated at 15 tons with the result that the cable of the
sling broke and the boiler fell to the bottom of the ship’s hold.
The sling was again adjusted and the boiler was again lifted but
as it was being brought up the bolt at the end of the derrick
broke and the boiler fell again. The boiler was so badly
damaged that it had to be shipped back to England to be rebuilt.
The damages suffered by Manila Railroad amounted to
P23,343.29. Manila Railroad then filed an action against the
Streamship Company to recover said damages. The Steamship
Company caused Atlantic Company to be brought as co-
defendant arguing that Atlantic Company as an independent
contractor, who had undertaken to discharge the boilers had
become responsible for the damage.
The Court of First Instance decided in favor of Manila Railroad,
the plaintiff, against Atlantic Company and absolved the
Steamship Company. Manila Railroad appealed from the
decision because the Steamship Company was not held liable
also. Atlantic Company also appealed from the judgment
against it.
ISSUE:
WAS THE STEAMSHIP COMPANY LIABLE TO MANILA RAILROAD
FOR DELIVERING THE BOILER IN A DAMAGED CONDITION?
RULING:
There was a contractual relation between the Steamship
Company and Manila Railroad. There was also a contractual
relation between the Steamship Company and Atlantic. But
there was no contractual relation between the Railroad
Company and Atlantic Company.
There was no question that the Steamship Company was liable
to Manila Railroad as it had the obligation to transport the boiler
in a proper manner safe and securely under the circumstances
required by law and customs. The Steamship Company cannot
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escape liability simply because it employed a competent
independent contractor to discharge the boiler.
Atlantic Company claimed that it was not liable, because it had
employed all the diligence of a good father of a family and
proper care in the selection of Leyden. Said argument was not
tenable, because said defense was not applicable to negligence
arising in the course of the performance of a contractual
obligation. The same can be said with respect to the liability of
Atlantic Company upon its contract with the Steamship
Company. There was a distinction between negligence in the
performance of a contractual obligation (culpa contractual) and
negligence considered as an independent source of obligation
(culpa aquiliana). Atlantic Company wasis liable to the
Steamship Company for the damage brought upon the latter by
the failure of Atlantic Company to use due care in discharging
the boiler, regardless of the fact that the damage was caused
by the negligence of an employee who was qualified for the
work, duly chose with due care.
Since there was no contract between the Railroad Company and
Atlantic Company, Railroad Company can had no right of action
to recover damages from Atlantic Company for the wrongful act
which constituted the violation of the contract. The rights of
Manila Railroadcan only be made effective through the
Steamship Company with whom the contract of affreightment
was made.
DKC Holdings Corp. v. CA
G.R. No. 118248, 5 April 2000
FACTS:
DKC Holdings Corporation entered into a Contract of Lease with
Option to Buy with Encarnacion Bartolome, which option must
be exercised within a period of two years counted from the
signing of the Contract. In turn, DKC undertook to pay
P3,000.00 a month as consideration for the reservation of its
option. Within the two-year period, DKC shall serve formal
written notice upon the lessor of its desire to exercise its option.
When Encarnacion died, petitioner coursed its payment to
private respondent Victor Bartolome, being the sole heir of
Encarnacion. Victor, however, refused to accept the payments.
Subsequently, petitioner served upon Victor, via registered mail,
notice that it was exercising its option to lease the property,
tendering the amount of P15,000.00 as rent. Again, Victor
refused to accept the tendered rental fee and to surrender
possession of the property to petitioner. On April 23, 1990,
petitioner filed a complaint for specific performance and
damages against Victor and the Register of Deeds
ISSUE:
WHETHER OR NOT THE RIGHTS UNDER A CONTACT OF LEASE
WITH OPTION TO BUY WERE TRANSMISSIBLE.
RULING:
Article 1311 of the Civil Code states that the general rule,
therefore, is that heirs are bound by contracts entered into by
their predecessors-in-interest except when the rights and
obligations arising therefrom are not transmissible by (1) their
nature, (2) stipulation or (3) provision of law. The Court held
that there is neither contractual stipulation nor legal provision
making the rights and obligations under the lease contract
intransmissible. More importantly, the nature of the rights and
obligations therein are transmissible.
In the case at bar, the subject matter of the contract is a lease,
which is a property right. The death of a party does not excuse
nonperformance of a contract which involves a property right
and the rights and obligations thereunder pass to the personal
representatives of the deceased. Similarly, nonperformance is

not excused by the death of the party when the other party has
a property interest in the subject matter of the contract.
Therefore, Victor is bound by the subject Contract of Lease with
Option to Buy.
b) No one may contract in the name of another – Art.
1317
G.R. No. L-9188 (1914)
Gutierrez Hermanos vs. Engracio Orense
FACTS:
Jose Duran, the nephew of Engracio Orense sold a parcel of land
owned by the latter to Gutierrez Hermanos in 1907 for the
amount of 1,500 pesos. The sale also stipulates that Jose Duran
has the right of repurchase within a period of 4 years.
Gutierrez Hermanos did not acquire actual possession of the
land because Engracio and Jose Duran were still occupying the
said land. After the lapse of 4 years, Duran still refused to
convey possession of the land thus forcing Hermanos to file a
criminal complaint of Estafa. Engracio, stepped forward as a
witness and testified that consent was given by him in the sale
of his land by his nephew, thus acquitting Duran of the charges.
Subsequently, Engracio was sued by Hermanos. Engracio
however contended first, that the land was rightfully his since in
the property registry, the ownership was recorded with his
name; second, no SPA was executed in favor Duran to sell the
land, nor was there authority given verbally to Duran to sell the
land; third; his knowledge of the sale was acquired long after
the actual sale took place; fourth, he did not intentionally and
deliberately perform any act that might have induced Hermanos
to believe that Duran had the authority to sell.
ISSUE:
WHETHER OR NOT THE LAND WAS LEGITIMATELY SOLD TO
HERMANOS BY DURAN?
HELD:
Yes. Notwithstanding the allegations of the defendant, the
record in this case shows that he did give his consent in order
that his nephew, Jose Duran, might sell the property in question
to Gutierrez Hermanos, and that he did thereafter confirm and
ratify the sale by means of a public instrument executed before
a notary.
It having been proven at the trial that he gave his consent to
the said sale, it follows that the defendant conferred verbal, or
at least implied, power of agency upon his nephew Duran, who
accepted it in the same way by selling the said property. The
principal must therefore fulfill all the obligations contracted by
the agent, who acted within the scope of his authority. (Civil
Code, arts. 1709, 1710 and 1727.)
Even should it be held that the said consent was granted
subsequently to the sale, it is unquestionable that the
defendant, the owner of the property, approved the action of
his nephew, who in this case acted as the manager of his uncle's
business, and Orense's ratification produced the effect of an
express authorization to make the said sale. (Civil Code, arts.
1888 and 1892.)
Article 1259 of the Civil Code prescribes: "No one can contract
in the name of another without being authorized by him or
without his legal representation according to law.
A contract executed in the name of another by one who has
neither his authorization nor legal representation shall be void,
unless it should be ratified by the person in whose name it was
executed before being revoked by the other contracting party.
The repeated and successive statements made by the defendant
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Orense in two actions, wherein he affirmed that he had given
his consent to the sale of his property, meet the requirements
of the law and legally excuse the lack of written authority, and,
as they are a full ratification of the acts executed by his nephew
Jose Duran, they produce the effects of an express power of
agency.
D. Parties
2. Freedom to contract – Art. 1306
G.R. No. L-47806, 14 April 1941
Gabriel v. Monte de Piedad and CA
FACTS:
Petitioner Gabriel was employed as an appraiser of jewels in the
pawnshop of Monte de Piedad. He executed a chattel mortgage
to secure the payment of the deficiencies which resulted from
his erroneous appraisal of the jewels pawned to the appellee,
amounting to P14,679.07, with six percent (6%) interest from
said date. In this chattel mortgage, Gabriel promised to pay to
Monte de Piedad P300 per month until the sum of P14,679.07,
with interest, is fully paid. In case of default to effectuate the
chattel mortgage, an action was instituted against Gabriel by
Monte de Piedad in the CFI. Gabriel denied the genuineness of
the execution of the said chattel mortgage.
By way of special defense, he alleged:(1) the chattel mortgage
was void because a) it is contrary to law, morals and public
policy; (b) he was made to sign it against his will and through
misrepresentation where E. Marco(Director-General) signed in
behalf of Monte de Piedad without the latter’s authority,(c) the
subject matter and considerations of the mortgage do not exist,
and(d) the payments already made allegedly for the mortgage
were in fact his salaries;(2) his acquittal in a criminal case that
used the chattel mortgage as evidence of his liability was a bar
to the present civil case.
ISSUE:
WHETHER OR NOT, THE CHATTEL MORTGAGE EXECUTED BY
GABRIEL IS AGAINST PUBLIC POLICY, LAW, OR MORALS?
RULING:
No. The Chattel Mortgage does not violate the law, morals or
public policy.
A contract is to be judge by its character, and courts will look to
the substances and not to the mere form of the transaction. The
freedom of contract is both a constitutional and statutory right
and to uphold this right, courts should move with all the
necessary caution and prudence in holding contracts void. The
term “public policy” is vague and uncertain in meaning, floating
and changeable in connotation. It may be said, however, that,
in general, a contract which is neither prohibited by law nor
condemned by judicial decision, nor contrary to public morals,
contravenes no public policy. In the absence of express
legislation or constitutional prohibition, a court, in order to
declare a contract void as against public policy, must find that
the contract as to the consideration or thing to be done, has a
tendency to injure the public, is against the public good, or
contravenes some established interests of society, or is
inconsistent with sound policy and good morals, or tends clearly
to undermine the security of individual rights, whether of
personal liability or of private property.
Petitioner also contends that the chattel mortgage in question is
void because it lacks consideration. A consideration, in the legal
sense of the word, is some right, interest, benefit, or advantage
conferred upon the promisor, to which he is otherwise not
lawfully entitled, or any detriment, prejudice, loss, or
disadvantage suffered or undertaken by the promisee other than
to such as he is at the time of consent bound to suffer.

Examining the contract at bar, it was executed voluntarily to
guarantee the deficiencies resulting from the erroneous
appraisals of the petitioner. A pre-existing admitted liability is a
good consideration for a promise. The fact that the bargain is a
hard one will not deprived it of validity. The exception to this
rule in modern legislation is where the inadequacy is so gross as
to amount to fraud, oppression or undue influence, or when
statutes require the consideration to be adequate. The instant
case does not fall within the exception.
Hence, the petition is hereby dismissed and the judgment
sought to be reviewed is affirmed, with costs against the
petitioner.
Pakistan International Airlines v. Ople
G.R. No. 61594, 28 September 1990
FACTS:
Pakistan International Airlines Corporation (“PIA”), a foreign
corporation licensed to do business in the Philippines, executed
in Manila two (2) separate contracts of employment, one with
private respondent Ethelynne B. Farrales and the other with
private respondent Ma. M.C. Mamasig.
The contracts provided that (1) the Duration of Employment is
for a period of 3 years, (2) PIA reserves the right to terminate
this agreement at any time by giving the EMPLOYEE notice in
writing in advance one month before the intended termination
or in lieu thereof, by paying the EMPLOYEE wages equivalent to
one month’s salary; and (3) the agreement shall be construed
and governed under and by the laws of Pakistan, and only the
Courts of Karachi, Pakistan shall have the jurisdiction to consider
any matter arising out of or under this agreement.
Farrales and Mamasig then commenced training in Pakistan and
after such, they began discharging their job functions as flight
attendants with base station in Manila and flying assignments to
different parts of the Middle East and Europe.
Roughly one (1) year and four (4) months prior to the expiration
of the contracts of employment, PIA sent separate letters to
private respondents advising both that their services as flight
stewardesses would be terminated. PIA claimed that both were
habitual absentees, were in the habit of bringing in from abroad
sizeable quantities of “personal effects”.
Prior Proceedings: Regional Director of MOLE ordered the
reinstatement of private respondents with full backwages or, in
the alternative, the payment to them of the amounts equivalent
to their salaries for the remainder of the fixed three-year period
of their employment contracts having attained the status of
regular employees.
On appeal the Deputy Minister of MOLE, adopted the findings of
fact and conclusions of the Regional Director and affirmed the
latter’s award save for the portion thereof giving PIA the option,
in lieu of reinstatement, “to pay each of the complainants
[private respondents] their salaries corresponding to the
unexpired portion of the contract[s] [of employment] . . .”
Hence, this instant Petition for Certiorari by PIA.
ISSUE:
WHETHER OR NOT THE PROVISIONS OF THE CONTRACT
SUPERSEDED THE GENERAL PROVISIONS OF THE LABOR CODE
RULING:
No. The principle of freedom to contract is not absolute. Art.
1306 provides that stipulations by the parties may be allowed
provided they are not contrary to law, morals, good customs,
public order & policy. Thus, the principle of autonomy of
contracting parties must be counterbalanced with the general
5
rule that provisions of the applicable law are deemed written
into the contract.
In this case, the law relating to labor and employment is an area
which the parties are not at liberty to insulate themselves and
their relationship from by simply contracting with each other.
Rivera v. Solidbank
G.R. No. 163269, 19 April 2006
FACTS:
Petitioner had been working for Solidbank Corporation since July
1, 1977. In December 1994, Solidbank offered two retirement
programs to its employees, the ORP and SRP. Petitioner applied
for retirement under the SRP. Solidbank approved the
application and gave petitioner the amount due to him. Rivera
received the amount and confirmed his separation from
Solidbank on February 25, 1995. Subsequently, Solidbank
required Rivera to sign an undated Release, Waiver and
Quitclaim, which was notarized on March 1, 1995. It stipulated
that petitioner cannot “seek employment with any competitor
bank or financial institution within one (1) year from February
28, 1995.” Furthermore, the bank was entitled to go after the
petitioner for the amount he received, in case of breach. On May
1, 1995, the Equitable Banking Corporation. Solidbank, then,
demanded the benefits received by the petitioner to be
returned.
ISSUE:
WHETHER OR NOT THE UNDATED RELEASE, WAIVER AND
QUITCLAIM IS VOID FOR BEING CONTRARY TO THE
CONSTITUTION, THE LAW AND PUBLIC POLICY, BECAUSE IT
WAS UNREASONABLE, ARBITRARY, OPPRESSIVE,
DISCRIMINATORY, CRUEL, UNJUST, INHUMAN, AND
VIOLATIVE OF HIS HUMAN RIGHTS.
RULING:
Yes. The stipulation in the contract is against public policy, in
that it is injurious to the public or against the public good.
Generally, the law does not relieve a party from the effects of
an unwise, foolish or disastrous contract, entered into with full
awareness of what he was doing and entered into and carried
out in good faith. Such a contract will not be discarded even if
there was a mistake of law or fact. On the other hand,
retirement plans, in light of the constitutional mandate of
affording full protection to labor, must be liberally construed in
favor of the employee, it is the general rule that pension or
retirement plans formulated by the employer are to be
construed against it. Retirement benefits, after all, are intended
to help the employee enjoy the remaining years of his life,
releasing him from the burden of worrying for his financial
support, and are a form of reward for being loyal to the
employer. Respondent, as an employer, is burdened to establish
that a restrictive covenant barring an employee from accepting
a competitive employment after retirement or resignation is not
an unreasonable or oppressive, or in undue or unreasonable
restraint of trade, thus, unenforceable for being repugnant to
public policy.
Thus, in determining whether the contract is reasonable or not,
the trial court should consider the following factors: (a) whether
the covenant protects a legitimate business interest of the
employer; (b) whether the covenant creates an undue burden
on the employee; (c) whether the covenant is injurious to the
public welfare; (d) whether the time and territorial limitations
contained in the covenant are reasonable; and (e) whether the
restraint is reasonable from the standpoint of public policy.
3. What they may not stipulate – Art. 1306

G.R. No. L-15127 May 30, 1961
EMETERIO CUI vs. ARELLANO UNIVERSITY
CONCEPCION, J.:
FACTS:
Emeterio Cui enrolled in the defendant university where plaintiff
finished his law studies in the up to and including the first
semester of the fourth year. During all the school years in which
plaintiff was studying law in defendant Law College, he was
awarded scholarship grants and his semestral tuition fees were
returned to him after ends of the semester. Plaintiff left the
defendant's law college and enrolled for the last semester of his
fourth year law in the college of law of the Abad Santos
University graduating from the college of law of the latter
university. He applied to take the bar examination in which he
needed the transcripts of his records in defendant Arellano
University. The defendant refused until after he had paid back
the P1,033 87, noting the contract that he signed which stated
that in consideration of the scholarship granted to him by the
University, he waives his right to transfer to another school
without having refunded to the defendant the equivalent of the
scholarship cash and followed by Memorandum No. 38 that the
Director of Private Schools issued.
ISSUE:
WHETHER OR NOT THE CONTRACT BETWEEN CUI AND THE
RESPONDENT UNIVERSITY, WHEREBY THE FORMER WAIVES
HIS RIGHT TO TRANSFER TO ANOTHER SCHOOL WITHOUT
HAVING REFUNDED TO THE DEFENDANT THE EQUIVALENT OF
THE SCHOLARSHIP CASH VALID OR NOT?
HELD:
The contract of waiver between the plaintiff and respondent on
September 10, 1951, is a direct violation of Memorandum No.
38 and hence null and void. The contract was contrary to sound
policy and civic honesty. The policy enunciated in Memorandum
No. 38, s. 1949 is sound policy. When students are given full or
partial scholarships, it is understood that such scholarships are
merited and earned. The amount in tuition and other fees
corresponding to these scholarships should not be subsequently
charged to the recipient students when they decide to quit
school or to transfer to another institution. Scholarships should
not be offered merely to attract and keep students in a school.
Arroyo v. Berwin, 36 Phil. 386 (1917)
DOCTRINE: Contracts without consideration or with an illicit
one have no effect whatsoever. A consideration is illicit when it
is contrary to law and good morals.
FACTS:
On Aug 14, 1914, defendant, representing Marcela Juaneza,
requested plaintiff to agree to dismiss a criminal proceeding for
theft against his client. Defendant stipulated with the plaintiff
that his client would recognize the plaintiff’s ownership in the
land situated on Calle San Juan, suburb of Molo, municipality of
Ilo-ilo (where his client ordered the cane cut, which land and
which cut cane are referred to in the cause for the theft) only if
plaintiff would ask the prosecuting attorney to dismiss the said
proceeding against his client. Plaintiff complied with the
agreement and requested the prosecuting attorney to dismiss
the criminal case (who then dismissed the case). However,
despite several demands by plaintiff, defendant has still not
delivered the written agreement acknowledging the ownership
of the described land. Thus, plaintiff prayed for the court to
render judgment ordering the defendant to comply with the
agreement by causing defendant’s client Marcela Juaneza to
sign the document in which she recognizes the plaintiff’s
ownership of the land. The trial court, however, dismissed the
6
complaint on the ground of illegality of the consideration of
alleged contract.
ISSUE:
WHETHER OR NOT TRIAL COURT ERRED IN DISMISSING THE
COMPLAINT ON THE GROUND OF ILLEGALITY OF THE
CONSIDERATION OF ALLEGED CONTRACT.
RULING:
No. Trial court decision affirmed.
An agreement by the owner of stolen goods to stifle the
prosecution of the person charged with the theft, for a pecuniary
or other valuable consideration, is manifestly contrary to public
policy and the due administration of justice. In the interest of
the public it is of the utmost importance that criminals should
be prosecuted, and that all criminal proceedings should be
instituted and maintained in the form and manner prescribed by
law; and to permit an offender to escape the penalties
prescribed by law by the purchase of immunity from private
individuals would result in a manifest perversion of justice.
Article 1255 of the Civil Code (now Art 1306, NCC)
provides that:
The contracting parties may make the agreement and establish
the clauses and conditions which they may dream advisable,
provided they are not in contravention of law, morals, or public
order.
Article 1275 (Old Civil Code) provides that:
Contracts without consideration or with an illicit one have no
effect whatsoever. A consideration is illicit when it is contrary to
law and good morals.
G.R. No. L-19638 June 20, 1966
FILIPINAS COMPANIA DE SEGUROS, ET AL v. HON.
FRANCISCO Y. MANDANAS (as Insurance
Commissioner) and AGRICULTURAL FIRE INSURANCE &
SURETY CO., INC., ET AL
FACTS:
The Philippine Rating Bureau is a formation of non-life insurance
companies in the country. It was created as a mechanism for
members to jointly fix rates, determine risks, gather information,
etc. Article 22 of their Constitution state that "Members of the
Bureau agree not to represent nor to effect reinsurance with not
to accept reinsurance from any company, body or underwriter,
licensed to do business in the Philippines not a member in good
standing of the Bureau. Defendant Madanas seeks to have this
stricken down as an illegal restraint on trade.
ISSUE:
Constitutionality of Art. 22 of the Constitution of the Ph Rating
Bureau,
RULING:
Test of Legality of an Agreement restraining trade:
(1) Reasonable Necessity in protecting the parties’ interests;
(2) Effect on competition ~ to regulate and promote competition
is valid while to suppress and destroy it is unlawful; BUT
considering the particular circumstances of the case and the
nature of the particular contract, where public interest and
welfare are not involved
PURPOSE OF ART. 22 (testimony of Salvador Estrada, Chairman
of the Bureau): to promote ethical practices in order to earn the
respect of the public, and to avoid the unethical practice of
underrating of the insurance companies that resulted from

intense competition BY coordinating with the various companies
in fixing the rates and applying it as a standard to all.
NOT ILLEGAL, IMMORAL, UNREASONABLE, or CONTRARY TO
PUBLIC POLICY in both objectives and means.
FURTHERMORE, Circular No. 54 (February 26, 1954) requires
the approval of the Insurance Commissioner before non-life
insurance companies can implement its rates.
Annual grant of license (April 28, 1954) by the Insurance
Commissioner to the Bureau with knowledge of its constitution
and with grant of authority to fix rates.
Bustamante v. Rosel
G.R. No. 126800, 29 November 1999
FACTS:
Petitioner entered into a loan agreement with the respondent
wherein the former as the borrower and the latter as the lender.
The loan was secured by a parcel of land of the petitioner as a
collateral. In their agreement, it was stated that in the event
that if petitioner herein fails to pay, the respondent has the
option to buy or purchase the collateral. When the loan was
about to mature, respondents proposed to buy the collateral
land on the amount stated in the loan agreement. Petitioner
herein refuse to sell and to execute a Deed of Absolute sale.
When petitioner tendered payment on the loan, respondent
refuse to receive and demand the sale of the land. Rosel filed a
complaint in the RTC which rendered a decision denying the
prayer for the issuance of the deed sale. However, upon appeal
to the Court of Appeals, the said decision was reversed. Hence,
this petition.
ISSUE:
WHETHER OR NOT THE STIPULATION IN THE LOAN
CONTRACT WAS VALID AND ENFORCEABLE.
RULING:
No.Contracts have the force of law between the contracting
parties and must be complied with in good faith. However,
certain exceptions to the rule, specifically Article 1306 of the
Civil Code, which provides that “The contracting parties may
establish such stipulations, clauses, terms and conditions as
they may deem convenient, provided they are not contrary to
law, morals, good customs, public order, or public policy.”
A scrutiny of the stipulation of the parties reveals a subtle
intention of the creditor to acquire the property given as security
for the loan. This is embraced in the concept of pactum
commissorium, which is proscribed by law. The elements of
pactum commissorium are as follows: (1) there should be a
property mortgaged by way of security for the payment of the
principal obligation, and (2) there should be a stipulation for
automatic appropriation by the creditor of the thing mortgaged
in case of non-payment of the principal obligation within the
stipulated period.
In this case, the intent to appropriate the property given as
collateral in favor of the creditor appears to be evident, for the
debtor is obliged to dispose of the collateral at the pre-agreed
consideration amounting to practically the same amount as the
loan. In effect, the creditor acquires the collateral in the event
of non-payment of the loan. This is within the concept of pactum
commissorium. Such stipulation is void.
WHEREFORE, we GRANT petitioner’s motion for reconsideration
and REVERSE the decision of the Court of Appeals.
E. Classification
b. Innominate – Art. 1307
Dizon v. Gaborro, 83 SCRA 688 (1978)
7
FACTS:
Petitioner Jose P. Dizon was the owner of the three (3) parcels
of land. He constituted a first mortgage lien in favor of the
Develop. ment Bank of the Philippines in order to secure a loan
in the sum of P38,000.00 trial a second mortgage lien in favor
of the Philippine National Bank to cure his indebtedness to said
bank in the amount of P93,831.91.Petitioner Dizon having
defaulted in the payment of his debt, the Development Bank of
the Philippines foreclosed the mortgage extrajudicially.
Sometime prior to October 6, 1959 Alfredo G. Gaborro trial Jose
P. Dizon met. Gaborro became interested in the lands of Dizon.
Dizon originally intended to lease to Gaborro the property which
had been lying idle for some time. But as the mortgage was
already foreclosed by the DPB trial the bank in fact purchased
the lands at the foreclosure sale on May 26, 1959, they
abandoned the projected lease.
Dizon and Alfredo Gaborro. on the same day, October 6, 1959,
constitute in truth and in fact an absolute sale of the three
parcels of land therein described or merely an equitable
mortgage or conveyance thereof by way of security for
reimbursement or repayment by petitioner Jose P. Dizon of any
and all sums which may have been paid to the Development
Bank of the Philippines and the Philippine National Bank by
Alfredo G. Gaborro
Said documents were executed by the parties and the payments
were made by Gaborro for the debt of Dizon to said banks after
the Development Bank of the Philippines had foreclosed the
mortgage executed by Dizon and during the period of
redemption after the foreclosure sale of the mortgaged property
to said creditor bank.
Gaborros contention; Deed of Sale with Assumption of
Mortgage trial Option to Purchase Real Estate
Dizon’s contention: merely an equitable mortgage or
conveyance thereof by way of security for reimbursement,
refund or repayment by petitioner Jose P. Dizon
ISSUE:
WHETHER OR NOT THE DEED WAS OF A DEED OF SALE WITH
ASSUMPTION OF MORTGAGE', TRIAL OPTION TO PURCHASE
REAL ESTATE OR MERELY AN EQUITABLE MORTGAGE OR
CONVEYANCE THEREOF BY WAY OF SECURITY FOR
REIMBURSEMENT, REFUND OR REPAYMENT BY PETITIONER
JOSE P. DIZON?
HELD:
In the light of the foreclosure proceedings and sale of the
properties, a legal point of primary importance here, as well as
other relevant facts and circumstances, We agree with the
findings of the trial and appellate courts that the true intention
of the parties is that respondent Gaborro would assume and pay
the indebtedness of petitioner Dizon to DBP and PNB, and in
consideration therefor, respondent Gaborro was given the
possession, the enjoyment and use of the lands until petitioner
can reimburse fully the respondent the amounts paid by the
latter to DBP and PNB, to accomplish the following ends: (a)
payment of the bank obligations; (b) make the lands productive
for the benefit of the possessor, respondent Gaborro, (c) assure
the return of the land to the original owner, petitioner Dizon,
thus rendering equity and fairness to all parties concerned.
In view of all these considerations, the law and Jurisprudence,
and the facts established. We find that the agreement between
petitioner Dizon and respondent Gaborro is one of those
inanimate contracts under Art. 1307 of the New Civil Code
whereby petitioner and respondent agreed "to give and to do"
certain rights and obligations respecting the lands and the
mortgage debts of petitioner which would be acceptable to the
bank. but partaking of the nature of the antichresis insofar as

the principal parties, petitioner Dizon and respondent Gaborro,
are concerned.
G.R. No. L-40424 June 30, 1980
R. MARINO CORPUS, petitioner, vs. COURT OF APPEALS
and JUAN T. DAVID, respondents
FACTS:
The defendant was charged administratively by several
employees of the Central Bank Export Department of which the
defendant is the director. Pending the investigation, he was
suspended from office. After the investigating committee found
the administrative charges to be without merit, and
subsequently recommended the immediate reinstatement of the
defendant, the then Governor of Central Bank, recommended
that the defendant is considered resigned as on the ground that
he had lost confidence in him.
The defendant filed the CFI of Manila a petition for certiorari,
mandamus and quo warranto with preliminary mandatory
injunction and damages against Miguel Cuaderno, Sr., the
Central Bank and Mario Marcos who was appointed to the
position of the defendant. Judge Lantin dismissed a case for
failure to exhaust the administrative remedies available to the
herein defendant. After they talked about the defendants
having lost his case before Judge Lantin, and knowing that the
plaintiff and the defendant were both members of the Civil
Liberties Union, Rafael Corpus requested the plaintiff to go over
the case and further said that he would send his son, the herein
defendant, to the plaintiff to find out what could be done about
the case. The defendant called up the plaintiff for an
appointment, and the plaintiff agreed to meet him in the latter’s
office. At said conference, the defendant requested the plaintiff
to handle the case because of Atty. Alvarez had already been
disenchanted and wanted to give up the case. Although at first
reluctant to handle the case, the plaintiff finally agreed on the
condition that he and Atty. Alverez would collaborate in the
case.
ISSUE:
WHETHER ATTY. JUAN T. DAVID IS ENTITLED TO ATTORNEY'S
FEES. YES.
RULING:
While there was no express agreement between petitioner
Corpus and respondent David as regards attorney's fees, the
facts of the case support the position of respondent David that
there was at least an implied agreement for the payment of
attorney's fees.
Payment of attorney's fees to respondent David may be justified
by virtue of the innominate contract of facio ut des (I do and
you give which is based on the principle that "no one shall
unjustly enrich himself at the expense of another." Innominate
contracts have been elevated to a codal provision in the New
Civil Code by providing under Article 1307 that such contracts
shall be regulated by the stipulations of the parties, by the
general provisions or principles of obligations and contracts, by
the rules governing the most analogous nominate contracts, and
by the customs of the people.
WE reiterated this rule in Pacific Merchandising Corp. vs.
Consolacion Insurance & Surety Co., Inc. (73 SCRA 564 [1976])
citing the case of Perez v. Pomar, supra thus:
Where one has rendered services to another, and these services
are accepted by the latter, in the absence of proof that the
service was rendered gratuitously, it is but just that he should
pay a reasonable remuneration therefor because 'it is a well-
known principle of law, that no one should be permitted to
enrich himself to the damage of another.
H. With respect to third persons
8
1. Stipulations in favor of third persons (stipulations
pour autrui) – Art. 1311, 2nd par.
G.R. No. L-27696 September 30, 1977
MIGUEL FLORENTINO, ROSARIO ENCARNACION de
FLORENTINO, MANUEL ARCE, JOSE FLORENTINO,
VICTORINO FLORENTINO, ANTONIO FLORENTINO,
REMEDION ENCARNACION and SEVERINA
ENCARNACION, petitioners-appellants, vs. SALVADOR
ENCARNACION, SR., SALVADOR ENCARNACION, JR.,
and ANGEL ENCARNACION, oppositors to encumbrance-
petitioners-appelles.
FACTS:
On May 22, 1964, the petitioners-appellants and the petitioner-
appellee filed with CFI an application for the registration under
Act 496 of a parcel of agricultural land located at Cabugao,
Ilocos Sur.
The application alleged among other things that the applicants
are the common and pro-indiviso owners in fee simple of the
said land with the improvements existing thereon; that to the
best of the knowledge and belief; there is no mortgage, lien or
encumbrance of any kind whatsoever affecting said land, nor
any other person having any estate or interest thereon, legal or
equitable, remainder, reservation at in expectancy; that said
applicants had acquired the aforesaid land thru and by
inheritance from their predecessors in interest, their aunt, Doña
Encarnacion Florentino, and Angel Encarnacion acquire their
respective shares of the land thru purchase from the original
heirs, Jesus, Caridad, Lourdes and Dolores, all surnamed
Singson, on one hand and from Asuncion Florentino on the
other.
After due notice and publication, the Court set the application
for hearing. Only the Director of Lands filed an opposition but
was later withdrawn so an order of general default was issued.
Upon application of the applicants, the Clerk of Court was
commissioned and authorized to receive the evidence of the
applicants and ordered to submit the same for the Court’s proper
resolution.
Exhibit O-1 embodied in the deed of extrajudicial partition
(Exhibit O), which states that with respect to the land situated
in Barrio Lubong, Dacquel, Cabugao, Ilocos Sur, the fruits
thereof shall serve to defray the religious expenses, was the
source of contention in this case (Spanish text). Florentino
wanted to include ExhibitO-1 on the title but the Encarnacion
supposed and subsequently withdrawn their application on their
shares, which was opposed by the former.
The Court after hearing the motion for withdrawal and the
opposition issued an order and for the purpose of ascertaining
and implifying that the products of the land made subject matter
of this land registration case had been used in answering for the
payment of expenses for the religious functions specified in the
Deed of Extrajudicial Partition which was no registered in the
office of the Register of Deeds from time immemorial; and that
the applicants knew of this arrangement and the Deed of
Extrajudicial Partition of August 24,1947, was not signed by
Angel Encarnacion or Salvador Encarnacion, Jr.-CFI: The self-
imposed arrangement in favor of the Church is a simple
donation, but is void since the donee has not accepted the
donation and Salvador Encarnacion, Jr. and Angel Encarnacion
had not made any oral or written grant at all so the court allowed
the religious expenses to be made and entered on the undivided
shares, interests and participations of all the applicants in this
case, except that of Salvador Encarnacion, Sr., Salvador
Encarnacion, Jr. and Angel Encarnacion.”-the petitioners-
appellants filed their Reply to the Opposition reiterating their
previous arguments, and also attacking the jurisdiction of the
registration court to pass upon the validity or invalidity of the

agreement Exhibit O-1, alleging that such is litigable only in an
ordinary action and not proper in a land registration proceeding.
The Motion for Reconsideration and of New Trial was denied for
lack of merit, but the court modified in highlighting that the
donee Church has not showed its clear acceptance of the
donation, and is the real party of this case, not the petitioners-
appellants.
ISSUE:
WHETHER THE COURT ERRED IN CONCLUDING THAT THE
STIPULATION IS JUST AN ARRANGEMENT STIPULATION. YES.
WHETHER THE STIPULATION CAN BE REVOKED BY THE
APPELLEES. NO
RULING:
The stipulation embodied on religious expenses is not revocable
at the unilateral option of the co-owners and neither is it binding
to both parties.
The stipulation in part of an extrajudicial partition duly agreed
and signed by the parties, hence the sanie must bind the
contracting parties thereto and its validity or compliance cannot
be left to the will of one of them (Art. 1308, N.C.C.).
Under Art 1311 of the New Civil Code, this stipulation takes
effect between the parties, their assign and heirs. The article
provides:
Art. 1311. — Contracts take effect only between the parties,
their assigns and heirs, except in cases where the rights and
obligations arising from the contract are not transmissible by
their nature, or by stipulation or by provision of law. The heir is
not liable beyond the value of the property he received from the
decedent.
If a contract should contain a stipulation in favor of a third
person, he may demand its fulfillment provided he
communicated his acceptance to the obligor before its
revocation. A mere incidental benefit or interest of a person is
not sufficient. The contracting parties must have clearly and
deliberately conferred a favor upon a third person.
In the case at bar, the determining point is whether the co-
owners intended to benefit the Church when in their
extrajudicial partition of several parcels of land inherited by
them from Doña Encarnacion Florendo they agreed that with
respect to the land, the fruits thereof shall serve to defray the
religious expenses. The evidence on record shows that the true
intent of the parties is to confer a direct and material benefit
upon the Church. The fruits of the aforesaid land were used
thenceforth to defray the expenses of the Church in the
preparation and celebration of the Holy Week.
We find that the trial court erred in holding that the stipulation,
arrangement or grant is revocable at the option of the co-
owners. While a stipulation in favor of a third person has no
binding effect in itself before its acceptance by the party
favored, the law does not provide when the third person must
make his acceptance. As a rule, there is no time at such third
person has after the time until the stipulation is revoked. Here,
We find that the Church accepted the stipulation in its favor
before it is sought to be revoked by some of the co-owners,
namely the petitioners-appellants herein. It is not disputed that
from the time of the will of Doña Encarnacion Florentino in 1941,
as had always been the case since time immemorial up to a year
before the filing of their application in May 1964, the Church had
been enjoying the benefits of the stipulation. The enjoyment of
benefits flowing therefrom for almost seventeen years without
question from any quarters can only be construed as an implied
acceptance by the Church of the stipulation pour autrui before
its revocation.
9
The acceptance does not have to be in any particular form, even
when the stipulation is for the third person an act of liberality or
generosity on the part of the promisor or promise.
It need not be made expressly and formally. Notification of
acceptance, other than such as is involved in the making of
demand, is unnecessary.
A trust constituted between two contracting parties for the
benefit of a third person is not subject to the rules governing
donation of real property. The beneficiary of a trust may
demand performance of the obligation without having formally
accepted the benefit of the this in a public document, upon mere
acquiescence in the formation of the trust and acceptance under
the second paragraph of Art. 1257 of the Civil Code.
G.R. No. L-23276 November 29, 1968
MELECIO COQUIA, MARIA ESPANUEVA and MANILA
YELLOW TAXICAB CO., INC., plaintiffs-appellees, vs.
FIELDMEN'S INSURANCE CO., INC., defendant-appellant.
FACTS:
The Fieldmen’s Company (company) issued a common carrier
accident insurance policy to Manila Yellow Taxicab Co. Inc.
(insured). In the policy it stipulated that accident arising from a
motor vehicle shall be insured with respect to the death or bodily
injured driver, conductor and/or inspector riding in the motor
vehicle.
Carlito Coquia met an accident while driving resulting in his
death. The insured asked the company for the insurance of
Carlito. The company refused to give insurance to the said
insured, the paaboutts of Carlito filed a complaint about a sum
of money for the insurance of their dead child. The company
contends that parents had no contractual relation with the
company, thus they are not the proper parties in the said case.
ISSUE:
WHETHER THE COQUIAS HAVE A CAUSE OF ACTION. YES.
RULING:
Although, in general, only parties to a contract may bring an
action based thereon, this rule is subject to exceptions, one of
which is found in the second paragraph of Article 1311 of the
Civil Code of the Philippines, reading:
If a contract should contain some stipulation in favor of a third
person, he may demand its fulfillment provided he
communicated his acceptance to the obligor before its
revocation. A mere incidental benefit or interest of a person is
not sufficient. The contracting parties must have clearly and
deliberately conferred a favor upon a third person.2
In the stipulations, the Company "will indemnify any authorized
Driver who is driving the Motor Vehicle" of the Insured and, in
the event of death of said driver, the Company shall, likewise,
"indemnify his personal representatives." In fact, the Company
"may, at its option, make indemnity payable directly to the
claimants or heirs of claimants ... it being the true intention of
this Policy to protect ... the liabilities of the Insured towards the
passengers of the Motor Vehicle and the Public" — in other
words, third parties.
Thus, the policy under consideration is typical of contracts pour
autrui, this character being made more manifest by the fact that
the deceased driver paid fifty percent (50%) of the
corresponding premiums, which were deducted from his weekly
commissions. Under these conditions, it is clear that the Coquias
— who, admittedly, are the sole heirs of the deceased — have
a direct cause of action against the Company,3 and, since they
could have maintained this action by themselves, without the
assistance of the Insured, it goes without saying that they could
and did properly join the latter in filing the complaint herein.4

[G.R. No. L-22404. May 31, 1971.] PASTOR B.
CONSTANTINO, plaintiff-appellant, vs. HERMINIA
ESPIRITU, defendant-appellee.
FACTS:
Pastor Constantino alleged that he had, by a fictitious deed of
absolute sale annexed thereto, conveyed to Herminia Espiritu
on October 30, 1953, for a consideration of P8,000.00, the two-
storey house and four (4) subdivision lots with the
understanding that Espiritu would hold the properties in trust for
their illegitimate son, Pastor Constantino, Jr., still unborn at the
time of the conveyance; that thereafter Espiritu mortgaged said
properties to the Republic Savings Bank of Manila twice to
secure payment of two loans, one of P3.000.00 and the other of
P2,000.00, and that thereafter she offered them for sale. The
complaint then prayed for the issuance of a writ of preliminary
injunction restraining appellee and her agents or representatives
from further alienating or disposing of the properties, and for
judgment ordering her to execute a deed of absolute sale of said
properties in favor of Pastor B. Constantino, Jr., the beneficiary
(who, at the filing of said complaint, was about five years of
age), and to pay attorney's fees in the sum of P2,000.00.
As a result of the conveyance, a TCT was issued in the name of
Espiritu.
On December 16, 1959, appellee moved to dismiss the
complaint on the ground that, Pastor Constantino, Jr., the
beneficiary of the alleged trust, was not included as party-
plaintiff, and on the further ground that appellant's cause of
action was unenforceable under the Statute of Frauds.
The trial court dismissed the complaint.
Constantino then filed a motion for the admission of an
amended complaint to include the minor, Pastor Constantino, Jr.
as co-plaintiff. Thereafter the lower court issued the appealed
order denying appellant's motion for the admission of his
amended complaint. Hence, the instant direct appeal.
ISSUE:
WHAT IS THE NATURE OF THE CONTRACT ENTERED INTO BY
THE PARTIES?
RULING:
It appears then that, upon the facts alleged by appellant, the
contract between him and appellee was a contract pour autrui,
although couched in the form of a deed of absolute sale, and
that appellant's action was, in effect, one for specific
performance. That one of the parties to a contract is entitled to
bring an action for its enforcement or to prevent its breach is
too clear to need any extensive discussion. Upon the other hand,
that the contract involved contained a stipulation pour autrui
amplifies this settled rule only in the sense that the third person
for whose benefit the contract was entered into may also
demand its fulfillment provided he had communicated his
acceptance thereof to the obligor before the stipulation in his
favor is revoked.
It appearing that the amended complaint submitted by appellant
to the lower court impleaded the beneficiary under the contract
as a party co-plaintiff, it seems clear that the three parties
concerned therewith would, as a result, be before the court and
the latter's adjudication would be complete and binding upon
them.
Whether the contract of sale entered into between appellant and
appellee was — as claimed in the amended complaint — subject
to the agreement that appellee would hold the properties in
trustfor their unborn child is a question of fact that appellee may
raise in her answer for the lower court to determine after trial.
On the other hand, the contention that the contract in question
is not enforceable by action by reason of the provisions of the
10
Statute of Frauds does not appear to be indubitable, it being
clear upon the facts alleged in the amended complaint that the
contract between the parties had already
beenpartiallyperformed by the execution of the deed of sale, the
action brought below being only for the enforcement of another
phase thereof, namely, the execution by appellee of a deed of
conveyance in favor of the beneficiary thereunder.
[G.R. No.115117. June 8, 2000.]
INTEGRATED PACKAGING CORP.,petitioner,vs. COURT OF
APPEALS and FIL-ANCHOR PAPER CO., INC.,respondents.
FACTS:
On May 5, 1978, petitioner and private respondent executed an
order agreement whereby private respondent bound itself to
deliver to petitioner a total of 3,450 reams of printing paper
worth P1,040,060.00 within the period of May, 1978 to October
1979 to be paid within a minimum of thirty days and maximum
of ninety days from delivery.
As of July 30, 1979, private respondent had delivered only 1,097
reams of printing paper to petitioner. Petitioner demanded for
the immediate delivery of the balance of the printing paper.
From June 5, 1980 to July 23, 1981 private respondent delivered
various quantities of printing paper amounting to P766,101.70.
Subsequently, petitioner encountered difficulties paying private
respondent said amount. Private respondent made a formal
demand upon petitioner to settle its account. The latter made
partial payments totalling to P97,200.00 only which was applied
to its back accounts. On the other hand, petitioner failed to
comply with its additional printing contract with Philippine
Appliance Corporation (Philacor), hence, Philacor demanded
compensation from petitioner for the delay and damages it
suffered on account thereof.
On August 14, 1981, private respondent filed with the Regional
Trial Court of Caloocan City a collection suit against petitioner.
By way of counterclaim, petitioner alleged that private
respondent delivered only 1,097 reams in total disregard of their
agreement and that by reason thereof, it suffered actual
damages and failed to realize expected profits.
Thereafter, the trial court rendered judgment declaring that
petitioner should pay private respondent the sum of
P763,101.70 representing the value of the printing paper
delivered from June 5, 1980 to July 23, 1981. However, it also
found petitioner's counterclaim meritorious and ordered the
private respondent to pay the petitioner P790,324.00 as
compensatory damages, as well as it also awarded moral
damages and attorney's fees.
On appeal, the Court of Appeals upheld the award in favor of
private respondent but deleted the award of damages in favor
of petitioner for lack of factual and legal basis. Hence, this
petition.
ISSUE:
(1) WHETHER OR NOT PRIVATE RESPONDENT VIOLATED THE
ORDER AGREEMENT? NO.
(2) WHETHER OR NOT PRIVATE RESPONDENT IS LIABLE FOR
PETITIONER'S BREACH OF CONTRACT WITH PHILACOR? NO
RULING:
The transaction between the parties is a contract of sale
whereby private respondent (seller) obligates itself to deliver
printing paper to petitioner (buyer) which, in turn, binds itself to
pay therefor a sum of money or its equivalent (price). 6Both
parties concede that the order agreement gives rise to a
reciprocal obligations such that the obligation of one is
dependent upon the obligation of the other. Reciprocal
obligations are to be performed simultaneously, so that the

performance of one is conditioned upon the simultaneous
fulfillment of the other. 8Thus, private respondent undertakes
to deliver printing paper of various quantities subject to
petitioner's corresponding obligation to pay, on a maximum 90-
day credit, for these materials. Note that in the contract,
petitioner is not even required to make any deposit, down
payment or advance payment, hence, the undertaking of private
respondent to deliver the materials is conditional upon payment
by petitioner within the prescribed period. Clearly, petitioner did
not fulfill its side of the contract as its last payment in August
1981 could cover only materials covered by delivery invoices
dated September and October 1980.
There is no dispute that the agreement provides for the delivery
of printing paper on different dates and a separate price has
been agreed upon for each delivery. It is also admitted that it is
the standard practice of the parties that the materials be paid
within a minimum period of thirty (30) days and a maximum of
ninety (90) days from each delivery.Accordingly, the private
respondent's suspension of its deliveries to petitioner whenever
the latter failed to pay on time, as in this case, is legally justified
under the second paragraph of Article 1583 of the Civil Code
which provides that: prLL
"When there is a contract of sale of goods to be delivered by
stated installments, which are to be separately paid for, and the
seller makes defective deliveries in respect of one or more
installments, orthe buyer neglects or refuses without just
causeto take delivery of orpay for one or more installments, it
depends in each case on the terms of the contract and the
circumstances of the case, whether the breach of contract is so
material astojustify the injured party in refusing to proceed
furtherand suing for damages for breach of the entire contract,
or whether the breach is severable, giving rise to a claim for
compensation but not to a right to treat the whole contract as
broken." (Emphasis supplied)
In this case, as found a quopetitioner's evidence failed to
establish that it had paid for the printing paper covered by the
delivery invoices on time. Consequently, private respondent has
the right to cease making further delivery, hence the private
respondent did not violate the order agreement.
As to liability for damages, private respondent cannot be held
liable under the contracts entered into by petitioner with
Philacor. Private respondent is not a party to said agreements.
It is also not a contract pour autrui. Aforesaid contracts could
not affect third persons like private respondent because of the
basic civil law principle of relativity of contracts which provides
that contracts can only bind the parties who entered into it, and
it cannot favor or prejudice a third person, even if he is aware
of such contract and has acted with knowledge thereof.
4. Interference by third persons – Art. 1314
Daywalt v. Corp.
G.R. No. L-13505, 4 February 1919
FACTS:
Teoderica Endencia obligated herself to convey to Geo W.
Daywalt a tract of land. The deed should be executed as soon
as the tittle of the land is perfected. There was a decree
recognizing Teoderica as the owner of land but the Torrens
certificate was not issued until later. The parties met
immediately upon the entering of the decree and made a new
contract.
There was a development of Teoderica’s land as the Torrens
title was issued and in view of this development she became
reluctant to transfer the whole tract of land asserting that she
never intended to sell the large amount of land and that she was
misinformed by the area of the land.
11
After the Torrens title was issued to Teoderica she gave it to the
defendant company for safekeeping in which the defendant did
so. As Teodorica still retained possession of said property Father
Sanz entered into an arrangement with her whereby large
numbers of cattle belonging to the defendant corporation were
pastured upon said land.
ISSUE:
WHETHER OR NOT A PERSON WHO IS NOT A PARTY TO A
CONTRACT FOR THE SALE OF LAND MAKES HIMSELF LIABLE
FOR DAMAGES TO THE VENDEE, BEYOND THE VALUE OF THE
USE AND OCCUPATION, BY COLLUDING WITH THE VENDOR
AND MAINTAINING HIM IN THE EFFORT TO RESIST AN ACTION
FOR SPECIFIC PERFORMANCE.
RULING:
The Supreme Court held that the members of the defendant’s
corporation, in advising and prompting Teodorica Endencia not
to comply with the contract of sale, were actuated by improper
and malicious motives.
In a fair conclusion on this feature of the case is that father Juan
Labarga and his associates believed in good faith that the
contract could not be enforced and that Teodorica would be
wronged if it should be carried into effect. Any advice or
assistance which they may have given was, therefore, prompted
by no mean or improper motive.
In the case at bar, as Teodorica Endencia was the party directly
bound by the contract, it is obvious that the liability of the
defendant corporation, even admitting that it has made itself
coparticipant in the breach of the contract, can in no even
exceed hers.
This leads us to consider at this point the extent of the liability
of Teodorica Endencia to the plaintiff by reason of her failure to
surrender the certificate of title and to place the plaintiff in
possession.
So Ping Bun v. CA, 314 SCRA 751 (1999)
FACTS:
In 1963, Tek Hua Trading Co. entered into lease agreements
with lessor Dee C. Chuan and Sons, Inc. involving four (4)
premises in Binondo, which the former used to store textiles.
The agreements were for one (1) year, with provisions for
month-to-month rental should the lessee continue to occupy the
properties after the term. In 1976, Tek Hua Trading Co. was
dissolved, and the former members formed Tek Hua Enterprises
Corp., herein respondent. So Pek Giok, managing partner of the
defunct company, died in 1986. Petitioner So Ping Bun, his
grandson, occupied the warehouse for his own textile business,
Trendsetter Marketing. On March 1, 1991, private respondent
Tiong sent a letter to petitioner, demanding that the latter
vacate the premises. Petitioner refused, and on March 4, 1992,
he requested formal contracts of lease with DCCSI. The
contracts were executed. Private respondents moved for the
nullification of the contract and claimed damages. The petition
was granted by the trial court, and eventually by the Court of
Appeals.
ISSUES:
(1) WHETHER OR NOT SO PING BUN IS GUILTY OF TORTUOUS
INTERFERENCE OF CONTRACT
(2) WHETHER OR NOT PRIVATE RESPONDENTS ARE ENTITLED
TO ATTORNEY’S FEES
HELD:
(1) Damage is the loss, hurt, or harm which results from injury,
and damages are the recompense or compensation awarded for
the damage suffered. One becomes liable in an action for

damages for a nontrespassory invasion of another's interest in
the private use and enjoyment of asset if (a) the other has
property rights and privileges with respect to the use or
enjoyment interfered with, (b) the invasion is substantial, (c) the
defendant's conduct is a legal cause of the invasion, and (d) the
invasion is either intentional and unreasonable or unintentional
and actionable under general negligence rules. The elements of
tort interference are: (1) existence of a valid contract; (2)
knowledge on the part of the third person of the existence of
contract; and (3) interference of the third person is without legal
justification or excuse. Petitioner's Trendsetter Marketing asked
DCCSI to execute lease contracts in its favor, and as a result
petitioner deprived respondent corporation of the latter's
property right. Clearly, and as correctly viewed by the appellate
court, the three elements of tort interference above-mentioned
are present in the instant case.
Authorities debate on whether interference may be justified
where the defendant acts for the sole purpose of furthering his
own financial or economic interest. One view is that, as a
general rule, justification for interfering with the business
relations of another exists where the actor's motive is to benefit
himself. Such justification does not exist where his sole motive
is to cause harm to the other. Added to this, some authorities
believe that it is not necessary that the interferer's interest
outweigh that of the party whose rights are invaded, and that
an individual acts under an economic interest that is substantial,
not merely de minimis, such that wrongful and malicious
motives are negatived, for he acts in self-protection. Moreover
justification for protecting one's financial position should not be
made to depend on a comparison of his economic interest in the
subject matter with that of others. It is sufficient if the impetus
of his conduct lies in a proper business interest rather than in
wrongful motives. Where there was no malice in the interference
of a contract, and the impulse behind one's conduct lies in a
proper business interest rather than in wrongful motives, a party
cannot be a malicious interferer. Where the alleged interferer is
financially interested, and such interest motivates his conduct,
it cannot be said that he is an officious or malicious
intermeddler.
In the instant case, it is clear that petitioner So Ping Bun
prevailed upon DCCSI to lease the warehouse to his enterprise
at the expense of respondent corporation. Though petitioner
took interest in the property of respondent corporation and
benefited from it, nothing on record imputes deliberate wrongful
motives or malice on him. Petitioner argues that damage is an
essential element of tort interference, and since the trial court
and the appellate court ruled that private respondents were not
entitled to actual, moral or exemplary damages, it follows that
he ought to be absolved of any liability, including attorney's fees.
While we do not encourage tort interferers seeking their
economic interest to intrude into existing contracts at the
expense of others, however, we find that the conduct herein
complained of did not transcend the limits forbidding an
obligatory award for damages in the absence of any malice. The
business desire is there to make some gain to the detriment of
the contracting parties. Lack of malice, however, precludes
damages. But it does not relieve petitioner of the legal liability
for entering into contracts and causing breach of existing ones.
The respondent appellate court correctly confirmed the
permanent injunction and nullification of the lease contracts
between DCCSI and Trendsetter Marketing, without awarding
damages. The injunction saved the respondents from further
damage or injury caused by petitioner's interference.
(2) Lastly, the recovery of attorney's fees in the concept of
actual or compensatory damages, is allowed under the
circumstances provided for in Article 2208 of the Civil Code. One
such occasion is when the defendant's act or omission has
compelled the plaintiff to litigate with third persons or to incur
expenses to protect his interest. But we have consistently held
12
that the award of considerable damages should have clear
factual and legal bases. In connection with attorney's fees, the
award should be commensurate to the benefits that would have
been derived from a favorable judgment. Settled is the rule that
fairness of the award of damages by the trial court calls for
appellate review such that the award if far too excessive can be
reduced. This ruling applies with equal force on the award of
attorney's fees. In a long line of cases we said, "It is not sound
policy to place in penalty on the right to litigate. To compel the
defeated party to pay the fees of counsel for his successful
opponent would throw wide open the door of temptation to the
opposing party and his counsel to swell the fees to undue
proportions."
Considering that the respondent corporation's lease contract, at
the time when the cause of action accrued, ran only on a month-
to-month basis whence before it was on a yearly basis, we find
even the reduced amount of attorney's fees ordered by the
Court of Appeals still exorbitant in the light of prevailing
jurisprudence. Consequently, the amount of two hundred
thousand (P200,000.00) awarded by respondent appellate court
should be reduced to one hundred thousand (P100,000.00)
pesos as the reasonable award or attorney's fees in favor of
private respondent corporation.
Jose Lagon v. CA and Lapuz
G.R. No. 119107, 18 March 2005
FACTS:
Petitioner Jose Lagon purchased from the estate of Bai Tonina
Sepi, through an intestate court, two parcels of land located at
Tacurong, Sultan Kudarat. A few months after the sale, private
respondent Menandro Lapuz filed a complaint for torts and
damages against petitioner before the Regional Trial Court
(RTC) of Sultan Kudarat.
Private respondent claimed that he entered into a contract of
lease with the late Bai Tonina Sepi Mengelen Guiabar over three
parcels of land (the property) in Sultan Kudarat, Maguindanao
beginning 1964. One of the provisions agreed upon was for
private respondent to put up commercial buildings which would,
in turn, be leased to new tenants. The rentals to be paid by
those tenants would answer for the rent private respondent was
obligated to pay Bai Tonina Sepi for the lease of the land. The
lease contract ended but since the construction of the
commercial buildings had yet to be completed, the lease
contract was allegedly renewed.
When Bai Tonina Sepi died, private respondent started remitting
his rent to the court-appointed administrator of her estate. But
when the administrator advised him to stop collecting rentals
from the tenants of the buildings he constructed, he discovered
that petitioner, representing himself as the new owner of the
property, had been collecting rentals from the tenants. He thus
filed a complaint against the latter, accusing petitioner of
inducing the heirs of Bai Tonina Sepi to sell the property to him,
thereby violating his leasehold rights over it.
In his answer to the complaint, petitioner denied that he induced
the heirs of Bai Tonina to sell the property to him, contending
that the heirs were in dire need of money to pay off the
obligations of the deceased. He also denied interfering with
private respondents leasehold rights as there was no lease
contract covering the property when he purchased it; that his
personal investigation and inquiry revealed no claims or
encumbrances on the subject lots
ISSUE:
WHETHER OR NOT THE PURCHASE BY LAGON OF THE SUBJECT
PROPERTY, DURING THE SUPPOSED EXISTENCE OF THE
PRIVATE RESPONDENT’S LEASE CONTRACT WITH THE LATE
 13

BAI TONINA SEPI, CONSTITUTED TORTUOUS INTERFERENCE

FOR WHICH LAGON SHOULD BE HELD LIABLE FOR DAMAGES.

RULING:

No, the interference of Lagon was with a legal justification (in

furtherance of a personal financial interest) and without bad
faith

The elements of Tortuous Interference with contractual relation

are: (1) Existence of a valid contract; (2) Knowledge on the part
of the third person of the existence of the contract; (3)
Interference of the third person without legal justification or
excuse.

As regard to the first element, the existence of a valid contract

must be duly established. In the given case the Court ruled that
the notarized copy of lease contract presented in court appeared
to be an incontestable proof that Bai Tonin Sepi and private
respondent renewed their contract. The second element on the
other hand, requires that there be knowledge on the part of the
interferer that the contract exists. In this case, Lagon had no
knowledge of the lease contract as he even conducted his own
personal investigation and inquiry, and unearthed no suspicious
circumstance that would have made a cautious man probe
deeper and watch out for any conflicting claim over the
property; that an examination of the entire property title bore
no indication of the leasehold interest of private respondent and
that even the registry of property had no record of the same. As
to the third element, a party may be held liable only when there
was no legal justification or excuse for his action or when his
conduct was stirred by a wrongful motive. To sustain a case for
tortuous interference, the other party must have acted with
malice or must have been driven by purely impious reasons to
injure the other. In the case, even assuming that private
respondent was able to prove the renewal of his lease contract
with Bai Tonina Sepi, the fact was that he was unable to prove
malice or bad faith on the part of petitioner in purchasing the
property. Therefore, the claim of tortuous interference was
never established.