CD assignments: OBLI Cases.
xlsx FEMCO’s bidder’s bond is a manifestation
I. Consensuality; Meeting of the minds
Art. 1305 and 1315, Civil Code
Jardine Davies v. CA, 333 SCRA 684
Pertinent Facts:
Now petitioner, Purefoods Corp., contends
the decision of the CA in affirming the RTC
decision regarding its alleged unilateral
cancelation of its contract with FEMSCO.
Issue:
Whether a contract was perfected between
Purefoods Corp and FEMSCO
Ruling:
Yes, a contract was perfected between
Purefoods Corp and FEMSCO.
In addition to object and cause, contracts
are perfected upon the acceptance by the
offeree of the offer made by the offeror.
Acceptance may be express or implied
except in cases where a formal acceptance
is required by law. Such acceptance must
be made known to the offeror
In the case at bar, petitioner asserts that
the letter sent to FEMSO was not an
acceptance of the offer but rather a
counteroffer. However, the court ruled that
the tenor of the letter was of the terms and
conditions as to how the obligation is to be
perfected rather than as to how the contract
can be perfected. Moreover, FEMCO’s
submission of the performance bond and
contractor's all-risk insurance was an
implied acceptance of the conditions set by
petitioner which then commenced the
contract. Furthermore, petitioner’s return of
of its acknowledgement of FEMCO’s
consent to the conditions. All acts manifest
an acceptance of the offer and the
counteroffer thereby perfecting a contract.
II. Autonomy; Freedom to Contract and
Stipulate Art. 1306, Civil Code
Azcuna, Jr. v. CA, GR No. 116665 255
SCRA 215 March 20,1996
Topic: Autonomy; Freedom to contract &
Stipulate
Facts:
1. Melquiades Azcuna Jr is the Lessee
a. Occupied three units of the
building owned by Barcelona
Family
2. Expiry date of the Lease came
a. No agreement for renewal
b. Azcuna did not surrender
units as well
3. Ejectment case was filed
4. MTC, RTC, CA favored Barcelona
family
a. Azcuna ordered to vacate
premises
b. To pay the monthly rentals
for continued use of the units
c. The sum of P 3k per day,
damages for failure to turn
over peacefully the units
leased starting July 1, 1993
up to the day units are
vacated.
5. Azcuna contends that the 3k per day
damages is improper,
a. that under the case of
Felesilda v Villanueva;
“Shoemart Inc v CA” and
“Hualam Construction v CA”-
Only damages that can be
 recovered in an ejectment
suit are the fair rental value
or reasonable compensation
for the use and occupation of
the real property. Other
damages must be claimed in
an ordinary action.
Issue:
WON the award for damages were
improper.
Ruling:
No. The award was proper.
Contracting parties have the freedom to
make stipulations in their contract provided
they are not contrary to law, moral, good
customs, public order or public policy.
In this case, The court was merely enforcing
what was stipulated upon in black and white
by the lessor and lessee appearing in
paragraph 10 of the lease contract:
That after the termination of the
Lease, the LESSEE shall peaceably
deliver to the LESSOR the leased
premises vacant and unencumbered
and in good tenantable conditions
minus the ordinary wear and tear. In
case the LESSEE's failure or
inability to do so, LESSOR has the
right to charge the LESSEE
P1,000.00 per day as damages
without prejudice to other remedies
which LESSOR is entitled in the
premise. (Emphasis supplied).
This is clearly an agreement for liquidated
damages — entitling private respondent to
claim a stipulated amount by way of
damages (correctly totalling P3,000.00 per
day as there were three (3) units being
leased by petitioner) over and above other
damages still legally due him, i.e., the fair
rental value for the use and occupation of
the property as provided for in Section 8,
Rule 70 of the Rules of Court.
The Court finds nothing immoral or illegal
with the indemnity/penalty clause of the
lease contract (paragraph 10) which does
not appear to have been forced upon or
fraudulently foisted on the petitioner.
Petitioner cannot now evade further liability
for liquidated damages, for "after entering
into such an agreement, petitioner cannot
thereafter turn his back on his word with a
plea that on him was inflicted a penalty
shocking to the conscience and impressed
with iniquity as to call for the relief sought
on the part of a judicial tribunal."
Therefore the award is proper.
Manila Bay Club v. CA, 245 SCRA 715
(CLOMATA)
Topic: Autonomy; Freedom to Contract and
Stipulate Art. 1306, Civil Code
Facts:
Sabenianos as owners-lessors and Manila
Bay Club Corporation as lessee executed
ten-year lease contract.
But the lease agreement was short-lived
because the Sabenianos unilaterally
terminated the lease due to the following
contract violations:
(a) For unpaid accumulated rentals in
arrears;
(b) For using the leased premises for
gambling and prostitution; and
(c) Failure to insure the leased building.
Petitioner invoked the "Special Clause" of
the lease contract that in case the MBC fail
or neglect to perform or comply with the
stipulations, the lease contract shall become
automatically terminated and cancelled and
the said premises shall be peacefully
vacated by the LESSEE.
The "Special Clause" of the lease contract
as found in paragraph 19 thereof to justify
their action. It reads:
"19. If the rental herein stipulated or any
part thereof at any time, shall be in arrears
or unpaid, or if the tenant shall at any time
fail or neglect to perform or comply with any
of the covenants, conditions, agreements or
restrictions stipulated or if the tenants shall
become bankrupt or insolvent or shall
compound with his creditors, then and in
any of such above cases, this lease contract
shall become automatically terminated and
cancelled and the said premises shall be
peacefully vacated by the LESSEE for the
LESSOR to hold and enjoy henceforth as if
these presents have not been made and it
shall be lawful for the LESSOR or any
person duly authorized in his behalf, without
any formal notice or demand to enter into
and upon said leased premises or any part
thereof without prejudice on the part of the
LESSOR to exercise all rights on the
contract of lease and those given by law.
And upon such cancellation of the contract,
the LESSEE hereby grants to the LESSOR
the legal right to enter and take possession
of the leased premises as though the term
of the lease contract has expired."
The trial court abandoned the first two
grounds for lack of sufficient evidence, but
found MBCC violated the "insurance clause"
(paragraph 22) of the contract, which CA
affirmed.
MBCC argued that Sabenianos cannot
unilaterally rescind the lease contract
because its purported violation of the
"insurance clause" was merely slight or
casual.
Issue:
WON the strict compliance with the
"insurance clause" is mandatory to result in
the automatic termination and cancellation
of the lease in case of non-observance?
Ruling:
Yes, failure to comply with the
mandatory requirement shall result in the
automatic termination and cancellation of
the lease as stipulated in their contract.
Article 1306 of the New Civil Code
provides that the contracting parties may
establish such stipulations, clauses, terms
and conditions as they may deem
convenient, provided they are not contrary
to law, morals, good customs, public order
or public policy.
In the case at bar, it can be fairly
judged from the tenor of the contract that
the parties intended mandatory compliance
with all the provisions of the contract.
Certainly, there is nothing wrong if the
parties to the lease contract agreed on
certain mandatory provisions concerning
their respective rights and obligations, such
as the procurement of the insurance and the
rescission clause. Failure of MBC to insure
the building is a breach of contract.
Thus, failure to comply with the
mandatory requirement shall result in the
automatic termination and cancellation of
the lease as stipulated in their contract.
De Leon v. CA (Dela Rosa)
Facts:
Private respondent Jose Vicente De Leon
and petitioner Sylvia Lichauco De Leon
were married and had a child named
Susana but they later on de facto separated
due to irreconcilable marital differences.
Sylvia left the conjugal home and went to
the United States where she obtained
American citizenship. Sylvia filed with the
Superior Court of California a petition for
dissolution of marriage against Jose
Vicente. In the divorce proceedings, Sylvia
also filed claims for support and distribution
of properties. It appears, however, that
since Jose Vicente was then a Philippine
resident and did not have any assets in the
United States, Sylvia chose to hold in
abeyance the divorce proceedings, and in
the meantime, concentrated her efforts to
obtain some sort of property settlements
with Jose Vicente in the Philippines.
Thus, on March 16, 1977, Sylvia succeeded
in entering into a Letter-Agreement with her
mother-in-law, private respondent Macaria
De Leon wherein the latter agreed to bind
herself jointly and severally to answer the
undertakings of Jose Vincent.
“In consideration for a peaceful and
amicable TERMINATION OF RELATIONS
between the undersigned and her lawfully
wedded husband, Jose Vicente de Leon,
your son, agrees to give Sylvia:(1) Ortigas
Condominium; (2) Wack-
WackCondominium; (3) two Ayala Alabang
lots;(5) California property; (6) P100,000; (7)
$35,000; (8) Monthly support; (9) Exclusive
custody of minor daughter.”
Thereafter, the court approved the joint
petition for judicial approval of dissolution of
the conjugal property of Sylvia and Jose.
On the other hand, Macaria filed with the
trial court a motion for leave to intervene
alleging that she is the owner of the
properties involved in the case. The motion
was granted. She assailed the validity and
legality of the Letter-Agreement which had
for its purpose, according to her, the
termination of marital relationship between
Sylvia and Jose Vicente.
Issue:
Whether or not the Letter-Agreement is
valid.
Held:
No, the Letter-Agreement is invalid. Sylvia
must return Macaria’s properties.
Article 1306 of the New Civil Code provides
that parties may stipulate terms and
conditions as they may deem convenient
provided they are not contrary to law,
morals or public policy. Otherwise, the
contract is void and inexistent from the
beginning. But marriage is not a mere
contract but a sacred social institution.
Thus, Article 52 of the Civil Code provides
that its nature, consequences and incidents
are governed by law and not subject to
stipulations. From the foregoing provisions,
the court held that the Letter-Agreement is
deemed null and void because it is
premised on the termination of marital
relationship which is not only contrary to law
but contrary to Filipino morals and public
policy.
Batarra v. Marcos, 7 Phil 156
Facts:
Fausta Batarra filed a complaint in court for
the recovery of the damages brought by
Francisco Marcos for the breach of promise
of marriage by the latter. The defendant
induced the plaintiff to submit herself to
sexual relation with him on account of such
promise of marriage.
Issue: W/N Batarra can claim for damages
for breach of contract to marry.
Held:
No. Batarra cannot claim damages.
The carnal relation being the consideration
(cause) of the promise to marry. Art. 1306
states that
If the crime or misdemeanor is the carnal
relation, then both parties are considered at
fault. Under Art. 1306, there can be no
recovery if both parties are at equal fault. If
both participated in the act then both are
equally guilty and no recovery can be
awarded to the parties.
Cui v Arellano (FLORES)
Topic: Autonomy; Freedom to Contract and
Stipulate Art. 1306, Civil Code
Ponente: Concepcion J
Facts:
Cui was a law student of Arellano
University. From 1st year to 4th year 1st
semester he was awarded scholarship
grants, for scholastic merit. Because of this
grant, plaintiff's semestral tuition fees were
returned to him after the ends of semester
and when his scholarship grants were
awarded to him. The whole amount of the
tuition fees paid by Cui and refunded to him
is in the total of P1,033.87.
During Cui's study in Arellano University, his
uncle was the dean of the College of law.
However, on Cui's 4th year 2nd semester,
his uncle severed ties with Arellano and
became the dean of the College of Law of
Abad Santos University. Likewise, Cui was
not able to pay his tuition fees and enrolled
for the last semester at Abad Santos
University.
After graduating, Cui needed to secure
permits of his TOR to take the Bar. Arellano
refused to give access to his TOR until Cui
paid back the P1,033.87. Cui was not able
to take the bar.
Arellano contends that it entered into a
contract with Cui. In granting Cui the
scholarship, he must waive his right to
transfer to another school.
Issue:
Whether the above quoted provision of the
contract between plaintiff and the
defendant, whereby the former waived his
right to transfer to another school without
refunding to the latter the equivalent of his
scholarships in cash, is valid or not.
Ruling:
It is not valid since the stipulation (waiver) in
question is contrary to sound morality, civic
honesty and good morals, hence null and
void.
If Arellano University understood clearly the
real essence of scholarships, it should have
not entered into a contract of waiver with
Cui. This waiver is a direct violation of
Memorandum and an open challenge to the
authority of the Director of Private Schools
because the contract was repugnant to
sound morality and civic honesty. The
practice of awarding scholarships to attract
students and keep them in school is not
good customs nor has it received some kind
of social and practical confirmation except in
some private institutions as in Arellano
University.
Ferrazzini v. GSell, 34 Phil 697
Topic:
Limitations of Right to Contract — The
right, however, is not absolute in character.
It is subject to several limitations. According
to Art. 1306, the stipulation, clause, term or
condition established by the contracting
parties must not be contrary to (1) law, (2)
morals, (3) good customs, (4) public order,
or (5) public policy.
Under the Spanish Civil Code (Art. 1255),
good customs and public policy are not
included, although Spanish jurisprudence
has always considered good customs as
included within the sphere of morals, and
public policy as synonymous with public
order.
Facts:
Carlos Gsell, engaged in a manufacturing
business, employed Anselmo Ferrazzini as
foreman in his umbrella factory but was then
discharged by Gsell. Ferrazzini filed a case
to recover damages from the wrongful
discharge because it was without written
advice. The trial court judgment favoured
Ferrazzini despite Gsell's claim that the
discharge was lawful and on account of
absence, unfaithfulness and disobedience.
Gsell, moreover, sought a counterclaim that
upon the termination of their employment
Ferrazzini cannot enter into employment
within five years except when given a
written permission. Thus, his appeal.
Issues:
W/N the stipulation preventing Ferrazzini
to enter into the employment of any
enterprise in the Philippines after obtaining
a special written permission is valid.
Ruling:
No, the stipulation is against public policy.
Public policy is a principle under freedom of
contract which holds that no subject or
citizen can lawfully do what has a tendency
to be injurious to the public or against the
public good.
Contract in undue or unreasonable restraint
of Ferrazzini's trade is unenforceable since
it restricts his industry and precludes his
occupational interests to support himself
and his family.
Note: The test on whether a given
agreement constitutes an unlawful
machination or a combination in restraint of
trade:
Whether, under the particular
circumstances of the case and the nature of
the particular contract involved in it, the
contract is, or is not, unreasonable
Omico Mining and Industrial Corp v.
Vallejos, 63 SCRA 301
FACTS:
Alfred Catolico filed a complaint against
Omico Mining and Frederick Webber
(President and Chairman of the Board of
Directors) alleging for payment of his
services as legal counsel for the
corporation.
Cause: defendants entered into a
contract of personal and
professional services with him under
the terms of which he was to head
the corporation’s legal department
with the condition that he should
render such services only after his
office hours “even into the dead wee
hours of the night and wherever
such services would not run in
conflict with his duties as a Judge”.
Omico undertook to pay him a yearly
salary of 35k but if there is a case
tried in court and the case won or
the company saved money, Catolico
will be given a 10% commission of
the amount involved in litigation. He
did his job. Their contract/ relations
were severed. Omico refused to pay
him.
Contention of Omico: their
stipulation about his professional
services is illegal, void, and
unenforceable as Catolico is a judge
who is prohibited from engaging in
private practice.
ISSUE: W/N the contract between
respondent and defendant is void for being
contrary to law and public policy
RULING: YES. The contract is void for
being contrary to law and public policy
because the contract was entered into while
Catolico was still a judge of CFI.
Sec. 35 Rule 138 of the revised rules of
court prohibits the private practice of judges
as their rights, duties, privileges, and
functions of office are so inherently
incompatible with the high official functions,
duties, powers, discretions and privileges of
a judge. The inhibitory rule makes it
obligatory upon the judicial officers
concerned to give their full time and
attention to their judicial duties, prevent
them from extending special favors to their
own private interests and assure the public
of their impartiality in the performance of
their functions. A contract whose cause,
object or purpose is contrary to law, morals,
good customs, public order or public policy
is considered inexistent and void from the
beginning
Maritime Co. v. Reparations
Commission, 40 SCRA 70 (MAG-ASO)
Topic: Autonomy
Case: a statute should be considered as
entering into and forming part of a contract
Facts: In plaintiff's complaint, after setting
forth its corporate character as well as that
of the defendant Reparations Commission,
which is vested by law with the power to
enter into contracts and to sue and be sued,
it alleged that shipments of reparations
goods were loaded in three of its vessels
consigned to defendant, with
corresponding freight charges
amounting to P228,250.58. Then came the
allegation that said vessels arrived in Manila
and discharged all such shipment of
reparations goods, which were duly
delivered to and received by defendant as
consignee in good order and condition, but
defendant failed and refused to pay,
notwithstanding repeated demands, the
total amount of the freight charge,
above-mentioned.
There was no denial in the answer of
defendant of the facts as alleged, but
Section 11 of the Reparations Act was
invoked to show that it was not liable at
all for the freight charges, a matter
which, according to defendant, was fully
known to plaintiff as it had in several
instances collected, freight charges from
the end-users concerned. Defendant
contended that plaintiff's claim was barred
by a prior judgment under the principle of
res adjudicata and that "as a carrier of
reparations goods, it is not only presumed
to know the law but is chargeable with
knowledge of that law, and when it thus
entered into a contract of carriage or
affreightment of reparations goods, it
rendered itself bound by the pertinent
provision of Section 11 of the Reparations
Law ... on the question of who is liable for
said freight charges; that as a matter of fact,
plaintiff in its prior dealings with the
defendant on this matter had so recognized
and accepted the set-up as envisioned by
Section 11 of the Reparations Law."
Defendant's contention was sustained by
the lower court. After referring to the
language of Section 11 of the Reparations
Act, it reached the conclusion, there, being
"no doubt on the interpretation as to who
will pay for the freight charges." It was
likewise set forth therein that plaintiff in fact
had been collecting freight charges from
end users and turning over a portion
thereof, at least 50%, to defendant to pay its
outstanding obligations, plaintiff having
purchased several vessels through the
Reparations Commission payable on
instalIments.
Issue: WON plaintiff had the right to
demand payment of freight charges from
defendant.
Ruling: No, plaintiff did not have the right to
demand payment of freight charges from
defendant.
It is to be recognized that a large degree of
autonomy is accorded contracting parties.
Not that it is unfettered. They may,
according to the Civil Code, 10 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 law
thus sets limits. It is a fundamental
requirement that the contract entered into
must be in accordance with, and not
repugnant to, an applicable statute. Its
terms are embodied therein. The
contracting parties need not repeat them.
They do not even have to be referred to.
Every contract thus contains not only
what has been explicitly stipulated, but
the statutory provisions that have any
bearing on the matter. It is an elementary
rule of contracts that the laws, in force at the
time the contract was made, enter into and
govern it. This is how the matter is put in the
latest decision: "The principle is thus well-
settled that an existing law enters into
and forms part of a valid contract
without the need for the parties
expressly making reference to it. Only
thus could its validity insofar as some of
its provisions are concerned be
assured."
The rule is that the law forms part of, and
is, read into, every contract, unless
clearly excluded therefrom in those
cases where such exclusion is allowed.
What is the law that forms part of, and is to
be read into, the contract between plaintiff-
appellant and defendant-appellee? It is, to
repeat, Section 11 of Republic Act No. 1789
as amended. More specifically: "The
insurance, ocean freight and other
expenses incident to importation shall
be paid by the end-user in accordance
with usual business practice." The Last
sentence is equally plain: "Nothing herein
shall be construed as exempting the
end-user from paying in full all the
necessary costs, charges and expenses
incident to the application for and the
procurement, production, delivery and
acquisition, of, the goods concerned."
The above provisions, then, form part of and
must be read into the shipping contracts
between plaintiff-appellant and defendant-
appellee, unless they could be "clearly
excluded therefrom", assuming "such
exclusion is allowed."
There is no showing that the shipping
contracts between them are clearly
excluded from the law, much less that such
exclusion could be allowed.
Communication Materials and Design,
Inc. v. CA, 260 SCRA 673
Petition was dismissed
Facts:
Petitioners COMMUNICATION MATERIALS
AND DESIGN, INC., (CMDI, for brevity) and
ASPAC MULTI-TRADE INC., (ASPAC, for
brevity) are both domestic corporations.
Private Respondents ITEC, INC. and/or
ITEC, INTERNATIONAL, INC. (ITEC, for
brevity) are corporations duly organized and
existing under the laws of the State of
Alabama, United States of America. There
is no dispute that ITEC is a foreign
corporation not licensed to do business in
the Philippines.
On August 14, 1987, ITEC entered into a
contract with petitioner ASPAC referred to
as "Representative Agreement". Pursuant to
the contract, ITEC engaged ASPAC as its
"exclusive representative" in the Philippines
for the sale of its products, in consideration
of which, ASPAC was paid a stipulated
commission.
One year into the second term of the
parties' agreement, ITEC decided to
terminate the same, because petitioner
ASPAC allegedly violated its contractual
commitment as stipulated in their
agreements. ITEC charges the petitioners
and another Philippine Corporation,
DIGITAL BASE COMMUNICATIONS, INC.
(DIGITAL) of using knowledge and
information of ITEC's products
specifications to develop their own line of
equipment and product support, which are
similar, if not identical to ITEC's own, and
offering them to ITEC's former customer.
On January 31, 1991, a complaint was filed
with the RTC by ITEC. It sought to enjoin,
first, preliminary and then, after trial,
permanently; (1) defendants to cease and
desist from selling or attempting to sell
PLDT and to any other party, products
which have been copied or manufactured
"in like manner, similar or identical to the
products, wares and equipment of plaintiff,"
and (2) defendant ASPAC, to cease and
desist from using in its corporate name,
letter heads, envelopes, sign boards and
business dealings, plaintiff's trademark,
internationally known as ITEC.
The defendants filed a motion to dismiss the
complaint on the ground that the plaintiff
has no legal capacity to sue as it is a foreign
corporation doing business in the
Philippines without the required BOI
authority and SEC license.
RTC denied the defendant’s motion to
dismiss and issued a writ of preliminary
injunction on the same day, thus, petitioners
elevated the case to the CA, but was then
again denied.
Issue:
Whether or not petitioners are estopped
from raising in defense that respondent is
an unlicensed corporation doing business in
the country, and therefore, is disqualified
from instituting the present action in our
courts.
Ruling:
Yes.
A foreign corporation doing business in the
Philippines may sue in Philippine Courts
although not authorized to do business here
against a Philippine citizen or entity who
had contracted with and benefited by said
corporation. To put it in another way, a party
is estopped to challenge the personality of a
corporation after having acknowledged the
same by entering into a contract with it. And
the doctrine of estoppel to deny corporate
existence applies to a foreign as well as to
domestic corporations. One who has dealt
with a corporation of foreign origin as a
corporate entity is estopped to deny its
corporate existence and capacity. The
principle will be applied to prevent a person
contracting with a foreign corporation from
later taking advantage of its noncompliance
with the statutes chiefly in cases where
such person has received the benefits of the
contract. This rule is deeply rooted in the
time-honored axiom of Commodum ex
injuria sua non habere debet — no person
ought to derive any advantage of his own
wrong. This is as it should be for as
mandated by law, "every person must in the
exercise of his rights and in the
performance of his duties, act with justice,
give everyone his due, and observe honesty
and good faith.
Also, the parties are charged with
knowledge of the existing law at the time
they enter into a contract and at the time it
is to become operative. Moreover, a person
is presumed to be more knowledgeable
about his own state law than his alien or
foreign contemporary.
The doctrine of lack of capacity to sue
based on the failure to acquire a local
license is based on considerations of sound
public policy. The license requirement was
imposed to subject the foreign corporation
doing business in the Philippines to the
jurisdiction of its courts. It was never
intended to favor domestic corporations who
enter into solitary transactions with unwary
foreign firms and then repudiate their
obligations simply because the latter are not
licensed to do business in this country. This
doctrine is based on the failure to acquire a
local license is based on considerations of
sound public policy. The license
requirement was imposed to subject the
foreign corporation doing business in the
Philippines to the jurisdiction of its courts. It
was never intended to favor domestic
corporations who enter into solitary
transactions with unwary foreign firms and
then repudiate their obligations simply
because the latter are not licensed to do
business in this country.
In this case, by entering into the
"Representative Agreement" with ITEC,
Petitioner is charged with knowledge that
ITEC was not licensed to engage in
business activities in the country, and is
thus estopped from raising in defense such
incapacity of ITEC, having chosen to ignore
or even presumptively take advantage of
the same.
Banco Filipino v. Ybañez, 445 SCRA 482
(NAPOLES)
Facts:
Respondents obtained a loan secured by a
mortgage over Transfer Certificate of Title
69836 from Banco Filipino, to be used for
the construction of a commercial building in
Cebu. Respondents executed a Promissory
Note for the sum of P1,225,000 payable in
fifteen years, with a stipulated interest of
21% per annum, and stipulating monthly
payments of P22,426. The first payment
was payable on January 24, 1983, and the
succeeding payments were due every 24th
of each month thereafter. The note also
stipulated that in case of default in the
payment of any of the monthly amortization
and interest, respondents shall pay a
penalty equivalent to 3% of the amount due
each month. Respondents’ total payment
from 1983 to 1988 amounted to around
1.4m.
From 1989 onwards, respondents did not
pay a single centavo. They alleged that
Banco Filipino had ceased operations
and/or was not allowed to continue
business, having been placed under
liquidation by the Central Bank. Banco
Filipino was closed on January 1, 1985 and
re-opened for business on July 1, 1994.
From its closure to its re-opening, petitioner
bank did not transact any business with its
customers.
On August 24, 1994, respondents were
served a Notice of Extra Judicial Sale of
their property covered by TCT No. 69836 to
satisfy their indebtedness allegedly of
P6,174,337.46 which includes the principal,
interest, surcharges and 10% attorney’s
fees. The public auction was scheduled on
September
22, 1994 at 2:00 in the afternoon.
On September 19, 1994, respondents filed
a suit for Injunction, Accounting and
Damages, alleging that there was no legal
and factual basis for the foreclosure
proceedings since the loan had already
been fully paid.
A restraining order was issued the following
day by the lower court enjoining petitioner to
cease and desist from selling the property at
public auction. The trial court ordered that
Banco Filipino shall make a proper
accounting of the obligation of the
respondents, reducing the interests and the
surcharge (21 to 17% per annum interests,
eliminated 1% surcharge per month), and
enjoining the foreclosure, unless the
respondents still failed to pay.
Both petitioners and respondents appealed
to the CA. CA affirmed the decision of the
trial court.
Issues
1. Is the rate of interest set at 21% per
annum legal?
2. Is the 3% monthly surcharge valid?
Ruling
 imposition of the 3% monthly surcharge, as
the penal clause to the obligation, violated
the limit imposed by the Usury Law. Said
1. Yes, 21% per annum interest rate is surcharge of 3% monthly must is declared
legal. null and void.

Art. 1306 provides that contracting parties

are free to stipulate the terms of their
contract for as long as the terms are not
contrary to law, morals, good customs, III. Mutuality Art. 1308, Civil Code
public policy, public order, and national
interests. Said stipulation is binding G.F. Equity, Inc. v. Valenzuela, 462 SCRA
between the parties. 466 (ORTEGA)
S/n: The case I found involved Valenzona,
not Valenzuela.
At the time the loan was granted Act No.
Topic: Mutuality
2655, already provided that the rate of
Article 1308 - "The contract must bind
interest for the forbearance of money when
both contracting parties; its validity or
secured by a mortgage upon real estate
compliance cannot be left to the will of
should not be more than 12% per annum or
one of them."
the maximum rate prescribed by the
Monetary Board. But on December 1, 1979,
Facts:
Monetary Board of the Central Bank of the
Philippines had issued CBP Circular No.
GF Equity, represented by its Chief
705-79. On loan transactions with maturities
Financial Officer W. Steven Uytengsu
of more than 730 days, it fixed the effective
(Uytengsu), hired Valenzona as Head
rate of interest at 21% per annum for both
Coach of the Alaska basketball team in the
secured and unsecured loans. Since the
Philippine Basketball Association (PBA)
loan in question has fixed 15 years for its
under a Contract of Employment. Under the
maturity, it fell within the coverage of said
contract, GF Equity would pay Valenzona
CBP Circular.
the sum of Thirty Five Thousand Pesos
Thus, the 21% annual interest that was (P35,000.00) monthly, net of taxes, and
freely and voluntarily agreed upon by the provide him with a service vehicle and
parties, is legal and not excessive nor gasoline allowance.
violative of the Usury Law.
While the employment period agreed upon
was for two years commencing on January
1, 1988 and ending on December 31, 1989,
2. No, the 3% monthly surcharge is the last sentence of paragraph 3 of the
invalid. contract carried the following condition:

In the loan agreement between the parties, 3. x x x If at any time during the
the total interest and other charges exceed contract, the COACH, in the sole
the prescribed 21% ceiling. Hence, the opinion of the CORPORATION,
 fails to exhibit sufficient skill or
competitive ability to coach the
team, the CORPORATION may
terminate this contract.
(Emphasis supplied)
Nevertheless, Valenzona still acceded to
the terms of the contract because he had
trust and confidence in Uytengsu who had
recommended him to the management of
GF Equity.
During his stint as Alaska's head coach, the
team placed third both in the Open and All-
Filipino PBA Conferences in 1988.
Valenzona was later advised by the
management of GF Equity by letter of
September 26, 1988 of the termination of
his services invoking their rights specified in
par. 3.
Close to six years after the termination of
his services, Valenzona's counsel, by letter
of July 30, 1994, demanded from GF Equity
payment of compensation arising from the
arbitrary and unilateral termination of his
employment. GF Equity, however, refused
the claim.
Issue:
Whether or not paragraph 3 of the contract
is null and void.
Ruling:
YES, paragraph 3 of the contract is null and
void because the assailed condition clearly
transgresses the principle of mutuality of
contracts. It leaves the determination of
whether Valenzona failed to exhibit
sufficient skill or competitive ability to coach
the Alaska team solely to the opinion of GF
Equity.
Mutuality is one of the characteristics of a
contract, its validity or performance or
compliance of which cannot be left to the
will of only one of the parties. This is based
on the principle that obligations arising from
contracts have the force of law between the
contracting parties and that there must be
mutuality between the parties based on their
essential equality to which is repugnant to
have one party bound by the contract
leaving the other free therefrom. Its ultimate
purpose is to render void a contract
containing a condition which makes its
fulfillment dependent exclusively upon the
uncontrolled will of one of the contracting
parties.
In this case, GF Equity was given an
unbridled prerogative to pre-terminate the
contract irrespective of the soundness,
fairness or reasonableness, or even lack of
basis of its opinion. GF Equity failed,
however, to advance any ground to justify
the pre-termination. It simply invoked the
assailed provision which is null and void.
Hence, since the pre-termination of the
contract was anchored on an illegal ground,
hence, contrary to law, and GF Equity
negligently failed to provide legal basis for
such pre-termination, e.g. that Valenzona
breached the contract by failing to discharge
his duties thereunder, GF Equity failed to
exercise in a legitimate manner its right to
pre-terminate the contract, thereby abusing
the right of Valenzona, and thus, entitle him
to damages.
WHEREFORE, the decision of the Court of
Appeals dated October 14, 2002 is hereby
SET ASIDE and another rendered declaring
the assailed provision of the contract NULL
AND VOID and ORDERING petitioner, GF
Equity, to pay private respondent, Arturo
Valenzona, actual damages in the amount
of P525,000.00 and attorney's fees in the
amount of P60,000.00.
UCPB v. Beluso, 530 SCRA 567 (PADUL)
Topic: Mutuality Art. 1308, Civil Code
Mutuality - Art 1308. The contracts must
bind both contracting parties; its validity
or compliance cannot be left to the will
of one of them.
Petition filed: Review on Certiorari
declaring void the interest rate provided
in the promissory notes executed by the
respondents Spouses Samuel and Odette
Beluso (spouses Beluso) in favor
ofpetitioner United Coconut Planters Bank
(UCPB)
FACTS
A case where UCPB granted the spouses
Beloso Promisorry Notes Line under a
Credit Agreement where a credit of up to
P1.2M could be availed (16 Apr ‘96 - 30 Apr
‘97). S. Beloso provided land titles of two
parcels of land for security. This credit
agreement was then amended increasing
the p. Note line to P2.35M extending to 28
Feb ‘98.
The three promissory notes were renewed
several times. On 30 April 1997, the
payment of the principal and interest of the
latter two promissory notes were debited
from the spouses Beluso’s account with
UCPB; yet, a consolidated loan for ₱1.3
Million was again released to the spouses
Beluso under one promissory note with a
due date of 28 February 1998. (di ko
kahibaw nganu sigi pautang si bank, but
okay hahaha)
To completely avail themselves of the ₱2.35
Million credit line extended to them by
UCPB, the spouses Beluso executed two
more promissory notes for a total of
₱350,000.00.
However, the spouses Beluso alleged that
the amounts covered by these last two
promissory notes were never released or
credited to their account and, thus, claimed
that the principal indebtedness was only ₱2
Million.
UCPB applied interest rates on the different
promissory notes ranging from 18% to 34%.
From 1996 to February 1998 the spouses
Beluso were able to pay the total sum of
₱763,692.03. UCPB continued to charge
them the interest rate as per below (this is
actually excessive)
On 2 September 1998, UCPB demanded
that the spouses Beluso pay their total
obligation of ₱2,932,543.00 plus 25%
attorney’s fees, but the spouses Beluso
failed to comply therewith. On 28 December
1998, UCPB foreclosed the properties
mortgaged by the spouses Beluso to secure
their credit line, which, by that time, already
ballooned to ₱3,784,603.00.
ISSUE:
Whether or not the interest charges were
valid on the grounds of Art 1308?
RULING:
No. The imposition of interests in the
promissory note is NOTvalid as Art 1308
provides the importance of mutuality.
The imposition of interest is void, as the
interest rates and the bases were
determined solely by petitioner UCPB:
FOR VALUE RECEIVED, I, and/or We, on
or before due date, SPS. SAMUEL AND
ODETTE BELUSO (BORROWER), jointly
and severally promise to pay to UNITED
COCONUT PLANTERS BANK (LENDER)
or order at UCPB Bldg., Makati Avenue,
Makati City, Philippines, the sum of
______________ PESOS, (P_____),
Philippine Currency, with interest thereon at
the rate indicative of DBD retail rate or as
determined by the Branch Head
While UCPB asserts that this is a reversible
error, and claims that though interest rate
was not numerically quantified in the face of
the promissory notes, it was nonetheless
categorically fixed, at the time of execution
thereof, at the "rate indicative of the DBD
retail rate." UCPB further contended that the
imposition of the questioned interest rates
did not infringe on the principle of mutuality
of contracts, because the spouses Beluso
had the liberty to choose whether or not to
renew their credit line at the new interest
rates pegged by UCPB.
As provided in Art 1308: The contract must
bind both contracting parties; its validity or
compliance cannot be left to the will of one
of them
As applied in Philippine National Bank v.
Court of Appeals:
“In order that obligations arising from
contracts may have the force of law
between the parties, there must be
mutuality between the parties based on their
essential equality. A contract containing a
condition which makes its fulfillment
dependent exclusively upon the
uncontrolled will of one of the contracting
parties, is void… to increase the interest
rate at will during the term of the loan, it is
null and void for being violative of the
principle of mutuality essential in contracts.
It would have invested the loan agreement
with the character of a contract of adhesion,
where the parties do not bargain on equal
footing, the weaker party's (the debtor)
participation being reduced to the
alternative "to take it or leave it" (Qua vs.
Law Union & Rock Insurance Co., 95 Phil.
85). Such a contract is a veritable trap for
the weaker party whom the courts of justice
must protect against abuse and imposition.
Same logic, with UCPB stating that rate
indicative of DBD retail rate or as
determined by the Branch Head" it indeed
reflects sole dependency on the will of
UCPB. If either of these two choices
presents an opportunity for UCPB to fix the
rate at will, the bank can easily choose such
an option, thus making the entire interest
rate provision violative of the principle of
mutuality of contracts.
Estoppel as a defense cannot cannot be
predicated on an illegal act. As between the
parties to a contract, validity cannot be
given to it by estoppel if it is prohibited by
law or is against public policy
s/n: there was also discussion on error of
computation, annulment of foreclosure sale,
violation of truth in lending act, forum
shopping; it’s in full text
Joaquin v. Mitsumine, 34 Phil 858 (SY)
Topic: Mutuality
Mutuality - Art 1308. The contracts must
bind both contracting parties; its validity
or compliance cannot be left to the will
of one of them.
Facts: Atty. Joaquin filed a written complaint
in Court of First Instance against defendant
Mitsumine, alleging that the plaintiff
executed an instrument whereby he gave a
chattel mortgage on certain apparatus for
the manufacture of aerated water as
security for a payment. He also alleged that
the said mortgage deed was entirely null
and void because it had been executed by
the plaintiff by mistake.
The defendant denied all the allegations
except that the plaintiff asked the defendant
to import a machine for the manufacture of
aerated waters and delivered it which the
plaintiff agreed to pay on the delivery P725
and P200 on account and the balance in
two installments.
Issue: whether or not the agreement must
be null and void.
Held: The contracting parties expressly
stipulate that:
The conditions of this obligation are such
that, if the mortgage debtor, his heirs,
executors or administrators faithfully comply
with all of the above-mentioned obligation in
conformity with the terms thereof, this
obligation shall then be null and void.
The plaintiff’s contention is unsound,
because the record shows it to have been
duly proven that he signed and forwarded
the commercial establishment of the
defendant which was an order to procure a
complete machine for the manufacture of
aerated waters.
The validity of the said mortgage deed is
unquestionable. The plaintiff failed to
explain what the error is nor have proved
any error. It was satisfactorily proven that
the only person who gave the order was the
one who signed the promissory notes who
was the plaintiff himself.
The facts lead to the conclusion that the
only person obliged to pay the defendant is
the plaintiff for the reason that he is the one
who contracted it.
On the validity and efficacy of obligations
set forth in authentic documents, neither
plea not duly justified nor testimony given by
the parties bound under such documents
can prevail against the contents of the
same, because it is not lawful to permit
anyone to contradict his own acts in order to
deceive himself or to deceive other in
whose favor the obligations were created.
If, after a perfect and binding contract has
been executed between the parties it occurs
to one of them to allege some defect therein
as a reason for annulling it, the alleged
defect must be conclusively proven, since
the validity and fulfillment of contracts can
not be left to the will of one of the
contracting parties (art. 1256, Civ. Code).
Garcia v. Legarda, 21 SCRA 555
(ZAMBRANO)
Mutuality - Art 1308. The contracts must
bind both contracting parties; its validity
or compliance cannot be left to the will
of one of them.
Petitioner : Maria Garcia and Marcelino A.
Timbang (spouses)
Respondent: Rita Legarda, Inc - a
corporation, engaged in the sale and resale
of residential lot in Manila and suburbs
Subject Matter of Contracts: 3 parcels of
land - 150 sq.m each
Summaries of the contracts to sell lang
ni guysh
Contract to sell No. 322 (Lot 40, Block 8-
CC) - executed by respondent in favor of
Emiliano Orellano (3/1/1947). Orellano
transferred rights to Encarnacion Vito
(06/26/1947). Vito transferred rights in
favor of Delfin Bacho (11/03/1947).
Finally, Bacho transferred rights to
petitioners (05/29/1948)
Contract to sell No. 324 (Lot 20, Block 5-
CC) - executed in favor of Jesusa Felix
(03/1/1947), two months later, Felix
transferred rights to petitioners
Contract to sell No. 965 (Lot No 27, Block
5-CC) - executed in favor Angela Alvarez
Solomon 01/08/1948. Solomon sold
rights and internet to petitioners
05/11/1948
Facts:
Petitioners appealing decision of the CA
reversing the CFI decision on Civil Case
G.R. No 27194-R
Civil cases were instituted (1) to have
certain contracts numbers 322, 324 and 965
declared existing and subsisting; (2) to
compel the respondent to accept payments
tendered by them; and (3) to recover moral
and exemplary damages and attorney’s
fees (amounts 6k and 1.5k, respectively)
Respondent’s answers were;
(1) As of June 11, 1952, Petitioners
failed to pay for the monthly
installments for contracts Nos 322
and 324 (Aug 1951 to June 1952),
for contract No. 965 (Aug 1951 to
May 1952)...demands for payment
were made, petitioners failed to pay
the amounts due and that upon the
expiration of the 90-day grace period
on on Jun e11, 1952 stipulated in
the sixth paragraph contracts, the
respondents cancelled them
(2) Prayed for an award of damages
and attorney’s fees in the sum of
P2,000.
Petitioners’ reply :
(1) There was no arrears on the
obligations under the three contracts
(2) Cancellation was unlawful and
arbitrary
CFI(RTC)’S DECISION: Declared Contracts
322, 324, and 965 as existing and
subsisting; ordered the respondent to
accept payments from petitioners and to
pay atty’s fees BUT DENIED the award for
moral and exemplary damages
CA’s DECISION: REVERSED CFI’S
decision
Petitioners’ appeal of current case was
taken from CA’s reversal
Petitioners’ contention on their appeal:
CA----
 (1) Wrong to rule that Rita Legarda
Inc did not waive its rights to
cancel contracts with the
petitioners on the ground that it
had previously accepted late
payments of the installments due
on such contracts.
(2) Wrong to declare that par. 9 (6? -
dli consistent ang nakabutang) of the
contracts in question is not a
violation OF Art. 1308 of the New
Civil Code (Mutuality)
(3) Wrong to not declare that
respondent could not and should
not precipitously decided to
forfeit all the payments
(4) Wrong to reversed CFI’s decision
Issue:
Whether or not stipulations of the contracts
are in violation of the provisions of Article
1308 of the civil code. NO.
Ruling:
No. The stipulations of paragraph 6 of the
contracts in question did not violate Article
1308 of the New Civil Code.
Article 1308 of the New Civil Code
emphasizes the principle that the contract
must bind both parties. Obligations arising
from contracts have the force of law
between the contracting parties and that
there must be mutuality between parties
based on essential equality to which is
repugnant to have one party bound by the
contract leaving the other free therefrom.
Paragraph 6 of the contracts in question
provides that in case in default in the
payment of installments by the vendee, he
shall have (1) “a month of grace”, and that
(2) should said month of grace expire
without the vendee paying his arrears, he
shall have another “period of 90 days” to
pay :all the amounts he should have paid,
etc. then the vendor “has the right to declare
this contract cancelled and of no effect”
The stipulations did not leave the validity or
compliance of the contract entirely “to the
will of one of the contracting parties”. The
power to cancel the contract is not immoral
or unlawful because all the petitioner had to
do was to prevent the respondent from
exercising the power to cancel the contract
by complying with his part of the contract
(through payment).
Additional:
On the question of whether or not by having
previously accepted payments of overdue
installments the respondent had waived its
right to declare the contracts cancelled and
of no effect.
No. Contracts were not absolute sale BUT
contracts to sell - on installment. They gave
the respondent’s the right to declare the
contracts cancelled and of no effect upon
fulfillment of certain conditions. All
conditions were fulfilled as shown in the
records.
The act of the respondent in accepting
installments in arrears was an act of
forbearance and gave the petitioners an
additional opportunity to keep the contract
alive. Act of humanity of the respondent did
not give the effect of waiver of their right to
cancel.
Thus, the stipulations of paragraph 6 of the
contracts in question did not violate Article
1308 of the New Civil Code.
PETITION was dismissed. CA’s decision
was affirmed by SC.

(SC cited the case of Taylor vs. Ky Tieng
Piao - contract expressly giving to one party
the right to cancel, the same if resolutory
condition, therein agreed upon, is not
fulfilled, is VALID, the reason being that
when the contract is thus cancelled the
agreement of the parties is in reality being
fulfilled.)
Security Bank v. Sps. Mercado, G.R. No.
192934
Pertinent Facts:
Spouses Mercado took a credit line from
Security bank where they mortgaged
some properties to secure it. One of the
stipulations under the terms and
conditions in securing the credit line is
that Security Bank solely determines the
interest rate applicable to each
availment.
Issue:
Whether the determination of interest
rates violate the principle of mutuality of
contracts.
Ruling:
Yes, Security Bank violated the
principle of mutuality of contracts.
The principle of mutuality of
contracts is found in Article 1308 of the
New Civil Code, which states that
contracts must bind both contracting
parties, and its validity or compliance
cannot be left to the will of one of them.
The binding effect of any agreement
between parties to a contract is
premised on two settled principles: (1)
that any obligation arising from contract
has the force of law between the parties;
and (2) that there must be mutuality
between the parties based on their
essential equality. As such, any contract
which appears to be heavily weighted in
favor of one of the
parties so as to lead to an
unconscionable result is void. Likewise,
any stipulation regarding the validity or
compliance of the contract that is
potestative or is left solely to the will of
one of the parties is invalid. This holds
true not only as to the original terms of
the contract but also to its modifications.
Consequently, any change in a contract
must be made with the consent of the
contracting parties, and must be
mutually agreed upon. Otherwise, it has
no binding effect.
In the case at bar, the spouses
Mercado supposedly: (1) agreed to pay
an annual interest based on a "floating
rate of interest;" (2) to be determined
solely by Security Bank; (3)on the basis
of Security Bank's own prevailing
lending rate; (4) which shall not exceed
the total monthly prevailing rate as
computed by Security Bank; and (5)
without need of additional confirmation
to the interests stipulated as computed
by Security Bank.
Interest provisions in the revolving credit
line agreement and its addendum
violate the principle of mutuality of
contracts. The authority to change the
interest rate was given to Security Bank
alone as the lender, without need of the
written assent of the spouses Mercado.
This unbridled discretion given to
Security Bank is evidenced by the
clause "I hereby give my continuing
consent without need of additional
confirmation to the interests stipulated
as computed by [Security Bank]."The
interest rate to be imposed is
determined solely by Security Bank for
lack of a stated, valid reference rate.
The reference rate of "Security Bank's
prevailing lending rate" is not pegged on
a market-based reference rate as
required by the BSP. Security Bank's
prevailing lending rate" is not
synonymous with "prevailing market
rate." For one, Security Bank is still the
one who determines its own prevailing
lending rate. More, the argument that
Security Bank is guided by other facts
(or external factors such as Singapore
Rate, London Rate, Inter-Bank Rate) in
determining its prevailing monthly rate
fails because these reference rates are
not contained in writing as required by
law and the BSP. Thus, we and that the
interest stipulations here are akin to the
ones invalidated in Silos and in
Philippine Savings Bank for being
potestative.
Allied Banking Corp v CA
GR No 124290
January 16, 1998
Topic: Mutuality
Facts:
1. Allied Banking Corporation leased
the property of the Tanquencos
a. The lease contract states
Provision 1 “ the term of this
lease shall be 14 yrs and
may be renewed for a like
term at the option of the
lessee.
2. Tanquencos donated the property to
their 4 children
3. A year before the expiration of the
contract of lease, Tanquencos
notified Allied that they are no longer
interested in renewing the contract
of lease.
4. Allied insisted that it was exercising
its option to renew their lease
a. Ruben Tanquenco made a
counter proposal, but Allied
rejected and insisted on the
renewal provision of the
lease.
5. MeTC, RTC, CA held that the
provision was void for being violative
of Art 1308 of civil code
a. That the renewal of the lease
cannot be left at the sole
option or will of the
defendant. For that would
amount to a situation where
the continuance and
effectivity of a contract will
depend only upon the sole
will or power of the lessee.
6. Allied insisted that the assailed
provision of the lease of contract
 was mutually agreed upon hence
valid and binding on both parties,
and the exercise by the petitioner of
its option to renew the contract was
part of their agreement and in
pursuance thereof.
Issue:
WON Provision 1 of the contract of lease is
valid.
Ruling:
Yes. The provision is valid.
Principle of mutuality of contracts provides
that "the contract must bind both the
contracting parties; its validity or compliance
cannot be left to the will of one of them."
This binding effect of a contract on both
parties is based on the principle that the
obligations arising from the contracts have
the force of law between the contracting
parties, and there must be mutuality
between them based essentially on their
equality under which it is repugnant to have
one party bound by the contract while
leaving the other free therefrom. The
ultimate purpose is to render void a contract
containing a condition which makes its
fulfillment dependent solely upon the
uncontrolled will of one of the contracting
parties.
In this case, the questioned provision
states that the lease "may be renewed
for a like term at the option of the
lessee." The lessor is bound by the
option he has conceded to the lessee.
The lessee likewise becomes bound only
when he exercises his option and the
lessor cannot thereafter be executed
from performing his part of the
agreement.
An express agreement which gives the
lessee the sole option to renew the lease
is frequent and subject to statutory
restrictions, valid and binding on the
parties. This option, which is provided in
the same lease agreement, is fundamentally
part of the consideration in the contract and
is no different from any other provision of
the lease carrying an undertaking on the
part of the lessor to act conditioned on the
performance by the lessee. It is a purely
executory contract and at most confers a
right to obtain a renewal if there is
compliance with the conditions on which the
rights are made to depend. The right of
renewal constitutes a part of the lessee's
interest in the land and forms a substantial
and integral part of the agreement.
The fact that such an option is binding only
on the lessor and can be exercised only by
the lessee does not render it void for lack of
mutuality. After all, the lessor is free to
give or not to give the option to the
lessee. And while the lessee has a right
to elect whether to continue with the
lease or not, once he exercises his
option to continue and the lessor
accepts, both parties are thereafter
bound by the new lease agreement. Their
rights and obligations become mutually
fixed, and the lessee is entitled to retain
possession of the property for the duration
of the new lease, and the lessor may hold
him liable for the rent therefor. The lessee
cannot thereafter escape liability even if he
should subsequently decide to abandon the
premises. Mutuality obtains in such a
contract and equality exists between the
lessor and the lessee since they remain with
the same faculties in respect to fulfillment.
Note: Allied vacated the premises while the
case was pending. CA decision was
reversed.
Almeda v. Court of Appeals, G.R. No.
113412 (CLOMATA)
Topic: Mutuality Art. 1308, Civil Code
Invoking the Law on Mandatory Foreclosure
(Act 3135, as amended and P.D. 385), the
PNB countered by ordering the extrajudicial
foreclosure of petitioners’ mortgaged
properties and scheduled an auction sale
for March 14, 1989. Upon motion by
petitioners, however, the lower court, on
April 5, 1989, granted a supplemental writ of
preliminary injunction, staying the public
auction of the mortgaged property.

Facts:
Issue:

Between 1981 and 1984, petitioners made

WON PNB could unilaterally raise interest
several partial payments on the loan totaling
rates on the loan, pursuant to the credit
P7,735,004.66, a substantial portion of
agreement’s escalation clause, and in
which was applied to accrued interest. On
relation to Central Bank Circular No. 905?
March 31, 1984, respondent bank, over
petitioners’ protestations, raised the interest
Ruling:
rate to 28%, allegedly pursuant to Section
III-c (1) of its credit agreement. Said interest
No, PNB cannot unilaterally raise the
rate thereupon increased from an initial 21%
interest rate on the loans.
to a high of 68% between March of 1984 to
September, 1986.
The binding effect of any agreement
between parties to a contract is premised on
Petitioners protested the increase in interest
two settled principles:
rates, to no avail. Before the loan was to
(1) that any obligation arising from contract
mature in March, 1988, the spouses filed on
has the force of law between the parties;
February 6, 1988 a petition for declaratory
and
relief with prayer for a writ of preliminary
(2) that there must be mutuality between the
injunction and temporary restraining order
parties based on their essential equality.
with the Regional Trial Court of Makati,
Any contract which appears to be heavily
docketed as Civil Case No. 18872. In said
weighed in favor of one of the parties so as
petition, which was raffled to Branch 134
to lead to an unconscionable result is void.
presided by Judge Ignacio Capulong.
Any stipulation regarding the validity or
compliance of the contract which is left
As a preliminary measure, the lower court,
solely to the will of one of the parties, is
on March 3, 1988, issued a writ of
likewise, invalid.
preliminary injunction enjoining the
Philippine National Bank from enforcing an
interest rate above the 21% stipulated in the In the case at bar, PNB wants to
credit agreement. By this time the spouses impose a unilateral and progressive
were already in default of their loan increase in interest rate. Their effect was to
obligations. increase the total obligation on an eighteen
million peso loan to an amount way over
three times that which was originally
granted to the borrowers. The contention of
PNB is null and void and that these
increases, occasioned by crafty
manipulations in the interest rates is
unconscionable and neutralizes the salutary
policies of extending loans to spur business
cannot be disputed.
Thus, PNB cannot unilaterally raise
the interest rate on the loans.
IV. Relativity Art. 1311, Civil Code
ROJALES v. DIME 783 SCRA 575
Topic: Relativity of Contracts
FACTS:
Petitioner Juana Vda. de Rojales owned a
parcel of land. Respondent Marcelino
dime filed a complaint alleging that on May
16, 1999, Rojales conveyed under a Pacto
de Retro Contract the lot in his favor and in
consideration of P2.502M. This is with a
right to repurchase the property within nine
months from March 24, 1999 to December
24, 1999. Despite repeated verbal and
formal demands for repurchase she refused
to exercise such right of repurchase the
subject property by her.
In her Answer, she denied the execution of
the Pacto de Retro sale in favor
of respondent and alleged that she had not
sold the subject property. She claimed that
the document presented was falsified
since the fingerprint appearing therein was
not hers and the signature of the notary
public was not his. She alleged that she
mortgaged the lot with Batangas Savings
and Loan Bank for P100K when her
daughter Violeta Rojales Rufo needed the
money for application of overseas work.
After examination by NBI, it was
concluded that questioned thumbmark of
original-duplicate copy of the notarized
Pacto de Retro sale and standard right
thumbmark were impressed by and
belong to the same person, Juana
Rojales.
RTC ruled in favor of Rojales stating that it
was not filed by the indispensable
party (Villamin, the common-law wife who
was the source of funds), hence the
judgment will be void.
CA ruled that Villamin is not an
indispensable party. It ruled that the person
who provided the funds for the purchase of
the property is not considered as an
indispensable party in a case of
consolidation of title filed by respondent, the
vendee, in whose favor the petitioner sold
the subject property under the contract of
sale con pacto de retro. MR denied.
ISSUE: WON Villamin is a privy to the
contract of sale.
RULING: No. As relevant to the case at bar,
Articles 1311 provides-
Article 1311. Contracts take effect only
between the parties, their assigns and heirs,
except in case where the rights and
obligations arising from the contract are not
transmissible by their nature, or by
stipulation or by provision of law. The heir is
not liable beyond the value of the property
he received from the decedent.
If a contract should contain some
stipulation in favor of a third person, he
may demand its fulfillment provided
he communicated his acceptance to
the obligor before its revocation. A mere
incidental benefit or interest of a person
is not sufficient. The contracting parties
must have clearly and deliberately
conferred a favor upon a third person.
The Court have consistently held that the
parties to a contract are the real
parties-in-interest in an action upon it.
The basic principle of relativity of
contracts is that contracts can only bind the
parties who entered into it, and cannot favor
or prejudice a third person, even if he is
aware of such contract and has acted with
knowledge thereof. Hence, one who is not a
party to a contract, and for whose benefit it
was not expressly made, cannot maintain
an action on it. One cannot do so, even
if the contract performed by the
contracting parties would incidentally inure
to one's benefit.
As evidenced by the contract of Pacto de
Retro sale, petitioner, the vendor, bound
herself to sell the subject property to
respondent, the vendee, and reserved
the right to repurchase the same
property. Therefore, the indispensable
parties are the parties to the Pacto de Retro
Sale - the vendor, the vendee, and their
assigns and heirs.
For not being an heir or an assignee of
the respondent, Villamin did not
substitute respondent in the personal rights
and obligation in the pacto de retro sale by
succession. Since she is not privy to the
contract, she cannot be considered as an
indispensable party in the action for
consolidation of title and ownership in favor
of the respondent. A cursory reading of the
contract reveals that the parties did not
clearly and deliberately confer a favor upon
Villamin, a third person.
Josefa v. Zhandong Trading, 417 SCRA
269
Facts:
Zhandong delivered to Josefa, who was
introduced as a client by Mr. Tan, the total
volume of 313 crates of boards valued at
P4,558,100.00 payable within 60 days from
delivery. Instead of paying Zhandong,
Josefa remitted his payments to Tan who in
turn delivered various checks to respondent,
who accepted them upon Tan‘s assurance
that said checks came from petitioner.
When a number of the checks bounced,
Tan issued his own checks and those of his
mother, but Tan later stopped payments.
Respondent demanded payment from Tan
and petitioner but was ignored; hence he
filed the instant complaint. In his answer
petitioner averred that he had already paid
all his obligations to respondent through
Tan. Furthermore, he claimed he is not privy
to the agreements between Tan and
respondent, and hence, in case his
payments were not remitted to respondent,
then it was not his (petitioner) fault and that
respondent should bear the consequences.
ISSUE: W/N petitioner is liable for payment
of the boards to respondent when he did not
negotiate the transaction with it, rather
through Tan as intermediary.
Held:
No. The transaction was negotiated
between Tan and petitioner who only
received the goods delivered by
respondent. Petitioner was not privy to the
arrangement between Tan and respondent.
Petitioner has fully paid for the goods to Tan
with whom he had arranged the transaction.
Contracts take effect only between the
parties, their successors in interest, heirs,
and assigns. When there is no privity of
contract, there is likewise no obligation or
liability and thus, no cause of action arises.
Petitioner, being not privy to the transaction
between Tan and respondent, should not be
made liable for the failure of Tan to deliver
the payment to respondent. Therefore,
respondent should recover the payment
from Tan.
Integrated Packing v. CA, 333 SCRA 170
(FLORES)
Topic: Relativity Art. 1311, Civil Code
Ponente: Quisumbing, J
Facts:
Respondent (deliver paper) --> Petitioner
(Printer) --> Philacor (Books)
Petitioner and private respondent executed
entered into an agreement whereby private
respondent bound itself to deliver to
petitioner 3,450 reams of printing paper,
worth P1,040,060.00 (1st Contract). The
materials were to be paid within a minimum
of thirty days and maximum of ninety days
from delivery. After sometime, petitioner
failed to pay respondent for the deliveries.
Later on, petitioner entered into a contract
with Philippine Appliance Corporation
(Philacor) to print three volumes of "Philacor
Cultural Books" for delivery of books with a
total cost of P3,000,000.00. (2nd Contract).
Petitioner entered into an additional printing
contract with Philacor (3rd Contract).
Unfortunately, petitioner failed to fully
comply with its contract with Philacor for the
printing of books. Thus, Philacor demanded
compensation from petitioner for the delay
and damage it suffered on account of
petitioner's failure.
Issue:
1. Whether or not private respondent
violated the order agreement. Yes
2. Whether or not private respondent is
liable for petitioner's breach of
contract with Philacor. No
(Important)
Ruling:
Yes, petitioner violated the contract with
private respondent
The transaction between the parties is a
contract of sale whereby private respondent
(seller) obligates itself to deliver printing
paper to petitioner (buyer) which, in turn,
binds itself to pay therefor a sum of money
or its equivalent (price).6 Both parties
concede that the order agreement gives rise
to a reciprocal obligations7 such that the
obligation of one is dependent upon the
obligation of the other. Reciprocal
obligations are to be performed
simultaneously, so that the performance of
one is conditioned upon the simultaneous
fulfillment of the other.8 Thus, private
respondent undertakes to deliver printing
paper of various quantities subject to
petitioner's corresponding obligation to pay,
on a maximum 90-day credit, for these
materials. Note that in the contract,
petitioner is not even required to make any
deposit, down payment or advance
payment, hence, the undertaking of private
respondent to deliver the materials is
conditional upon payment by petitioner
within the prescribed period. Clearly,
petitioner did not fulfill its side of the
contract as its last payment in August 1981
could cover only materials covered by
delivery invoices dated September and
October 1980.
Petitioner's evidence failed to establish that
it had paid for the printing paper covered by
the delivery invoices on time. Consequently,
private respondent has the right to cease
making further delivery, hence the private
respondent did not violate the order
agreement.
No, because respondent is not a party to
the contract between petitioner and
Philancor.
As correctly held by the appellate court,
private respondent cannot be held liable
under the contracts entered into by
petitioner with Philacor. Private respondent
is not a party to said agreements. It is also
not a contract pour autrui. Aforesaid
contracts could not affect third persons like
private respondent because of the basic
civil law principle of relativity of contracts
which provides that contracts can only bind
the parties who entered into it, and it cannot
favor or prejudice a third person, 10 even if
he is aware of such contract and has acted
with knowledge thereof.
DKC Holdings v. CA, 329 SCRA 666
Topic:
Contracts take effect only between the
parties, their assigns, and heirs (Art. 1311)
The general rule, therefore, is that heirs are
bound by contracts entered into by their
predecessors-in-interest except when the
rights and obligations arising therefrom are
not transmissible by 1) nature; 2)
stipulation; 3) provision of law.
Facts:
DKC Holdings Corporation (petitioner)
entered into a Contract of Lease with Option
to Buy with Encarnacion Bartolome on
March 16, 1998.
Encarnacion was given the option to lease
or lease with purchase the subject land.
This option must be exercised within a
period of two years counting from the
signing of the contract.
DKC regularly paid the monthly P 3,000.00
provided for by the Contract as reservation
of its Option to Encarnacion until her death
in January 1990.
DKC coursed the payments to Victor, heir of
Encarnacion but refused the payments and
the exercise of DKC to the option. DKC filed
a complaint for specific performance and
damages against Victor and the Registry of
Deeds.
Issue:
W/N the rights and obligations were
transmissible in a Contract of Lease with
Option to Buy.
Ruling:
Yes, the rights were transmissible. The
general rule provides that heirs are bound
by contracts entered into by their
predecessors-in-interest. However, the
exemptions are when the said rights and
obligations arise from 1) nature, 2)
stipulation, or 3) provision of law.
Viktor, thus, is obliged to specific
performance and damages to DKC for the
exercise of their option.
The death of a party does not excuse
nonperformance of a contract which
involves a property right, including rights
and obligations to be passed to ther
personal representatives of the deceased
Non performance is not excused by death
especially when the other party has a
property interest in the contract.
Metrobank v. Chiok, 742 SCRA 435
Doctrine: The right of rescission under
Article 1191 of the Civil Code can only
be exercised in accordance with the
principle of relativity of contracts under
Article 1131 of the same code. Under the
civil law principle of relativity of contracts
under Article 1131, contracts can only
bind the parties who entered into it, and
it cannot favor or prejudice a third
person, even if he is aware of such
contract and has acted with knowledge
thereof. Metrobank and Global Bank are
not parties to the contract to buy foreign
currency between Chiok and Nuguid.
Therefore, they are not bound by such
contract and cannot be prejudiced by the
failure of Nuguid to comply with the
terms thereof.
FACTS: On July 5, 1995, respondent Chiok
bought US$1,022,288.50 dollars from
Nuguid where Chiok deposited the three
manager’s checks ( two Asian Bank
Manager's Check and one Metrobank
Cashier's check), with an aggregate value
of ₱26,068,350.00 in Nuguid’s account.
Nuguid, however, failed to deliver the dollar
equivalent of the three checks as agreed
upon, which prompted Chiok to request that
payment on the three checks be stopped.
On the following day, Chiok filed a
Complaint for damages with application for
ex parte restraining order and/or preliminary
injunction with the RTC of Quezon City
against the spouses Nuguid, and the
depositary banks, Asian Bank and
Metrobank. On the same day a TRO was
issued directing Niguid to refrain from
presenting the said checks for payment and
the depositary banks from honoring the
same. Upon the filing by Chiok of the
requisite bond, the Writ was subsequently
issued to prevent during the pendency of
the issue Asian Bank and Metro Bank from
paying the aforementioned check.
ISSUE: Whether or not the purchaser of
manager’s and cashier’s checks has the
right to have the checks cancelled by filing
an action for rescission of its contract with
the payee
RULING: NO, When Nuguid failed to deliver
the agreed amount to Chiok, Chiok had a
cause of action against Nuguid to ask for
the rescission of their contract. On the other
hand, Chiok did not have a cause of action
against Metrobank and Global Bank that
would allow him to rescind the contracts of
sale of the manager’s or cashier’s checks,
which would have resulted in the crediting of
the amounts thereof back to his accounts.
The right of rescission under Article 1191 of
the Civil Code can only be exercised in
accordance with the principle of relativity of
contracts under Article 1131 of the same
code, which provides:
 Art. 1311. “Contracts take effect only
between the parties, their assigns
and heirs, except in case where the
rights and obligations arising from
the contract are not transmissible by
their nature, or by stipulation or by
provision of law”
Under the civil law principle of relativity of
contracts (Article 1131), contracts can only
bind the parties who entered into it, and it
cannot favor or prejudice a third person,
even if he is aware of such contract and has
acted with knowledge thereof. Metrobank
and Global Bank are not parties to the
contract to buy foreign currency between
Chiok and Nuguid. Therefore, they are not
bound by such contract and cannot be
prejudiced by the failure of Nuguid to
comply with the terms thereof.
Barfel Development Corp. v. CA (MAG-
ASO)
Topic: Relativity
Case: party-plaintiffs impleading an
additional party-defendant after the former
had concluded presenting their evidence
and while the original defendants were in
the process of presenting their witnesses
Facts: The defendants (petitioners), as
sellers, and Reginas Industries, represented
by Zaragoza, concluded an Agreement to
Buy/Sell two parcels of land with two
houses. Said Agreement bears the
expressed stipulation that “the seller will
apply the payment of the cash portion of the
purchase price to the removal of any and all
liens on the properties.” The plaintiff paid a
down payment upon the signing of the
agreement. The defendants warranted that
the subject properties are “free from any
liens and encumbrances'' except for a
mortgage in favor of BPI and the Deed of
Restrictions, but the plaintiffs (respondents)
found out that defendants made a blatant
misrepresentation when it was discovered
that the subject properties have a second
mortgage with the PISO/Central Bank.
Defendant advised that the second
mortgage obligation is reduced only to
P54,000 and gave assurance that he will
submit the necessary documents to support
the same so that a legal valid and
acceptable arrangement could be worked
out with the Central Bank for the release of
said second mortgage.
Defendants deliberately failed and/or
refused and to date continued to fail and
refuse to comply with their contractual
obligation of securing the release of the
second mortgage. The malice, fraud and the
gross and evident bad faith on the part of
the defendants is further demonstrated by
the fact that subsequently, BPI advised that
it was disauthorized by defendants to
consummate the transaction
During defendants’ presentation of
evidence, plaintiffs filed a motion for leave
to file an amended complaint and motion to
admit the same. The amendment
consisted of impleading PISO Bank as
additional party defendant and compel it
to accept payment of the existing second
mortgage from private respondent Reginas,
since allegedly no complete relief can be
had unless the second mortgage in favor of
said PISO bank is released.
Issue: WON a party who has not taken part
in a contract can sue or be sued for
performance or for cancellation thereof.
Ruling: No, a party who has not taken part
in a contract cannot sue or be sued for
performance or for cancellation thereof.
According to Article 1311 of the Civil Code,
a contract takes effect between the
parties who made it, and also their
assigns and heirs, except in cases where
the rights and obligations arising from
the contract are not transmissible by
their nature, or by stipulation or by
provision of law. Since a contract may be
violated only by the parties, thereto as
against each other, in an action upon that
contract, the real parties in interest, either
as plaintiff or as defendant, must be parties
to said contract. Therefore, a party who
has not taken part in it cannot sue or be
sued for performance or for cancellation
thereof, unless he shows that he has a
real interest affected thereby.” A “real
interest” has been defined as “a present
substantial interest, as distinguished from a
mere expectancy or a future, contingent,
subordinate or consequential interest.”
Private respondents maintain that PISO is a
proper party under sec. 8, Rule 3 of the
Revised Rules of Court: Section 8. Joinder
of proper parties. — When persons who are
not indispensable but who ought to be
parties if complete reliefs is to be accorded
as between those already parties, have not
been made parties and are subject to the
jurisdiction of the court as to both service of
process and venue, the court shall order
them summoned to appear in the action.
But the court may, in its discretion,
proceed in the action without making
such persons parties, and the judgment
rendered therein shall be without
prejudice to the rights of such persons.
Wherever a case will be completely decided
as between the party litigants, an interest
existing in some other persons whom the
process of the court cannot reach will not
prevent a decree upon merits. As far as the
complaint for specific performance and
damages is concerned, complete relief
maybe accorded between private
respondents and petitioners (as original
parties) without the presence of the
second mortgagee (PISO bank).
The amendment sought by private
respondents, which is to include a new party
defendant at a late stage in the proceeding
is a substantial one. The effect would be
to start trial anew with the parties
recasting their theories of the case.
Liberality in allowing amendments is
greatest in the early stages of a lawsuit,
decreases as it progresses and changes at
times to a strictness amounting to a
prohibition.
Robledo v. NLRC
Petition was dismissed.
Facts:
Bacani Security and Protective Agency
(BSPA) was a single proprietorship owned,
managed and operated by the late Felipe
Bacani. The petitioners in this case were
former employees of said agency. They
were employed as security guards. On
December 31, 1989, Felipe Bacani retired
the business name and BSPA ceased to
operate effective on that day. On January
15, 1990 Felipe Bacani died and an
intestate proceeding was instituted for the
settlement of his estate before the Regional
Trial Court, NCR, Branch.
Earlier, on October 26, 1989, respondent,
Bacani Security and Allied Services Co.,
Inc. (BASEC) had been organized and
registered as a corporation with the
Securities and Exchange Commission. The
primary purpose of the corporation was to
"engage in the business of providing
security" to persons and entities. This was
the same line of business that BSPA was
engaged in. Most of the petitioners, after
losing their jobs in BSPA, were employed in
BASEC.
On July 5, 1990, some of the petitioners
filed a complaint with the DOLE, for
underpayment of wages and nonpayment of
overtime pay, legal holiday pay, separation
pay and/or retirement/resignation benefits,
and for the return of their cash bond which
they posted with BSPA.
On March 1, 1992, the Labor Arbiter
rendered a decision upholding the right of
the petitioners, finding complainants entitled
to their money claims.
On appeal the National Labor Relations
Commission reversed. It declared the Labor
Arbiter without jurisdiction and instead
suggested that petitioners file their claims
with the RTC, where an intestate
proceeding for the settlement of Bacani's
estate was pending. Petitioners moved for a
reconsideration but their motion was denied
for lack of merit.
Petitioners contend that public respondent
erred in setting aside the Labor Arbiter's
judgment on the ground that BASEC is the
same entity as BSPA the latter being owned
and controlled by one and the same family,
namely the Bacani family. For this reason
they urge that the corporate fiction should
be disregarded and BASEC
should be held liable for the obligations of
the defunct BSPA.
Issues:
(1) Whether or not Bacani Security and
Allied Services Co. Inc. (BASEC) can be
held liable for claims of petitioners against
Bacani Security and Protective Agency
(BSPA).
(2) Whether or not the Labor Arbiter has
jurisdiction to decide the claims.
Ruling:
(1) No, they cannot be held liable.
The rule is settled that unless expressly
assumed labor contracts are not
enforceable against the transferee of an
enterprise. The reason for this is that labor
contracts are in personam (made against or
affecting a specific person only; imposing a
personal liability). Consequently, it has been
held that claims for backwages earned from
the former employer cannot be filed against
the new owners of an enterprise. Nor is the
new operator of a business liable for claims
for retirement pay of employees.
In this case, BASEC is an entity separate
and distinct from that of BSPA. BSPA is a
single proprietorship owned and operated
by Felipe Bacani. Hence its debts and
obligations were the personal obligations of
its owner. Petitioners’ claim which are
based on these debts and personal
obligations, did not survive the death of
Felipe Bacani on January 15, 1990 and
should have been filed instead in the
intestate proceedings involving his estate.
(2) No since the claims of petitioners
are actually money claims against the
estate of Felipe Bacani. They must be filed
against his estate in accordance with sec. 5
of Rule 86.
Under said law, claims which must be filed
under the notice. If not filed, barred;
exceptions. — All claims for money against
the decedent, arising from contract, express
or implied, whether the same be due, not
due, or contingent, all claims for funeral
expenses and expenses for the last
sickness of the decedent, and judgment for
money against the decedent, must be filed
within the time limited in the notice;
otherwise, they are barred forever, except
that they may be set forth as counterclaims
in any action that the executor or
administrator may bring against the
claimants. . .
The rationale for the rule is that upon the
death of the defendant, a testate or intestate
proceeding shall be instituted in the proper
court wherein all his creditors must appear
and file their claims which shall be paid
proportionately out of the property left by the
deceased. The objective is to avoid duplicity
of procedure. Hence the ordinary actions
must be taken out from the ordinary courts.
Under Art. 110 of the Labor Code, money
claims of laborers enjoy preference over
claims of other creditors in case of
bankruptcy or liquidation of the employer's
business.
Javier Security v. Shell Craft and Button
(Napoles)
Facts
H. L. Swiryn had engaged at P290.00 a
month the services of Federico E. Javier to
guard the premises of appellee Shell-Craft
& Button Corporation, of which Swiryn is the
vice-president and manager. Because the
services rendered by Federico E. Javier
were efficient, defendant corporation
renewed annually its contract with him. The
last renewal, on 4 May 1956, would have
expired on 1 December 1957.
Before the contract expired, Federico E.
Javier died suddenly on 9 May 1957. His
widow, appellant Concepcion D. Javier, was
then in Hongkong. To guard the compound
of the corporation, Swiryn engaged the
services of another agency on the same
day. For this reason, the heirs of Federico
E. Javier sued for breach of contract, with
damages for its unexpired term from 9 May
to 1 December 1957.
Issue
Whether or not the rights and
obligations are transmissible to the heirs
of a party.
Ruling
No. The rights and obligations are not
transmissible to the heirs of a party.
ART. 1311. Contracts take effect only
between the parties, their assigns and
heirs, except in case where the rights
and obligations arising from the contract
are not transmissible by their nature, or
by stipulation or by provision of law.

It is clear that the failure to specify in
the contract the conditions required of
the individual guards and watchmen
proves that the Shell-Craft relied upon
proper selection and supervision by
Javier himself. This trust and confidence
the company cannot be compelled to
repose in Javier’s wife or heirs, and as
to them, the contract is to be deemed
not transmissible.
Because the widow could not be
expected to perform the contract for
custodial services celebrated by her
husband, and because upon the death
of Javier no one could take his place (his
widow being at the time in Hongkong
and his children minors), while the
premises could not be left unguarded by
trusted persons, the appellee was
entitled to regard its contract with Javier
terminated then and there.
Therefore, the defendant was justified in
replacing the guards of plaintiffs’
agency.
1.Stipulation pour autrui
Marmont Hotel v. CA (ORTEGA)
Topic: Stipulation pour autrui
Art. 1311 - Contracts take effect only
between the parties, their assigns and
heirs, except in case where the rights
and obligations arising from the contract
are not transmissible by their nature, or
by stipulation or by provision of law. The
heir is not liable beyond the value of the
property he received from the decedent.
If a contract should contain some
stipulation in favor of a third person,
he may demand its fulfillment
provided he communicated his
acceptance to the obligor before its
revocation. A mere incidental benefit
or interest of a person is not
sufficient. The contracting parties
must have clearly and deliberately
conferred a favor upon a third
person. (1257a)
Facts:
On May 2, 1975, a Memorandum of
Agreement was executed between Maris
Trading and petitioner Marmont Resort
Hotel Enterprises, Inc. ("Marmont"), a
corporation engaged in the hotel and resort
business at Olongapo City. Under the
agreement, Maris Trading undertook to drill
for water and to provide all equipment
necessary to install and complete a water
supply facility to service the Marmont Resort
Hotel in Olongapo, for a stipulated fee of
P40,000.00.
In fulfillment of its contract, Maris Trading
drilled a well and installed a water pump on
a portion of a parcel of land situated in
Olongapo City, then occupied by
respondent spouses Federico and Aurora
Guiang. Five (5) months later, a second
Memorandum of Agreement was executed
between Maris Trading and Aurora Guiang,
with Federico Guiang signing as witness.
After some time, the water supply of the
Marmont Resort Hotel became inadequate
to meet the hotel's water requirements.
Petitioner Marmont secured the services of
another contractor which suggested that in
addition to the existing water pump, a
submersible pump be installed to increase
the pressure and improve the flow of water
to the hotel.
Thereafter, the manager of the Marmont
Resort Hotel, sought permission from the
Guiang spouses to inspect the water pump
which had been installed on the portion of
the land previously occupied by the spouses
and to make the necessary additional
installations but the permission was not
granted.
Marmont filed a Complaint against the
Guiang spouses for damages resulting from
their refusal to allow representatives of
petitioner and the second contractor firm
entry into the water facility site, meanwhile,
Guiang spouses in their defense denied
having previous knowledge of the first
Memorandum of Agreement entered
between Marmont Resort Hotel and Maris
Trading and asserted that the second
Memorandum of Agreement was invalid for
not having been executed in accordance
with law.
Issue:
Whether or not the 2nd Memorandum of
Agreement (entered between Maris Trading
and Guiang spouses) is valid.
Ruling:
YES, the 2nd Memorandum of Agreement is
valid. It is clear from the stipulations in the
2nd MOA that Marmont was to benefit from
it. In fact, said stipulations appear to have
been designed precisely to benefit petitioner
and, thus, partake of the nature of
stipulations pour autrui, contemplated in
Article 1311 of the Civil Code.
A stipulation pour autrui is a stipulation in
favor of a third person conferring a clear
and deliberate favor upon him, which
stipulation is found in a contract entered into
by parties neither of whom acted as agent
of the beneficiary. The Court concluded that
the purpose and intent of the stipulating
parties (Maris Trading and respondent
spouses) to benefit the third person
(petitioner Marmont) is sufficiently clear in
the second Memorandum of Agreement.
The sole purpose of Maris Trading in
acquiring possessory rights over that
specific portion of the land where well and
pump and piping had been installed, was to
supply the water requirements of petitioner's
hotel. That said purpose was known by
respondent spouses, is made explicit by the
second Memorandum of Agreement. Maris
Trading itself had no need for a water
supply facility; neither did the respondent
spouses. The water facility was intended
solely for Marmont Resort Hotel. The
interest of Marmont cannot therefore be
regarded as merely "incidental.”
S/n: See relevant stipulations in the 2nd
Memorandum of Agreement –
That the First Party (i.e., Maris Trading) has
dug, drilled and tapped water source for
Marmont Resort, located at Bo. Barretto,
Olongapo City in accordance with their
agreement executed on May 2, 1975 and
notarized before Isagani M. Jungco, Notary
Public and entered as Doc. No. 166; Page
No. 135; Book No. XV; Series of 1975.
That the First Party has erected, built and
drilled for the water source of Marmont
Resort on the land owned by the Second
Party [respondent spouses] at the corner of 2) the Insured has not complied with the
J. Montelibano Street and Maquinaya Drive provisions of the policy concerning
(Provincial Road) with the latter's arbitration.
permission;... (Emphasis supplied)
ISSUE:
The issue was whether or not the Coquias
had a rightful claim to the proceeds of the
deceased.

RULING:
Yes, they have as the policy was one
concerning contracts pour atrui the
enforcement of which may be demanded by
Coquia v. Fieldmen's Insurance G.R. No.
a third party for whose benefit it was made,
L-23276 November 29, 1968 (PADUL)
although not a party to the contract, before
the stipulation in his favor has been revoked
Topic: Stipulation pour autrui
by the contracting parties. Breaking down
s/n: petition for review
the provisions of the contract, it was clear
that item 7 pertaining to the event in case of
FACTS
death “the Company will, in respect of the
liability incurred by such person, indemnify
Melecio Coquia and Maria Espanueva are
his personal representatives in terms of and
parents of Carlito Coquia. Carlito was
subject to the limitations of this Policy,
working as a taxi cab driver in Manila Yellow
provided, that such representatives shall, as
Taxicab Co., Inc. As an employee, he was
though they were the Insured, observe, fulfill
afforded with an accident insurance benefit
and be subject to the Terms of this Policy
that lasts from Dec 1 1961 to Dec 1 1962.
insofar as they can apply.”
The company was Fieldmen’s Insurance.

In fact, the Company "may, at its option,

On February 10, 1962 within the period of
make indemnity payable directly to the
the policy, Carlito was involved in an
claimants or heirs of claimants ... it being
accident and consequently died. Yellowcab
the true intention of this Policy to protect ...
and his parents filed P5k claims from
the liabilities of the Insured towards the
Fieldmen’s Insurance but the company
passengers of the Motor Vehicle and the
compromised with P2K. The petitioners
Public" — in other words, third parties.
countered with 4K but the Insurance
Hence, this is typical contracts pour autrui,
company did not accept it. Hence, on 18th
made more manifest by the fact that the
September the Insured and Carlito’s parents
deceased driver paid fifty percent (50%) of
filed a complaint against the Company to
the corresponding premiums, which were
collect the proceeds of the policy.
deducted from his weekly commissions.
Under these conditions, it is clear that the
The Insurance company appealed and
Coquias — who, admittedly, are the sole
contended that plaintiffs have no cause of
heirs of the deceased — have a direct
action because: 1) the Coquias have no
cause of action against the Company and
contractual relation with the Company; and
since they could have maintained this action
by themselves, without the assistance of the
Insured, it goes without saying that they
could and did properly join the latter in filing
the complaint herein.
On the issue of arbitration, none of the
parties invoked it nor made any reference to
arbitration, during the negotiations
preceding the institution of the present case.
No settlement in arbitration from both
counsels. Hence, where neither party
demands an arbitration, both parties thereby
waive it.
Mandarin Villa v. CA
Mandarin Villa v CA
GR No. 119850
June 20, 1996
Facts:
1. Clodualdo de Jesus hosted a dinner
for his friends at Mandarin Villa
Seafoods Village
2. After dinner Waiter handed the bill
3. Clodualdo offered to pay the bill thru
credit card issued by Philippine
Commercial Credit Card (Bankard)
4. The card was accepted by waiter but
when swiped the prompt showed
that the card was EXPIRED
5. Clodualdo remonstrated that it is not
expired showing the embossed
expiry date on the card
a. They swiped again but the
computed still showed that it
is expired.
6. Professor Lirag another guest
uttered remarks “ Clody, may
problema ba? Baka kailangang
maghugas na kami ng pinggan?”
7. Then Clody got his BPI Express
Credit Card and paid the bill which
was accepted.
8. This incident triggered the filing of
the suit for damages against
Mandarin Villa and Bankard.
9. RTC ruled in favor of Clody
10. CA ruled: absolved Bankard and
Mandarin became solely responsible
for the damages.
11. Mandarin contends that
Respondents (Clody) offer to pay by
means of credit card partook of the
nature of a proposal to novate an
existing obligation for which
petitioner, as creditor, must first give
its consent otherwise there will be no
binding contract between them.
Issue:
WON Mandarin Villa cannot be faulted for
its refusal to accept the BANKARD credit
card.
Ruling:
No
Mandarin Villa Seafood Village is affiliated
with BANKARD. In fact, an "Agreement" 6
entered into by petitioner and BANKARD
dated June 23, 1989, provides inter
alia:jgc:chanrobles.com.ph
"The MERCHANT shall honor validly
issued PCCCI credit cards
presented by their corresponding
holders in the purchase of goods
and/or services supplied by it
provided that the card expiration
date has not elapsed and the card
number does not appear on the
latest cancellation bulletin of lost,
suspended and canceled PCCCI
credit cards and, no signs of
tampering, alterations or
irregularities appear on the face of
the credit card"
While the private respondent may not be a
party to the said agreement, the above-
quoted stipulation conferred a favor upon
the private respondent, a holder of credit
card validly issued by BANKARD.
This stipulation is a stipulation pour autri
and under Article 1311 of the Civil Code
private respondent may demand its
fulfillment provided he communicated his
acceptance to the petitioner before its
revocation.
In this case, private respondent’s offer to
pay by means of his BANKARD credit card
constitutes not only an acceptance of the
said stipulation but also an explicit
communication of his acceptance to the
obligor.
In addition, the record shows that petitioner
posted a logo inside Mandarin Villa Seafood
Village stating that "Bankard is accepted
here" This representation is conclusive
upon the petitioner which it cannot deny or
disprove as against the private respondent,
the party relying thereon. Petitioner,
therefore, cannot disclaim its obligation to
accept private respondent’s BANKARD
credit card without violating the equitable
principle of estoppel.
Everett Steamship v. CA (ZAMBRANO)
Topic: Stipulation pour autrui
Art. 1311 - Contracts take effect only
between the parties, their assigns and
heirs, except in case where the rights
and obligations arising from the contract
are not transmissible by their nature, or
by stipulation or by provision of law. The
heir is not liable beyond the value of the
property he received from the decedent.
If a contract should contain some
stipulation in favor of a third person,
he may demand its fulfillment
provided he communicated his
acceptance to the obligor before its
revocation. A mere incidental benefit
or interest of a person is not
sufficient. The contracting parties
must have clearly and deliberately
conferred a favor upon a third
person. (1257a)
Everett Steamship Corporation -
petitioner
Everett Orient Lines - respondent’s
principal, owned ADELFAEVERETTE,
vessel carrying the imported crates from
Japan
Hernandez Trading Co. Inc - Private
respondent, imported three crates of bus
spare parts from its supplier Maruman
Trading Company Ltd
Maruman Trading Co., LTD - shipper
Bill of Lading - document issued by a
carrier to acknowledge receipt of cargo
for shipment.
In this case, it is stipulated in the bill of
lading that the maximum amount
stipulated under Clause 18 is only
Y100,000, liability of the petitioner is thus
liable (argument of the petitioner - they
should not pay for the Y1,552,500 - cost
of lost cargo)
Facts:
Petition for review - seeks the reversal of
the CA decision, which affirmed the RTC
decision finding petitioner liable to
private respondent Hernandez Trading
Co. Inc.
Hernandez Trading Co., Inc. (Hernandez)
imported 3 crates of bus spare parts
(MARCO C/No. 12, MARCO C/No. 13 and
MARCO C/No. 14), from Maruman Trading
Company, Ltd. (Maruman), a foreign
corporation based in Japan. The crates
(covered by Bill of Lading No. NGO53MN)
were shipped on board
“ADELFAEVERETTE,” a vessel owned by
Everett Orient Lines. Upon arrival at the port
of Manila, it was discovered that the crate
marked MARCO C/No. 14 was missing.
Hernandez made a formal claim for
Y1,552,500.00, as shown in an Invoice No.
MTM-941, dated November 14, 1991.
Everett Streamship Corp. offered to pay
only Y100,000.00 the maximum amount
stipulated under Clause 18 of the covering
bill of lading. Hernandez rejected the offer
and thereafter instituted a suit for collection.
The Trial Court decided in favor of
Hernandez. The Court of Appeals Affirmed
but deleted the award of attorney’s fees.
ISSUE(S):
1. Whether or not the limited liability clause
in the Bill of Lading is valid
2. Whether or not Hernandez as consignee,
who is not a signatory to the bill of lading is
bound by the stipulations thereof
RULING:
1. YES.
A stipulation in the bill of lading limiting the
common carrier’s liability for loss or
destruction of a cargo to a certain sum,
unless the shipper or owner declares a
greater value, is sanctioned by law,
particularly Articles 1749 and 1750 of the
Civil Code which provide:
ART. 1749. A stipulation that the common
carrier’s liability is limited to the value of the
goods appearing in the bill of lading, unless
the shipper or owner declares a greater
value, is binding.
ART. 1750. A contract fixing the sum that
may be recovered by the owner or shipper
for the loss, destruction, or deterioration of
the goods is valid, if it is reasonable and
just under the circumstances, and has been
freely and fairly agreed upon.
Maruman Trading, had the option to declare
a higher valuation if the value of its cargo
was higher than the limited liability of the
carrier. Considering that the shipper did not
declare a higher valuation, it had itself to
blame for not complying with the
stipulations. The trial court’s ratiocination
that private respondent could not have
“fairly and freely” agreed to the limited
liability clause in the bill of lading because
the said conditions were printed in small
letters does not make the bill of lading
invalid. Contracts of adhesion are valid and
binding. Greater vigilance, however, is
required of the courts when dealing with
contracts of adhesion in that the said
contracts must be carefully scrutinized “in
order to shield the unwary (or weaker party)
from deceptive schemes contained in ready-
made covenant. Article 24 of the Civil Code
which mandates that “(i)n all contractual,
property or other relations, when one of the
parties is at a disadvantage on account of
his moral dependence, ignorance,
indigence, mental weakness, tender age or
other handicap, the courts must be vigilant
for his protection. Maruman Trading, we
assume, has been extensively engaged in
the trading business. It can not be said to be
ignorant of the business transactions it
entered into involving the shipment of its
goods to its customers. The shipper could
not have known, or should know the
stipulations in the bill of lading and there it
should have declared a higher valuation of
the goods shipped. Moreover, Maruman
Trading has not been heard to complain that
it has been deceived or rushed into
agreeing to ship the cargo in petitioner’s
vessel. In fact, it was not even impleaded in
this case.
2. YES. Hernandez as consignee, who is
not a signatory to the bill of lading is bound
by the stipulations thereof.
(The bill of lading subject of the present
controversy specifically provides,
among others:
18. All claims for which the carrier may
be liable shall be adjusted and settled on
the basis of the shipper's net invoice
cost plus freight and insurance
premiums, if paid, and in no event shall
the carrier be liable for any loss of
possible profits or any consequential
loss.
The carrier shall not be liable for any
loss of or any damage to or in any
connection with, goods in an amount
exceeding One Hundred thousand Yen in
Japanese Currency (Y100,000.00) or its
equivalent in any other currency per
package or customary freight unit
(whichever is least) unless the value of
the goods higher than this amount is
declared in writing by the shipper before
receipt of the goods by the carrier and
inserted in the Bill of Lading and extra
freight is paid as required.)
The right of a party in the same situation as
Hernandez, to recover for loss of a
shipment consigned to him under a bill of
lading drawn up only by and between the
shipper and the carrier, springs from either
a relation of agency that may exist between
him and the shipper or consignor, or his
status as stranger in whose favor some
stipulation is made in said contract, and who
becomes a party thereto when he demands
fulfillment of that stipulation, in this case the
delivery of the goods or cargo shipped.
When Hernandez formally claimed
reimbursement for the missing goods from
Everett and subsequently filed a case
against the it based on the very same bill of
lading, it accepted the provisions of the
contract and thereby made itself a party
thereto, or at least has come to court to
enforce it.The private respondent cannot
now reject or disregard the carrier’s limited
liability stipulation in the bill of lading. He is
bound to the whole stipulations in the bill of
lading and must respect the same.
The commercial Invoice No. MTM-941 does
not in itself sufficiently and convincingly
show that Everett has knowledge of the
value of the cargo as contended by
Hernandez.
SC reversed the decision of the CA. Loss of
the cargo is limited to Y100,000.
Notes:
1. CA’s consideration
- Petitioner’s categorical admission
of loss and failure to overcome
the presumption of negligence
and fault
2. Private respondent contended
that the petitioner should be held
liable for the whole amount since
the terms appearing at the back of
 the bill of lading was so written in
fine prints and that the same was
not signed by shipper or plaintiff,
thus respondent was not bound
by clause.
3. Art. 1750 - A contract fixing the
sum that may be recovered by the
owner or shipper for the loss,
destruction or deterioration of the
goods is valid, if it is reasonable
and just under the circumstances,
and has been fairly and freely
agreed upon.
RTC ruled that the requirements of the said
article have not been met.
The fact that the those conditions are
printed at the back of the bill of lading in
letters so small that they are hard to read
would not warrant the presumption that the
plaintiff or its supplier was aware of these
conditions such that he had “fairly and freely
agreed to these conditions.
It can not be said the respondent had
actually entered into the contract with the
defendant.
CA affirmed RTC decision but deleted the
award of attorney’s fees.
- No evidence appears on record to
show that Hernandez consented to
the terms of the Bill of Lading. The
shipper named in the Bill of Lading is
Maruman trading Co., LTD whom
the petitioner contracted with for the
transportation of the lost goods
- assigns and heirs except in cases where
Even if assuming the the shipper accepted
the terms of the bill of lading when it
delivered the cargo to the appellant, still it
does not necessarily follow that Hernandez
as consignee was bound thereby
considering that the latter was never privy to
the shipping contract
In order to counter the carrier’s limited
liability, Clause 18 of the bill of lading
requires that the shipper should have
declared in writing a higher valuation of the
goods BEFORE receipt thereof by the
carrier and insert the said declaration in the
bill of lading, with extra freight paid. Shipper
never complied this.
Kauffman v. PNB
Pertinent Facts:
Philippine National Bank - Manila Philippine
agreed to transfer of $45,000 to petitioner
Kauffman in New York City upon request
and against the account of Fiber and
Produce Company (PFPC). However, a
representative of PNB - New York, reluctant
to accept bills from PFPC, withheld the
money from Kauffman.
Issue:
Whether the petitioner possesses the right
to demand the delivery of the obligation.
Ruling:
Yes, petitioner has the right to
demand the delivery of the money.
Generally, contracts only take effect
between the contracting parties, their
rights and obligation arising from the
contract is not transmissible by their nature,
or by stipulation or by provision of law and
in cases where a contract contain some
stipulation in favour of a third person.
 In the case at bar, PFPC and PNB
perfected a contract where PNB agreed to
give $45,000 through its New York office to
Kauffman. Before the application of
stipulation pour autrui, a third person must
signify his acceptance before it has been
revoked. Kauffman, being the third person,
accepted such stipulation evident when he
went to PNB to get the money PFPC meant
to give to him.
Associated bank v CA
GR 123793
June 29, 1998
Topic: Stipulation Pour Autri
Facts:
1. Associated Banking Corp and
Citizens bank and Trust Company
merged to form one banking
corporation known as Associated
Citizens Bank, later changed to
Associated Bank.
2. Mr. Lorenzo Sarmiento Jr. executed
a promissory note which was
prescribed.
3. Sarmiento failed to pay despite
repeated demands.
4. Sarmiento assail that he executed
the promissory note in favor of
CBTC and said that the note was a
contract pour autri
Issue: WON the note was a stipulation Pour
Autri
Ruling:
No.
A stipulation pour autrui is one in favor of a
third person who may demand its fulfillment,
provided he communicated his acceptance
to the obligor before its revocation. An
incidental benefit or interest, which another
person gains, is not sufficient. The
contracting parties must have clearly and
deliberately conferred a favor upon a third
person
Florentino vs. Encarnacion Sr. enumerates
the requisites for such contract:
(1) the stipulation in favor of a third person
must be a part of the contract, and not the
contract itself;
(2) the favorable stipulation should not be
conditioned or compensated by any kind of
obligation; and
(3) neither of the contracting parties bears
the legal representation or authorization of
the third party.
The "fairest test" in determining whether the
third person's interest in a contract is a
stipulation pour autrui or merely an
incidental interest is to examine the
intention of the parties as disclosed by their
contract.
We carefully and thoroughly perused the
promissory note, but found no stipulation at
all that would even resemble a provision in
consideration of a third person. The
instrument itself does not disclose the
purpose of the loan contract. It merely lays
down the terms of payment and the
penalties incurred for failure to pay upon
maturity. It is patently devoid of any
indication that a benefit or interest was
thereby created in favor of a person other
than the contracting parties. In fact, in no
part of the instrument is there any mention
of a third party at all. Except for his
barefaced statement, no evidence was
proffered by private respondent to support
his argument. Accordingly, his contention
cannot be sustained. At any rate, if indeed
the loan actually benefited a third person
who undertook to repay the bank, private
respondent could have availed himself of
the legal remedy of a third-party complaint.
That he made no effort to implead such third
person proves the hollowness of his
arguments.
V. Obligatory Force

Tiu Peck v. CA (CLOMATA)
Article 1159 provides that Obligations
arising from contracts have the force of the
law between the contracting parties and
should be complied with in good faith.
Topic: Obligatory Force
Facts:
Joaquin Tiu Singco, father of petitioner Tiu
Peck, owned and operated the Argentina
Trading, a business engaged in the buying
and selling of lumber hardware and general
merchandise in San Marcelino, Zambales.
Helping him run the business were private
respondents: Tan King and his wife
Conchita M. Rubiato who is registered as
the the owner in the business license.
After the death of Joaquin Tiu Singco in
1974, Tiu Peck took over and continued the
business left by his father Tan King and
Conchita M. Rubiato continued to help him
in the management of the said business and
eventually became business partners of Tiu
Peck.
Sometime in 1983, petitioners and private
respondents decided to end their business
partnership. The parties discussed the
manner of their separation and the
liquidation of the partnership properties. As
a result of the discussion, an "Agreement on
the Apportionment of Partnership Business"
was drawn up and signed with witnesses
from Chinese Chamber of Commerce.
Immediately thereafter, Tiu Peck took
possession of the lumber and hardware
business including the lot and building as
well as the merchandise therein. On the
other hand, Tan King and Conchita M.
Rubiato took possession of the piggery
business, the lot and all the improvements
thereon as well as the hogs.
After three (3) years, private respondents
wrote to petitioners demanding partition of
the same properties subject of the
Agreement.
After trial, the Regional Trial Court of the
Third Judicial Region, Branch 72, Olongapo
City, rendered judgment, declaring, among
other things, that the parcels of land which
were the share of Rubiato and Tan King
from the agreement are owned in common
by the plaintiffs and the defendants in pro-
indiviso equal shares; and ordering both to
partition the said parcels of land among
themselves.
Petitioners (as defendants) appealed the
above decision to respondent Court of
Appeals who modified the decision of the
RTC, thus the foregoing.
Issue:
WON the agreement on the Apportionment
of Partnership Business between Tiu Peck
and Rubiato et al is valid and binding?
Ruling:
Yes, the agreement is valid and
binding.
Contracts shall be obligatory in
whatever form they may have been entered
into, provided all the essential requisites for
their validity are present.
In the case here, there is no
question that petitioners and the private
respondents voluntarily entered into the
agreement to apportion or divide their
businesses, whether as partners or co-
owners. That agreement is the law between
them. The fact that after signing the
agreement both parties immediately took
possession of their respective shares is the
most compelling evidence that there was
indeed a binding partition of the properties.
Contacts, once perfected, have the force of
law between the parties who are bound to
comply therewith in good faith, and neither
one may, without the consent of the other,
renege therefrom.
Therefore, the agreement is valid
and binding.
GOLANGCO V. PCIB G.R. No. 142830
MARCH 24, 2006 1306
FACTS:
William Polanco Construction Corporation
(WGCC) and the Philippine Commercial
International Bank (PCIB) entered into a
contract for the construction of the
extension of the PCIB Tower II on October
20, 1989. It included the application of a
granitite wash-out finish on the exterior
walls of the building.
In June 1, 1992, PCIB accepted turnover of
completed work and to answer for any
defect arising within a period of one
year, WGCC submitted a guarantee bond
issued by Malayan Insurance in
compliance with the construction contract.
The issue arose when portions of the
granitite wash-out finish of the exterior of
the building began peeling off and falling
from the walls in 1993. WGCC made minor
repairs.
But in 1994, PCIB entered into another
contract with Brains and Brawns
Corporation to re-do the entire granitite
wash-out finish after WGCC that it was “not
in a position to do the new finish work”
though it was willing to share a part of the
cost. PCIB incurred P11.6M for the repair
work.
Construction Industry Arbitration
Commission PCIB filed a request for
arbitration with the CIAC for the
reimbursement of its expenses for the
repairs made by another contractor it
complaint WGCC alleged non-compliance
with their contractual terms on materials and
workmanship. WGCC interposed a P5.7M
counter-claim for material cost. CIAC
declared WGCC liable for the construction
defects in the project. WGCC filed for
review with CA but was dismissed.
ISSUE: WON petitioner WGCC is liable for
defects in the granitite wash-out finish that
occurred after the lapse of the one-year
defects liability period provided in Art. XI of
the construction contract.
HELD:
We rule in favor of WGCC.
Autonomy of contracts - The autonomous
nature of contracts is enunciated in Article
1306 of the Civil Code.
Obligations arising from contracts have the
force of law between the parties and should
be complied with in good faith. In
characterizing the contract as having the
force of law between the parties, the law
stresses the obligatory nature of a binding
and valid agreement.
The provision in the construction contract
providing for a defects liability period was
not shown as contrary to law, morals, good
customs, pubic order or public policy. By the
nature of the obligation in such contract, the
provision limiting liability for defects and
fixing specific guaranty periods was not only
fair and equitable; it was also
necessary. Without such limitation, the
contractor would be expected to make a
perpetual guarantee on all materials and
workmanship.
The adoption of a one-year guarantee,
as done by WGCC and PCIB, is
established usage in the Philippines for
private and government construction
contracts. The contract did not specify a
different period for defects in the granitite
wash-out finish; hence, any defect therein
should have been brought to WGCC’s
attention within the one-year defects liability
period in the contract.
We cannot countenance an interpretation
that undermines a contractual stipulation
freely and validly agreed upon. The courts
will not relieve a party from the effects of an
unwise or unfavorable contract freely
entered into.
The inclusion in a written contract for a
piece of work [,] such as the one in
question, of a provision defining a
warranty period against defects, is not
uncommon. This kind of a stipulation is
of particular importance to the contractor,
for as a general rule, after the lapse of the
period agreed upon therein, he may no
longer be held accountable for whatever
defects, deficiencies or imperfections that
may be discovered in the work executed by
him.
FGU Insurance v. G.P Sarmiento Trucking
FACTS:
G.P. Sarmiento Trucking Corporation (GPS)
undertook to deliver refrigerators aboard
one of its Isuzu truck, driven by Lambert
Eroles, from the plant site of Concepcion
Industries, Inc. to the Central Luzon
Appliances in Dagupan City. While the truck
was traversing the north diversion road
along McArthur highway in Barangay
Anupol, Bamban, Tarlac, it collided with an
unidentified truck, causing it to fall into a
deep canal, resulting in damage to the
cargoes. FGU Insurance Corporation
(FGU), an insurer of the shipment, paid to
Concepcion Industries, Inc., the value of the
covered cargoes. FGU, in turn, being the
subrogee of the rights and interests of
Concepcion Industries, Inc., sought
reimbursement of the amount it had paid to
the latter from GPS. Since the trucking
company failed to heed the claim, FGU filed
a complaint for damages and breach of
contract of carriage against GPS and its
driver Lambert Eroles. Respondents
asserted that that the cause of damage was
purely accidental.
ISSUE: W/N is liable for damages arising
from negligence.
Held:
In culpa contractual, upon which the action
of petitioner rests as being the subrogee of
Concepcion Industries, Inc., the mere proof
of the existence of the contract and the
failure of its compliance justify, prima facie,
a corresponding right of relief. Respondent
trucking corporation recognizes the
existence of a contract of carriage between
it and petitioner and admits that the cargoes
it has assumed to deliver have been lost or
damaged while in its custody. In such a
situation, a default on, or failure of
compliance with, the obligation – in this
case, the delivery of the goods in its custody
to the place of destination - gives rise to a
presumption of lack of care and
corresponding liability on the part of the
contractual obligor the burden being on him
to establish otherwise. GPS has failed to do
so. Respondent driver, without concrete
proof of his negligence or fault, may not
himself be ordered to pay petitioner. The
driver, not being a party to the contract of
carriage between petitioner and defendant,
may not be held liable under the agreement.
A contract can only bind the parties who
have entered into it or their successors who
have assumed their personality or their
juridical position. Petitioner‘s civil action
against the driver can only be based on
culpa aquiliana, which, unlike culpa
contractual, require the claimant for
damages to prove negligence or fault on the
part of the defendant.
Asia World Recruitment, Inc. v. NLRC
(FLORES)
Topic: Obligatory Force
Ponente: Quisumbing, J
Facts:
Petitioner Asia World Recruitment is a
domestic corporation with authority granted
by the POEA to recruit and deploy Filipino
overseas contract workers abroad.
Petitioner’s principal is Roan Selection Trust
International Ltd., a diamond and gold
mining company in Angola, Africa.
Private respondent Medel, Jr., is a Filipino
who entered into an employment contract
with petitioner to work as a Security Officer
in its diamond mine, for a period of twelve
(12) months commencing upon his
departure from the Philippines. Private
respondent arrived in Angola sometime in
December, 1988. In addition to being a
Security Officer, he was made to work as a
Dispatcher and Metallurgy Inspector in the
diamond mine. During his employment,
private respondent elevated the grievances
of his Filipino co-workers to the
management, which apparently strained
relations between him and management.
In March 1989, private respondent received
a letter of termination informing him that the
company was not satisfied with his
performance within the three-month trial
period, and that his employment with the
company would be terminated. The records
show, however, that private respondent was
repatriated to the Philippines two (2) days
after he received the notice of termination.
POEA Adjudication Office rendered a
decision finding petitioner solidarily liable for
illegal dismissal, and ordering them to pay
herein private respondent the sum for the
unexpired portion of the contract.
Petitioner elevated their appeals to NLRC
for the reversal of the POEA decision.
NLRC dismissed petitioner's appeal and
granted respondent's claims (salary
differentials, overtime pay, etc.).
Issue:
WON public respondent NLRC committed
grave abuse of discretion when it affirmed
the decision of the POEA finding that private
respondent was illegally dismissed with the
modification that salary differential, overtime
pay and attorney’s fees should be allowed.
Ruling:
No, NLRC did not commit a grave abuse of
discretion since there was a breach of
contract of employment and summary
dismissal are contrary to law.
The records clearly show that private
respondent was an employee with a fixed
period of twelve (12) months. Private
respondent, therefore, was an employee
hired for a fixed term whose employment
was to end only at the expiration of the
period stipulated in his contract. Thus, this
is not a simple case of illegal dismissal of an
employee whose employment is without a
definite period, rather, we find that the
principal cause of action in a private
respondent’s complaint is breach of contract
of employment for a definite period. As a
party to this contract, he enjoys security of
tenure, for the period of time his contract is
in effect. Petitioner contends that private
respondent was only a probationary
employee for a period of three (3) months.
Even if granted, for the sake of argument,
that this were true, as a probationary
employee, he is nonetheless entitled to
constitutional protection of security of tenure
that no worker shall be dismissed except for
cause provided by law and after due
process. Security of tenure is a right of
paramount value guaranteed by the
Constitution and should not be denied on
mere speculation.
Petitioner invoked the provision in the
employment contract which allows summary
dismissal. Consequently, petitioner argues
that written notice to the private respondent
was no longer an indispensable procedural
requirement to satisfy the dictates of due
process but was merely a formality in the
course of effecting severance of
employment. Such blatant violation of basic
labor law principles cannot be permitted by
this Court. Although a contract is law
between the parties, the provisions of
positive law which regulate such contracts
are deemed included and shall limit and
govern the relations between the parties."
The burden is on the employer to prove that
the termination was after due process, and
for a valid or authorized cause. For the two
requisites in our jurisdiction to constitute a
valid dismissal are: (a) the existence of a
cause expressly stated in Article 282 of the
Labor Code; and (b) the observance of due
process, including the opportunity given the
employee to be heard and defend himself.
Applying the above legal criteria, we find
that private respondent herein was indeed
dismissed without cause and without due
process.
Magbanua v. Uy
Topic:
"Rights may be waived through a
compromise agreement, notwithstanding a
final judgment that has already settled the
rights of the contracting parties. To be
binding, the compromise must be shown
to have been voluntarily, freely and
intelligently executed by the parties, who
had full knowledge of the judgment.
Furthermore, it must not be contrary to law,
morals, good customs and public policy."
Peralta, J.
Facts:
As a final consequence of the final and
executory decision of the Supreme Court
which affirmed with modification the
decision of the NLRC, hearings were
conducted to determine the amount of wage
differentials due the eight petitioners. The
petitioners filed a Motion for Issuance of
Writ of Execution. Rizalino Uy filed a
Manifestation requesting that the cases be
terminated and closed, stating that the
judgment award as computed had been
complied with to the satisfaction of
petitioners. Said Manifestation was also
signed by the eight petitioners. Together
with the manifestation is a Joint Affidavit
dated May 5, 1997 of petitioners, attesting
to the receipt of payment from respondent
and waiving all other benefits due them in
connection with their complaint. On October
20, 1997, six of the eight petitioners filed a
Manifestation requesting that the cases be
considered closed and terminated as they
are already satisfied of what they have
received from respondent. Together with
said Manifestation is a Joint Affidavit in the
local dialect, of the six petitioners attesting
that they have no more collectible amount
from respondent and if there is any, they are
abandoning and waiving the same.
Issues:
1. W/N the final and executory judgment
of the Supreme Court could be subject to
compromise settlement;
2. W/N the petitioners’ affidavit waiving
their awards in the labor case executed
without the assistance of their counsel
and labor arbiter is valid.
Ruling:
1. Yes, the compromise settlement is
valid and may be subject to rescission if
either or both parties are unaware of the
existence of the final judgment.
The validity of the agreement is
determined by compliance with the
requisites and principles of contracts,
not by when it was entered into.
Petitioners voluntarily entered into the
compromise agreement. Circumstances
also reveal that respondent has already
complied with its obligation pursuant to the
compromise agreement. Having already
benefited from the agreement, estoppel
bars petitioners from challenging it.
2. The presence or the absence of counsel
when a waiver is executed does not
determine its validity. There is no law
requiring the presence of a counsel to
validate a waiver. The test is whether it was
executed voluntarily, freely and intelligently;
and whether the consideration for it was
credible and reasonable. Where there is
clear proof that a waiver was wangled from
an unsuspecting or a gullible person, the
law must step in to annul such a
transaction. In the present case, petitioners
failed to present any evidence to show that
their consent had been vitiated.
Royal Line, Inc. v CA
FACTS: Petitioner and the National
Shipyards and Steel Corporation (NASSCO)
entered into a written contract for the
conversion of M/V Sea Belle into a
passenger and cargo vessel. Additional
work was done on the ship, so NASSCO
demanded the sum of P196,245.37,
representing the difference between the
amount already paid by the petitioner and
the contract price.
Petitioner rejected the demand, claiming it
had not authorized the additional work in
writing and the additional price to be paid
had not been determined in writing by the
parties as required under Article 1724 of the
Civil Code.
Art. 1724. 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
 landowner 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.
The trial court sustained NASSCO, and
petitioner appealed. The Court of Appeals
held that said article was not applicable in
the instant case as it referred only to
structures on land and did not include
vessels. Petitioner filed for certiorari to
challenge this decision.
ISSUE: WON the petitioner is liable for the
additional work done on the vessel
RULING: YES, the petitioner is liable for the
additional work done on the vessel.
Article 1724 does not apply to this case as it
is applicable only to work to be built on land.
Since said article does not apply, the
contract between the parties come under
the general rules on contract in which no
particular form is required for the agreement
under consideration. The contract may be
oral or written.
Moreover, in Article IV of the written
contract of services it was provided that:
during the performance of the work
required, the OWNER, at his option
may send an authorized
representative to be present while
the work is being performed. In the
event that the OWNER requests for
any modification, change, and/or
extra work to be performed on the
vessel which are not otherwise
specified in the contract, the same
shall be subject of another contract
between the parties hereto.
In the case at bar, Victorino Estrella and
Steve Pierre were sent by petitioner to the
NASSCO shipyard in Mariveles while the
M/V Sea Belle was being repaired and that
they represented said petitioner when they
requested the extra work that was
subsequently done on the vessel. This
second contract was not reduced to writing,
but it was nonetheless as binding between
the parties as the first written contract
Boysaw v. Interphil Promotions, Inc.
(MAG-ASO)
Topic: Obligatory Force
Facts: Solomon Boysaw and his then
Manager, Willie Ketchum, signed with
Interphil Promotions, Inc. represented by
Lope Sarreal, Sr., a contract to engage
Gabriel "Flash" Elorde in a boxing
contest for the junior lightweight
championship of the world. It was stipulated
that the bout would be held at the Rizal
Memorial Stadium in Manila on September
30, 1961 or not later than 30 days thereafter
should a postponement be mutually agreed
upon, and that Boysaw would not, prior to
the date of the boxing contest, engage in
any other such contest without the written
consent of Interphil Promotions, Inc.
However, before September 30, 1961,
Boysaw entered into a non-title bout on
June 19, 1961 and without consent from
Interphil, Ketchum assigned to Amado
Araneta the managerial rights over Boysaw.
Amado Araneta in turn transferred the
earlier acquired managerial rights to Alfredo
again without the consent from Interphil.
Yulo thereafter informed Interphil Boysaw’s
readiness to comply with the boxing
contract of May 1, 1961. The GAB after a
series of conferences of both parties
scheduled the Elorde-Boysaw fight on
November 4, 1961. Yulo refused to accept
the charge in the fight date even after
Sarreal offered to advance the fight date to
October 28, 1961. However, he changed his
mind and decided to accept the fight date
on November 4, 1961. While an Elorde-
Boysaw fight was eventually staged, the
fight contemplated in the May 1, 1961
boxing contract never materialized.
As a result, Yulo and Boysaw sued Interphil
for damages allegedly due to the latter’s
refusal to honor their commitments under
the boxing contract of May 1, 1961.
Issue: WON there was a violation of the
fight contract of May 1, 1961 and if there is,
who violated the contract.
Ruling: Yes, there was a violation of the
fight contract of May 1, 1961 by Boysaw
himself. Without the approval or consent of
Interphil, he fought Louis Avila on June 19,
1961 in Las Vegas Nevada. Appellant Yulo
admitted this fact during the trial.
While the contract imposed no penalty for
such violation, this does not grant any of the
parties the unbridled liberty to breach it with
impunity. Actionable injury inheres in
every contractual breach.
Those who in the performance of their
obligations are guilty of fraud,
negligence or delay, and those who in
any manner contravene the terms
thereof, are liable for damages. [Art.
1170, 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. [Part 1, Art.
1191, Civil Code].
There is no doubt that the contract in
question gave rise 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,
so that the performance of one is
conditioned upon the simultaneous
fulfillment of the other." The power to
rescind is given to the injured party. "Where
the plaintiff is the party who did not
perform the undertaking which he was
bound by the terms of the agreement to
perform, he is not entitled to insist upon
the performance of the contract by the
defendant, or recover damages by
reason of his own breach.”
Another violation was the assignment and
transfer, first to J. Amado Araneta, and
subsequently, to appellant Yulo, Jr., of the
managerial rights over Boysaw without the
knowledge or consent of Interphil. The
assignments, from Ketchum to Araneta, and
from Araneta to Yulo, were in fact novations
of the original contract which, to be valid,
should have been consented to by Interphil.
Novation which consists in substituting
a new debtor in the place of the original
one, may be made even without the
knowledge or against the will of the
latter, but not without the consent of the
creditor. [Art. 1293, Civil Code].
Under the law when a contract is unlawfully
novated by an applicable and unilateral
substitution of the obligor by another, the
aggrieved creditor is not bound to deal with
the substitute. The consent of the creditor
to the change of debtors, whether in
expromision or delegacion is an
indispensable requirement.
That appellant Yulo, Jr., through a letter,
advised Interphil on September 5, 1961 of
his acquisition of the managerial rights over
Boysaw cannot change the fact that such
acquisition, and the prior acquisition of such
rights by Araneta were done without the
consent of Interphil. Not being reliably
informed, appellees cannot be deemed to
have consented to such changes.
Villamor v. Court of Appeals
Petition was denied.
Facts:
Macaria Labingisa Reyes was the owner of
a 600-square meter lot located at Baesa,
Caloocan City. In July 1971, Macaria sold a
portion of 300 square meters of the lot to
the Spouses Julio and Marina Villamor for
the total amount of P21,000.00. On
November 11, 1971, Macaria executed a
"Deed of option" in favor of Villamor in
which the remaining 300 square meter
portion of the lot would be sold to Villamor
under the conditions stated therein. The
option offered had been accepted by the
petitioner.
When Macaria’s husband, Roberto Reyes,
retired in 1984, they offered to repurchase
the lot sold by them to the Villamor spouses
but Marina Villamor refused and reminded
them instead that the Deed of Option in fact
gave them the option to purchase the
remaining portion of the lot. The Villamors,
on the other hand, claimed that they had
expressed their desire to purchase the
remaining 300 square meter portion of the
lot but the Reyeses had been ignoring them.
Thus, on July 13, 1987, after conciliation
proceedings in the barangay level failed,
The Villamors filed a complaint for specific
performance against the Reyes.
On July 26, 1989, judgment was rendered
by the trial court in favor of the Villamor
Spouses, ordering the defendant MACARIA
LABINGISA REYES and ROBERTO
REYES, to sell unto the plaintiffs the land.
Not satisfied with the decision of the trial
court, the Reyes spouses appealed to the
Court of Appeals.
On February 12, 1991, the Court of Appeals
rendered a decision reversing the decision
of the trial court and dismissing the
complaint.
Issue:
Whether or not the contract is still binding
and valid despite the lapse of more than
thirteen years from the execution of the
contract.
Ruling:
No.
A contract of sale is, under Article 1475 of
the Civil Code, "perfected at the moment
there is a meeting of minds upon the thing
which is the object of the contract and upon
the price. From that moment, the parties
may reciprocally demand performance,
subject to the provisions of the law
governing the form of contracts." Since
there was, between the parties, a meeting
of minds upon the object and the price,
there was already a perfected contract of
sale. What was, however, left to be done
was for either party to demand from the
other their respective undertakings under
the contract. It may be demanded at any
time either by the private respondents, who
may compel the petitioners to pay for the
property or the petitioners, who may compel
the private respondents to deliver the
property.
It is of judicial notice that the price of real
estate in Metro Manila is continuously on
the rise. To allow the petitioner to demand
the delivery of the property subject of this
case thirteen (13) years or seventeen (17)
years after the execution of the deed at the
price of only P70.00 per square meter is
inequitous. For reasons also of equity and in
consideration of the fact that the private
respondents have no other decent place to
live, this Court, in the exercise of its equity
jurisdiction is not inclined to grant
petitioners' prayer.

However, in this case, the Deed of Option

did not provide for the period within which
the parties may demand the performance of
their respective undertakings in the
instrument. The parties could not have
contemplated that the delivery of the
property and the payment thereof could be
made indefinitely and render uncertain the
status of the land. The failure of either
parties to demand performance of the
obligation of the other for an unreasonable
length of time renders the contract
ineffective. Under Article 1144 (1) of the
Civil Code, actions upon a written contract
must be brought within ten (10) years. The
Deed of Option was executed on November
11, 1971. The acceptance, as already
mentioned, was also accepted in the same
instrument. The complaint in this case was
filed by the petitioners on July 13, 1987,
seventeen (17) years from the time of the
execution of the contract. Hence, the right of
action had prescribed. There were
allegations by the petitioners that they
demanded from the private respondents as
early as 1984 the enforcement of their rights
under the contract. Still, it was beyond the
ten (10) year period prescribed by the Civil
Code.