Case Digests on Contracts intimidation, or undue influence (Articles 1306, 1336, 1337, Civil Code of the Philippines).
uence (Articles 1306, 1336, 1337, Civil Code of the Philippines). But the court a quo has
Case: George Batchelder vs. Central Bank of the Philippines, March 29, 1972, J. Fernando.
Facts: George Batchelder, who is an American citizen but permanently residing in the Philippines, is engaged in the
construction business. Batchelder, in compliance with Monetary Board Resolution No. 857 (Filipino and resident
American contractors undertaking construction projects in US military bases in the Philippines shall be authorized to
utilize 90% of the proceeds of their contracts for the purchase of construction equipment, and etc.) and Monetary Board
Resolution No. 695 (Agent bank should, upon compliance with its terms, credit the contractor’s accounts in pesos, the
buying rate being governed by the appropriate rules and regulations.), surrendered to the Central Bank through the latter’s
authorized agents, his dollar earnings and applied with the latter for license to utilize 90% of his surrendered earnings.
However, the Central Bank never heeded to the plaintiff’s application arguing that the Monetary Board Resolutions relied
upon simply laid down policy without in any way giving rise to a valid and binding agreement to which the law should
give effect. The trial court found for Batchelder. On appeal, Central Bank interposed an issue that there was no such
contractual obligation between the parties which will hold Central Bank liable therefore.
Issue:Whether there exist a contract between Central Bank and Batchelder, a dollar earner by virtue of the Monetary
Board Resolutions of the former.
Held: NO. What was done by the Central Bank was merely to issue in pursuance of its rule-making power the resolutions.
There is no question that the Central Bank as a public corporation could enter into contracts. It is so provided for among
the corporate powers vested in it. Thus: "The Central Bank is hereby authorized to adopt, alter, and use a corporate seal
which shall be judicially noticed; to make contracts; to lease or own real personal property, and to sell or otherwise dispose
of the same; to sue and be sued; and otherwise to do and perform any and all things that may be necessary or proper to
carry out the purposes of this Act." No doubt would have arisen therefore if defendant Central Bank, utilizing a power
expressly granted, did enter into a contract with plaintiff. It could have done so, but it did not do so.
Nor is this to deal unjustly with plaintiff. Defendant Central Bank in its motion to dismiss before the lower court was quite
explicit as to why under the circumstances, no right could be recognized as possessed by him. As set forth in such
pleading:
"We contend that Monetary Board Resolution No. 857, dated June 17, 1960, as amended by Monetary Board
Resolution No. 695, dated April 28, 1961, does not give right to Filipino and resident American contractors
undertaking construction projects in U.S. military bases to reacquire at the preferred rate ninety per cent
(90%) of the foreign exchange sold or surrendered to defendant Central Bank thru the authorized agent banks.
Nor does said resolution serve as a general authorization or license granted by the Central Bank to utilize the
ninety per cent (90%) of their dollar earnings. M.B. Resolution No. 857, as amended, merely laid down a
general policy on the utilization of the dollar earnings of Filipino and resident American contractors
undertaking projects in U.S. military bases, ... ."
Further, there is this equally relevant portion in such motion to dismiss:
"It is clear from the aforecited provisions of said memorandum that not all imports against proceeds of
contracts entered into prior to April 25, 1960 are entitled to the preferred buying rate of exchange. Only
imports against proceeds of contracts entered into prior to April 25, 1960, not otherwise classified as dollar-
to-dollar transactions, are entitled to the preferred rate of exchange. It is for this reason that the contractor is
required to first file an application with defendant Central Bank (Import Department) thru the Authorized
Agent Banks, for the purpose of determining whether the imports against proceeds of contracts entered
into prior to April 25, 1960 are classified asdollar-to-dollar transactions (which are not entitled to the
preferred rate of exchange), or not (which are entitled to the preferred rate of exchange), and that if said
imports are entitled to the preferred rate of exchange, defendant Central Bank would issue a license to the
contractor for authority to buy foreign exchange at the preferred rate for the payment of said imports."
Had there been greater care therefore on the part of the plaintiff to show why in his opinion he could assert a right in
accordance not with a contract binding on the Central Bank, because there is none, but by virtue of compliance with rules
and regulations of an administrative tribunal, then perhaps a different outcome would have been justified.
The decision of the trial court is dismissed without prejudice.
Case: Republic of the Philippines vs. PLDT, January 27, 1969, J.B.L. Reyes.
Facts: PLDT first entered into an agreement whereby telephone messages, coming from the US and received by RCA’s
domestic station could automatically be transferred to the lines of PLDT and vice versa. Soon after, the Bureau of
Telecommunications set up its own Government Telephone System by utilizing its own appropriation and equipment and
by renting trunk lines of the PLDT to enable government offices to call private parties. Later on, the Bureau entered into an
agreement with RCA Communications, Inc. for a joint overseas telephone service whereby the Bureau would convey
radio-telephone overseas calls received by RCA’s station to and from local residents. PLDT complained into such
agreement. With much demands for telephone servicing, neither the Bureau and PLDT filled those demands. Hence, the
Bureau had proposed to the PLDT that both enter into an interconnecting agreement. The PLDT replied positively with
condition that the Bureau would submit to the jurisdiction of Public Service Commission and in consideration of 37 ½% of
the gross revenues. However, the Bureau disagreeable, commenced a suit against PLDT praying for judgment
commanding PLDT to execute a contract with it. Trial court ruled for PLDT stating that the Bureau could not compel
PLDT to enter into an agreement with it because both parties were not in agreement.
Issue:Whether or not neither the court nor even the Republic through the Bureau of Telecommunications can compel
PLDT to enter into a contract with the latter.
Held: NO. Parties can not be coerced to enter into a contract where no agreement is had between them as to the principal
terms and conditions of the contract. Freedom to stipulate such terms and conditions is of the essence of our
contractual system, and by express provision of the statute, a contract may be annulled if tainted by violence,
apparently overlooked that while the Republic may not compel the PLDT to celebrate a contract with it, the Republic may,
in the exercise of the sovereign power of eminent domain, require the telephone company to permit interconnection of the
government telephone system and that of the PLDT, as the needs of the government service may require, subject to the
payment of just compensation to be determined by the court.
Case: R. Marino Corpus vs. CA and Juan David, June 30, 1980, J. Makasiar.
Facts: Corpus and Atty. Juan David are intimately related to each other, being close friends. In fact, Corpus was called by
Atty. David as Marino and latter to former as Juaning. Corpus was once charged with an administrative case by several
employees of Central Bank Export Department of which he is the Director. By reason thereto, he was suspended and
considered resigned. Thru Atty. Alvarez, he filed Petition before CFI of Manila under Judge Lantin which was dismissed
for lack of exhaustion of administrative remedies. Hence, Atty. David was retained as counsel by Marino Corpus in a case
dismissed by Judge Lantin. Before the SC, David was able to win the case. With that, Corpus wrote a letter to David and
gave the latter a check worth P2,000. But David replied and gave the check back to Corpus, writing, “When I decided to
render professional services in your case, I was motivated by the value to me of the very intimate relations which you and I
have enjoyed xxx and was not primarily for professional fee xxx. When you shall have obtained a decision which would
have finally resolved the case in your favor, remembering me then will make me happy.” Corpus was able to get a
favorable judgment ordering his reinstatement and payment of back salaries and allowances. Marino Corpus contends that
respondent David is not entitled to attorney's fees because there was no contract to that effect. On the other hand,
respondent David contends that the absence of a formal contract for the payment of the attorney's fees will not negate the
payment thereof because the contract may be express or implied, and there was an implied understanding between the
petitioner and private respondent that the former will pay the latter attorney's fees when a final decision shall have been
rendered in favor of the petitioner reinstating him to -his former position in the Central Bank and paying his back salaries.
Issue:Whether or not there has been a contract between Corpus and Atty. David for the payment of the latter’s
attorney’s fees.
Held: YES. While there was express agreement between petitioner Corpus and respondent David as regards attorney's
fees, the facts of the case support the position of respondent David that there was at least an implied agreement for the
payment of attorney's fees.
Petitioner's act of giving the check for P2,000.00 through his aforestated April 18, 1962 letter to respondent David
indicates petitioner's commitment to pay the former attorney's fees, which is stressed by expressing that "I wish I could
give more but as you know we were banking on a SC decision reinstating me and reimbursing my back salaries This last
sentiment constitutes a promise to pay more upon his reinstatement and payment of his back salaries. Petitioner ended his
letter that he was "looking forward to a continuation of the case in the lower court, ... to which the certiorari-mandamus-
quo warranto case was remanded by the Supreme Court for further proceedings.
Moreover, the payment of attorney's fees to respondent David may also be justified by virtue of the innominate contract of
facio ut des (I do and you give which is based on the principle that "no one shall unjustly enrich himself at the expense of
another." innominate contracts have been elevated to a codal provision in the New Civil Code by providing under Article
1307 that such contracts shall be regulated by the stipulations of the parties, by the general provisions or principles of
obligations and contracts, by the rules governing the most analogous nominate contracts, and by the customs of the people.
The rationale of this article was stated in the 1903 case of Perez vs. Pomar (2 Phil. 982). In that case, the Court sustained
the claim of plaintiff Perez for payment of services rendered against defendant Pomar despite the absence of an express
contract to that effect, thus:
It does not appear that any written contract was entered into between the parties for the
employment of the plaintiff as interpreter, or that any other innominate contract was entered into
but whethertheplaintiffsservicesweresolicitedorwhethertheywereoffered to the defendant for his
assistance, inasmuch as these services were accepted and made use of by the latter, we must
consider that there was a tacit and mutual consent as to the rendition of the services. This gives
rise to the obligation upon the person benefited by the services to make compensation therefor,
since the bilateral obligation to render service as interpreter, on the one hand, and on the other to
pay for the service rendered, is thereby incurred. (Arts. 1088, 1089, and 1262 of the Civil Code).
xxxxxxxxx
... Whether the service was solicited or offered, the fact remains that Perez rendered to Pomar
services as interpreter. As it does not appear that he did this gratuitously, the duty is imposed
upon the defendant, he having accepted the benefit of the service, to pay a just compensation
therefor, by virtue of the innominate contract of facio ut des implicitly established.
xxxxxxxxx
... because it is a well-known principle of law that no one should permitted to enrich himself to
the damage of another" (emphasis supplied; see also Tolentino, Civil Code of the Philippines, p.
388, Vol. IV 119621, citing Estate of Reguera vs. Tandra 81 Phil. 404 [1948]; Arroyo vs. Azur
76 Phil. 493119461; and Perez vs. Pomar. 2 Phil. 682 [1903]).
WE reiterated this rule in Pacific Merchandising Corp. vs. Consolacion Insurance & Surety Co., Inc. (73 SCRA 564
[1976]) citing the case of Perez v. Pomar, supra thus:
Where one has rendered services to another, and these services are accepted by the latter, in the
absence of proof that the service was rendered gratuitously, it is but just that he should pay a
reasonable remuneration therefor because 'it is a well-known principle of law, that no one should
be permitted to enrich himself to the damage of another (emphasis supplied).
Case: Daisy Tiu vs. Platinum Plans Phil., Inc., February 28, 2007, J. Quisumbing.
Facts: Daisy Tiu was an employee of Platinum Plans whose business is pre-need industry. She was the Division Marketing
Director from 1987-1989, and later re-hired as Senior Assistant Vice-President and Territorial Operations Head in charge
of its Hongkong and ASEAN operations, with respect to the latter under a contract of employment for 5 years. However,
stopped reporting to work and eventually became employed with Professional Pension Plans which is also a pre-need
industry, being its Vice-President for Sales. Hence, Platinum sued Tiu for damages alleging that the latter violated the non-
involvement clause in her contract of employment which provides that, “8. NON INVOLVEMENT PROVISION – The
EMPLOYEE further undertakes that during his/her engagement with EMPLOYER and in case of separation from the
Company, whether voluntary or for cause, he/she shall not, for the next TWO (2) years thereafter, engage in or be involved
with any corporation, association or entity, whether directly or indirectly, engaged in the same business or belonging to the
same pre-need industry as the EMPLOYER.” However, Tiu countered that the non-involvement clause is unenforceable
for being against public policy. The trial court sustained the validity of the non-involvement clause, stating that a contract
in restraint of trade is valid provided there is a limitation upon either time or place. CA affirmed the trial court’s decision.
Issue:Whether the non-involvement clause in this case is valid.
Held: YES. A non-involvement clause is not necessarily void for being in restraint of trade as long as there are
reasonable limitations as to time, trade, and place.
In this case, the non-involvement clause has a time limit: two years from the time petitioner’s employment with respondent
ends. It is also limited as to trade, since it only prohibits petitioner from engaging in any pre-need business akin to
respondent’s. More significantly, since petitioner was the Senior Assistant Vice-President and Territorial Operations Head
in charge of respondent’s Hongkong and Asean operations, she had been privy to confidential and highly sensitive
marketing strategies of respondent’s business. To allow her to engage in a rival business soon after she leaves would make
respondent’s trade secrets vulnerable especially in a highly competitive marketing environment. In sum, we find the non-
involvement clause not contrary to public welfare and not greater than is necessary to afford a fair and reasonable
protection to respondent.
In any event, Article 1306 of the Civil Code provides that parties to a contract 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.
Article 1159 of the same Code also provides that obligations arising from contracts have the force of law between the
contracting parties and should be complied with in good faith. Courts cannot stipulate for the parties nor amend their
agreement where the same does not contravene law, morals, good customs, public order or public policy, for to do so
would be to alter the real intent of the parties, and would run contrary to the function of the courts to give force and effect
thereto. Not being contrary to public policy, the non-involvement clause, which petitioner and respondent freely agreed
upon, has the force of law between them, and thus, should be complied with in good faith
Case: Emeterio Cui vs. Arellano University, May 30, 1961, J. Concepcion.
Facts:Emeterio Cui was enrolled in the College of Law in Arellano University and finished his law studies up to and
including the first semester of fourth year, during which period, his uncle, Francisco Capistrano, the brother of Cui’s
mother, was the dean and legal counsel of such University. Cui enrolled for the last semester of his law studies in Arellano
but failed to pay his tuition fees because his uncle Dean Capistrano has severed his connection to such school for having
accepted the deanship and chancellorship of the College of Law of Abad Santos University. Cui also transferred to such
latter law school and graduated to such school. It will be noted that during those years of stay at Arellano, Cui was
awarded scholarship grants for scholastic merits so that his semestral tuition fees were returned to him after the ends of
semester and where his scholarship was granted to him. When Cui applied to take for the Bar Examination, he needed
transcripts of his records in Arellano but the latter denied until the former will pay back the amount refunded to the former
by Arellano citing this pertinent provision in a contract which Cui signed every after grant of scholarship, “"In
consideration of the scholarship granted to me by the University, I hereby waive my right to transfer to another school
without having refunded to the University (defendant) the equivalent of my scholarship cash.” Cui raised his defense into
this Memorandum issued by the Director of Private Schools, as follow:
“2. When students are given full or partial scholarships, it is understood that such scholarships
are merited and earned. The amount in tuition and other fees corresponding to these scholarships
should not be subsequently charged to the recipient students when they decide to quit school or
to transfer to another institution. Scholarships should not be offered merely to attract and keep
students in a school.
3. Several complaints have actually been received from students who have enjoyed scholarships,
full or partial, to the effect that they could not transfer to other schools since their credentials
would not be released unless they would pay the fees corresponding to the period of the
scholarships. Where the Bureau believes that the right of the student to transfer is being denied
on this ground, it reserves the right to authorize such transfer.”
Issue:Whether the provision in the Contract between Cui and Arellano University whereby the former waived his right
to transfer to another school without refunding to the latter the equivalent of his scholarship in cash is valid.
Held: NO. The stipulation whereby student cannot transfer to another school without refunding scholarship cash is
null and void.Scholarship are awarded in recognition of merit not to keep outstanding students in school to bolster its
prestige. In the understanding of that university scholarships award is a business scheme designed to increase the business
potential of an education institution. Thus conceived it is not only inconsistent with sound policy but also good morals.
But what is morals? Manresa has this definition. It is good customs; those generally accepted principles of morality which
have received some kind of social and practical confirmation. 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. The University of the Philippines which implements Section 5 of Article
XIV of the Constitution with reference to the giving of free scholarships to gifted children, does not require scholars to
reimburse the corresponding value of the scholarships if they transfer to other schools. So also with the leading colleges
and universities of the United States after which our educational practices or policies are patterned. In these institutions
scholarships are granted not to attract and to keep brilliant students in school for their propaganda mine but to reward
merit or help gifted students in whom society has an established interest or a first lien. (Emphasis supplied.) In this case,
scholarship award is a business scheme designed to increase the business potential of an educational institution with
respect to Arellano’s case.
Case: Ramon Saura vs. Estela Sindico, March 23, 1960, J.B.L. Reyes.
Facts: Ramon E. Saura and Estela P. Sindico were contesting for nomination as the official candidate of the Nacionalista
Party in the fourth district of Pangasinan in the congressional elections of November 12, 1957. On August 23, 1957, the
parties entered into a written agreement bearing the same date, containing among other matters stated therein, a pledge that
—
Each aspirant shall respect the result of the aforesaid convention, i.e., no one of us shall either run as a rebel or
independent candidate after losing in said convention.
In the provincial convention held by the Nacionalista Party on August 31, 1957, Saura was elected and proclaimed the
Party's official congressional candidate for the aforesaid district of Pangasinan. Nonetheless, Sindico, in disregard of the
covenant, filed, on September 6, 1957, her certificate of candidacy for the same office with the Commission on Elections,
and she openly and actively campaigned for her election. Wherefore, on October 5, 1957, plaintiff Saura commenced this
suit for the recovery of damages. Upon motion of the defendant, the lower court, in its order of November 19, 1957,
dismissed the complaint on the basis that the agreement sued upon is null and void, in tat (1) the subject matter of the
contract, being a public office, is not within the commerce of man; and (2) the "pledge" was in curtailment of the free
exercise of elective franchise and therefore against public policy. Hence, this appeal.
Issue:Whether or not the agreement between Saura and Sindico is valid.
Held: NO. We agree with the lower court in adjudging the contract or agreement in question a nullity. Among those that
may not be the subject matter (object) of contracts are certain rights of individuals, which the law and public policy have
deemed wise to exclude from the commerce of man. Among them are the political rights conferred upon citizens,
including, but not limited to, once's right to vote, the right to present one's candidacy to the people and to be voted to
public office, provided, however, that all the qualifications prescribed by law obtain. Such rights may not, therefore, be
bargained away curtailed with impunity, for they are conferred not for individual or private benefit or advantage but for the
public good and interest.
Constitutional and statutory provision fix the qualifications of persons who may be eligible for certain elective public
offices. Said requirements may neither be enlarged nor reduced by mere agreements between private parties. A voter
possessing all the qualifications required to fill an office may, by himself or through a political party or group, present his
candidacy without further limitations than those provided by law.
Case: Leal vs. IAC and Vicente Santiago (Substituted by Salud Santiago), November 5, 1987, J. Sarmiento.
Facts: On March 21, 1941, a document entirely in Spanish language entitled as “Compraventa” was executed by Vicente
Santiago and his brother Luis Santiago in favor of Cirilo Leal (the deceased father of herein petitioners), involving the
three parcels of land, as per paragraph (b) thereof states in translation as, “"they shall not sell to others these three lots but
only to the seller Vicente Santiago or to his heirs or successors". However, pursuant to the “Compraventa”, the title over
those three parcels of land was cancelled and a new one was issued in the name of Cirilo Leal who immediately took
possession and exercised possession and ownership over those lands which was inherited by herein petitioners after
Cirilo’s death. These parcels of land were either mortgaged or leased by petitioner-children of Cirilo to their co-petitioners.
However, Vicente Santiago approached the petitioners and offered re-purchase of subject properties in pursuant to the
Compraventa. Trial court dismissed the complaint for being premature. Court of Appeals under Justice Paras affirmed the
trial court’s decision.
Issue:Whether or not the prohibition to sell to third parties pursuant to the Compraventa is valid.
Held: NO. Contracts are generally binding between the parties, their assigns and heirs; however, under Art. 1255 of the
Civil Code of Spain, which is applicable in this instance, pacts, clauses, and conditions which are contrary to public order
are null and void, thus, without any binding effect.
Parenthetically, the equivalent provision in the Civil Code of the Philippines is that of Art. 1306, which states: "That
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. Public order signifies the public weal —
public policy. 5 Essentially, therefore, public order and public policy mean one and the same thing. Public policy is simply
the English equivalent of "order publico" in Art. 1255 of the Civil Code of Spain. 6
One such condition which is contrary to public policy is the present prohibition to self to third parties, because the same
virtually amounts to a perpetual restriction to the right of ownership, specifically the owner's right to freely dispose of his
properties. This, we hold that any such prohibition, indefinite and stated as to time, so much so that it shall continue to be
applicable even beyond the lifetime of the original parties to the contract, is, without doubt, a nullity. In the light of this
pronouncement, we grant the petitioners' prayer for the cancellation of the annotations of this prohibition at the back of
their Transfer Certificates 'Title.
In the case before us, we cannot and any express or implied grant of a right to repurchase, nor can we infer, from any word
or words in the questioned paragraph, the existence of any such right. The interpretation in the resolution (Justice Sison) is
rather strained. The phrase "in case case" of should be construed to mean "should the buyers wish to sell which is the plain
and simple import of the words, and not "the buyers should sell," which is clearly a contorted construction of the same
phrase. The resort to Article 1373 of the Civil Code of the Philippines is erroneous. The subject phrase is patent and
unambiguous, hence, it must not be given another interpretation
But even assuming that such a right of repurchase is granted under the "Compraventa," the petitioner correctly asserts that
the same has already prescribed. Under Art. 1508 of the Civil Code of Spain (Art,. 1606 of the Civil Code of the
Philippines), the right to redeem or repurchase, in the absence of an express agreement as to time, shall last four years from
the date of the contract. In this case then, the right to repurchase, if it was at four guaranteed under in the "Compraventa,"
should have been exercise within four years from March 21, 1941 (indubitably the date of execution of the contract), or at
the latest in 1945.
In the respondent court's resolution, it is further ruled that the right to repurchase was given birth by the condition
precedent provided for in the phrase "siempre y cuando estos ultimos pueden hacer la compra" (when the buyer has money
to buy). In other words, it is the respondent court's contention that the right may be exercised only when the buyer has
money to buy. If this were so, the second paragraph of Article 1508 would apply — there is agreement as to the time,
although it is indefinite, therefore, the right should be exercised within ten years, because the law does not favor suspended
ownership. Since the alleged right to repurchase was attempted to be exercised by Vicente Santiago only in 1966, or 25
years from the date of the contract, the said right has undoubtedly expired.
The law provides that for conventional redemption to take place, the vendor should reserve, in no uncertain terms, the right
to repurchase the thing sold.Thus, the right to redeem must be expressly stipulated in the contract of sale in order that it
may have legal existence.
Case: Banco Filipino Savings and Mortgage Bank vs. Hon. Navarro and Florante Del Valle, July 28, 1987, J.
Melencio-Herrera.
Facts:On May 20, 1975, respondent Florante del Valle (the BORROWER) obtained a loan secured by a real estate
mortgage (the LOAN, for short) from petitioner BANCO FILIPINO1 in the sum of Forty-one Thousand Three Hundred
(P41,300.00) Pesos, payable and to be amortized within fifteen (15) years at twelve (12%) per cent interest annually.
Hence, the LOAN still had more than 730 days to run by January 2, 1976, the date when CIRCULAR No. 494 was issued
by the Central Bank.
Stamped on the promissory note evidencing the loan is an Escalation Clause, reading as follows:
I/We hereby authorize Banco Filipino to correspondingly increase the interest rate stipulated in this contract
without advance notice to me/us in the event law should be enacted increasing the lawful rates of interest that
may be charged on this particular kind of loan.
The Escalation Clause is based upon Central Bank CIRCULAR No. 494 issued on January 2, 1976, the pertinent portion of
which reads:
3. The maximum rate of interest, including commissions, premiums, fees and other charges on loans with
maturity of more than seven hundred thirty (730) days, by banking institutions, including thrift banks and
rural banks, or by financial intermediaries authorized to engage in quasi-banking functions shall be nineteen
percent (19%) per annum.
x x x           x x x          x x x
7. Except as provided in this Circular and Circular No. 493, loans or renewals thereof shall continue to be
governed by the Usury Law, as amended."
On the strength of CIRCULAR No. 494 BANCO FILIPINO gave notice to the BORROWER on June 30, 1976 of the
increase of interest rate on the LOAN from 12% to 17% per annum effective on March 1, 1976.
Contending that CIRCULAR No. 494 is not the law contemplated in the Escalation Clause of the promissory note, the
BORROWER filed suit against BANCO FILIPINO for "Declaratory Relief" with respondent Court, praying that the
Escalation Clause be declared null and void and that BANCO FILIPINO be ordered to desist from enforcing the increased
rate of interest on the BORROWER's real estate loan.
For its part, BANCO FILIPINO maintained that the Escalation Clause signed by the BORROWER authorized it to
increase the interest rate once a law was passed increasing the rate of interest and that its authority to increase was
provided for by CIRCULAR No. 494.
In its judgment, respondent Court nullified the Escalation Clause and ordered BANCO FILIPINO to desist from enforcing
the increased rate of interest on the BORROWER's loan.
* On February 24, 1983, the parties represented by their respective counsel, not only moved to withdraw the appeal on the
ground that it had become moot and academic "because of recent developments in the rules and regulations of the Central
Bank," but also prayed that "the decision rendered in the Court of First Instance be therefore vacated and declared of no
force and effect as if the case was never filed," since the parties would like to end this matter once and for all."
However, "considering the subject matter of the controversy in which many persons similarly situated are interested and
because of the need for a definite ruling on the question," the Court, in its Resolution of February 24, 1983, impleaded the
Central Bank and required it to submit its Comment, and encouraged homeowners similarly situated as the BORROWER
to intervene in the proceedings.
Issue:Whether or not Banco Filipino can increase the interest rate on the loan from 12% to 19% per annum under the
Escalation clause.
Held: NO. It is clear from the stipulation between the parties that the interest rate may be increased "in the event a law
should be enacted increasing the lawful rate of interest that may be charged on this particular kind of loan." " The
Escalation Clause was dependent on an increase of rate made by "law" alone.
CIRCULAR No. 494, although it has the effect of law, is not a law. "Although a circular duly issued is not strictly a
statute or a law, it has, however, the force and effect of law."6 (Italics supplied). "An administrative regulation adopted
pursuant to law has the force and effect of law."7 "That administrative rules and regulations have the force of law can no
longer be questioned. "8
The distinction between a law and an administrative regulation is recognized in the Monetary Board guidelines quoted in
the letter to the BORROWER of Ms. Paderes of September 24, 1976 (supra). According to the guidelines, for a loan's
interest to be subject to the increases provided in CIRCULAR No. 494, there must be an Escalation Clause allowing the
increase "in the event that any law or Central Bank regulation is promulgated increasing the maximum interest rate for
loans." The guidelines thus presuppose that a Central Bank regulation is not within the term "any law."
It is now clear that from March 17, 1980, escalation clauses to be valid should specifically provide: (1) that there can
be an increase in interest if increased by law or by the Monetary Board; and (2) in order for such stipulation to be
valid, it must include a provision for reduction of the stipulated interest "in the event that the applicable maximum
rate of interest is reduced by law or by the Monetary Board."
Case: Spouses Mariano and Gilda Florendo vs. CA and Land Bank of the Philippines, December 17, 1996, J.
Panganiban.
Facts:Gilda Florendo (was) an employee of (Respondent Bank) from May 17, 1976 until August 16, 1984 when she
voluntarily resigned. However, before her resignation, she applied for a housing loan of P148,000.00, payable within 25
years from (respondent bank's) Provident Fund on July 20, 1983. Florendo and Land Bank entered into a Housing Loan
Agreement which the former executed a Real Estate Mortgage and Promissory Note. Land Bank increased the interest rate
from 9% to 17% per annum pursuant to ManCom Resolution No. 85-08 and Provident Fund Memorandum Circular
proving that,
“ManCom (Management Committee) Resolution No. 85-08, together with PF (Provident Fund) Memorandum
Circular No. 85-08, which escalated the interest rates on outstanding housing loans of bank employees who
voluntarily "secede" (resign) from the Bank; the range of rates varied depending upon the number of years
service rendered by the employees concerned. The rates were made applicable to those who had previously
resigned from the bank as well as those who would be resigning in the future.”
And the same increase being stated in the real estate mortgage as follows,
“The rate of interest charged on the obligation secured by this mortgage. . ., shall be subject, during the life of
this contract, to such an increase/decrease in accordance with prevailing rules, regulations and circulars of the
Central Bank of the Philippines as the Provident Fund Board of Trustees of the Mortgagee may prescribe for
its debtors and subject to the condition that the increase/decrease shall only take effect on the date of
effectivity of said increase/decrease and shall only apply to the remaining balance of the loan.”
Florendo protested such increase. The trial court ruled in favor of the bank. However, Florendo argued that, the increased
rate of interest is onerous and was imposed unilaterally, without the consent of the borrower-spouses. And that there is in
fact no Central Bank rule, regulation or other issuance which would have triggered an application of the escalation clause
as to her factual situation.
Issue:Whether or not the bank has valid and legal basis to impose an increased interest rate on the petitioner’s housing
loan.
Held: NO. In the case at bar, the loan was perfected on July 20, 1983. PD No. 116 became effective on January 29, 1973.
CB Circular No. 416 was issued on July 29, 1974. CB Circ. 504 was issued February 6, 1976. CB Circ. 706 was issued
December 1, 1979. CB Circ. 905, lifting any interest rate ceiling prescribed under or pursuant to the Usury Law, as
amended, was promulgated in 1982. These and other relevant CB issuances had already come into existence prior to the
perfection of the housing loan agreement and mortgage contract, and thus it may be said that these regulations had been
taken into consideration by the contracting parties when they first entered into their loan contract. In light of the CB
issuances in force at that time, respondent bank was fully aware that it could have imposed an interest rate higher than 9%
per annum rate for the housing loans of its employees, but it did not. In the subject loan, the respondent bank knowingly
agreed that the interest rate on petitioners' loan shall remain at 9% p.a. unless a CB issuance is passed authorizing an
increase (or decrease) in the rate on such employee loans and the Provident Fund Board of Trustees acts accordingly.
Thus, as far as the parties were concerned, all other onerous factors, such as employee resignations, which could have been
used to trigger an application of the escalation clause were considered barred or waived. If the intention were otherwise,
they — especially respondent bank — should have included such factors in their loan agreement.
ManCom Resolution No. 85-08, which is neither a rule nor a resolution of the Monetary Board, cannot be used as basis for
the escalation in lieu of CB issuances, since paragraph (f) of the mortgage contract very categorically specifies that any
interest rate increase be in accordance with "prevailing rules, regulations and circulars of the Central Bank . . . as the
Provident Fund Board . . . may prescribe." The Banco Filipino and PNB doctrines are applicable four-square in this case.
As a matter of fact, the said escalation clause further provides that the increased interest rate "shall only take effect on the
date of effectivity of (the) increase/decrease" authorized by the CB rule, regulation or circular. Without such CB issuance,
any proposed increased rate will never become effective.
We have already mentioned (and now reiterate our holding in several
cases 15) that by virtue of CB Circular 905, the Usury Law has been rendered ineffective. Thus, petitioners' contention that
the escalation clause is violative of the said law is bereft of any merit.
On the other hand, it will not be amiss to point out that the unilateral determination and imposition of increased interest
rates by the herein respondent bank is obviously violative of the principle of mutuality of contracts ordained in Article
1308 of the Civil Code. As this Court held in PNB: 16
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 (Garcia vs. Rita Legarda, Inc., 21 SCRA 555).
Hence, even assuming that the . . . loan agreement between the PNB and the private respondent
gave the PNB a license (although in fact there was none) to increase the interest rate at will
during the term of the loan, that license would have been 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.
The respondent bank tried to sidestep this difficulty by averring that petitioner Gilda Florendo as a former bank employee
was very knowledgeable concerning respondent bank's lending rates and procedures, and therefore, petitioners were "on an
equal footing" with respondent bank as far as the subject loan contract was concerned. That may have been true insofar as
entering into the original loan agreement and mortgage contract was concerned. However, that does not hold true when it
comes to the determination and imposition of escalated rates of interest as unilaterally provided in the ManCom
Resolution, where she had no voice at all in its preparation and application.
To allay fears that respondent bank will inordinately be prejudiced by being stuck with this "sweetheart loan" at patently
concessionary interest rates, which according to respondent bank is the "sweetest deal" anyone could obtain and is an act
of generosity considering that in 1985 lending rates in the banking industry were peaking well over 30% p.a., 17 we need
only point out that the bank had the option to impose in its loan contracts the condition that resignation of an employee-
borrower would be a ground for escalation. The fact is it did not. Hence, it must live with such omission.
Case: Aniceto Saludo Jr. vs. Security Bank Corporation, October 13, 2010, J. Perez.
Facts:On 30 May 1996, Booklight was extended an omnibus line credit facility3 by SBC in the amount of P10,000,000.00.
Said loan was covered by a Credit Agreement4 and a Continuing Suretyship5 with petitioner as surety, both documents
dated 1 August 1996, to secure full payment and performance of the obligations arising from the credit accommodation.
Booklight drew several availments of the approved credit facility from 1996 to 1997 and faithfully complied with the
terms of the loan. On 30 October 1997, SBC approved the renewal of credit facility of Booklight in the amount of
P10,000,000.00 under the prevailing security lending rate.6 From August 3 to 14, 1998, Booklight executed nine (9)
promissory notes7 in favor of SBC in the aggregate amount of P9,652,725.00. For failure to settle the loans upon maturity,
demands8 were made on Booklight and petitioner for the payment of the obligation but the duo failed to pay. As of 15 May
2000, the obligation of Booklight stood at P10,487,875.41, inclusive of interest past due and penalty. 9
On 16 June 2000, SBC filed against Booklight and herein petitioner an action for collection of sum of money with the
RTC. RTC ruled that Saludo is jointly and severally liable with Booklight. CA affirmed in toto. Saludo argued that the
Continuing Suretyship is a contract of adhesion and that its participation thereto is only his signing the same.
Issue:Whether or not a lawyer can be excused from liability by arguing that the contract is one of a contract of
adhesion.
Held: NO. The lameness of petitioner’s stand is pointed up by his attempt to escape from liability by labelling the
Continuing Suretyship as a contract of adhesion.
A contract of adhesion is defined as one in which one of the parties imposes a ready-made form of contract, which the
other party may accept or reject, but which the latter cannot modify. One party prepares the stipulation in the contract,
while the other party merely affixes his signature or his ‘adhesion’ thereto, giving no room for negotiation and depriving
the latter of the opportunity to bargain on equal footing.
A contract of adhesion presupposes that the party adhering to the contract is a weaker party. That cannot be said of
petitioner. He is a lawyer. He is deemed knowledgeable of the legal implications of the contract that he is signing.
It must be borne in mind, however, that contracts of adhesion are not invalid per se. Contracts of adhesion, where one party
imposes a ready-made form of contract on the other, are not entirely prohibited. The one who adheres to the contract is, in
reality, free to reject it entirely; if he adheres, he gives his consent.
Case: Metropolitan Bank and Trust Company vs. Rogelio Reynado and Jose Adrandea, August 9, 2010, J. Del
Castillo.
Facts: On January 31, 1997, petitioner Metropolitan Bank and Trust Company charged respondents before the Office of
the City Prosecutor of Manila with the crime of estafa under Article 315, paragraph 1(b) of the Revised Penal Code. In the
affidavit of petitioner’s audit officer, Antonio Ivan S. Aguirre, it was alleged that the special audit conducted on the cash
and lending operations of its Port Area branch uncovered anomalous/fraudulent transactions perpetrated by respondents in
connivance with client Universal Converter Philippines, Inc. (Universal). In their defense, respondents denied
responsibility in the anomalous transactions with Universal and claimed that they only intended to help the Port Area
branch solicit and increase its deposit accounts and daily transactions.
Meanwhile, on February 26, 1997, petitioner and Universal entered into a Debt Settlement Agreement whereby the latter
acknowledged its indebtedness to the former in the total amount of P50,990,976.27 as of February 4, 1997 and undertook
to pay the same in bi-monthly amortizations in the sum of P300,000.00 starting January 15, 1997, covered by postdated
checks, “plus balloon payment of the remaining principal balance and interest and other charges, if any, on December 31,
2001.” The City Prosecutor and DOJ dismissed the case. Hence, Metrobank filed a petition for certiorari and mandamus to
CA. CA likewise affirmed the decisions of the City Prosecutor and DOJ stating that, while novation does not extinguish
criminal liability, it may prevent the rise of such liability as long as it occurs prior to the filing of the criminal information
in court.
Issue: Whether or not the Debt Settlement Agreement between Metropolitan Bank and Trust Company and Universal is
tantamount to a novation of obligation by the latter to the former which extinguishes the criminal liability for Estafa by
the latter.
Held: NO. Initially, it is best to emphasize that “novation is not one of the grounds prescribed by the Revised Penal Code
for the extinguishment of criminal liability.” In a catena of cases, it was ruled that criminal liability for estafa is not
affected by a compromise or novation of contract. In Firaza v. People and Recuerdo v. People, this Court ruled that in a
crime of estafa, reimbursement or belated payment to the offended party of the money swindled by the accused does not
extinguish the criminal liability of the latter. We also held in People v. Moreno and in People v. Ladera that “criminal
liability for estafa is not affected by compromise or novation of contract, for it is a public offense which must be
prosecuted and punished by the Government on its own motion even though complete reparation should have been made
of the damage suffered by the offended party.” Similarly in the case of Metropolitan Bank and Trust Company v. Tonda
cited by petitioner, we held that in a crime of estafa, reimbursement of or compromise as to the amount misappropriated,
after the commission of the crime, affects only the civil liability of the offender, and not his criminal liability.
Thus, the doctrine that evolved from the aforecited cases is that a compromise or settlement entered into after the
commission of the crime does not extinguish accused’s liability for estafa. Neither will the same bar the prosecution of
said crime. Accordingly, in such a situation, as in this case, the complaint for estafa against respondents should not be
dismissed just because petitioner entered into a Debt Settlement Agreement with Universal. Even the OSG arrived at the
same conclusion:
Contrary to the conclusion of public respondent, the Debt Settlement Agreement entered into between petitioner and
Universal Converter Philippines extinguishes merely the civil aspect of the latter’s liability as a corporate entity but not the
criminal liability of the persons who actually committed the crime of estafa against petitioner Metrobank. x x x
Case: Prudential Bank and Trust Company (BPI) vs. Liwayway Abasolo, September 27, 2010, J. Carpio Morales.
Facts:Leonor Valenzuela-Rosales inherited two parcels of land in Laguna which upon her death were inherited by her
heirs thereby appointing Liwayway Abasolo as their agent thru the SPA empowering the latter to sell the properties. One,
Corazon Marasigan expressed her interest in buying that same properties but because she had no money yet she suggested
the idea of first mortgaging the properties to Prudential Bank and the proceeds of which would be paid directly to Abasolo.
On consultation with Prudential Bank’s employee named Norberto Mendiola, a Deed of Absolute Sale was executed
thereby transferring to Marasigan the property with assurance that the proceeds thereof would be paid directly to Abasolo.
When all went well with the loan, in the absence of a written request for a bank guarantee, the PBTC released the proceeds
of the loan to Marasigan, whom latter despite repeated demands failedto pay the purchase price of the properties.
Marasigan only paid in kind but never the entire purchase price. Hence, Abasolo filed a complaint for collection of sum of
money and annulment of sale and mortgage with damages. Marasigan, however, denied the existence of any agreement
that the proceeds be paid to Abasolo and that the payment in kind was already sufficient. RTC ruled in favor of Abasolo
ordering PBTC to pay Abasolo in the event that Marasigan failed to pay. CA affirmed.
Issue:Whether or not PBTC would be subsidiarily liable to Abasolo in the absence of any contractual relationship
between the two.
Held: NO. In the absence of a lender-borrower relationship between petitioner and Liwayway, there is no inherent
obligation of petitioner to release the proceeds of the loan to her. To a banking institution, well-defined lending policies
and sound lending practices are essential to perform its lending function effectively and minimize the risk inherent in any
extension of credit. In order to identify and monitor loans that a bank has extended, a system of documentation is
necessary. Under this fold falls the issuance by a bank of a guarantee which is essentially a promise to repay the liabilities
of a debtor, in this case Corazon. It would be contrary to established banking practice if Mendiola issued a bank guarantee,
even if no request to that effect was made.
The principle of relativity of contracts in Article 1311 of the Civil Code supports petitioner’s cause:
 
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. (underscoring
supplied)
 
 
For Liwayway to prove her claim against petitioner, a clear and deliberate act of conferring a favor upon her
must be present. A written request would have sufficed to prove this, given the nature of a banking business, not to
mention the amount involved.
 
Since it has not been established that petitioner had an obligation to Liwayway, there is no breach to speak of.
Liwayway’s claim should only be directed against Corazon. Petitioner cannot thus be held subisidiarily liable.
Case: Asian Cathay Finance and Leasing Corporation vs. Spouses Cesario Gravador and Norma De Vera and
Spouses Dumigpi, July 5, 2010, J. Nachura.
Facts:Asian Cathay Finance and Leasing Corporation (ACFLC) extended a loan of Eight Hundred Thousand Pesos
(P800,000.00) to respondent Cesario Gravador, with respondents Norma de Vera and Emma Concepcion Dumigpi as co-
makers. The loan was payable in sixty (60) monthly installments of P24,400.00 each. To secure the loan, respondent
Cesario executed a real estate mortgage 5 over his property in Sta. Maria, Bulacan. Respondents paid the initial installment
due in November 1999. However, they were unable to pay the subsequent ones. Hence, petitioner filed a petition for
extrajudicial foreclosure of mortgage. Respondent, however, filed a suit for annulment of such mortgage claiming that the
real estate mortgage is null and void. They pointed out that the mortgage does not make reference to the promissory note
dated October 22, 1999. The promissory note does not specify the maturity date of the loan, the interest rate, and the mode
of payment; and it illegally imposed liquidated damages. The real estate mortgage, on the other hand, contains a provision
on the waiver of the mortgagor’s right of redemption, a provision that is contrary to law and public policy. Respondents
added that ACFLC violated Republic Act No. 3765, or the Truth in Lending Act, in the disclosure statement that should be
issued to the borrower. RTC denied the application for TRO by respondent and thereafter dismissed the complaint
sustaining the validity of the promissory note and real estate mortgage stating among others that, respondents are well-
educated individuals who could not feign naiveté in the execution of the loan documents. It, therefore, rejected
respondents’ claim that ACFLC deceived them into signing the promissory note, disclosure statement, and deed of real
estate mortgage. The RTC further held that the alleged defects in the promissory note and in the deed of real estate
mortgage are too insubstantial to warrant the nullification of the mortgage. It added that a promissory note is not one of the
essential elements of a mortgage; thus, reference to a promissory note is neither indispensable nor imperative for the
validity of the mortgage. CA reversed the trial court’s decision.
Issue:Whether or not the subject promissory note and real estate mortgage is one of contract of adhesion.
Held: YES. The supposed waiver by the mortgagors was contained in a statement made in fine print in the REM. It was
made in the form and language prepared by [petitioner]ACFLC while the [respondents] merely affixed their signatures or
adhesion thereto. It thus partakes of the nature of a contract of adhesion. It is settled that doubts in the interpretation of
stipulations in contracts of adhesion should be resolved against the party that prepared them. This principle especially
holds true with regard to waivers, which are not presumed, but which must be clearly and convincingly shown. [Petitioner]
ACFLC presented no evidence hence it failed to show the efficacy of this waiver.
Moreover, to say that the mortgagor’s right of redemption may be waived through a fine print in a mortgage contract is, in
the last analysis, tantamount to placing at the mortgagee’s absolute disposal the property foreclosed. It would render
practically nugatory this right that is provided by law for the mortgagor for reasons of public policy. A contract of
adhesion may be struck down as void and unenforceable for being subversive to public policy, when the weaker party is
completely deprived of the opportunity to bargain on equal footing.
Case: Pepito Velasco, et al. vs. CA and GSIS, January 28, 1980, J. Barredo.
Facts:Sometime on November 10, 1965, Alta Farms secured from the GSIS a Three Million Two Hundred Fifty Five
Thousand Pesos (P3,255,000.00) loan and an additional loan of Five Million Sixty-Two Thousand Pesos (P5,062,000.00)
on October 5, 1967, to finance a piggery project. These loans were secured by two mortgage. Alta Farms defaulted in the
payment of its amortizations presumably because of this that Alta Farms executed a Deed of Sale With Assumption of
Mortgage with Asian Engineering Corporation on July 10, 1969 but without the previous consent or approval of the GSIS
and in direct violation of the provisions of the mortgage contracts. Even without the approval of the Deed of Sale With
Assumption of Mortgage by the GSIS, Asian Engineering Corporation executed an Exclusive Sales Agency, Management
and Administration Contract in favor of Laigo Realty Corporation, with the intention of converting the piggery farm into a
subdivision. And on October 20, 1969, Asian Engineering executed another contract with Laigo, whereby Laigo was to
undertake the development of the property into a subdivision. Laigo, on the other hand, entered into a contract with
Lumanlan to construct for the home buyers, 20 houses on the subdivision. Another contract was entered into between
Laigo and Velasco for construction of the houses. However, when neither Laigo nor the individual home buyers paid for
the home constructed, Velasco wrote the GSIS to intercede for the unpaid accounts of the home buyers. Contracts that
were subsequently entered into by Laigo include that of Delos Santos, Galang and Lumbang. However, GSIS categorically
denied that the firm has clear legal ground against Laigo having no privity of contract between petitioners. With the same
plight, herein petitioners filed a case against GSIS. The latter however, presented a defense through the execution of Deed
of Quitclaim and Undertaking by Laigo Realty.
Issue:Whether there is contractual privity between GSIS and Lumanlan and Velasco.
Held: YES. What is more, the reliance of GSIS on the Deed of Quitclaim of May 7, 1970 is to Our mind misplaced. We
have analyzed this document carefully, and We are of the considered view that it is actually evidence against GSIS. Even
if what is unnatural in ordinary business or industrial experience were assumed, that is, that GSIS was unaware all along
during the period of their construction of the work then being done by petitioners - albeit it is possible there was no express
consent given to - by and thru the aforementioned deed of quitclaim, GSIS agreed to receive and did actually receive the
benefits of what petitioners had accomplished or would accomplish under their contracts with Laigo., So much so, that the
dispositive portion of the quitclaim dead does not really relieve GSIS from liability to petitioners. Properly viewed, GSIS
virtually assumed under said deed, liability in regard to claims like those of petitioners who might not be paid by Laigo
albeit said liability has been made subject to the reservation that it could seek indemnity from Laigo.
GSIS received Alta Farms' proposal about the conversion of their piggery project into a subdivision (in which Laigo
Realty's participation was mentioned) as early as February 5, 1970. It was only in November, 1970 that it issued its "cease
and desist" order. From all indications, the jobs of petitioners were already practically finished then. And in the Joint
Manifestation filed by the parties with the trial court as late as February 20, 1976, GSIS made it clear that "defendant
(GSIS) up to the present has not collected from the house owners of the 63 houses built by the plaintiffs notwithstanding
the foreclosure proceedings and consolidation 6f ownership." Again, it is thus obvious that GSIS assumed ownership of
the houses built by petitioners and was benefited by the same, and the fact that it has not collected any payment from the
"house owners" or the construction of the houses respectively occupied by them is of no moment insofar as its liability to
petitioners is concerned. Surely, it is not pretended that those "house owners" would be allowed to enrich themselves at the
expense of petitioners. Indeed, the term "house owners" is inappropriate, if only because in Paragraph 16 of its Comment
on the petition herein, GSIS unequivocally state that "GSIS foreclosed the properties including all improvements (the
houses in 1970" and, thereby, became the owner of said houses.
Case: George Kauffman vs. PNB, Sept. 29, 1921, J. Street.
Facts:George A. Kauffman, was the president of a domestic corporation engaged chiefly in the exportation of hemp from
the Philippine Islands and known as the Philippine Fiber and Produce Company, of which company the plaintiff apparently
held in his own right nearly the entire issue of capital stock. On February 5, 1918, the board of directors of said company,
declared a dividend of P100,000 from its surplus earnings for the year 1917, of which the plaintiff was entitled to the sum
of P98,000. This amount was accordingly placed to his credit on the books of the company, and so remained until in
October of the same year when an unsuccessful effort was made to transmit the whole, or a greater part thereof, to the
plaintiff in New York City.
In this connection it appears that on October 9, 1918, George B. Wicks, treasurer of the Philippine Fiber and Produce
Company, presented himself in the exchange department of the Philippine National Bank in Manila and requested that a
telegraphic transfer of $45,000 should be made to the plaintiff in New York City, upon account of the Philippine Fiber and
Produce Company. Upon receiving this telegraphic message, the bank's representative in New York sent a cable message
in reply suggesting the advisability of withholding this money from Kauffman, in view of his reluctance to accept certain
bills of the Philippine Fiber and Produce Company. The Philippine National Bank acquiesced in this and on October 11
dispatched to its New York agency another message to withhold the Kauffman payment as suggested.
Meanwhile Wicks, the treasurer of the Philippine Fiber and Produce Company, cabled to Kauffman in New York, advising
him that $45,000 had been placed to his credit in the New York agency of the Philippine National Bank; and in response to
this advice Kauffman presented himself at the office of the Philippine National Bank in New York City on October 15,
1918, and demanded the money. By this time, however, the message from the Philippine National Bank of October 11,
directing the withholding of payment had been received in New York, and payment was therefore refused.
Hence, Kauffman instituted a suit before the CFI of Manila to recover the sum.
Issue:Whether or not Kauffman has right of action against PNB.
Held: YES. In the case of Uy Tam and Uy Yet vs. Leonard (30 Phil., 471), is found an elaborate dissertation upon the
history and interpretation of the paragraph above quoted and so complete is the discussion contained in that opinion that it
would be idle for us here to go over the same matter. Suffice it to say that Justice Trent, speaking for the court in that case,
sums up its conclusions upon the conditions governing the right of the person for whose benefit a contract is made to
maintain an action for the breach thereof in the following words:
So, we believe the fairest test, in this jurisdiction at least, whereby to determine whether the interest of a third person in a
contract is a stipulation pour autrui, or merely an incidental interest, is to rely upon the intention of the parties as
disclosed by their contract.
If a third person claims an enforcible interest in the contract, the question must be settled by determining whether the
contracting parties desired to tender him such an interest. Did they deliberately insert terms in their agreement with the
avowed purpose of conferring a favor upon such third person? In resolving this question, of course, the ordinary rules of
construction and interpretation of writings must be observed. (Uy Tam and Uy Yet vs. Leonard, supra.)
Further on in the same opinion he adds: "In applying this test to a stipulation pour autrui, it matters not whether the
stipulation is in the nature of a gift or whether there is an obligation owing from the promise to the third person. That no
such obligation exists may in some degree assist in determining whether the parties intended to benefit a third person,
whether they stipulated for him." (Uy Tam and Uy Yet vs. Leonard, supra.)
In the light of the conclusion thus stated, the right of the plaintiff to maintain the present action is clear enough; for it is
undeniable that the bank's promise to cause a definite sum of money to be paid to the plaintiff in New York City is a
stipulation in his favor within the meaning of the paragraph above quoted; and the circumstances under which that promise
was given disclose an evident intention on the part of the contracting parties that the plaintiff should have the money upon
demand in New York City. The recognition of this unqualified right in the plaintiff to receive the money implies in our
opinion the right in him to maintain an action to recover it; and indeed if the provision in question were not applicable to
the facts now before us, it would be difficult to conceive of a case arising under it.
It will be noted that under the paragraph cited a third person seeking to enforce compliance with a stipulation in his favor
must signify his acceptance before it has been revoked. In this case the plaintiff clearly signified his acceptance to the bank
by demanding payment; and although the Philippine National Bank had already directed its New York agency to withhold
payment when this demand was made, the rights of the plaintiff cannot be considered to as there used, must be understood
to imply revocation by the mutual consent of the contracting parties, or at least by direction of the party purchasing he
exchange.
Case: Bonifacio Brothers Inc., et al. vs. Enrique Mora, et al., May 29, 1967, J. Castro.
Facts:Enrique Mora, owner of Oldsmobile sedan model 1956, bearing plate No. QC- mortgaged the same to the H.S.
Reyes, Inc., with the condition that the former would insure the automobile with the latter as beneficiary. The automobile
was thereafter insured on June 23, 1959 with the State Bonding & Insurance Co., Inc., and motor car insurance policy A-
0615 was issued to Enrique Mora. During the effectivity of the insurance contract, the car met with an accident. The
insurance company then assigned the accident to the Bayne Adjustment Co. for investigation and appraisal of the damage.
Enrique Mora, without the knowledge and consent of the H.S. Reyes, Inc., authorized the Bonifacio Bros. Inc. to furnish
the labor and materials, some of which were supplied by the Ayala Auto Parts Co. For the cost of labor and materials,
Enrique Mora was billed at P2,102.73 through the H.H. Bayne Adjustment Co. In the meantime, the car was delivered to
Enrique Mora without the consent of the H.S. Reyes, Inc., and without payment to the Bonifacio Bros. Inc. and the Ayala
Auto Parts Co. of the cost of repairs and materials. Upon the theory that the insurance proceeds should be paid directly to
them, the Bonifacio Bros. Inc. and the Ayala Auto Parts Co. filed on May 8, 1961 a complaint with the Municipal Court of
Manila against Enrique Mora and the State Bonding & Insurance Co., Inc. for the collection of the sum of P2,002.73.
Issue:Whether there is privity of contract between the Bonifacio Bros. Inc. and the Ayala Auto Parts Co. on the one
hand and the insurance company on the other.
Held: NO. In this connection, this Court has laid down the rule that the fairest test to determine whether the interest of a
third person in a contract is a stipulation pour autrui or merely an incidental interest, is to rely upon the intention of the
parties as disclosed by their contract.4 In the instant case the insurance contract does not contain any words or clauses to
disclose an intent to give any benefit to any repairmen or materialmen in case of repair of the car in question. The parties to
the insurance contract omitted such stipulation, which is a circumstance that supports the said conclusion. On the other
hand, the "loss payable" clause of the insurance policy stipulates that "Loss, if any, is payable to H.S. Reyes, Inc."
indicating that it was only the H.S. Reyes, Inc. which they intended to benefit.
We likewise observe from the brief of the State Bonding & Insurance Company that it has vehemently opposed the
assertion or pretension of the appellants that they are privy to the contract. If it were the intention of the insurance
company to make itself liable to the repair shop or materialmen, it could have easily inserted in the contract a stipulation to
that effect. To hold now that the original parties to the insurance contract intended to confer upon the appellants the benefit
claimed by them would require us to ignore the indespensable requisite that a stipulation pour autrui must be clearly
expressed by the parties, which we cannot do.
As regards paragraph 4 of the insurance contract, a perusal thereof would show that instead of establishing privity between
the appellants and the insurance company, such stipulation merely establishes the procedure that the insured has to follow
in order to be entitled to indemnity for repair. This paragraph therefore should not be construed as bringing into existence
in favor of the appellants a right of action against the insurance company as such intention can never be inferred therefrom.
Case : Miguel Florentino, et al. vs. Salvador Encarnacion, et al., Sept. 30, 1977, J. Guerrero.
Facts:Just after the death of Encarnacion FIorentino in 1941 up to last year and as had always been the case since time
immomorial the products of the land made subject matter of this land has been used in answering for the payment for the
religious functions specified in the Deed Extrajudicial Partition belated August 24, 1947. This arrangement about the
products answering for the comment of expenses for religions functions as mentioned above was not registered in the
office of the Register of Deeds under Act No 3344, Act 496 or and, other system of registration. The heirs, however, of
Encarnacion filed with CFI of Ilocos Sur an application for registration of a parcel of agricultural land and the revocation
of the said provision in the Deed pertaining to the products of such land subject to payment of religious functions
expenses.
Issue:Whether or not the stipulation, arrangement or grant is revocable at the option of the co-heirs.
Held: NO. We find that the trial court erred in holding that the stipulation, arrangement or grant (Exhibit O-1) is revocable
at the option of the co-owners. While a stipulation in favor of a third person has no binding effect in itself before its
acceptance by the party favored, the law does not provide when the third person must make his acceptance. As a rule, there
is no time at such third person has after the time until the stipulation is revoked. Here, We find that the Church accepted
the stipulation in its favor before it is sought to be revoked by some of the co-owners, namely the petitioners-appellants
herein. It is not disputed that from the time of the with of Doña Encarnacion Florentino in 1941, as had always been the
case since time immemorial up to a year before the firing of their application in May 1964, the Church had been enjoying
the benefits of the stipulation. The enjoyment of benefits flowing therefrom for almost seventeen years without question
from any quarters can only be construed as an implied acceptance by the Church of the stipulation pour autrui before its
revocation.
We hold that said stipulation is a stipulation pour autrui. A stipulation pour autrui is a stipulation in favor of a third person
conferring a clear and deliberate favor upon him, and which stipulation is merely a part of a contract entered into by the
parties, neither of whom acted as agent of the third person, and such third person and demand its fulfillment provoked that
he communicates his to the obligor before it is revoked. The requisites are: (1) that the stipulation in favor of a third person
should be a part, not the whole, of the contract; (2) that the favorable stipulation should not be conditioned or compensated
by any kind of obligation whatever; and (3) neither of the contracting bears the legal represented or authorization of third
person.
To constitute a valid stipulation pour autrui it must be the purpose and intent of the stipulating parties to benefit the third
and it is not sufficient that the third person may be incidentally benefited by the stipulation. The fairest test to determine
whether the interest of third person in a contract is a stipulation pour autrui or merely an incidental interest, is to rely upon
the intention of the parties as disclosed by their contract. In applying this test, it meters not whether the stipulation is in the
nature of a gift or whether there is an obligation owing from the promisee to the third person. That no such obsorption
exists may in some degree assist in determining whether the parties intended to benefit a third person.
Case: Bank of America NT & SA vs. IAC and Air Cargo and Travel Corporation, Nov. 11, 1986, J. Melencio-
Herrera.
Facts:Plaintiff Air Cargo and Travel Corporation is the owner of Account Number 19842-01-2 with defendant Bank of
America. Defendant Toshiyuki Minami, President of plaintiff corporation in Japan, is the owner of Account Number
24506-01-7 with defendant Bank. On March 10, 1981, the Bank received a tested telex advise from Kyowa Bank of Japan
stating, ADVISE PAY USDLS 23,595. — TO YOUR A/C NBR 24506-01-7 OF A. C. TRAVEL CORPORATION MR.
TOSHIYUKO MINAMI and the Bank Credited the amount of US$23,595.00 to Account Number 24506-07-1 (should be
24506-01-7) owned, as aforesaid, by Minami. On March 12, 1981, Minami withdrew the sum of P180,000.00 the
equivalent in Philippine Pesos of the sum of US$23,595.00 from the Bank on his Account Number 24506-07-1 (should be
24506-01-7). According to ACTC in its Comment, in the early part of 1981, it was Tokyo Tourist Corporation in Japan
which applied with Kyowa Bank, Ltd. also based in Tokyo, Japan, for telegraphic transfer of the sum of US$23,595.00
payable to ACTC's account with BANKAMERICA, Manila. When the tested telex was received on May 10, 1981,
employees of BANKAMERICA noted its patent ambiguity. Notwithstanding, on the following day, BANKAMERICA
credited the amount of US$23,595.00 to the account of Minami. ACTC claimed that the amount should have been credited
to its account and demanded restitution, but BANKAMERICA refused. On February 18, 1982, ACTC filed suit for
damages against BANKAMERICA and Minami before the Trial Court in Pasig for the failure of BANKAMERICA to
restitute. Trial court decided in favor of the respondent. CA also affirmed.
Issue:Whether or not there was a stipulation pour autrui.
Held: YES. In Vargas Plow Factory, Inc. vs. Central Bank, it was held that "the opening of a letter of credit in favor of the
exporter becomes ultimately but the result of a stipulation pour autrui" (27 SCRA 84 [1969]). Similarly, when KYOWA
asked BANK-AMERICA to pay an amount to a beneficiary (either ACTC or Minami), the contract was between
KYOWA and BANK-AMERICA and it had a stipulation pour autrui.
It is our considered opinion that, in the tested telex, considered either as a patent ambiguity or as a latent ambiguity, the
beneficiary is Minami. The mention of Account No. 24506-01-7, as well as the name of Minami, has to be given more
weight than the mention of the name of ACTC. BANKAMERICA could not have very well disregarded that account
number. It could also be that the mention of ACTC's name was a further identification of Minami, to prevent payment to a
possible another "Toshiyuko Minami" who may not be connected with ACTC. On the other hand, it should be difficult to
concede that, in the tested telex, Account No. 24506-01-7 was erroneously written and should be substituted by Account
No. 19842-01-2 in the name of ACTC.
It should be recalled that the tested telex originated from KYOWA at the behest of Tokyo Tourist Corporation with whom
ACTC had business dealings. Minami, on the other hand, was the liaison officer of ACTC in Japan. As the entity
responsible for the tested telex was Tokyo Tourist Corporation, it can reasonably be concluded that if it had intended that
the US$23,595.00 should be credited to ACTC, upon learning that the amount was credited to Minami, it should have
gone, together with the representatives of ACTC, in protest to KYOWA and lodged a protest. Since that was not done, it
could well be that Tokyo Tourist Corporation had really intended its remittance to be credited to Minami. The identity of
the beneficiary should be in accordance with the identification made by KYOWA, and ACTC cannot question that
identification as it is not a party to the arrangement between KYOWA and BANKAMERICA (see Manila Railroad Co. vs.
Compañia Trasatlantica, 38 Phil. 875 [1918]).
Case: Marimperio Campañia Naviera, S.A. vs. CA and Union Import and Export Corporation and Philippine
Traders Corporation, Dec. 14, 1987, J. Paras.
Facts:In 1964 Philippine Traders Corporation and Union Import and Export Corporation entered into a joint business
venture for the purchase of copra from Indonesia for sale in Europe. James Liu President and General Manager of the
Union took charge of the European market and the chartering of a vessel to take the copra to Europe. Peter Yap of
Philippine on the other hand, found one P.T. Karkam in Dumai Sumatra who had around 4,000 tons of copra for sale.
Exequiel Toeg of Interocean was commissioned to look for a vessel and he found the vessel "SS Paxoi" of Marimperio
available. Philippine and Union authorized Toeg to negotiate for its charter but with instructions to keep confidential the
fact that they are the real charterers.
Consequently on March 21, 1965, in London England, a "Uniform Time Charter" for the hire of vessel "Paxoi" was
entered into by the owner, Marimperio Compania Naviera, S.A. through its agents N. & J. Vlassopulos Ltd. and Matthews
Wrightson, Burbridge, Ltd. to be referred to simply as Matthews, representing Interocean Shipping Corporation, which
was made to appear as charterer, although it merely acted in behalf of the real charterers, private respondents herein.
The Charterer was however twice in default in its payments which were supposed to have been done in advance. Hence,
Union Import and Export Corporation and Philippine Traders Corporation filed a complaint with the Court of First
Instance of Manila, Branch VIII, against the Unknown Owners of the Vessel "SS Paxoi" for specific performance with
prayer for preliminary attachment. CFI rendered its decision in favor of Marimperio and against UIEC. CA affirmed.
Issue:Whether or not UIEC has legal capacity to bring the suit for specific performance against Marimperio based on
the Charter Party.
Held: NO. It is obvious from the disclosure made in the charter party by the authorized broker, the Overseas Steamship
Co., Inc., that the real charterer is the Interocean Shipping Company (which sublet the vessel to Union Import and Export
Corporation which in turn sublet it to Philippine Traders Corporation).
In a sub-lease, there are two leases and two distinct judicial relations although intimately connected and related to each
other, unlike in a case of assignment of lease, where the lessee transmits absolutely his right, and his personality
disappears; there only remains in the juridical relation two persons, the lessor and the assignee who is converted into a
lessee (Moreno, Philippine Law Dictionary, 2nd ed., p. 594). In other words, in a contract of sub-lease, the personality
of the lessee does not disappear; he does not transmit absolutely his rights and obligations to the sub-lessee; and the
sub-lessee generally does not have any direct action against the owner of the premises as lessor, to require the
compliance of the obligations contracted with the plaintiff as lessee, or vice versa (10 Manresa, Spanish Civil Code,
438).
However, there are at least two instances in the Civil Code which allow the lessor to bring an action directly (accion
directa) against the sub-lessee (use and preservation of the premises under Art. 1651, and rentals under Article 1652).
Art. 1651 reads:
Without prejudice to his obligation toward the sub-lessor, the sub-lessee is bound to the lessor for all acts
which refer to the use and preservation of the thing leased in the manner stipulated between the lessor and the
lessee.
Article 1652 reads:
The sub-lessee is subsidiarily liable to the lessor for any rent due from the lessee. However, the sub-lessee
shall not be responsible beyond the amount of rent due from him, in accordance with the terms of the sub-
lease, at the time of the extra-judicial demand by the lessor.
Payments of rent in advance by the sub-lessee shall be deemed not to have been made, so far as the lessor's
claim is concerned, unless said payments were effected in virtue of the custom of the place.
It will be noted however that in said two Articles it is not the sub-lessee, but the lessor, who can bring the action. In the
instant case, it is clear that the sub-lessee as such cannot maintain the suit they filed with the trial court (See A.
Maluenda and Co. v. Enriquez, 46 Phil. 916).
In the law of agency "with an undisclosed principal, the Civil Code in Article 1883 reads:
If an agent acts in his own name, the principal has no right of action against the persons with whom the agent
has contracted; neither have such persons against the principal.
 In such case the agent is the one directly bound in favor of the person with whom he has contracted, as if the
transaction were his own, except when the contract involves things belonging to the principal.
The provisions of this article shag be understood to be without prejudice to the actions between the principal and agent.
While in the instant case, the true charterers of the vessel were the private respondents herein and they chartered the vessel
through an intermediary which upon instructions from them did not disclose their names. Article 1883 cannot help the
private respondents, because although they were the actual principals in the charter of the vessel, the law does not
allow them to bring any action against the adverse party and vice, versa.
Case: Geo Daywalt vs. La Corporacion De Los Padres Agustinos Recoletos, et al., J. Street.
Facts:In the year 1902, Teodorica Endencia, an unmarried woman, resident in the Province of Mindoro, executed a
contract whereby she obligated herself to convey to Geo. W. Daywalt, a tract of land situated in the barrio of Mangarin,
municipality of Bulalacao, now San Jose, in said province. It was agreed that a deed should be executed as soon as the title
to the land should be perfected by proceedings in the Court of Land Registration and a Torrens certificate should be
produced therefore in the name of Teodorica Endencia. A decree recognizing the right of Teodorica as owner was entered
in said court in August 1906, but the Torrens certificate was not issued until later. The second contract was not
immediately carried into effect for the reason that the Torrens certificate was not yet obtainable and in fact said certificate
was not issued until the period of performance contemplated in the contract had expired. The Torrens certificate was in
time issued to Teodorica Endencia, but in the course of the proceedings relative to the registration of the land, it was found
by official survey that the area of the tract inclosed in the boundaries stated in the contract was about 1.248 hectares of 452
hectares as stated in the contract. In view of this development Teodorica Endencia became reluctant to transfer the whole
tract to the purchaser, asserting that she never intended to sell so large an amount of land and that she had been
misinformed as to its area.
This attitude of hers led to litigation in which Daywalt finally succeeded, upon appeal to the Supreme Court, in obtaining a
decree for specific performance; and Teodorica Endencia was ordered to convey the entire tract of land to Daywalt
pursuant to the contract of October 3, 1908, which contract was declared to be in full force and effect. When the Torrens
certificate was finally issued in 1909 in favor of Teodorica Endencia, she delivered it for safekeeping to the defendant
corporation, and it was then taken to Manila where it remained in the custody and under the control of P. Juan Labarga the
procurador and chief official of the defendant corporation, until the deliver thereof to the plaintiff was made compulsory
by reason of the decree of the Supreme Court in 1914.
Agustines then entered into some arrangement with Endencia with the use of the land. Daywalt, however, sued Agustines
for unlawfully inducing Endencia to refrain from the performance of her contract for the sale of land in question.
Issue:Whether La Corporacion may be held liable to the vendee, beyond the value of the use and occupation of the land
by colluding with the vendor.
Held: NO. Whatever may be the character of the liability which a stranger to a contract may incur by advising or assisting
one of the parties to evade performance, there is one proposition upon which all must agree. This is, that the stranger
cannot become more extensively liable in damages for the nonperformance of the contract than the party in whose
behalf he intermeddles.To hold the stranger liable for damages in excess of those that could be recovered against
the immediate party to the contract would lead to results at once grotesque and unjust. In the case at bar, as
Teodorica Endencia was the party directly bound by the contract, it is obvious that the liability of the defendant
corporation, even admitting that it has made itself coparticipant in the breach of the contract, can in no even exceed hers.
This leads us to consider at this point the extent of the liability of Teodorica Endencia to the plaintiff by reason of her
failure to surrender the certificate of title and to place the plaintiff in possession.
It should in the first place be noted that the liability of Teodorica Endencia for damages resulting from the breach of her
contract with Daywalt was a proper subject for adjudication in the action for specific performance which Daywalt
instituted against her in 1909 and which was litigated by him to a successful conclusion in this court, but without obtaining
any special adjudication with reference to damages. Indemnification for damages resulting from the breach of a contract is
a right inseparably annexed to every action for the fulfillment of the obligation (art. 1124, Civil Code); and its is clear that
if damages are not sought or recovered in the action to enforce performance they cannot be recovered in an independent
action. As to Teodorica Endencia, therefore, it should be considered that the right of action to recover damages for the
breach of the contract in question was exhausted in the prior suit. However, her attorneys have not seen fit to interpose the
defense of res judicata in her behalf; and as the defendant corporation was not a party to that action, and such defense
could not in any event be of any avail to it, we proceed to consider the question of the liability of Teodorica Endencia for
damages without refernce to this point.
The most that can be said with refernce to the conduct of Teodorica Endencia is that she refused to carry out a contract for
the sale of certain land and resisted to the last an action for specific performance in court. The result was that the
plaintiff was prevented during a period of several years from exerting that control over the property which he was
entitled to exert and was meanwhile unable to dispose of the property advantageously.
Case: C.S. Gilchrist vs. E.A. Cuddy, et al. and Jose Fernandez Espejo and Mariano Zaldarriaga, Feb. 18, 1915, J.
Trent.
Facts:Cuddy, a resident of Manila, was the owner of the "Zigomar;" that Gilchrist was the owner of a cinematograph
theater in Iloilo; that in accordance with the terms of the contract entered into between Cuddy and Gilchrist the former
leased to the latter the "Zigomar" for exhibition in his (Gilchrist's) theater for the week beginning May 26, 1913; and that
Cuddy willfully violate his contract in order that he might accept the appellant's offer of P350 for the film for the same
period. Espejo admitted that he knew that Cuddy was the owner of the film. He received a letter from his agents in Manila
dated April 26, assuring him that he could not get the film for about six weeks. The arrangement between Cuddy and the
appellants for the exhibition of the film by the latter on the 26th of May were perfected after April 26, so that the six weeks
would include and extend beyond May 26.
Issue:Whether or not there was interference.
Held: YES. In the case at bar the only motive for the interference with the Gilchrist — Cuddy contract on the part of the
appellants was a desire to make a profit by exhibiting the film in their theater. There was no malice beyond this desire;
but this fact does not relieve them of the legal liability for interfering with that contract and causing its breach. It is,
therefore, clear, under the above authorities, that they were liable to Gilchrist for the damages caused by their acts,
unless they are relieved from such liability by reason of the fact that they did not know at the time the identity of
the original lessee (Gilchrist) of the film.
The liability of the appellants arises from unlawful acts and not from contractual obligations, as they were under no
such obligations to induce Cuddy to violate his contract with Gilchrist. So that if the action of Gilchrist had been one
for damages, it would be governed by chapter 2, title 16, book 4 of the Civil Code. Article 1902 of that code provides that
a person who, by act or omission, causes damages to another when there is fault or negligence, shall be obliged to repair
the damage do done. There is nothing in this article which requires as a condition precedent to the liability of a tort-feasor
that he must know the identity of a person to whom he causes damages. In fact, the chapter wherein this article is found
clearly shows that no such knowledge is required in order that the injured party may recover for the damage suffered.
But the fact that the appellants' interference with the Gilchrist contract was actionable did not of itself entitle Gilchrist to
sue out an injunction against them.
Case: Estate of K.H. Hemady, deceased vs. Luzon Surety Co., Inc., Nov. 28, 1956, J.B.L. Reyes.
Facts:The Luzon Surety Co. had filed a claim against the Estate based on twenty different indemnity agreements, or
counter bonds, each subscribed by a distinct principal and by the deceased K. H. Hemady, a surety solidary guarantor) in
all of them, in consideration of the Luzon Surety Co.’s of having guaranteed, the various principals in favor of different
creditors. The Luzon Surety Co., prayed for allowance, as a contingent claim, of the value of the twenty bonds it had
executed in consideration of the counterbonds, and further asked for judgment for the unpaid premiums and documentary
stamps affixed to the bonds, with 12 per cent interest thereon. The lower court dismissed the claims of Luzon Surety
stating,
(1) that the premiums due and cost of documentary stamps were not contemplated under the indemnity agreements to be a
part of the undertaking of the guarantor (Hemady), since they were not liabilities incurred after the execution of the
counterbonds; and
(2) that “whatever losses may occur after Hemady’s death, are not chargeable to his estate, because upon his death he
ceased to be guarantor.”
Issue:Whether or not Luzon Surety can file against the estate a contingent claim for reimbursement.
Held: YES. Our conclusion is that the solidary guarantor’s liability is not extinguished by his death, and that in such event,
the Luzon Surety Co., had the right to file against the estate a contingent claim for reimbursement. It becomes unnecessary
now to discuss the estate’s liability for premiums and stamp taxes, because irrespective of the solution to this question, the
Luzon Surety’s claim did state a cause of action, and its dismissal was erroneous.
The foregoing concept is confirmed by the next Article 2057, that runs as follows:
“ART. 2057. — If the guarantor should be convicted in first instance of a crime involving dishonesty or should become
insolvent, the creditor may demand another who has all the qualifications required in the preceding article. The case is
excepted where the creditor has required and stipulated that a specified person should be guarantor.”
From this article it should be immediately apparent that the supervening dishonesty of the guarantor (that is to say, the
disappearance of his integrity after he has become bound) does not terminate the contract but merely entitles the creditor to
demand a replacement of the guarantor. But the step remains optional in the creditor: it is his right, not his duty; he may
waive it if he chooses, and hold the guarantor to his bargain. Hence Article 2057 of the present Civil Code is incompatible
with the trial court’s stand that the requirement of integrity in the guarantor or surety makes the latter’s undertaking strictly
personal, so linked to his individuality that the guaranty automatically terminates upon his death.
The contracts of suretyship entered into by K. H. Hemady in favor of Luzon Surety Co. not being rendered intransmissible
due to the nature of the undertaking, nor by the stipulations of the contracts themselves, nor by provision of law, his
eventual liability thereunder necessarily passed upon his death to his heirs. The contracts, therefore, give rise to contingent
claims provable against his estate under section 5, Rule 87 (2 Moran, 1952 ed., p. 437; chan roblesvirtualawlibraryGaskell
& Co. vs. Tan Sit, 43 Phil. 810, 814).
“The most common example of the contigent claim is that which arises when a person is bound as surety or guarantor for a
principal who is insolvent or dead. Under the ordinary contract of suretyship the surety has no claim whatever against his
principal until he himself pays something by way of satisfaction upon the obligation which is secured. When he does this,
there instantly arises in favor of the surety the right to compel the principal to exonerate the surety. But until the surety has
contributed something to the payment of the debt, or has performed the secured obligation in whole or in part, he has no
right of action against anybody — no claim that could be reduced to judgment. (May vs. Vann, 15 Pla., 553; chan
roblesvirtualawlibraryGibson vs. Mithell, 16 Pla., 519; chan roblesvirtualawlibraryMaxey vs. Carter, 10 Yarg. [Tenn.], 521
Reeves vs. Pulliam, 7 Baxt. [Tenn.], 119; Ernst vs. Nou, 63 Wis., 134.)”
Case Discussions:
“Contracts take effect only as between the parties, their assigns and heirs, except in the case where the rights and
obligations arising from the contract are not transmissible by their nature, or by stipulation or by provision of law.” While
in our successional system the responsibility of the heirs for the debts of their decedent cannot exceed the value of the
inheritance they receive from him, the principle remains intact that these heirs succeed not only to the rights of the
deceased but also to his obligations. “The principle on which these decisions rest is not affected by the provisions of the
new Code of Civil Procedure, and, in accordance with that principle, the heirs of a deceased person cannot be held to be
“third persons” in relation to any contracts touching the real estate of their decedent which comes in to their hands by
right of inheritance; they take such property subject to all the obligations resting thereon in the hands of him from whom
they derive their rights.” The binding effect of contracts upon the heirs of the deceased party is not altered by the
provision in our Rules of Court that money debts of a deceased must be liquidated and paid from his estate before the
residue is distributed among said heirs (Rule 89). The reason is that whatever payment is thus made from the estate is
ultimately a payment by the heirs and distributees, since the amount of the paid claim in fact diminishes or reduces the
shares that the heirs would have been entitled to receive.
General rule: A party’s contractual rights and obligations are transmissible to the successors. Ratio: The rule is a
consequence of the progressive “depersonalization” of patrimonial rights and duties that, as observed by Victorio
Polacco, has characterized the history of these institutions. From the Roman concept of a relation from person to person,
the obligation has evolved into a relation from patrimony to patrimony, with the persons occupying only a representative
position, barring those rare cases where the obligation is strictly personal, i.e., is contracted intuitu personae, in
consideration of its performance by a specific person and by no other. The transition is marked by the disappearance of
the imprisonment for debt.
Exceptions:
1. The nature of the obligation of the surety or guarantor does not warrant the conclusion that his peculiar
individual qualities are contemplated as a principal inducement for the contract.
2. Intransmissibility by stipulation of the parties. Being exceptional and contrary to the general rule, this
intransmissibility should not be easily implied, but must be expressly established, or at the very least, clearly
inferable from the provisions of the contract itself, and the text of the agreements sued upon nowhere indicate
that they are non-transferable. Because under the law (Article 1311), a person who enters into a contract is
deemed to have contracted for himself and his heirs and assigns, it is unnecessary for him to expressly
stipulate to that effect; hence, his failure to do so is no sign that he intended his bargain to terminate upon his
death. Similarly, that the Luzon Surety Co., did not require bondsman Hemady to execute a mortgage
indicates nothing more than the company’s faith and confidence in the financial stability of the surety, but not
that his obligation was strictly personal.
3. “Not transmissible by operation of law”.
a. The provision makes reference to those cases where the law expresses that the rights or
obligations are extinguished by death, as is the case in legal support (Article 300), parental
authority (Article 327), usufruct (Article 603), contracts for a piece of work (Article 1726),
partnership (Article 1830 and agency (Article 1919). By contract, the articles of the Civil Code
that regulate guaranty or suretyship (Articles 2047 to 2084) contain no provision that the
guaranty is extinguished upon the death of the guarantor or the surety.
Case: So Ping Bun vs. CA and Tek Hua Enterprises Corp. and Manuel Tiong, September 21, 1999, J. Quisumbing.
Facts:In 1963, Tek Hua Trading Co, through its managing partner, So Pek Giok, entered into lease agreements with lessor
Dee C. Chuan & Sons Inc. (DCCSI). Subjects of four (4) lease contracts were premises located at Nos. 930, 930-Int., 924-
B and 924-C, Soler Street, Binondo, Manila. Tek Hua used the areas to store its textiles. The contracts each had a one-year
term. They provided that should the lessee continue to occupy the premises after the term, the lease shall be on a month-to-
month basis.
When the contracts expired, the parties did not renew the contracts, but Tek Hua continued to occupy the premises. In
1976, Tek Hua Trading Co. was dissolved. Later, the original members of Tek Hua Trading Co. including Manuel C.
Tiong, formed Tek Hua Enterprising Corp., herein respondent corporation.
So Pek Giok, managing partner of Tek Hua Trading, died in 1986. So Pek Giok's grandson, petitioner So Ping Bun,
occupied the warehouse for his own textile business, Trendsetter Marketing.
On August 1, 1989, lessor DCCSI sent letters addressed to Tek Hua Enterprises, informing the latter of the 25% increase in
rent effective September 1, 1989. The rent increase was later on reduced to 20% effective January 1, 1990, upon other
lessees' demand. Again on December 1, 1990, the lessor implemented a 30% rent increase. Enclosed in these letters were
new lease contracts for signing. DCCSI warned that failure of the lessee to accomplish the contracts shall be deemed as
lack of interest on the lessee's part, and agreement to the termination of the lease. Private respondents did not answer any
of these letters. Still, the lease contracts were not rescinded.
Petitioner refused to vacate. On March 4, 1992, petitioner requested formal contracts of lease with DCCSI in favor
Trendsetter Marketing. So Ping Bun claimed that after the death of his grandfather, So Pek Giok, he had been occupying
the premises for his textile business and religiously paid rent. DCCSI acceded to petitioner's request. The lease contracts in
favor of Trendsetter were executed. In the suit for injunction, private respondents pressed for the nullification of the lease
contracts between DCCSI and petitioner. They also claimed damages. Trial court ruled in annulling the contract of lease
between So Ping Bun and Dee. CA upheld trial court’s decision.
Issue:Whether or not So Ping Bun is guilty of tortuous interference of contract.
Held: YES. The elements of tort interference are:
(1) existence of a valid contract;
(2) knowledge on the part of the third person of the existence of contract; and
(3) interference of the third person is without legal justification or excuse.
A duty which the law of torts is concerned with is respect for the property of others, and a cause of action ex delicto may
be predicated upon an unlawful interference by one person of the enjoyment by the other of his private
property.This may pertain to a situation where a third person induces a party to renege on or violate his undertaking under
a contract. In the case before us, petitioner's Trendsetter Marketing asked DCCSI to execute lease contracts in its favor,
and as a result petitioner deprived respondent corporation of the latter's property right. Clearly, and as correctly viewed by
the appellate court, the three elements of tort interference above-mentioned are present in the instant case.
Authorities debate on whether interference may be justified where the defendant acts for the sole purpose of furthering his
own financial or economic interest. One view is that, as a general rule, justification for interfering with the business
relations of another exists where the actor's motive is to benefit himself. Such justification does not exist where his sole
motive is to cause harm to the other. Added to this, some authorities believe that it is not necessary that the interferer's
interest outweigh that of the party whose rights are invaded, and that an individual acts under an economic interest that is
substantial, not merely de minimis, such that wrongful and malicious motives are negatived, for he acts in self-protection.
Moreover justification for protecting one's financial position should not be made to depend on a comparison of his
economic interest in the subject matter with that of others. It is sufficient if the impetus of his conduct lies in a proper
business interest rather than in wrongful motives.
As early as Gilchrist vs. Cuddy, we held that where there was no malice in the interference of a contract, and the impulse
behind one's conduct lies in a proper business interest rather than in wrongful motives, a party cannot be a malicious
interferer. Where the alleged interferer is financially interested, and such interest motivates his conduct, it cannot be said
that he is an officious or malicious intermeddler.
In the instant case, it is clear that petitioner So Ping Bun prevailed upon DCCSI to lease the warehouse to his enterprise at
the expense of respondent corporation. Though petitioner took interest in the property of respondent corporation and
benefited from it, nothing on record imputes deliberate wrongful motives or malice on him.
Case: Nicolas Sanchez vs. Severina Rigos, June 14, 1972, J. Concepcion.
Facts:On April 3, 1961, plaintiff Nicolas Sanchez and defendant Severina Rigos executed an instrument entitled "Option
to Purchase," whereby Mrs. Rigos "agreed, promised and committed ... to sell" to Sanchez the sum of P1,510.00, a parcel
of land situated in the barrios of Abar and Sibot, municipality of San Jose, province of Nueva Ecija, within two (2) years
from said date with the understanding that said option shall be deemed "terminated and elapsed," if "Sanchez shall fail to
exercise his right to buy the property" within the stipulated period. Inasmuch as several tenders of payment of the sum of
Pl,510.00, made by Sanchez within said period, were rejected by Mrs. Rigos, on March 12, 1963, the former deposited said
amount with the Court of First Instance of Nueva Ecija and commenced against the latter the present action, for specific
performance and damages. Rigos contended that the contract between the parties "is a unilateral promise to sell, and the
same being unsupported by any valuable consideration, by force of the New Civil Code, is null and void". Accordingly, on
February 28, 1964, the lower court rendered judgment for Sanchez, ordering Mrs. Rigos to accept the sum judicially
consigned by him and to execute, in his favor, the requisite deed of conveyance.
Issue:Whether or not there was a perfected contract of sale.
Held: YES. However, this Court itself, in the case of Atkins, Kroll and Co., Inc. v. Cua Hian Tek, 8decided later that
Southwestern Sugar & Molasses Co. v. Atlantic Gulf & Pacific Co., 9saw no distinction between Articles 1324 and 1479 of
the Civil Code and applied the former where a unilateral promise to sell similar to the one sued upon here was involved,
treating such promise as an option which, although not binding as a contract in itself for lack of a separate consideration,
nevertheless generated a bilateral contract of purchase and sale upon acceptance. Speaking through Associate Justice, later
Chief Justice, Cesar Bengzon, this Court said:
Furthermore, an option is unilateral: a promise to sell at the price fixed whenever the offeree should decide to
exercise his option within the specified time. After accepting the promise and before he exercises his option,
the holder of the option is not bound to buy. He is free either to buy or not to buy later. In this case, however,
upon accepting herein petitioner's offer a bilateral promise to sell and to buy ensued, and the respondent ipso
facto assumed the obligation of a purchaser. He did not just get the right subsequently to buy or not to buy. It
was not a mere option then; it was a bilateral contract of sale.
Lastly, even supposing that Exh. A granted an option which is not binding for lack of consideration, the
authorities hold that:
"If the option is given without a consideration, it is a mere offer of a contract of sale, which is not
binding until accepted. If, however, acceptance is made before a withdrawal, it constitutes a
binding contract of sale, even though the option was not supported by a sufficient
consideration. ... . (77 Corpus Juris Secundum, p. 652. See also 27 Ruling Case Law 339 and
cases cited.)
"It can be taken for granted, as contended by the defendant, that the option contract was not valid
for lack of consideration. But it was, at least, an offer to sell, which was accepted by letter, and of
the acceptance the offerer had knowledge before said offer was withdrawn. The concurrence of
both acts — the offer and the acceptance — could at all events have generated a contract, if none
there was before (arts. 1254 and 1262 of the Civil Code)." (Zayco vs. Serra, 44 Phil. 331.)
In other words, since there may be no valid contract without a cause or consideration, the promisor is not bound by
his promise and may, accordingly, withdraw it. Pending notice of its withdrawal, his accepted promise partakes,
however, of the nature of an offer to sell which, if accepted, results in a perfected contract of sale.
Case: Tong Brothers Co vs. IAC and Juliano and Company, Dec. 21, 1987, J. Gutierrez Jr.
Facts:The petitioner is a registered general partnership engaged in the construction and repair of vessels with drydocking
facilities at Recodo Zamboanga del Sur while the private respondent is a domestic corporation engaged in the coastwise
shipping industry operating for that purpose the vessel M/S Zamboanga-J.
Sometime in December, 1974, the private respondent allegedly contracted with the petitioner the annual drydocking and
repair of the Zamboanga-J. On the ground that the petitioner did not complete and execute all the work necessary, essential
and indispensable to rendering the vessel seaworthy resulting in its deterioration and total loss, the private respondent filed
a complaint against the petitioner for specific performance and damages with the Court of First Instance of Cotabato.
The petitioner denied that there was a perfected contract to repair Zamboanga-J between the two parties.
Issue:Whether or not there was a perfected contract between the petitioner and the private respondents to repair the
vessel Zamboanga-J.
Held: NO. There was not yet a meeting of the minds as to the cause of the contract. The cause of a contract has been
defined "as the essential reason which moves the contracting parties to enter into it (8 Manresa, 5th Edition, p. 450). In
other words, the cause is the immediate, direct and proximate reason which justifies the creation of an obligation thru the
will of the contracting parties (3 Castan, 4th Edition, p. 347)." (General Enterprises, Inc. v. Lianga Bay Logging Co., Inc.,
11 SCRA 733, 739). For the private respondent, the cause of the contract was the repair of its vessel Zamboanga-J while
for the petitioner the cause would be its commitment to repair the vessel and make it seaworthy. The telegrams dated
January 17, January 20, and January 28, 1975 sent by the petitioner to the private respondent, however, indicate
that the former had not accepted the repair of Zamboanga-J, the reason being that the extent of the repair to be
made necessitated a major expense so that the petitioner insisted on the presence of the private respondent for
evaluation before it accepted the repair of the wooden vessel. That the petitioner had not yet consented to the contract is
evident when on January 28, 1975, it sent a telegram stating: "... NO AGREEMENT AS TO THE EX TENT OF REPAIRS
AND PAYMENT WILL UNDOCK VESSEL." The fact that the private respondent who received this telegram ignored it,
confirms that there was no perfected contract to repair Zamboanga-J.
It is to be noted that despite its knowledge of Zamboanga-J having been undocked as early as February 7, 1975 when the
petitioner sent a telegram advising that Zamboanga-J undocked already, " the private respondent took no action to save its
vessel. Instead, its officers and crew were ordered ashore and the vessel was left to rot and decay in the sea of Zamboanga.
It was only on July 28, 1975, after the lapse of almost six months, that the private respondent tried to recover the value of
its vessel from the petitioner.
Under the circumstances, we rule that the proximate cause of the total loss of Zamboanga-J was the negligence of the
private respondent. Breach of contract by the appellant could not have been the proximate cause as there was no perfected
contract between the parties to repair Zamboanga-J. Hence, the private respondent is not entitled to recover damages
against the private respondent.
Case: Lorenzo Velasco and Socorro Velasco vs. CA and Magdalena Estate, Inc., June 29, 1973, J. Castro.
Facts:This is a suit for specific performance filed by Lorenzo Velasco against the Magdalena Estate, Inc. on the allegation
that on November 29, 1962 the plaintiff and the defendant had entered into a contract of sale by virtue of which the
defendant offered to sell the plaintiff and the plaintiff in turn agreed to buy a parcel of land at No. 39 corner 6th Street and
Pacific Avenue, New Manila, this City, for the total purchase price of P100,000.00. It is alleged by the plaintiff that the
agreement was that the plaintiff was to give a down payment of P10,000.00 to be followed by P20,000.00 and the balance
of P70,000.00 would be paid in installments, the equal monthly amortization of which was to be determined as soon as the
P30,000.00 down payment had been completed. It is further alleged that the plaintiff paid down payment of P10,000.00 on
November 29, 1962 as per receipt No. 207848 and that when on January 8, 1964 he tendered to the defendant the payment
of the additional P20,000.00 to complete the P30,000.00 the defendant refused to accept and that eventually it likewise
refused to execute a formal deed of sale obviously agreed upon. The plaintiff demands P25,000.00 exemplary damages,
P2,000.00 actual damages and P7,000.00 attorney's fees.
The defendant, in its Answer, denies that it has had any direct dealings, much less, contractual relations with the
plaintiff regarding the property in question, and contends that the alleged contract is entirely unenforceable under
the Statute of Frauds.
Issue:Whether or not a contract of sale was perfected although the parties did not agree yet as to the “manner of
payment”.
Held: NO. It is not difficult to glean from the aforequoted averments that the petitioners themselves admit that they and
the respondent still had to meet and agree on how and when the down-payment and the installment payments were to be
paid. Such being the situation, it cannot, therefore, be said that a definite and firm sales agreement between the parties had
been perfected over the lot in question. Indeed, this Court has already ruled before that a definite agreement on the manner
of payment of the purchase price is an essential element in the formation of a binding and unforceable contract of sale.
3
The fact, therefore, that the petitioners delivered to the respondent the sum of P10,000 as part of the down-payment that
they had to pay cannot be considered as sufficient proof of the perfection of any purchase and sale agreement between the
parties herein under article 1482 of the new Civil Code, as the petitioners themselves admit that some essential matter —
the terms of payment — still had to be mutually covenanted.
Case: Pentacapital Investment Corp. vs. Makilito Mahinay, July 5, 2010, J. Nachura.
Facts:Petitioner filed a complaint for a sum of money against respondent Makilito Mahinay based on two separate loans
obtained by the latter, amounting to P1,520,000.00 and P416,800.00, or a total amount of P1,936,800.00. These loans were
evidenced by two promissory notes dated February 23, 1996. Despite repeated demands, respondent failed to pay the
loans, hence, the complaint. In his Answer with Compulsory Counterclaim, respondent claimed that petitioner had no
cause of action because the promissory notes on which its complaint was based were subject to a condition that did not
occur. While admitting that he indeed signed the promissory notes, he insisted that he never took out a loan and that the
notes were not intended to be evidences of indebtedness. By way of counterclaim, respondent prayed for the payment of
moral and exemplary damages plus attorney’s fees. In this case, respondent denied liability on the ground that the
promissory notes lacked consideration as he did not receive the proceeds of the loan.
Issue:Whether or not the respondent is bound by the promissory note.
Held:YES. In its complaint for sum of money, petitioner prayed that respondent be ordered to pay his obligation
amounting to P1,936,800.00 plus interest and penalty charges, and attorney’s fees. This obligation was evidenced by two
promissory notes executed by respondent. Respondent, however, denied liability on the ground that his obligation was
subject to a condition that did not occur. He explained that the promissory notes were dependent upon the happening of a
remote event that the parties tried to anticipate at the time they transacted with each other, and the event did not happen.36
He further insisted that he did not receive the proceeds of the loan.To ascertain whether or not respondent is bound by the
promissory notes, it must be established that all the elements of a contract of loan are present. Like any other contract, a
contract of loan is subject to the rules governing the requisites and validity of contracts in general. It is elementary in this
jurisdiction that what determines the validity of a contract, in general, is the presence of the following elements: (1)
consent of the contracting parties; (2) object certain which is the subject matter of the contract; and (3) cause of the
obligation which is established.
Under Article 1354 of the Civil Code, it is presumed that consideration exists and is lawful unless the debtor proves
the contrary. Moreover, under Section 3, Rule 131 of the Rules of Court, the following are disputable
presumptions: (1) private transactions have been fair and regular; (2) the ordinary course of business has been
followed; and (3) there was sufficient consideration for a contract. A presumption may operate against an adversary
who has not introduced proof to rebut it. The effect of a legal presumption upon a burden of proof is to create the necessity
of presenting evidence to meet the legal presumption or the prima facie case created thereby, and which, if no proof to the
contrary is presented and offered, will prevail. The burden of proof remains where it is, but by the presumption, the
one who has that burden is relieved for the time being from introducing evidence in support of the averment,
because the presumption stands in the place of evidence unless rebutted.
In the present case, as proof of his claim of lack of consideration, respondent denied under oath that he owed petitioner a
single centavo. He added that he did not apply for a loan and that when he signed the promissory notes, they were all blank
forms and all the blank spaces were to be filled up only if the sale transaction over the subject properties would not push
through because of a possible adverse decision in the civil cases involving them (the properties). He thus posits that since
the sale pushed through, the promissory notes did not become effective. Contrary to the conclusions of the RTC and the
CA, we find such proof insufficient to overcome the presumption of consideration. The presumption that a contract has
sufficient consideration cannot be overthrown by the bare, uncorroborated and self-serving assertion of respondent that it
has no consideration. The alleged lack of consideration must be shown by preponderance of evidence.
Case: Agustino Ong Yiu vs. CA and Philippine Air Lines, Inc., June 29, 1979, J. Melencio-Herrera.
Facts:On August 26, 1967, petitioner was a fare paying passenger of respondent Philippine Air Lines, Inc. (PAL), on
board Flight No. 463-R, from Mactan Cebu, bound for Butuan City. He was scheduled to attend the trial of Civil Case No.
1005 and Spec. Procs. No. 1125 in the Court of First Instance, Branch II, thereat, set for hearing on August 28-31, 1967.
As a passenger, he checked in one piece of luggage, a blue "maleta" for which he was issued Claim Check No. 2106-R.
The plane left Mactan Airport, Cebu, at about 1:00 o'clock P.M., and arrived at Bancasi airport, Butuan City, at past 2:00
o'clock P.M., of the same day. Upon arrival, petitioner claimed his luggage but it could not be found. The next day, the
missing luggage was delivered to him but with folder containing certain exhibits, transcripts and private documents in
Civil Case No. 1005 and Sp. Procs. No. 1126 were missing, aside from two gift items for his parents-in-law. Petitioner
refused to accept the luggage. Dagorro returned it to the porter clerk, Maximo Gomez, who sealed it and forwarded the
same to PAL Cebu. Meanwhile, petitioner asked for postponement of the hearing of Civil Case No. 1005 due to loss of his
documents, which was granted by the Court. Hence, Ong filed a complaint against PAL for damages for breach of contract
of transportation. Trial court found PAL to have acted in bad faith and awarded moral damages amounting to 80,000 and
exemplary damages, 30,000, with attorney’s fees, 5,000. However, CA only found PAL guilty of simple negligence and
revered the decision of trial court granting moral and exemplary damages to Ong but ordered PAL to pay Ong the sum of
100.00, the baggage liability assumed by the former under the condition of carriage at the back of the ticket.
Issue:Whether or not Ong and PAL entered into a contract which limited PAL’s liability on lost documents of Ong.
Held: YES. We agree with the foregoing finding. The pertinent Condition of Carriage printed at the back of the plane
ticket reads:
8. BAGGAGE LIABILITY ... The total liability of the Carrier for lost or damaged baggage of the passenger is
LIMITED TO P100.00 for each ticket unless a passenger declares a higher valuation in excess of P100.00,
but not in excess, however, of a total valuation of P1,000.00 and additional charges are paid pursuant to
Carrier's tariffs.
There is no dispute that petitioner did not declare any higher value for his luggage, much less did he pay any additional
transportation charge.
But petitioner argues that there is nothing in the evidence to show that he had actually entered into a contract with PAL
limiting the latter's liability for loss or delay of the baggage of its passengers, and that Article 1750* of the Civil Code has
not been complied with.
While it may be true that petitioner had not signed the plane ticket, he is nevertheless bound by the provisions thereof.
"Such provisions have been held to be a part of the contract of carriage, and valid and binding upon the passenger
regardless of the latter's lack of knowledge or assent to the regulation". It is what is known as a contract of "adhesion", in
regards which it has been said that contracts of adhesion wherein one party imposes a ready made form of contract on the
other, as the plane ticket in the case at bar, are contracts not entirely prohibited. The one who adheres to the contract is in
reality free to reject it entirely; if he adheres, he gives his consent. And as held in Randolph v. American Airlines, 103
Ohio App. 172, 144 N.E. 2d 878; Rosenchein vs. Trans World Airlines, Inc., 349 S.W. 2d 483, "a contract limiting liability
upon an agreed valuation does not offend against the policy of the law forbidding one from contracting against his own
negligence.
Considering, therefore, that petitioner had failed to declare a higher value for his baggage, he cannot be permitted a
recovery in excess of P100.00.Besides, passengers are advised not to place valuable items inside their baggage but "to
avail of our V-cargo service ". I t is likewise to be noted that there is nothing in the evidence to show the actual value of
the goods allegedly lost by petitioner.
Case: Weldon Construction Corp. vs. CA and Manuel Cancio, Oct. 12, 1987, J. Cortes.
Facts:In 1961 Lucio Lee, whose name was later changed to Lucio Lee Rodriguez, was doing business under the trade
name Weldon Construction, the predecessor-in-interest of the herein petitioner, WELDON CONSTRUCTION
CORPORATION. The latter corporation was incorporated in July, 1963 as a closed corporation composed of Lucio Tee
(owner of Weldon Construction), his wife, his sister and the latter's husband, and a cousin. The assets of Weldon
Construction were transferred to, and its liabilities assumed by the new corporation. Hence, the instant case was brought by
WELDON CONSTRUCTION CORPORATION as successor-in-interest of Weldon Construction and Lucio Lee.
Prior to March 7, 1961, Lucio Lee drafted plans for a theater-apartment building which private respondent Cancio intended
to put up. Thereafter, on March 7, 1961, he submitted to the latter a proposal for the supervision of the construction of said
building on commission basis. The proposal was signed not by Lee but by his office manager, Antonio Wong. The private
respondent never affixed his signature on the document.
Among the provisions Contained in the proposal was the setting up of a revolving fund of P10,000.00 Pesos for the costs
and expenditures to be incurred in the construction of the building, such as materials and labor among others. The fund
was to be replenished by the owner of the building from time to time (Id). The proposal also provided for the payment to
Weldon Construction of a commission of ten per cent (10%) of the total cost of the building.
Issue:Whether or not the contract providing for the commission of Weldon was perfected.
Held: NO. In view of all the foregoing considerations this Court finds that the agreement between the parties is the
contract of construction for a stipulated price which is akin to a contract for a piece of work defined in the aforequoted
article. Both parties having fully performed their reciprocal obligations in accordance with said contract, petitioner is
estopped from invoking an entirely different agreement so as to demand additional consideration. Once a contract has been
consummated, there is nothing left to be done or to be demanded by the parties thereto. All obligations arising from the
contract are extinguished.
As set by the parties, the consideration for the construction of the Gay Theater building is P600,000.00 Pesos which
amount has been fully paid by the private respondent. There is no basis for the petitioner's demand for the payment of
P62,378.83 Pesos as commission of ten per cent (10%) of the total cost of construction.
The first proposal submitted by Weldon Construction for rendering service under a contract of supervision (Exhibit "A") is
simply that, a proposal. It never attained perfection as the contract between the parties. Only an absolute or unqualified
acceptance of a definite offer manifests the consent necessary to perfect a contract (Article 1319, New Civil Code). The
advance payment of P10,000.00 Pesos was not an unqualified acceptance of the offer contained in the first proposal
(Exhibit "A") as in fact an entirely new proposal (Exhibit "4") was submitted by Weldon Construction subsequently. If, as
claimed by the petitioner, the parties had already agreed upon a contract of supervision under Exhibit "A," why then was a
second proposal made? Res ipsa loquitur. The existence of the second proposal belies the perfection of any contract arising
from the first proposal .
Case: C & C Commercial Corp. vs. Antonio Menor (Acting as Gen. Manager of National Waterworks and Sewerage
Authority) and Members of the Committee on Pre-qualification, NAWASA, Jan. 27, 1983, J. Aquino.
Facts:Judge Cloribel of the Court of First Instance of Manila in his decision dated March 1, 1967 in Civil Case No. 66750,
a mandamus case, ordered the Acting General Manager of the National Waterworks and Sewerage Authority and the
members of the Committee on Pre-Qualification to allow C & C Commercial Corporation to participate as a qualified
bidder in the public bidding for the supply of asbestos cement pressure pipes to the Nawasa in spite of the fact that it had a
pending tax case and had no tax clearance certificate. By virtue of that judgment, which became final because the Nawasa
did not appeal, C & C Commercial Corporation took part in the bidding. When the bids were opened on May 18, 1967, it
was found to be the lowest bidder. Judge Cloribel in his order of August 23, 1967 granted the motion and ordered
Menor and the other Nawasa officials to award within ten days from notice the contract to C & C Commercial
Corporation as the lowest bidder. From that order, the Nawasa appealed to this Court. Judge Cloribel approved its record
on appeal in his order of November 9, 1967. Realizing that the appeal would delay the award and that another bidder might
be given the contract, C & C Commercial Corporation filed in the lower court another petition for mandamus dated
November 21, 1967 wherein it prayed that the Nawasa Board of Directors, its Committee of Awards and Menor, its acting
general manager, be restrained from awarding the contract to another bidder and that they be ordered to award the contract
to C & C Commercial Corporation.
Issue:Whether or not NAWASA can be compelled to award the contract to C & C as the lowest bidder thereof.
Held: NO. It was not the ministerial duty of the Nawasa officials to award the contract to C & C Commercial Corporation
even if it was the lowest bidder, The Nawasa in its addendum No.1 to the invitation to bid dated July 6, 1966 reserved the
right "to reject the bid of any bidder" (p. 35, Record on Appeal).
Therefore, a bidder whose bid is rejected has no cause for complaint nor a right to dispute the award to another bidder
(Esguerra & Sons vs. Aytona, 114 Phil. 1189; Surigao Mineral Reservation Board vs. Cloribel, L-27072, July 31, 1968, 24
SCRA 491).
It should be noted that "advertisements for bidders are simply invitations to make proposals, and the advertiser is not
bound to accept the highest or lowest bidder, unless the contrary appears" (Art. 1326, Civil Code). No such contrary
intention appears in this case. Moreover, the Nawasa was justified in not awarding the contract- to C & C Commercial
Corporation because it had no tax clearance certificate. It had a pending tax case in the Bureau of Internal Revenue. The
award to C & C Commercial Corporation would be in gross contravention of Administrative Order No. 66.
That was the ruling in Nawasa vs. Reyes, L-28597, February 29, 1968, 22 SCRA 905, where the bidder was also the
appellee herein, C & C Commercial Corporation. It was held therein that C & C Commercial Corporation was disqualified
under the said order to take part in the bidding to supply the Nawasa with steel pipes because it had "tremendous tax
liabilities".
Case: Vicente Tang vs. CA and Phil. American Life Insurance Company (PALIC), May 25, 1979, J. Abad Santos.
Facts:On September 25, 1965, Lee See Guat, a widow, 61 years old, and an illiterate who spoke only Chinese, applied for
an insurance on her life for P60,000 with the respondent Company. The application consisted of two parts, both in the
English language. The second part of her application dealt with her state of health and because her answers indicated that
she was healthy, the Company issued her Policy No. 0690397, effective October 23, 1965, with her nephew Vicente E.
Tang, herein Petitioner, as her beneficiary,
On November 15, 1965, Lee See Guat again applied with the respondent Company for an additional insurance on her life
for P40,000. Considering that her first application had just been approved, no further medical examination was made. On
April 20, 1966, Lee See Guat died of lung cancer. Thereafter, the beneficiary of the two policies, Vicente E. Tang claimed
for their face value in the amount of P100,000 which the insurance company refused to pay on the ground that the insured
was guilty of concealment and misrepresentation at the time she applied for the two policies. Hence, the filing of Civil
Case No. 90062 in the Court of First Instance of Manila which dismissed the claim because of the concealment practised
by the insured in violation of the Insurance Law. CA affirmed the decision of the CFI.
Issue:Whether or not it is PALIC’s obligation to explain the terms of the contract to an illiterate insured.
Held:NO. It should be noted that under Art. 1332 above quoted, the obligation to show that the terms of the contract had
been fully explained to the party who is unable to read or understand the language of the contract, when fraud or mistake is
alleged, devolves on the party seeking to enforce it. Here the insurance company is not seeking to enforce the contracts; on
the contrary, it is seeking to avoid their performance. It is petitioner who is seeking to enforce them even as fraud or
mistake is not alleged. Accordingly, respondent company was under no obligation to prove that the terms of the insurance
contracts were fully explained to the other party. Even if we were to say that the insurer is the one seeking the performance
of the contracts by avoiding paying the claim, it has to be noted as above stated that there has been no imputation of
mistake or fraud by the illiterate insured whose personality is represented by her beneficiary the petitioner herein. In sum,
Art. 1332 is inapplicable to the case at bar. Considering the findings of both the CFI and Court of Appeals that the insured
was guilty of concealment as to her state of health, we have to affirm.
Case: Juanito Cariño and Cirila Vicencio vs. CA and Pablo Encabo, Juanita De los Santos and Land Authority, July
31, 1987, J. Padilla.
Facts:On 22 January 1954, Pablo Encabo formally applied with the Land Estates Division, Bureau of Lands, to purchase a
parcel of land designated as Lot 1, Block 4, Plan Psd-24819, which was a part of the Tuason Estate purchased by the
government pursuant to the provisions of Commonwealth Act No. 539, for resale to bona fide tenants or occupants who
are qualified to own public land in the Philippines. Thereafter, Encabo, through petitioner Cirila Vicencio, supposedly as
"agent, " came to an agreement with Josue Quesada transferring rights over the lot to the latter, conditioned on approval by
the Land Tenure Administration (LTA, for short). The transfer of rights by Encabo to Quesada was not put in writing but
payment of the price for the rights transferred was evidenced by receipts. In November (undated) 1958, Encabo executed a
Deed of Sale of House and Transfer of Rights (Exh. "D-1"), purportedly conveying to herein petitioners (Juanito Cariño
and Cirila Vicencio), his rights over the lot, subject to approval of the LTA. On 17 December 1958, Encabo wrote a letter
to the LTA (Exh. "1") requesting permission to transfer his rights. On 19 April 1960, Juanito Cariño filed a petition with
the LTA seeking approval of the transfer to herein petitioners of rights to the lot in question on the basis of the Deed of
Sale of House and Transfer of Rights executed by Pablo Encabo (Exh. "D-1"). The petition of Juanito Cariño was docketed
as LTA Case No. 490, to which respondent Pablo Encabo objected and filed an Answer in opposition thereto. LTA ruled in
maintaining the status quo. Cariño appealed to Office of the President and refused to give up possession of the land.
Hence, Encobo filed an action in CFI of Manila declaring them as owners. Lower court favored Encobo. CA affirmed.
Issue:Whether or not Deed of Sale of House and Transfer of Rights on which the petitioners have based their
application over the questioned lot is simulated and therefore an inexistent deed of sale.
Held: YES. This Court finds that there is substantial and convincing evidence that Exhibit "D-1" was a simulated deed of
sale and transfer of rights, to warrant the affirmance of the decision of the respondent Court of Appeals. The characteristic
of simulation is the fact that the apparent contract is not really desired or intended to produce legal effects nor in any way
alter the judicial situation of the parties. 13 Under the circumstances surrounding their transaction, the parties knew that the
document Exhibit "D-1" was at once fictitious and simulated where none of the parties intended to be bound thereby.
Strongly indicative of the simulated character of Exhibit ,"D-1" is the fact that the Cariños could not produce the receipts
evidencing their alleged payments to the Land Authority for the disputed lot, nor were they able to produce the Agreement
to Sell.
Contracts of sale are void and produce no effect whatsoever where the price, which appears therein as paid, has in fact
never been paid by the vendee to the vendor. A sale of land without consideration, but intended merely to protect a party to
a joint venture for the cash advances he was to make for the realty subdivision that the parties wanted to put up, is null and
void. The law is clear on this matter. The Civil Code provides:
Art. 1409. The following contracts are inexistent and void from the beginning:
x x x           x x x          x x x
(2) Those which are absolutely simulated or fictitious;
x x x           x x x          x x x
These contracts cannot be ratified. Neither can the right to set up the defense of illegality be waived.
Furthermore, even without going into the merits and/or validity of Exhibit "D-1", it is clear that there has been no legal
transfer of rights in favor of the Cariños because neither the LTA nor the Land Authority has approved or given due course
to such transfer of rights.25 The LTA never waived its right to approve the transfer of rights. It only ruled that the status quo
will be maintained so long as the Court has not yet ruled on the authenticity of document Exhibit "D-1". The ownership of
the lot by the Cariños is still contingent on the approval of the LTA upon their compliance with all the requirements of the
latter. Since no approval or due course has yet been given by the LTA or LA to such transfer of rights, the document
Exhibit "D-1" is not enforceable against the latter.
Case: Manuel Lagunzad vs. Maria Soto Vda. De Gonzales and CA, Aug. 6, 1979, J. Melencio-Herrera.
Facts:The present controversy stems from a "Licensing Agreement" entered into by and between petitioner Manuel M.
Lagunzad and private respondent Maria Soto Vda. de Gonzales on October 5, 1961, which contract petitioner claims to be
null and void for having been entered into by him under duress, intimidation and undue influence.
The antecedental facts follow: Sometime in August, 1961, petitioner Manuel Lagunzad, a newspaperman, began the
production of a movie entitled "The Moises Padilla Story" under the name of his own business outfit, the "MML
Productions." It was based mainly on the copyrighted but unpublished book of Atty. Ernesto Rodriguez, Jr., entitled "The
Long Dark Night in Negros" subtitled "The Moises Padilla Story," the rights to which petitioner had purchased from Atty.
Rodriguez in the amount of P2,000.00.
The book narrates the events which culminated in the murder of Moises Padilla sometime between November 11 and
November 17, 1951. Padilla was then a mayoralty candidate of the Nacionalista Party (then the minority party) for the
Municipality of Magallon, Negros Occidental, during the November, 1951 elections. Governor Rafael Lacson, a member
of the Liberal Party then in power and his men were tried and convicted for that murder in People vs. Lacson, et al. In the
book, Moises Padilla is portrayed as "a martyr in contemporary political history."
Although the emphasis of the movie was on the public life of Moises Padilla, there were portions which dealt with his
private and family life including the portrayal in some scenes, of his mother, Maria Soto Vda. de Gonzales, private
respondent herein, and of one "Auring" as his girl friend. On October 3, 1961, petitioner received a telephone call from one
Mrs. Nelly Amante, half-sister of Moises Padilla, objecting to the filming of the movie and the "exploitation" of his life.
On October 5, 1961, Mrs. Amante, for and in behalf of her mother, private respondent, demanded in writing for certain
changes, corrections and deletions in the movie. 5 Petitioner contends that he acceded to the demands because he had
already invested heavily in the picture to the extent of mortgaging his properties, 6 in addition to the fact that he had to
meet the scheduled target date of the premiere showing.
On the same date, October 5, 1961, after some bargaining as to the amount to be paid, which was P50,000.00 at first, then
reduced to P20,000.00, 7 petitioner and private respondent, represented by her daughters and Atty. Ernesto Rodriguez, at
the law office of Jalandoni and Jamir, executed a "Licensing Agreement". Petitioner takes the position that he was
pressured into signing the Agreement because of private respondent's demand, through Mrs. Amante, for payment for the
"exploitation" of the life story of Moises Padilla, otherwise, she would "call a press conference declaring the whole picture
as a fake, fraud and a hoax and would denounce the whole thing in the press, radio, television and that they were going to
Court to stop the picture."Because petitioner refused to pay any additional amounts pursuant to the Agreement, on
December 22, 1961, private respondent instituted the present suit against him. The trial court favored respondent. CA
affirmed.
Issues:
(1) Whether or not the Licensing Agreement was null and void.
(2) Whether or not the consent of Petitioner in entering into such Licensing Agreement was procured with
duress, intimidation and undue influence.
Held:
(1) NO.Neither do we agree with petitioner's submission that the Licensing Agreement is null and void for lack of, or for
having an illegal cause or consideration. While it is true that petitioner had purchased the rights to the book entitled "The
Moises Padilla Story," that did not dispense with the need for prior consent and authority from the deceased heirs to
portray publicly episodes in said deceased's life and in that of his mother and the members of his family. As held in
Schuyler v. Curtis, 14"a privilege may be given the surviving relatives of a deceased person to protect his memory, but the
privilege exists for the benefit of the living, to protect their feelings and to prevent a violation of their own rights in the
character and memory of the deceased."
Petitioner's averment that private respondent did not have any property right over the life of Moises Padilla since the latter
was a public figure, is neither well taken. Being a public figure ipso facto does not automatically destroy in toto a person's
right to privacy. The right to invade a person's privacy to disseminate public information does not extend to a fictional or
novelized representation of a person, no matter how public a figure he or she may be. 15 In the case at bar, while it is true
that petitioner exerted efforts to present a true-to-life story of Moises Padilla, petitioner admits that he included a little
romance in the film because without it, it would be a drab story of torture and brutality.
(2) NO. We also find it difficult to sustain petitioner's posture that his consent to the Licensing Agreement was procured
thru duress, intimidation and undue influence exerted on him by private respondent and her daughters at a time when he
had exhausted his financial resources, the premiere showing of the picture was imminent, and "time was of the essence."
As held in Martinez vs. Hongkong & Shanghai Bank, 17 it is necessary to distinguish between real duress and the motive
which is present when one gives his consent reluctantly. A contract is valid even though one of the parties entered into it
against his own wish and desires, or even against his better judgment. In legal effect, there is no difference between a
contract wherein one of the contracting parties exchanges one condition for another because he looks for greater profit or
gain by reason of such change, and an agreement wherein one of the contracting parties agrees to accept the lesser of two
disadvantages. In either case, he makes a choice free and untramelled and must accordingly abide by it. The Licensing
Agreement has the force of law between the contracting parties and since its provisions are not contrary to law, morals,
good customs, public order or public policy (Art. 1306, Civil Code), petitioner Should comply with it in good faith.
Case: Liam Law vs. Olympic sawmill Co. and Elino Lee Chi, May 28, 1984, J. Melencio-Herrera.
Facts:On or about September 7, 1957, plaintiff loaned P10,000.00, without interest, to defendant partnership and
defendant Elino Lee Chi, as the managing partner. The loan became ultimately due on January 31, 1960, but was not paid
on that date, with the debtors asking for an extension of three months, or up to April 30, 1960.
On March 17, 1960, the parties executed another loan document. Payment of the P10,000.00 was extended to April 30,
1960, but the obligation was increased by P6,000.00. Defendants again failed to pay their obligation by April 30, 1960 and,
on September 23, 1960, plaintiff instituted this collection case. Defendants admitted the P10,000.00 principal obligation,
but claimed that the additional P6,000.00 constituted usurious interest. Trial court favored Law and ordered herein
respondents to pay the former, the principal amount of 10,000 plus 6,000 by way of liquidated damages.
Issue:Whether or not the additional P6,000 is recoverable.
Held: YES. Under Article 1354 of the Civil Code, in regards to the agreement of the parties relative to the P6,000.00
obligation, "it is presumed that it exists and is lawful, unless the debtor proves the contrary". No evidentiary hearing
having been held, it has to be concluded that defendants had not proven that the P6,000.00 obligation was illegal.
Confirming the Trial Court's finding, we view the P6,000.00 obligation as liquidated damages suffered by plaintiff, as of
March 17, 1960, representing loss of interest income, attorney's fees and incidentals.
Case: Lao Sok vs. Lydia Sabaysabay, et al., Aug. 9, 1985, J. Gutierrez Jr.
Facts:Petitioner Lao Sok owned and operated the Shelton Department Store located at Carriedo Street, Quiapo, Manila.
Private respondents, Lydia Sabaysabay, Amparo Mangulat, Rosita Salviejo, Nenita Ruinata, Vilma Capillo and Virginia
Sanorjo were all salesladies of the department store with a daily wage of P14.00 each. On October 12, 1980, petitioner's
store was razed by fire. He did not report the loss of jobs of the salesladies which resulted from the burning of his
department store to the Regional Office of the Ministry of Labor. Petitioner promised the private respondents that he
would transfer them to his other department stores. Several weeks passed but petitioner still did not fulfill his promise. The
petitioner, however, told the respondents that he would give them their separation pay and other benefits due them as soon
as he collected the insurance proceeds arising from his burned store. The private respondents accepted this offer of the
petitioner.
Petitioner later collected the proceeds of his insurance but he did not give the private respondents their separation pay and
other benefits. Neither did he employ them in his other stores as earlier promised. On May 14, 1981, the private
respondents filed a complaint with the Ministry of Labor and Employment charging the petitioner with illegal dismissal
and non-payment of their separation pay, allowance and incentive leave pay. Labor Arbiter favored herein respondents.
NLRC affirmed.
Issue:Whether or not a contract was perfected between the sales ladies and Lao Sok in payment of formers separation
pay.
Held:YES. Lao Sok made an offer which was duly accepted by the private respondents. There was, therefore, a meeting of
the minds between two parties whereby one bound himself with respect to the other, to give something or to render some
service (Article 1305, Civil Code). By the unconditional acceptance of the offer that they would be paid separation pay, a
contract was therefore perfected. Petitioner contends that the contract though orally made is unenforceable since it does not
comply with the Statute of Frauds.
This contention has no merit.
Contracts in whatever form they may have been entered into are binding on the parties unless form is essential for the
validity and enforceability of that particular contract. (See Lopez v. Auditor General, 20 SCRA 655). We held in Shaffer v.
Palma (22 SCRA 934):
xxx xxx xxx
... Whether the agreement is in writing or not is a question of evidence. Nevertheless, even granting that the
agreement is not in writing, this circumstance does not militate against the validity or enforceability of said
agreement, because contracts are binding upon the parties in whatever form they may have been entered into
unless the law requires otherwise. (Article 1356, Civil Code; Lopez v. The Auditor General, et al., L-25859,
July 13, 1967; Pilar Gil Vdan de Murciano v. The Auditor General, et al., 103 Phil. 907). It is true that Article
1358 of the Civil Code provides that contracts involving more than P500.00 must appear in writing, but
nothing is said therein that such requirement is necessary for their validity or enforceability. It has been held
that the writing required under Article 1358 is merely for convenience, (Thunga Chui v. Que Bentac, 2 Phil.
561; Ng Hoc v. Tong Ho, 52 0,G., 4396) and so the agreement alleged in the amended complaint in the
present case can be enforced even if it may not be in writing.
The requirement of writing for the offer made by Lao Sok is only for convenience and not enforceability. In fact, the
petitioner could be compelled to put the offer in writing, a step no longer necessary now because of this petition.
Case: Meliton Gallardo and Teresa Villanueva vs. IAC and Marta Villanueva, et al., Oct. 29, 1987, J. Paras.
Facts:A parcel of land situated in Cavinti, Laguna was owned and registered in the name of late Pedro Villanueva. Herein
petitioners claimed that the aforestated land was sold to them in a private document, an unnotarized deed of sale written in
Tagalog that was allegedly by the late Villanueva. Subsequently, the Original Certificate of Title was cancelled on the
basis of the private document of sale (Exhibit "B") and a new certificate of title was issued in the name of the petitioners.
However, during the Second World War, the records as well as the Office of the Register of Deeds of Laguna, where the
original of their new transfer certificate of title was kept, were completely burned. Accordingly, by virtue of an Affidavit
of Reconstitution dated December 2, 1958 (Record on Appeal, Annex "DD," pp. 41-42) and upon presentation of the
Owner's Duplicate Certificate of Title, the title was administratively reconstituted and the Register of Deeds of Laguna
issued Transfer Certificate of Title No. RT-6293 (No. 23350) in the name of the petitioners (Record on Appeal, Annex
"B", pp. 7). On November 17, 1976, defendant Marta Villanueva together with Pedro Villanueva, Jr., and Restituto R.
Villanueva executed and filed an Affidavit of Adverse Claim with the Office of the Register of Deeds of Laguna.
petitioners instituted court suit against the private respondent and her husband, Dr. Marcelo S. Agana, Sr. by filing a
complaint for Quieting of Title and Damages with the Court of First Instance of Laguna. CFI of Laguna declared the deed
of sale void ab initio. IAC affirmed. Petitioners claim that the sale although not in a public document, is nevertheless valid
and binding citing this Court's rulings in the cases of Cauto v. Cortes, 8 Phil. 459, 460; Guerrero v. Miguel, 10 Phil. 52,
53; Bucton v. Gabar 55 SCRA 499 wherein this Court ruled that even a verbal contract of sale of real estate produces legal
effects between the parties.
Issue:Whether or not the unnotarized deed of sale purportedly executed on August 10, 1937 by the primitive owner
Pedro Villanueva, in favor of petitioners, can be considered as a valid instrument for effecting the alienation by way of
sale of a parcel of land registerd under the Torrens System.
Held:NO. True, as argued by appellants, a private conveyance of registered property is valid as between the parties.
However, the only right the vendee of registered property in a private document is to compel through court processes the
vendor to execute a deed of conveyance sufficient in law for purposes of registration. Plaintiffs-appellants' reliance on
Article 1356 of the Civil Code is unfortunate. The general rule enunciated in said Art. 1356 is that contracts are obligatory,
in whatever form they may have been entered, provided all the essential requisites for their validity are present. The next
sentence provides the exception, requiring a contract to be in some form when the law so requires for validity or
enforceability. Said law is Section 127 of Act 496 which requires, among other things, that the conveyance be executed
"before the judge of a court of record or clerk of a court of record or a notary public or a justice of the peace, who shall
certify such acknowledgment substantially in form next hereinafter stated."
Such law was violated in this case. The action of the Register of Deeds of Laguna in allowing the registration of the private
deed of sale was unauthorized and did not lend a bit of validity to the defective private document of sale.
Upon consideration of the facts and circumstances surrounding the execution of the assailed document, the trial court
found that said private document (Exhibit "B") was null and void and that it was signed by somebody else not Pedro
Villanueva. Such findings of fact besides being based on the records, were sustained by the Court of Appeals.
Case: Lim Yhi Luya vs. CA and Hind Sugar Company, Sept.11, 1980, J. Guerrero.
Facts:Petitioner Lim Yhi Luya is a businessman, resident of Lingayen, Pangasinan where he operates a grocery store,
hardware store and gasoline station. Private respondent Hind Sugar Company is engaged in the manufacturing and
marketing of sugar, its principal office located in Manaoag, Pangasinan. Vice President and General Manager of
respondent company is Atty. Emiliano Abalos. His assistant is Generoso Bongato, while the cashier and accountant of the
company is Teodoro Garcia.
Petitioner and private respondent since 1958 have had business dealings with each other, the company selling sugar to the
petitioner and the latter has been supplying the company with diesoline, gasoline, muriatic acid, sulfuric acid, other
supplies and materials ordered on credit. On November 12, 1970, petitioner received a telegram from Manager Abalos in
the following tenor: "Please come tomorrow morning without fail." (Exh. "B"). The following day, November 13, 1970,
petitioner proceeded to the company and in the office of Manager Abalos, the latter offered to sell sugar at P37.00 per
picul. The parties agreed to the purchase of 4,085 piculs of sugar at P35.00 per picul. With the terms as follows: “TERMS:
CASH UPON SIGNING OF THIS CONTRACT”. Between November 13, 1970 to January 27, 1971, petitioner withdrew
from the company warehouse in varying quantities a total amount of 3,735 piculs under substitute delivery orders, leaving
a balance of 350 piculs undelivered.
On January 22, 1971, the question of payment cropped out between the parties. Petitioner claimed that he had paid
P142,975.00 to the company officials, Cashier Garcia and Manager Abalos on November 13. 1970 and as proof of his
payment, he referred to the contract, particularly to the stipulation stating "Terms: Cash upon sing of this contract."
Respondent company officials denied the claim of the petitioner, alleging that petitioner never paid for the sugar on
November 13, 1970 or at any time thereafter. An audit report or examination of the books of the company made by
External Auditor Victorino Daroya showed no payment by petitioner.
On May 17, 1971, petitioner, as plaintiff below, filed the complaint against the defendant Hind Sugar Company stating 6
causes of actions. The trial court favored Lim. But CA reversed.
Issue:Whether or not payment has already been made.
Held: YES. Considering the admitted fact that the contract of sale (Exhibit "A") was prepared in the office of respondent
company by Generoso Bongato, Assistant to the Manager of the company, upon instruction of General Manager Emiliano
L. Abalos who is a lawyer, and We are now confronted with the varying or conflicting interpretations of the parties thereto,
the respondent company contending that the stipulation "Terms: Cash upon signing of this contract" does not mean that the
agreement was a cash transaction because no money was paid by the petitioner at the time of the signing thereof, whereas
the petitioner insists that it was a cash transaction inasmuch as he paid cash amounting to P142,975.00 upon the signing of
the contract, the payment having been made at around 1:30 in the afternoon of November 13, 1970 to the cashier, Teodoro
Garcia, and Manager Abalos although the sale was agreed to in the morning of the same day, November 13, 1970, the
conflicting interpretations have shrouded the stipulation with ambiguity or vagueness. Then, the cardinal rule should and
must apply, which is that the interpretation shall not favor the party who caused the ambiguity (Art. 1377, New Civil
Code). We rule that in the instant case, the interpretation to be taken shall not favor the respondent company since
it is the party who caused the ambiguity in its preparation.
We do not agree with the meaning of the provision in the contract ascribed by the respondent court in its decision that:
"Stated in another way, the provision of the Contract in question means that the payment of the P142,975.00 IS TO
FOLLOW or IS TO BE MADE (and NOT WAS MADE) upon the signing of said contract." As already drafted or drawn
up, complete and finalized with all the signatures thereon of the contracting parties and presented in court as Exhibit "A"
without any change whatsoever in the mode of payment, such provision plainly and simply means that the payment was in
CASH, and not on CREDIT. The ambiguity raised by the use of the words or phrases in the questioned provision must be
resolved and interpreted against the respondent company.
In truth the stipulation in the contract which reads: "Terms: Cash upon signing of this contract" is very clear and simple in
its meaning, leaving no doubt in Our minds upon the intention of the contracting parties, hence, the first rule of contract
interpretation that the literal meaning of its stipulation shall control, is the governing rule at hand. Resorting to Webster's
Third New International Dictionary, p. 2515, for the definition of the word "upon" which literally means, among others,
"10a (1): immediately following on; very soon after; ... b: on the occasion of at the time of; ... " the clear import of the
stipulation is that payment was made on the occasion of or at the time of the signing of the contract and not that payment
will follow the signing. We must adopt the former meaning because it is such an interpretation that would most adequately
render the contract effectual, following Article 1373 of the New Civil Code which provides:
Art. 1373. If some stipulation of any contract should admit of several meanings, it shall be understood as
bearing that import which is most adequate to render it effectua.
The evidence for the petitioner establishes that after paying the cash consideration to Cashier Garcia and Manager Abalos,
the parties signed the contract and thereafter a signed copy of said contract was given to petitioner and also the four (4)
delivery orders covering the 4,085 piculs of sugar sold. The questioned stipulation recites exactly the act of payment which
is the paying of the money on the occasion of or at the time of the signing. Respondent would have Us believe that the
stipulation does not mean what it conveys because petitioner has not paid cash after the signing of the contract nor at any
time thereafter. We cannot agree with the respondent for otherwise the sanctity of the written contract can easily be
violated and impugned, for otherwise oral testimony would prevail over a written document to vary, alter or modify the
written terms, and most importantly, respondent's interpretation would render the stipulation ineffectual as a mere
agreement.
Case: Republic of the Philippines vs. Carmen M. Vda. De Castellvi, et al., Aug. 15, 1974, J. Zaldivar.
Facts :Plaintiff-appellant, the Republic of the Philippines, (hereinafter referred to as the Republic) filed, on June 26, 1959,
a complaint for eminent domain against defendant-appellee, Carmen M. Vda. de Castellvi, judicial administratrix of the
estate of the late Alfonso de Castellvi (hereinafter referred to as Castellvi), over a parcel of land situated in the barrio of
San Jose, Floridablanca, Pampanga. In its complaint, the Republic alleged, among other things, that the fair market value
of the above-mentioned lands, according to the Committee on Appraisal for the Province of Pampanga, was not more than
P2,000 per hectare, or a total market value of P259,669.10; and prayed, that the provisional value of the lands be fixed at
P259.669.10, that the court authorizes plaintiff to take immediate possession of the lands upon deposit of that amount with
the Provincial Treasurer of Pampanga; that the court appoints three commissioners to ascertain and report to the court the
just compensation for the property sought to be expropriated, and that the court issues thereafter a final order of
condemnation.
On June 29, 1959 the trial court issued an order fixing the provisional value of the lands at P259,669.10.
In her "motion to dismiss" filed on July 14, 1959, Castellvi alleged, among other things, that the land under her
administration, being a residential land, had a fair market value of P15.00 per square meter, so it had a total market value
of P11,389,485.00; that the Republic, through the Armed Forces of the Philippines, particularly the Philippine Air Force,
had been, despite repeated demands, illegally occupying her property since July 1, 1956, thereby preventing her from using
and disposing of it, thus causing her damages by way of unrealized profits. This defendant prayed that the complaint be
dismissed, or that the Republic be ordered to pay her P15.00 per square meter, or a total of P11,389,485.00, plus interest
thereon at 6% per annum from July 1, 1956; that the Republic be ordered to pay her P5,000,000.00 as unrealized profits,
and the costs of the suit. The Republic argues that the "taking" should be reckoned from the year 1947 when by virtue of
a special lease agreement between the Republic and appellee Castellvi, the former was granted the "right and privilege"
to buy the property should the lessor wish to terminate the lease, and that in the event of such sale, it was stipulated that
the fair market value should be as of the time of occupancy; and that the permanent improvements amounting to more that
half a million pesos constructed during a period of twelve years on the land, subject of expropriation, were indicative of an
agreed pattern of permanency and stability of occupancy by the Philippine Air Force in the interest of national Security.
Issue :Whether or not the value of the land should be computed at the time when the Republic occupied the land as
lessee.
Held : NO. The Republic's claim that it had the "right and privilege" to buy the property at the value that it had at the time
when it first occupied the property as lessee nowhere appears in the lease contract. What was agreed expressly in
paragraph No. 5 of the lease agreement was that, should the lessor require the lessee to return the premises in the same
condition as at the time the same was first occupied by the AFP, the lessee would have the "right and privilege" (or option)
of paying the lessor what it would fairly cost to put the premises in the same condition as it was at the commencement of
the lease, in lieu of the lessee's performance of the undertaking to put the land in said condition. The "fair value" at the
time of occupancy, mentioned in the lease agreement, does not refer to the value of the property if bought by the lessee,
but refers to the cost of restoring the property in the same condition as of the time when the lessee took possession of the
property. Such fair value cannot refer to the purchase price, for purchase was never intended by the parties to the lease
contract. It is a rule in the interpretation of contracts that "However general the terms of a contract may be, they shall not
be understood to comprehend things that are distinct and cases that are different from those upon which the parties
intended to agree" (Art. 1372, Civil Code).
Case : Eastern Shipping Lines, Inc. Vs. Margarine-Verkaufs-Union GmbH, Sept. 27, 1979, J. Teehankee. (Acting)
Facts:Respondent corporation, a West German corporation not engaged in business in the Philippines, was the consignee
of 500 long tons of Philippine copra in bulk with a total value of US$ 108,750.00 shipped from Cebu City on board
petitioner's (a Philippine corporation) vessel, the SS "EASTERN PLANET" for discharge at Hamburg, Germany.
Petitioner's bill of lading for the cargo provided as follows:
... Except as otherwise stated herein and in - the Charter Party, this contract shag be governed by the laws of
the Flag of the Ship carrying the goods. In case of average, same shall be adjusted according to York-
Antwerp Rules of 1950.
While the vessel was off Gibraltar, a fire broke out aboard the and caused water damage to the copra shipment in the
amount of US$ 591.38. Petitioner corporation rejected respondent's claim for payment of the and respondent filed on June
18, 1966 in the Manila court of first instance its complaint against petitioner as defendant for recovery of the same and
US$ 250.00 - attorney's fees and expenses of litigation.
After trial, the lower court rejected petitioner's defense that did not exceed 5% of respondent's interest in the cargo it was
not liable under Philippine Law for the damage which I rendered judgment on April 25, 1969 "ordering the defendant,
Eastern Shipping Lines, Inc. to pay to the plaintiff, Margarine-Verkaufs-Union GMBH, the sum of US$ 591.38, with
interest at the legal rate from the date of the filing of the complaint until fully paid, plus US$ 250.00 as attorney's fees and
the costs of the suit."
In this review on questions of law, petitioner reiterates as its first assignment t of error its submittal that Article 848 of the
Code of Commerce 1 which would bar claims for averages not exceeding 5% of the claimant's interest should be applied
rather than the lower court's ruling that petitioner's bill of lading expressly contained "an agreement to the contrary," i.e.
for the application of the York-Antwerp Rules which provide for respondent's fun recovery of the damage loss.
Issue:Whether Article 848 of the Code of Commerce which would bar claims for averages not exceeding 5% of the
claimants interest should be applied.
Held: NO. We hold that the lower court correctly ruled the cited codal article to be "not applicable in this particular
case for the reason that the bill of lading (Exhibit "F") contains "an agreement to the contrary" for it is expressly
provided in the last sentence of the first paragraph (Exhibit "1-A") that "In case of average, same shall be adjusted
according to York-Antwerp Rules of 1950." The insertion of said condition is expressly authorized by Commonwealth
Act No. 65 which has adopted in toto the U.S. Carriage of Goods by Sea Act. Now, it has not been shown that said rules
limit the recovery of damage to cases within a certain percentage or proportion that said damage may bear to claimant's
interest either in the vessel or cargo as provided in Article 848 of the Code of Commerce On the contrary, Rule 3 of said
York-Antwerp Rules expressly states that "Damage done to a ship and cargo, or either of them, by water or otherwise,
including damage by breaching or scuttling a burning ship, in extinguishing a fire on board the ship, shall be made good as
general average. ... "
There is a clear and irreconcilable inconsistency between the York-Antwerp Rules expressly adopted by the parties as their
contract under the bill of lading which sustains respondent's claim and the codal article cited by petitioner which would bar
the same. Furthermore, as correctly contended by respondent, what is here involved is a contract of adhesion as embodied
in the printed bill of lading issued by petitioner for the shipment to which respondent as the consignee merely adhered,
having no choice in the matter, and consequently, any ambiguity therein must be construed against petitioner as the author.
Case: Isidora Cabaliw and Soledad Sadorra vs. Sotero Sadorra, et al., June 11, 1975, J. Munoz Palma.
Facts:Isidora Cabaliw was the wife of Benigno Sadorra by his second marriage solemnized on May 5, 1915, before the
Justice of the Peace of Bayambang, Pangasinan. This couple had a daughter named Soledad Sadorra. During their
marriage, the spouses acquired two (2) parcels of land situated in Iniangan, Dupax, Nueva Vizcaya. Having been
abandoned by her husband, Isidora Cabaliw instituted an action for support with the Court of First Instance of Manila,
entitled "Isidora Cabaliw de Orden versus Benigno Sadorra" docketed therein as Civil Case No. 43193. On January 30,
1933, judgment was rendered requiring Benigno Sadorra to pay his wife, Isidora Cabaliw, the amount of P75.00 a month
in terms of support as of January 1, 1933, and P150.00 in concept of attorney's fees and the costs.
Unknown to Isidora Cabaliw, on August 19, 1933, Benigno Sadorra executed two (2) deeds of sale over the two parcels of
land above described in favor of his son-in-law, Sotero Sadorra, the latter being married to Encarnacion Sadorra, a
daughter of Benigno Sadorra by his first marriage. Because of the failure of her husband to comply with the judgment of
support, Isidora Cabaliw filed in Civil Case 43192 a motion to cite Benigno Sadorra for contempt and the Court of First
Instance of Manila in its Order of May 12, 1937, authorized Isidora to take possession of the conjugal property, to
administer the same, and to avail herself of the fruits thereof in payment of the monthly support in arrears. With this order
of the Court, Isidora proceeded to Nueva Vizcaya to take possession of the aforementioned parcels of land, and it was then
that she discovered that her husband had sold them to his son-in-law Sotero. On February 1, 1940, Isidora filed with the
Court of First Instance of Nueva Vizcaya Civil Case No. 449 against her husband and Sotero Sadorra for the recovery of
the lands in question on the ground that the sale was fictitious; at the same time a notice of lis pendens was filed with the
Register of Deeds of Nueva Vizcaya.
In May of 1940, Benigno Sadorra died.
Issue:Whether or not the sale by Benigno to Sotero Sadorra was valid.
Held: NO. The facts narrated in the first portion of this Decision which are not disputed, convincingly show or prove that
the conveyances made by Benigno Sadorra in favor of his son-in-law were fraudulent. For the heart of the matter is that
about seven months after a judgment was rendered against him in Civil Case No. 43192 of the Court of First Instance of
Manila and without paying any part of that judgment, Benigno Sadorra sold the only two parcels of land belonging to the
conjugal partnership to his son-in-law. Such a sale even if made for a valuable consideration is presumed to be in fraud of
the judgment creditor who in this case happens to be the offended wife.
Article 1297 of the old Civil Code which was the law in force at the time of the transaction provides:   of giving consent to the contract." (Par. 1.) In the instant case-Gimena had no capacity to give consent to the contract of
Contracts by virtue of which the debtor alienates property by gratuitous title are presumed to be made in fraud
of creditors.
Alienations by onerous title are also presumed fraudulent when made by persons against whom some
judgment has been rendered in any instance or some writ of attachment has been issued. The decision or
attachment need not refer to the property alienated and need not have been obtained by the party seeking
rescission. (emphasis supplied)
The above-quoted legal provision was totally disregarded by the appellate court, and there lies its basic error.
Furthermore, the presumption of fraud established by the law in favor of petitioners is bolstered by other indicia of bad
faith on the part of the vendor and vendee. Thus (1) the vendee is the son-in-law of the vendor. In the early case
ofRegalado vs. Luchsinger & Co., 5 Phil. 625, this Court held that the close relationship between the vendor and the
vendee is one of the known badges of fraud. (2) At the time of the conveyance, the vendee, Sotero, was living with his
father-in-law, the vendor, and he knew that there was a judgment directing the latter to give a monthly support to his
wife Isidora and that his father-in-law was avoiding payment and execution of the judgment.  6 (3) It was known to the
vendee that his father-in-law had no properties other than those two parcels of land which were being sold to him.  7 The
fact that a vendor transfers all of his property to a third person when there is a judgment against him is a strong indication
of a scheme to defraud one who may have a valid interest over his properties.  
Case: Hongkong and Shanghai Banking Corporation vs. Ralph Pauli and Spouses Sally Garganera and Mateo
Garganera, May 30, 1988, J. Griño-Aquino.
Facts:On June 14, 1957, the Hongkong & Shanghai Banking Corporation filed a complaint against the defendant Ralph
Pauli, to collect the sum of P258,964.15. The decision having become final, the Bank endeavored to execute it but the
writs of execution were returned unsatisfied because no leviable assets of Pauli could be located by the sheriffs.
Unknown to the Hongkong & Shanghai Bank, Pauli had on January 8, 1957 purchased from the Philippine National Bank
(PNB) a sugar cane plantation known as Hacienda Riverside (Lot No. 693 of Saravia Cadastre, Negros Occidental). To
avoid discovery of the transaction by his creditors, he did not register the deed of Sale. Six years later, on March 1, 1963,
he fraudulently sold the hacienda to his daughter, defendant-appellee Sally Garganera, and her husband Mateo Garganera.
The sale was registered on March 5, 1963. Transfer Certificate of Title No. 34425 was issued to the Garganeras.
Having discovered that the sugar plantation belonged to Paul, the Hongkong and Shanghai Bank filed on January 13, 1969
in the Court of First Instance of Manila a complaint for revival of the 1962 judgment in its favor in Civil Case No. 32799.
However, Pauli and Garganera filed a motion to dismiss on the ground of prescription and res judicata. Trial court granted
the motion and was affirmed by the CA.
Issues:
(1) Whether or not the action for annulment of sale has prescribed.
(2) Whether or not res judicata applies in the case at bar.
Held:
(1) YES.When a transaction involves registered land, the four-year period fixed in Article 1391 within winch to bring an
action for annulment of the deed, shall be computed from the registration of the conveyance (March 5, 1963) on the
familiar theory that the registration of the document is constructive notice of the conveyance to the whole world (Armentia
vs. Patriarca, 18 SCRA 1253; Avecilla vs. Yatco, 103 Phil. 666).
Plaintiff's submission that the four-year period commenced to run from the date when the Bank obtained actual knowledge
of the fraudulent sale of Pauli's land to the Garganeras (sometime in 1969) and that hence the four-year period for bringing
an action to annul the sale had not yet expired when it filed the action for annullment on February 17, 1971, is
unacceptable. That theory would diminish public faith in the integrity of torrens titles and impair commercial transactions
involving registered lands for it would render uncertain the computation of the period for the prescription of such actions.
(2) NO. Civil Case No. 465, the action for annulment of the Sale is not barred by res judicata, specifically, the prior
judgment in Civil Case No. 75319, for revival of the judgment in the collection suit, Civil Case No. 32799, for the subject
matter and causes of action in the two cases are different. The three (3) Identities required for the application of the bar by
prior judgment: Identity of parties, of subject matter and causes of action, are lacking.
Case: Eduardo Felipe, et al. vs. Heirs of Maximo Aldon, Feb. 16, 1983, J. Abad Santos.
Facts:Maximo Aldon married Gimena Almosara in 1936. The spouses bought several pieces of land sometime between
1948 and 1950. In 1960-62, the lands were divided into three lots, 1370, 1371 and 1415 of the San Jacinto Public Land
Subdivision, San Jacinto, Masbate.
In 1951, Gimena Almosara sold the lots to the spouses Eduardo Felipe and Hermogena V. Felipe. The sale was made
without the consent of her husband, Maximo.
On April 26, 1976, the heirs of Maximo Aldon, namely his widow Gimena and their children Sofia and Salvador Aldon,
filed a complaint in the Court of First Instance of Masbate against the Felipes. The complaint which was docketed as Civil
Case No. 2372 alleged that the plaintiffs were the owners of Lots 1370, 1371 and 1415; that they had orally mortgaged the
same to the defendants; and an offer to redeem the mortgage had been refused so they filed the complaint in order to
recover the three parcels of land.
The defendants asserted that they had acquired the lots from the plaintiffs by purchase and subsequent delivery to them.
The trial court favored the Felipes as lawful owners thereto. However, it was reversed by CA. Hence, this petition.
Issue:Whether or not the sale of land to the Felipes by one of the spouses is voidable.
Held: YES. The view that the contract made by Gimena is a voidable contract is supported by the legal provision
that contracts entered by the husband without the consent of the wife when such consent is required, are annullable
at her instance during the marriage and within ten years from the transaction questioned. (Art. 173, Civil Code.)
According to Art. 1390 of the Civil Code, among the voidable contracts are "[T]hose where one of the parties is incapable
sale. The capacity to give consent belonged not even to the husband alone but to both spouses.
Gimena's contract is not rescissible for in such contract all the essential elements are untainted but Gimena's consent was
tainted. Neither can the contract be classified as unenforceable because it does not fit any of those described in Art. 1403
of the Civil Code. And finally, the contract cannot be void or inexistent because it is not one of those mentioned in Art.
1409 of the Civil Code. By process of elimination, it must perforce be a voidable contract.
The voidable contract of Gimena was subject to annulment by her husband only during the marriage because he was the
victim who had an interest in the contract. Gimena, who was the party responsible for the defect, could not ask for its
annulment. Their children could not likewise seek the annulment of the contract while the marriage subsisted because they
merely had an inchoate right to the lands sold.
The termination of the marriage and the dissolution of the conjugal partnership by the death of Maximo Aldon did not
improve the situation of Gimena. What she could not do during the marriage, she could not do thereafter. The case of Sofia
and Salvador Aldon is different. After the death of Maximo they acquired the right to question the defective contract
insofar as it deprived them of their hereditary rights in their father's share in the lands. The father's share is one-half (1/2)
of the lands and their share is two-thirds (2/3) thereof, one-third (1/3) pertaining to the widow.
Case: House International Building Tenants Association, Inc. vs. IAC, Centertown Marketing Corp., et al., June 30,
1987, J. Cortes.
Facts:Petitioner House International Building Tenants Association, Inc. (ASSOCIATION, for short) is a domestic non-
stock, non-profit civic corporation, whose incorporators, directors and members constitute the great majority of more than
a hundred heads of families who are tenants of long and good standing of the 14-storey House International Building
located at 777 Ongpin Street, Binondo, Manila. The land and the improvements thereon were formerly owned by Atty.
Felipe Ang who mortgaged the same to the Government Service Insurance System (hereinafter referred to as GSIS) to
secure payment of an obligation. After foreclosure of the mortgage and for failure of Ang to exercise his right of
redemption over the foreclosed property, the ownership thereof was consolidated with the GSIS which subsequently sold it
to Centertown Marketing Corporation (CENTERTOWN, for short) in a deed of conditional sale, without notice to the
tenants of the building and without securing the prior clearance of the then Ministry of Human Settlements.
As CENTERTOWN was not authorized by its Articles of Incorporation to engage in the real estate business, it organized a
sister corporation, with almost an the same incorporators and stockholders, as CENTERTOWN'S, under the corporate
name of Manila Towers Development Corporation (TOWERS, for short) for the primary purpose of engaging in the real
estate business. Subsequently, CENTERTOWN assigned to its sister corporation TOWERS all its rights and obligations
under the Deed of Conditional Sale, with the consent and approval of the GSIS.
Thereafter, herein petitioner filed a complaint with the Regional Trial Court of Manila against CENTERTOWN, TOWERS
and GSIS for annulment of the deed of conditional sale and the subsequent assignment thereof by CENTERTOWN to
TOWERS. The complaint alleged in part that the Deed of Conditional Sale is null and void ab initio for being ultra vires,
since defendant CENTERTOWN is not qualified to acquire real estate property or to engage in real estate transactions. The
court a quo dismissed the complaint and was affirmed by CA.
Issue:Whether or not House International Building Tenants Association can sue for annulment of the deed of
conditional sale between GSIS and Centertown.
Held: NO. The main thrust of the petitioner's challenge on the validity of the conditional sale is that the contract is ultra
vires because the respondent CENTERTOWN is not qualified to acquire properties under its Articles of Incorporation. The
petitioner has confused a void contract with an ultra vires contract which is merely voidable.
We agree with the Court of Appeals that on this issue the provision of Art. 1397 of the Civil Code is in point, thus:
Art. 1397. The action for the annulment of contracts may be instituted by all who are thereby obliged
principally or subsidiarily.
Petitioner is neither a party nor a privy to the Deed of Conditional Sale and the assignment thereof: thus, it cannot assail
the validity of the said contracts. In Ibañez vs. Hongkong and Shanghai Bank, we said:
From these legal provisions it is deduced that it is the interest had in a given contract, that is the determining
reason of the right which lies in favor of the party obligated principally or subsidiarily to enable him to bring
an action for the nullity of the contract in which he intervened, and, therefore, he who has no right in a
contract is not entitled to prosecute an action for nullity, for, according to the precedents established by the
courts, the person who is not a party to a contract, nor has any cause of action or representation from those
who intervened therein, is manifestly without right of action and personality such as to enable him to assail
the validity of the contract. (Decisions of the supreme court of Spain, of April 18, 1901, and November 23,
1903, pronounced in cases requiring an application of the preinserted article 1302 of the Civil Code.) (22
Phil. 572; 584).
Case: Marta Ortega vs. Daniel Leonardo, May 28, 1958, J. Bengzon.
Facts:Marta Ortega and Daniel Leonardo had an oral contract of sale of a parcel of land occupied by the former located at
San Andres, Malate Manila. Defendant, however, also asserted a similar right, alleging occupancy of a portion of the land
subsequent to plaintiff's. During the investigation of such conflicting interests, defendant asked plaintiff to desist from
pressing her claim and definitely promised that if and when he succeeded in getting title to Lot I , he would sell to her a
portion thereof with an area of 55.60 square meters (particularly described) at the rate of P25.00 per square meter,
provided she paid for the surveying and subdivision of the Lot and provided further that after he acquired title, she could
continue holding the lot as tenant by paying a monthly rental of P10.00 until said portion shall have been segregated and
the purchase price fully paid. Plaintiff accepted defendant's offer, and desisted from further claiming Lot I.
However, when defendant finally acquired title thereto; and that relying upon their agreement, plaintiff caused the survey
and segregation of the portion which defendant had promised to sell incurring expenses therefor, said portion being now
designated as Lot I-B in a duly prepared and approved subdivision plan.On July 1954, after the plans of subdivision and
segregation of the lot had been approved by the Bureau of Lands, plaintiff tendered to defendant the purchase price
which the latter refused to accept, without cause or reason.Hence, Ortega sued Leonardo for specific performance. The
latter argued that the oral contract of sale is unenforceable.
Issue:Whether or not the oral contract of sale is unenforceable.
Held: NO. It is admitted by both parties that an oral agreement to sell a piece of land is not enforceable. (Art. 1403, Civil
Code, Section 21, Rule 123, Rules of Court.) Plaintiff, however, argues that the contract in question, although verbal, was
partially performed because plaintiff desisted from claiming the portion of lot I in question due to the promise of defendant
to transfer said portion to her after the issuance of title to defendant. The court thinks that even granting that plaintiff really
desisted to claim not on oral promise to sell made by defendant, the oral promise to sell cannot be enforced. The desistance
to claim is not a part of the contract of sale of the land. Only in essential part of the executory contract will, if it has
already been performed, make the verbal contract enforceable, payment of price being an essential part of the contract of
sale. the above means that partial performance of a sale contract occurs only when part of the purchase price is paid, it
surely constitutes a defective statement of the law. American Jurisprudence in its title "Statute of Frauds" lists other acts of
partial performance, such as possession, the making of improvements, rendition of services, payment of taxes,
relinquishment of rights, etc.
Thus, it is stated that "The continuance in possession may, in a proper case, be sufficiently referable to the parol contract of
sale to constitute a part performance thereof. There may be additional acts or peculiar circumstances which sufficiently
refer the possession to the contract. . . . Continued possession under an oral contract of sale, by one already in possession
as a tenant, has been held a sufficient part performance, where accompanied by other acts which characterize the continued
possession and refer it to the contract of purchase. Hence, as there was partial performance, the principle excluding
parol contracts for the sale of realty, does not apply.
Case: Rosario Carbonnel vs. Jose Poncio, Ramon Infante and Emma Infante, May 12, 1958, J. Concepcion.
Facts:Jose Poncio is the owner of a parcel of land which both Rosario Carbonell and Emma Infante offered to buy. When
Poncio was unable to keep up with the installments due on his mortgage, he approached Carbonell and offered to sell the
lot to the latter which the latter accepted with the proposed price of 9.50 per square meter which Poncio accepted.
Carbonell and Poncio executed a document. And Carbonell paid Poncio 200 (out of P647). However, when Carbonell was
about to pay the balance, Poncio told Carbonell that he could not proceed with the sale because he sold it already to Infante
for P3,535 (for the assumption of his mortgage with Republic Savings Bank). Carbonell sued Poncio and Infante to recover
the land. Trial court dismissed the complaint upon the ground that Carbonell’s cause of action is unenforceable.
Issue:Whether or not the sale of house and lot to Infante by Poncio was valid.
Held:We are of the opinion and so hold that the appeal is well taken. It is well settled in this jurisdiction that the
Statute of Frauds is applicable only to executory contracts (Facturan vs. Sabanal, 81 Phil., 512), not to contracts
that are totally or partially performed (Almirol, et al., vs. Monserrat, 48 Phil., 67, 70; Robles vs. Lizarraga Hermanos, 50
Phil., 387; Diana vs. Macalibo, 74 Phil., 70).
Subject to a rule to the contrary followed in a few jurisdictions, it is the accepted view that part performance
of a parol contract for the sale of real estate has the effect, subject to certain conditions concerning the nature
and extent of the acts constituting performance and the right to equitable relief generally, of taking such
contract from the operation of the statute of frauds, so that chancery may decree its specific performance or
grant other equitable relief. It is well settled in Great Britain and in this country, with the exception of a few
states, that a sufficient part performance by the purchaser under a parol contract for the sale of real estate
removes the contract from the operation of the statute of frauds. (49 Am. Jur. 722-723.)
In the words of former Chief Justice Moran: "The reason is simple. In executory contracts there is a wide field for fraud
because unless they be in writing there is no palpable evidence of the intention of the contracting parties. The statute has
precisely been enacted to prevent fraud." (Comments on the Rules of Court, by Moran, Vol. III [1957 ed.], p. 178.)
However, if a contract has been totally or partially performed, the exclusion of parol evidence would promote fraud or bad
faith, for it would enable the defendant to keep the benefits already denied by him from the transaction in litigation, and, at
the same time, evade the obligations, responsibilities or liabilities assumed or contracted by him thereby.
For obvious reasons, it is not enough for a party to allege partial performance in order to hold that there has been such
performance and to render a decision declaring that the Statute of Frauds is inapplicable. But neither is such party required
to establish such partial performance by documentary proof before he could have the opportunity to introduce oral
testimony on the transaction. Indeed, such oral testimony would usually be unnecessary if there were documents proving
partial performance. Thus, the rejection of any and all testimonial evidence on partial performance, would nullify the rule
that the Statute of Frauds is inapplicable to contracts which have been partly executed, and lead to the very evils that the
statute seeks to prevent.
Hence, Carbonell then had superior right over Infante. The private document entitled, “Contract for ½ lot which I bought
from Jose Poncio” was not such memorandum in writing within the purview of the Statute of Frauds. The memorandum
merely states that Poncio is allowed to stay in the property which he had sold to Carbonell. There is no mention of the
essential elements of a contract of sale. Hence, from the terms of the contract, the sale of the property is already an
accomplished act.
Case: Bienvenido Babao, et al. vs. Florencio Perez, et al., Dec. 28, 1957, J. Bautista Angelo.
Facts:Plaintiff is the judicial administrator of the estate of the late Santiago Babao while defendant Florencio Perez is the
judicial administrator of the estate of the late Celestina Perez. Celestina Perez was in her lifetime the owner of the parcel of
land in question which was not registered either under Act 496 or under the Spanish Mortgage law. Sometime in 1924
when the deceased Santiago Babao married Maria Cleofe Perez, niece of Celestina Perez, the latter and the former entered
into a verbal agreement whereby Santiago Babao bound himself to improve the land by leveling and clearing all the forest
trees standing thereon and planting in lieu there of coconuts, rice, corn and other crops such as bananas and bamboo trees,
and to act at the same time as administrator thereof during the lifetime of Celestina Perez, all expenses for labor, and
materials to be at his cost, in consideration of which Celestina in turn bound herself to convey to Santiago Babao or, his
wife ½ of land, together with all the improvements thereon upon her death. Pursuant to said verbal agreement, Santiago
Babao in 1924 left his job as administrator of the Llana Estate in San Juan, Batangas for which he was receiving a salary of
P150 a month, and started leveling and clearing the land having planted in an area of 50 hectares 50,000 coconuts trees,
and rice and corn in another area of 70 hectares, leaving out only 50 hectares unimproved, all of which having been
administered by him from 1924 to 1946. However, in the violation of the aforesaid verbal agreement, Celestina Perez,
acting through Leovigildo Perez, to whom she extended a power of Attorney to sell, sold few days before she died about
127 hectares of the land in question in consequence of which Santiago Babao was deprived of the possession and
administration thereof from 1945. Said sales are fictitious and were made clear violation of the oral agreement made
between Celestina Perez and Santiago Babao and as such the same are null and void. Hence, Babao sued the estate of
Celestina for the recovery of his share on the land.
Issue:Whether or not the verbal agreement between Santiago Babao and Celestina Perez is enforceable.
Held: NO. This statute, formerly incorporated as Section 21 of Rule 123 of our Rules of Court, is now found in Article
1403 of the new Civil Code, which provides, in so far as pertinent to this case, as follows:
In the following cases an agreement hereafter made shall be enforceable by action unless the same, or some
note or memorandum thereof, be in writing, and subscribed by the party charged or by his agent, evidence
therefore, of the agreement cannot be received without the writing, or secondary evidence of its contents;
(a) An agreement that by its terms is not to be performed within a year from the making thereof.
(e) An agreement . . . for the sale of real property or of an interest therein.
Appellants contends that the alleged verbal agreement falls under the paragraphs (a) and (c) above-quoted because the
same may be considered as an agreement which by its terms is not to be performed within one year from the making
thereof, or one which involves a sale of real property or of an interest therein. If this premise is correct, appellants contend,
then the trial court erred in allowing the introduction of parole evidence to prove the alleged agreement over the vigorous
objection of counsel for appellants.
That the alleged verbal agreement is one which by its terms is not to be performed within one year is very apparent from
the allegations of the complaint. Thus, it is therein alleged that the agreement was allegedly made in 1924 and by its terms
Santiago Babao bound himself (1) to improve all the forest trees and planting thereon coconuts, rice, corn and other crops
such as bananas and bamboo trees, and (2) to act at the same time as administrator of said land and improvements during
the lifetime to Celestina Perez. And in consideration of such undertaking, Celestina Perez "bound herself to give and
deliver, either to Santiago Babao or his wife Cleofe Perez, one-half (½) of the whole area of said land as improved with all
the improvements thereon upon her death". It is also alleged in the complaint that Celestina Perez died on August 24,
1947, or 23 years after the making of the alleged agreement while Santiago Babao died on January 6, 1948. From the
above terms, therefore, it is not difficult to see that the undertaking assumed by Santiago Babao which was to clear, level
and plant to coconut trees and other plants 156 hectares of forest land could not be accomplished in one year. In fact, the
alleged improvements were supposedly accomplished during the lifetime of Celestina, which lasted over a period of 23
years, and even then not all was cleared and planted but only a portion thereof. Another part of his undertaking is that he is
to administer the land during the lifetime of Celestina, and as we have already said, her death occurred 23 years after the
agreement.
Case: Felipe Cabague and Geronimo Cabague vs. Matias Auxilio and Socorro Auxilio, Nov. 26, 1952, J. Bengzon.
Facts:Felipe Cabague and his son Geronimo sued the defendant Matias Auxilio and his daughter Socorro to recover
damages resulting from defendants' refusal to carry out the previously agreed marriage between Socorro and Geronimo.
The complaint alleged, in short: (a) that defendants promised such marriage to plaintiffs, provided the latter would
improve the defendants' house in Basud and spend for the wedding feast and the needs of the bride; (b) that relying upon
such promises plaintiffs made the improvement and spent P700; and (c) that without cause defendants refused to honor
their pledged word.
The defendants moved to dismiss, arguing that the contract was oral, unenforceable under the rule of evidence
hereinbefore mentioned. And the court dismissed the case. On appeal to the Court of First Instance, the plaintiffs
reproduced their complaint and defendants reiterated their motion to dismiss.
Issues:
(1) Whether or not Geronimo may sue Socorro for damages for the alleged breach of mutual promise to
marry.
(2) Whether Felipe’s action may prosper in enforcing an agreement in consideration of marriage.
Held:
(1) YES. For breach of that mutual promise to marry, Geronimo may sue Socorro for damages. This is such
action, and evidence of such mutual promise is admissible.
(2) NO. However Felipe Cabague's action may not prosper, because it is to enforce an agreement in consideration
of marriage. Evidently as to Felipe Cabague and Matias Auxilio this action could not be maintained on the
theory of "mutual promise to marry". Neither may it be regarded as action by Felipe against Socorro "on a
mutual promise to marry."
Case: Suga Sotto Yuvienco, et al. Vs. Hon. Dacuycuy, Dely Rodriguez, et al., May 27, 1981, J. Barredo.
Facts:The petitioners, thru Pedro Gamboa, owned the Sotto property (land and building) situated at Tacloban City are
willing to sell such property to private respondents (Yao King Ong) with the following terms, “I am therefore gluing you
and the rest of the occupants until July 31, 1978 within it which to decide whether you want to buy the property. If I do not
hear from you by July 31, I will offer or close the deal with the other interested buyer. Xxx" The private respondents
accepted the same stating, “PROPOSAL ACCEPTED ARRIVING TUESDAY MORNING WITH CONTRACT
PREPARE PAYMENT BANK DRAFT”. Nonetheless, the alleged subsequent agreement about the P2 M down and P4.5
M in 90 days may at best be deemed as a distinct cause of action. And placed against the insistence of petitioners, as
demonstrated in the two deeds of sale taken by Atty. Gamboa to Tacloban, Annexes 9 and 10 of the answer of herein
respondents, that there was no agreement about 90 days, an issue of fact arose, which could warrant a trial in order for the
trial court to determine whether or not there was such an agreement about the balance being payable in 90 days instead of
the 30 days stipulated in Annexes 9 and 10 above-referred to. Hence, private respondent filed a suit for specific
performance.
Issue:Whether herein Private Respondent’s claim is enforceable.
Held: NO. Our conclusion, therefore, is that although there was no perfected contract of sale in the light of the letter of
Atty. Gamboa of July 12, 1978 and the letter-reply thereto of Yao; it being doubtful whether or not, under Article 1319 of
the Civil Code, the said letter may be deemed as an offer to sell that is "certain", and more, the Yao telegram is far from
being an "absolute" acceptance under said article, still there appears to be a cause of action alleged in Paragraphs 8 to 12 of
the respondents' complaint, considering it is alleged therein that subsequent to the telegram of Yao, it was agreed that the
petitioners would sell the property to respondents for P6.5 M, by paving P2 M down and the balance in 90 days and which
agreement was allegedly violated when in the deeds prepared by Atty. Gamboa and taken to Tacloban, only 30 days were
given to respondents.
Hence, looking at the pose of respondents that there was a perfected agreement of purchase and sale between them and
petitioners under which they would pay in installments of P2 M down and P4.5 M within ninety 90) days afterwards it is
evident that such oral contract involving the "sale of real property" comes squarely under the Statute of Frauds (Article
1403, No. 2(e), Civil Code.)
Case: Olegario Clarin vs. Alberto Rulona, Feb. 20, 1984, J. Gutirrez, Jr.
Facts:Petitioner sold ten hectares of his share of the disputed lot to him for P2,500.00. The conditions of the sale were that
a downpayment of P1,000.00 was to be made and then the balance of P1,500.00 was to be paid in monthly installment of
P100.00. Respondent delivered to the petitioner a downpayment of P800.00 and on the first week of June the amount of
P200.00 was also delivered thereby completing the downpayment of P1,000.00. On the first week of August, another
delivery was made by the respondent in the amount of P100.00 as payment for the first installment. Respondent further
alleged that despite repeated demands to let the sale continue and for the petitioner to take back the six postal money
orders, the latter refused to comply.
In his answer, the petitioner alleged that while it is true that he had a projected contract of sale of a portion of land with the
respondent, such was subject to the following conditions: (1) that the contract would be realized only if his co-heirs
would give their consent to the sale of a specific portion of their common inheritance from the late Aniceto Clarin
before partition of the said common property and (2) that should his co-heirs refuse to give their consent, the projected
contract would be discontinued or would not be realized. Petitioner further contended that the respondent knew fully well
the above terms and accepted them as conditions precedent to the perfection or consummation of the contract; that
respondent delivered the amount of P1,000.00 as earnest money, subject to the above conditions and that the amount was
returned by the petitioner upon his learning definitely that his co-heirs and co-owners refused to give their consent to the
projected sale.
Respondent Rulona filed a complaint for specific performance and recovery of improvements on the ground that the
petitioner and his wife violated the terms of the agreement of sale “by returning by their own volition and without the
consent of plaintiff, the amount of P1,100.00 in six postal money orders, covering the downpayment of P1,000.00 and first
installment of P100.00.” Trial court rendered judgment in favor of respondent. CA sustained.
Issue:Whether or not the contract of sale was perfected.
Held:YES. While it is true that Exhibits A and B are, in themselves, not contracts of sale, they are, however, clear
evidence that a contract of sale was perfected between the petitioner and the respondent and that such contract had
already been partially fulfilled and executed. A contract of sale is perfected at the moment there is a meeting of minds
upon the thing which is the object of the contract and upon the price. (Article 1475, Civil Code; Phil. Virginia Tobacco
Administration v. De los Angeles, 87 SCRA 210). Such contract is binding in whatever form it may have been entered
into. (Lopez v. Auditor General, 20 SCRA 655).
Construing Exhibits A and B together, it can be seen that the petitioner agreed to sell and the respondent agreed to buy a
definite object, that is, ten hectares of land which is part and parcel of Lot 20 PLD No. 4, owned in common by the
petitioner and his sisters although the boundaries of the ten hectares would be delineated at a later date. The parties also
agreed on a definite price which is P2,500.00. Exhibit B further shows that the petitioner has received from the respondent
as initial payment, the amount of P800.00. Hence, it cannot be denied that there was a perfected contract of sale between
the parties and that such contract was already partially executed when the petitioner received the initial payment of
P800.00. The latter’s acceptance of the payment clearly showed his consent to the contract thereby precluding him from
rejecting its binding effect. (See Federation of United Namarco Distributors, Inc. v. National Marketing Corporation, 4
SCRA 884). With the contract being partially executed, the same is no longer covered by the requirements of the
Statute of Frauds in order to be enforceable. (See Khan v. Asuncion, 19 SCRA 996). Therefore, with the contract being
valid and enforceable, the petitioner cannot avoid his obligation by interposing that Exhibit A is not a public document. On
the contrary, under Article 1357 of the Civil Code, the petitioner can even be compelled by the respondent to execute a
public document to embody their valid and enforceable contract.
The petitioner’s contention that he was only forced to receive money from the respondent due to the insistence of the latter
merits little consideration. It is highly improbable that the respondent would give different sums on separate dates to the
petitioner with no apparent reason, without a binding assurance from the latter that the disputed lot would be sold to him.
We agree with the trial court and the appellate court that the payments were made in fulfillment of the conditions of the
sale, namely, a downpayment of P1,000.00 and the balance of P1,500.00, to be paid in monthly installments of P100.00
each.
We, therefore, find no error in the lower court’s holding that a contract of sale was perfected between the petitioner and the
respondent and that the sale did not depend on a condition that the petitioner’s co-owners would have to agree to the sale.
Case: Bisaya Land Transportation Co, Antonio Cuenco and Benjamin Roa vs. Marciano Sanchez, Aug. 31, 1987, J.
Padilla.
Facts:In May 1975, Sanchez was appointed by BISTRANCO as shipping agent in Butuan City for the vessel M/V Don
Mariano. 2 The new Butuan City Agent 3referred to in the letter "Exhibit "C" was Marciano Sanchez. Later, on 12 March
1976, when BISTRANCO was under receivership, Sanchez was appointed by its Receiver, Atty. Adolfo V. Amor, as
acting shipping agent, also for M/V Doña Remedies, in addition to M/V Doña Filomena, in the port of Butuan City
"pending the execution of the formal contract of agency. 4 When Sanchez was constituted as acting shipping agent, he
received the same commission as his predecessor, one ONG YUI who received 10% for all freight and passenger revenues
coming from Butuan City and 5 % for all freight going to Butuan. 5
Thereafter, or on 27 July 1976, a formal Contract of Agency, marked as Exhibit "F", was executed between BISTRANCO,
represented by Receiver Atty. Adolfo V. Amor and Marciano C. Sanchez, represented by his authorized representative
Exequiel Aranas. On 30 July 1976, after Sanchez found that Paragraph 16 of the Contract of agency was quite prejudicial
to him, he executed with BISTRANCO a Supplemental Shipping Agency Contract, marked as Exhibit "G", which was
duly signed by Receiver Atty. Adolfo V. Amor on behalf of BISTRANCO and Marciano C. Sanchez himself. 6 But, both
the Contract of Agency and the Supplemental Shipping Agency Contract were never submitted by Atty. Adolfo Amor to
the receivership court for its approval.
While the shipping business of BISTRANCO in Butuan City flourished, evidently to the mutual benefit of both parties, on
26 December 1979, co-petitioner Benjamin G. Roa, as Executive Vice-President of BISTRANCO, wrote Sanchez a letter
10 advising him that, effective 1 January 1980, BISTRANCO would commence operating its branch office in Butuan City.
Realizing that the letter, marked as Exhibit "FF", was in effect a repudiation of the Contracts, Sanchez filed an action for
specific performance with preliminary injunction and damages with the Regional Trial Court of Cebu City on 28
December 1979. Trial court rendered judgment in favor of Sanchez and CA affirmed.
Issue:Whether or not the contracts are unenforceable for want of authority and approval from the receivership court.
Held: YES. In the case at bar, it is undisputed that Atty. Adolfo Amor was entrusted, as receiver, with the administration
of BISTRANCO and it business. But the act of entering into a contract is one which requires the authorization of the court
which appointed him receiver. Consequently, the questioned Contracts can rightfully be classified as unenforceable for
having been entered into by one who had acted beyond his powers, due to Receiver Amor's failure to secure the court's
approval of said Contracts.
These unenforceable Contracts were nevertheless deemed ratified in the case at bar, based upon the facts and
circumstances on record which have led this Court to conclude that BISTRANCO had actually ratified the questioned
Contracts as follows:
(1) Reduce Sanchez’ commission;
(2) Failure to post a bond;
(3) Informing Sanchez that BISTRANCOis abiding strictly with the terms of the contract.
Case: Victorino Hernandez vs. CA and Substituted Heirs of Rev. Fr. Lucio Garcia, April 27, 1988, J. Narvasa.
Facts:Fr. Garcia 4 applied in 1959 for the registration in his name of Lots 1-A, 1-B, and 2 of Plan Psu-172410-B in Bo.
San Dionisio, Parañaque. His property adjoined that of Hernandez, and since both estates were once owned by one Andres
San Buenaventura, 5 no dividing boundaries existed thereon until cadastral surveyors from the Bureau of Lands laid down
official monuments to mark the separation of the lots. These monuments were set along a line which the landowners had
previously agreed upon as representing the correct boundary between their estates. This was in 1956. 6
Unknown to Hernandez, the Advance Plan Psu-172410-B submitted in Fr. Garcia's behalf to the land registration court in
1959 included 220 square meters of land now disputed — Lots ABC and 4057-A of Lot 1-B. This area fell beyond the
stipulated boundaries of Fr. Garcia's land and encroached pro tanto on the land of Hernandez (on which, it should be
mentioned, his tenants had been living for many years [decades, in fact] before the date of Fr. Garcia's application). 7
Allegedly lulled into complacency by the recentness of their agreement as to the limits of their respective properties, and
confident that the visible landmarks installed by the government surveyors precluded any overstepping of those limits,
Hernandez proffered no opposition to Fr. Garcia's application, leaving the heirs of Andres San Buenaventura as the only
oppositors thereto.
It was not until the court had already ordered the registration of the lots in Fr. Garcia's name that Hernandez discovered the
anomaly in the application. He at once filed a petition for review of the decree, but in view of the new trial ordered by the
court upon motion of the heirs-oppositors, the petition was dismissed on the ground of prematurity. 8 The court thereafter
adjudged Fr. Garcia as the owner of Lots 1-A and 2 and the heirs-oppositors as owners of Lot 1-B.
On appeal, however, the Court of Appeals declared Fr. Garcia absolute owner, by acquisitive prescription, of an the lots.
Issue:Whether or not the Statute of Frauds is applicable.
Held: NO. Given the weight they deserve, the recorded facts prove Hernandez's entitlement to the relief sought. The
respondents' reliance on the Statute of Frauds to secure a contrary judgment is misplaced. The Statute of Frauds finds no
application to this case. Not every agreement "affecting land" must be put in writing to attain enforceability. Under
the Statute of Frauds, Article 1403(2) (e) of the Civil Code, such formality is only required of contracts involving leases
for longer than one year, or for the sale of real property or of an interest therein. Hernandez's testimony is thus admissible
to establish his agreement with Fr. Garcia as to the boundary of their estates. It is also to be noted that the presence of
Hernandez's tenants on the land within his side of the border, were this to be reckoned from the "mojones," further
buttresses his claim.
Case: Domingo Rubias vs. Isaias Batiller, May 29, 1973, J. Teehankee.
Facts:On August 31, 1964, plaintiff Domingo D. Rubias, a lawyer, filed a suit to recover the ownership and possession of
certain portions of lot under Psu-99791 located in Barrio General Luna, Barotac Viejo, Iloilo which he bought from his
father-in-law, Francisco Militante in 1956 against its present occupant defendant, Isaias Batiller, who illegally entered said
portions of the lot on two occasions — in 1945 and in 1959. Plaintiff prayed also for damages and attorneys fees. (pp. 1-7,
Record on Appeal). In his answer with counter-claim defendant claims the complaint of the plaintiff does not state a cause
of action, the truth of the matter being that he and his predecessors-in-interest have always been in actual, open and
continuous possession since time immemorial under claim of ownership of the portions of the lot in question.
Issue:Whether or not the contract of sale between appellant and his father-in-law, the late Francisco Militante over the
property subject of Plan Psu-99791 was void because it was made when plaintiff was counsel of his father-in-law in a
land registration case involving the property in dispute.
Held: YES. It is noteworthy that Caltan's rationale for his conclusion that fundamental consideration of public policy
render void and inexistent such expressly prohibited purchase (e.g. by public officers and employees of government
property intrusted to them and by justices, judges, fiscals and lawyers of property and rights in litigation and submitted to
or handled by them, under Article 1491, paragraphs (4) and (5) of our Civil Code) has been adopted in a new article of our
Civil Code, viz, Article 1409 declaring such prohibited contracts as "inexistent and void from the beginning."
Indeed, the nullity of such prohibited contracts is definite and permanent and cannot be cured by ratification. The public
interest and public policy remain paramount and do not permit of compromise or ratification. In his aspect, the
permanent disqualification of public and judicial officers and lawyers grounded on public policy differs from the
first three cases of guardians, agents and administrators (Article 1491, Civil Code), as to whose transactions it had
been opined that they may be "ratified" by means of and in "the form of a new contact, in which cases its validity
shall be determined only by the circumstances at the time the execution of such new contract. The causes of nullity
which have ceased to exist cannot impair the validity of the new contract. Thus, the object which was illegal at the time of
the first contract, may have already become lawful at the time of the ratification or second contract; or the service which
was impossible may have become possible; or the intention which could not be ascertained may have been clarified by the
parties. The ratification or second contract would then be valid from its execution; however, it does not retroact to the date
of the first contract."
Case: Benedicto Javier, as administrator of the estate of Eusebio Cruz vs. Dominga Cruz, et al., Nov. 29, 1977, J.
Fernandez.
Facts:Eusebio Cruz, who died on February 2, 1941 at the age of 100 years without leaving any will nor compulsory heirs,
was the absolute and exclusive owner of a parcel of mountainous and unimproved land situated in sitio Matogalo, Taytay,
Rizal which he inherited from his forebears, described therein; that during his lifetime, Eusebio Cruz had been living with
one Teodora Santos 'without the sanction of marriage"; that Teodora Santos had with her as distant relatives and protegees
the brothers Gregorio Cruz and Justo Cruz; that Gregorio Cruz was the father of Delfin Cruz, deceased husband of
defendant Dominga Vda. de Cruz and father of defendants Leonila, Roman, Eliseo, Leberata and Melecio, all surnamed
Cruz; that on January 16, 1941 Delfin Cruz, by means of deceit and in collusion with persons among them his father
Gregorio Cruz made Eusebio Cruz, who could read and write, stamp his thumbmark on a deed of sale of a portion of
the land described in the complaint consisting of 26,577 square meters for the sum of P700.00 in favor of said Delfin
Cruz; that at that time Delfin Cruz did not have theithin thirty days from submittal of the case for decision, but the validity
of the law cannot be seriously challenged."
Issue:Whether or not the deed of sale was valid.
Held: NO. The undisputed facts of record support the evidence of Javier that the deed of sale is void and inexistent for
lack of consent and consideration. It is a fact that on January 17, 1941, when the deed was executed, Eusebio was almost
100 years old and was in a weak condition. With that, it is obvious that Delfincould not have raised the amount of 700 as
consideration of the land supposedly sold to him by Eusebio. The consideration is not only grossly inadequate but also
shocking to the conscience. No sane person would sell the land for only about 40.00 per hectare. The Court, thence, found
Eusebio not voluntarily affix his thumb mark on the deed of sale.
Case: Potenciano Menil and wife Crispina Nayve vs. CA, Agueda Garan, et al., July 31, 1978, J. Guerrero.
Facts:On November 3, 1955, Agueda Garan obtained a homestead patent over the land in question. On February 4, 1956,
Original Certificate of Title No. 220 was issued by the Register of Deeds of Surigao in her name pursuant to the homestead
patent. On May 7, 1960, within the prohibitive 5-year period, Agueda Garan sold the land to movant Patenciano Manil for
P415.00, as evidenced by a deed of sale bearing the same date. But, for reasons not revealed in the records, the contracting
parties did not registered the deed of sale in the Registry of Deeds in Surigao. Original Certificate of Title No. 220 was not
cancelled and the land remained registered in the name of Agueda Garan. On August 30, 1964, Agueda Garan executed
another deeds of sale over the same parcel of land in favor of the same vendee, Potenciano Menil, and for the same price
P415.00. On August 30, 1965, the contracting parties registered the second deed of sale in the Registry of Deeds in
Surigao. Original Certificate of Title No. 220 was cancelled, and Transfer Certificate of Title No. T-60, in lieu thereof, was
issued in the name of Potenciano Menil. On February 28, 1966, Potenciano Menil mortgaged the land to the Development
Bank of the Philippines to secure an agricultural loan which the former obtained from the latter. Petitioners were in
possession of the land in question until sometime in 1967 when private respondents Agueda Garan, Francisco Calanias,
Miguel Nayve, Jr., Rufo Nayve, and Lucio Calanias forcibly took possession of the said land, and filed against petitioners
Civil Case No. 1692 for "Quieting of Title" before Branch 11 of the Court of First Instance of Surigao del Norte.
Issue:Whether or not Menil can still recover the land from Garan.
Held: NO. It is not disputed by the parties that the contract of sale executed on May 7, 1960, having been executed less
than 5 years from May 7, 1960, the date the homestead patent was awarded to private respondent Agueda Garan, is null
and void for being violative of Section 118 of C.A. 141 [Public Land Act] which provides:
Sec. 118. Except in favor of the government or any of its branches, units, or institutions, lands acquired under
free patent or homestead provisions shall not be subject to encumbrance or alienation from the date of the
approval of the application and for a term of five years from and after the date of issuance of the patent or
grant, nor shall they become liable to the satisfaction of any debt contracted prior to the expiration of said
period, but the improvements or crops on the land may be mortgaged or pledged to qualified persons,
associations, or corporations.
It cannot be claimed that there are two contracts: one which is undisputably null and void, and another, having been
executed after the lapse of the 5-year prohibitory period, which is valid. The second contract of sale executed on March 3,
1964 is admittedly a confirmatory deed of sale. Even the petitioners concede this point. 3 Inasmuch as the contract of sale
executed on May 7, 1960 is void for it is expressly prohibited or declared void by law [CA- 141, Section 118], it therefore
cannot be confirmed nor ratified. Article 1409 of the New Civil Code states:
Art. 1409. The following contracts are inexistent and void from the beginning:
 (1) Those whose cause, object, or purpose is contrary to law, morals, good customs, public order
or public policy;
(2) Those which are absolutely simulated or fictitious;
(3) Those whose cause or object did not exist at the time of the transaction;
(4) Those whose object is outside the commerce of men;
(5) Those which contemplate an impossible service;
(6) Those where the intention of the parties relative to the principal object of the contract cannot
be ascertained;
(7) Those expressly prohibited or declared void by law.
These contracts cannot be ratified. Neither can the right to set up the defense of illegality be
waived.
Further, noteworthy is the fact that the second contract of sale over the said homestead in favor of the same vendee,
petitioner Potenciano Menil, is for the same price of P415.00. Clearly, the unvarying term of the said contract is ample
manifestation that the same is simulated and that no object or consideration passed between the parties to the contract. It is
evident from the whole record of the case that the homestead had long been in the possession of the vendees upon the
execution of the first contract of sale on May 7, 1960; likewise, the amount of P415.00 had long been paid to Agueda
Garan on that same occasion. We find no evidence to the contrary.
Case: Director of Lands vs. Silveretra Ababa, et al., Feb. 27, 1979, J. Makasiar.
Facts:The adverse claimant, Atty. Alberto B. Fernandez was retained as counsel by petitioner, Maximo Abarquez, in Civil
Case No. R-6573 of the Court of First Instance of Cebu, entitled "Maximo Abarquez vs. Agripina Abarquez", for the
annulment of a contract of sale with right of repurchase and for the recovery of the land which was the subject matter
thereof. The Court of First Instance of Cebu rendered a decision on May 29, 1961 adverse to the petitioner and so he
appealed to the Court of Appeals.
Litigating as a pauper in the lower court and engaging the services of his lawyer on a contingent basis, petitioner, liable to
compensate his lawyer whom he also retained for his appeal executed a document on June 10, 1961 in the Cebuano-
Visayan dialect whereby he obliged himself to give to his lawyer one-half (1/2) of whatever he might recover from Lots
5600 and 5602 should the appeal prosper.
Issue:Whether or not the contract for a contingent fee is prohibited by Article 1491 of the New Civil Code.
Held: NO. This contention is without merit. Article 1491 prohibits only the sale or assignment between the lawyer and his
client, of property which is the subject of litigation. As WE have already stated. "The prohibition in said article a only to
applies stated: " The prohibition in said article applies only to a sale or assignment to the lawyer by his client of the
property which is the subject of litigation. In other words, for the prohibition to operate, the sale or t of the property must
take place during the pendency of the litigation involving the property" (Rosario Vda. de Laig vs. Court of Appeals, et al.,
L-26882, November 21, 1978).
Likewise, under American Law, the prohibition does not apply to "cases where after completion of litigation the lawyer
accepts on account of his fee, an interest the assets realized by the litigation" (Drinker, Henry S., Legal Ethics, p. 100
[1953], citing App. A, 280; N.Y. Ciu 714). "There is a clear distraction between such cases and one in which the lawyer
speculates on the outcome of the matter in which he is employed" (Drinker, supra, p. 100 citing A.B.A. Op. 279).
A contract for a contingent fee is not covered by Article 1491 because the tranfer or assignment of the property in
litigation takes effect only after the finality of a favorable judgment. In the instant case, the attorney's fees of Atty.
Fernandez, consisting of one-half (1/2) of whatever Maximo Abarquez might recover from his share in the lots in question,
is contingent upon the success of the appeal. Hence, the payment of the attorney's fees, that is, the transfer or assignment of
one-half (1/2) of the property in litigation will take place only if the appeal prospers. Therefore, the tranfer actually takes
effect after the finality of a favorable judgment rendered on appeal and not during the pendency of the litigation involving
the property in question. Consequently, the contract for a contingent fee is not covered by Article 1491.
Case: Francisco Tongkoy (For Estate of Late Luis Tongkoy) vs. CA, Mercedes Sonora, et al., June 28, 1983, J.
Makasiar.
Facts:The first is Lot No. 1397 of the Cadastral Survey of Bacolod, otherwise known as Hacienda Pulo, containing an area
of 727,650 square meters and originally registered under Original Certificate of Title No. 2947 in the names of Francisco
Tongoy, Jose Tongoy, Ana Tongoy, Teresa Tongoy and Jovita Tongoy in pro-indiviso equal shares. Said co-owners were
all children of the late Juan Aniceto Tongoy. The second is Lot No. 1395 of the Cadastral Survey of Bacolod, briefly
referred to as Cuaycong property, containing an area of 163,754 square meters, and formerly covered by Original
Certificate of Title No. 2674 in the name of Basilisa Cuaycong.
Of the original registered co-owners of Hacienda Pulo, three died without issue, namely: Jose Tongoy, who died a
widower on March 11, 1961; Ama Tongoy, who also died single on February 6, 1957, and Teresa Tongoy who also died
single on November 3, 1949. The other two registered co-owners, namely, Francisco Tongoy and Jovita Tongoy, were
survived by children. On April 17, 1918, Hacienda Pulo was mortgaged by its registered co-owners to the Philippine
National Bank (PNB), Bacolod Branch, as security for a loan of P11,000.00 payable in ten (10) years at 8% interest per
annum. The mortgagors however were unable to keep up with the yearly amortizations, as a result of which the PNB
instituted judicial foreclosure proceedings over Hacienda Pulo on June 18, 1931. To avoid foreclosure, one of the co-
owners and mortgagors, Jose Tongoy, proposed to the PNB an amortization plan that would enable them to liquidate
their account. But, on December 23, 1932, the PNB Branch Manager in Bacolod advised Jose Tongoy by letter that the
latter's proposal was rejected and that the foreclosure suit had to continue. As a matter of fact, the suit was pursued to
finality up to the Supreme Court which affirmed on July 31, 1935 the decision of the CFI giving the PNB the right to
foreclose the mortgage on Hacienda Pulo. In the meantime, Patricio D. Tongoy and Luis Tongoy executed on April 29,
1933 a Declaration of Inheritance wherein they declared themselves as the only heirs of the late Francisco Tongoy and
thereby entitled to the latter's share in Hacienda Pulo. On March 13, 1934, Ana Tongoy, Teresa Tongoy, Mercedes
Sonora, Trinidad Sonora, Juan Sonora and Patricio Tongoy executed an "Escritura de Venta" (Exh. 2 or Exh. W),
which by its terms transferred for consideration their rights and interests over Hacienda Pulo in favor of Luis D.
Tongoy.
Issue:Whether or not the rights of herein respondents over subject properties, which were the subjects of simulated or
fictitious transactions, have already prescribed.
Held: NO. The negative answer to the aforesaid query is found in Articles 1409 and 1410 of the New Civil Code. Said
provisions state thus:
Art. 1409. The following contracts are inexistent and void from the beginning:
xxx xxx xxx
2) Those which are absolutely simulated or fictitious;
xxx xxx xxx
These contracts cannot be ratified. Neither can the right to set up the defense of illegality be waived
(emphasis supplied).
Art. 1410. The action or defense for the declaration of the inexistence of a contract does not prescribe.
The characteristic of simulation is the fact that the apparent contract is not really desired nor intended to produce legal
effects nor in any way alter the juridical situation of the parties. Thus, where a person, in order to place his property
beyond the reach of his creditors, simulates a transfer of it to another, he does not really intend to divest himself of his title
and control of the property; hence, the deed of transfer is but a sham. This characteristic of simulation was defined by this
Court in the case of Rodriguez vs. Rodriguez, No. L-23002, July 31, 1967, 20 SCRA 908.
A void or inexistent contract is one which has no force and effect from the very beginning, as if it had never been entered
into, and which cannot be validated either by time or by ratification (p. 592, Civil Code of the Philippines, Vol. IV,
Tolentino, 1973 Ed.).
A void contract produces no effect whatsoever either against or in favor of anyone; hence, it does not create, modify or
extinguish the juridical relation to which it refers (p. 594, Tolentino, supra).
The following are the most fundamental characteristics of void or inexistent contracts:
1) As a general rule, they produce no legal effects whatsoever in accordance with the principle "quod nullum est nullum
producit effectum."
2) They are not susceptible of ratification.
3) The right to set up the defense of inexistence or absolute nullity cannot be waived or renounced.
4) The action or defense for the declaration of their inexistence or absolute nullity is imprescriptible.
5) The inexistence or absolute nullity of a contract cannot be invoked by a person whose interests are not directly affected
(p. 444, Comments and Jurisprudence on Obligations and Contracts, Jurado, 1969 Ed.; emphasis supplied).
The nullity of these contracts is definite and cannot be cured by ratification. The nullity is permanent, even if the cause
thereof has ceased to exist, or even when the parties have complied with the contract spontaneously (p. 595, Tolentino,
supra).
In Eugenio vs. Perdido, et al., No. L-7083, May 19, 1955, 97 Phil. 41, this Court thus reiterated:
Under the existing classification, such contract would be "inexisting" and the "action or defense
for declaration' of such inexistence "does not prescribe' (Art. 14 10 New Civil Code). While it is
true that this is a new provision of the New Civil Code, it is nevertheless a principle recognized
since Tipton vs. Velasco, 6 Phil. 67 that "mere lapse of time cannot give efficacy to contracts that
are null and void.
Consistently, this Court held that 11 where the sale of a homestead is nun and void, the action to recover the same does not
prescribe because mere lapse of time cannot give efficacy to the contracts that are null and void and inexistent" (Angeles,
et al. vs. Court of Appeals, et al., No. L-11024, January 31, 1958, 102 Phil. 1006).
Evidently, therefore, the deeds of transfer executed in favor of Luis Tongoy were from the very beginning absolutely
simulated or fictitious, since the same were made merely for the purpose of restructuring the mortgage over the
subject properties and thus preventing the foreclosure by the PNB.
Considering the law and jurisprudence on simulated or fictitious contracts as aforestated, the within action for
reconveyance instituted by herein respondents which is anchored on the said simulated deeds of transfer cannot and should
not be barred by prescription. No amount of time could accord validity or efficacy to such fictitious transactions, the defect
of which is permanent.
There is no implied trust that was generated by the simulated transfers; because being fictitious or simulated, the transfers
were null and void ab initio-from the very beginning and thus vested no rights whatsoever in favor of Luis Tongoy or his
heirs. That which is inexistent cannot give life to anything at all.
Case: Lita Enterprises, Inc. vs. Second Civil Cases Division, IAC, Nicasio Ocampo and Francisca Garcia, April 27,
1984, J. Escolin.
Facts:Sometime in 1966, the spouses Nicasio M. Ocampo and Francisca Garcia, herein private respondents, purchased in
installment from the Delta Motor Sales Corporation five (5) Toyota Corona Standard cars to be used as taxicabs. Since
they had no franchise to operate taxicabs, they contracted with petitioner Lita Enterprises, Inc., through its representative,
Manuel Concordia, for the use of the latter's certificate of public convenience in consideration of an initial payment of
P1,000.00 and a monthly rental of P200.00 per taxicab unit. To effectuate said agreement, the aforesaid cars were
registered in the name of petitioner Lita Enterprises, Inc, Possession, however, remained with tile spouses Ocampo who
operated and maintained the same under the name Acme Taxi, petitioner's trade name.
Thereafter, in March 1973, respondent Nicasio Ocampo decided to register his taxicabs in his name. He requested the
manager of petitioner Lita Enterprises, Inc. to turn over the registration papers to him, but the latter allegedly refused.
Issue:Whether or not the Spouses can recover the cars from Lita Enterprises.
Held: NO. Unquestionably, the parties herein operated under an arrangement, comonly known as the "kabit
system", whereby a person who has been granted a certificate of convenience allows another person who owns
motors vehicles to operate under such franchise for a fee. A certificate of public convenience is a special privilege
conferred by the government . Abuse of this privilege by the grantees thereof cannot be countenanced. The "kabit system"
has been Identified as one of the root causes of the prevalence of graft and corruption in the government transportation
offices. In the words of Chief Justice Makalintal, "this is a pernicious system that cannot be too severely condemned. It
constitutes an imposition upon the good faith of the government.
Although not outrightly penalized as a criminal offense, the "kabit system" is invariably recognized as being contrary to
public policy and, therefore, void and inexistent under Article 1409 of the Civil Code, It is a fundamental principle that the
court will not aid either party to enforce an illegal contract, but will leave them both where it finds them. Upon this
premise, it was flagrant error on the part of both the trial and appellate courts to have accorded the parties relief from their
predicament. Article 1412 of the Civil Code denies them such aid. It provides:
ART. 1412. if the act in which the unlawful or forbidden cause consists does not constitute a criminal offense,
the following rules shall be observed;
(1) when the fault, is on the part of both contracting parties, neither may recover what he has given by virtue
of the contract, or demand the performance of the other's undertaking.
The defect of inexistence of a contract is permanent and incurable, and cannot be cured by ratification or by prescription.
As this Court said in Eugenio v. Perdido, 2 "the mere lapse of time cannot give efficacy to contracts that are null void."
The principle of in pari delicto is well known not only in this jurisdiction but also in the United States where common law
prevails. Under American jurisdiction, the doctrine is stated thus: "The proposition is universal that no action arises, in
equity or at law, from an illegal contract; no suit can be maintained for its specific performance, or to recover the property
agreed to be sold or delivered, or damages for its property agreed to be sold or delivered, or damages for its violation. The
rule has sometimes been laid down as though it was equally universal, that where the parties are in pari delicto, no
affirmative relief of any kind will be given to one against the other." Although certain exceptions to the rule are
provided by law, We see no cogent reason why the full force of the rule should not be applied in the instant case.
"Ex pacto illicito non oritur actio" [No action arises out of an illicit bargain] is the tune-honored maxim that must be
applied to the parties in the case at bar. Having entered into an illegal contract, neither can seek relief from the courts, and
each must bear the consequences of his acts.
Case: Francisca Arsenal and Remedios Arsenal vs. IAC, Heirs of Torcuato Suralta, July 14, 1986, J. Gutierrez Jr.
Facts:On January 7, 1954, the defendant Filomeno Palaos secured OCT No. P-290 (Exh. A) from the Register of Deeds of
Bukidnon for Lot 81, Pls-112, consisting of 87,829 sq. m. more or less, situated at former barrio of Kitaotao now a
municipality of Bukidnon, by virtue of Homestead Patent No. V-23602 granted to him.
On September 10, 1957, said Filomeno Palaos and his wife Mahina Lagwas executed in favor of the plaintiff, Torcuato
Suralta, sold four (4) hectares of the land embraced in his Torrens Certificate for the sum of P 890.00, Philippine Currency,
by means of a deed of acknowledged before a Notary (Exh. C). Plaintiff Suralta immediately took possession of the four-
hectare portion of Lot 81 above-mentioned cultivated and worked the same openly, continuously and peacefully up to the
present time in concept of owner thereof. He built a house and introduced permanent improvements thereon now valued at
no less than P20,000.00.
Sometime in 1964, the defendant-spouses Francisca Arsenal and Remedio Arsenal became tenants of an adjoining land
owned by Eusebio Pabualan that is separated from the land in question only by a public road. On March 14, 1967, said
Filomeno Palaos and his wife executed a notarial Deed of Sale (Exh. 1 for the defendant) in consideration of the amount of
P800.00, Philippine Currency, supposedly for the remaining three (3) hectares of their land without knowing that the
document covered the entirety of Lot 81 including the four-hectare portion previously deeded by them to the plaintiff. The
deed of sale was presented to the Office of the Commission on National Integration at Malaybalay for approval because
Palaos and his wife belong to the cultural minorities and unlettered. The field representative and inspector of that office
subsequently approved the same (Exh. K and Exh. 2) without inspecting the land to determine the actual occupants
thereon.
On July 11, 1973, the plaintiff presented his Sales Contract in the Office of the Register of Deeds but it was refused
registration for having been executed within the prohibitive period of five years from the issuance of the patent. In order to
cure the defect, he caused Filomeno Palaos to sign a new Sales Contract (Exh. D) in his favor before Deputy Clerk of
Court Florentina Villanueva covering the same four-hectare portion of Lot 81. In August 1973, the plaintiff caused the
segregation of his portion from the rest of the land by Geodetic Engineer Benito P. Balbuena, who conducted the
subdivision survey without protest from Francisca Arsenal who was notified thereof. The subdivision plan (Exh. E) was
approved by the Commissioner of Land Registration on April 18, 1974.
On March 6, 1974, Torcuato Suralta filed a case against Filomeno Palaos, Mahina Lagwas, Francisca Arsenal, Remedio
Arsenal and the Register of Deeds of Bukidnon for the annulment of Transfer Certificate of Title No. T-7879 issued to the
Arsenals insofar as it covers the four-hectare portion previously sold to him. In answer to the complaint, the Arsenals
denied previous knowledge of the sale to Suralta of the land in question. As a special defense, they assailed the validity of
the purchase by Suralta in 1957, pointing to the prohibition contained in the Public Land Law against its disposal
within the period of five years from the issuance of the homestead patent. They also questioned the legality of the sale
made to Suralta in 1957 by Filomeno Palaos and Mahina Lagwas for not having been approved by the Commission on
National Integration despite the fact that Palaos and his wife belong to the cultural minorities, are illiterates, and do not
understand the English language in which the deed of sale in favor of Suralta was written.
Issue:Whether or not the contract of sale executed in 1957 between respondents Palaos and Suralta is null and void.
Held: YES. The law on the matter which is the Public Land Act (Commonwealth Act No. 141, as amended) provides:
Sec. 118. Except in favor, of the Government or any of its branches, units or institutions, lands acquired under free patent
or homestead provisions shall not be subject to encumbrance or alienation from the date of the approval of the application
and for a term of five years from and after the date of issuance of the patent or grant nor shall they become liable to the
satisfaction of any debt contracted prior to the expiration of said period, but the improvements or crops on the land may be
mortgaged or pledged to qualified persons, associations, or corporations.
No alienation, transfer, or conveyance of any homestead after five years and before twenty-five years after issuance of title
shall be valid without the approval of the Secretary of Agriculture and Natural Resources, which approval shall not be
denied except on constitutional and legal ground (As amended by Com. Act No. 456, approved June 8, 1939).
xxx xxx xxx
Sec. 120. Conveyance and encumbrance made by persons belonging to the so-called 'non-Christian Filipinos' or national
cultural minorities, when proper, shall be valid if the person making the conveyance or encumbrance is able to read and
can understand the language in which the instrument or conveyance or encumbrance is written. Conveyances and
encumbrances made by illiterate non-Christians or literate non-Christians where the instrument of conveyance is in a
language not understood by the said literate non-Christian shall not be valid unless duly approved by the Chairman of the
Commission on National Integration. (As amended by Rep. Act No. 3872, approved June 18, 1964).
xxx xxx xxx
Sec. 124. Any acquisition, conveyance, alienation, transfer, or other contract made or executed in violation of any of the
provisions of sections one hundred and eighteen, one hundred and twenty, one hundred and twenty-one, one hundred and
twenty-two, and one hundred twenty-three of this Act shall be unlawful and null and void from its execution and shall
produce the effect of annulling and cancelling the grant, title, patent, or permit originally issued, recognized or confirmed,
actually or presumptively, and cause the reversion of the property and its improvements to the State.
The above provisions of law are clear and explicit. A contract which purports of alienate, transfer, convey or encumber any
homestead within the prohibitory period of five years from the date of the issuance of the patent is void from its execution.
In a number of cases, this Court has held that such provision is mandatory (De los Santos v. Roman Catholic Church of
Midsayap, 94 Phil. 405).
Under the provisions of the Civil Code, a void contract is inexistent from the beginning. It cannot be ratified neither can
the right to set up the defense of its illegality be waived. (Art. 1409, Civil Code).
To further distinguish this contract from the other kinds of contract, a commentator has stated that:
The right to set up the nullity of a void or non-existent contract is not limited to the parties as in the case of annullable or
voidable contracts; it is extended to third persons who are directly affected by the contract. (Tolentino, Civil Code of the
Philippines, Vol. IV, p. 604, [1973]).
Any person may invoke the inexistence of the contract whenever juridical effects founded thereon are asserted against him.
(Id. p. 595).
Concededly, the contract of sale executed between the respondents Palaos and Suralta in 1957 is void. It was entered into
three (3) years and eight (8) months after the grant of the homestead patent to the respondent Palaos in 1954.
Being void, the foregoing principles and rulings are applicable. Thus, it was erroneous for the trial court to declare that the
benefit of the prohibition in the Public Land Act "does not inure to any third party." Such a sweeping declaration does not
find support in the law or in precedents. A third person who is directly affected by a void contract may set up its nullity. In
this case, it is precisely the petitioners' interest in the disputed land which is in question.
As to whether or not the execution by the respondents Palaos and Suralta of another instrument in 1973 cured the defects
in their previous contract, we reiterate the rule that an alienation or sale of a homestead executed within the five-year
prohibitory period is void and cannot be confirmed or ratified. This Court has on several occasions ruled on the nature of a
confirmatory sale and the public policy which proscribes it. In the case of Menil v. Court of Appeals (84 SCRA 413), we
stated that:
It cannot be claimed that there are two contracts: one which is undisputably null and void, and another, having been
executed after the lapse of the 5-year prohibitory period, which is valid. The second contract of sale executed on March 3,
1964 is admittedly a confirmatory deed of sale. Even the petitioners concede this point. (Record on Appeal, pp. 55-56).
Inasmuch as the contract of sale executed on May 7, 1960 is void for it is expressly prohibited or declared void by law (CA
141, Section 118), it therefore cannot be confirmed nor ratified.
Case: Manotok Realty, Inc. vs. CA and Felipe Madlangawa, April 30, 1987, J. Gutierrez Jr.
Facts:The private respondent Felipe Madlangawa claims that he has been occupying a parcel of land in the Clara de
Tambunting de Legarda Subdivision since 1949 upon permission being obtained from Andres Ladores, then an overseer of
the subdivision, with the understanding that the respondent would eventually buy the lot.
On April 2, 1950, the owner of the lot, Clara Tambunting, died and her entire estate, including her paraphernal properties
which covered the lot occupied by the private respondent were placed under custodia legis.
On April 22, 1950, the private respondent made a deposit for the said lot in the sum of P1,500.00 which was received by
Vicente Legarda, husband of the late owner. As evidenced by the receipt issued by Vicente Legarda, the lot consisted of an
area of 240 square meters and was sold at P30.00 per square meter. There, thus, remained an unpaid balance of P5,700.00
but the private respondent did not pay or was unable to pay this balance because after the death of the testatrix, Clara
Tambunting de Legarda, her heirs could not settle their differences. Apart from the initial deposit, no further payments
were made from 1950.
On April 28, 1950, Don Vicente Legarda was appointed as a special administrator of the estate. Meanwhile the private
respondent remained in possession of the lot in question.
In its effort to clear the Tambunting Subdivision of its squatters and occupants, the petitioner caused the publication of
several notices in the Manila Times issues of January 1, 1966 and the Taliba issues of January 2, and March 16, 1966,
advising the occupants to vacate their respective premises, otherwise, court action with damages would follow. In addition
to these notices by publication, the petitioner sent circulars to the occupants to vacate.
The private respondent was one of the many occupants who refused to vacate the lots they were occupying, so that on
April 26, 1968, the petitioner filed the action below to recover the said lot.
Issue:Whether or not the sale of the lot to Felipe Madlangawa is valid.
Held: NO. We are, therefore, led to the inevitable conclusion that the sale between Don Vicente Legarda and the private
respondent is void ab initio, the former being neither an owner nor administrator of the subject property. Such being the
case, the sale cannot be the subject of the ratification by the Philippine Trust Company or the probate court. As was held in
the case of Arsenal v. Intermediate Appellate Court (143 SCRA 40, 49):
Under the provisions of the Civil Code, a void contract is inexistent from the beginning. It cannot
be ratified neither can the right to set up the defense of its illegality be waived. (Art. 1409, Civil
Code .
To further distinguish this contract from the other kinds of contract, a commentator has stated
that.
The right to set up the nullity of a void or non-existent contract is not
limited to the parties as in the case of annuable or voidable contracts, it
is extended to third persons who are directly affected by the contract.
(Tolentino, Civil Code of the Philippines, Vol. IV, p. 604, [1973]).
Any person may invoke the inexistence of the contract whenever
juridical affects founded thereon are asserted against him. (Id. P. 595).
Section 1, Rule 89 of the Revised Rules of Court provides for the procedure on how a property in custodia legis can be
disposed of by sale:
Order of sale of personalty. — Upon the application of the executor or administrator, and on
written notice to the heirs and other persons interested, the court may order the whole or a part of
the personal estate to be sold, if it appears necessary for the purpose of paying debts, expenses of
administration, or legacies, or for the preservation of the property.
After the appointment of Don Vicente Legarda as administrator of the estate of Dona Clara Tambunting, he should have
applied before the probate court for authority to sell the disputed property in favor of the private respondent. If the probate
court approved the request, then Don Vicente Legarda would have been able to execute a valid deed of sale in favor of the
respondent. Unfortunately, there was no effort on the part of the administrator to comply with the above-quoted rule of
procedure nor on that of the respondent to protect his interests or to pay the balance of the installments to the court
appointed administrator.
Case: Cornelia Clanor Vda. De Portugal, et al. Vs. IAC and Hugo C. Portugal, March 25, 1988, J. Sarmiento.
Facts:Petitioner Cornelia Clanor and her late husband Pascual Portugal, during the lifetime of the latter, were able to
accumulate several parcels of real property. Among these were a parcel of residential land situated in Poblacion, Gen.
Trias, Cavite, designated as Lot No. 3201, consisting of 2,069 square meters, more or less, and covered by T.C.T. No. RT-
9355, in their names, and an agricultural land located at Pasong Kawayan, Gen. Trias, Cavite, with an area of 43,587
square meters, more or less, known as Lot No. 2337, and also registered in their names under T.C.T. No. RT-9356 of the
Registry of Deeds for the Province of Cavite.
Sometime in January, 1967, the private respondent Hugo Portugal, a son of the spouses, borrowed from his mother,
Cornelia, the certificates of title to the above-mentioned parcels of land on the pretext that he had to use them in securing a
loan that he was negotiating. Cornelia, the loving and helpful mother that she was, assented and delivered the titles to her
son. The matter was never again brought up until after Pascual Portugal died on November 17, 1974. (Cornelia herself died
on November 12, 1987.) When the other heirs of the deceased Pascual Portugal, the petitioners herein, for the purposes of
executing an extra-judicial partition of Pascual's estate, wished to have all the properties of the spouses collated, Cornelia
asked the private respondent for the return of the two titles she previously loaned, Hugo manifested that the said titles no
longer exist. When further questioned, Hugo showed the petitioners Transfer Certificate of Title T.C.T. No. 23539
registered in his and his brother Emiliano Portugal's names, and which new T.C.T. cancelled the two previous ones. This
falsification was triggered by a deed of sale by which the spouses Pascual Portugal and Cornelia Clanor purportedly sold
for P8,000.00 the two parcels of land adverted to earlier to their two sons, Hugo and Emiliano. Confronted by his mother
of this fraud, Emiliano denied any participation. And to show his good faith, Emiliano caused the reconveyance of Lot No.
2337 previously covered by TCT No. RT-9356 and which was conveyed to him in the void deed of sale. Hugo, on the
other hand, refused to make the necessary restitution thus compelling the petitioners, his mother and his other brothers and
sisters, to institute an action for the annulment of the controversial deed of sale and the reconveyance of the title over Lot
No. 3201 (the residential land).
Issue:Whether or not the deed of sale is valid.
Held: NO. The case at bar is not purely an action for reconveyance based on an implied or constructive trust. Neither is it
one for the annullment of a fraudulent contract. A closer scrutiny of the records of the case readily supports a finding that
fraud and mistake are not the only vices present in the assailed contract of sale as held by the trial court. More than these,
the alleged contract of sale is vitiated by the total absence of a valid cause or consideration. The petitioners in their
complaint, assert that they, particularly Cornelia, never knew of the existence of the questioned deed of sale. They claim
that they came to know of the supposed sale only after the private respondent, upon their repeated entreaties to produce
and return the owner's duplicate copy of the transfer certificate of title covering the two parcels of land, showed to them
the controversial deed. And their claim was immeasurably bolstered when the private respondent's co-defendant below, his
brother Emiliano Portugal, who was allegedly his co-vendee in the transaction, disclaimed any knowledge or participation
therein. If this is so, and this is not contradicted by the decisions of the courts below, the inevitable implication of the
allegations is that contrary to the recitals found in the assailed deed, no consideration was ever paid at all by the private
respondent. Applying the provisions of Articles 1350, 1352, and 1409 of the new Civil Code in relation to the
indispensable requisite of a valid cause or consideration in any contract, and what constitutes a void or inexistent contract,
we rule that the disputed deed of sale is void ab initio or inexistent, not merely voidable. And it is provided in Article 1410
of the Civil Code, that '(T)he action or defense for the declaration of the inexistence of a contract does not prescribe.
But even if the action of the petitioners is for reconveyance of the parcel of land based on an implied or constructive trust,
still it has been seasonably filed. For as heretofore stated, it is now settled that actions of this nature prescribe in ten years,
the point of reference being the date of registration of the deed or the date of the issuance of the certificate of titIe over the
property. 4In this case, the petitioner commenced the instant action for reconveyance in the trial court on October 26, 1976,
or less than ten years from January 23, 1967 when the deed of sale was registered with the Register of Deeds. 5 Clearly,
even on this basis alone, the present action has not yet prescribed.
Case: Heirs of Spouses Luis Yanas and Maria Aglimot (represented by Abraham Yanas) vs. Heirs of Spouses
Antonio Acaylar, et al., April 25, 1985, J. Aquino Jr.
Facts:This case is about the validity of the sale of land executed by Luis Yanas, an illiterate Subano. Yanas, also known as
Sulung Subano, had occupied, even before 1926, Lot No. 5408 with an area of 13 hectares located at Sitio Dionom (Lower
Gumay), Barrio Sianib, Pinan (Dipolog), Zamboanga del Norte (Exh. L). Through lawyer Leoncio S. Hamoy, Yanas
claimed the lot in the cadastral proceeding.
It is adjacent to the Dionom Creek and is about two kilometers from the national highway. He planted the land to rice,
corn, coconuts and fruit trees. He built houses thereon. He declared it for tax purposes in his name. Judge Manalac on
September 30, 1941 issued Decree No. N-11330 adjudicating Lot No. 5408 to Yanas "married to Maria Aglimot" (Exh. C).
Lawyer Valeriano S. Concha, Sr., an adjoining owner of Yanas since 1946, who became clerk of court, testified that Yanas
had always occupied the lot since 1946 up to his death in 1962 (103 tsn June 4, 1970). His son filed an adverse claim for
Yanas.
OnAugust 7,1950 Yanas thumbmarked in Dapitan a deed of sale and conveyance wherein he purportedly sold to Antonio
L. Acaylar of Dapitan for P200 his 13-hectare land. The sale was notarized on the following day, August 8. An
instrumental witness was lawyer Hamoy. The sale was approved by Governor Felipe B. Azcuna on May 15, 1953 or 33
months after the sale.
It is the theory of the heirs of Yanas that that deed of sale is fictitious and fraudulent because what Yanas thumbmarked on
August 7, 1950 was supposed to be a receipt attesting that he owed Hamoy P 200 for his legal services. Hamoy allegedly
taking advantage of his illiteracy, made Yanas affix his thumbmark to a deed of sale in English (Exh. 2).
The decree issued by Judge Manalac in 1941 was registered only on June 5, 1954. On that day, OCT No. 64 was issued to
Yanas. On December 21, 1954 Acaylar registered the 1950 deed of sale. He obtained TCT No. T-3338 (Exh. 5). How
Acaylar came to have possession of the owner's duplicate of OCT No. 64 and why it was not delivered to Yanas are not
shown in the record.
When Yanas discovered that his title was cancelled, he caused on August 28, 1958 an adverse claim to be annotated on
Acaylar's title. He stated in his adverse claim that he never sold his land and that the price of P200 was grossly inadequate
because the land was worth not less than P6,000 (Exh. D).
Yanas died in 1962. His widow, Maria Aglimot, also a Subano, and his children filed in 1963 an action to declare void
Acaylar's title. A notice of lis pendens was annotated on that title. Aglimot died in 1965. The trial court found the sale to
be valid and binding. The Appellate Court affirmed the trial court's decision. The heirs of Yanas appealed to this Court.
Issue:Whether or not the deed of sale is valid.
Held: NO. We hold that the sale was fictitious and fraudulent. Among the badges of fraud and fictitiousness taken
collectively are the following: (1) the fact that the sale is in English, the alleged vendor being illiterate; (2) the fact that his
wife did not join in the sale and that her name is indicated in the deed as "Maria S. Yanas" when the truth is that her
correct name is Maria Aglimot Yanas; (3) the obvious inadequacy of P200 as price for a 13-hectare land (P15.40 a
hectare); (4) the notarization of the sale on the day following the alleged thumbmarking of the document; (5) the failure to
state the boundaries of the lot sold; (6) the fact that the governor approved it more than two years after the alleged sale; (7)
its registration more than three years later, and (8) the fact that the Acaylars were able to occupy only four hectares out of
the 13 hectares and were eventually forcibly ousted therefrom by the children and agents of the vendor. It was not a fair
and regular transaction done in the ordinary course of business.
The fact that the alleged sale took place in 1950 and the action to have it declared void or inexistent was filed in 1963 is
immaterial. The action or defense for the declaration of the inexistence of a contract does not prescribe (Art. 1410, Civil
Code).

Case: Epifania Sarsosa Vda de Barsobia and Pacita Vallar vs. Victoriano Cuenco, April 16, 1982, J. Melencio-
Herrera.
Facts:On September 5, 1936, Epifania Sarsosa then a widow, sold the land in controversy to a Chinese, Ong King Po, for
the sum of P1,050.00 (Exhibit "B"). Ong King Po took actual possession and enjoyed the fruits thereof.
On August 5, 1961, Ong King Po sold the litigated property to Victoriano T. Cuenco (respondent herein), a naturalized
Filipino, for the sum of P5,000.00 (Exhibit "A"). Respondent immediately took actual possession and harvested the fruits
therefrom.
On March 6, 1962, Epifania "usurped" the controverted property, and on July 26, 1962, Epifania (through her only
daughter and child, Emeteria Barsobia), sold a one-half (1/2) portion of the land in question to Pacita W. Vallar, the other
petitioner herein (Exhibit "2"). Epifania claimed that it was not her intention to sell the land to Ong King Po and that she
signed the document of sale merely to evidence her indebtedness to the latter in the amount of P1,050.00. Epifania has
been in possession ever since except for the portion sold to the other petitioner Pacita.
On September 19, 1962, respondent filed a Forcible Entry case against Epifania before the Municipal Court of Sagay,
Camiguin. The case was dismissed for lack of jurisdiction since, as the laws then stood, the question of possession could
not be properly determined without first settling that of ownership.
On December 27, 1966, respondent instituted before the Court of First Instance of Misamis Oriental a Complaint for
recovery of possession and ownership of the litigated land, against Epifania and Pacita Vallar (hereinafter referred to
simply as petitioners).
In their Answer below, petitioners insisted that they were the owners and possessors of the litigated land; that its sale to
Ong King Po, a Chinese, was inexistent and/or void ab initio; and that the deed of sale between them was only an evidence
of Epifania's indebtedness to Ong King Po.
Issue:Whether or not the sale of land is valid.
Held: YES. The facts stand, a parcel of coconut land was sold by its Filipino owner, petitioner Epifania, to a Chinese, Ong
King Po, and by the latter to a naturalized Filipino, respondent herein. In the meantime, the Filipino owner had unilaterally
repudiated the sale she had made to the Chinese and had resold the property to another Filipino. The basic issue is: Who is
the rightful owner of the property?
There should be no question that the sale of the land in question in 1936 by Epifania to Ong King Po was inexistent and
void from the beginning (Art. 1409 [7], Civil Code) 6 because it was a contract executed against the mandatory provision
of the 1935 Constitution, which is an expression of public policy to conserve lands for the Filipinos. Said provision reads:
Save in cases of hereditary succession, no private agricultural land shall be transferred or
assigned except to individuals, corporations, or associations, qualified to acquire or hold lands of
the public domain. 7
Had this been a suit between Epifania and Ong King Po, she could have been declared entitled to the litigated land on the
basis, as claimed, of the ruling in Philippine Banking Corporation vs. Lui She, 8 reading:
... For another thing, and this is not only cogent but also important. Article 1416 of the Civil
Code provides as an exception to the rule on pari delicto that when the agreement is not illegal
per se but is merely prohibited, and the prohibition by the law is designed for the protection of
the plaintiff, he may, if public policy is thereby enhanced, recover what he has sold or
delivered. ...
But the factual set-up has changed. The litigated property is now in the hands of a naturalized Filipino. It is no longer
owned by a disqualified vendee. Respondent, as a naturalized citizen, was constitutionally qualified to own the subject
property. There would be no more public policy to be served in allowing petitioner Epifania to recover the land as it is
already in the hands of a qualified person. Applying by analogy the ruling of this Court in Vasquez vs. Giap and Li Seng
Giap & Sons: 9
... if the ban on aliens from acquiring not only agricultural but also urban lands, as construed by
this Court in the Krivenko case, is to preserve the nation's lands for future generations of
Filipinos, that aim or purpose would not be thwarted but achieved by making lawful the
acquisition of real estate by aliens who became Filipino citizens by naturalization.
While, strictly speaking, Ong King Po, private respondent's vendor, had no rights of ownership to transmit, it is likewise
inescapable that petitioner Epifania had slept on her rights for 26 years from 1936 to 1962. By her long inaction or
inexcusable neglect, she should be held barred from asserting her claim to the litigated property (Sotto vs. Teves, 86 SCRA
157 [1978]).
Case: Vicente Godinez, et al. Vs. Fong Pak Luen, et al., Jan. 27, 1983, J. Gutierrez Jr.
Facts:On September 30, 1966, the plaintiffs filed a complaint in the Court of First Instance of Sulu alleging among others
that they are the heirs of Jose Godinez who was married to Martina Alvarez Godinez sometime in 1910; that during the
marriage of their parents the said parents acquired a parcel of land lot No. 94 of Jolo townsite with an area of 3,665 square
meters as evidenced by Original Certificate of Title No. 179 (D -155) in the name of Jose Godinez; that their mother died
sometime in 1938 leaving the plaintiffs as their sole surviving heirs; that on November 27, 1941, without the knowledge of
the plaintiffs, the said Jose Godinez, for valuable consideration, sold the aforesaid parcel of land to the defendant Fong Pak
Luen, a Chinese citizen, which transaction is contrary to law and in violation of the Civil Code because the latter being an
alien who is inhibited by law to purchase real property; that Transfer Certificate Title No. 884 was then issued by the
Register of Deeds to the said defendant, which is null and void ab initio since the transaction constituted a non-existent
contract; that on January 11, 1963, said defendant Fong Pak Luen executed a power of attorney in favor of his co-
defendant Kwan Pun Ming, also an alien, who conveyed and sold the above described parcel of land to co-defendant
Trinidad S. Navata, who is aware of and with full knowledge that Fong Pak Luen is a Chinese citizen as well as Kwan Pun
Ming, who under the law are prohibited and disqualified to acquire real property in this jurisdiction; that defendant Fong
Pak Luen has not acquired any title or interest in said parcel of land as the purported contract of sale executed by Jose
Godinez alone was contrary to law and considered non- existent, so much so that the alleged attorney-in-fact, defendant
Kwan Pun Ming had not conveyed any title or interest over said property and defendant Navata had not acquired anything
from said grantor and as a consequence Transfer Certificate of Title No. 1322, which was issued by the Register of Deeds
in favor of the latter is null and void ab initio,- that since one-half of the said property is conjugal property inherited by the
plaintiffs from their mother, Jose Godinez could -not have legally conveyed the entire property; that notwithstanding
repeated demands on said defendant to surrender to plaintiffs the said property she refused and still refuses to do so to the
great damage and prejudice of the plaintiffs; and that they were constrained to engage the services of counsel in the sum of
P2,000.00.1äwphï1.ñët The plaintiffs thus pray that they be adjudged as the owners of the parcel of land in question and
that Transfer Certificate of Title RT-90 (T-884) issued in the name of defendant Fong Pak Luen be declared null and void
ab initio,
Issue:Whether or not the contract is null and void.
Held: YES. The meaning of the above provision was fully discussed in Krivenko v. Register of Deeds of Manila (79 Phil.
461) which also detailed the evolution of the provision in the public land laws, Act No. 2874 and Commonwealth Act No.
141. The Krivenko ruling that "under the Constitution aliens may not acquire private or agricultural lands, including
residential lands" is a declaration of an imperative constitutional policy. Consequently, prescription may never be invoked
to defend that which the Constitution prohibits. However, we see no necessity from the facts of this case to pass upon the
nature of the contract of sale executed by Jose Godinez and Fong Pak Luen whether void ab initio, illegal per se or merely
pro-exhibited.** It is enough to stress that insofar as the vendee is concerned, prescription is unavailing. But neither can
the vendor or his heirs rely on an argument based on imprescriptibility because the land sold in 1941 is now in the hands of
a Filipino citizen against whom the constitutional prescription was never intended to apply. The lower court erred in
treating the case as one involving simply the application of the statute of limitations.
From the fact that prescription may not be used to defend a contract which the Constitution prohibits, it does not
necessarily follow that the appellants may be allowed to recover the property sold to an alien. As earlier mentioned, Fong
Pak Luen, the disqualified alien vendee later sold the same property to Trinidad S. Navata, a Filipino citizen qualified to
acquire real property.
Case : Donato Reyes Yap and Melitona Maravillas vs. Hon. Grageda and Jose Rico, March 28, 1983, J. Gutierrez Jr.
Facts:On April 12, 1939, Maximino Rico, for and in his own behalf and that of the minors Maria Rico, Filomeno Rico,
Prisco Rico, and Lourdes' Rico, executed a Deed of Absolute Sale (Annex 'A' to the complaint) over Lot 339 and a portion
of Lot 327 in favor of the petitioner Donato Reyes Yap who was then a Chinese national. Respondent Jose A. Rico is the
eldest son of Maximino Rico, one of the vendors in Annex 'A'.
Subsequently, the petitioner as vendee caused the registration of the instrument of sale and the cancellation of Original
Certificates of Title Nos. 29332 and 29410 and the consequent issuance in his favor of Transfer Certificate of Title No. T-
2433 covering the two lots subject matter of the Contract of Sale.
After the lapse of nearly fifteen years from and after the execution of the deed of absolute sale, Donato Reyes Yap was
admitted as a Filipino citizen and allowed to take his oath of allegiance to the Republic of the Philippines. He was,
thereafter, issued Certificate of Naturalization No. 7, File No. 19 of the Court of First Instance of Albay.
On December 1, 1967, the petitioner ceded the major portion of Lot No. 327 consisting of 1,078 square meters which he
acquired by purchase under the deed of sale in favor of his engineer son, Felix Yap, who was also a Filipino citizen
because of the Filipino citizenship of his mother and the naturalization of his father Donato Reyes Yap.
Subsequently, Lourdes Rico, aunt and co-heir of respondent Jose A. Rico. sold the remaining portion of Lot 327 to the
petitioner who had his rights thereon duly registered under Act 496. Petitioner, Donato Reyes Yap, has been in possession
of the lots in question since 1939, openly, publicly, continuously, and adversely in the concept of owner until the present
time. The petitioner has one surviving son by his first marriage to a Filipino wife. He has five children by his second
marriage also to a Filipina and has a total of 23 grandchildren all of whom are Filipino citizens.
The respondent court considered Section 5, Article XIII of the 1935 Constitution that "no private agricultural land shall be
transferred or assigned except to individuals, corporations, or associations qualified to acquire or hold lands of the public
domain in the Philippines" to be an absolute and unqualified prohibition and, therefore, ruled that a conveyance contrary to
it would not be validated nor its void nature altered by the subsequent naturalization of the vendee.
Issue:Whether or not the sale is valid.
Held: YES. The rulings in Vasquez v.Leng Seng Giap et al. (96 Phil. 447) and Sarosa Vda. de Bersabia v. Cuenco (113
SCRA 547) sustain the petitioner's contentions. We stated in Sarosa Vda de Bersabia:
There should be no question that the sale of the land in question in 1936 by Epifania to Ong King
Po was inexistent and void from the beginning (Art. 1409 [7], Civil Code) because it was a
contract executed against the mandatory provision of the 1935 Constitution, which is an
expression of public policy to conserve lands for the Filipinos. Said provision reads:
Save in cases of hereditary succession, no private agricultural land shall
be transferred or assigned except to in. individuals, corporations, or
associations, qualified to acquire or hold lands of the public domain.
Had this been a suit between Epifania and Ong King Po she could have been declared entitled to
the litigated land on the basis, as claimed, of the ruling in Philippine Banking Corporation vs. Lui
She, reading:
... For another thing, and this is not only cogent but also important.
Article 1416 of the Civil Code provides as an exception to the rule on
pari delicto that when the agreement is not illegal per se but is merely
prohibited, and the prohibition by the law is designed for the protection
 of the plaintiff, he may, if public policy is thereby enhanced, recover
what he has sold or delivered. ...
But the factual set-up has changed. The litigated property is now in the hands of a naturalized
Filipino. It is no longer owned by a disqualified vendee. Respondent, as a naturalized citizen, was
constitutionally qualified to own the subject property. There would be no more public policy to
be served in allowing petitioner Epifania to recover the land as it is already in the hands of a
qualified person. Applying by analogy the ruling of this Court in Vasquez vs. Giap and Leng
Seng Giap & Sons:
... if the ban on aliens from acquiring not only agricultural but also
urban lands, as construed by this Court in the Krivenko case, is to
preserve the nation's lands for future generations of Filipinos, that aim
or purpose would not be thwarted but achieved by making lawful the
acquisition of real estate by aliens who became Filipino citizens by
naturalization.
Only recently, we had occasion to reiterate the above rulings in Vicente Godines v. Fong Pak Luen, et al. (G.R. No. L-
36731, January 27, 1983).
Case: Jesus Pineda vs. Jose Dela Rama and CA, April 28, 1983, J. Gutierrez Jr.
Facts:Dela Rama is a practising lawyer whose services were retained by Pineda for the purpose of making representations
with the chairman and general manager of the National Rice and Corn Administration (NARIC) to stop or delay the
institution of criminal charges against Pineda who allegedly misappropriated 11,000 cavans of palay deposited at his
ricemill in Concepcion, Tarlac. The NARIC general manager was allegedly an intimate friend of Dela Rama.
According to Dela Rama, petitioner Pineda has used up all his funds to buy a big hacienda in Mindoro and, therefore,
borrowed the P9,300.00 subject of his complaint for collection. In addition to filling the suit to collect the loan evidenced
by the matured promissory note, Dela Rama also sued to collect P5,000.00 attorney's fees for legal services rendered as
Pineda's counsel in the case being investigated by NARIC.
The Court of First Instance of Manila decided Civil Case No. 45762 in favor of petitioner Pineda. The court believed the
evidence of Pineda that he signed the promissory note for P9,300.00 only because Dela Rama had told him that this
amount had already been advanced to grease the palms of the 'Chairman and General Manager of NARIC in order to save
Pineda from criminal prosecution.
Issue:Whether or not Dela Rama can recover from Pineda.
Held: NO. We agree with the trial court which believed Pineda. It is indeed unusual for a lawyer to lend money to his
client whom he had known for only three months, with no security for the loan and on interest. Dela Rama testified that he
did not even know what Pineda was going to do with the money he borrowed from him. The petitioner had just purchased
a hacienda in Mindoro for P210,000.00, owned sugar and rice lands in Tarlac of around 800 hectares, and had P60,000.00
deposits in three banks when he executed the note. It is more logical to believe that Pineda would not borrow P5,000.00
and P4,300.00 five days apart from a man whom he calls a "fixer" and whom he had known for only three months.
Whether or not the supposed cash advances reached their destination is of no moment. The consideration for the
promissory note - to influence public officers in the performance of their duties - is contrary to law and public policy. The
promissory note is void ab initio and no cause of action for the collection cases can arise from it.
Case: Conchita Liguez vs. CA and Maria Ngo Vda de Lopez, et al., Dec. 18, 1957, J.B.L. Reyes.
Facts:The case began upon complaint filed by petitioner-appellant against the widow and heirs of the late Salvador P.
Lopez to recover a parcel of 51.84 hectares of land, situated in barrio Bogac-Linot, of the municipality of Mati, Province
of Davao. Plaintiff averred to be its legal owner, pursuant to a deed of donation of said land, executed in her favor by the
late owner, Salvador P. Lopez, on 18 May 1943. The defense interposed was that the donation was null and void for
having an illicit causa or consideration, which was the plaintiff's entering into marital relations with Salvador P. Lopez, a
married man; and that the property had been adjudicated to the appellees as heirs of Lopez by the court of First Instance,
since 1949.
The Court of Appeals found that the deed of donation was prepared by the Justice of the Peace of Mati, Davao, before
whom it was signed and ratified on the date aforesaid. At the time, the appellant Liguez was a minor, only 16 years of age.
While the deed recites—
That the DONOR, Salvador P. Lopez, for and in the consideration of his love and affection for the said
DONEE, Conchita Liguez, and also for the good and valuable services rendered to the DONOR by the
DONEE, does by these presents, voluntarily give grant and donate to the said donee, etc. (Paragraph 2,
Exhibit "A")
the Court of Appeals found that when the donation was made, Lopez had been living with the parents of appellant for
barely a month; that the donation was made in view of the desire of Salvador P. Lopez, a man of mature years, to have
sexual relations with appellant Conchita Liguez; that Lopez had confessed to his love for appellant to the instrumental
witnesses, with the remark that her parents would not allow Lopez to live with her unless he first donated the land in
question; that after the donation, Conchita Liguez and Salvador P. Lopez lived together in the house that was built upon
the latter's orders, until Lopez was killed on July 1st, 1943, by some guerrillas who believed him to be pro-Japanese.
It was also ascertained by the Court of Appeals that the donated land originally belonged to the conjugal partnership of
Salvador P. Lopez and his wife, Maria Ngo; that the latter had met and berated Conchita for living maritally with her
husband, sometime during June of 1943; that the widow and children of Lopez were in possession of the land and made
improvements thereon; that the land was assessed in the tax rolls first in the name of Lopez and later in that of his widow.;
and that the deed of donation was never recorded.
Upon these facts, the Court of Appeals held that the deed of donation was inoperative, and null and void (1) because the
husband, Lopez, had no right to donate conjugal property to the plaintiff appellant; and (2) because the donation was
tainted with illegal cause or consideration, of which donor and donee were participants.
Issue:Whether or not the deed of donation is void.
Held:Partly Yes. In our opinion, the Court of Appeals erred in applying to the present case the pari delicto rule. First,
because it can not be said that both parties here had equal guilt when we consider that as against the deceased Salvador P.
Lopez, who was a man advanced in years and mature experience, the appellant was a mere minor, 16 years of age, when
the donation was made; that there is no finding made by the Court of Appeals that she was fully aware of the terms of the
bargain entered into by and Lopez and her parents; that, her acceptance in the deed of donation (which was authorized by
Article 626 of the Old Civil Code) did not necessarily imply knowledge of conditions and terms not set forth therein; and
that the substance of the testimony of the instrumental witnesses is that it was the appellant's parents who insisted on the
donation before allowing her to live with Lopez. These facts are more suggestive of seduction than of immoral bargaining
on the part of appellant. It must not be forgotten that illegality is not presumed, but must be duly and adequately proved.
In the second place, the rule that parties to an illegal contract, if equally guilty, will not be aided by the law but will both be
left where it finds them, has been interpreted by this Court as barring the party from pleading the illegality of the bargain
either as a cause of action or as a defense. Memo auditor propriam turpitudinem allegans. The text of the articles makes it
plain that the donation made by the husband in contravention of law is not void in its entirety, but only in so far as it
prejudices the interest of the wife. In this regard, as Manresa points out (Commentaries, 5th Ed., pp. 650-651, 652-653),
the law asks no distinction between gratuitous transfers and conveyances for a consideration.
To determine the prejudice to the widow, it must be shown that the value of her share in the property donated can not be
paid out of the husband's share of the community profits. The requisite data, however, are not available to us and
necessitate a remand of the records to the court of origin that settled the estate of the late Salvador P. Lopez.
The situation of the children and forced heirs of Lopez approximates that of the widow. As privies of their parent, they are
barred from invoking the illegality of the donation. But their right to a legitime out of his estate is not thereby affected,
since the legitime is granted them by the law itself, over and above the wishes of the deceased. Hence, the forced heirs are
entitled to have the donation set aside in so far as in officious: i.e., in excess of the portion of free disposal (Civil Code of
1889, Articles 636, 654) computed as provided in Articles 818 and 819, and bearing in mind that "collationable gifts"
under Article 818 should include gifts made not only in favor of the forced heirs, but even those made in favor of strangers,
as decided by the Supreme Court of Spain in its decisions of 4 May 1899 and 16 June 1902. So that in computing the
legitimes, the value of the property to herein appellant, Conchita Liguez, should be considered part of the donor's estate.
Once again, only the court of origin has the requisite date to determine whether the donation is inofficious or not.
With regard to the improvements in the land in question, the same should be governed by the rules of accession and
possession in good faith, it being undisputed that the widow and heirs of Lopez were unaware of the donation in favor of
the appellant when the improvements were made.
Case: Philippine Banking Corp (representing the Estate of Justinia Santos Y Faustino) vs. Lui She (in her own
behalf and as administratrix of the intestate estate of Wong Heng), Dec. 18, 1967, J. Castro.
Facts:On November 15, 1957, the parties entered into the lease contract for 50 years: that ten days after, that is on
November 25, they amended the contract so as to make it cover the entire property of Justina Santos; that on December 21,
less than a month after, they entered into another contract giving Wong Heng the option to buy the leased premises should
his pending petition for naturalization be granted; that on November 18, 1958, after failing to secure naturalization and
after finding that adoption does not confer the citizenship of the adopting parent on the adopted, the parties entered into
two other contracts extending the lease to 99 years and fixing the period of the option to buy at 50 years.
which indubitably demonstrate that each of the contracts in question was designed to carry out Justina Santos' expressed
wish to give the land to Wong and thereby in effect place its ownership in alien hands,1 about which we shall have
something more to say toward the end of this resolution. We concluded that "as the lease contract was part of a scheme to
violate the Constitution it suffers from the same infirmity that renders the other contracts void and can no more be saved
from illegality than the rest of the contracts."
Issue:Whether or not the contract is valid.
Held: NO. As for the 1959 wills, it is said that they manifest a desire to abide by the law, as is evident from the statement
therein that Wong's right to buy the land be allowed "anytime he or his children should be entitled to buy lands in the
Philippines (i.e., upon becoming Filipino citizens)". It seems obvious, however, that this is nothing but a reiteration of the
substance of the lease contract and conditional option to buy which in compensation, as our decision demonstrates, amount
to a conveyance, the protestation of compliance with the law notwithstanding. In cases like the one at bar, motives are
seldom avowed and avowals are not always candid. The problem is not, however, insuperable, especially as in this case the
very witnesses for the defendant-appellant testified that —
Considering her age, ninety (90) years old at the time and her condition, she is a wealthy woman, it is just
natural when she said. "This is what I want and this will be done." In particular reference to this contract of
lease, when I said "This is not proper, she said — 'you just go ahead, you prepare that, I am the owner, and if
there is illegality, I am the only one that can question the illegality.'"6
The ambition of the old woman before her death, according to her revelation to me, was to see to it that these
properties be enjoyed, even to own them, by Wong Heng because Doña Justina told me that she did not have
any relatives, near or far, and she considered Wong Heng as a son and his children her grandchildren;
especially her consolation in life was when she would hear the children reciting prayers in Tagalog.7
She was very emphatic in the care of the seventeen (17) dogs and of the maids who helped her much, and she told me to
see to it that no one could disturb Wong Heng from those properties. That is why we thought of adoption, believing that
thru adoption Wong Heng might acquired Filipino citizenship, being the adopted child of a Filipino citizen.
Case: Heirs of Marciana Avila vs. CA and Aladino Ch. Bacarrisas, Nov. 14, 1986, J. Paras.
Facts:In 1939, the Court of First Instance of Misamis Oriental, as a cadastral court, adjudicated Lots 594 and 828 of the
Cadastral Survey of Cagayan to Paz Chavez. But because Paz Chavez failed to pay the property taxes of Lot 594, the
government offered the same for sale at a public auction. Marciana G. Avila, a teacher, wife of Leonardo Avila and the
mother of the herein petitioners, participated in and won the bidding. Despite the provision of Section 579 of the Revised
Administrative Code prohibiting public school teachers from buying delinquent properties, nobody, not even the
government questioned her participation in said auction sale. In fact on February 20, 1940, after the expiration of the
redemption period, the Provincial Treasurer executed in her favor the final bill of sale. (Rollo, pp. 10-11).
Sometime in 1947, OCT Nos. 100 and 101, covering said Lots 594 and 828, were issued in favor of Paz Chavez. In
opposition thereto, private respondents filed a petition for review of the decrees on August 25, 1947 at the Court of First
Instance of Misamis Oriental, Branch II, in Cadastral Case No. 17, Lot No. 594 entitled "The Director of Lands, Applicant
v. Atanacia Abalde, et al., Claimants in Re: Petition for Review of Decree, Marciana G. Avila, Petitioner vs. Paz Chavez,
Respondents."
Issue:Whether or not the purchase of Avila is valid.
Held: NO. While it is true that Marciana Avila, their mother and predecessor-in-interest, purchased the questioned
property at a public auction conducted by the government; paid the purchase price; and was issued a final bill of sale after
the expiration of the redemption period, it is however undisputed that such purchase was prohibited under Section 579 of
the Revised Administrative Code, as amended, which provides:
Section 579. Inhibition against purchase of property at tax sale.-Official and employees of the
Government of the Republic of the Philippines are prohibited from purchasing, directly or
indirectly, from the Government, any property sold by the Government for the non-payment of
any public tax. Any such purchase by a public official or employee shall be void.
Thus, the sale to her of Lot 594 is void.
On the other hand, under Article 1409 of the Civil Code, a void contract is inexistent from the beginning. It cannot be
ratified neither can the right to set up the defense of its illegality be waived. (Arsenal, et al. vs, The Intermediate Appellate
Court. et al., G.R. No. 66696, July 14, 1986). Moreover, Marciana Avila was a party to an illegal transaction, and
therefore, under Art. 1412 of the Civil Code, she cannot recover what she has given by reason of the contract or ask for the
fulfillment of what has been promised her.
Furthermore, in a registration case, the judgment confirming the title of the applicant and ordering its registration in his
name necessarily carries with it the delivery of possession which is an inherent element of the right of ownership.
(Abulocion et al. v. CFI of Iloilo, et al., 100 Phil. 553 [1956]). Hence, a writ of possession may be issued not only against
the person who has been defeated in a registration case but also against anyone unlawfully and adversely occupying the
land or any portion thereof during the land registration proceedings up to the issuance of the final decree. It is the duty of
the registration court to issue said writ when asked for by the successful claimant. (Demorar v. Ibañez, etc., et al., 97 Phil.
72 [1955]; Abulocion et al v. CFI of Iloilo, et al., supra).
Under the circumstances, possession cannot be claimed by petitioners, because their predecessor-in-interest besides being
at fault is not the successful claimant in the registration proceedings and hence not entitled to a writ of possession. As
correctly stated by the Court of Appeals when respondent Court issued the writ of execution as to Lot 594, there really was
no legal basis for the same, for Avila had not secured a decree, nor a judgment of confirmation of title over said lot.
Case: Teja Marketing And/Or Angel Jaucian vs. IAC and Pedro N. Nale, March 9, 1987, J. Paras.
Facts:On May 9, 1975, the defendant bought from the plaintiff a motorcycle with complete accessories and a sidecar in the
total consideration of P8,000.00 as shown by Invoice No. 144 (Exh. "A"). The records of the LTC show that the
motorcycle sold to the defendant was first mortgaged to the Teja Marketing by Angel Jaucian though the Teja Marketing
and Angel Jaucian are one and the same, because it was made to appear that way only as the defendant had no franchise of
his own and he attached the unit to the plaintiff's MCH Line. The agreement also of the parties here was for the plaintiff to
undertake the yearly registration of the motorcycle with the Land Transportation Commission. Pursuant to this agreement
the defendant on February 22, 1976 gave the plaintiff P90.00, the P8.00 would be for the mortgage fee and the P82.00 for
the registration fee of the motorcycle. The plaintiff, however failed to register the motorcycle on that year on the ground
that the defendant failed to comply with some requirements such as the payment of the insurance premiums and the
bringing of the motorcycle to the LTC for stenciling, the plaintiff saying that the defendant was hiding the motorcycle
from him. Lastly, the plaintiff explained also that though the ownership of the motorcycle was already transferred to the
defendant the vehicle was still mortgaged with the consent of the defendant to the Rural Bank of Camaligan for the reason
that all motorcycle purchased from the plaintiff on credit was rediscounted with the bank.
It also appears and the Court so finds that defendant purchased the motorcycle in question, particularly for the purpose of
engaging and using the same in the transportation business and for this purpose said trimobile unit was attached to the
plaintiffs transportation line who had the franchise, so much so that in the registration certificate, the plaintiff appears to
be the owner of the unit. Furthermore, it appears to have been agreed, further between the plaintiff and the defendant, that
plaintiff would undertake the yearly registration of the unit in question with the LTC. Thus, for the registration of the unit
for the year 1976, per agreement, the defendant gave to the plaintiff the amount of P82.00 for its registration, as well as the
insurance coverage of the unit.
Eventually, petitioner Teja Marketing and/or Angel Jaucian filed an action for "Sum of Money with Damages" against
private respondent Pedro N. Nale in the City Court of Naga City. The City Court rendered judgment in favor of petitioner.
CA affirmed.
Issue:Whether or not Teja Marketing can recover from Pedro Nale.
Held:However, as the purchase of the motorcycle for operation as a trimobile under the franchise of the private respondent
Jaucian, pursuant to what is commonly known as the "kabit system", without the prior approval of the Board of
Transportation (formerly the Public Service Commission) was an illegal transaction involving the fictitious registration of
the motor vehicle in the name of the private respondent so that he may traffic with the privileges of his franchise, or
certificate of public convenience, to operate a tricycle service, the parties being in pari delicto, neither of them may bring
an action against the other to enforce their illegal contract [Art. 1412 (a), Civil Code].
Unquestionably, the parties herein operated under an arrangement, commonly known as the "kabit system" whereby a
person who has been granted a certificate of public convenience allows another person who owns motor vehicles to operate
under such franchise for a fee. A certificate of public convenience is a special privilege conferred by the government.
Abuse of this privilege by the grantees thereof cannot be countenanced. The "kabit system" has been Identified as one of
the root causes of the prevalence of graft and corruption in the government transportation offices.
Although not outrightly penalized as a criminal offense, the kabit system is invariably recognized as being contrary to
public policy and, therefore, void and in existent under Article 1409 of the Civil Code. It is a fundamental principle that the
court will not aid either party to enforce an illegal contract, but will leave both where it finds then. Upon this premise it
would be error to accord the parties relief from their predicament. Article 1412 of the Civil Code denies them such aid. It
provides:
Art. 1412. If the act in which the unlawful or forbidden cause consists does not constitute a
criminal offense, the following rules shall be observed:
1. When the fault is on the part of both contracting parties, neither may recover that he has given
by virtue of the contract, or demand, the performance of the other's undertaking.
The defect of in existence of a contract is permanent and cannot be cured by ratification or by prescription. The mere lapse
of time cannot give efficacy to contracts that are null and void.
Case: Aurelio Briones vs. Primitivo Cammayo, et al., Oct. 4, 1971, J. Dizon.
Facts:Defendants executed the real estate mortgage, as security for the loan of P1,200.00 given to defendant Primitivo P.
Cammayo upon the usurious agreement that defendant pays to the plaintiff and that the plaintiff reserve and secure, as in
fact plaintiff reserved and secured himself, out of the alleged loan of P1,500.00 as interest the sum of P300.00 for one year.
That although the mortgage contract was executed for securing the payment of P1,500.00 for a period of one year, without
interest, the truth and the real fact is that plaintiff delivered to the defendant Primitivo P. Cammayo only the sum of
P1,200.00 and withheld the sum of P300.00 which was intended as advance interest for one year. That on account of said
loan of P1,200.00, defendant Primitivo P. Cammayo paid to the plaintiff during the period from October 1955 to July 1956
the total sum of P330.00 which plaintiff, illegally and unlawfully refuse to acknowledge as part payment of the account but
as in interest of the said loan for an extension of another term of one year.
That said contract of loan entered into between plaintiff and defendant Primitivo P. Cammayo is a usurious contract and is
contrary to law, morals, good customs, public order or public policy and is, therefore, in existent and void from the
beginning (Art. 1407 Civil Code) Hence, Aurelio cannot recover the principal obligation.
Issue:Whether the creditor is entitled to collect from the debtor the amount representing the principal obligation.
Held: YES. We do not agree with such reasoning, Article 1411 of the New Civil Code is not new; it is the same as Article
1305 of the Old Civil Code. Therefore, said provision is no warrant for departing from previous interpretation that, as
provided in the Usury Law (Act No. 2655, as amended), a loan with usurious interest is not totally void only as to the
interest.
True, as stated in Article 1411 of the New Civil Code, the rule of pari delicto applies where a contract's nullity proceeds
from illegality of the cause or object of said contract.
However, appellants fail to consider that a contract of loan with usurious interest consists of principal and accessory
stipulations; the principal one is to pay the debt; the accessory stipulation is to pay interest thereon.
And said two stipulations are divisible in the sense that the former can still stand without the latter. Article 1273, Civil
Code, attests to this: "The renunciation of the principal debt shall extinguish the accessory obligations; but the waiver of
the latter shall leave the former in force."
The question therefore to resolve is whether the illegal terms as to payment of interest likewise renders a nullity the
legal terms as to payments of the principal debt. Article 1420 of the New Civil Code provides in this regard: "In
case of a divisible contract, if the illegal terms can be separated from the legal ones, the latter may be enforced."
In simple loan with stipulation of usurious interest, the prestation of the debtor to pay the principal debt, which is the cause
of the contract (Article 1350, Civil Code), is not illegal. The illegality lies only as to the prestation to pay the stipulated
interest; hence, being separable, the latter only should be deemed void, since it is the only one that is illegal.