G.R. No.

108052 July 24, 1996

PHILIPPINE NATIONAL BANK, petitioner,
vs.
THE COURT OF APPEALS and RAMON LAPEZ, doing business under the name and
style SAPPHIRE SHIPPING, respondents.

Doctrine: In order that compensation may prosper, it is necessary a) that each one of the
obligors be bound principally, and that he be at the same time a principal creditor of the
other; b) that both debts consists in a sum of money, or if the things due are consumable, they
be of the same kind, and also of the same quality if the latter has been stated; c) that the two
debts be due; d) that they be liquidated and demandable; e) that over neither of them there by
any retention or controversy, commenced by third persons and communicated in due time to
the debtor (Article 1279 of the Civil Code).

FACTS:
The Philippine National Bank (PNB) applied/appropriated the amounts of $2,627.11 and
P34,340.38 from remittances of the Ramon Lapez’s principals abroad. These were admitted
by the PNB, subject to the affirmative defense of compensation for what is owing to it on the
principle of solutio indebiti. The first remittance was made by the NCB of Jeddah for the
benefit of the Ramon Lapez, to the credited to his account at Citibank, Greenhills Branch; the
second was from Libya, and was intended to be deposited at Lapez’s account with PNB.
Lapez made a written demand upon PNB for remittance of the equivalent of $2,627.11 by
means of a letter. This was answered by the latter inviting the former to come for a
conference. There were indeed two instances in the past, one in November 1980 and the other
in January 1981 when Ramon Lapez’s account No. 830-2410 was doubly credited with the
equivalents of $5,679.23 and $5,885.38, respectively, which amounted to an aggregate
amount of P87,380.44. PNB’s evidence on this point, were never refuted nor impugned by
the former. He claims, however, that Lapez’s claim has prescribed. PNB made a demand
upon the Lapez for refund of the double or duplicated credits erroneously made on latter’s
account, by means of a letter dated October 23, 1986 or 5 years and 11 months from
November 1980, and 5 years and 9 months from January 1981. Such letter was answered by
Lapez on December 2, 1986. Ramon Lapez’s letter was likewise replied to by PNB. The
deduction of P34,340.58 was made by PNB not without the knowledge and consent of the
Lapez, who was issued a receipt No. 857576 dated February 18, 1987 by PNB. There is no
question that the two erroneous double payments made to Lapez’s accounts in 1980 and 1981
created an extra-contractual obligation on the part of Lapez in favor of PNB, under the
principle of solutio indebiti, that if something is received when there is no right to demand it,
and it was unduly delivered through mistake, the obligation to return it arises.

ISSUE:
Whether or not PNB was legally justified in making the compensation or set-off against the
two remittances coursed through it in favor of Ramon Lapez to recover on the double credits
it erroneously made in 1980 and 1981, based on the principle solutio indebiti.

RULING:
No, PNB was not legally justified in making the compensation or set-off against the two
remittances. Article 1279 of the Civil Code provides, that in order that compensation may
prosper, it is necessary a) that each one of the obligors be bound principally, and that he be at
the same time a principal creditor of the other; b) that both debts consists in a sum of money,
or if the things due are consumable, they be of the same kind, and also of the same quality if
the latter has been stated; c) that the two debts be due; d) that they be liquidated and
demandable; e) that over neither of them there by any retention or controversy, commenced
by third persons and communicated in due time to the debtor. In the case of the $2,627.11,
requisites Nos. 2 through 5 are apparently present, for both debts consist in a sum of money,
are both due, liquidated and demandable, and over neither of them is there a retention or
controversy commenced by third persons and communicated in due time to the debtor. The
Court is of the opinion that the parties are not both principally bound with respect to the
$2,627.11 from Jeddah; neither are they at the same time principal creditor of the other.
Therefore, as matters stand, the parties' obligations are not subject to compensation or set off
under Art. 1279 of the Civil Code, for the reason that the defendant is not a principal debtor
nor is the plaintiff a principal creditor insofar as the amount of $2,627.11 is concerned. They
are debtor and creditor only with respect to the double payments; but are trustee-beneficiary
as to the fund transfer of $2,627.11. Only the plaintiff is principally bound as a debtor of the
defendant to the extent of the double credits. On the other hand, the defendant was an implied
trustee, who was obliged to deliver to the Citibank for the benefit of the plaintiff the sum of
$2,627.11. Hence, it is submitted that the set-off or compensation of $2,627.11 against the
double payments to plaintiff's account is not in accordance with law. On this point, the Court
finds the plaintiff's theory of agency to be untenable. For one thing, there was no express
contract of agency. On the other hand, were we to infer that there was an implied agency, the
same would not be between the plaintiff and defendant, but rather, between the National
Commercial Bank of Jeddah as principal on the one hand, and the defendant as agent on the
other. Thus, in case of violation of the agency, the cause of action would accrue to the NCB
and not to the plaintiff.
 G.R. No. 167434 February 19, 2007
SPOUSES RAMON M. NISCE and A. NATIVIDAD PARAS-NISCE, Petitioners,
vs.
EQUITABLE PCI BANK, INC., Respondent.

Doctrine: Compensation takes effect by operation of law when all the requisites mentioned
in Article 1279 of the New Civil Code are present and extinguishes both debts to the
concurrent amount even though the creditors and debtors are not aware of the compensation.
Legal compensation operates even against the will of the interested parties and even without
their consent. Such compensation takes place ipso jure; its effects arise on the very day on
which all requisites concur. Under Article 1278 of the New Civil Code, compensation shall
take place when two persons, in their own right, are creditors and debtors of each other.

FACTS:
Equitable PCI Bank as creditor-mortgagee filed a petition for extrajudicial foreclosure sought
to foreclose the real estate mortgage contracts executed by the spouses Ramon and Natividad
Nisce over two parcels of land one dated February 26, 1974; two (2) sets of "Additional Real
Estate Mortgage" dated September 27, 1978 and June 3, 1996; and an "Amendment to Real
Estate Mortgage" dated February 28, 2000. The mortgage contracts were executed by the
spouses Nisce to secure their obligation under the two Promissory Notes, including a
Suretyship Agreement executed by Natividad. The obligation of the Nisce spouses totaled
₱34,087,725.76, adding the ₱17,422,285.99 and surety of US$57,306.59 and ₱16,665,439.77.
However, the Ex-Officio Sheriff set the sale at public auction. The Nisce spouses filed before
the RTC of Makati City a complaint for nullity of the Suretyship Agreement, damages and
legal compensation with prayer for injunctive relief against the Bank and the Ex-Officio
Sheriff. The Nisce spouse were surprised when they received a letter from the Bank
demanding payment of their loan account, and later a petition for extrajudicial foreclosure.
They insisted, however, that the suretyship agreement was null and void. The spouses Nisce
likewise alleged that since they and the Bank were creditors and debtors with respect to each
other, their obligations should have been offset by legal compensation to the extent of their
account with the Bank. To support their plea for a writ of preliminary and prohibitory
injunction, the spouses Nisce alleged that the amount for which their property was being sold
at public auction which is ₱34,087,725.76 was grossly excessive; the US dollar deposit of
Natividad with PCI Capital Asia Ltd. Hong Kong, and the obligation covered by the
suretyship agreement had not been deducted. They insisted that their property rights would be
violated if the sale at public auction would push through.

ISSUE:
Whether or not legal compensation may operate to extinguish the petitioners ’obligation.

RULING:
Yes, legal compensation may operate to extinguish the petitioners’ obligation. Compensation
takes effect by operation of law when all the requisites mentioned in Article 1279 of the New
Civil Code are present and extinguishes both debts to the concurrent amount even though the
creditors and debtors are not aware of the compensation. Legal compensation operates even
against the will of the interested parties and even without their consent. Such compensation
takes place ipso jure; its effects arise on the very day on which all requisites concur. Under
Article 1278 of the New Civil Code, compensation shall take place when two persons, in
their own right, are creditors and debtors of each other. In order that compensation may be
proper, petitioners were burdened to establish a.) that each one of the obligors be bound
principally, and that he be at the same time a principal creditor of the other; b.) that both
debts consist in a sum of money, or if the things due are consumable, they be of the same
kind, and also of the same quality if the latter has been stated; c.) that the two debts be due;
d.) that they be liquidated and demandable; e.) that over neither of them there be any
retention or controversy, commenced by third persons and communicated in due time to the
debtor. As its minimum, compensation presupposes two persons who, in their own right and
as principals, are mutually indebted to each other respecting equally demandable and
liquidated obligations over any of which no retention or controversy commenced and
communicated in due time to the debtor exists. Compensation, be it legal or conventional,
requires confluence in the parties of the characters of mutual debtors and creditors, although
their rights as such creditors or their obligations as such debtors need not spring from one and
the same contract or transaction. When petitioner Natividad Nisce deposited her
US$20,500.00 with the PCIB on July 19, 1984, PCIB became the debtor of petitioner. Indeed,
a certificate of deposit is a written acknowledgment by a bank or borrower of the receipt of a
sum of money or deposit which the Bank or borrower promises to pay to the depositor, to the
order of the depositor; or to some other person; or to his order whereby the relation of debtor
and creditor between the bank and the depositor is created. The issuance of a certificate of
deposit in exchange for currency creates a debtor-creditor relationship. Admittedly, PCI
Capital is a subsidiary of respondent Bank. Even then, PCI Capital has an independent and
separate juridical personality from that of the respondent Bank, its parent company; hence,
any claim against the subsidiary is not a claim against the parent company and vice versa.
The evidence on record shows that PCIB, which had been merged with Equitable Bank, owns
almost all of the stocks of PCI Capital. However, the fact that a corporation owns all of the
stocks of another corporation, taken alone, is not sufficient to justify their being treated as
one entity. If used to perform legitimate functions, a subsidiary’s separate existence shall be
respected, and the liability of the parent corporation, as well as the subsidiary shall be
confined to those arising in their respective business. A corporation has a separate personality
distinct from its stockholders and from other corporations to which it may be conducted. This
separate and distinct personality of a corporation is a fiction created by law for convenience
and to prevent injustice.
 G.R. No. L-29981 April 30, 1971
EUSEBIO S. MILLAR, petitioner,
vs.
THE HON. COURT OF APPEALS and ANTONIO P. GABRIEL, respondents.

Doctrine: The stipulation for the payment of the obligation under the terms of the deed of
chattel mortgage serves only to provide an express and specific method for its extinguishment
payment in two equal installments. The defense of implied novation requires clear and
convincing proof of complete incompatibility between the two obligations. The law requires
no specific form for an effective novation by implication. The test is whether the two
obligations can stand together. If they cannot, incompatibility arises, and the second
obligation novates the first. If they can stand together, no incompatibility results and novation
does not take place.

FACTS:
The petitioner, Eusebio S. Millar obtained a favorable judgment from the Court of First
Instance of Manila, in civil case 27116, condemning Antonio P. Gabriel to pay him the sum
of P1,746.98 with interest at 12% per annum from the date of the filing of the complaint, the
sum of P400 as attorney's fees, and the costs of suit. From the said judgment, the respondent,
Antonio P. Gabriel appealed to the Court of Appeals which, however, dismissed the appeal.
Subsequently, after remand by the Court of Appeals of the case, the petitioner moved ex parte
in the court of origin for the issuance of the corresponding writ of execution to enforce the
judgment. Acting upon the motion, the lower court issued the writ of execution applied for,
on the basis of which the sheriff of Manila seized the respondent's Willy's Ford jeep. The
respondent, however, pleaded with the petitioner to release the jeep under an arrangement
whereby the respondent, to secure the payment of the judgement debt, agreed to mortgage the
vehicle in favor of the petitioner. The petitioner agreed to the arrangement; thus, the parties,
executed a chattel mortgage on the jeep in the amount of P1,700.00 pesos, Philippine
currency, which mortgagor Antonio Gabriel agrees to pay on March 31, 1957 an amount of
P850 pesos and on April 30, 1957 another P850.00 pesos. Upon failure of the respondent to
pay the first installment due on March 31, 1957, the petitioner obtained an alias writ of
execution. This writ which the sheriff served on the respondent only on May 30, 1957 after
the lapse of the entire period stipulated in the chattel mortgage for the respondent to comply
with his obligation was returned unsatisfied. Thereafter, the lower court, at the instance of the
petitioner, issued several alias writs and pursuant to the last writ, the sheriff levied on certain
personal properties belonging to the respondent, and then scheduled them for execution sale.
However, the respondent filed an urgent motion for the suspension of the execution sale on
the ground of payment of the judgment obligation. The lower court ruled that novation had
taken place, and that the parties had executed the chattel mortgage only to secure or get better
security for the judgment. The respondent duly appealed the aforesaid order to the Court of
Appeals, which set aside the order of execution, holding that the subsequent agreement of the
parties impliedly novated the judgment obligation in civil case 27116.

ISSUE:
Whether or not the subsequent agreement of the parties as embodied in the deed of chattel
mortgage impliedly novated the judgment obligation in civil case 27116.

HELD:
No, the subsequent agreement of the parties as embodied in the deed of chattel mortgage does
not impliedly novated the judgment obligation in civil case 27116. The Court ruled that no
substantial incompatibility between the mortgage obligation and the judgment liability of the
respondent sufficient to justify a conclusion of implied novation. The stipulation for the
payment of the obligation under the terms of the deed of chattel mortgage serves only to
provide an express and specific method for its extinguishment payment in two equal
installments. The chattel mortgage simply gave the respondent a method and more time to
enable him to fully satisfy the judgment indebtedness. The chattel mortgage agreement in no
manner introduced any substantial modification or alteration of the judgment. Instead of
extinguishing the obligation of the respondent arising from the judgment, the deed of chattel
mortgage expressly ratified and confirmed the existence of the same, amplifying only the
mode and period for compliance by the respondent. The unmistakable terms of the deed of
chattel mortgage reveal that the parties constituted the chattel mortgage purposely to secure
the satisfaction of the then existing liability of the respondent arising from the judgment
against him in civil case 27116. As a security for the payment of the judgment obligation, the
chattel mortgage agreement effectuated no substantial alteration in the liability of the
respondent. The defense of implied novation requires clear and convincing proof of complete
incompatibility between the two obligations. The law requires no specific form for an
effective novation by implication. The test is whether the two obligations can stand together.
If they cannot, incompatibility arises, and the second obligation novates the first. If they can
stand together, no incompatibility results and novation does not take place. The Court do not
see any substantial incompatibility between the two obligations as to warrant a finding of an
implied novation. Nor do they find satisfactory proof showing that the parties, by explicit
terms, intended the full discharge of the respondent's liability under the judgment by the
obligation assumed under the terms of the deed of chattel mortgage so as to justify a finding
of express novation.
 G.R. No. L-25897 August 21, 1976
AGUSTIN DORMITORIO and LEONCIA D. DORMITORIO, petitioner
vs.
HONORABLE JOSE FERNANDEZ, Judge of the Court of First Instance of Negros
Occidental, Branch Bacolod City, and SERAFIN LAZALITA, respondents.

Doctrine: After judgment has become final, facts and circumstances transpire which render
its execution impossible or unjust, the interested party may ask the court to modify or alter
the judgment to harmonize the same with justice and the facts.

FACTS:
Municipality of Victorias owned a several parcels of lands in Victorias, Negros Occidental,
known as Lots Nos. 102 and 120 and 138 and 102-New, the lots were sold by the
Municipality, either in cash or installment for ten (10) years at one peso per square meter.
The plaintiff Serafin Lazalita, bought from the Municipality of Victorias, Lot No. 1, Block 16
of the consolidated-subdivision plan, payable in installment at one peso per square meter, and
in the year 1958, upon full payment until about eight continuous years, plaintiff had been in
full and peaceful possession of the said land, and he introduced permanent and valuable
improvements. In 1955, however, the spouses Agustin Dormitorio and Leoncia D.
Dormitorio, purchased also, from the defendant Municipality of Victorias, their lot known as
Lot 2, Block 16, of the same consolidation-subdivision plan, in cash, at one peso per square
meter. Immediately thereafter, the Dormitorios, obtained a transfer Certificate of Title for
their property, from the Office of the Register of Deeds, Bacolod. However, the spouses
Dormitorio, have not taken actual possession of the land, they have purchased from the
defendant Municipality of Victorias, up to the present. On December 12, 1958, the spouses
Dormitorio, brought a suit against the plaintiff Lazalita, for Ejectment and the conflict
between them was made known to the office of the Municipal Mayor and the Council of
Victorias, who tried to settle the matter between the parties Dormitorio and Lazalita. Through
a private Land Surveyor, it was found out, that the Lot sold by the Municipality of Victorias,
to the plaintiff, was converted into the new Municipal Road known as "Jover Street" and that
the lot presently occupied by him, is supposed to be the lot No. 2, bought by the spouses
Dormitorio from the Municipality of Victorias; and so, availing of the said discovery, the
Court of First Instance ordered the plaintiff Lazalita to vacate the land and to pay a monthly
rental of P20.00, to said Dormitorio, besides his Attorney's fees. The Municipality of
Victorias, is willing to amicably settle the case, by giving the plaintiff another lot, if they
could open their newly proposed subdivision, or pay back Lazalita the amount necessary and
just for plaintiff to acquire another lot for his residence, and for the expenses of transferring
his present residential house thereto. The parties in the ejectment case agreed that the
decision in that case would no longer be enforced and executed in relation to the amicable
settlement reached by Lazalita and the municipality. However, by means of fraud,
misrepresentation and concealment of the true facts of the case, the spouses were able to
mislead the court thru an ex-parte motion to issue by mistake an Order for the issuance of a
Writ of Execution by making the court believe that the former decision was still enforceable
and executory. The CFI ruled that the compromise agreement as evidenced by the agreed
stipulation of facts was a clear proof of animus novandi and superseded the first court order
in the ejectment case.
ISSUE:
Whether or not the judgment of the court had been novated and thus can no longer be
enforced.

RULING:
Yes, the judgment of the court had been novated and thus can no longer be enforced. The
Court ruled that the agreement filed by the parties in the ejectment case created as between
them new rights and obligations which naturally superseded the judgment of the municipal
court. Hence, it is plain that in no case were the subsequent arrangements entered into with
any unqualified intention to discard or replace the judgment in favor of the plaintiff-appellee;
and without such intent or animus novandi, no substitution of obligations could possibly take
place. The presence of the animus novandi is undeniable. Nor is there anything novel in such
an approach. As early as Molina v. De la Riva the principle has been laid down that, when,
after judgment has become final, facts and circumstances transpire which render its execution
impossible or unjust, the interested party may ask the court to modify or alter the judgment to
harmonize the same with justice and the facts. Again, the present case is far stronger, for
there is a later decision expressly superseding the earlier one relied upon on which the writ of
execution thereafter set aside was based. Nor can it be denied that as the later decision was
the result of a compromise, it had the effect of res judicata. The parties were, therefore, bound
by it. There was thus an element of bad faith when petitioners did try to evade its terms.
Respondent Judge, however, upon being duly informed, set matters right. There is no merit
likewise to the point raised by petitioners that they were not informed by respondent Judge of
the petition by private respondent to set aside the writ of execution. The motion for
reconsideration was thereafter denied. Under the circumstances, the failure to give notice to
petitioners had been cured. That is a well-settled doctrine.
 G.R. No. L-18411 December 17, 1966
MAGDALENA ESTATES, INC., plaintiff-appellee,
vs.
ANTONIO A. RODRIGUEZ and HERMINIA C. RODRIGUEZ, defendants-
appellants.

Doctrine: For the rule to be settled that novation is presumed and sustained, it needs to be
established that the old and new contracts are incompatible in all points, or that the will to
novate appears by express agreement of the parties or in acts of similar import. An obligation
to pay a sum of money is not novated, in a new instrument wherein the old is ratified, by
changing only the terms of payment and adding other obligations not incompatible with the
old one, or wherein the old contract is merely supplemented by the new one.

FACTS:
The Appellants Antonio A. Rodriguez and Herminia C. Rodriguez bought from the appellee
Magdalena Estates, Inc. a parcel of land in Quezon City known as Lot 7-K-2-G, Psd-26193.
In view of an unpaid balance of P5,000.00 on account of the purchase price of the lot, the
appellants executed promissory note on January 4, 1957. On the same date, the appellants and
the Luzon Surety Co., Inc. executed a bond in favor of the appellee wherein the Surety will
undertake the compliance with the obligation to pay the amount of P 5,000 the unpaid
balance of the purchase price of the parcel of land within 60 days from Jan. 7, 1957, also it
was stated that the Surety shall be notified in writing within 10 days from moment of default
otherwise, their undertaking will automatically be null and void. On June 20, 1958, when the
obligation of the appellants became due and demandable, the Luzon Surety Co., Inc. paid to
the appellee the sum of P5,000.00. Subsequently, the appellee demanded from the appellants
the payment of P655.89 corresponding to the alleged accumulated interests on the principal
of P5,000.00. Due to the refusal of the appellants to pay the said interest, the appellee started
this suit in the Municipal Court of Manila to enforce the collection thereof. The said court, on
February 5, 1959, rendered judgment in favor of the appellee and against the appellants,
ordering the latter to pay jointly and severally the appellee the sum of P655.89 with interest
thereon at the legal rate from November 10, 1958, the date of the filing of the complaint, until
the whole amount is fully paid. Not satisfied with that judgment, appellants appealed to the
Court of First Instance of Manila, where the case was submitted for decision on the pleadings
and appealed to the Supreme Court that Court of First Instance of Manila erred in not finding
and declaring that the obligation of the defendants-appellants in favor of the plaintiff-appellee
was totally extinguished by payment and/or condonation.

ISSUE:
Whether or not the Magdalena Estates’s unqualified acceptance of payment made by the
Luzon Surety Co. of P 5,000 amounted to a waiver or condonation on its part.

RULING:
No, Magdalena Estates’s unqualified acceptance of payment made by the Luzon Surety Co.
of P 5,000 does not amounted to a waiver or condonation on its part. The Court do not agree
with the contention of the appellants. It is very clear in the promissory note that the principal
obligation is the balance of the purchase price of the parcel of land known as Lot 7-K-2-G,
Psd-26193, which is the sum of P5,000.00, and in the surety bond, the Luzon Surety Co., Inc.
undertook to pay the amount of P5,000.00 representing balance of the purchase price of a
parcel of land known as Lot 7-K-2-G, Psd-26193. The appellee did not protest nor object
when it accepted the payment of P5,000.00 because it knew that that was the complete
amount undertaken by the surety as appearing in the contract. The liability of a surety is not
extended, by implication, beyond the terms of his contract. It is for the same reason that the
appellee cannot apply a part of the P5,000.00 as payment for the accrued interest. Appellants
are relying on Article 1253 of the Civil Code, but the rules contained in Articles 1252 to 1254
of the Civil Code apply to a person owing several debts of the same kind of a single creditor.
They cannot be made applicable to a person whose obligation as a mere surety is both
contingent and singular; his liability is confined to such obligation, and he is entitled to have
all payments made applied exclusively to said application and to no other. Besides, Article
1253 of the Civil Code is merely directory, and not mandatory. Inasmuch as the appellee
cannot protest for non-payment of the interest when it accepted the amount of P5,000.00 from
the Luzon Surety Co., Inc., nor apply a part of that amount as payment for the interest, we
cannot now say that there was a waiver or condonation on the interest due. It is claimed that
there was a novation and/or modification of the obligation of the appellants in favor of the
appellee because the appellee accepted without reservation the subsequent agreement set
forth in the surety bond despite its failure to provide that it also guaranteed payment of
accruing interest. The rule is settled that novation by presumption has never been favored. To
be sustained, it needs to be established that the old and new contracts are incompatible in all
points, or that the will to novate appears by express agreement of the parties or in acts of
similar import. An obligation to pay a sum of money is not novated, in a new instrument
wherein the old is ratified, by changing only the terms of payment and adding other
obligations not incompatible with the old one, or wherein the old contract is merely
supplemented by the new one. The mere fact that the creditor receives a guaranty or accepts
payments from a third person who has agreed to assume the obligation, when there is no
agreement that the first debtor shall be released from responsibility does not constitute a
novation, and the creditor can still enforce the obligation against the original debtor. In the
instant case, the surety bond is not a new and separate contract but an accessory of the
promissory note.
 G.R. No. 120817 November 4, 1996
ELSA B. REYES, petitioner,
vs.
COURT OF APPEALS, SECRETARY OF JUSTICE, AFP-MUTUAL BENEFIT
ASSOCIATION, INC., and GRACIELA ELEAZAR, respondents.

Doctrine: The absence of a new contract extinguishing the old one destroys any possibility of
novation by conventional subrogation. Novation by substitution of creditor requires an
agreement among the three parties concerned the original creditor, the debtor and the new
creditor. It is a new contractual relation based on the mutual agreement among all the
necessary parties, Hence, there is no novation if no new contract was executed by the parties.
Article 1301 of the Civil Code is explicit; thus, Conventional subrogation of a third person
requires the consent of the original parties and of the third person. There must be an express
intention to novate animus novandi. Novation is never presumed. Article 1300 of the Civil
Code provides inter alia that conventional subrogation must be clearly established in order
that it may take effect.

FACTS:
Elsa Reyes, the president of Eurotrust Capital Corp. alleges on the first resolution that
Eurotrust and B.E. Ritz Mansion International Corporation (BERMIC) entered into a loan
agreement. Pursuant to the said contract, Eurotrust extended to Bermic P216.053,126.80 to
finance the construction of the latter's Ritz Condominium and Gold Business Park. The loan
was without collateral but with higher interest rates than those allowed by the banks. In turn,
Bermic issued 21 post-dated checks to cover payments of the loan packages. However, when
those checks were presented for payment, the same were dishonored by the drawee bank,
Rizal Commercial Banking Corporation (RCBC), due to stop payment order made by
Graciela Eleazar. Despite Eurotrust's notices and repeated demands to pay, Eleazar failed to
make good the dishonored checks. Elsa Reyes continued to collect on the post-dated checks
issued by Eleazar contrary to their agreement which leads Eurotrust to hold the amounts in
constructive trust for the real owners. Upon her counsel's advise, Eleazar had the payment
stopped. After investigation, the Office of the Provincial Prosecutor of Rizal issued a
resolution dismissing the complaints filed by Elsa Reyes against Graciela Eleazar on the
ground that when the latter assumed the obligation of Reyes to AFP-MBAI, it constituted
novation, extinguishing any criminal liability on the part of Eleazar. The Secretary of Justice
dismissed the petition holding that the novation of the loan agreement prevents the rise of any
incipient criminal liability since the novation had the effect of cancelling the checks and
rendering without effect the subsequent dishonor of the already cancelled checks. While on
the second Resolution dated January 12, 1993, Cristina Cornista, AFP-MBAI decided to
purchase several securities amounting to P120,000,000.00 from Eurotrust. From February
1990 to September 1990, a total of 21 transactions were entered into between Eurotrust and
AFP-MBAI. Eurotrust delivered to AFP-MBAI treasury notes amounting to P73 million.
However, Eurotrust fraudulently borrowed all those treasury notes from the AFP-MBAI for
purposes of verification with the Central Bank. Despite AFP-MBAI's repeated demands,
Eurotrust failed to return the said treasury notes. Instead it delivered 21 post-dated checks in
favor of AFP-MBAI which were dishonored upon presentment for payment. Eurotrust
nonetheless made partial payment to AFP-MBAI amounting to P35,151,637.72. Reyes
interposed the defense of novation and insisted that AFP-MBAI's claim of unreturned P73
million worth of government securities has been satisfied upon her payment of P30 million.
With respect to the remaining P43 million, the same was paid when Eurotrust assigned its
Participation Certificates to AFP-MBAI. This finding was affirmed by the respondent court
which pointed out that "the first contract was novated in the sense that there was a
substitution of creditor" when respondent Eleazar, with the agreement of Reyes, directly paid
her obligations to AFP-MBAI.

ISSUE:
Whether or not there was a novation by substitution of creditor.

RULING:
No, the Court ruled that there was no novation by substitution of creditor. The Court cannot
see how novation can take place considering the surrounding circumstances which negate the
same. The principle of novation by substitution of creditor was erroneously applied in the
first questioned resolution involving the contract of loan between petitioner and respondent
Eleazar. In order that a novation can take place, the concurrence of the following requisites is
indispensable, a) there must be a previous valid obligation, b) there must be an agreement of
the parties concerned to a new contract, c) there must be the extinguishment of the old
contract, and d) there must be the validity of the new contract. Upon the facts shown in the
record, there is no doubt that the last three essential requisites of novation are wanting in the
instant case. No new agreement for substitution of creditor war forged among the parties
concerned which would take the place of the preceding contract. The absence of a new
contract extinguishing the old one destroys any possibility of novation by conventional
subrogation. In concluding that a novation took place, the respondent court relied on the two
letters dated March 19, 1991, which, according to it, formalized petitioner's and respondent
Eleazar's agreement that BERMIC would directly settle its obligation with the real owners of
the funds the AFP MBAI and DECS IMC. It is evident that the two letters merely gave
respondent Eleazar an authority to directly settle the obligation of petitioner to AFP-MBAI
and DECS-IMC. It is essentially an agreement between petitioner and respondent Eleazar
only. There was no mention whatsoever of AFP-MBAI's consent to the new agreement
between petitioner and respondent Eleazar much less an indication of AFP-MBAI's intention
to be the substitute creditor in the loan contract. Well settled is the rule that novation by
substitution of creditor requires an agreement among the three parties concerned the original
creditor, the debtor and the new creditor. It is a new contractual relation based on the mutual
agreement among all the necessary parties, Hence, there is no novation if no new contract
was executed by the parties. Article 1301 of the Civil Code is explicit; thus, Conventional
subrogation of a third person requires the consent of the original parties and of the third
person. The fact that respondent Eleazar made payments to AFP-MBAI and the latter
accepted them does not ipso facto result in novation. There must be an express intention to
novate animus novandi. Novation is never presumed. Article 1300 of the Civil Code provides
inter alia that conventional subrogation must be clearly established in order that it may take
effect. The consent of the creditor to a novation by change of debtor is as indispensable as the
creditor's consent in conventional subrogation in order that a novation shall legally take
place. The mere circumstance of AFP-MBAI receiving payments from respondent Eleazar
who acquiesced to assume the obligation of petitioner under the contract of sale of securities,
when there is clearly no agreement to release petitioner from her responsibility, does not
constitute novation, at most, it only creates a juridical relation of co-debtorship or suretyship
on the part of respondent Eleazar to the contractual obligation of petitioner to AFP-MBAI
and the latter can still enforce the obligation against the petitioner. In the civil law setting,
novation is literally construed as to make new. So it is deeply rooted in the Roman Law
jurisprudence, the principle novatio non praesumitur that novation is never presumed. At
bottom, for novation to be a jural reality, its animus must be ever present, debitum pro debito
basically extinguishing the old obligation for the new one. The foregoing elements are found
wanting in the case at bar.

G.R. No. 154127 December 8, 2003

ROMEO C. GARCIA, petitioner,
vs.
DIONISIO V. LLAMAS, respondent.

Doctrine: Novation is a mode of extinguishing an obligation by changing its objects or

principal obligations, by substituting a new debtor in place of the old one, or by subrogating a
third person to the rights of the creditor. Hence, for novation to be valid and legal, the law
requires that the creditor expressly consent to the substitution of a new debtor. Since novation
implies a waiver of the right the creditor had before the novation, such waiver must be
express. It cannot be supposed, without clear proof, that the present respondent has done
away with his right to exact fulfillment from either of the solidary debtors.

FACTS:
The respondent Dionisio Llamas filed a complaint against petitioner Romeo Garcia and
Eduardo de Jesus. The complaint alleged that on 23 December 1996, petitioner and de Jesus
borrowed ₱400,000.00 from respondent; that, on the same day, they executed a promissory
note wherein they bound themselves jointly and severally to pay the loan on or before 23
January 1997 with a 5% interest per month; that the loan has long been overdue and, despite
repeated demands, petitioner and de Jesus have failed and refused to pay it; and that, by
reason of their unjustified refusal, respondent was compelled to engage the services of
counsel to whom he agreed to pay 25% of the sum to be recovered from petitioner and de
Jesus, plus ₱2,000.00 for every appearance in court. Petitioner Garcia, in his Answer, averred
that he assumed no liability under the promissory note. Respondent replied to Garcia’s
answer, that the loan remained unpaid for the reason that the check issued by de Jesus
bounced, and that Petitioner Garcia’s answer was not even accompanied by a certificate of
non-forum shopping. Eduardo de Jesus asserted in his Answer with Counterclaim that out of
the supposed ₱400,000.00 loan, he received only ₱360,000.00, the P40,000.00 having been
advance interest thereon for two months, that is, for January and February 1997; that, in fact,
he paid the sum of ₱120,000.00 by way of interests; that this was made when respondent’s
daughter, one Nits Llamas-Quijencio, received the sum of ₱40,000.00, representing the peso
equivalent of his accumulated leave credits, another ₱40,000.00 as advance interest, and still
another ₱40,000.00 as interest for the months of March and April 1997; that he had difficulty
in paying the loan and had asked respondent for an extension of time; that respondent acted in
bad faith in instituting the case, respondent having agreed to accept the benefits de Jesus
would receive for his retirement, but respondent nonetheless filed the instant case while his
retirement was being processed; and that, in defense of his rights, he agreed to pay his
counsel ₱20,000.00 as attorney’s fees, plus ₱1,000.00 for every court appearance. Regional
Trial Court (RTC) the judgment on the pleadings was rendered in favor of respondent. The
appellate court ruled that no novation express or implied had taken place when respondent
accepted the check from De Jesus.
ISSUE:
Whether or not there was novation of the obligation.

RULING:
No, there was no novation took place. The Court ruled that applying the foregoing Article
1293 of the Civil Code to the instant case, the Court hold that no novation took place.
Petitioner seeks to extricate himself from his obligation as joint and solidary debtor by
insisting that novation took place, either through the substitution of De Jesus as sole debtor or
the replacement of the promissory note by the check. Alternatively, the former argues that the
original obligation was extinguished when the latter, who was his co-obligor, "paid" the loan
with the check. The fallacy of the second alternative argument is all too apparent. The check
could not have extinguished the obligation, because it bounced upon presentment. By law, the
delivery of a check produces the effect of payment only when it is encashed. Novation is a
mode of extinguishing an obligation by changing its objects or principal obligations, by
substituting a new debtor in place of the old one, or by subrogating a third person to the rights
of the creditor. Article 1293 of the Civil Code defines novation which consists in substituting
a new debtor in the place of the original one, may be made even without the knowledge or
against the will of the latter, but not without the consent of the creditor. Payment by the new
debtor gives him rights mentioned in articles 1236 and 1237. In general, there are two modes
of substituting the person of the debtor: (1) expromision and (2) delegacion. In expromision,
the initiative for the change does not come from and may even be made without the
knowledge of the debtor, since it consists of a third person’s assumption of the obligation. As
such, it logically requires the consent of the third person and the creditor. In delegacion, the
debtor offers, and the creditor accepts, a third person who consents to the substitution and
assumes the obligation; thus, the consent of these three persons are necessary. Both modes of
substitution by the debtor require the consent of the creditor. Novation may also be extinctive
or modificatory. It is extinctive when an old obligation is terminated by the creation of a new
one that takes the place of the former. It is merely modificatory when the old obligation
subsists to the extent that it remains compatible with the amendatory agreement. Whether
extinctive or modificatory, novation is made either by changing the object or the principal
conditions, referred to as objective or real novation; or by substituting the person of the
debtor or subrogating a third person to the rights of the creditor, an act known as subjective or
personal novation. For novation to take place, the following requisites must concur, 1) there
must be a previous valid obligation; 2) the parties concerned must agree to a new contract; 3)
the old contract must be extinguished and 4) there must be a valid new contract. Novation
may also be express or implied. It is express when the new obligation declares in unequivocal
terms that the old obligation is extinguished. It is implied when the new obligation is
incompatible with the old one on every point. The test of incompatibility is whether the two
obligations can stand together, each one with its own independent existence. The parties did
not unequivocally declare that the old obligation had been extinguished by the issuance and
the acceptance of the check, or that the check would take the place of the note. There is no
incompatibility between the promissory note and the check. In order to change the person of
the debtor, the old one must be expressly released from the obligation, and the third person or
new debtor must assume the former’s place in the relation. Consequently, that which arises
from a purported change in the person of the debtor must be clear and express. Moreover, it
must be noted that for novation to be valid and legal, the law requires that the creditor
expressly consent to the substitution of a new debtor. Since novation implies a waiver of the
right the creditor had before the novation, such waiver must be express. It cannot be
supposed, without clear proof, that the present respondent has done away with his right to
exact fulfillment from either of the solidary debtors. More important, De Jesus was not a third
person to the obligation. From the beginning, he was a joint and solidary obligor of the
₱400,000 loan; thus, he can be released from it only upon its extinguishment. Respondent’s
acceptance of his check did not change the person of the debtor, because a joint and solidary
obligor is required to pay the entirety of the obligation. It must be noted that in a solidary
obligation, the creditor is entitled to demand the satisfaction of the whole obligation from any
or all of the debtors. It is up to the former to determine against whom to enforce collection.
Having made himself jointly and severally liable with De Jesus, petitioner is therefore liable
for the entire obligation.

G.R. No. 126712 April 14, 1999

LEONIDA C. QUINTO, petitioner,
vs.
PEOPLE OF THE PHILIPPINES, respondent.

Doctrine: There are two forms of novation by substituting the person of the debtor,
depending on whose initiative it comes from, the expromision and delegacion. In the former,
the initiative for the change does not come from the debtor and may even be made without
his knowledge. Since a third person would substitute for the original debtor and assume the
obligation, his consent and that of the creditor would be required. In the latter, the debtor
offers, and the creditor accepts, a third person who consents to the substitution and assumes
the obligation, thereby releasing the original debtor from the obligation; here, the intervention
and the consent of all parties thereto would perforce be necessary. In either of these two
modes of substitution, the consent of the creditor, such as can be seen, is an indispensable
requirement.

FACTS:
Petitioner Leonida C. Quinto, was indicted for the crime of estafa that she received in trust
from one Aurelia Cariaga pieces of jewelry with a total value of P36,000.00 for the purpose
of selling the same on commission basis and with the express obligation on the part of the
accused to turn over the proceeds of sale thereof, or to return the said jewelries, if not sold,
five (5) days after receipt thereof, but the accused once in possession of the jewelries, far
from complying with her obligation, with intent of gain, grave abuse of confidence and to
defraud said Aurelia Cariaga, did then and there wilfully, unlawfully and feloniously
misappropriate, misapply and convert to her own personal use and benefit the said jewelries
and the proceeds of sale or to return the pieces of jewelry, to the damage and prejudice of the
said Aurelia Cariaga in the aforementioned amount of P36,000.00. The Regional Trial Court
found Leonida guilty beyond reasonable doubt of the crime of estafa and to indemnify private
complainant in the amount of P36,000.00. Leonida interposed an appeal to the Court of
Appeals.

ISSUE:
Whether or not there was novation of the contract.

RULING:
No, there was no novation of contract. Novation is never presumed, and the animus novandi,
whether totally or partially, must appear by express agreement of the parties, or by their acts
that are too clear and unequivocal to be mistaken. Novation, in its broad concept, may either
be extinctive or modificatory. It is extinctive when an old obligation is terminated by the
creation of a new obligation that takes the place of the former; it is merely modificatory when
the old obligation subsists to the extent it remains compatible with the amendatory
agreement. An extinctive novation results either by changing the object or principal
conditions, objective or real, or by substituting the person of the debtor or subrogating a third
person in the rights of the creditor either subjective or personal. Under this mode, novation
would have dual functions, one to extinguish an existing obligation, the other to substitute a
new one in its place requiring a conflux of four essential requisites, (1) a previous valid
obligation; (2) an agreement of all parties concerned to a new contract; (3) the
extinguishment of the old obligation; and (4) the birth of a valid new obligation. The
extinguishment of the old obligation by the new one is a necessary element of novation which
may be effected either expressly or impliedly. The term "expressly" means that the
contracting parties incontrovertibly disclose that their object in executing the new contract is
to extinguish the old one. Upon the other hand, no specific form is required for an implied
novation, and all that is prescribed by law would be an incompatibility between the two
contracts. While there is really no hard and fast rule to determine what might constitute to be
a sufficient change that can bring about novation, the touchstone for contrariety, however,
would be an irreconcilable incompatibility between the old and the new obligations. There
are two ways which could indicate, in fine, the presence of novation and thereby produce the
effect of extinguishing an obligation by another which substitutes the same. The first is when
novation has been explicitly stated and declared in unequivocal terms. The second is when
the old and the new obligations are incompatible on every point. The test of incompatibility is
whether or not the two obligations can stand together, each one having its independent
existence. If they cannot, they are incompatible and the latter obligation novates the first.
Corollarily, changes that breed incompatibility must be essential in nature and not merely
accidental. The incompatibility must take place in any of the essential elements of the
obligation, such as its object, cause or principal conditions thereof; otherwise, the change
would be merely modificatory in nature and insufficient to extinguish the original obligation.
Novation is not one of the means recognized by the Penal Code whereby criminal liability
can be extinguished; hence, the role of novation may only be either to prevent the rise of
criminal liability or to cast doubt on the true nature of the original basic transaction, whether
or not it was such that its breach would not give rise to penal responsibility. The criminal
liability for estafa already committed is then not affected by the subsequent novation of
contract, for it is a public offense which must be prosecuted and punished by the State in its
own conation.
Contravention of the tenor

G.R. No. 160867 September 20, 2006

BONIFACIO NAKPIL, petitioner,
vs.
MANILA TOWERS DEVELOPMENT CORPORATION, respondent.

Doctrine: When the obligation consists in not doing, and the obligor does what has been
forbidden him, it shall also be undone at his expense.
Two factors must exist before there can be a constructive eviction: (1) an act or
omission by the landlord, or someone acting under his authority, which permanently
interferes with the tenant's beneficial enjoyment or use of the leased premises; and (2) an
abandonment of possession by the lessee within a reasonable time.

FACTS:
Cheong Kiao Ang, leased the 14-storey high rise building to about 200 Filipino Chinese
tenants who used the same for either residential or commercial purposes. One of these tenants
was Atty. Bonifacio Nakpil who leased Room 204 in the mezzanine floor. He used the unit as
his law office. The tenants of the building later formed the House International Building
Tenants Association, Inc. (HIBTAI). The City Engineer reiterated his request to MTDC
urging that the building be immediately repaired. About eight (8) years later, a request for an
immediate ocular inspection of the building to determine its safety and a prior notice to the
tenants and in the presence of a representative of HIBTAI, the representatives of the Office of
the Building Official conducted an ocular inspection of the building. Consequently, the City
Building Official wrote a letter to the building administrator, ordering him to cause the
tenants to vacate the building and undertake the necessary repairs and rehabilitation of the
building. Notices was sent to the tenants, giving them fifteen (15) days within which to
vacate the building to give way to its general repair. However, at the time, Atty. Nakpil was
in the United States, and his secretary was left behind to take care of the law office. Upon his
arrival in the Philippines, Atty. Nakpil filed, on November 5, 1996, a complaint in the
Regional Trial Court (RTC) of Manila against the MTDC, seeking for actual, moral, and
exemplary damages, attorney's fees, litigation expenses, costs of suit and other reliefs. He
alleged that his room was destroyed, the walls and partitions were completely hammered
down, and the electricity was cut off. His personal belongings were either scattered, thrown
away, or stolen. He pointed out that he had been renting the premises and complying with the
conditions of the lease since 1965. The MTDC violated his right as lessee to the possession of
the premises, unlawfully depriving him of said possession without any lawful authority or
court order.
ISSUE:
Whether or not the MTDC is liable for actual, moral and exemplary damages to Nakpil.

RULING:
No, MTDC is not liable for actual, moral and exemplary damages to Nakpil. Article 1654 of
the Civil Code enumerates the obligations of the lessor, 1) to deliver the thing which is the
object of the contract in such a condition as to render it fit for the use intended; 2) to make on
the same during the lease all the necessary repairs in order to keep it suitable for the use for
which it has been devoted, unless there is a stipulation to the contrary; 3) to maintain the
lessee in the peaceful and adequate enjoyment of the lease for the entire duration of the
contract. Failure of the lessor to fulfill any of these obligations will render the lessor liable for
damages. In contracts, the obligor (lessor) who acted in good faith is liable for damages that
are the material and probable consequence of the breach of the obligation and which the
parties have foreseen or could have reasonably foreseen at the time the obligation was
contracted. In case of fraud, bad faith, malice or wanton attitude, he shall be responsible for
all damages which may be reasonably attributed to the non-performance of the obligation.
Breach of contract is the failure without legal reason to comply with the terms of a contract. It
is also defined as the failure, without legal excuse, to perform any promise which forms the
whole or part of the contract. There is no factual and legal basis for any award for damages to
respondent. The duty to maintain the lessee in the peaceful and adequate enjoyment of the
lease for the duration of the contract is merely a warranty that the lessee shall not be
disturbed in his legal, and not physical, possession. The lessor must see that the enjoyment is
not interrupted or disturbed, either by others' acts save in the case provided for in the article
1560 (now Article 1664), or by his own. By his own acts, because, being the person
principally obligated by the contract, he would openly violate it if, in going back on his
agreement, he should attempt to render ineffective in practice the right in the thing he had
granted to the lessee; and by others' acts, because he must guarantee the right he created, for
he is obliged to give warranty in the manner we have set forth in our commentary on article
1553, and, in this sense, it is incumbent upon him to protect the lessee in the latter's peaceful
enjoyment. When the act of trespass is done by third persons, it must be distinguished
whether it is trespass in fact or in law because the lessor is not liable for a trespass in fact or a
mere act of trespass by a third person. Further, the obligation under Article 1654(3) arises
only when acts, termed as legal trespass (perturbacion de derecho), disturb, dispute, object to,
or place difficulties in the way of the lessee's peaceful enjoyment of the premises that in some
manner cast doubt upon the right of the lessor by virtue of which the lessor himself executed
the lease. There is no question that the possession by respondent of the leased premises had
been disturbed by the attempt of the personnel of the City Building Official to repair and
rehabilitate the building due to MTDC's failure to undertake the same. Any act or omission
by the lessor which causes a substantial interference with the actual possession of the lessee
will constitute a breach of the obligation of quiet enjoyment. In some jurisdictions, the
lessor's failure to make repairs or alterations to the leased premises as required by public
authorities, particularly those that are substantial and structural in nature, constitutes
constructive eviction, which makes the lessor liable for damages. Such conclusion is
grounded on the fact that the lessors, in those cases, were obliged to make structural and
substantial repairs on the leased property. The same doctrine could very well be applied in
our jurisdiction considering that, under our laws, the lessor is likewise obliged to make the
necessary repairs on the leased premises which would undoubtedly include those that are
structural and substantial in nature. In fact, there may be a constructive eviction if the
landlord does a wrongful act or is guilty of any default or neglect whereby the leased
premises are rendered unsafe, unfit, or unsuitable for occupancy, in whole, or in substantial
part, for the purposes for which they were leased. It bears stressing, however, that two factors
must exist before there can be a constructive eviction: (1) an act or omission by the landlord,
or someone acting under his authority, which permanently interferes with the tenant's
beneficial enjoyment or use of the leased premises; and (2) an abandonment of possession by
the lessee within a reasonable time.

G.R. No. 190601 February 7, 2011

SPOUSES LUIGI M. GUANIO and ANNA HERNANDEZ-GUANIO, Petitioners,
vs.
MAKATI SHANGRI-LA HOTEL and RESORT, INC., also doing business under the
name of SHANGRI-LA HOTEL MANILA, Respondent.

Doctrine: The doctrine of proximate cause is applicable only in actions for quasi-delicts, not
in actions involving breach of contract. The doctrine is a device for imputing liability to a
person where there is no relation between him and another party. In such a case, the
obligation is created by law itself. But, where there is a pre-existing contractual relation
between the parties, it is the parties themselves who create the obligation, and the function of
the law is merely to regulate the relation thus created.

FACTS:
The petitioner spouses Luigi M. Guanio and Anna Hernandez-Guanio booked at the Shangri-
la Hotel Makati the respondent. Prior to the event, Makati Shangri-La Hotel & Resort, Inc.
scheduled an initial food tasting. Petitioners claim that they requested the hotel to prepare for
seven persons the two of them, their respective parents, and the wedding coordinator. At the
scheduled food tasting, however, respondent prepared for only six. The parties eventually
agreed on a final price ₱1,150 per person. A day before the event or on July 27, 2001, the
parties finalized and forged their contract. Petitioners claim that during the reception,
respondent’s representatives, Catering Director and Sales Manager, did not show up despite
their assurance that they would; their guests complained of the delay in the service of the
dinner; certain items listed in the published menu were unavailable; the hotel’s waiters were
rude and unapologetic when confronted about the delay; and despite Alvarez’s promise that
there would be no charge for the extension of the reception beyond 12:00 midnight, they were
billed and paid ₱8,000 per hour for the three-hour extension of the event up to 4:00 A.M. the
next day. Petitioners received an apologetic reply from Krister Svensson, the hotel’s
Executive Assistant Manager in charge of Food and Beverage. They nevertheless filed a
complaint for breach of contract and damages before the Regional Trial Court (RTC) of
Makati City. RTC rendered judgment in favor of petitioners. On appeal, the Court of
Appeals, by Decision of July 27, 2009,6 reversed the trial court’s decision, it holding that the
proximate cause of petitioners’ injury was an unexpected increase in their guests.

ISSUE:
Whether or not proximate cause is applicable to actions involving breach of contract.
RULING:
No, proximate cause is not applicable to actions involving breach of contract. The Court finds
that since petitioners’ complaint arose from a contract, the doctrine of proximate cause finds
no application to it. The doctrine of proximate cause is applicable only in actions for quasi-
delicts, not in actions involving breach of contract. The doctrine is a device for imputing
liability to a person where there is no relation between him and another party. In such a case,
the obligation is created by law itself. But, where there is a pre-existing contractual relation
between the parties, it is the parties themselves who create the obligation, and the function of
the law is merely to regulate the relation thus created. In the case at bar, Article 1170 should
be applied that those who in the performance of their obligations are guilty of fraud,
negligence or delay, and those who in any manner contravene the tenor thereof, are liable for
damages. Breach of contract is defined as the failure without legal reason to comply with the
terms of a contract. It is also defined as the failure, without legal excuse, to perform any
promise which forms the whole or part of the contract. To the Court, the foregoing
explanation of the hotel’s Banquet Director overcomes any presumption of admission of
breach which Svensson’s letter might have conveyed. The exculpatory clause
notwithstanding, the Court notes that respondent could have managed the situation better, it
being held in high esteem in the hotel and service industry. Given respondent’s vast
experience, it is safe to presume that this is not its first encounter with booked events
exceeding the guaranteed cover. It is not audacious to expect that certain measures have been
placed in case this predicament crops up. That regardless of these measures, respondent still
received complaints as in the present case, does not amuse. To the Court, the delay in service
might have been avoided or minimized if respondent exercised prescience in scheduling
events. No less than quality service should be delivered especially in events which possibility
of repetition is close to nil. Petitioners are not expected to get married twice in their lifetimes.
In the present petition, under considerations of equity, the Court deems it just to award the
amount of ₱50,000.00 by way of nominal damages to petitioners, for the discomfiture that
they were subjected to during to the event. The Court recognizes that every person is entitled
to respect of his dignity, personality, privacy and peace of mind. Respondent’s lack of
prudence is an affront to this right.
Fraud

ALEJANDRO V. TANKEH, petitioner, vs. DEVELOPMENT BANK OF THE

PHILIPPINES, STERLING SHIPPING LINES, INC., RUPERTO V. TANKEH,
VICENTE ARENAS, AND ASSET PRIVATIZATION TRUST, respondents.

Doctrine: Dolo Causante or causal fraud are those deceptions or misrepresentations of a

serious character employed by one party and without which the other party would not have
entered into the contract. In order that fraud may make a contract voidable, it should be
serious and should not have been employed by both contracting parties. Hence, the
commission of incidental fraud obliges the person employing it to pay damages.

FACTS:
Respondent Ruperto V. Tankeh is the president of Sterling Shipping Lines, Inc. It was
incorporated on April 23, 1979 to operate ocean-going vessels engaged primarily in foreign
trade. Ruperto V. Tankeh applied for a $3.5 million loan from public respondent
Development Bank of the Philippines for the partial financing of an ocean-going vessel
named the M/V Golden Lilac. Dr Alejandro Tankeh alleged that his younger brother Ruperto
V. Tankeh approached and informed petitioner that he was operating a new shipping line
business. Petitioner claimed that respondent had told him that petitioner would be given
1,000 shares to be a director of the business. The shares were worth P1,000,000.00. To
authorize the loan, Development Bank of the Philippines required four (4) conditions.
Petitioner signed the Assignment of Shares of Stock with Voting Rights then signed the
promissory note and that he was the last to sign the note. The loan was approved by
respondent Development Bank of the Philippines. On December 3, 1981, respondent
corporation Sterling Shipping Lines, Inc. through respondent Ruperto V. Tankeh executed a
Deed of Assignment in favor of Development Bank of the Philippines. Petitioner required
that its board of directors pass a resolution releasing him from all liabilities, particularly the
loan contract with Development Bank of the Philippines. In addition, petitioner asked that the
private respondents notify Development Bank of the Philippines that he had severed his ties
with Sterling Shipping Lines, Inc. On January 29, 1987, the M/V Sterling Ace was sold in
Singapore for $350,000.00 by Development Bank of the Philippines’ legal counsel Atty.
Prospero N. Nograles. When petitioner came to know of the sale, he wrote respondent
Development Bank of the Philippines to express that the final price was inadequate, and
therefore, the transaction was irregular. At this time, petitioner was still bound as a debtor
because of the promissory note, which petitioner signed. Petitioner filed several Complaints
against respondents, praying that the promissory note be declared null and void and that he be
absolved from any liability from the mortgage of the vessel and the note in question. In the
Complaints, petitioner alleged that respondent Ruperto V. Tankeh, together with Vicente L.
Arenas, Jr. and Jose Maria Vargas, had exercised deceit and fraud in causing petitioner to
bind himself jointly and severally to pay respondent Development Bank of the Philippines the
amount of the mortgage loan. Although he had been made a stockholder and director of the
respondent corporation Sterling Shipping Lines, Inc., petitioner alleged that he had never
invested any amount in the corporation and that he had never been an actual member of the
board of directors. He alleged that all the money he had supposedly invested was provided by
respondent Ruperto V. Tankeh. He claimed that he only attended one meeting of the board.
Other than that, he had never been notified of another meeting of the board of directors. RTC
ruled that Promissory Note and the Mortgage Contract null and void.

ISSUE:
Whether the fraud contemplated serious enough to render a contract voidable.

HELD:
No, fraud does not contemplate serious enough to render a contract voidable. Hence, in
refusing to allow petitioner to participate in the management of the business, respondent
Ruperto V. Tankeh was liable for the commission of incidental fraud. Although there was no
fraud that had been undertaken to obtain petitioner’s consent, there was fraud in the
performance of the contract. The records showed that petitioner had been unjustly excluded
from participating in the management of the affairs of the corporation. This exclusion from
the management in the affairs of Sterling Shipping Lines, Inc. constituted fraud incidental to
the performance of the obligation. Petitioner had been effectively deprived of the opportunity
to actually engage in the operations of Sterling Shipping Lines, Inc. Petitioner had a
reasonable expectation that the same level of engagement would be present for the duration
of their working relationship. This would include an undertaking in good faith by respondent
Ruperto V. Tankeh to be transparent with his brother that he would not automatically be
made part of the company’s administration. However, the Court finds there is nothing to
support the assertion that Sterling Shipping Lines, Inc. and Arenas committed incidental
fraud and must be held liable. Respondent Ruperto V. Tankeh is liable to his older brother,
petitioner Alejandro, for damages. The obligation to pay damages to petitioner is based on
several provisions of the Civil Code. Article 1157, obligations arise from a) law; b) contracts;
c) quasi-contracts; d) acts or omissions punished by law; and e) quasi-delicts. Thus, the
liability of respondent Ruperto V. Tankeh is based on the law, under Article 1344, which
provides that the commission of incidental fraud obliges the person employing it to pay
damages. Respondent Ruperto V. Tankeh abused his right to pursue undertakings in the
interest of his business operations. Under the provisions of this law, in culpa contractual or
breach of contract, moral damages may be recovered when the defendant acted in bad faith or
was guilty of gross negligence amounting to bad faith or in wanton disregard of his
contractual obligation and, exceptionally, when the act of breach of contract itself is
constitutive of tort resulting in physical injuries. Moral damages may be awarded in breaches
of contracts where the defendant acted fraudulently or in bad faith. The person claiming
moral damages must prove the existence of bad faith by clear and convincing evidence for
the law always presumes good faith. It is not enough that one merely suffered sleepless
nights, mental anguish, serious anxiety as the result of the actuations of the other party. An
award of moral damages would require certain conditions to be met, (1) first, there must be
an injury, whether physical, mental or psychological, clearly sustained by the claimant; (2)
second, there must be culpable act or omission factually established; (3) third, the wrongful
act or omission of the defendant is the proximate cause of the injury sustained by the
claimant; and (4) fourth, the award of damages is predicated on any of the cases stated in
Article 2219 of the Civil Code. In this case, the four elements cited in Francisco are present.
To justify an award for exemplary damages, the wrongful act must be accompanied by bad
faith, and an award of damages would be allowed only if the guilty party acted in a wanton,
fraudulent, reckless or malevolent manner. In this case, this Court finds that respondent
Ruperto V. Tankeh acted in a fraudulent manner through the finding of dolo incidente due to
his failure to act in a manner consistent with propriety, good morals, and prudence.

Negligence
G.R. No. 119850 June 20, 1996
MANDARIN VILLA, INC., petitioner,
vs.
COURT OF APPEALS, and CLODUALDO DE JESUS, respondents.

Doctrine: The test for determining the existence of negligence in a particular case is that if
did the defendant in doing the alleged negligent act use the reasonable care and caution which
an ordinary prudent person would have used in the same situation? If not, then he is guilty of
negligence. The Point of Sale (POS) Guidelines which outlined the steps that petitioner must
follow under the circumstances provides.

FACTS:
The private respondent, Clodualdo de Jesus, a practicing lawyer and businessman, hosted a
dinner for his friends at the petitioner's restaurant, the Mandarin Villa Seafoods Village
Greenhills, Mandaluyong City. After dinner the waiter handed to him the bill in the amount
of P2,658.50. Private respondent offered to pay the bill through his credit card issued by
Philippine Commercial Credit Card Inc. (BANKARD). This card was accepted by the waiter
who immediately proceeded to the restaurant's cashier for card verification. Ten minutes
later, however, the waiter returned and audibly informed private respondent that his credit
card had expired. Private respondent remonstrated that said credit card had yet to expire on
September 1990, as embossed on its face. The waiter was unmoved, thus, private respondent
and two of his guests approached the restaurant's cashier who again passed the credit card
over the verification computer. The same information was produced that his card is expired.
Professor Lirag, another guest, uttered "may problema ba? Baka kailangang maghugas na
kami ng pinggan?" Thereupon, private respondent left the restaurant and got his BPI Express
Credit Card from his car and offered it to pay their bill. This was accepted and honored by the
cashier after verification. The incident triggered the filing of a suit for damages by private
respondent. Petitioner contends that it cannot be faulted for its cashier's refusal to accept
private respondent's BANKARD credit card, the same not being a legal tender. It argues that
private respondent's offer to pay by means of credit card partook of the nature of a proposal
to novate an existing obligation for which petitioner, as creditor, must first give its consent
otherwise there will be no binding contract between them. Petitioner cannot seek refuge
behind this averment.
ISSUE:
Whether or not petitioner is negligent under the circumstances obtaining in this case; and if
such negligence is the proximate cause of the private respondent's damage.

HELD:
Yes, petitioner is negligent and such negligence is the proximate cause of the private
respondent's damage. The test for determining the existence of negligence in a particular case
is that if did the defendant in doing the alleged negligent act use the reasonable care and
caution which an ordinary prudent person would have used in the same situation? If not, then
he is guilty of negligence. The Point of Sale (POS) Guidelines which outlined the steps that
petitioner must follow under the circumstances provides. A cursory reading of said rule
reveals that whenever the words CARD EXPIRED flashes on the screen of the verification
machine, petitioner should check the credit card's expiry date embossed on the card itself. If
unexpired, petitioner should honor the card provided it is not invalid, cancelled or otherwise
suspended. But if expired, petitioner should not honor the card. In this case, private
respondent's BANKARD credit card has an embossed expiry date of September 1990.
Clearly, it has not yet expired on October 19, 1989, when the same was wrongfully
dishonored by the petitioner. Hence, petitioner did not use the reasonable care and caution
which an ordinary prudent person would have used in the same situation and as such
petitioner is guilty of negligence. In this connection, we quote with approval the following
observations of the respondent Court. While it is true that private respondent did not have
sufficient cash on hand when he hosted a dinner at petitioner's restaurant, this fact alone does
not constitute negligence on his part. Neither can it be claimed that the same was the
proximate cause of private respondent's damage. The Court take judicial notice of the current
practice among major establishments, petitioner included, to accept payment by means of
credit cards in lieu of cash. Thus, petitioner accepted private respondent's BPI Express Credit
Card after verifying its validity, a fact which all the more refutes petitioner's imputation of
negligence on the private respondent. Neither can the Court conclude that the remark of
Professor Lirag was a supervening event and the proximate cause of private respondent's
injury. The humiliation and embarrassment of the private respondent was brought about not
by such a remark of Professor Lirag but by the fact of dishonor by the petitioner of private
respondent's valid BANKARD credit card. If at all, the remark of Professor Lirag served only
to aggravate the embarrassment then felt by private respondent, albeit silently within himself.