NOVATION MUST BE STATED IN CLEAR AND UNEQUIVOCAL TERMS TO EXTINGUISH AN OBLIGATION.

IT CANNOT BE PRESUMED AND MAY BE IMPLIED ONLY IF THE OLD AND NEW CONTRACTS ARE
INCOMPATIBLE ON EVERY POINT (Arco Pulp and Paper Co., Inc v. Lim, G.R. 206806, June 25, 2014).

x—————x

ARCO PULP AND PAPER CO., INC. v. LIM

G.R. No. 206806, June 25, 2014
Leonen, J.

FACTS:
This is a petition for review on certiorari wherein petitioner Arco Pulp and Paper Company Inc. (Arco Pulp and
Paper) assails the Court of Appeal’s decision ordering petitioner to pay respondent Dan Lim (Lim) the total
amount of Php 7,220, 968. 31 with interest at 12% per annum from the time of demand and other damages and
fees.

The parties entered into agreement wherein Lim would supply Arco Pulp and Paper scrap papers, cartons and
other raw materials. They further agreed that Arco Pulp and Paper would either pay Lim in the value equivalent of
the raw materials or deliver to him their finished products of equivalent value. When Lim delivered said materials,
a check was issued as down payment, however the same check was dishonored for being drawn against a
closed account. Meanwhile, Arco Pulp and Paper and a certain Eric Sy (Sy) executed a memorandum of
agreement (MOA) where Arco Pulp and Paper bound themselves to deliver their finished products to Megapack
Container Corporation, owned by Sy. According to the MOA the raw materials would be supplied by Lim.
Thereafter, Lim sent a letter to Arco Pulp and Paper demanding payment of the amount, but to no avail. Hence, a
complaint for collection of sum of money was filed. The RTC dismissed the complaint holding that a novation took
place when the MOA was executed. On appeal to the CA, the latter reversed the RTC decision and rendered the
assailed decision.

Petitioners argue that the execution of the MOA constituted a novation of the original obligation since Sy
became the new debtor of respondent. Respondent, on the other hand, argues that the CA was correct in ruling
that there was no proper novation in this case. He argues that the CA was correct in ordering the payment of
P7,220,968.31 with damages since the debt of petitioners remains unpaid.

ISSUE:
Was the obligation between the parties extinguished by novation?

HELD:
No. The obligation between the parties was an alternative obligation. In an alternative obligation, there is more
than one object, and the fulfillment of one is sufficient, determined by the choice of the debtor who generally has
the right of election. The right of election is extinguished when the party who may exercise that option
categorically and unequivocally makes his or her choice known. The choice of the debtor must also be
communicated to the creditor who must receive notice of it.

Further, The MOA did not constitute a novation of the original contract. When petitioner Arco Pulp and Paper
opted instead to deliver the finished products to a third person, it did not novate the original obligation between
the parties. Novation extinguishes an obligation between two parties when there is a substitution of objects or
debtors or when there is subrogation of the creditor. It occurs only when the new contract declares so “in
unequivocal terms” or that “the old and the new obligations be on every point incompatible with each other.”
There is nothing in the MOA that states that with its execution, the obligation of petitioner to respondent would be
extinguished. It also does not state that Sy somehow substituted petitioner as respondent’s debtor. It merely
shows that Arco Pulp and Paper opted to deliver the finished products to a third person instead. In this case,
respondent was not privy to the MOA, thus, his conformity to the contract need not be secured. If the MOA was
intended to novate the original agreement between the parties,respondent must have first agreed to the
substitution of Sy as his new debtor. The MOA must also state in clear and unequivocal terms that it has replaced
the original obligation of petitioner Arco Pulp and Paper to respondent. Neither of these circumstances is present
in this case. Petitioner Arco Pulp and Paper’s act of tendering partial payment to respondent also conflicts with
their alleged intent to pass on their obligation to Eric Sy. When respondent sent his letter of demand to Arco
Pulp and Paper, and not to Sy, it showed that the former neither acknowledged nor consented to the latter as his
new
debtor.
These acts, when taken together, clearly show that novation did not take place. Thus, Arco Pulp and Paper Co is
liable to pay Lim.
FOR ARBITRATION TO BE PROPER, IT IS IMPERATIVE THAT IT BE GROUNDED ON AN AGREEMENT
BETWEEN THE PARTIES
The propriety of compelling AEV to submit itself to arbitration must necessarily be founded on contract. While the
principle of privity or relativity of contracts acknowledges that contractual obligations are transmissible to a
party’s assigns and heirs, AEV is not WLI’s successor-in-interest (Aboitiz Equity Ventures, Inc. V.
Chiongbian,G.R. No197530., July 9, 2014).

x—————x

FOR ARBITRATION TO BE PROPER, IT IS IMPERATIVE THAT IT BE GROUNDED ON AN AGREEMENT

BETWEEN THE PARTIES

Aboitiz Equity Ventures, Inc. V. Chiongbian

G.R. No.197530, July 9, 2014
Leonen, J.

FACTS:
This is a petition for review on certiorari with an application for the issuance of a TRO and/or WPI under Rule 45
which prays that the assailed orders by the RTC denying petitioner Aboitiz Equity Ventures’ s motion to dismiss
and motion for reconsideration be nullified and set aside and that judgment be rendered dismissing with
prejudice the complaint.

There are different contracts in this case entered into by the parties.
1. The January 8, 1996 Agreement in which ASC, CAGLI, and WLI principally owned by Aboitiz family, Gothong
family and Chiongbian family respectively, merged their shipping enterprises , with WLI (subsequently renamed
WG&A) as the surviving entity. Section 11.06 of this Agreement provided for arbitration as the mechanism for
settling all disputes arising out of or in connection with the Agreement;

2. Annex SL-V of the Agreement between CAGLI and WLI (and excluded ASC and any other Aboitiz-controlled
entity), and which confirmed WLI’s commitment to acquire certain inventories, worth not more than P400 bmillion,
of CAGLI. Annex SL-V stated that the acquisition was “pursuant to the Agreement.” It did not contain an
arbitration clause;

3. The September 23, 2003 Share Purchase Agreement or SPA in which AEV agreed to purchase the
Chiongbian and Gothong groups’ shares in WG&A’s issued and outstanding stock and renamed its business to
ATSC. Section 6.5 of the SPA provided for arbitration as the mode of settling any dispute arising from the SPA.
Section 6.8 of the SPA further provided that the Agreement of January 8, 1996 shall be deemed terminated
except its Annex SL-V;

Thereafter, CAGLI sent a letter to ATSC demanding that the latter pay the excess inventory it delivered to WLI.
CAGLI likewise demanded AEV and respondent Chiongbian that they refer their dispute to arbitration. In
response, AEV countered that the excess inventory had already been returned to CAGLI and that it should not
be included in the dispute, considering that it is an entity separate and distinct from ATSC. Thus, CAGLI was
constrained to file a complaint before the RTC against Chiongbian, ATSC, ASC, and AEV to compel them to
submit to arbitration. ATSC and AEV moved for the dismissal of the case, contending that CAGLI did not have a
cause of action for arbitration since its claim had already been paid. The RTC discharged AEV and ordered the
other parties to proceed with arbitration. CAGLI filed another application for arbitration. Dissatisfied, ATSC and
ASC moved for reconsideration but the RTC denied ATSC's Motion for Reconsideration. Hence, this petition.

ISSUE:
Is petitioner, Aboitiz Equity Ventures, Inc., bound by an agreement to arbitrate with CAGLI, with respect to the
latter’s claims for unreturned inventories delivered to William Lines, Inc./WG&A, Inc./Aboitiz Transport System
Corporation?

HELD:
No. There is no agreement binding AEV to arbitrate with CAGLI on the latter’s claims arising from Annex SL-V.
For arbitration to be proper, it is imperative that it be grounded on an agreement between the parties. In this
petition, not one of the parties — AEV, CAGLI, Victor S. Chiongbian, and Benjamin D. Gothong — has alleged
and/or shown that the controversy is properly the subject of “compulsory arbitration as provided by statute. Thus,
the propriety of compelling AEV to submit itself to arbitration must necessarily be founded on contract. While the
principle of privity or relativity of contracts acknowledges that contractual obligations are transmissible to a
party’s assigns and heirs, AEV is not WLI’s successor-in-interest. In the period relevant to this petition, the
transferee of the inventories transferred by CAGLI pursuant to Annex SL-V assumed three (3) names: (1) WLI,
the original name of the entity that survived the merger under the January 8, 1996 Agreement; (2) WG&A, the
name taken by WLI in the wake of the Agreement; and (3) ATSC, the name taken by WLI/WG&A in the wake of
the SPA. As such, it is now ATSC that is liable under Annex SL-V. Pursuant to the January 8, 1996 Agreement,
the Aboitiz group (via ASC) and the Gothong group (via CAGLI) became stockholders of WLI/WG&A, along with
the Chiongbian group (which initially controlled WLI). This continued until, pursuant to the SPA, the Gothong
group and the Chiongbian group transferred their shares to AEV. With the SPA, AEV became a stockholder of
WLI/WG&A, which was subsequently renamed ATSC. Nonetheless, AEV’s status as ATSC’s stockholder does
not subject it to ATSC’s obligations It is basic that a corporation has a personality separate and distinct from
that of its individual stockholders. AEV’s status as ATSC’s stockholder is, in and of itself, insufficient to make
AEV liable for ATSC’s obligations. Moreover, the SPA does not contain any stipulation which makes AEV
assume ATSC’s obligations. It is true that Section 6.8 of the SPA stipulates that the rights and obligations
arising from Annex SL-V are not terminated. But all that Section 6.8 does is recognize that the obligations under
Annex SL-V subsist despite the termination of the January 8, 1996 Agreement. At no point does the text of
Section 6.8 support the position that AEV steps into the shoes of the obligor under Annex SL-V and assumes its
obligations. Neither does Section 6.5 of the SPA suffice to compel AEV to submit itself to arbitration. While it is
true that Section 6.5 mandates arbitration as the mode for settling disputes between the parties to the SPA,
Section 6.5 does not indiscriminately cover any and all disputes which may arise between the parties to the SPA.

Hence, petition is granted.

NO PERSON SHOULD UNJUSTLY ENRICH HIMSELF OR HERSELF AT THE EXPENSE OF
ANOTHER
Unjust enrichment exists, according to Hulst v. PR Builders, Inc., "when a person unjustly retains a
benefit at the loss of another, or when a person retains money or property of another against the
fundamental principles of justice, equity and good conscience." (Carlos A. Loria vs. Ludolfo P.
Muñoz, Jr., G.R. No. 187240, October 15, 2014)

x—————x

NO PERSON SHOULD UNJUSTLY ENRICH HIMSELF OR HERSELF AT THE EXPENSE OF

ANOTHER

Carlos A. Loria, Petitioner, vs. Ludolfo P. Muñoz, Jr., Respondent

G.R. No. 187240, October 15, 2014
Leonen, J.

FACTS:
This is a petition for review on certiorari to set aside the Court of Appeals' decision and resolution in
CA-G.R. CV No. 81882. The Court of Appeals ordered petitioner Carlos A. Loria to pay respondent
Ludolfo P. Muñoz, Jr. ₱2,000,000.00 in actual damages with 12% interest per year from the filing of
the complaint until full payment.

Carlos A. Loria (Loria) invited Ludolfo P. Muñoz, Jr. (Muñoz) to advance ₱2,000,000.00 for a
subcontract of a river-dredging project in Guinobatan. As Muñoz had already known Loria for five
years, he accepted the latter’s proposal. However, the project was finished without it being
subcontracted to Muñoz. Muñoz then filed a complaint for sum of money against Loria. The MTC ruled
in favor of Muñoz and ordered Loria to return the ₱2,000,000.00. On appeal, the CA sustained the trial
court’s findings. Hence, this petition for review on certiorari.

Loria argues that their agreement was void for being contrary to law and public policy. That since their
agreement was void, the parties were in pari delicto, and Muñoz should not be allowed to recover the
money he gave under the contract.

On the other hand, Muñoz argues that Loria’s petition raises questions of fact and law that the trial and
appellate courts have already passed upon and resolved in his favor. He prays that this court deny
Loria’s petition for raising questions of fact.

ISSUE:
Whether Loria is liable for ₱2,000,000.00 to Muñoz

HELD:
Yes, Loria is liable and must return Munoz’s ₱2,000,000.00 under the principle of unjust enrichment.

Under Article 22 of the Civil Code of the Philippines, "every person who through an act of performance
by another, or any other means, acquires or comes into possession of something at the expense of the
latter without just or legal ground, shall return the same to him." There is unjust enrichment "when a
person unjustly retains a benefit to the loss of another, or when a person retains money or property of
another against the fundamental principles of justice, equity and good conscience.” The principle of
unjust enrichment has two conditions. First, a person must have been benefited without a real or valid
basis or justification. Second, the benefit was derived at another person’s expense or damage.

In this case, Loria received ₱2,000,000.00 from Muñoz for a subcontract of a government project to
dredge the Masarawag and San Francisco Rivers in Guinobatan, Albay. However, contrary to the
parties’ agreement, Muñoz was not subcontracted for the project. Nevertheless, Loria retained the
₱2,000,000.00.

Thus, Loria was unjustly enriched. He retained Muñoz’s money without valid basis or justification.
Under Article 22 of the Civil Code of the Philippines, Loria must return the ₱2,000,000.00 to Muñoz.
CHOICE OF LAW AND FORUM NON CONVENIENS ARE ENTIRELY DIFFERENT MATTERS
Choice of law provisions are an offshoot of the fundamental principle of autonomy of contracts. In contrast,
forum non conveniens is a device akin to the rule against forum shopping. It is designed to frustrate illicit
means for securing advantages and vexing litigants that would otherwise be possible if the venue of litigation
(or dispute resolution) were left entirely to the whim of either party. (Saudi Arabian Airlines vs. Rebesencio,
G.R. No 198587, January 14, 2015)

x—————x

CHOICE OF LAW AND FORUM NON CONVENIENS ARE ENTIRELY DIFFERENT MATTERS

Saudi Arabian Airlines (Saudia) and Brenda J. Betia, Petitioners, vs. Ma. Jopette M. Rebesencio,
Montassah B. Sacar-Adiong, Rouen Ruth A. Cristobal and Loraine S. Schneider-Cruz, Respondents.
G.R. No. 198587, January 14, 2015
Leonen, J.

FACTS:
This is a Petition for Review on Certiorari with application for the issuance of a temporary restraining order
and/or writ of preliminary injunction under Rule 45 of the 1997 Rules of Civil Procedure praying that judgment
be rendered reversing and setting aside the June 16, 2011 Decision and September 13, 2011 Resolution of the
Court of Appeals in CA-G.R. SP. No. 113006.

Ma. Jopette M. Rebesencio, Montassah B. Sacar-Adiong, Rouen Ruth A. Cristobal and Loraine S. Schneider-
Cruz (respondents) were recruited and hired by Saudi Arabian Airlines (petitioner) as Temporary Flight
Attendants. Eventually, respondents became Permanent Flight Attendants. They continued their employment
with respondent until they were separated from service. Respondents allege that the termination of their
employment was illegal and was made solely because they were pregnant. They further allege that petitioner
informed them that if they did not resign, petitioner would terminate their employment all the same. Hence, they
were forced to tender their respective resignation letters. Petitioner however justified its actions by invoking its
“Unified Employment Contract for Female Cabin Attendants” (Unified Contrcat). Under the Unified Contract, the
employment of a Flight Attendant who becomes pregnant is rendered void. Respondents filed a Complaint for
illegal dismissal against petitioner. The Labor Arbiter rendered a decision dismissing respondents complaint.
On appeal, the NLRC reversed the ruling of the Labor Arbiter.

Saudia asserts that Philippine courts and/or tribunals are not in a position to make an intelligent decision as to
the law and the facts. This is because respondents' Cabin Attendant contracts require the application of the
laws of Saudi Arabia, rather than those of the Philippines. It claims that the difficulty of ascertaining foreign law
calls into operation the principle of forum non conveniens, thereby rendering improper the exercise of
jurisdiction by Philippine tribunals.

ISSUE:
Whether the LA and the NLRC may exercise jurisdiction over Saudi Arabian Airlines and apply Philippine law in
adjudicating the present dispute

HELD:
Yes, the LA and NLRC may exercise jurisdiction over Saudia and apply Philippine laws in adjudicating the
dispute.

A choice of law governing the validity of contracts or the interpretation of its provisions does not necessarily
imply forum non conveniens. Choice of law and forum non conveniens are entirely different matters.

Choice of law provisions are an offshoot of the fundamental principle of autonomy of contracts. Article 1306 of
the Civil Code firmly ensconces this:

Article 1306. The contracting parties may establish such stipulations, clauses, terms and conditions as
they may deem convenient, provided they are not contrary to law, morals, good customs, public order,
or public policy.
In contrast, forum non conveniens is a device akin to the rule against forum shopping. It is designed to frustrate
illicit means for securing advantages and vexing litigants that would otherwise be possible if the venue of
litigation (or dispute resolution) were left entirely to the whim of either party.

Accordingly, under the doctrine of forum non conveniens, "a court, in conflicts of law cases, may refuse
impositions on its jurisdiction where it is not the most 'convenient' or available forum and the parties are not
precluded from seeking remedies elsewhere." In Puyat v. Zabarte, this court recognized the following situations
as among those that may warrant a court's desistance from exercising jurisdiction:

1) The belief that the matter can be better tried and decided elsewhere, either because the main aspects of the
case transpired in a foreign jurisdiction or the material witnesses have their residence there;

2) The belief that the non-resident plaintiff sought the forum, a practice known as forum shopping, merely to
secure procedural advantages or to convey or harass the defendant;

3) The unwillingness to extend local judicial facilities to non-residents or aliens when the docket may already be
overcrowded;

4) The inadequacy of the local judicial machinery for effectuating the right sought to be maintained; and

5) The difficulty of ascertaining foreign law.

The use of the word "may" (i.e., "may refuse impositions on its jurisdiction") in the decisions shows that the
matter of jurisdiction rests on the sound discretion of a court. Neither the mere invocation of forum non
conveniens nor the averment of foreign elements operates to automatically divest a court of jurisdiction. Rather,
a court should renounce jurisdiction only "after 'vital facts are established, to determine whether special
circumstances' require the court's desistance." As the propriety of applying forum non conveniens is contingent
on a factual determination, it is, therefore, a matter of defense.

Here, the circumstances of the parties and their relation do not approximate the circumstances enumerated in
Puyat, which this court recognized as possibly justifying the desistance of Philippine tribunals from exercising
jurisdiction.

First, there is no basis for concluding that the case can be more conveniently tried elsewhere. As established
earlier, Saudia is doing business in the Philippines. For their part, all four (4) respondents are Filipino citizens
maintaining residence in the Philippines and, apart from their previous employment with Saudia, have no other
connection to the Kingdom of Saudi Arabia. It would even be to respondents' inconvenience if this case were to
be tried elsewhere.

Second, the records are bereft of any indication that respondents filed their Complaint in an effort to engage in
forum shopping or to vex and inconvenience Saudia.

Third, there is no indication of "unwillingness to extend local judicial facilities to non-residents or aliens." That
Saudia has managed to bring the present controversy all the way to this court proves this.

Fourth, it cannot be said that the local judicial machinery is inadequate for effectuating the right sought to be
maintained. Summons was properly served on Saudia and jurisdiction over its person was validly acquired.

Lastly, there is not even room for considering foreign law. Philippine law properly governs the present dispute.

As the question of applicable law has been settled, the supposed difficulty of ascertaining foreign law (which
requires the application of forum non conveniens) provides no insurmountable inconvenience or special
circumstance that will justify depriving Philippine tribunals of jurisdiction.
FAILURE TO COMPLY WITH RECIPROCAL PRESTATION ALLOWS PARTY TO AVAIL REMEDY
UNDER ARTICLE 1191

The failure of one of the parties to comply with its reciprocal prestation allows the wronged party to
seek the remedy of Article 1191. The wronged party is entitled to rescission or resolution under Article
1191, and even the payment of damages. It is a principal action precisely because it is a violation of
the original reciprocal prestation. (The Wellex Group, Inc. vs. U-Land Airlines, Co., Ltd. G.R. No.
167519, January 14, 2015)
x—————x
FAILURE TO COMPLY WITH RECIPROCAL PRESTATION ALLOWS PARTY TO AVAIL REMEDY
UNDER ARTICLE 1191

The Wellex Group, Inc. vs. U-Land Airlines, Co., Ltd.

.G.R. No. 167519, January 14, 2015
Leonen, J.

FACTS:
This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court. Wellex (a corporation
engaged in maintaining airline operations in the Philippines, owning shares of stock in several
corporations including Air Philippines International Corporation (APIC), Philippine Estates Corporation
(PEC), and Express Savings Bank (ESB) allegedly all shares of stock of Air Philippines Corporation
(APC)), entered into a Memorandum of Agreement (MOA) with U-Land Airlines Co. (a corporation
engaged in the business of air transportation in Taiwan and in other Asian countries) to expand their
respective airline operations in Asia.

In the first MOA, Wellex and U-Land agreed to develop a long-term business relationship through the
creation of joint interest in airline operations and property development projects in the Philippines. The
first MOA stated that within 40 days from its execution date, Wellex and U-Land would execute a share
purchase agreement covering U-Land’s acquisition of the shares of stock of both APIC (APIC shares)
and PEC (PEC shares). The transfer of APIC shares and PEC shares to U-Land was conditioned on
the full remittance of the final purchase price as reflected in the share purchase agreement,
conditioned upon the approval of SEC. Wellex and U-Land also agreed to enter into a joint
development agreement simultaneous with the execution of the share purchase agreement covering
housing and other real estate development projects.

U-Land agreed to remit the sum of US$3 million. However, the 40-day period lapsed on June 25, 1998,
without Wellex and U-Land entering into any share purchase agreement although drafts were
exchanged between the two. Despite the absence of a share purchase agreement, U-Land remitted to
Wellex a total of US$7,499,945.00. Thus, after the receipt, Wellex delivered to U-Land stock
certificates representing PEC shares and APIC shares and Transfer Certificates of Title (TCT). On
October 1, 1998, U-Land received a letter from Wellex, indicating a list of stock certificates that the
latter was giving to the former by way of “security.”

Despite these transactions, Wellex and U-Land still failed to enter into the share purchase agreement
and the joint development agreement. Thus, U-Land, through counsel, demanded the return of the
US$7,499,945.00. Subsequently, U-Land filed a Complaint praying for rescission of the First
Memorandum of Agreement and damages against Wellex and for the issuance of a Writ of Preliminary
Attachment. From U-Land’s point of view, its primary reason for purchasing APIC shares from Wellex
was APIC’s majority ownership of shares of stock in APC (APC shares). U-Land further alleges that it
repeatedly requested that the parties enter into the share purchase agreement. RTC held that the
rescission is proper. CA affirmed. Hence this Appeal. Petitioner Wellex maintains that respondent U-
Land’s remittance of US$7,499,945.00 constituted mere partial performance of a reciprocal obligation
rendering respondent as not entitled to rescission. The nature of this reciprocal obligation requires both
parties’ simultaneous fulfillment of the totality of their reciprocal obligations and not only partial
performance on the part of the allegedly injured party.

ISSUE:
Did the Court of Appeals err in affirming the Decision of the Regional Trial Court that granted the
rescission of the First Memorandum of Agreement prayed for by U-Land?
HELD:
NO, the rescission is proper. The failure of one of the parties to comply with its reciprocal prestation
allows the wronged party to seek the remedy of Article 1191. The wronged party is entitled to
rescission or resolution under Article 1191, and even the payment of damages. It is a principal action
precisely because it is a violation of the original reciprocal prestation. Article 1381 and Article 1383, on
the other hand, pertain to rescission where creditors or even third persons not privy to the contract can
file an action due to lesion or damage as a result of the contract. In Ong v. Court of Appeals, this
court defined rescission:
Rescission, as contemplated in Articles 1380, et seq., of the New Civil Code, is a remedy granted
by law to the contracting parties and even to third persons, to secure the reparation of damages
caused to them by a contract, even if this should be valid, by restoration of things to their
condition at the moment prior to the celebration of the contract. It implies a contract, which even if
initially valid, produces a lesion or a pecuniary damage to someone.

Ong elaborated on the confusion between “rescission” or resolution under Article 1191 and rescission
under Article 1381:
On the other hand, Article 1191 of the New Civil Code refers to rescission applicable to reciprocal
obligations. Reciprocal obligations are those which arise from the same cause, and in which each
party is a debtor and a creditor of the other, such that the obligation of one is dependent upon the
obligation of the other. They are to be performed simultaneously such that the performance of
one is conditioned upon the simultaneous fulfillment of the other. Rescission of reciprocal
obligations under Article 1191 of the New Civil Code should be distinguished from rescission of
contracts under Article 1383. Although both presuppose contracts validly entered into and
subsisting and both require mutual restitution when proper, they are not entirely identical.

While Article 1191 uses the term “rescission,” the original term which was used in the old Civil
Code, from which the article was based, was “resolution.” Resolution is a principal action which is
based on breach of a party, while rescission under Article 1383 is a subsidiary action limited to
cases of rescission for lesion under Article 1381 of the New Civil Code.

When a party seeks the relief of rescission as provided in Article 1381, there is no need for reciprocal
prestations to exist between or among the parties. All that is required is that the contract should be
among those enumerated in Article 1381 for the contract to be considered rescissible. Unlike Article
1191, rescission under Article 1381 must be a subsidiary action because of Article 1383. Contrary to
petitioner Wellex’s argument, this is not rescission under Article 1381 of the Civil Code. This case does
not involve prejudicial transactions affecting guardians, absentees, or fraud of creditors. Article 1381(3)
pertains in particular to a series of fraudulent actions on the part of the debtor who is in the process of
transferring or alienating property that can be used to satisfy the obligation of the debtor to the creditor.
There is no allegation of fraud for purposes of evading obligations to other creditors. The actions of the
parties involving the terms of the First Memorandum of Agreement do not fall under any of the
enumerated contracts that may be subject of rescission. Further, respondent U-Land is pursuing
rescission or resolution under Article 1191, which is a principal action. It is immediately available to the
party at the time that the reciprocal prestation was breached. Article 1383 mandating that rescission be
deemed a subsidiary action cannot be applicable to rescission or resolution under Article 1191.

Thus, respondent U-Land correctly sought the principal relief of rescission or resolution under Article
1191. The obligations of the parties gave rise to reciprocal prestations, which arose from the same
cause: the desire of both parties to enter into a share purchase agreement that would allow both
parties to expand their respective airline operations in the Philippines and other neighboring countries.
ARBITRATION CLAUSE IN A DOCUMENT EXTENDS TO SUBSEQUENT CONTRACTS MADE
FOR THE SAME PURPOSE AND BINDS PARTIES SUBSEQUENTLY THERETO

An arbitration clause in a document of contract may extend to subsequent documents of contract

executed for the same purpose. Nominees of a party to and beneficiaries of a contract containing an
arbitration clause may become parties to a proceeding initiated based on that arbitration clause.
(Bases Conversion Development Authority v. DMCI Project Developers, Inc., G.R. No. 173137 &
173170, January 11, 2016)

x—————x

ARBITRATION CLAUSE IN A DOCUMENT EXTENDS TO SUBSEQUENT CONTRACTS MADE

FOR THE SAME PURPOSE AND BINDS PARTIES SUBSEQUENTLY THERETO

Bases Conversion Development Authority v. DMCI Project Developers, Inc.

G.R. No. 173137, January 11, 2016
North Luzon Railways Corporation V. DMCI Project Developers, Inc.
G.R. NO. 173170
Leonen, J.

FACTS:
This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court. On June 10, 1995,
Bases Conversion Development Authority (BCDA) entered into a Joint Venture Agreement with
Philippine National Railways (PNR) and other foreign corporations. Under the Joint Venture
Agreement, the parties agreed to construct a railroad system from Manila to Clark with possible
extensions to Subic Bay and La Union and later, possibly to Ilocos Norte and Nueva Ecija. BCDA shall
establish North Luzon Railways Corporation (Northrail) for purposes of constructing, operating, and
managing the railroad system.The Joint Venture Agreement contained the following provision:
ARTICLE XVI
ARBITRATION
If any dispute arise hereunder which cannot be settled by mutual accord between the parties to such
dispute, then that dispute shall be referred to arbitration. The arbitration shall be held in whichever
place the parties to the dispute decide and failing mutual agreement as to a location within twenty-one
(21) days after the occurrence of the dispute, shall be held in Metro Manila and shall be conducted in
accordance with the Philippine Arbitration Law (Republic Act No. 876) supplemented by the Rules of
Conciliation and Arbitration of the International Chamber of Commerce. All award of such arbitration
shall be final and binding upon the parties to the dispute.

BCDA organized and incorporated Northrail. BCDA invited investors to participate in the railroad
project's financing and implementation. Among those invited were D.M. Consunji, Inc. and Metro
Pacific Corporation. On February 8, 1996, the Joint Venture Agreement was amended to include D.M.
Consunji, Inc. and/or its nominee as party. Under the amended Joint Venture Agreement, D.M.
Consunji, Inc. shall be an additional investor of Northrail. They entered into a Memorandum of
Agreement. Subsequently, upon BCDA and Northrail's request, DMCI Project Developers, Inc. (DMCI-
PDI) deposited P300 million into Northrail’s account with Land Bank of the Philippines. The deposit
was made on August 7, 1996 for its "future subscription of the Northrail shares of stocks." In Northrail’s
1998 financial statements submitted to the Securities and Exchange Commission, this amount was
reflected as "Deposits For Future Subscription." At that time, Northrail’s application to increase its
authorized capital stock was still pending with the Securities and Exchange Commission. However,
Northrail withdrew from the Securities and Exchange Commission its application for increased
authorized capital stock. Moreover, according to DMCI-PDI, BCDA applied for Official Development
Assistance from Obuchi Fund of Japan. This required Northrail to be a 100% government-owned and
controlled corporation.

On September 27, 2000, DMCI-PDI started demanding from BCDA and Northrail the return of its P300
million deposit. DMCI-PDI cited Northrail's failure to increase its authorized capital stock as reason for
the demand.BCDA and Northrail refused to return the deposit as DMCI-PDI is already privy to the
transactions. DMCI-PDI reiterated the request and sent a demand letter for the refund of its P300
million deposit for future Northrail subscription. On March 18, 2005, BCDA denied such request,
prompting DMCI-PDI to file before the RTC of Makati a Petition to Compel Arbitration against BCDA
and Northrail, pursuant to the alleged arbitration clause in the Joint Venture Agreement. DMCI-PDI
prayed for "an order directing the parties to proceed to arbitration in accordance with the terms and
conditions of the agreement." RTC then granted DMCI-PDI's Petition to Compel Arbitration. Hence,
this Petition.

BCDA argues that only the parties to an arbitration agreement can be bound by that agreement. The
arbitration clause that DMCI-PDI sought to enforce was in the Joint Venture Agreement, to which
DMCI-PDI was not a party. In a separate Petition for Review, Northrail alleges that it cannot be
compelled to submit itself to arbitration because it was not a party to the arbitration agreement. On the
other hand, DMCI-PDI contends that the arbitration agreement extended to all documents relating to
the project. Even though the agreement was expressed only in the Joint Venture Agreement, its effect
extends to the amendment to the Joint Venture Agreement and Memorandum of Agreement.

ISSUE:
May DMCI-PDI compel BCDA and Northrail to submit to arbitration?

HELD:
YES, DMCI-PDI may compel both BCDA and Northrail to submit to arbitration. Arbitration is a mode of
settling disputes between parties. Like many alternative dispute resolution processes, it is a product of
the meeting of minds of parties submitting a pre-defined set of disputes. They agree among
themselves to a process of dispute resolution that avoids extended litigation.

There is no rule that a contract should be contained in a single document. A whole contract may be
contained in several documents that are consistent with one other. Moreover, at any time during the
lifetime of an agreement, circumstances may arise that may cause the parties to change or add to the
terms they previously agreed upon. Thus, amendments or supplements to the agreement may be
executed by contracting parties to address the circumstances or issues that arise while a contract
subsists.

When an agreement is amended, some provisions are changed. Certain parts or provisions may be
added, removed, or corrected. These changes may cause effects that are inconsistent with the
wordings of the contract before the changes were applied. In that case, the old provisions shall be
deemed to have lost their force and effect, while the changes shall be deemed to have taken effect.
Provisions that are not affected by the changes usually remain effective. When a contract is
supplemented, new provisions that are not inconsistent with the old provisions are added. The nature,
scope, and terms and conditions are expanded. In that case, the old and the new provisions form part
of the contract.

A reading of all the documents of agreement shows that they were executed by the same parties.
Initially, the Joint Venture Agreement was executed only by BCDA, PNR, and the foreign
corporations. When the Joint Venture Agreement was amended to include D.M. Consunji, Inc.
and/or its nominee, D.M. Consunji, Inc. and/or its nominee were deemed to have been also a
party to the original Joint Venture Agreement executed by BCDA, PNR, and the foreign
corporations. D.M. Consunji, Inc. and/or its nominee became bound to the terms of both the Joint
Venture Agreement and its amendment. Moreover, each document was executed to achieve the single
purpose of implementing the railroad project, such that documents of agreement succeeding the
original Joint Venture Agreement merely amended or supplemented the provisions of the original Joint
Venture Agreement.

The first agreement — the Joint Venture Agreement — defined the project, its purposes, the parties,
the parties' equity participation, and their responsibilities. The second agreement — the amended
Joint Venture Agreement —- only changed the equity participation of the parties and included D.M.
Consunji, Inc. and/or its nominee as party to the railroad project. The third agreement — the
Memorandum of Agreement — raised the seed capitalization of Northrail from P100 million as
indicated in the first agreement to P600 million, in order to accelerate the implementation of the same
project defined in the first agreement. The Memorandum of Agreement is an implementation of the
Joint Venture Agreement and the amended Joint Venture Agreement. It could not exist without
referring to the provisions of the original and amended Joint Venture Agreements. It assumes a prior
knowledge of its terms. Thus, the Joint Venture Agreement, the amended Joint Venture Agreement,
and the Memorandum of Agreement should be treated as one contract because they all form part of a
whole agreement.

Hence, the arbitration clause in the Joint Venture Agreement should not be interpreted as applicable
only to the Joint Venture Agreement's original parties. The succeeding agreements are deemed part of
or a continuation of the Joint Venture Agreement. The arbitration clause should extend to all the
agreements and its parties since it is still consistent with all the terms and conditions of the
amendments and supplements.
TICKLER : In other words, as a general rule, a person defaults and prescriptive period for action runs when (1)
the obligation becomes due and demandable; and (2) demand for payment has been made.
The prescriptive period neither runs from the date of the execution of a contract nor does the prescriptive
period necessarily run on the date when the loan becomes due and demandable. Prescriptive period runs from
the date of demand subject to certain exceptions (University of Mindanao Inc. vs Bangko Sental ng
Pilipinas, G.R. No. 194964-65, January 11, 2016).

The doctrine of apparent authority does not apply if the principal did not commit any acts or conduct
which a third party knew and relied upon in good faith as a result of the exercise of reasonable prudence.
Moreover, the agent's acts or conduct must have produced a change of position to the third party's detriment
University of Mindanao Inc. vs Bangko Sental ng Pilipinas, G.R. No. 194964-65, January 11, 2016).
.

UNIVERSITY OF MINDANAO, INC., VS. BANGKO SENTRAL PILIPINAS

G.R. No. 194964-65, January 11, 2016
LEONEN, J.

FACTS:
This case is a petition for Review on Certiorari under Rule 45 seeking to modify the decision of the CA,
in reversing the decision of lower courts, dismissing the complaint for annulment of the real estate mortgaged
contracts and finding that the respondent ‘s right to foreclose the mortgaged has not prescribed. The petitioner
is University of Mindanao, an educational institution, while the respondent is the Banko Sentral ng Pilipinas.
In 1982, Guillermo Torres was the chairperson of petitioner’s Board of Trustees. He was also the
chairperson of two thrift banks, namely, First Iligan Savings & Loan Association, Inc. (FISLAI) and Davao
Savings and Loan Association, Inc. (DSLAI). During this period, Torres acquired several loans from
respondent bank for the operation of the thrift banks. The loans were secured by two real estate mortgaged
contracts executed by Saturnino Petalcorin covering several properties of petitioner in Cagayan de Oro City
and Iligan City. Due to financial loses, the banks were under rehabilitation which led to their merging and later
became known as Mindanao Savings and Loan Association, Inc., (MSLAI). In 1991, MSLAI never recovered
and was eventually liquidated.
In 1999, respondent sent a letter to petitioner seeking for the payment of the loan and if remained
unheeded the necessary foreclosure proceedings would follow. In reply, petitioner denied the properties were
mortgaged claiming that contracts were unenforceable since there was no board resolution authorizing
Petalcorin to execute the agreements. Likewise, the action to foreclose already prescribed. On the other hand,
respondent contented that petitioner was already estopped from denying Petalcorin’s authority to transact
based on the board resolution dated March 30, 1982 and Aurora de Leon's notarized Secretary's Certificate.

ISSUES:

.Whether or not the respondent’s right of to foreclose the mortgaged has prescribed.

Whether or not petitioner is bound by the real estate mortgaged contract executed by Petalcorin.

HELD:

No, the right to foreclose the mortgaged has not prescribed. The prescriptive period for actions on
mortgages is ten years from the day they may be brought. Actions on mortgages may be brought not upon the
execution of the mortgage contract but upon default in payment of the obligation secured by the mortgage.
Under Art. 1169 of the NCC, those obliged to deliver or to do something incur in delay from the time the obligee
judicially or extra judicially demands from them the fulfilment of their obligation. However, demand is not
necessary if the case falls under one of the exceptions. In the case at bar, given the termination of all traces of
the thrift banks existence, demand may have been rendered unnecessary Thus, respondent would have had
ten years from due date in 1990 or until 2000 to institute an action on the mortgage contract.

No, petitioner is not bound by the real estate mortgage contracts executed by Petalcorin. This court
has recognized apparent authority to bind corporate representatives in instances when the corporation, through
its silence or other acts of recognition, allowed others to believe that persons, through their usual exercise of
corporate powers, were conferred with authority to deal on the corporation's behalf. However, the doctrine of
apparent authority does not apply if the principal did not commit any acts or conduct which a third party knew
and relied upon in good faith as a result of the exercise of reasonable prudence. Moreover, the agent's acts or
conduct must have produced a change of position to the third party's detriment. In the case at bar, Petalcorin's
authority to transact on behalf of petitioner cannot be presumed based on a Secretary's Certificate and excerpt
from the minutes of the alleged board meeting that were found to have been simulated. These documents
cannot be considered as the corporate acts that held out Petalcorin as petitioner's authorized representative for
mortgage transactions. They were not supported by an actual board meeting. Thus, estoppel does not apply.
TICKLER: However, through the specified terms and conditions, the tenor of the Letter Agreement indicated
an intention for a single transaction. This intent must prevail even though the articles involved are physically
separable and capable of being paid for and delivered individually, consistent with the New Civil Code
(Spouses Lam v. Kodak Phils., Ltd, G.R. No. 167615, January 11, 2016)..

When rescission is sought under Article 1191 of the Civil Code, it need not be judicially invoked because the
power to resolve is implied in reciprocal obligations. When a party fails to comply with his or her obligation, the
other party's right to resolve the contract is triggered. The resolution immediately produces legal effects if the
non-performing party does not question the resolution. Court intervention only becomes necessary when the
party who allegedly failed to comply with his or her obligation disputes the resolution of the contract (Spouses
Lam v. Kodak Phils., Ltd, G.R. No. 167615, January 11, 2016).

.
Spouses Lam v. Kodak Phils., Ltd
G.R. No. 167615, January 11, 2016
LEONEN, J.

FACTS:

This case is a Petition for Review on Certiorari under Rule 45 seeking to modify the decision of CA
finding that the contract of sale entered by the parties is susceptible of partial performance under Art.1225 of
the NCC. The petitioners are spouses Alexander and Julie Lam while the respondent is Kodak Philippines, Ltd.

Petitioner spouses and respondent corporation entered into a Letter of Agreement for the sale of three
minilab equipment, each amounting to P1, 796,000.00. After the respondent delivered the first unit, petitioners
issued twelve post-dated checks for payment. Two of the checks were honoured by the depository bank, while
the subsequent ones were dishonoured due to the stop payment order issued by petitioners. Consequently,
respondent cancelled the sale and demanded that petitioners return the unit it delivered together with its
accessories. Petitioner ignored the demand but also rescinded the contract through a letter on account of
respondent’s failure to deliver the two remaining units. This prompted respondent to file a case for replevin/
recovery of sum of money against petitioner before RTC.

The lower court ruled in favour of petitioner and found that respondent defaulted in the performance of
its obligation under the Letter Agreement. Upon appeal, CA held that the contract executed by the parties
showed that their obligations were susceptible of partial performance, thus, respondent only breached its
obligation to deliver the two units and not the delivery of the first unit. The court also ordered for restitution.

In this appeal, petitioners averred that the contract of sale was not divisible since Letter Agreement
was for a package deal consisting of three units. For the delivery of these units, petitioners were obliged to pay
48 monthly payments, the total of which constituted one debt. In contrast, respondent argued that the parties'
contract contained divisible obligations since each unit was individually priced and were delivered to different
outlets. Hence, it was the petitioners who breached their obligation under the contract by issuing a stop
payment order.

ISSUE:

Whether or not the Letter of Agreement pertained to obligations that are divisible since the units were
individually priced and delivered to different outlets.

Whether or not the CA was correct in ordering petitioners to return the unit they received from respondent and
the latter to return the amount received as partial payment for the equipment.

HELD:
No, the Letter Agreement contained an indivisible obligation. Under Article 1225 of the NCC, even
though the object or service may be physically divisible, an obligation is indivisible if so provided by law or
intended by the parties. In Nazareno v. Court of Appeals, it was held that an obligation is indivisible when it
cannot be validly performed in parts, whatever may be the nature of the thing which is the object thereof. The
indivisibility refers to the prestation and not to the object thereof. In the case at bar, after examining the Letter
Agreement, there was no indication that the units petitioners ordered were covered by three separate
transactions. The factors considered by the lower court are mere incidents of the execution of the obligation,
which is to deliver three units of the Minilab Equipment on the part of respondent and payment for all three on
the part of petitioners. The intention to create an indivisible contract is apparent from the benefits that the Letter
Agreement afforded to both parties.

Yes, with both parties opting for rescission of the contract under Article 1191, the CA correctly ordered
for restitution. Under Article 1991 of the NCC, the power to rescind obligations is implied in reciprocal ones.
This rescission has the effect of mutual restitution, wherein, it abrogates the contract from its inception and
requires a mutual restitution of benefits received. In addition since this is implied in reciprocal obligation, like a
contract of sale, it need not be judicially invoked. When a party fails to comply with his or her obligation, the
other party's right to resolve the contract is triggered. Court intervention only becomes necessary when the
party who allegedly failed to comply with his or her obligation disputes the resolution of the contract. In the case
at bar, since both parties in this case have exercised their right to resolve under Article 1191, there is no need
for a judicial decree before the resolution produces effects.
NO MUTUALITY OF CONTRACT WHEN INTEREST IS SET AT SOLE DISCRETION OF ONE PARTY
There is no mutuality of contract when the interest rate in a loan agreement is set at the sole discretion of one party. Nor
is there any mutuality when there is no reasonable means by which the other party can determine the applicable interest
rate. These types of interest rates stipulated in the loan agreement are null and void. However, the nullity of the stipulated
interest rate does not automatically nullify the provision requiring payment of interest. Certainly, it does not nullify the
obligation to pay the principal loan obligation. (Spouses Limso vs PNB, G.R. Nos. 158622, 169441, 172958, 173194,
196958, 197120, 205463, January 27, 2016)
x----------------x
NO MUTUALITY OF CONTRACT WHEN INTEREST IS SET AT SOLE DISCRETION OF ONE PARTY
SPOUSES ROBERT ALAN L. and NANCY LEE LIMSO, Petitioners vs. PHILIPPINE NATIONAL BANK and THE
REGISTER OF DEEDS OF DAVAO CITY, Respondents.
G.R. Nos. 158622, 169441, 172958, 173194, 196958, 197120, 205463, January 27, 2016
Leonen, J.
FACTS:
This is a petition for review on certiorari filed by PNB assailing the Decision in CA-G.R. CV No. 79732-MIN which declared
the unilateral imposition of interest rates by defendant-appellant PNB as null and void.
Spouses Limso and Davao Sunrise out a loan of P700 million with PNB and secured it with real estate mortgage. After
having difficulty in paying the loan they requested to restructure their loan. PNB then executed a Conversion,Restructuring
and Extension Agreement which totaled to 1.067 billion which included the unpaid interest. A provision under the loan
contract was that the interest rate shall be determined "at the rate per annum to be set by the Bank. The interest rate shall
be reset by the Bank every month." The restructured loan was secured with the properties which are 4 parcels of land
registered under Davao Sunrise. Spouses Limso and Davao Sunrise failed to pay even after PNB sent demand letters. On
August 21, 2000 PNB filed a Petition for Extrajudicial Foreclosure of Real Estate Mortgage before the Sheriff’s Office in
Davao. PNB was declared the highest bidder. The Sps. and Davao Sunrise files a complaint in court praying for the
declaration of nullity of unilateral imposition and increases of interest rates
The spouses argued that the unilateral increases of interest rates imposed by the defendant bank is over and above the
stipulated interest rates provided for in the Promissory Notes, is null and void and must be lowered 12% per annum only,
from the date of the filing of the Complaint
Philippine National Bank argues that there was mutuality of contracts between the parties, and that the interest rates
imposed were valid in view of the escalation clauses in their contract.
Issue: Does the provision under the loan contract regarding the unilateral imposition and increase of interest rates violate
the principle of mutuality of contract?
Held: Yes. The unilateral imposition and increase of interest rates violate the principle of mutuality of contracts.
Article 1318 of the Civil Code states that “there is no contract unless the following requisites concur: (1) consent of the
contracting parties; (2) object certain which is the subject matter of the contract; (3) cause of the obligation which is
established. When one of the elements is not present the contract cannot be perfected. There is no mutuality of contract
when the determination of interest rates are at the sole discretion of one party. The escalation clauses in contracts are
void when they allow the creditor to unilaterally adjust the interest rates without the consent of the debtor. The principle of
mutuality of contracts dictates that a contract must be rendered void when the execution of its terms is skewed in favor of
one party.
In this case, petitioner Sps. Limso and Davao Sunrise gave no consent as to the increase in the interest rates. Since there
was no room for negotiation regarding the interest rates, the principal of mutuality of contracts was violated. There was no
meeting of the mind and consequently PNB’s unilateral imposition on the increases in the interest rates are not valid.
RESCISSION OF A CONTRACT DOES NOT NECESSARILY OBLITERATE THE LIABILITY FOR
STIPULATED LIQUIDATED DAMAGES

Although the provisions of a contract are legally null and void, the stipulated method of computing liquidated
damages may be accepted as evidence of the intent of the parties. The provisions, therefore, can be basis for
finding a factual anchor for liquidated damages (PEZA vs. Pilhino Sales Corporation, G.R. No. 185765.
September 28, 2016).
x—————x
PHILIPPINE ECONOMIC ZONE AUTHORITY, petitioner, vs. PILHINO SALES CORPORATION,
respondent
G.R. No. 185765. September 28, 2016
LEONEN, J

FACTS:
This resolves a Petition for Review on Certiorari praying that the Decision of the RTC ordering respondent,
Pilhino Sales Corporation (Pilhino), to pay petitioner, Philippine Economic Zone Authority (PEZA), in liquidated
damages at the rate of 1/10 of 1% of the total contract price of Php5,800,000.00 for each day of delay be
reinstated.

In 1997, Petitioner published an invitation to bid for its acquisition of two (2) brand new fire truck units.
Respondent secured the contract for the acquisition of the fire trucks. A stipulation in the contract stated that "in
case of failure to deliver the goods on the date specified the Supplier agrees to pay penalty at the rate of 1/10
of 1% of the total contract price for each day commencing on the first day after the date stipulated above."
Respondent failed to comply despite formal demands prompting petitioner to file a Complaint for rescission of
contract and damages.

Petitioner asks for the reinstatement of the RTC's award asserting that it already suffered damage when
respondent failed to deliver the trucks on time; that the contractually stipulated penalty of 1/10 of 1% of the
contract price for every day of delay was neither unreasonable nor contrary to law, morals, or public order; that
the stipulation on liquidated damages was freely entered into by it and respondent; and that the Court of
Appeals' computation had no basis in fact and law. Respondent, on the other hand, suggests that with the
rescission of its contract with petitioner must have come the negation of the contractual stipulation on liquidated
damages and the obliteration of its liability for such liquidated damages.

ISSUE:
Does the rescission of a contract necessarily and inexorably follows the obliteration of liability for what the
same contracts stipulates as liquidated damages?

HELD:
No. The rescission of a contract does not necessarily and inexorably follows the obliteration of liability for what
the same contracts stipulates as liquidated damages. A contract of sale, such as that entered into by petitioner
and respondent, entails reciprocal obligations. As explained in Spouses Velarde v. Court of Appeals, "[i]n a
contract of sale, the seller obligates itself to transfer the ownership of and deliver a determinate thing, and the
buyer to pay therefor a price certain in money or its equivalent." Rescission on account of breach of reciprocal
obligations is provided for in Article 1191 of the Civil Code: The power to rescind obligations is implied in
reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him. The injured
party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in
either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become
impossible. The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a
period. This is understood to be without prejudice to the rights of third persons who have acquired the thing, in
accordance with articles 1385 and 1388 and the Mortgage Law. Jurisprudence has long settled that the
restoration of the contracting parties to their original state is the very essence of rescission. Mutual restitution
under Article 1191 is, however, no license for the negation of contractually stipulated liquidated damages.
Article 1191 itself clearly states that the options of rescission and specific performance come "with the payment
of damages in either case." The very same breach or delay in performance that triggers rescission is what
makes damages due. When the contracting parties, by their own free acts of will, agreed on what these
damages ought to be, they established the law between themselves. Their contemplation of the consequences
proper in the event of a breach has been articulated. When courts are, thereafter, confronted with the need to
award damages in tandem with rescission, courts must not lose sight of how the parties have explicitly stated,
in their own language, these consequences. To uphold both Article 1191 of the Civil Code and the parties' will,
contractually stipulated liquidated damages must, as a rule, be maintained. Hence, the rescission of a contract
does not necessarily and inexorably follows the obliteration of liability for what the same contracts stipulates as
liquidated damages.
A TRIBUNAL MAY EMPLOY AIDS IN INTERPRETATION OF CONTRACTS NOT ONLY WHEN
CONFRONTED BY AMBIGUOUS CONTRACTUAL TERMS BUT ALSO WITH TOTAL ABSENCE OF THE
INSTRUMENT THEREOF
A tribunal confronted not only with ambiguous contractual terms but also with the total absence of an
instrument which definitively articulates the contracting parties' agreement does not act in excess of jurisdiction
when it employs aids in interpretation, such as those articulated in Articles 1370 to 1379 of the Civil Code. In so
doing, a tribunal does not conjure its own contractual terms and force them upon the parties. (CE
Construction Corporation vs. Araneta Center, Inc., G.R. No. 192725, August 9, 2017)

x—————x

CE CONSTRUCTION CORPORATION, petitioner, vs. ARANETA CENTER, INC., respondent.

G.R. No. 192725. August 9, 2017
Leonen, J.

FACTS:
This resolves a Petition for Review on Certiorari under Rule 45 of the 1997 Rules of Civil Procedure, praying
that the Decision of the Court of Appeals modifying the CIAC Arbitral Tribunal Decision by reducing the amount
in favour of petitioner CE Construction Corporation (CECON) be reversed and set aside. It likewise prays that
the Decision of the CIAC Arbitral Tribunal awarding petitioner a total sum of P231,357,136.72 be reinstated.

In June 2002, ACI sent invitations to different construction companies, including CECON for them to bid on a
project that would eventually be the Gateway Mall. As part of its invitation to prospective contractors, ACI
furnished bidders with Tender Documents describing the project's contract sum to be a "lump sum" or "lump
sum fixed price" and restricted cost adjustments. CECON submitted its bid, indicating a tender amount of
P1,449,089,174.00. CECON's proposal "specifically stated that its bid was valid for only ninety (90) days, or
only until 29 November 2002" and that the project cost quoted was "based upon the prices prevailing at
December 26, 2002" price levels. It was only after the lapse of CECON’s proposal when ACI verbally informed
CECON that the contract was being awarded to it. Negotiations between ACI and CECON persisted. Still
without settling on a contract sum, even the object of the contract was subjected to multiple modifications. In a
letter by ACI it acknowledges that “a binding contract is now existing.” It also expressed ACI's corresponding
undertaking to prepare a formal contract. Despite ACI's undertaking, no formal contract documents were
delivered to CECON or otherwise executed between ACI and CECON. CECON thus filed with the CIAC its
Request for Adjudication.

The CIAC Arbitral Tribunal rendered its Decision noting that the way that events actually unfolded, CECON was
no longer bound by its representations in respect of the lump-sum amount. On the other hand, the Court of
Appeals held as inviolable the lump-sum fixed price arrangement between ACI and CECON. It faulted the CIAC
Arbitral Tribunal for acting in excess of jurisdiction as it supposedly took it upon itself to unilaterally modify the
arrangement between ACI and CECON. ACI insists on the inviolability of its supposed agreement with CECON,
as embodied in the contract documents delivered to contractors alongside the original offer to bid. By the
inviolability their agreement, ACI insists on the supposed immutability of the stipulated contract sum and on the
impropriety of the CIAC Arbitral Tribunal in writing its own terms for ACI and CECON to follow.

ISSUE:

I. Is there is an established contract between CECON and ACI that simply requires interpretation and
application?

II. Did the CIAC Arbitral Tribunal act in excess of its jurisdiction by drawing up its own terms and force
these terms upon ACI and CECON?

III. Is ACI correct on the supposed immutability of the stipulated contract sum between ACI and CECON?
HELD:

I. No. There is no established contract between CECON and ACI that simply requires interpretation and
application. There was never a meeting of minds on the price. Thus, that stipulation could not
have been the basis of any obligation. It is a legal principle of long standing that when the
language of the contract is explicit, leaving no doubt as to the intention of the parties, the courts
may not read into it any other intention that would contradict its plain import. The clear terms of the
contract should never be the subject matter of interpretation. Neither abstract justice nor the rule of
liberal interpretation justifies the creation of a contract for the parties which they did not make
themselves or the imposition upon one party to a contract or obligation not assumed simply or
merely to avoid seeming hardships. Their true meaning must be enforced, as it is to be presumed
that the contracting parties know their scope and effects.

By delivering tender documents to bidders, ACI made an offer. By these documents, it specified its
terms and defined the parameters within which bidders could operate. These tender documents,
therefore, guided the bidders in formulating their own offers to ACI, or, even more fundamentally,
helped them make up their minds if they were even willing to consider undertaking the proposed
project. In responding and submitting their bids, contractors, including CECON, did not
peremptorily become subservient to ACI's terms. Rather, they made their own representations as
to their own willingness and ability. They adduced their own counter-offers, although these were
already tailored to work within ACI's parameters. These exchanges were in keeping with Article
1326 of the Civil Code: Article 1326. Advertisements for bidders are simply invitations to make
proposals, and the advertiser is not bound to accept the highest or lowest bidder, unless the
contrary appears. The mere occurrence of these exchanges of offers fails to satisfy the Civil
Code's requirement of absolute and unqualified acceptance: Article 1319. Consent is manifested
by the meeting of the offer and the acceptance upon the thing and the cause which are to
constitute the contract. The offer must be certain and the acceptance absolute. A qualified
acceptance constitutes a counter-offer. Acceptance made by letter or telegram does not bind the
offerer except from the time it came to his knowledge. The contract, in such a case, is presumed
to have been entered into in the place where the offer was made. Subsequent events do not only
show that there was no meeting of minds on CECON's initial offered contract sum. They also
show that there was never any meeting of minds on the contract sum at all. In accordance with
Article 1321 of the Civil Code, an offeror may fix the time of acceptance. Thus, CECON specifically
stated that its bid was valid for only ninety (90) days, such time lapsed but ACI failed to manifest
its acceptance of CECON's offered contract sum. It was only sometime after said period that ACI
verbally informed CECON that the contract was being awarded to it. Absent a concurrence of
consent and object, no contract was perfected. ACI's supposed acceptance was not an effective,
unqualifed acceptance, as contemplated by Article 1319 of the Civil Code. ACI's delivery,
CECON's review, and both parties' final act of formalizing their respective consent and affixing
their respective signatures would have established a clear point in which the contract between ACI
and CECON has been perfected. These points would have validated the Court of Appeals'
assertion that all that remained to be done was to apply unequivocal contractual provisions.
Without properly executed contract documents, what would have been a straightforward exercise,
akin to the experience in F.F. Cruz , became a drawn-out fact- finding affair. The situation that ACI
engendered made it necessary for the CIAC Arbitral Tribunal to unravel the terms binding ACI to
CECON from sources other than definitive documents.

II. NO. The CIAC Arbitral Tribunal did not act in excess of its jurisdiction by drawing up its own terms and
force these terms upon ACI and CECON. The reality of a vacuum where there were no definite
contractual terms, coupled with the demands of a "fair and expeditious resolution" of a dispute
centered on contractual interpretation, called into operation Article 1371 of the Civil Code: In order
to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall
be principally considered. Article 1379 of the Civil Code invokes principles from the Revised Rules
on Evidence. By invoking these principles, Article 1379 makes them properly applicable in every
instance of contractual interpretation, even those where the need for interpretation arises outside
of court proceedings: Article 1379. The principles of interpretation stated in Rule 123 of the Rules
 of Court shall likewise be observed in the construction of contracts. Within its competence and in
keeping with basic principles on contractual interpretation, the CIAC Arbitral Tribunal ascertained
the true and just terms governing ACI and CECON. Thus, the CIAC Arbitral Tribunal did not
conjure its own contractual creature out of nothing. In keeping with this, the CIAC Arbitral Tribunal
found it proper to sustain CECON's position. There having been no meeting of minds on the
contract sum, the amount due to CECON became susceptible to reasonable adjustment, subject
to proof of legitimate costs that CECON can adduce. The following principles governed the
interpretation of the change orders, requests, and other communications, which had effectively
been surrogates of a single definite instrument executed by the parties. From the Civil Code:
Article 1375. Words which may have different significations shall be understood in that which is
most in keeping with the nature and object of the contract. Article 1376. The usage or custom of
the place shall be borne in mind in the interpretation of the ambiguities of a contract, and shall fill
the omission of stipulations which are ordinarily established.

III. NO. Contrary to ACI's oft-repeated argument, the CIAC Arbitral Tribunal correctly found that ACI had
gained no solace in statutory provisions on the immutability of prices stipulated between a
contractor and a landowner. Article 1724 of the Civil Code reads: The contractor who undertakes
to build a structure or any other work for a stipulated price, in conformity with plans and
specifications agreed upon with the land-owner, can neither withdraw from the contract nor
demand an increase in the price on account of the higher cost of labor or materials, save when
there has been a change in the plans and specifications, provided: (1) Such change has been
authorized by the proprietor in writing; and (2) The additional price to be paid to the contractor has
been determined in writing by both parties. Article 1724 demands two (2) requisites in order that a
price may become immutable: First, there must be an actual, stipulated price; and second, plans
and specifications must have definitely been agreed upon. Neither requisite avails in this case.
A CONTRACT IS THE LAW BETWEEN THE PARTIES
It is fundamental that a contract is the law between the parties and, absent any showing that its
provisions are wholly or in part contrary to law, morals, good customs, public order, or public policy, it
shall be enforced to the letter by the courts. (DPWH v. CMC, G.R. No. 179732, September 13, 2017)

x—————x

A CONTRACT IS THE LAW BETWEEN THE PARTIES

It is fundamental that a contract is the law between the parties and, absent any showing that its
provisions are wholly or in part contrary to law, morals, good customs, public order, or public policy, it
shall be enforced to the letter by the courts. (DPWH v. CMC, G.R. No. 179732, September 13, 2017)

DPWH v. CMC/MONARK/PACIFIC/HI-TRI JOINT VENTURE

G.R. No. 179732; September 13, 2017
Leonen, J.

FACTS:
In a petition for review on certiorari, petitioner Department of Public Works and Highways (DPWH)
assails the decision of the CA affirming the Award of the Construction Industry Arbitration Commission
(CIAC) in favor of respondent CMC/Monark/Pacific/Hi-Tri Joint Venture (Joint Venture).

The Republic of the PH through petitioner DPWH executed a contract with respondent Joint Venture
for the construction of a road project in Zamboanga Del Sur. While the project was on going,
respondent’s truck and equipment were set on fire along with a bombing incident that happened at
their hatching plant. Their several written demands for extension and payment of the foreign
component of the contract remained unheeded. Thus, they filed a complaint against DPWH before
CIAC for the recovery of their claims.

CIAC promulgated an award with legal interest only on the ground that respondent itself admitted that
there was no provision in the contract for interest at the rate of 24% per annum on delayed payments.
Respondent argues that the amount of 24% interest is payment for actual damages and not stipulated
interest.

ISSUE:
Is respondent Joint Venture entitled to an award of actual damages in the form of interest at the rate of
24% despite absence of such stipulation in the contract?

HELD:
No, respondent Joint Venture is not entitled to actual damages in the form of interest at the rate of
24%. It is fundamental that a contract is the law between the parties and, absent any showing that its
provisions are wholly or in part contrary to law, morals, good customs, public order, or public policy, it
shall be enforced to the letter by the courts.

In the case herein, respondent was not able to establish the basis of its claim that it is entitled to an
award of 24% interest. Moreover, as found by the CA and CIAC, the parties had agreed to delete the
provision on interest on delayed payments, since the project was funded by the Asian Development
Bank.

There is also no basis to award respondent 24% interest as actual damages for the additional
expenses it incurred due to petitioner's delayed payments. Before actual damages may be awarded, it
is imperative that the claimant proves its claims first.

In this case, respondent has not sufficiently shown how awarding it 24% interest per annum on
delayed payments corresponds to the actual damages it allegedly suffered. Respondent failed to show
a causal relation between the alleged losses and the injury it suffered from petitioner's actions.

Therefore, only the legal interest shall be awarded in absence of any stipulation by the parties to the
contract as to such rate of interest.
MANAGEMENT CONTRACT IS A FORM OF STIPULATION POUR AUTRUI
In the performance of its job, an arrastre operator is bound by the management contract it had executed with
the Bureau of Customs. However, a management contract, which is a sort of a stipulation pour autrui within the
meaning of Article 1311 of the Civil Code, is also binding on a consignee because it is incorporated in the gate
pass and delivery receipt which must be presented by the consignee before delivery can be effected to it. The
insurer, as successor-in-interest of the consignee, is likewise bound by the management contract. (Oriental
Assurance v. Ong, G.R. No. 189524, October 11, 2017)

x—————x

MANAGEMENT CONTRACT IS A FORM OF STIPULATION POUR AUTRUI

In the performance of its job, an arrastre operator is bound by the management contract it had executed with
the Bureau of Customs. However, a management contract, which is a sort of a stipulation pour autrui within the
meaning of Article 1311 of the Civil Code, is also binding on a consignee because it is incorporated in the gate
pass and delivery receipt which must be presented by the consignee before delivery can be effected to it. The
insurer, as successor-in-interest of the consignee, is likewise bound by the management contract. (Oriental
Assurance v. Ong, G.R. No. 189524, October 11, 2017)

ORIENTAL ASSURANCE CORPORATION vs. MANUEL ONG, doing business under the name WESTERN
PACIFIC TRANSPORT SERVICES AND/OR ASIAN TERMINALS
G.R. No. 189524, October 11, 2017
Leonen, J.

FACTS:
This is a petition for review on certiorari under Rule 45 filed by petitioner Oriental Assurance Corporation
seeking a review of the resolution of the CA affirming the RTC’s dismissal of the complaint against respondent
Manuel Ong on the ground that petitioner’s claim has already prescribed.

JEA Steel Industries, Inc. imported coil steel sheets from South Korea. Upon arrival of the vessel at the Manila
South Harbor, the coils were discharged and stored under the custody of the arrastre contractor, Asian
Terminals. They were then loaded on the trucks of respondent Manuel Ong and delivered to JEA Steel’s plant
in Cavite. Upon arrival and inspection, eleven of the coils were found to be damaged. Petitioner Oriental, as
insurer of JEA Steel, paid the latter for the damaged coils. It then demanded indemnity from respondent but
were refused.

Asian Terminals argues that Oriental’s claim was already barred for the latter’s failure to file a notice of claim
within the 15-day period provided in the Gate Pass. Oriental contends that it was not aware of the provisions of
the Gate Pass or the Management Contract, neither of which it was a party to. Consequently, it cannot be
bound by the stipulation limiting the liability of Asian Terminals.

ISSUE:
Is petitioner Oriental Assurance bound by the provisions of the Management Contract and the Gate Pass as
the insurer-subrogee and successor-in-interest of consignee JEA Steel

HELD:
Yes, the provisions of the Management Contract and the Gate Pass as to the 15-day prescriptive period is
binding upon petitioner Oriental Assurance. In the performance of its job, an arrastre operator is bound by the
management contract it had executed with the Bureau of Customs. However, a management contract, which is
a sort of a stipulation pour autrui within the meaning of Article 1311 of the Civil Code, is also binding on a
consignee because it is incorporated in the gate pass and delivery receipt which must be presented by the
consignee before delivery can be effected to it. The insurer, as successor-in-interest of the consignee, is
likewise bound by the management contract. Indeed, upon taking delivery of the cargo, a consignee (and
necessarily its successor-in-interest) tacitly accepts the provisions of the management contract, including those
which are intended to limit the liability of one of the contracting parties, the arrastre operator.

As subrogee, petitioner merely stepped into the shoes of the consignee and may only exercise those rights that
the consignee may have against the wrongdoer who caused the damage. And since the right of action of the
consignee is subject to a precedent condition stipulated in the Gate Pass, which includes by reference the
terms of the Management Contract, necessarily a suit by the insurer is subject to the same precedent condition.
Therefore, the provisions of a gate pass or of an arrastre management contract are binding on an insurer-
subrogee even if the latter is not a party to it.
RESCISSION UNDER ARTICLE 1191 OF THE CIVIL CODE IS THE PROPER REMEDY WHEN A
PARTY BREACHES A RECIPROCAL OBLIGATION
Rescission under Article 1191 of the Civil Code is the proper remedy when a party breaches a
reciprocal obligation. Because each case has its own distinct circumstances, this Court's power to fix a
period of an obligation under Article 1197 is discretionary and should be exercised only if there is just
cause (Camp John Hay Development Corporation vs. Charter Chemical and Coating
Corporation, G.R. No. 198849, August 7, 2019).

x—————x

RESCISSION UNDER ARTICLE 1191 OF THE CIVIL CODE IS THE PROPER REMEDY WHEN A
PARTY BREACHES A RECIPROCAL OBLIGATION
Rescission under Article 1191 of the Civil Code is the proper remedy when a party breaches a
reciprocal obligation. Because each case has its own distinct circumstances, this Court's power to fix a
period of an obligation under Article 1197 is discretionary and should be exercised only if there is just
cause (Camp John Hay Development Corporation vs. Charter Chemical and Coating
Corporation, G.R. No. 198849, August 7, 2019).

Camp John Hay Development Corporation vs. Charter Chemical and Coating Corporation
G.R. No. 198849, August 7, 2019
Leonen, J.

FACTS:
Camp John Hay Development Corporation (hereinafter Camp John) is the investment arm of a
consortium engaged in the construction of the Camp John Hay Manor in Baguio City. In January 2001,
Camp John entered into a Contractor's Agreement with Charter Chemical and Coating Corporation
(hereinafter Charter Chemical), the company awarded to complete the interior and exterior painting
works of unit 2E of the Camp John Hay Manor for P15,500,000.00. This was inclusive of the price of
two (2)-studio type units at Camp John Hay Suites, the total amount of which would be based on the
units chosen by Charter Chemical.

In 2003, Charter Chemical completed the painting works, after which Camp John issued a Final
Inspection and Acceptance Certificate belatedly on May 30, 2005. Charter Chemical demanded the
execution of the deed of sale and delivery of the titles of the 2 units in September 2004, with a follow-
up in April 2005. In June 2005, Camp John and Charter Chemical executed contracts to sell. In
August 2005, Camp John issued certifications to Charter Chemical that the 2 units were fully paid
under their offsetting scheme. However, the units were not delivered because the construction of
Camp John Hay Suites was not yet complete.

Camp John had initially estimated that the construction would be completed by 2006. In a Lease
Agreement executed October 19, 1996, Camp John and Bases Conversion on and Development
Authority (BCDA) provided for a period of 3.5 years from the execution of the Lease Agreement to
complete the various physical components in Camp John Hay. When this timetable was not followed
due to alleged mutual delays and force majeure, they revised the targeted completion dates.
Admitting various unforeseen events, Camp John again failed to complete its construction on
2006.

Due to the subsisting construction delay in the construction, Charter Chemical wrote Camp John,
demanding that it transfer the units or pay the value of these units. When it felt that further demands
would be futile, Charter Chemical filed before the Construction Industry Arbitration Commission a
Request for Arbitration under the arbitration clause. The arbitral tribunal ruled that Charter Chemical
was entitled to its claim for the value of the two (2) units. The ruling was affirmed by CA.

In a PFR on Certiorari, Camp John contends that the action filed should have been for the fixing of a
period under Articles 1191 and 1197 of CC, and not an action for the rescission of the contract.
Charter Chemical argues that since Camp John was already delayed in delivering the units in 2007,
the arbitral tribunal and CA correctly applied Article 1191 of CC, awarding indemnity for damages to
them.
ISSUE:
What is the proper remedy in the case: Rescission under Art. 1191 of the Civil Code or the fixing of the
period by the court under Art. 1197 of the same law? RESCISSION UNDER ART. 1191

HELD:
1. RESCISSION OF THE CONTRACT IS SANCTIONED HERE.

Under the contract, petitioner and respondent have reciprocal obligations. Respondent, for its part,
was bound to render painting services for petitioner’s property. This was completed by respondent in
2003, after which it was belatedly issued a clearance in 2005. Meanwhile, in accordance with the
Contractor’s Agreement, petitioner paid part of the contract price with the remaining balance to be paid
through offsetting of two (2) Camp John Hay Suites units. However, despite incessant demands from
respondent, petitioner failed to deliver these units because their construction had yet to be completed.
The law, then, gives respondent the right to seek rescission because petitioner could not comply with
what is incumbent upon it.

Rescission on account of breach of reciprocal obligations is provided under Article 1191 of the Civil
Code which provides: The power to rescind obligations is implied in reciprocal ones, in case one of the
obligors should not comply with what is incumbent upon him. The injured party may choose between
the fulfillment and the rescission of the obligation, with the payment of damages in either case. He may
also seek rescission, even after he has chosen fulfillment, if the latter should become impossible. The
court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons who have acquired the thing, in
accordance with articles 1385 and 1388 and the Mortgage Law.

This provision refers to rescission applicable to reciprocal obligations. It is invoked when there is
noncompliance by one (1) of the contracting parties in case of reciprocal obligations. Reciprocal
obligations are those which arise from the same cause, and in which each party is a debtor and a
creditor of the other, such that the obligation of one is dependent upon the obligation of the other. They
are to be performed simultaneously such that the performance of one is conditioned upon the
simultaneous fulfillment of the other.”

Rescission under Article 1191 will be ordered when a party to a contract fails to comply with his or her
obligation. Rescission “is a principal action that is immediately available to the party at the time that the
reciprocal obligation was breached.” The right of rescission of a party to an obligation under Article
1191 of the Civil Code is predicated on a breach of faith by the other party who violates the reciprocity
between them. The breach contemplated in the said provision is the obligor’s failure to comply with an
existing obligation. When the obligor cannot comply with what is incumbent upon him, the obligee may
seek rescission and, in the absence of any just cause for the court to determine the period of
compliance, the court shall decree the rescission. Resolution grants the injured party the option to
pursue, as principal actions, either a rescission or specific performance of the obligation, with payment
of damages in either case.

2. ON THE OTHER HAND, SC CANNOT CURE THE DEFICIENCY HERE BY FIXING THE
PERIOD OF THE OBLIGATION. THERE IS NO JUST CAUSE FOR THE SC TO FIX THE
PERIOD FOR THE BENEFIT OF PETITIONER.

Article 1197 applies “when the obligation does not fix a period but from its nature and circumstances it
can be inferred that a period was intended.” This provision allows the courts to fix the duration
“because the fulfillment of the obligation itself cannot be demanded until after the court has fixed the
period for compliance therewith and such period has arrived.” The power of the courts to fix a period is
discretionary. The surrounding facts of each case must be taken into consideration in deciding whether
the fixing of a period is sanctioned. The discretion to fix an obligation’s period is addressed to the
court’s judgment and is tempered by equitable considerations. SC mentioned instances when the
court refused to fix a period, citing Central Philippine University vs. CA and Araneta vs. Philippine
Sugar Estates as bases.

Here, there is no just cause for SC to determine the period of compliance. As can be gleaned from the
records of this case, the obligation of petitioner to build the Camp John Hay Suites had been dragging
for years even before it entered into the Contractor’s Agreement with respondent. The MOA that
petitioner executed with BCDA shows that the construction of the Camp John Hay Suites began in
1996. When respondent demanded the units’ transfer in 2007, more than 10 years had lapsed; yet,
within those years, petitioner was still not able to complete the construction of the Camp John Hay
Suites. To tolerate petitioner’s excuses would only cause more delay and burden to respondent. To
belatedly fix the period for petitioner’s compliance would mean refusing immediate payment to
respondent. Petitioner’s noncompliance with its obligation to deliver the 2 units as payment to
respondent can no longer be excused. The law and jurisprudence are clear. When the obligor cannot
comply with its obligation, the obligee may exercise its right to rescind the obligation, and the courts
will order the rescission in the absence of any just cause to fix the period. Here, lacking any
reasonable explanation and just cause for the fixing of the period for petitioner’s noncompliance, the
rescission of the obligation is justified.

3. ON THIS NOTE, SC MADE A CORRELATION BETWEEN THE RESCISSION MENTIONED IN

ART.1191 (WHICH SOME LEGAL LUMENARIES CALL AS “RESOLUTION”) AND THE ONE
MENTIONED IN ART. 1385.

Rescission of the obligation under Article 1191 is a declaration that a contract is void at its inception.
Its effect is to restore the parties to their original position, insofar as practicable. Rescission has the
effect of “unmaking a contract, or its undoing from the beginning, and not merely its termination.”
Hence, rescission creates the obligation to return the object of the contract. It can be carried out only
when the one who demands rescission can return whatever he may be obliged to restore. To rescind
is to declare a contract void at its inception and to put an end to it as though it never was. It is not
merely to terminate it and release the parties from further obligations to each other, but to abrogate it
from the beginning and restore the parties to their relative positions as if no contract has been made.

Mutual restitution is required in cases involving rescission under Article 1191. “Where a contract is
rescinded, it is the duty of the court to require both parties to surrender that which they have
respectively received and to place each other as far as practicable in his original situation; the
rescission has the effect of abrogating the contract in all parts.”

Restitution under Article 1385 of the Civil Code equally applies for rescission under Article 1191.
Despite the fact that Article 1124 of the old Civil Code from whence Article 1191 was taken, used the
term “resolution”, the amendment thereto (presently, Article 1191) explicitly and clearly used the term
“rescission”. Unless Article 1191 is subsequently amended to revert back to the term “resolution”, SC
has no alternative but to apply the law, as it is written.

Article 1385 provides: Rescission creates the obligation to return the things which were the object of
the contract, together with their fruits, and the price with its interest; consequently, it can be carried out
only when he who demands rescission can return whatever he may be obliged to restore. Neither shall
rescission take place when the things which are the object of the contract are legally in the possession
of third persons who did not act in bad faith. In this case, indemnity for damages may be demanded
from the person causing the loss.

Although rescission repeals the contract from its inception, it does not disregard all the consequences
that the contract has created. What mutual rescission entails is “the return of the benefits that each
party may have received as a result of the contract.”

Here, it is clear that only petitioner benefited from the contract. Respondent has already performed the
painting works in 2003, and it was accepted by petitioner as satisfactory. Since this service cannot be
undone and petitioner has already enjoyed the value of the painting services over the years,
respondent is entitled to the payment of the painting services with interest in accordance with Articles
1191 and 2210 of the Civil Code. The interest shall be computed from the date of extrajudicial demand
by respondent in accordance with Article 1169 of the Civil Code.
FRAUD MUST BE SERIOUS IN ORDER TO ANNUL THE CONTRACT, OTHERWISE, THERE MAY ONLY
BE CLAIM FOR DAMAGES
There are two types of fraud contemplated in the performance of contracts: dolo incidente or incidental fraud
and dolo causante or fraud serious enough to render a contract voidable. If there is fraud in the performance of
the contract, then this fraud will give rise to damages. If the fraud did not compel the imputing party to give his
or her consent, it may not serve as the basis to annul the contract, which exhibits dolo causante. However, the
party alleging the existence of fraud may prove the existence of dolo incidente. This may make the party
against whom fraud is alleged liable for damages (Tankeh v. Development Bank of the Philippines, G.R. No.
171428, November 11, 2013).

x—————x

FRAUD MUST BE SERIOUS IN ORDER TO ANNUL THE CONTRACT, OTHERWISE, THERE MAY ONLY
BE CLAIM FOR DAMAGES

Tankeh v. Development Bank of the Philippines

G.R. No. 171428, November 11, 2013
Leonen, J.

FACTS:

This is a Petition for Review on Certiorari praying that the decision of the CA be reversed, and the
decision of the RTC be affirmed.

Alejandro was approached by his brother, Ruperto, President of Sterling Shipping Lines (SSL),
informing him that the Ruperto was operating a new shipping line business and offered Alejandro 1000 shares
worth P1M to be a director of the business. Alejandro accepted the offer based on the promised that he be part
of the admin staff so that he can oversee the operation of the business plus his son, who is a practicing lawyer
would be given a position in the company.

A loan was applied from DBP for financing of an ocean-going vessel with the conditions that: 1)
mortgage be constituted over the vessel, 2) Ruperto and Alejandro Tankeh, other corporate officers and
SSL become liable jointly and severally for the amount of the loan ; 3) future earnings of the mortgage
should be assigned to DBP, and 4) DBP is assigned to no less than 67% of the voting shares of the company.
Alejandro signed the Assignment of Shares and the promissory note making him liable jointly and severally for
the amount of the loan. Upon realizing that he was only being made a tool to realize the purposes of Ruperto,
Alejandro officially informed the company by means of letter that he has severed his connection with the
company and asking the board to pass a resolution to released him from his liabilities with DBP and notify the
latter about this.

Despite the assignment of the vessel and cash equity contribution of SSL to cover part of the
acquisition cost of the vessel and the like, the promissory note still subsisted. Alejandro filed several Complaint
against DBP, praying that the promissory note be declared null and void and that he be absolved from any
liability from the mortgage of the vessel and the note in question. He alleged that Ruperto and the other officers
had exercised deceit and fraud in causing Alejandro to bind himself jointly and severally to pay DBP. Although
he had been made a stockholder and director of SSL., he had been a director in name only, and it was Ruperto
who invested on the company and he had not participated in the board meetings.

ISSUE:
Is the fraud alleged to have been employed by Ruperto serious enough as to warrant the annulment of
the loan contract?

HELD:
No. There is only incidental fraud in this case which may be a ground for claim of damages, but not
annulment of contracts.

The distinction between fraud as a ground for rendering a contract voidable or as basis for an award of
damages is provided in Article 1344: In order that fraud may make a contract voidable, it should be serious
and should not have been employed by both contracting parties. Incidental fraud only obliges the person
employing it to pay damages.

There are two types of fraud contemplated in the performance of contracts: dolo incidente or incidental
fraud and dolo causante or fraud serious enough to render a contract voidable. If there is fraud in the
performance of the contract, then this fraud will give rise to damages. If the fraud did not compel the imputing
party to give his or her consent, it may not serve as the basis to annul the contract, which exhibits dolo
causante. However, the party alleging the existence of fraud may prove the existence of dolo incidente. This
may make the party against whom fraud is alleged liable for damages.

Article 1340 of the Civil Code recognizes the reality of some exaggerations in trade which negates
fraud. It reads: The usual exaggerations in trade, when the other party had an opportunity to know the facts,
are not in themselves fraudulent.

Given the standing and stature of Alejandro, he was in a position to ascertain more information about
the contract. The following facts show that Alejandro was fully aware of the magnitude of his undertaking: First,
Alejandro was fully aware of the financial reverses that SSL had been undergoing, and he took great pains to
release himself from the obligation. Second, his background as a doctor, as a bank organizer, and as a
businessman with experience in the textile business and real estate should have apprised him of the irregularity
in the contract that he would be undertaking. This meant that at the time Alejandro gave his consent to become
a part of the corporation, he had been fully aware of the circumstances and the risks of his participation. Intent
is determined by the acts. Finally, the records showed that Alejandro had been fully aware of the effect of his
signing the promissory note. The bare assertion that he was not privy to the records cannot counteract the fact
that Alejandro himself had admitted that after he had severed ties with his brother, he had written a letter
seeking to reach an amicable settlement with Rupert. Alejandro’s actions defied his claim of a complete lack of
awareness regarding the circumstances and the contract he had been entering.

The required standard of proof – clear and convincing evidence – was not met. There was no dolo
causante or fraud used to obtain the Alejandro’s consent to enter into the contract. Alejandro had the
opportunity to become aware of the facts that attended the signing of the promissory note. He even admitted
that he has a lawyer-son who the Alejandro had hoped would assist him in the administration of Sterling
Shipping Lines, Inc. The totality of the facts on record belies Alejandro’s claim that fraud was used to obtain his
consent to the contract given his personal circumstances and the applicable law.

However, in refusing to allow Alejandro to participate in the management of the business, Ruperto was
liable for the commission of incidental fraud. In Geraldez, this Court defined incidental fraud as "those which
are not serious in character and without which the other party would still have entered into the contract.
Although there was no fraud that had been undertaken to obtain Alejandro’s consent, there was fraud in the
performance of the contract.

Ancilliary Issue:

What amount of damages may be awarded by the court in favor of Alejandro? Kommentar [EMCV1]: Not sure on
whether the issue on torts or damages
The enumeration on Article 1157 as to sources of obligations does not preclude the possibility that a should be included. (the instruction
single action may serve as the source of several obligations to pay damages in accordance with the Civil Code. sheet required the discussion for this
Thus, the liability of respondent Ruperto is based on the law, under Article 1344, which provides that the to be added)
commission of incidental fraud obliges the person employing it to pay damages.
These are only ancillary, and not too
There was also a patent abuse of right on the part of respondent Tankeh. This abuse of right is doctrinal. Focus on the fraud aspect of
included in Articles 19 and 21 of the Civil Code. Ruperto abused his right to pursue undertakings in the interest the case. The case is too long, with
of his business operations. This is because of his failure to at least act in good faith and be transparent with very important explanations on the
Alejandro regarding Sterling Shipping Lines, Inc.’s daily operations. concept of fraud.

As to award of moral damages:

 In Francisco v. Ferrer, the Court ruled that moral damages may be awarded on the following bases: To
recover moral damages in an action for breach of contract, the breach must be palpably wanton, reckless,
malicious, in bad faith, oppressive or abusive.

Under the provisions of this law, in culpa contractual or breach of contract, moral damages may be
recovered when the defendant acted in bad faith or was guilty of gross negligence (amounting to bad faith) or in
wanton disregard of his contractual obligation and, exceptionally, when the act of breach of contract itself is
constitutive of tort resulting in physical injuries.

An award of moral damages would require certain conditions to be met, to wit: (1) first, there must be
an injury, whether physical, mental or psychological, clearly sustained by the claimant; (2) second, there must
be culpable act or omission factually established; (3) third, the wrongful act or omission of the defendant is the
proximate cause of the injury sustained by the claimant; and (4) fourth, the award of damages is predicated on
any of the cases stated in Article 2219 of the Civil Code.

In this case, the four elements cited in Francisco are present. First, petitioner suffered an injury due to
the mental duress of being bound to such an onerous debt to Development Bank of the Philippines and Asset
Privatization Trust. Second, the wrongful acts of undue exclusion done by respondent Ruperto V. Tankeh
clearly fulfilled the same requirement. Third, the proximate cause of his injury was the failure of respondent
Ruperto V. Tankeh to comply with his obligation to allow petitioner to either participate in the business or to
fulfill his fiduciary responsibilities with candor and good faith. Finally, Article 2219 of the Civil Code provides
that moral damages may be awarded in case of acts and actions referred to in Article 21, which, as stated, had
been found to be attributed to respondent Ruperto V. Tankeh.

As to award of exemplary damages:

To justify an award for exemplary damages, the wrongful act must be accompanied by bad faith, and
an award of damages would be allowed only if the guilty party acted in a wanton, fraudulent, reckless or
malevolent manner. In this case, this Court finds that respondent Ruperto V. Tankeh acted in a fraudulent
manner through the finding of dolo incidente due to his failure to act in a manner consistent with propriety, good
morals, and prudence.
IN BIDDING CONTRACTS, THIS COURT HAS RULED THAT THE AWARD OF THE CONTRACT TO THE
BIDDER IS AN ACCEPTANCE OF THE BIDDER'S OFFER.
Its effect is to perfect a contract between the bidder and the contractor upon notice of the award to the bidder.
Thus, the award of a contract to a bidder perfects the contract. Failure to sign the physical contract does not
affect the contract's existence or the obligations arising from it (Metro Rail Transit Development Corp. v.
Gammon Philippines, Inc., G.R. No. 200401, January 17, 2018).
.

x—————x

IN BIDDING CONTRACTS, THIS COURT HAS RULED THAT THE AWARD OF THE CONTRACT TO THE
BIDDER IS AN ACCEPTANCE OF THE BIDDER'S OFFER

Metro Rail Transit Development Corp. v. Gammon Philippines, Inc.

G.R. No. 200401, January 17, 2018
Leonen, J.

FACTS:

This is a Petition for Review on Certiorari assailing the CA’s decision which affirmed the CIAC
Decision. The CIAC awarded Gammon Philippines, Inc. (Gammon) its monetary claims for lost profits and
reimbursements for engineering services, design work, and site dewatering and clean up, due to breach of
contract.

This case involves MRT's MRT-3 North Triangle Description Project (Project), covering 54 hectares
of land, out of which 16 hectares were allotted for a commercial center. Parsons Interpro JV (Parsons) was the
Management Team authorized to oversee the construction’s execution. Gammon received from Parsons an
invitation to bid for the complete concrete works of the Podium. Gammon submitted three (3) separate bids and
won in the bidding. On August 27, 1997, Parsons issued a Letter of Award and Notice to Proceed (First Notice Kommentar [EMCV1]: The dates in
to Proceed) to Gammon, accompanied by the formal contract documents. Gammon signed and returned the this case are very important. Do not
First Notice to Proceed without the contract documents on September 2, 1997. By a second letter on delete them
September 3, 1997, Gammon also transmitted to Parsons a signed Letter of Comfort to guarantee its
obligations in the Project.

However, in a Letter dated September 8, 1997, MRT wrote Gammon that it would need one (1) or two
(2) weeks before it could issue the latter the Formal Notice to Proceed. On September 9, 1997, Gammon
transmitted the contract documents to Parsons. In a facsimile transmission sent on the same day, Parsons
directed Gammon "to hold any further mobilization activities."

On April 2, 1998, MRT issued in favor of Gammon another Notice of Award and Notice to Proceed
(Third Notice to Proceed). Gammon received from Parsons the Contract for the Construction and Development
of the Superstructure, MRT-3 North Triangle - Amended Notice to Proceed dated June 10, 1998 (Fourth Notice
to Proceed). Gammon wrote MRT, acknowledging the latter's intent to grant the Fourth Notice to Proceed to
another party despite having granted the First Notice to Proceed to Gammon. Thus, it notified MRT of its claims
for reimbursement for costs, losses, charges, damages, and expenses it had incurred due to the rapid
mobilization program in response to MRT's additional work instructions, suspension order, ongoing
discussions, and the consequences of its award to another party

MRT argues that there was no perfected contract between the parties as Gammon only accepted
MRT's offer after MRT had already revoked it. MRT claims that it withdrew its offer to Gammon in its
September 8, 1997 Letter, when it suspended the Project to review the foreign exchange rates and interest
rates. It emphasizes that while Gammon had already then returned the First Notice to Proceed, it did not return
the contract documents until September 12, 1997.By then, MRT had already withdrawn the First Notice to
Proceed, and the parties were already renegotiating the contract's cause and object.

On the other hand, Gammon maintains that there was a perfected contract between the parties. It
insists that MRT did not withdraw or modify its offer before Gammon signed and returned the First Notice to
Proceed and the contract documents. It claims that the contract was not cancelled and was only temporarily
and partially suspended, and this did not affect its perfection.

ISSUE:
Is there was a perfected contract of sale between MRT and Gammon.

HELD:
Yes, there is perfected contract. A contract is perfected when both parties have consented to the
object and cause of the contract. There is consent when the offer of one party is absolutely accepted by the
other party. The acceptance of the other party may be express or implied. However, the offering party may
impose the time, place, and manner of acceptance by the other party, and the other party must comply.

To determine when the contract was perfected, the acceptance of the offer must be unqualified,
unconditional, and made known to the offeror. Before knowing of the acceptance, the offeror may withdraw the
offer. Moreover, if the offeror imposes the manner of acceptance to be done by the offerree, accepts the offer in
a different manner, it is not effective, but constitutes a counter-offer, which the offeror may accept or reject.

In bidding contracts, this Court has ruled that the award of the contract to the bidder is an acceptance
of the bidder's offer. Its effect is to perfect a contract between the bidder and the contractor upon notice of the
award to the bidder. Thus, the award of a contract to a bidder perfects the contract. Failure to sign the physical
contract does not affect the contract's existence or the obligations arising from it.

Applying this principle to the case at bar, the Court finds that there is a perfected contract between
the parties. MRT has already awarded the contract to Gammon, and Gammon's acceptance of the award was
communicated to MRT before MRT rescinded the contract. The Invitation to Bid issued to Gammon stated that
MRT "will select the Bidder that [MRT] judges to be the most suitable, most qualified, most responsible and
responsive, and with the most attractive Price and will enter into earnest negotiations to finalize and execute
the Contract."

On May 30, 1997, Gammon tendered its bids. In a Letter dated July 14, 1997, Gammon submitted
another offer to MRT in response to the latter's invitation to submit a final offer considering the fluctuation in
foreign exchange rates and an odd-and-even vehicle restriction plan. Parsons thereafter issued the First Notice
to Proceed In its First Letter, Gammon signed and returned the First Notice to Proceed to signify its consent to
its prestations. In its Second Letter, Gammon transmitted to Parsons the signed Letter of Comfort to guarantee
its obligations in the Project.

On September 9, 1997, Gammon returned to Parsons the contract documents. MRT argues that the
return of the contract documents occurred after it had already revoked its offer However, MRT had already
accepted the offered bid of Gammon and had made known to Gammon its acceptance when it awarded the
contract and issued it the First Notice to Proceed on August 27, 1997. The First Notice to Proceed clearly laid
out the object and the cause of the contract. In exchange for P1,401,672,095.00, Gammon was to furnish
"labor, supervision, materials, plant, equipment and other facilities and appurtenances necessary to perform all
the works in accordance with [its bid]."

This acceptance is also manifested in the First Notice to Proceed when it authorized Gammon to
proceed with the work seven (7) days from its receipt or from the time the site is de-watered and cleaned up.
Thus, Gammon's receipt of the First Notice to Proceed constitutes the acceptance that is necessary to perfect
the contract.
PROPER REMEDY WHEN A PARTY BREACHES A RECIPROCAL OBLIGATION
Rescission under Article 1191 of the Civil Code is the proper remedy when a party breaches a reciprocal
obligation. It is invoked when there is noncompliance by one of the contracting parties in case of reciprocal
obligations (Camp John Hay Development Corporation vs. Charter Chemical Coating Corporation; GR No.
198849; Leonen, J.)

CAMP JOHN HAY DEVELOPMENT CORPORATION VS. CHARTER CHEMICAL AND COATING
CORPORATION
GR No. 198849; August 7, 2019
Leonen, J.

FACTS:
This is a Petition for Review on Certiorari assailing the Decision and Resolution of CA affirming the Final Award
issued by Construction Industry Arbitration Commission (CIAC) finding Charter Chemical and Coating
Corporation (Charter Chemical) to be entitled to the payment of monetary equivalent of two units in Camp John
Hay Suites in the total amount of P5, 900,00.00.

Camp John Hay Development Corporation (CJHD), the investment arm of a consortium engaged in the
construction of Camp John Hay in Baguio City, entered into a Contractor’s Agreement with Charter Chemical
to complete the interior and exterior painting works of unit 2E of Camp John Hay Manor for the contract price of
P15,500,000.00 inclusive of the price of 2 studio type units chosen by Charter Chemical.

In 2003, Charter Chemical completed the painting works, after which CJHD issued a Final Inspection and
Acceptance Certificate belatedly on May 30, 2005. Charter Chemical demanded the execution of the deed of
sale and delivery of the titles of the two units in September 2004, with a follow up in April 2005. In June 2005,
CJHD and Charter Chemical executed a contract to sell.

Due to unforseen delay in the construction, Charter Chemical, through counsel, wrote to CJHD demanding that
it transfers the units or pay the value of these units.

When it felt that further demands would be futile, Charter Chemical, on June 12, 2008, filed before CIAC a
request for arbitration under the arbitration clause in the Contractor’s Agreement which it ruled in favor of
Charter Chemical.

ISSUE:
Which between the rescission under article 1191 of the Civil Code or the fixing of the period by the court under
article 1197 of the same law is the proper remedy of the party?

HELD:
Rescission under Article 1191 of the Civil Code is the proper remedy. The court cannot fix the period in this
case.

Article 1191 provides that:

“The power to rescind obligations is implied in reciprocal ones in case one of the obligors should not comply
with what is incumbent upon him.

The injured party may choose between the fulfilment and rescission of obligation, with payment of damages in
either case. He may also seek rescission, even after he has chosen fulfilment, if the latter should have become
impossible.”

This provision refers to rescission applicable to reciprocal obligations. It is invoked when there is
noncompliance by one of the contracting parties in case of reciprocal obligations. The right of rescission of a
party to an obligation under article 1191 is predicated on a breach of faith by the other party who violates the
reciprocity between them. The breach contemplated in the said provision is the obligor’s failure to comply with
an existing obligation.

Under their contract, petitioner and respondent have reciprocal obligations. Respondent, for its part, was bound
to render painting services for petitioner’s property. This was completed in 2003. Meanwhile, in accordance
with the Contractor’s Agreement, petitioner paid part of the contract price with the remaining balance to be paid
through offsetting the two Camp John Hay Suites units. However, despite incessant demands, respondent,
failed to deliver these units. The law then gives respondents the right to seek rescission because petitioner
could not comply with what is incumbent upon him.

Petitioner’s claim that the fixing of the period under article 1197 is the proper remedy and not rescission under
article 1191. SC disagreed and held that it cannot cure the deficiency by fixing the period in this case, there is
no just cause for SC to determine the period of compliance.