Limitations of Contractual Stipulations (SCRA 40)

By: Atty. Severiano Tabios

Under Article 1306 of the Civil Code, 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. The second
clause of the said provision provides the limitations to contractual stipulations
This provision states the autonomous nature of contracts. Freedom to stipulate terms
and conditions is the essence of the contractual system provided such stipulations are
not contrary to the limitations imposed by law, morality, good customs, public order, and
public policy. It bears stressing that transgressions of the specific limitations of
contractual stipulations not only nullifies the contract but also subjects the parties in
appropriate cases to prosecution or denial of remedies.
It is important to note that while the legal system upholds the sanctity of a contract such
that a contract is deemed to be the law between the contracting parties, still it will have
to yield to the superior and legitimate exercise by the State of police power to promote
the general welfare of the people.

Basic Rules in the Interpretation of Contracts (SCRA 739)

By: Mauricio C. Ulep

Chapter 5 of the Civil Code provides for the Rules of Interpretation of Contracts, from
Article 1370 to 1379. The purpose of interpretation is to be able to know that the intent
of the parties so that the contract can be properly implemented.
The cardinal rule in the interpretation of contracts is embodies in the first paragraph of
Article 1370 of the Civil Code. Such provision is akin to the plain meaning rule which
provides that when the words are clear and unambiguous, the intent is to be discovered
only from the express language of the agreement. That the intention of the parties must
be sought is said to be the basic rule in the interpretation of contracts because all other
rules are but ancilliary to the ascertainment of the meaning intended by the parties.
Once the intention has been ascertained it becomes an integral part of the contract as
though it had been originally expressed therein in unequivocal terms.
Fundamentals of Void or Inexistent Contracts-SCRA 124

This annotation further explains the fundamentals of void or inexistent contract; the last kind of
defective contract. The following circumstances caused the inexistence or absolute nullity of contracts:
The void or inexistent contract may proceed from the illegality of the cause or object. It is also void
when the cause, object or purpose is contrary to law, morals, good customs, public order or public policy
or that the object is outside the commerce of men. Lastly, when the intention of the contracting parties
relative to the principal object, cannot be ascertained. The Supreme Court classified void contracts into
inexistent and illegal or illicit ones. To declare that the contract is void, the party must present
convincing proof.

Fundamental Characteristics of Void or Inexistent Contracts

We must take note the following characteristics of a void or inexistent contract.

First, void contracts have no legal effects and not susceptible to ratification since the essential elements
are void, inexistent or contrary to law, morals, good customs or outside the commerce of men. An
example of this is an agreement to stifle the prosecution of a crime. From the very beginning, such
agreement is void and hence ratification would be useless. 
Second, the defenses of inexistent or absolute nullity of a contract cannot be waived. However, it may
be barred by laches when the person delayed in asserting his right or claim having been afforded an
opportunity to institute a suit. Third, the action or defense for declaration of inexistence or nullity of a
contract is imprescriptible. However, such defense may be barred by laches, where plaintiff, who had
the opportunity to institute a case, delayed in asserting such right or claim. Lastly, such defense of nullity
or inexistence of a contract is not available to third persons since they are not directly affected by such
action. Only those persons who are principally or subsidiarily obliged may institute an action for
annulment.

The Essence of Compromise Agreement-SCRA 98

The basic law involving this subject matter is under the provisions of Article 2028 to 2041 of the New
Civil Code. Article 2028 of the New Civil Code states that a compromise is a contract whereby the
parties, by making reciprocal concessions, avoid litigation or put an end to one already commenced. The
parties adjust their difficulties by mutual consent by setting aside their differences and come up with a
mutual understanding regarding the obligation.

There are two kinds of compromise. The first one is an extrajudicial compromise, where the compromise
or contract to avoid lawsuit is made outside the sphere of court. The parties, without judicial
intervention, make an agreement to settle the issues at hand. The other one is judicial compromise
where it is made in or submitted to the court for approval in order to terminate a case already filed in
court. It is for the disposal of the court and the parties are enjoined to comply with the terms of the
agreement, ending the long battle of litigation.
The following must be remembered under this annotation: First, an Agreement between the contracting
parties, approved by the court, has the force and effect of a judgment, it shall be effective and executed
immediately. However, after court’s final judgment, parties may enter into a compromise agreement.
These are the binding effects on parties. Second, a decision based on a compromise agreement has the
effect of res judicata. The court’s decision based on the compromise agreement is final and executory.
Lastly, a compromise entered into by a lawyer is without effect if made without authority from the
principal party.

DIRECTOR OF FOREST ADMINISTRATION v. HON. RAMON C. FERNANDEZ

Facts:
On August 28, 1943, private respondent Eugenia Soriano de Gomez, represented by her husband
Teodoro Y. Gomez, file before the CFI of Pangasinan an application for the registration of her titles
to eleven (11) parcels of land situated in Pangasinan, to wit: Lots 1, 2, 3 and 4 of Plan Psu-24384;
and Lots 1, 2, 3, 4, 5 and 6 of Plan Psu-114232.
The Director of Forestry opposed the registration of Lot Nos. 1, 2, 3, 4, 5 and 6 (Plan Psu-114232)
on the ground that the same are within the public forest belonging to the Republic of the Philippines
under the control and administration of the Bureau and that the applicant Eugenia Soriano de
Gomez filed in the Bureau an application for registration as private woodland Lots Nos. 1, 2, 3, 4, 5,
and 6 of Psu-114232 in 1940 under informacion posesoria (a possessory information) dated April 6,
1895 but upon investigation conducted by said Bureau, it was found that the land has never been
brought to a state of cultivation, nor had she and her predecessors-in-interest been in continuous,
open, public and peaceful possession of the land.
The Reforestation Administration, on the other hand, opposed the registration of same lots on the
ground that the same are within the public forest under the control, supervision and administration of
the Reforestation Administration.
On December 18, 1968, the registration court rendered its decision on the case ordering the
issuance of the corresponding decree and certificate of title over the portion of the Plan Psu-114232
East of the road in Lot 6 of the same plan, in favor of the applicants.
The Bureau of Forestry and the Reforestation Administration appealed the decision of the land
registration court to respondent Court of Appeals. Respondent appellate court affirmed the decision
of the land registration court, hence, this petition.
Issues: 
1. Whether or not the land applied for became private property upon the issuance of Spanish title.
2. Whether or not the lands in question can be acquired by prescription.
RULING:
1. No. Under Article 393 of the Spanish Mortgage Law, the registered possessory information
proceedings do not ripen into ownership except under certain conditions such as: (a) that an
applicant has been in open possession of the land; (b) that an application to this effect has been filed
after the expiration of twenty (20) years from the date of such registration; (c) that such conversion
be announced by means of a proclamation in a proper official bulletin; (d) that there is a court order
for the conversion of the registration of possession into a record of ownership; and (e) that the
Register of Deeds make the proper record thereof in the Registry .
In the case at bar, none of these requisites have been complied with. It is, therefore, indisputable
that the registration of possession had not been converted into a registration of ownership in
accordance with ArticIe 393 of the Spanish Mortgage Law hence private respondents do not
possess a registerable title.
2. No. No possession or claim of ownership on the lands in question can vest title on the private
respondents, it being indisputable that they are public lands or parcels of land within the forest zone,
not subject to private appropriation. Forest lands of the public domain cannot be acquired by
prescription, its possession however long cannot ripen into private ownership. Forestlands cannot be
owned by private persons. It is not registerable whether the title is a Spanish title or a torrens title.
Private respondents have no registerable right over the whole lot described in Plan Psu-114232.
The petitions is granted and the appealed decision is Reversed and Set Aside.

Pacio vs Billion, 1 SCRA 384 (1961), G.R No. L-15088

Facts:
In 1901, Flaviano Pacio married Severa Jucutan. Herein defendants were their children. Severa died in
1930; and thereafter Flavio married the plaintiff Toribia Fontanilla, who bore him the other four
plaintiffs. The dispute between the parties in the La Union court of first instance, concerned two parcels
of land which defendants allegedly retained without any right thereto. The litigants later agreed to a
partition of the first parcel, and the court so decreed. As to the second parcel, a hearing was held, and it
was awarded to the defendants, on the ground that it had been donated propter nuptias to Severa, in
1901, by Flaviano Pacio, who was then admittedly the owner. The plaintiffs-appellants contend that the
donation was void, because it was not made in a public instrument.

Issue: 
Whether or not the donation was void because it was not made in a public instrument.
Ruling:
Yes, the donation was void because it was not made in a public instrument.
Art. 633 of the Spanish Civil Code states that "In order that a donation of real property be valid it must
be made by public instrument in which the property donated must be specifically described and the
amount of the encumbrances to be assumed by the donee expressed . . .." In 1901 when the gift was
made, the law was contained in the Spanish Civil Code, according to which, even between the parties,
the donation must be in a public instrument. Both husband and wife held possession of the land, and
the stipulation says that from 1933 the parties shared the harvests equally. At any rate, it is obvious that
normally, prescription by adverse possession can not exist between husband and wife. 
Therefore, it follows that Flaviano Pacio continued to be the owner of the land as the donation had no
effect and there was no prescription.
NDC vs Tobia, 7 SCRA 692 (1963)

Facts:
National Development Company, represented by its agent, The Philippine National Bank appealed an
order of the Court of First Instance of Negros Occidental dismissing their complaint upon the ground of
prescription of action.
In the complaint filed on March 22, 1960, NDC seeks to recover from Jose YULO TOBIAS, under a
promissory note of said defendant, dated and issued on May 13, 1946, for the sum of P7,000.00,
payable "on demand after date." Upon being summoned, Tobias filed a motion to dismiss upon the
ground that "the action upon which the complaint is based has prescribed long ago." NDC assails as
erroneous upon the theory that the statute of limitations does not run against them because the same is
an instrumentality of the Government.

Issue:
Whether or not the statute of limitations runs against the plaintiff, NDC.

Ruling:
Yes, the statute of limitations run against the plaintiff, NDC. 
The Court has held in the case of Association Cooperative de Credito Agricola de Miagao vs. Monteclaro
(74 Phil. 281), "even the Agricultural and Industrial Bank, which is a government owned and controlled
corporation and which has been created to promote agriculture and industry on a larger scale than
agriculture credit cooperative associations, cannot be said to exercise a sovereign function. It is, like all
other corporation capitalized by the Government, a business corporation," and, as such, its causes of
action are subject to the statute of limitations. 
In the case at bar, the plaintiff herein, NDC, does not exercise sovereign powers — and, hence, can not
invoke the exemptions thereof — but is an agency for the performance of purely corporate, proprietary
or business functions.
Therefore, the statute of limitations does run against the plaintiff, NDC, hence, the order appealed from
was affirmed by the Court.

The Fundamentals of Novation by Severiano S. Tabios

This annotation discusses thoroughly the fundamentals of Novation; as one of the modes of
extinguishing an obligation. Under this annotation it stated that Novation is never presumed, as shown
in the case of Ajax Marketing et al., vs. Court of Appeals, where the defense of Novation was interposed.
The Court held that there was no intent, expressly or by acts between the parties to novate, the Court
refused to recognize the existence of Novation.

Novation is the extinguishment of an obligation by the substitution or change of the obligation by a

subsequent one which extinguishes or modifies it. The following are the modes of Novation; either by
changing the object of principal conditions, or by substituting another in place of the debtor or by
subrogating a third person in the rights of the creditor.
In order to novate an obligation, the following requisites must be present:
First, the existence of a previous valid obligation between the contracting parties. Second, the existence
of an agreement of parties to new obligation which partakes that the two agreements, the old and the
new, must be incongruent. Third, the intention of the contracting parties to extinguish the old
obligation. Lastly, the validity of the new obligation. Novation is distinct since it serves two-fold purpose,
as gleaned in the requisites, the extinguishment of the old obligation and the giving birth to a new
obligation to take over the old.

DBP vs. Adil 161 SCRA 121 (1990) Case Digest

Facts: 
On February 10,1940 spouses Patricio Confesor and
Jovita Villafuerte obtained an agricultural loan from the Agricultural and Industrial Bank (AIB), now the
Development Bank of the Philippines (DBP), in the sum of P2,000.00, Philippine Currency, as evidenced
by a promissory note of said date whereby they bound themselves jointly and severally to pay the
account in ten (10) equal yearly amortizations. As the obligation remained outstanding and unpaid even
after the lapse of the aforesaid tenyear period, Confesor, who was by then a member of the Congress of
the Philippines, executed a second promissory note on April 11,1961 expressly acknowledging said loan
and promising to pay the same on or before June 15, 1961. Said spouses not having paid the obligation
on the specified date, the DBP filed a complaint dated September 11, 1970 in the City Court of Iloilo City
against the spouses for the payment of the loan. Spouses appealed in the CFI and the decision was
reversed favouring the spouses.
Hence, DBP filed a petition.

Issue: Whether or not the right to prescription may be renounced or waived.

Ruling: Yes. There is no doubt that prescription has set in as to the first promissory note of February
10,1940. However, when respondent Confesor executed the second promissory note on April 11, 1961
whereby he promised to pay the amount covered by the previous promissory note on or before June 15,
1961, and upon failure to do so, agreed to the foreclosure of the mortgage, said respondent thereby
effectively and expressly renounced and waived his right to the prescription of the action covering the
first promissory note. 
A party acknowledges the correctness of a debt and promises to pay it after the same has prescribed
and with full knowledge of the prescription he thereby waives the benefit of prescription. This is not a
mere case of acknowledgment of a debt that has prescribed but a new promise to pay the debt.

The court a quo held that in signing the second promissory note alone, respondent Confesor cannot
thereby bind his wife, respondent Jovita Villafuerte. The Supreme Court disagreed. Under Article 165 of
the Civil Code, the husband is the administrator of the conjugal partnership. As such administrator, all
debts and obligations contracted by the husband for the benefit of the conjugal partnership, are
chargeable to the conjugal partnership.Hence, the conjugal partnership is liable for this obligation.
Petition is granted reinstating the decision of the City Court of Iloilo City.
CASE DIGEST:
Catholic Bishop of Balanga vs Court of Appeals
G.R No. 112519, Nov. 14, 1996

FACTS: The case involves a parcel of land formerly owned by the Catholic Bishop of Balanga. On August
30, 1936, the then parish priest and administrator of all the properties of the church, executed an
Escritura De Donacion to Ana de los Reyes, as a reward for her service to the Church. She accepted the
donation but failed to register the deed of donation for unknown reasons. Before the  death of de los
Reyes, her nephew, the appellant in this case inherited the said parcel of land and took possession of it.
However, the complainant-appellee on November 5, 1985 or more than 49 years after the donation was
executed, questioned the donation.

ISSUE: WON the doctrine of laches is applicable.

RULING: Yes, the petitioner’s inaction for 49 years since the execution of the deed of donation, despite
its knowledge of respondent’s adverse, peaceful and continuous possession of the property in the
concept of an owner, warrants the application of doctrine of laches. The court ruled that where a party
allows a number of years, in this case 49 years, to lapse from the emergence of cause of action, before
instituting court action to enforce claim, such action would be barred by the equitable defense of laches.
Therefore, the said application of laches is warranted.

CASE DIGEST:

Florencia Q. De Abraham et.al. vs. Intestate Estate of Juan C. Ysmael

G.R. No. L-16741 Jan. 31, 1962

FACTS: On September 1943, Juan C. Ysmael obtained a loan from Alfonso Abraham in the amount of
P12,500 in Japanese currency notes and executed a promissory note. Alfonso Abraham died on 1945
while the former died on 1952 leaving the note still unpaid. The heirs of the Alfonso filed a
“Reclamation”, demanding payment of the amount. After a lengthy court hearing, the lower court
granted the petition and allowed the claim against the intestate estate of Ysmael. The administratix
appealed to the Court of Appeals and eventually the decision was overturn. It ruled that the claim is
barred by prescription, estoppel and laches.

ISSUE: WON the petition is barred by prescription and laches.

RULING: No. The defense of laches may only prosper if the elements of laches are present: first, the
conduct on the part of defendant, giving rise to the situation complained of; second, delay in asserting
the right after knowledge or notice; third, lack of knowledge or notice on the part of the defendant that
complainant would assert the right and lastly, injury or prejudice to the defendant in the event relief is
accorded. The last element, under this case, may not exist against the respondent since neither injury or
prejudice may occur by the allowance of the claim. The mere lapse of time during which there was
neglect to enforce the right is not the sole basis of the rule on laches. The changes of conditions which
arise during the period there has been neglect may also be considered. When there are no changes of
conditions detrimental to the defendant, the defense of laches may not prosper.

CASE DIGEST:
Z.E Lotho, Inc. vs Ice and Cold Storage Industries of the Philippines, Inc., et al.
G.R. No. L-16563 Dec. 28, 1961

FACTS: The plaintiff-appellant is a corporation that operates an ice plant and sells it at wholesale or retail
in the towns of San Pablo, Sta. Rosa and Cabuyao. The controversy started when Lotho’s dealers started
to buy the bulk of the ice from the defendant company from 1948 to 1955. Sometime in 1955, Lotho
claimed that the sales made to the dealers by the defendant company amounts to indirect sales within
its authorized territory. Lotho made efforts to discuss the matter to defendant company but it
eventually failed. Litigation ensued but the trial court dismissed the action. Lotho urged the Supreme
Court to overturn the decision which was based on the ground of laches and consent on its part, since
those defenses are not pleaded nor their elements were proven.

ISSUE: WON, the equitable defense of laches should apply

RULING: Yes, the defense of laches will apply here. The court ruled that the elements of the defense of
laches were satisfied.First, the conduct of Lotho in giving rise to the situation of which complaint is
made, when it claimed that there was an invasion of its rights.. The delay in asserting its rights when
Lotho turn a blind eye to the activities of its dealers. Furthemore, it took seven years that Lotho finally
asserted its right against the defendant who had no knowledge of the controversy. Lastly, it would be
inequitable to allow Lotho, who sleep to assert its right, to enforce his legal rights as enunciated in the
doctrine of stale demands

CASE DIGEST:
Nielson & Company, Inc., vs Lepanto Consolidated Mining Company
G.R No. L-21601 Dec. 17, 1966

FACTS: The case involves the two companies who executed an operating agreement before WWII where
Nielson will operate and manage the mining properties of Lepanto for a certain fee and share of profits.
However, the Board of Lepanto decided to renegotiate the agreement since it deemed the mechanics
unfair. They entered into a new contract with new terms and conditions. However, the operations were
disrupted because of the World War II. Consequently, Lepanto took over the management after
liberations. The two were in conflict over the status of the operating contract since it stipulated that the
contract shall remain in suspension in case of fortuitous event or force majeure such as war, as shown in
this case. Nielson brought an action of to recover damages allegedly suffered by the former because of
the refusal to comply with the terms of the contract. Nevertheless, Lepanto set up special defenses,
among them, prescription and laches, as bars against the institution of the action.
ISSUE: WON appellant Nielson is guilty of laches.

RULING: No, the Court ruled that Nielson cannot be held guilty of laches in filing the instant case since it
was the inevitable result of the protracted negotiations between the parties concerning the settlement
of their differences.The said delay was caused by both parties because of the failed renegotiations.
Furthermore, the elements of laches were not satisfied here. Prescription is based on a fixed time;
laches is not. Therefore, Nielson is not guilty of laches.

ANNOTATION:
Novation 12 SCRA 759
The Concept of Novation was discussed under this annotation, along with its classification.

Novation is the substitution or change of an obligation by another, resulting in its extinguishment or

modification. It has two-fold purpose; to extinguish the old obligation and to create a new one.

Novation may be classified according to its essence and forms.

1. Essence
Novation maybe objective or real, subjective or personal and mixed. 
a. Objective or real novation is when there is a change of the object or principal conditions of an existing
obligation. 
b. Subjective or personal is there is a change of either the person of the debtor or of the creditor. It has
two forms, substitution by expromision, where a third party initiates the substitution and delegacion,
where the original debtor offers that other person will replace him and the creditor accepts thereafter.
On the part of the creditor, personal novation may be effected by subrogating a third person in the
rights of the creditor. It can be conventional, when by the very agreement of the original creditor, the
third person will substitute and legal which takes place by operation of law. 
c. Mixed Novation may be both objective and subjective serves as dual purpose.

2. Forms
Novation may be express or tacit. 
a. Express when it is declared in unequivocal terms that the old obligation is extinguished by a new one.  
b. Tacit when the old and new obligations are incompatible with each other on every point.

Requisites:
The following are the four essential requisites of novation, first, a previous valid obligation; second,
agreement of the parties to the new obligation; third, extinguishment of the old obligation and lastly,
validity of the new obligation.

Extinguishment:
Extinguishment of a previous obligation by the new one may be either express or implied. Express when
there is a declaration in unequivocal terms that the old obligation is extinguished by the new which
substitutes it. Tacit or implied when the old and the new obligation are incompatible on every point.This
is in order to determine whether or not the old and the new obligations can stand together.