Obligations and Contract Cases

8/19/2019 Obligations and Contract Cases

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THE METROPOLITAN BANK AND TRUST COMPANY v.

ANA GRACE ROSALES AND YO YUK TO

G.R. No. 183204

FACTS: Respondent Ana Grace Rosales (Rosales) is the owner of China Golden Bridge Travel

Services, a travel agency. Respondent Yo Yuk To is the mother of respondent Rosales.

In 2000, respondents opened a Joint Peso Account with Petitioner Metropolitan Bank and Trust

Company. As of August 4, 2004, respondents’ Joint Peso Account showed a balance of

P2,515,693.52.

In May 2002, respondent Rosales accompanied her Taiwanese National client, Liu Chiu Fang, to

petitioner’s branch in Escolta to open a savings account, as required by the Philippine Leisure and

Retirement Authority (PLRA). Respondent Rosales acted as an interpreter for Liu Chiu Fang.

Respondents opened with petitioner’s Pritil-Tondo branch a Joint Dollar Account with an initial

deposit of US$14,000.00.

On July 31, 2003, petitioner issued a “Hold Out” order against respondents’ accounts. On September 3, 2003, a criminal case for Estafa through False Pretences, Misrepresentation,

Deceit, and Use of Falsified Documents, against respondent Rosales. Petitioner accused

respondent Rosales and an unidentified woman as the ones responsible for the unauthorized and

fraudulent withdrawal of US$75,000.00 from Liu Chiu Fang’s dollar account with petitioner’s

Escolta branch. The Office of the City Prosecutor dismissed the complaint.

Respondents filed a Complaint for Breach of Obligation and Contract with damages against

petitioner. Respondents alleged that they attempted several times to withdraw their deposits

but were unable to because petitioner had placed their accounts under “Hold Out” status.

Petitioner alleged that respondents have no cause of action because it has a valid reason for

issuing the “Hold Out” order. It averred that due to fraudulent scheme of respondent Rosales, itwas compelled to reimburse Liu Chiu Fang the amount of US$75,000.00 and to file a criminal

complaint against respondent Rosales.

While the criminal case was being tried, the City Prosecutor of Manila filed an Estafa case against

respondent Rosales.

The RTC rendered a decision finding petitioner liable for damages for breach of contract. It ruled

that it is the duty of petitioner to release the deposit to respondents as the act of withdrawal of

a bank deposit is an act of demand by the creditor.

The CA affirmed the decision of the RTC.

ISSUE: Whether or not petitioner is liable for breach of contract?

HELD: Yes. The Court finds petitioner guilty of breach of contract when it unjustifiably refused to

release respondents’ deposit despite demand. In cases of breach of contract, moral damages may

be recovered only if the defendant acted fraudulently or in bad faith, or is guilty of gross

negligence amounting to bad faith, or in wanton disregard of his contractual obligations.


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In this case, a review of the circumstances surrounding the issuance of the “Hold Out” order

reveals that petitioner issued a “Hold Out” order in bad faith. First of all, the order was issued

without legal basis. Second, petitioner did not inform respondents of the reason for the “Hold

Out.” Third, the order was issued prior to the filing of the criminal complaint.

The Court finds that petitioner indeed acted in a wanton, fraudulent, reckless, oppressive or

malevolent manner when it refused to release the deposits of respondent without any legal basis.


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ARCO PULP AND PAPER CO., INC. VS.

DAN T. LIM

G.R. NO. 206806

Facts: Dan T. Lim works in the business of supplying scrap papers, cartons, and other raw

materials, under the name Quality Paper and Plastic Products, Enterprises, to factories engaged

in the paper mill business. From February 2007 to March 2007, he delivered scrap papers worth

7,220,968.31 to Arco Pulp and Paper Company, Inc. (Arco Pulp and Paper) through its Chief

Executive Officer and President, Candida A. Santos. The parties allegedly agreed that Arco Pulp

and Paper would either pay Dan T. Lim the value of the raw materials or deliver to him their

finished products of equivalent value.

Dan T. Lim alleged that when he delivered the raw materials, Arco Pulp and Paper issued a post-

dated check dated April 18, 2007 in the amount of 1,487,766.68 as partial payment, with the

assurance that the check would not bounce. When he deposited the check on April 18, 2007, it

was dishonoured for being drawn against a closed account.On the same day, Arco Pulp and Paper and a certain Eric Sy executed a memorandum of

agreement where Arco Pulp and Paper bound themselves to deliver their finished products to

Mega pack Container Corporation, owned by Eric Sy, for his account. According to the

memorandum, the raw materials would be supplied by Dan T. Lim, through his company, Quality

Paper and Plastic Products. The memorandum of agreement reads as follows:

Per meeting held at ARCO, April 18, 2007, it has been mutually agreed between Mrs. Candida A.

Santos and Mr. Eric Sy that ARCO will deliver 600 tons Test Liner 150/175 GSM, full width 76

inches at the price of P18.50 per kg. to Megapack Container for Mr. Eric Sy’s account.

It has been agreed further that the Local OCC materials to be used for the production of the

above Test Liners will be supplied by Quality Paper & Plastic Products Ent., total of 600 MetricTons at P6.50 per kg. (Price subject to change per advance notice). Quantity of Local OCC delivery

will be based on the quantity of Test Liner delivered to Megapack Container Corp. based on the

above production schedule.

On May 5, 2007, Dan T. Lim sent a letter to Arco Pulp and Paper demanding payment of the

amount of 7,220,968.31, but no payment was made to him.

Issue: Whether or not there was novation.

Held: 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 as follows:

"Art. 1293. 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."


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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 concernedmust agree to a new contract. 3) The old contract must be extinguished. 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.

Because novation requires that it be clear and unequivocal, it is never presumed, thus: In the civil

law setting, novatio 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. There is nothing in the

memorandum of agreement that states that with its execution, the obligation of petitioner Arco

Pulp and Paper to respondent would be extinguished. It also does not state that Eric Sy somehow

substituted petitioner Arco Pulp and Paper as respondent’s debtor. It merely shows that

petitioner Arco Pulp and Paper opted to deliver the finished products to a third person instead.

The consent of the creditor must also be secured for the novation to be valid: Novation must be

expressly consented to. Moreover, the conflicting intention and acts of the parties underscore

the absence of any express disclosure or circumstances with which to deduce a clear and

unequivocal intent by the parties to novate the old agreement.

In this case, respondent was not privy to the memorandum of agreement, thus, his conformity

to the contract need not be secured.

If the memorandum of agreement was intended to novate the original agreement between the

parties, respondent must have first agreed to the substitution of Eric Sy as his new debtor. The

memorandum of agreement must also state in clear and unequivocal terms that it has replaced

the original obligation of petitioner Arco Pulp and Paper to respondent. Neither of these

circumstances is present in this case.


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Petitioner Arco Pulp and Paper’s act of tendering partial payment to respondent also conflicts

with their alleged intent to pass on their obligation to Eric Sy. When respondent sent his letter of

demand to petitioner Arco Pulp and Paper, and not to Eric Sy, it showed that the former neither

acknowledged nor consented to the latter as his new debtor. These acts, when taken together,

clearly show that novation did not take place. Since there was no novation, petitioner Arco Pulp

and Paper’s obligation to respondent remains valid and existing.


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ROLANDO C. DE LA PAZ VS.

L & J DEVELOPMENT COMPANY

GR. NO. 183360.

Facts: Petitioner lent P350,000 to respondent without a specified maturity date at 6% monthly

interest. Respondent failed to pay, so petitioner filed a complaint for collection. Respondent

claims the interest rate is unconscionable. Interest rate upheld by the RTC and increased by the

CA to 12%

Issue: Was the CA correct in increasing the interest?

Held: The lack of a written stipulation to pay interest on the loaned amount disallows a creditor

from charging monetary interest.

Under Article 1956 of the Civil Code, no interest shall be due unless it has been expressly

stipulated in writing. Jurisprudence on the matter also holds that for interest to be due andpayable, two conditions must concur: a) express stipulation for the payment of interest; and b)

the agreement to pay interest is reduced in writing.

Here, it is undisputed that the parties did not put down in writing their agreement. Thus, no

interest is due. The collection of interest without any stipulation in writing is prohibited by law.

Even if the payment of interest has been reduced in writing, a 6% monthly interest rate on a loan

is unconscionable, regardless of who between the parties proposed the rate.


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BPI EXPRESS VS.

ARMOVIT

G.R. NO. 163654

(This case involves a credit card holder’s claim for damages arising from the suspension of her

credit privileges due to her supposed failure to reapply for their reactivation. She has insisted

that she was not informed of the condition for reactivation.)

FACTS: Armovit, then a depositor of BPI, was issued a pre-approved credit card with a credit limit

of P20k that was to expire at the end of March 1993.

On Nov. 21, 1992, she treated her British friends from Hong Kong to lunch. As the host, she

handed to the waiter her credit card to settle the bill, but the waiter soon returned to inform her

that her credit card had been cancelled upon verification with BPI and would not be honoured.

Hence, her guests were made to share the bill to her extreme embarrassment.

Armovit called BPI to verify the status of her credit card. She learned that her credit card hadbeen summarily cancelled for failure to pay her outstanding obligations. She denied having

defaulted on her payments. Thus, she demanded compensation for the shame, embarrassment

and humiliation she had suffered in the amount of P2M.

BPI Express Credit countered that her demand for monetary compensation had no basis; it

claimed that it had sent Armovit a telegraphic message requesting her to pay her arrears for three

consecutive months, and that she did not comply with the request, causing it to temporarily

suspend her credit card; that while the obligation was settled, she failed to submit the required

application form in order to reactivate her credit card privileges; that the temporary suspension

of her credit card was in accordance with the terms and conditions of the credit card, since

Armovit defaulted in her obligationsRTC: Ordered BPI to pay Armovit moral and exemplary damages; that BPI failed to furnish

Armovit the application form, hence the latter could not be blamed for not complying.

CA: assailed the decision of the RTC; since Armovit had not signed any application form in the

issuance and renewals of her credit card from 1989 to 1992, she could not have known the terms

and conditions embodied in the application form even if the credit card had specified that its use

bound the holder to its terms and conditions. It did not see merit in BPI Express Credit’s

contention that the submission of a new application form was a pre-requisite for the lifting of the

suspension of her credit card, inasmuch as such condition was not stated in a clear and

unequivocal manner.

ISSUE: Whether or not the CA was correct in awarding damages in favour of Armovit for the

temporary suspension of her credit card on the ground of her failure to submit a new application

form.

RULING: The relationship between the credit card issuer and the credit card holder is a

contractual one that is governed by the terms and conditions found in the card membership


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agreement. Such terms and conditions constitute the law between the parties. In case of their

breach, moral damages may be recovered where the defendant is shown to have acted

fraudulently or in bad faith. Malice or bad faith implies a conscious and intentional design to do

a wrongful act for a dishonest purpose or moral obliquity. However, a conscious or intentional

design need not always be present because negligence may occasionally be so gross as to amount

to malice or bad faith. Hence, bad faith in the context of Article 2220 of the Civil Code includes

gross negligence.

Such terms and conditions printed on the credit card application form spelled out the terms and

conditions of the contract between BPI Express Credit and its card holders; it determined the

rights and obligations of the parties. Yet, a review of such terms and conditions did not reveal

that Armovit needed to submit her new application as the antecedent condition for her credit

card to be taken out of the list of suspended cards.

Considering that the terms and conditions nowhere stated that the card holder must submit the

new application form in order to reactivate her credit card, to allow BPI Express Credit to impose

the duty to submit the new application form in order to enable Armovit to reactivate the creditcard would contravene the Parole Evidence Rule. Indeed, there was no agreement between the

parties to add the submission of the new application form as the means to reactivate the credit

card.

In the context of the contemporaneous and subsequent acts of the parties, the only condition

for the reinstatement of her credit card was the payment of her outstanding obligation. Had it

intended otherwise, BPI Express Credit would have surely informed her of the additional

requirement in its letters of March 19, 1992 and March 31, 1992. That it did not do so confirmed

that they did not agree on having her submit the new application form as the condition to

reactivate her credit card.

The letter of BPI Express Credit dated April 8, 1992 did not clearly and categorically informArmovit that the submission of the new application form was the pre-condition for the

reactivation of her credit card. The statement in the letter merely raised doubt as to whether the

requirement had really been a pre-condition or not. With BPI Express Credit being the party

causing the confusion, the interpretation of the contract could not be done in its

favour. Moreover, it cannot be denied that a credit card contract is considered as a contract of

adhesion because its terms and conditions are solely prepared by the credit card issuer.

Consequently, the terms and conditions have to be construed against BPI Express Credit as the

party who drafted the contract.


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SPS. JUICO VS.

CHINA BANKING CORP

G. R. NO. 187678

FACTS: SPS Juico vs. CHINA BANK DOCTRINE: the escalation clause is void if it grants respondent

the power to impose an increased rate of interest without a written notice to petitioners and

their written consent. Concurring doctrine by CJ Sereno these points must be considered by

creditors and debtors in the drafting of valid escalation clauses.

Firstly, as a matter of equity and consistent with P.O. No. 1684, the escalation clause must be

paired with a de-escalation clause.9 Secondly, so as not to violate the principle of mutuality, the

escalation must be pegged to the prevailing market rates, and not merely make a generalized

reference to "any increase or decrease in the interest rate" in the event a law or a Central Bank

regulation is passed. Thirdly, consistent with the nature of contracts, the proposed modification

must be the result of an agreement between the parties. In this way, our credit system would be

facilitated by firm loan provisions that not only aid fiscal stability, but also avoid numerousdisputes and litigations between creditors and debtors. Spouses Ignacio F. Juico and Alice P.

Juico (petitioners) obtained a loan from China Banking Corporation (respondent) as evidenced by

two Promissory Notes both dated October 6, 1998 and numbered 507-001051-34and 507-

001052-0,5 for the sums of !!6,216,000 and P4, 139,000, respectively. The loan was secured by a

Real Estate Mortgage (REM) over petitioners’ property located at 49 Greensville St., White Plains,

Quezon City respondent demanded the full payment of the outstanding balance with accrued

monthly interests. As of February 23, 2001, the amount due on the two promissory notes totalled

P19, 201,776. On the same day, the mortgaged property was sold at public auction, with

respondent China bank as highest bidder for the amount of P10, 300,000. petitioners received 8a

demand letter9 dated May 2, 2001 from respondent for the payment ofP8,901,776.63, theamount of deficiency after applying the proceeds of the foreclosure sale respondent prayed that

judgment be rendered ordering the petitioners to pay jointly and severally: (1)P8,901,776.63

representing the amount of deficiency, plus interests at the legal rate, from February 23, 2001

until fully paid; (2) an additional amount equivalent to 1/10 of 1% per day of the total amount,

until fully paid, as penalty; (3) an amount equivalent to 10% of the foregoing amounts as

attorney’s fees; and (4) expenses of litigation and costs of suit. Ms. Annabelle Cokai Yu, its Senior

Loans Assistant stated that as of now the outstanding balance of petitioners was P15, 190,961.48.

Yu reiterated that the interest rate changes every month based on the prevailing market rate.

She notified petitioners of the prevailing rate by calling them monthly .It was increased

unilaterally RTC: ordered Spouses to pay bank 9M plus the interest which amounted to 15M.CA

AFFIRMED PETITIONER: They insist that the increase in interest rates were unilaterally imposed

by the bank and thus violate the principle of mutuality of contracts.

ISSUE: whether the increase in interest rates is void for violating the mutuality of contracts


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HELD: Yes RATIO: Article 1308. The contract must bind both contracting parties; its validity or

compliance cannot be left to the will of one of them. Article 1956 of the Civil Code likewise

ordains that "no interest shall be due unless it has been expressly stipulated in writing." The

binding effect of any agreement between parties to a contract is premised on xxx (2) that there

must be mutuality between the parties based on their essential equality. Any contract which

appears to be heavily weighted in favour of one of the parties so as to lead to an unconscionable

result is void. Any stipulation regarding the validity or compliance of the contract which is left

solely to the will of one of the parties, is likewise, invalid Escalation clauses refer to stipulations

allowing an increase in the interest rate agreed upon by the contracting parties. This Court has

long recognized that there is nothing inherently wrong with escalation clauses Nevertheless, an

escalation clause "which grants the creditor an unbridled right to adjust the interest

independently and upwardly, completely depriving the debtor of the right to assent to an

important modification in the agreement" is void. A stipulation of such nature violates the

principle of mutuality of contracts. In a case, SC said that petitioner’s assent to the modifications

in the interest rates cannot be implied from their lack of response to the memos sent byrespondent It is now settled that an escalation clause is void where the creditor unilaterally

determines and imposes an increase in the stipulated rate of interest without the express

conformity of the debtor. Such unbridled right given to creditors to adjust the interest

independently and upwardly would completely take away from the debtors the right to assent

to an important modification in their agreement and would also negate the element of mutuality

in their contracts. More recently in Solid bank Corporation v. Permanent Homes,

Incorporated,39 we upheld as valid an escalation clause which required a written notice to and

conformity by the borrower to the increased interest rate In Polotan, Sr. v. CA ,On petitioner’s

contention that the interest rate was unilaterally imposed and based on the standards and rate

formulated solely by respondent credit card company, we held: Cardholder hereby authorizesSecurity Diners to correspondingly increase the rate of such interest in the event of changes in

prevailing market rates x x x" is an escalation clause. However, it cannot be said to be dependent

solely on the will of private respondent as it is also dependent on the prevailing market rates.

Thus, it was valid because it wasn’t solely potestative as it was based on the market rates

(something outside the control of respondent) here, the interest rates would vary as determined

by prevailing market rates. Evidently, the parties intended the interest on petitioners’ loan,

including any upward or downward adjustment, to be determined by the prevailing market rates

and not dictated by respondent’s policy. HOWEVER, SC hold that the escalation clause here is still

void because it grants respondent the power to impose an increased rate of interest without a

written notice to petitioners and their written consent. Respondent’s monthly telephone calls to

petitioners advising them of the prevailing interest rates would not suffice. A detailed billing

statement based on the new imposed interest with corresponding computation of the total debt

should have been provided by the respondent to enable petitioners to make an informed

decision. An appropriate form must also be signed by the petitioners to indicate their conformity

to the new rates. Compliance with these requisites is essential to preserve the mutuality of

contracts. For indeed, one-sided impositions do not have the force of law between the parties,


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because such impositions are not based on the parties’ essential equality. In the absence of

consent on the part of the petitioners to the modifications in the interest rates, the adjusted

rates cannot bind them. Hence, we consider as invalid the interest rates in excess of 15%, the

rate charged for the first year. Based on the August 29, 2000 demand letter of China Bank,

petitioners’ total principal obligation under the two promissory notes which they failed to settle

is P10, 355,000. However, due to China Bank’s unilateral increases in the interest rates from 15%

to as high as 24.50% and penalty charge of 1/10 of 1% per day or 36.5% per annum for the period

November 4, 1999 to February 23, 2001, petitioners’ balance ballooned to P19,201,776.63. Note

that the original amount of principal loan almost doubled in only 16 months. The Court also finds

the penalty charges imposed excessive and arbitrary, hence the same is hereby reduced to 1%

per month or 12% per annum. Concurring by CJ Sereno: not all escalation clauses in loan

agreements are void per se .it is to maintain fiscal stability and to retain the value of money in

long term contracts. However, a contract containing a provision that makes its fulfilment

exclusively dependent upon the uncontrolled will of one of the contracting parties is void. Hence

the provision on the promissory note: I/We hereby authorize the CHINA BANKING CORPORATIONto increase or decrease as the case may be, the interest rate/service charge presently stipulated

in this note without any advance notice to me/us in the event a law or Central Bank regulation is

passed or promulgated by the Central Bank of the Philippines or appropriate government

entities, increasing or decreasing such interest rate or service charge. Is void. The floating rate

of interest in the trust receipt agreement is also void. It reads: I, WE jointly and severally agree

to any increase or decrease in the interest rate which may occur after July 1, 1981, when the

Central Bank floated the interest rate, and to pay additionally the penalty of I% per month until

the amount/s or installments/s due and unpaid under the trust receipt on the reverse side hereof

is/are fully paid. It is ok, for banks to stipulate that interest rates on a loan not be fixed and instead

be made dependent upon prevailing market conditions as long as there should always be areference rate upon which to peg such variable interest rates. An example of such a valid variable

interest rate was found in Polotan, Sr. v. Court of Appeals.10 In that case, the contractual

provision stating that "if there occurs any change in the prevailing market rates, the new interest

rate shall be the guiding rate in computing the interest due on the outstanding obligation without

need of serving notice to the Cardholder other than the required posting on the monthly

statement served to the Cardholder" was considered valid. The aforequoted provision was

upheld notwithstanding that it may partake of the nature of an escalation clause, because at the

same time it provides for the decrease in the interest rate in case the prevailing market rates

dictate its reduction. Here, the use of the phrase "any increase or decrease in the interest rate”

is without reference to the prevailing market rate actually imposed by the regulations of the

Central Bank.8 It is thus not enough to state, as akin to China Bank's provision, that the bank may

increase or decrease the interest rate in the event a law or a Central Bank regulation is passed.

To adopt that stance will necessarily involve a determination of the interest rate by the creditor

since the provision spells a vague condition - it only requires that any change in the imposable

interest must conform to the upward or downward movement of borrowing rates. And if that

determination is not subjected to the mutual agreement of the contracting parties, then the


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resulting interest rates to be imposed by the creditor would be unilaterally determined.

Consequently, the escalation clause violates the principle of mutuality of contracts. Based on

jurisprudence, therefore, these points must be considered by creditors and debtors in the

drafting of valid escalation clauses. Firstly, as a matter of equity and consistent with P.O. No.

1684, the escalation clause must be paired with a de-escalation clause.9 Secondly, so as not to

violate the principle of mutuality, the escalation must be pegged to the prevailing market rates,

and not merely make a generalized reference to "any increase or decrease in the interest rate"

in the event a law or a Central Bank regulation is passed. Thirdly, consistent with the nature of

contracts, the proposed modification must be the result of an agreement between the parties.

In this way, our credit system would be facilitated by firm loan provisions that not only aid fiscal

stability, but also avoid numerous disputes and litigations between creditors and debtors.


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METROPOLITAN BANK VS.

ABSOLUTE MANAGEMENT CORP.

G.R. NO. 170498

Facts: Metrobank deposited the AMC checks to Ayala Lumber and Hardware’s account; because

of Chua’s control over AMC’s operations, Metrobank assumed that the checks payable to AMC

could be deposited to Ayala Lumber and Hardware’s account.

Ayala Lumber and Hardware had no right to demand and receive the checks that were deposited

to its account; despite Chua’s control over AMC and Ayala Lumber and Hardware, the two entities

are distinct, and checks exclusively and expressly payable to one cannot be deposited in the

account of the other.

In its fourth-party complaint, Metrobank claims that Chua’s estate should reimburse it if it

becomes liable on the checks that it deposited to Ayala Lumber and Hardware’s account.

Issue: Whether or not Ayala Lumber must return the amount of said checks to Metrobank.

Held: Metrobank acted in a manner akin to a mistake when it deposited the AMC checks to Ayala

Lumber and Hardware’s account because it assumed that the checks payable to AMC could be

deposited to Ayala Lumber and Hardware’s account. This disjunct created an obligation on the

part of Ayala Lumber and Hardware, through its sole proprietor, Chua, to return the amount of

these checks to Metrobank.

This fulfills the requisites of solutio indebiti. Metrobank’s fourth-party complaint falls under the

quasi-contracts enunciated in Article 2154 of the Civil Code. Article 2154 embodies the concept

"solutio indebiti" which arises when something is delivered through mistake to a person who has

no right to demand it. It obligates the latter to return what has been received through mistake.Solutio indebiti, as defined in Article 2154 of the Civil Code, has two indispensable requisites:

first, that something has been unduly delivered through mistake; and second, that something

was received when there was no right to demand it.


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LILY LIM VS.

KOU CO PING

G.R. NO. 175256

Principle: A single act or omission that cause damage to an offended party may gave rise to two

separate civil liabilities on the part of the offender –(1)civil liability ex delicto, that is, civil liability

arising from the criminal offense under Article 100 of the Revised Penal Code and (2) independent

civil liability, that is civil liability that may be pursued independently of the criminal proceedings.

The independent civil liability may be based on “an obligation not arising from the act or omission

complained of as felony”. It may also be based on an act or omission that may constitute felony

but, nevertheless, treated independently from the criminal action by specific provision of the

Article 33 of the Civil Code.

FACTS: FR Cement Corporation issued several withdrawal authorities for the account of cement

dealers and traders, Fil-Cement and Tigerbilt. Each withdrawal authority contained provision thatit is valid for six months from its date of issuance, unless revoked by FRCC Marketing Department

.Filcement and Tigerbilt sold their withdrawal authorities to Co. On February Co then sold these

withdrawal authorities to Lim. Using the withdrawal authorities Lim withdrew cement bags from

FRCC on a staggered basis. Sometime in April 1999, FRCC did not allow Lim to withdraw the

remaining bags covered by the withdrawal authorities. Lim clarified the matter with Co and

administrative manager of Fil-Cement, who explained that the plant implemented a price

increase and would only release the goods once Lim pays the price difference or agrees to receive

lesser quantity of cement. Lim filed case of Estafa through Misappropriation or Conversion

against Co. The Regional Trial Court acquitted Co. After the trial on the civil aspect of the criminal

case the court also found Co not civilly liable. Lim sought a reconsideration which the regionaltrial Court denied. On March 14, 2005 Lim filed her notice of appeal on the civil aspect of the

criminal case. On April 19, 2005 Lim filed a complaint for specific performance and damages

before the RTC.

ISSUE: Whether or not there is no forum shopping for a private complainant to pursue a civil

complaint for specific performance and damages while appealing the judgment on the civil aspect

of a criminal case for estafa?

HELD: A single act or omission that cause damage to an offended party may gave rise to two

separate civil liabilities on the part of the offender – (1) civil liability ex delicto, that is, civil liability

arising from the criminal offense under Article 100 of the Revised Penal Code and (2) independent

civil liability, that is civil liability that may be pursued independently of the criminal proceedings.

The independent civil liability may be based on “an obligation not arising from the act or omission

complained of as felony”. It may also be based on an act or omission that may constitute felony

but, nevertheless, treated independently from the criminal action by specific provision of the

Article 33 of the Civil Code. Because of the distinct and independent nature of the two kinds of


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civil liabilities, jurisprudence holds that the offended party may pursue two types of civil liabilities

simultaneously or cumulatively, without offending the rules on forum shopping, litis pendentia

or res judicata. The criminal cases of estafa are based on culpa criminal while the civil action for

collection is anchored on culpa contractual. The first action is clearly a civil action ex delicto, it

having been instituted together with criminal action. On the other hand, the second action,

judging by the allegations contained in the complaint, is a civil action arising from contractual

obligation and fortuitous conduct. The Civil Case involves only the obligation arising from

contract and from tort, whereas the appeal in the estafa case involves only the civil obligations

of Co arising from the offense charged.


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GILAT SATELLITE VS.

UCPB

G.R. NO. 189563

Facts: One Virtual placed with Gilat Satellite Network (Gilat) a purchase order for various

telecommunications equipment, promising to pay portions of the price according to a payment

schedule. To ensure the prompt payment, it obtained a surety bond from defendant UCPB

General Insurance Co., Inc. (UCPB) in favor of Gilat

One Virtual failed to pay Gilat twice, prompting Gilat to write the surety UCPB two demand letters

for payment. However, UCPB failed to settle the amount.

Gilat filed a complaint against UCPB. The RTC, ruling in favor of Gilat, found that Gilat has already

complied with its end of the obligation, i.e. delivery and installation of the purchased equipment.

Demand notwithstanding, One Virtual and UCPB, as surety, failed to settle the obligation. The

lower court reasoned that UCPB, as surety, bound itself to pay in accordance with the Payment

Milestones. This obligation was not made dependent on any condition outside the terms andconditions of the Surety Bond and Payment Milestones.

However, the RTC denied Gilat’s claim for interest on the premise that the interest shall only

accrue when the delay or refusal to pay the principal obligation is without any justifiable cause.

Here, UCPB failed to pay its surety obligation because of the advice of its principal (One Virtual)

not to pay. The RTC then obligated UCPB to pay Gilat the principal debt (US $1.2 Million) under

the Surety Bond, with legal interest at the rate of 12% per annum computed from the time the

judgment becomes final and executory, plus attorney’s fees and litigation expenses.

The Court of Appeals (CA) dismissed the appeal of UCPB based on lack of jurisdiction. It ruled that

in "enforcing a surety contract, the ‘complementary-contracts-construed-together’ doctrine

finds application." In this case, the CA considered the arbitration clause contained in the PurchaseAgreement (principal contract) between Gilat and One Virtual as applicable and binding on the

parties to the suretyship agreement (accessory contract). Hence, the trial court’s Decision was

vacated. Gilat and One Virtual were ordered to proceed to arbitration.

Subject: Liability of a surety on the principal contract is direct, primary and absolute; The

existence of a suretyship agreement does not give the surety the right to intervene in the

principal contract, hence, surety cannot invoke the arbitration clause between the parties in the

principal contract; Interest, as a form of indemnity, may be awarded to a creditor in case of

inexcusable delay incurred by a debtor in the payment of his obligation

Held: Liability of a surety on the principal contract is direct, primary and absolute

1. The failure of One Virtual, as the principal debtor, to fulfill its monetary obligation to petitioner

Gilat gave the latter an immediate right to pursue UCPB as the surety.

2. In suretyship, the oft-repeated rule is that a surety’s liability is joint and solidary with that of

the principal debtor. This undertaking makes a surety agreement an ancillary contract, as it

presupposes the existence of a principal contract. Nevertheless, although the contract of a surety


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is in essence secondary only to a valid principal obligation, its liability to the creditor or "promise"

of the principal is said to be direct, primary and absolute; in other words, a surety is directly and

equally bound with the principal. He becomes liable for the debt and duty of the principal obligor,

even without possessing a direct or personal interest in the obligations constituted by the latter.

3. Thus, a surety is not entitled to a separate notice of default or to the benefit of excussion. It

may in fact be sued separately or together with the principal debtor.

4. Sureties do not insure the solvency of the debtor, but rather the debt itself. They are

contracted precisely to mitigate risks of non-performance on the part of the obligor. This

responsibility necessarily places a surety on the same level as that of the principal debtor. The

effect is that the creditor is given the right to directly proceed against either principal debtor or

surety. This is the reason why excussion cannot be invoked. To require the creditor to proceed

to arbitration would render the very essence of suretyship nugatory and diminish its value in

commerce. (See Palmares v. Court of Appeals)

The existence of a suretyship agreement does not give the surety the right to intervene in the

principal contract, hence, surety cannot invoke the arbitration clause between the parties in theprincipal contract

5. UCPB’s claim that the Purchase Agreement, being the principal contract to which the

Suretyship Agreement is accessory, must take precedence over arbitration as the preferred mode

of settling disputes, cannot be sustained.

6. The acceptance of a surety agreement does not change in any material way the creditor’s

relationship with the principal debtor nor does it make the surety an active party to the principal

creditor-debtor relationship. In other words, the acceptance [of the surety agreement] does not

give the surety the right to intervene in the principal contract. The surety’s role arises only upon

the debtor’s default, at which time, it can be directly held liable by the creditor for payment as a

solidary obligor. Hence, the surety remains a stranger to the Purchase Agreement. (SeeStronghold Insurance Co. Inc. v. Tokyu Construction Co. Ltd.)

7. UCPB cannot invoke in its favor the arbitration clause in the Purchase Agreement, because it

is not a party to that contract. An arbitration agreement being contractual in nature, it is binding

only on the parties thereto, as well as their assigns and heirs.

8. Section 24 of Republic Act No. 9285 is clear in stating that a referral to arbitration may only

take place "if at least one party so requests not later than the pre-trial conference, or upon the

request of both parties thereafter." UCPB has not presented evidence to show that either Gilat

or One Virtual submitted its contesting claim for arbitration.

Interest, by way of damages or indemnity, may be awarded to a creditor in case of inexcusable

delay incurred by a debtor in the payment of his obligation

9. Article 2209 of the Civil Code is clear: "[i]f an obligation consists in the payment of a sum of

money, and the debtor incurs a delay, the indemnity for damages, there being no stipulation to

the contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation,

the legal interest."

10. Delay arises from the time the obligee judicially or extrajudicially demands from the obligor

the performance of the obligation, and the latter fails to comply. Delay, as used in Article 1169,


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is synonymous with default or mora, which means delay in the fulfilment of obligations. It is the

nonfulfillment of an obligation with respect to time.

11. In order for the debtor (in this case, the surety) to be in default, it is necessary that the

following requisites be present:

(1) That the obligation be demandable and already liquidated; (2) that the debtor delays

performance; and (3) that the creditor requires the performance judicially or extrajudicially.

12. If a surety, upon demand, fails to pay, it can be held liable for interest, even if in thus paying,

its liability becomes more than the principal obligation. The increased liability is not because of

the contract, but because of the default and the necessity of judicial collection.

13. For delay to merit interest, it must be inexcusable in nature

14. In culpa contractual x x x the mere proof of the existence of the contract and the failure of its

compliance justify, prima facie, a corresponding right of relief. xxx A breach upon the contract

confers upon the injured party a valid cause for recovering that which may have been lost or

suffered. The remedy serves to preserve the interests of the promisee that may include his

"expectation interest," which is his interest in having the benefit of his bargain by being put in asgood a position as he would have been in had the contract been performed, or his "reliance

interest," which is his interest in being reimbursed for loss caused by reliance on the contract by

being put in as good a position as he would have been in had the contract not been made; or his

"restitution interest," which is his interest in having restored to him any benefit that he has

conferred on the other party. Indeed, agreements can accomplish little, either for their makers

or for society, unless they are made the basis for action. The effect of every infraction is to create

a new duty, that is, to make recompense to the one who has been injured by the failure of

another to observe his contractual obligation unless he can show extenuating circumstances, like

proof of his exercise of due diligence x x x or of the attendance of fortuitous event, to excuse him

from his ensuing liability. (See Guanio v. Makati-Shangri-la Hotel)15. Records are bereft of proof to show that UCPB’s delay was indeed justified by the

circumstances – that is, One Virtual’s advice regarding Gilat’s alleged breach of obligations.

16. As to the issue of when interest must accrue, our Civil Code is explicit in stating that it accrues

from the time judicial or extrajudicial demand is made on the surety. This ruling is in accordance

with the provisions of Article 1169 of the Civil Code and of the settled rule that where there has

been an extra-judicial demand before an action for performance was filed, interest on the

amount due begins to run, not from the date of the filing of the complaint, but from the date of

that extra-judicial demand. Interest must start to run from the time petitioner sent its first

demand letter (5 June 2000), because the obligation was already due and demandable at that

time.

17. Petitioner is rewarded legal interest at the rate of 6% per annum from 5 June 2000, its first

date of extra judicial demand, until the satisfaction of the debt.

18. "When the obligation is breached, and it consists in the payment of a sum of money, i.e., a

loan or forbearance of money, the interest due should be that which may have been stipulated

in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially

demanded. In the absence of stipulation, the rate of interest shall be 6% per annum to be


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computed from default, i.e., from judicial or extrajudicial demand under and subject to the

provisions of Article 1169 of the Civil Code. x x x When the judgment of the court awarding a sum

of money becomes final and executory, the rate of legal interest...shall be 6% per annum from

such finality until its satisfaction, this interim period being deemed to be by then an equivalent

to a forbearance of credit." (See Nacar v. Gallery Frames, modifying Eastern Shipping Lines v. CA)


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J PLUS ASIA DEVELOPMENT CORPORATION v.

UTILITY ASSURANCE CORPORATION

G.R. NO. 199650

FACTS: On December 24, 2007, petitioner and Martin E. Mabunay, doing business under the

name and style of Seven Shades of Blue Trading and Services, entered into a Construction

Agreement to build the former‘s 72-room condominium/hotel (Condotel Building 25). The

project, costing P42,000,000.00, was to be completed within one year or 365 days reckoned from

the first calendar day after signing of the Notice of Award and Notice to Proceed and receipt of

down payment (20% of contract price). The P8, 400,000.00 down payment was fully paid on

January 14, 2008. Payment of the balance of the contract price will be based on actual work

finished within 15 days from receipt of the monthly progress billings. Per the agreed work

schedule, the completion date of the project was December 2008. Mabunay also submitted the

required Performance Bond issued by respondent Utility Assurance Corporation (UTASSCO) in

the amount equivalent to 20% down payment or P8.4 million.The Construction Agreement provides for liquidated damages, as follows: ARTICLE 12 –

LIQUIDATED DAMAGES: 12.01 Time is of the essence in this Agreement. Should the

CONTRACTOR fail to complete the PROJECT within the period stipulated herein or within the

period of extension granted by the OWNER, plus One (1) Week grace period, without any

justifiable reason, the CONTRACTOR hereby agrees –

a. The CONTRACTOR shall pay the OWNER liquidated damages equivalent to One Tenth of One

Percent (1/10 of 1%) of the Contract Amount for each day of delay after any and all extensions

and the One (1) week Grace Period until completed by the CONTRACTOR. b. The CONTRACTOR,

even after paying for the liquidated damages due to unexecuted works and/or delays shall not

relieve it of the obligation to complete and finish the construction.Any sum which may be payable to the OWNER for such loss may be deducted from the amounts

retained under Article 9 or retained by the OWNER when the works called for under this

Agreement have been finished and completed.

Liquidated Damage[s] payable to the OWNER shall be automatically deducted from the

contractors’ collectibles without prior consent and concurrence by the CONTRACTOR.

12.02 To give full force and effect to the foregoing, the CONTRACTOR hereby, without necessity

of any further act and deed, authorizes the OWNER to deduct any amount that may be due under

Item (a) above, from any and all money or amounts due or which will become due to the

CONTRACTOR by virtue of this Agreement and/or to collect such amounts from the Performance

Bond filed by the CONTRACTOR in this Agreement.

Mabunay commenced work at the project site on January 7, 2008. On November 14, 2008, after

conducting a joint inspection and evaluation, the project was only thirty one point thirty nine

percent (31.39 %) complete.

On November 19, 2008, petitioner terminated the contract and sent demand letters to Mabunay

and respondent surety. As its demands went unheeded, petitioner filed a Request for Arbitration

before the Construction Industry Arbitration Commission (CIAC). Petitioner prayed that Mabunay


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and respondent be ordered to pay the sums of P8,980,575.89 as liquidated damages and

P2,379,441.53 corresponding to the unrecouped down payment or overpayment petitioner

made to Mabunay.

In his Answer, Mabunay claimed that the delay was caused by retrofitting and other revision

works ordered by Joo Han Lee. He asserted that he actually had until April 30, 2009 to finish the

project since the 365 days period of completion started only on May 2, 2008 after clearing the

retrofitted old structure. Hence, the termination of the contract by petitioner was premature and

the filing of the complaint against him was baseless, malicious and in bad faith.

ISSUE: Whether or not Mabunay had incurred delay in the performance of his obligations under

the Construction Agreement and is therefore liable.

HELD: Indeed, resolution of the issue of delay was crucial upon which depends petitioner‘s right

to the liquidated damages pursuant to the Construction Agreement.

Default or mora on the part of the debtor is the delay in the fulfillment of the prestation by reasonof a cause imputable to the former. It is the non-fulfillment of an obligation with respect to time.

Article 1169 of the Civil Code provides: ART. 1169. Those obliged to deliver or to do something

incur in delay from the time the obligee judicially or extrajudicially demands from them the

fulfillment of their obligation. It is a general rule that one who contracts to complete certain

work within a certain time is liable for the damage for not completing it within such time, unless

the delay is excused or waived. The Construction Agreement provides in Article 10 thereof the

following conditions as to completion time for the project

The CONTRACTOR shall complete the works called for under this Agreement within ONE (1)

YEAR or 365 Days reckoned from the 1st calendar day after signing of the Notice of Award and

Notice to proceed and receipt of down payment.In this regard the CONTRACTOR shall submit a detailed work schedule for approval by

OWNER within Seven (7) days after signing of this Agreement and full payment of 20% of the

agreed contract price. Said detailed work schedule shall follow the general schedule of activities

and shall serve as basis for the evaluation of the progress of work by CONTRACTOR.

In this jurisdiction, the following requisites must be present in order that the debtor may be in

default: (1) that the obligation be demandable and already liquidated; (2) that the debtor delays

performance; and (3) that the creditor requires the performance judicially or extrajudicially.

In holding that Mabunay has not at all incurred delay, the CA pointed out that the obligation to

perform or complete the project was not yet demandable as of November 19, 2008 when

petitioner terminated the contract, because the agreed completion date was still more than one

month away (December 24, 2008). Since the parties contemplated delay in the completion of the

entire project, the CA concluded that the failure of the contractor to catch up with schedule of

work activities did not constitute delay giving rise to the contractor‘s liability for damages.

Records showed that as early as April 2008, or within four months after Mabunay commenced

work activities, the project was already behind schedule for reasons not attributable to


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petitioner. In the succeeding months, Mabunay was still unable to catch up with his

accomplishment even as petitioner constantly advised him of the delays,xxx .

Liability for liquidated damages is governed by Articles 2226 to 2228 of the Civil Code, which

provide:

ART. 2226. Liquidated damages are those agreed upon by the parties to a contract, to be paid

in case of breach thereof.

ART. 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be

equitably reduced if they are iniquitous or unconscionable.

ART. 2228. When the breach of the contract committed by the defendant is not the one

contemplated by the parties in agreeing upon the liquidated damages, the law shall determine

the measure of damages, and not the stipulation.

A stipulation for liquidated damages is attached to an obligation in order to ensure performance

and has a double function: (1) to provide for liquidated damages, and (2) to strengthen the

coercive force of the obligation by the threat of greater responsibility in the event of breach. The

amount agreed upon answers for damages suffered by the owner due to delays in the completionof the project. As a precondition to such award, however, there must be proof of the fact of delay

in the performance of the obligation.

As already demonstrated, the contractor‘s default in this case pertains to his failure to

substantially perform the work on account of tremendous delays in executing the scheduled work

activities. Where a party to a building construction contract fails to comply with the duty imposed

by the terms of the contract, a breach results for which an action may be maintained to recover

the damages sustained thereby, and of course, a breach occurs where the contractor inexcusably

fails to perform substantially in accordance with the terms of the contract.


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GOLDEN VALLEY EXPLORATION, INC. (GVEI) VS.

PINKIAN MINING COMPANY (PMC) AND COPPER VALLEY, INC. (CVI).

G.R. NO. 190080

Facts: PMC is the owner of 81 mining claims 15 of which were covered by Mining Lease Contract

(MLC) while the remaining 66 had pending applications for lease. PMC entered into an Operating

Agreement (OA) with GVEI, granting the latter "full, exclusive and irrevocable possession, use,

occupancy, and control over the mining claims for a period of 25 years, with a stipulation that

GVEI’s non-payment of royalties would give PMC sufficient cause to cancel or rescind the OA, In

a letter, PMC extrajudicially rescinded the OA upon GVEI’s violations of thereof. GVEI contested

PMC’s extra-judicial rescission of the OA through a Letter.

PMC no longer responded to GVEI’s letter. Instead, it entered into a Memorandum of Agreement

(MOA) with CVI, whereby the latter was granted the right to enter, possess, occupy and control

the mining claims and to explore and develop the mining claims, among others, for a period of

25 years. Due to the foregoing, GVEI filed a Complaint Annulment of Contract and Damagesagainst PMC and CVI. The RTC declared the rescission of the OA void and the execution of the

MOA between PMC and CVI without force and effect. On appeal, the CA reversed the RTC ruling

and upheld the validity of PMC’s rescission of the OA and its subsequent execution of the MOA

with CVI.

Issue: Whether there was a valid rescission of the OA.

Held: Yes. In reciprocal obligations, either party may rescind the contract upon the other’s

substantial breach of the obligation/s he had assumed thereunder. Article 1191 of the Civil Code

which states that “the power to rescind obligations is implied in reciprocal ones, in case one ofthe obligors should not comply with what is incumbent upon him. The injured party may choose

between the fulfilment and the rescission of the obligation, with the payment of damages in

either case. He may also seek rescission, even after he has chosen fulfilment, if the latter should

become impossible”. As a general rule, the power to rescind an obligation must be invoked

judicially and cannot be exercised solely on a party’s own judgment that the other has committed

a breach of the obligation. This is so because rescission of a contract will not be permitted for a

slight or casual breach, but only for such substantial and fundamental violations as would defeat

the very object of the parties in making the agreement. As a well-established exception,

however, an injured party need not resort to court action in order to rescind a contract when the

contract itself provides that it may be revoked or cancelled upon violation of its terms and

conditions. By expressly stipulating in the OA that GVEI’s non -payment of royalties would give

PMC sufficient cause to cancel or rescind the OA, the parties clearly had considered such violation

to be a substantial breach of their agreement. Thus, in view of the above-stated jurisprudence

on the matter, PMC’s extra-judicial rescission of the OA based on the said ground was valid.


24/34

EDS MANUFACTURING INC vs.

HEALTHCHECK INT’L INC

G.R. NO: 162802

FACTS: -lcalth Maintenance Organization HMO) entered into a one-year

contract with DLSUMC in which HCI was to provide the employees of EMI and their dependents

as host of medical services and benefits

gan. HCI notified EMI that its accreditation

with DLSUMC was suspended and advised it to avail of the services of nearby accredited

institutions.

SUMC resumed services. Despite this

commitment, HCI failed to preserve its credit standing with DLSUMC prompting the latter to

suspend its accreditation for a second time. A third suspension was still to follow on and

remained in force until the end of the contract period.

s were notbeing honoured by the DLSUMC and other hospitals and physicians. EMI formally notified HCI

that it was rescinding their April 1998 Agreement on account of

HCI’s serious and repeated breach of its undertaking including but not limited to the unjustified

non-availability of services. It demanded a return of premium for the unused period in the cost

of P6 million.

the failure of EMI to collect all the

HMO cards of the employees and surrender them to HCI as stipulated in the Agreement. HCI had

to tell EMI on that its employees were still utilizing the cards even beyond the pretermination

date set by EMI. It asked for the surrender of the cards so that it could process the pretermination

of the contract and finalize the reconciliation of accounts.two letters demanding for the payment

ofP5,884,205 as the 2/3 portion of the premium that remained unutilized after the Agreement

was rescinded in the previous September.

-empted EMI’s threat of legal action by instituting the present case before the

Regional Trial Court of Pasig. The cause of action it presented was the unlawful pretermination

of the contract and failure of EMI to submit to a joint reconciliation of accounts and deliver such

assets as properly belonged to HCI.

an answer alleging that HCI reneged on its duty to provide adequate

medical coverage after EMI paid the premium in full. Having rescinded the contract, it claimed

that it was entitled to the unutilized portion of the premium, and that the accounting required

by HCI could not be undertaken until it submitted the monthly utilization reports mentioned in

the Agreement.

escission of the Agreement was not

done through court action or by a notarial act and was based on casual or slight breaches of the

contract. Moreover, despite the announced rescission, the employees of EMI continued to avail

of HCI’s services.


25/34

ional, (HCI)

substantially breached their agreement, it also appears that Eds Manufacturing, Inc. (EMI) did

not validly rescind the contract between them. Thus, the CA dismissed the complaint filed by HCI,

while at the same time dismissing the counterclaim filed by EMI.

id decision. However, the same was

denied in a Resolution dated March 16, 2004.

ISSUE: W/O/N There was a valid rescission of the agreement of the parties

RULING: We rule in the negative.

First, Article 1191 of the Civil Code states:

The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should

not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the obligation, with

the payment of damages in either case. He may also seek rescission, even after he has chosenfulfillment, if the latter should become impossible.

The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of

a period.

This is understood to be without prejudice to the rights of third persons who have acquired the

thing, in accordance with Articles 1385 and 1388 and the Mortgage Law.

The general rule is that rescission (more appropriately, resolution ) of a contract will not be

permitted for a slight or casual breach, but only for such substantial and fundamental violations

as would defeat the very object of the parties in making the agreement.

Thus, the rescission referred to in Article 1191, more appropriately referred to as resolution, is

on the breach of faith by one of the parties which is violative of the reciprocity between them.In the present case, it is apparent that HCI violated its contract with EMI to provide medical

service to its employees in a substantial way. As aptly found by the CA, the various reports made

by the EMI employees from July to August 1998 are living testaments to the gross denial of

services to them at a time when the delivery was crucial to their health and lives.

However, although a ground exists to validly rescind the contract between the parties, it appears

that EMI failed to judicially rescind the same. In Iringan v. Court of Appeals, this Court reiterated

the rule that in the absence of a stipulation, a party cannot unilaterally and extrajudicially rescind

a contract. A judicial or notarial act is necessary before a valid rescission (or resolution) can take

place. Thus – Clearly, a judicial or notarial act is necessary before a valid rescission can take place,

whether or not automatic rescission has been stipulated. It is to be noted that the law uses the

phrase "even though" emphasizing that when no stipulation is found on automatic rescission, the

judicial or notarial requirement still applies. x x x x

But in our view, even if Article 1191 were applicable, petitioner would still not be entitled to

automatic rescission. In Escueta v. Pando, we ruled that under Article 1124 (now Article 1191) of

the Civil Code, the right to resolve reciprocal obligations, is deemed implied in case one of the

obligors shall fail to comply with what is incumbent upon him. But that right must be invoked


26/34

judicially. The same article also provides: "The Court shall decree the resolution demanded,

unless there should be grounds which justify the allowance of a term for the performance of the

obligation."

This requirement has been retained in the third paragraph of Article 1191, which states that "the

court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a

period."

Consequently, even if the right to rescind is made available to the injured party, the obligation is

not ipso facto erased by the failure of the other party to comply with what is incumbent upon

him.

The party entitled to rescind should apply to the court for a decree of rescission. The right cannot

be exercised solely on a party’s own judgment that the other committed a breach of the

obligation. The operative act which produces the resolution of the contract is the decree of the

court and not the mere act of the vendor. Since a judicial or notarial act is required by law for a

valid rescission to take place, the letter written by respondent declaring his intention to rescind

did not operate to validly rescind the contract. What is more, it is evident that EMI had notrescinded the contract at all. As observed by the CA, despite EMI s pronouncement, it failed to

surrender the HMO cards of its employees although this was required by the Agreement, and

allowed them to continue using them beyond the date of the rescission. The in-patient and the

out-patient utilization reports submitted by 1 ICI shows entries as late as March 1999, signifying

that EMI employees 1 were availing of the services until the contract period were almost over.

The continued use by them of their privileges under the contract, with the apparent consent of

EMI, belies any intention to cancel or rescind it, even as they felt that they ought to have received

more than what they got.


27/34

OSCAR AND THELMA CACAYORIN VS.

ARMED FORCES AND POLICE MUTUAL BENEFIT ASSOCIATION, INC. (AFPMBAI)

G.R. NO. 171298

Facts: Oscar Cacayorin filed an application with AFPMBAI to purchase a property which the latter

owned through a loan facility. Oscar and his wife, Thelma, and the Rural Bank of San Teodoro

executed a Loan and Mortgage Agreement with the former as borrowers and the Rural Bank as

lender, under the auspices of PAG-IBIG. On the basis of the Rural Bank's letter of guaranty,

AFPMBAI executed in petitioners' favor a Deed of Absolute Sale, and a new title was issued in

their name. Then, the PAG-IBIG loan facility did not push through and the Rural Bank closed.

Meanwhile, AFPMBAI somehow was able to take possession of petitioners' loan documents and

the TCT, while petitioners were unable to pay the loan for the property. AFPMBAI made written

demands for petitioners to pay the loan for the property. Then, petitioners filed with the RTC a

complaint for consignation of loan payment, recovery of title and cancellation of mortgage

annotation against AFPMBAI, PDIC and the Register of Deeds of Puerto Princesa City. AFPMBAIfiled a motion to dismiss claiming that petitioners' Complaint falls within the jurisdiction of the

Housing and Land Use Regulatory Board (HLURB), as it was filed by petitioners in their capacity

as buyers of a subdivision lot and it prays for specific performance of contractual and legal

obligations decreed under Presidential Decree No. 957(PD 957). It added that since no prior valid

tender of payment was made by petitioners, the consignation case was fatally defective and

susceptible to dismissal.

Issue: Whether or not the case falls within the exclusive jurisdiction of the HLURB.

Ruling: No. Unlike tender of payment which is extrajudicial, consignation is necessarily judicial;hence, jurisdiction lies with the RTC, not with the HLURB. Under Article 1256 of the Civil Code,

the debtor shall be released from responsibility by the consignation of the thing or sum due,

without need of prior tender of payment, when the creditor is absent or unknown, or when he is

incapacitated to receive the payment at the time it is due, or when two or more persons claim

the same right to collect, or when the title to the obligation has been lost. The said provision

clearly precludes consignation in venues other than the courts.


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ADELAIDA SORIANO V.

PEOPLE OF THE PHILIPPINES

G.R. NO. 181692

Facts: Evelyn Alagao (Evelyn), daughter of private complainant Consolacion Alagao(Alagao), as

borrower-mortgagor, executed a “Contract of Loan Secured by Real Estate Mortgage with Special

Power to Sell Mortgage Property without Judicial Proceedings “in favour of petitioner as lender-

mortgagee. The instrument provides for a P40, 000 loan secured by a parcel of land registered in

Evelyn’s name. It likewise provides that the loan was to be paid two years from the date of

execution of the contract and that Evelyn agrees to give petitioner¼ of every harvest from her

corn land until the full amount of the loan has been paid, starting from the first harvest. Based

on Alagao’s testimony, the first harvest was made only in September 1994. Petitioner on the

other hand claims that from the time the loan was obtained until September 1994, there were

already four harvests. During pre-trial, it was admitted by Alagao that she did not only receive

P40,000 as provided in the contract of loan but P51,730 in the form of fertilizers and cashadvances. Alagao and some companions delivered 398 sacks of corn grains to petitioner.

Petitioner prepared a voucher indicating that Alagao had received the amount of P85,607 as full

payment for the 398 sacks of corn grains. Alagao signed said voucher even if she only received

P3,000. According to Alagao, 64 of the 398 sacks will serve as partial payment of her P40,000 loan

with petitioner while the remaining balance will come from theP85,607 cash she was supposed

to receive as payment for the corn grains delivered so she can redeem her daughter’s land title.

The Regional Trial Court (RTC) of Misamis Oriental, Branch 40, rendered a decision finding

petitioner guilty beyond reasonable doubt of the crime of estafa. However, the CA set

petitioner’s conviction aside in the assailed decision. The CA ruled that the prosecution failed to

establish that petitioner made false pretenses, fraudulent acts or fraudulent means to induceAlagao to deliver to her the 398 sacks of corn grains. In fact, in Alagao’s testimony, she admitted

that she delivered the corn grains to petitioner because the latter was demanding payment from

her and she wanted to pay her obligation of P40,000 to petitioner so that she could get back the

title of her daughter’s mortgaged property and the balance of the total cash value of the 398

sacks of corn. Thus, the CA held, in the absence of deceit, petitioner’s liability is only civil.

Unsatisfied, petitioner is now before the Supreme Court questioning her civil liability.

Issue: Whether legal compensation is proper.

Held: Yes. Compensation is a mode of extinguishing to the concurrent amount, the debts of

persons who in their own right are creditors and debtors of each other. The object of

compensation is the prevention of unnecessary suits and payments through the mutual

extinction by operation of law of concurring debts. Article 1279 of the Civil Code provides for the

requisites for compensation to take effect and the Court ruled that all the requisites for

compensation are present in the instant case. First, petitioner and Alagao are debtors and

creditors of each other. It is undisputable that petitioner and Alagao owe each other sums of


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money. Petitioner owes P85,607 for the value of the corn grains delivered to her by Alagao in

September 1994 while Alagao owes petitioner P51,730 by virtue of a loan extended by the latter

in February 1994.Second, both debts consist in a sum of money. There is no issue as to the

P85,607 debt by petitioner that it consists a sum of money. As to the P51,730 received by Alagao

from petitioner, though what was extended by petitioner consists of cash advances and

fertilizers, there is no dispute that said amount is payable in money. Third, both debts are due.

Upon delivery of the 398 sacks to petitioner, she was under the obligation to pay for the value

thereof as buyer. As to Alagao’s debt, the contract of loan provided that it is payable in February

1996. Though it was not yet due in September 1994 when she delivered the 398 sacks of corn

grains to petitioner, it eventually became due at the time of trial of the instant case. Fourth, both

debts are liquidated and demandable. A debt is liquidated when the amount is known or is

determinable by inspection of the terms and conditions of relevant documents. There is no

dispute that the value of the 398 sacks of corn grains is P85,607. And lastly, neither of the debts

are subject of a controversy commenced by a third person. There are no third-party claims with

respect to Alagao’sP51,730 loan. As to petitioner’s P85,607 debt representing the 398 sacks ofcorn grains, the alleged other owners have not commenced any action to protect their claim over

it. Thus, the P85, 607 debt cannot be considered subject of a controversy by a third person. With

respect to the 1/4 share in the harvest due to petitioner as provided in the contract of loan, the

same cannot be considered in the legal compensation of the debts of the parties since it does

not consist in a sum of money, said share being in the form of harvests. More importantly, it is

not yet liquidated. There is still a dispute as to how many harvests were made from the time of

the execution of contract of loan up to the time the action was commenced against petitioner

and even when the principal obligation became due in February 1996. Thus, the harvests due

petitioner is not capable of determination.


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DAVID VS.

DAVID

G.R.NO.162365

FACTS: On July 7, 1995, Respondent Eduardo C. David (Eduardo), and his brother Edwin C. David

(Edwin), acting on their own and in behalf of their co-heirs, sold their inherited properties to

Petitioner Roberto R. David (Roberto), specifically: (a) a 1,231 square meters parcel of land,

together with all the improvements thereon, located in Baguio City (Baguio City lot); and (b) 2

units International CO 967- Truck Tractor with two Mi-Bed Trailers. A deed of sale with

assumption of mortgage (deed of sale) embodied the terms of their agreement, stipulating that

the consideration for the sale was P6,000,000.00, of which P2,000,000.00 was to be paid to

Eduardo and Edwin, and the remaining P4,000,000.00 to be paid to Development Bank of the

Philippines (DBP) in Baguio City to settle the outstanding obligation secured by a mortgage on

such properties. Eduardo and Edwin was given the right to repurchase within 3 years from the

execution of the deed of sale based on the purchase price agreed upon, plus 12% interest perannum.

A memorandum of agreement (MOA) was executed by Roberto and Edwin in April 1997, with

spouses Marquez and Soledad Go, by which they agreed to sell the Baguio City lot to the latter

for P10,000,000.00. The Spouses Go then deposited the amount of P10,000,000.00 to Robertos

account. Thereafter, Roberto gave Eduardo P2,800,00.00 and returned to him one of the truck

tractors and trailers subject of the deed of sale.

When Eduardo demanded for the return of the other truck tractor and trailer but Roberto

refused, he initiated a replevin suit again the latter, alleging that he was exercising his right torepurchase under the deed of sale. Roberto then denied that Eduardo could repurchase the

properties in question; and insisted that the MOA had extinguished their deed of sale by

novation.

The RTC rendered a judgment in favor of Eduardo on December 5, 2001. RTC opined that the

stipulation giving Eduardo the right to repurchase had made the deed of sale a conditional sale;

that Eduardo had fulfilled the conditions for the exercise of the right to repurchase; that the

ownership of the properties had reverted to Eduardo; that Robertos defense of novation had no

merit; and that due to Roberto's bad faith in refusing to satisfy Eduardos claim.

Roberto appealed to the CA.

The CA affirmed the decision of RTC. It opined that although there was no express exercise of the

right to repurchase, the sum of all the relevant circumstances indicated that there was an

exercise of the right to repurchase pursuant to the deed of sale, that the findings of the RTC to

the effect that the conditions for the exercise of the right to repurchase had been adequately

satisfied by Eduardo, and that no novation as claimed by Roberto had intervened.


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The CA denied Robert's motion for reconsideration. Hence, Roberto filed a petition for review on

certiorari.

ISSUE: Whether or not Respondent Eduardo exercised his right to repurchase?

HELD: Respondent Eduardo exercised his right to repurchase.

CIVIL LAW: right to repurchase

A sale with right to repurchase is governed by Article 1601 of the Civil Code, which provides that:

Conventional redemption shall take place when the vendor reserves the right to repurchase the

thing sold, with the obligation to comply with the provisions of Article 1616 and other stipulations

which may have been agreed upon. Conformably with Article 1616, the seller given the right to

repurchase may exercise his right of redemption by paying the buyer: (a) the price of the sale, (b)

the expenses of the contract, (c) legitimate payments made by reason of the sale, and (d) thenecessary and useful expenses made on the thing sold.

The CA and the RTC both found and held that Eduardo had complied with the conditions

stipulated in the deed of sale and prescribed by Article 1616 of the Civil Code. From the testimony

of the defendant himself, the preconditions for the exercise of the plaintiffs right to repurchase

were adequately satisfied by the latter. The alleged repurchase was exercised within the

stipulated period of 3 years from the time the Deed of Sale was executed. Moreover, the

defendant returned to plaintiff the amount of P2,800,000.00 from the total purchase price of

P10,000,000.00. This only means that this is the excess amount pertaining to plaintiff and co-

heirs after the defendant deducted the repurchase price of P2,000,000.00 plus interests and hisexpenses. Add to that is the fact that defendant returned one of the trucks and trailers subject

of the Deed of Sale.

In Metropolitan Bank and Trust Company v. Tan, the court ruled that a redemption within the

period allowed by law is not a matter of intent but of payment or valid tender of the full

redemption price within the period. Verily, the tender of payment is the sellers manifestation of

his desire to repurchase the property with the offer of immediate performance.

In the present case, Eduardo paid the repurchase price to Roberto by depositing the proceeds of

the sale of the Baguio City lot in the latter's account. Such payment was an effective exercise of

the right to repurchase. On the other hand, the court dismissed as devoid of merit Roberto's

insistence that the MOA had extinguished the obligations established under the deed of sale by

novation. In sales with the right to repurchase, the title and ownership of the property sold are

immediately vested in the vendee, subject to the resolutory condition of repurchase by the

vendor within the stipulated period. Accordingly, the ownership of the affected properties


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reverted to Eduardo once he complied with the condition for the repurchase, thereby entitling

him to the possession of the other motor vehicle with trailer.


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NARCISO DEGAÑOS v

PEOPLE

G.R. No. 162826

FACTS: In an amended information, the Office of the Provincial Prosecutor charged Aida Luz, and

Narciso Degaños in the RTC with estafa under Article 315 of the RPC allegedly committed as

follows: That they received from Sps Atty. Bordador gold and pieces of jewelry worth almost 500k

under express obligation to sell the same on commission and remit the proceeds thereof or

return the unsold gold and pieces of jewelry, but the said accused, once in possession of the said

merchandise and far from complying with their obligation, in spite of repeated demands for

compliance therewith, wilfully, unlawfully and feloniously, with intent of gain and grave abuse of

confidence misapply, misappropriate and convert to their own use and benefit the said

merchandise and/or the proceeds thereof, to the damage and prejudice of said Sps. Atty.

Bordador in the said amount of almost 500k.Prior to the institution of the instant case, a separate

civil action for the recovery of sum of money was filed by the Sps. Bordador against accused Aidaand Narciso. In an amended complaint Ernesto Luz, husband of Aida, was impleaded as party

defendant. RTC found Narciso liable and ordered him to pay the sum of P725,463,98 as actual

and consequential damages plus interest and attorney’s fees in the amount of P10,000.00. On

the other hand, Aida was ordered to pay the amount of P21,483.00, representing interest on her

personal loan. The case against Ernesto Luz was dismissed for insufficiency of evidence. Both

parties appealed to the CA which affirmed the aforesaid decision. On further appeal, the SC

sustained the CA. While the said civil case was pending, the private complainants instituted the

present case against the accused. Narciso and Aida Luz are brother and sister. Lydia knew them

because they are the relatives of her husband. The usual business practice of Sps. Atty Bordador

with the accused was for Narciso to receive the jewelry and gold items for and in behalf of Aidaand for Narciso to sign the "Kasunduan at Katibayan" receipts while Aida will pay for the price

later on. The subject items were usually given to Narciso only upon instruction from Aida through

telephone calls or letters. Said business arrangement went on for quite some time since Narciso

and Aida Luz had been paying religiously. When the accused defaulted in their payment, they

sent demand letters Aida sent a letter to Lydia Bordador requesting for an accounting of her

indebtedness. Lydia made an accounting which contained the amount of P122,673.00 as principal

and P21,483.00 as interest. Thereafter, she paid the principal amount through checks. She did

not pay the interest because the same was allegedly excessive. Atty. Jose Bordador brought a

ledger to her and asked her to sign the same. The said ledger contains a list of her supposed

indebtedness to the private complainants. She refused to sign the same because the contents