Arrieta vs NRCC
ARRIETA VS. NARIC
FACTS:
Paz Arrieta was awarded by NARIC the contract of delivery of
20,000 metric tons of Burmese rice at $203 per metric ton. On the
other hand, the corporation committed itself to pay for the
imported rice by means of an irrevocable, confimed, and assignable
letter of credit in US currency in favor of Arrieta or supplier in
Burma immediately. However, the corporation took the first step to
open a letter of credit a full month from the execution of the
contract only July 30, 1952. On the same day, Arrieta advised the
corporation of the extreme necessity for the immediate opening of
the letter of credit since she had by then made a tender to her
supplier in Ragoon Burma. Consequently, the credit instrument
applied for was opened only on September 8, 1952, since the
corporation was not in financial capacity to pay the 50% marginal
cash deposit when the credit instrument was approved on August 4,
1952.
As a result of the delay, the allocation of Arrieta was
cancelled and the 5% deposit, approximately Php 200,000, was
forfeited. Arrieta tried to restore the cancelled Burmese rice
allocation, but failed. Arrieta then instead offered to substitute
Thailand rice to NARIC, communicating that such was a solution
which should be beneficial for both parties. However, the
corporation rejected the substitution. Hence, Arrieta sent a letter to
the corporation, demanding for the compensation for the damages
caused her.
ISSUE:
1. Was the failure to open immediately the letter of credit in
dispute amounted to a breach of the contract for which the
corporation should be held liable?
2. Was there any waiver on the part of Arrieta?
RULING:
1. Yes. It was clear from the records that the sole and principal
reason for the cancellation of the allocation contracted by Arrieta in
Ragoon, Burma was the failure of the letter of credit to be opened.
The failure, therefore, was the immediate cause for the consequent
damage which resulted. It was clear from the records that the delay
in the opening of the letter of credit was due to the inability of the
corporation to meet the condition imposed by the bank for the
granting the same.
Furthermore, the liability of the corporation stemmed not
alone from failure or inability to satisfy the requirements of the
bank, but its culpability arose from is willful and deliberate
assumption of contractual obligations even as it was well aware of
its financial incapacity to undertake the prestation. Under Article
1170, “those who in the performance of their obligation are guilty
of fraud, negligence, or delay and those who in any manner
contravene the tenor thereof, are liable in damages.” The terms “in
any manner contravene the tenor thereof” includes any illicit act
which impairs the strict and faithful fulfillment of the obligation, or
every kind or defective performance. In general also, every debtor
who fails in the performance of his obligation is bound to indemnify
for the losses and damages caused thereby.
The payment for damages or the award to be given should be
converted into the Philippine peso at the rate of exchange prevailing
at the time the obligation was incurred pursuant to RA 527.
2. No. The subsequent offer to substitute the Thailand rice for
the originally contracted Burmese did not constitute a waiver.
Waivers are not presumed. It must be clearly and convincingly
shown either by express stipulations or acts admitting no other
reasonable explanation. In this case, no such intent to waive had
been established.
Tibajia vs CA
Tibajia spouses delivered to Sheriff the total money judgment in
cashier’s check and cash.Private respondent, Eden Tan, refused to
accept the payment made by the Tibajia spouses and instead
insisted that the garnished funds deposited with the cashier of the
Regional Trial Court of Pasig, Metro Manila be withdrawn to satisfy
the judgment obligation. Tibajias filed a motion to lift the writ of
execution on the ground that the judgment debt had already been
paid. The motion was denied.
ISSUE
Whether or not payment by means of cashier’s check is considered
payment in legal tender.
RULING
NO. A check, whether a manager’s check or ordinary check, is not
legal tender, and an offer of a check in payment of a debt is not a
valid tender of payment and may be refused receipt by the obligee
or creditor. A check is not legal tender and that a creditor may
validly refuse payment by check, whether it be a manager’s,
cashier’s or personal check. The Supreme Court stressed that, “We
are not, by this decision, sanctioning the use of a check for the
payment of obligations over the objection of the creditor.”
Tibajia vs CA
A suit for collection of a sum of money filed by Eden Tan against the
Tibajia spouses
A writ of attachment was issued by the trial court
The Deputy Sheriff filed a return stating that a deposit made by the
Tibajia spouses had been garnished by him.
Tibajia spouses delivered to Deputy Sheriff Eduardo Bolima the total
money judgment in check
Private respondent refused to accept the payment made by the
Tibajia spouses and instead insisted that the garnished funds
deposited be withdrawn to satisfy the judgment obligation.
Petitioners filed a motion to lift the writ of execution on the ground
that the judgment debt had already been paid
Motion was denied by the trial court on the ground that payment in
cashier's check is not payment in legal tender and that payment was
made by a third party other than the defendant
ISSUE
WHETHER OR NOT THE BPI CASHIER'S CHECK TENDERED BY
PETITIONERS FOR PAYMENT OF THE JUDGMENT DEBT, IS "LEGAL
TENDER"
RULING
The provisions of law applicable to the case at bar are the following:
a. Article 1249 of the Civil Code which provides:
Art. 1249. The payment of debts in money shall be made in the
currency stipulated, and if it is not possible to deliver such currency,
then in the currency which is legal tender in the Philippines.
The delivery of promissory notes payable to order, or bills of
exchange or other mercantile documents shall produce the effect of
payment only when they have been cashed, or when through the
fault of the creditor they have been impaired.
In the meantime, the action derived from the original obligation
shall be held in abeyance.;
b. Section 1 of Republic Act No. 529, as amended, which
provides:
Sec. 1. Every provision contained in, or made with respect to, any
obligation which purports to give the obligee the right to require
payment in gold or in any particular kind of coin or currency other
than Philippine currency or in an amount of money of the
Philippines measured thereby, shall be as it is hereby declared
against public policy null and void, and of no effect, and no such
provision shall be contained in, or made with respect to, any
obligation thereafter incurred. Every obligation heretofore and
hereafter incurred, whether or not any such provision as to
payment is contained therein or made with respect thereto, shall be
discharged upon payment in any coin or currency which at the time
of payment is legal tender for public and private debts
Section 63 of Republic Act No. 265, as amended (Central Bank Act)
which provides:
Sec. 63. Legal character — Checks representing deposit money do
not have legal tender power and their acceptance in the payment of
debts, both public and private, is at the option of the creditor:
Provided, however, that a check which has been cleared and
credited to the account of the creditor shall be equivalent to a
delivery to the creditor of cash in an amount equal to the amount
credited to his account.
In the recent cases of Philippine Airlines, Inc. vs. Court of Appeals 4
and Roman Catholic Bishop of Malolos, Inc. vs. Intermediate
Appellate Court, 5 this Court held that —
A check, whether a manager's check or ordinary check, is not legal
tender, and an offer of a check in payment of a debt is not a valid
tender of payment and may be refused receipt by the obligee or
creditor.
DBP vs CA
FACTS:
Lydia P. Cuba is a grantee of a Fishpond Lease Agreement from the
Government
Cuba obtained loans from DBP stated under promissory notes dated
September 6, 1974; August 11, 1975; and April 4, 1977 executing 2
Deeds of Assignment of her Leasehold Rights as security
Upon failure to pay, without foreclosure proceedings it was
appropriated and DBP executed in turn a Deed of Conditional Sale
of the Leasehold Rights in her favor
Her offer to repurchase was accepted and a new Fishpond Lease
Agreement was issued by the Ministry of Agriculture and Food in
her favor alone excluding her husband
Failing to pay her amortizations, she entered into a temporary
agreement with DBP
Soon, she was sent a Notice of Rescission and DBP took possession
of the Leasehold Rights of the fishpond
After the public bidding, DBP executed a Deed of Conditional Sale in
favor of defendant Agripina Caperal
Cuba filed against DBP since no foreclosure proceedings was done
thus, contrary to Article 2088 of the Civil Code
RTC: favored Cuba, it being a pactum commissorium
return leasehold rights to Cuba
entitling P1,067,500 actual damages, P100,000 moral and P50,000
exemplary damages and P100,000 attorney’s fees
CA: leasehold rights to Caperal as valid but same damages
ISSUE: W/N Cuba should be awarded with actual and compensatory
damages
HELD: NO. CA reversed except the P50,000 as moral damages.
REMANDED to the trial court for the reception of the income
statement of DBP, as well as the statement of the account of Lydia
P. Cuba, and for the determination of each party’s financial
obligation to one another
assignment of leasehold rights was a mortgage contract (Article
2087)
not novated, cession (Article 1255 of the Civil Code), dation in
payment (Article 1245 of the civil Code), pactum commissorium
condition no. 12 did not provide that CUBA’s default would operate
to vest in DBP ownership of the said rights
The fact that CUBA offered and agreed to repurchase her leasehold
rights from DBP did not estop her from questioning DBP’s act of
appropriation.
estoppel cannot give validity to an act that is prohibited by law or
against public policy
alleged loss of personal belongings and equipment was not proved
by clear evidence. Other than the testimony of CUBA and her
caretaker, there was no proof as to the existence of those items
before DBP took over the fishpond in question. Neither was a single
receipt or record of acquisition presented.

dated 17 May 1985, CUBA included “losses of property” as among

the damages resulting from DBP’s take-over of the fishpond. Yet, it
was only in September 1985 when her son and a caretaker went to
the fishpond and the adjoining house that she came to know of the
alleged loss of several articles

bangus which died also not duly proved nor was it expressed in her
later 7 months after DBP took over

The award of actual damages should, therefore, be struck down for

lack of sufficient basis

Exemplary or corrective damages in the amount of P25,000 should

likewise be awarded by way of example or correction for the public
good. There being an award of exemplary damages, attorney’s fees
are also recoverable
______________________________________________________

Pabugais vs Sahijwani
ETPI vs ETEV

Eastern Telecommunications Phils., Inc. (ETPI) is a corporation

engaged in the business of providing telecommunications facilities.
Eastern Telecoms Employees Union (ETEU) is the certified exclusive
bargaining agent of the company’s rank and file employees. It has
an existing CBA with the company to expire in the year 2004 with a
Side Agreement signed on September 3, 2001.
In essence, the labor dispute was a spin-off of the company’s plan to
defer payment of the 2003 14th, 15th and 16th month bonuses
sometime in April 2004. The company’s main ground in postponing
the payment of bonuses is due to allege continuing deterioration of
company’s financial position which started in the year 2000.
However, ETPI while postponing payment of bonuses sometime in
April 2004, such payment would also be subject to availability of
funds.
Invoking the Side Agreement of the existing CBA for the period
2001-2004 between ETPI and ETEU, the union strongly opposed the
deferment in payment of the bonuses by filing a preventive
mediation complaint with the NCMB.
Later, the company made a sudden turnaround in its position by
declaring that they will no longer pay the bonuses until the issue is
resolved through compulsory arbitration.
Thus ETEU filed a Notice of Strike on the ground of unfair labor
practice for failure of ETPI to pay the bonuses in gross violation of
the economic provision of the existing CBA.
ETPI insists that it is under no legal compulsion to pay 14th, 15th
and 16th month bonuses for the year 2003 and 14th month bonus
for the year 2004 contending that they are not part of the
demandable wage or salary and that their grant is conditional based
on successful business performance and the availability of company
profits from which to source the same. To thwart ETEU’s monetary
claims, it insists that the distribution of the subject bonuses falls
well within the company’s prerogative, being an act of pure gratuity
and generosity on its part. Thus, it can withhold the grant thereof
especially since it is currently plagued with economic difficulties and
financial losses.
ETPI further avers that the act of giving the subject bonuses did not
ripen into a company practice arguing that it has always been a
contingent one dependent on the realization of profits and, hence,
the workers are not entitled to bonuses if the company does not
make profits for a given year. It asseverates that the 1998 and 2001
CBA Side Agreements did not contractually afford ETEU a vested
property right to a perennial payment of the bonuses. It opines that
the bonus provision in the Side Agreement allows the giving of
benefits only at the time of its execution. For this reason, it cannot
be said that the grant has ripened into a company practice.
ISSUES: Is ETPI is liable to pay 14th, 15th and 16th month bonuses
for the year 2003 and 14th month bonus for the year 2004 to the
members of respondent union?
HELD: YES
 month bonuses in the 1998-2001 CBA Side Agreement, as well as in
the 2001-2004 CBA Side Agreement, which was signed on
From a legal point of view, a bonus is a gratuity or act of liberality of
September 3, 2001. The provision, which was similarly worded,
the giver which the recipient has no right to demand as a matter of
states:
right. The grant of a bonus is basically a management prerogative
which cannot be forced upon the employer who may not be obliged
to assume the onerous burden of granting bonuses or other
Employment-Related Bonuses
benefits aside from the employee’s basic salaries or wages.

The Company confirms that the 14th, 15th and 16th month bonuses
A bonus, however, becomes a demandable or enforceable
(other than the 13th month pay) are granted.
obligation when it is made part of the wage or salary or
compensation of the employee. Particularly instructive is the ruling
of the Court in Metro Transit Organization, Inc. v. NLRC, where it
was written: A reading of the above provision reveals that the same provides for
the giving of 14th, 15th and 16th month bonuses without
qualification. The wording of the provision does not allow any other
interpretation. There were no conditions specified in the CBA Side
Whether or not a bonus forms part of wages depends upon the
Agreements for the grant of the benefits contrary to the claim of
circumstances and conditions for its payment. If it is additional
ETPI that the same is justified only when there are profits earned by
compensation which the employer promised and agreed to give
the company. Terse and clear, the said provision does not state that
without any conditions imposed for its payment, such as success of
the subject bonuses shall be made to depend on the ETPI’s financial
business or greater production or output, then it is part of the wage.
standing or that their payment was contingent upon the realization
But if it is paid only if profits are realized or if a certain level of
of profits. Neither does it state that if the company derives no
productivity is achieved, it cannot be considered part of the wage.
profits, no bonuses are to be given to the employees. In fine, the
Where it is not payable to all but only to some employees and only
payment of these bonuses was not related to the profitability of
when their labor becomes more efficient or more productive, it is
business operations.
only an inducement for efficiency, a prize therefore, not a part of
the wage.

The records are also bereft of any showing that the ETPI made it
clear before or during the execution of the Side Agreements that
In the case at bench, it is indubitable that ETPI and ETEU agreed on
the bonuses shall be subject to any condition. Indeed, if ETPI and
the inclusion of a provision for the grant of 14th, 15th and 16th
ETEU intended that the subject bonuses would be dependent on the
company earnings, such intention should have been expressly
declared in the Side Agreements or the bonus provision should have
been deleted altogether. Verily, by virtue of its incorporation in the
CBA Side Agreements, the grant of 14th, 15th and 16th month
bonuses has become more than just an act of generosity on the part
of ETPI but a contractual obligation it has undertaken. Moreover,
the continuous conferment of bonuses by ETPI to the union
members from 1998 to 2002 by virtue of the Side Agreements
evidently negates its argument that the giving of the subject
bonuses is a management prerogative.
Granting arguendo that the CBA Side Agreement does not
contractually bind petitioner ETPI to give the subject bonuses,
nevertheless, the Court finds that its act of granting the same has
become an established company practice such that it has virtually
become part of the employees’ salary or wage. A bonus may be
granted on equitable consideration when the giving of such bonus
has been the company’s long and regular practice. In Philippine
Appliance Corporation v. CA, it was pronounced:
To be considered a “regular practice,” however, the giving of the
bonus should have been done over a long period of time, and must
be shown to have been consistent and deliberate. The test or
rationale of this rule on long practice requires an indubitable
showing that the employer agreed to continue giving the benefits
knowing fully well that said employees are not covered by the law
requiring payment thereof.
The records show that ETPI, aside from complying with the regular
13th month bonus, has been further giving its employees 14th
month bonus every April as well as 15th and 16th month bonuses
every December of the year, without fail, from 1975 to 2002 or for
27 years whether it earned profits or not. The considerable length
of time ETPI has been giving the special grants to its employees
indicates a unilateral and voluntary act on its part to continue giving
said benefits knowing that such act was not required by law.
Accordingly, a company practice in favor of the employees has been
established and the payments made by ETPI pursuant thereto
ripened into benefits enjoyed by the employees.
NOTES:
From the foregoing, ETPI cannot insist on business losses as a basis
for disregarding its undertaking. It is manifestly clear that although
it incurred business losses in the year 2000, it continued to
distribute 14th, 15th and 16th month bonuses for said year.
Notwithstanding such huge losses, ETPI entered into the 2001-2004
CBA Side Agreement on September 3, 2001 whereby it contracted
to grant the subject bonuses to ETEU in no uncertain terms. ETPI
continued to sustain losses for the succeeding years of 2001 and
2002. Still and all, this did not deter it from honoring the bonus
provision in the Side Agreement as it continued to give the subject
bonuses to each of the union members in 2001 and 2002 despite its
alleged precarious financial condition. Parenthetically, it must be
emphasized that ETPI even agreed to the payment of the 14th, 15th
and 16th month bonuses for 2003 although it opted to defer the
actual grant in April 2004. All given, business losses could not be
cited as grounds for ETPI to repudiate its obligation under the 2001- a full payment of IGLF loan. However, respondent filed a collection
2004 CBA Side Agreement. case against petitioner after it failed to pay the remaining balance.
Petitioner contended that through respondent’s president, Carlos
The Court finds no merit in ETPI’s contention that the bonus
Sobrepeñas, it was agreed to condone or waive the penalties and
provision confirms the grant of the subject bonuses only on a single
service charges as well as a voucher showing the full payment of the
instance because if this is so, the parties should have included such
petitioners. The trial court rendered a decision in favor of
limitation in the agreement. Nowhere in the Side Agreement does it
respondents which was sustained by CA.
say that the subject bonuses shall be conferred once during the year
the Side Agreement was signed.

The giving of the subject bonuses cannot be peremptorily

withdrawn by ETPI without violating Article 100 of the Labor Code:

Art. 100. Prohibition against elimination or diminution of benefits. –

ISSUE:
Nothing in this Book shall be construed to eliminate or in any way
diminish supplements, or other employee benefits being enjoyed at
the time of promulgation of this Code.
Whether or not there was condonation on petitioner’s loan

The rule is settled that any benefit and supplement being enjoyed
by the employees cannot be reduced, diminished, discontinued or
eliminated by the employer. The principle of non-diminution of
benefits is founded on the constitutional mandate to protect the
rights of workers and to promote their welfare and to afford labor HELD:
full protection.

YAM & YEK SUN Lent vs CA NO. The appointment of a receiver operates to suspend the
authority of a corporation and of its directors and officers over its
Petitioners Victor Yam and Yek Sun obtained an IGLF loan from
property and effects, such authority being reposed in the receiver.
respondent Manphil Invest Corporation in the amount of Php
Sobrepeñas has no authority to condone the debt. The notation on
300,000 with interest. It was secured by chattel mortgage. On April
the voucher covering the check payment that a “full payment of
2, 1985, respondent was placed under receivership of Central Bank.
IGLF loan” was made does not bind respondent. It would have been
Petitioners paid on July 31, 1986 which was received by Central
different if the notated appeared in the receipt issued by the
Bank. It contained a notation on the voucher that there was already
corporation through its receiver, which would be an admission
against interest. Express condonation must comply the forms of
donation. Where the value exceeds Php 5,000, the donation and
acceptance must be made in writing; otherwise, void.
Mirasol v CA
The Mirasols are sugarland owners and planters. Philippine National
Bank (PNB) financed the Mirasols' sugar production venture FROM
1973-1975 under a crop loan financing scheme. The Mirasols signed
Credit Agreements, a Chattel Mortgage on Standing Crops, and a
Real Estate Mortgage in favor of PNB. The Chattel Mortgage
empowered PNB to negotiate and sell the latter's sugar and to apply
the proceeds to the payment of their obligations to it.
President Marcos issued PD 579 in November, 1974 authorizing
Philippine Exchange Co., Inc. (PHILEX) to purchase sugar allocated
for export and authorized PNB to finance PHILEX's purchases. The
decree directed that whatever profit PHILEX might realize was to be
remitted to the government. Believing that the proceeds were more
than enough to pay their obligations, petitioners asked PNB for an
accounting of the proceeds which it ignored. Petitioners continued
to avail of other loans from PNB and to make unfunded withdrawals
from their accounts with said bank. PNB asked petitioners to settle
their due and demandable accounts. As a result, petitioners,
conveyed to PNB real properties by way of dacion en pago still
leaving an unpaid amount. PNB proceeded to extrajudicially
foreclose the mortgaged properties. PNB still had a deficiency claim.
Petitioners continued to ask PNB to account for the proceeds,
insisting that said proceeds, if properly liquidated, could offset their
outstanding obligations. PNB remained adamant in its stance that
under P.D. No. 579, there was nothing to account since under said
law, all earnings from the export sales of sugar pertained to the
National Government.
On August 9, 1979, the Mirasols filed a suit for accounting, specific
performance, and damages against PNB.
Issue:
Whether or not the Trial Court has jurisdiction to declare a statute
unconstitutional without notice to the Solicitor General where the
parties have agreed to submit such issue for the resolution of the
Trial Court.
Whether PD 579 and subsequent issuances thereof are
unconstitutional.
Whether or not said PD is subject to judicial review.
Held: It is settled that Regional Trial Courts have the authority and
jurisdiction to consider the constitutionality of a statute,
presidential decree, or executive order. The Constitution vests the
power of judicial review or the power to declare a law, treaty,
international or executive agreement, presidential decree, order,
instruction, ordinance, or regulation not only in this Court, but in all
Regional Trial Courts.
The purpose of the mandatory notice in Rule 64, Section 3 is to
enable the Solicitor General to decide whether or not his
intervention in the action assailing the validity of a law or treaty is
necessary. To deny the Solicitor General such notice would be
tantamount to depriving him of his day in court. We must stress
that, contrary to petitioners' stand, the mandatory notice
requirement is not limited to actions involving declaratory relief and
similar remedies. The rule itself provides that such notice is required
in "any action" and not just actions involving declaratory relief.
Where there is no ambiguity in the words used in the rule, there is
no room for construction. 15 In all actions assailing the validity of a
statute, treaty, presidential decree, order, or proclamation, notice
to the Solicitor General is mandatory.
Petitioners contend that P.D. No. 579 and its implementing
issuances are void for violating the due process clause and the
prohibition against the taking of private property without just
compensation. Petitioners now ask this Court to exercise its power
of judicial review.
Jurisprudence has laid down the following requisites for the exercise
of this power: First, there must be before the Court an actual case
calling for the exercise of judicial review. Second, the question
before the Court must be ripe for adjudication. Third, the person
challenging the validity of the act must have standing to challenge.
Fourth, the question of constitutionality must have been raised at
the earliest opportunity, and lastly, the issue of constitutionality
must be the very lis mota of the case.
Sime Darby vs good year
Macgraphics owned several billboards across Metro Manila and
other surrounding municipalities, one of which was a 35 x 70 neon
billboard located at the Magallanes Interchange in Makati City.The
Magallanes billboard was leased by Macgraphics to Sime Darby in
April 1994 at a monthly rental of P120,000.00. The lease had a term
of four years and was set to expire on March 30, 1998. Upon signing
of the contract, Sime Darby paid Macgraphics a total ofP1.2 million
representing the ten-month deposit which the latter would apply to
the last ten months of the lease. Thereafter, Macgraphics
configured the Magallanes billboard to feature Sime Darby's name
and logo.
On April 22, 1996, Sime Darby executed a Memorandum of
Agreement[(MOA)with Goodyear, whereby it agreed to sell its tire
manufacturing plants and other assets to the latter for a total ofP1.5
billion.
Just a day after, on April 23, 1996, Goodyear improved its offer to
buy the assets of Sime Darby from P1.5 billion toP1.65 billion. The
increase of the purchase price was made in consideration, among
others, of the assignment by Sime Darby of the receivables in
connection with its billboard advertising in Makati City and Pulilan,
Bulacan.
On May 9, 1996, Sime Darby and Goodyear executed a deed
entitled "Deed of Assignment in connection with Microwave
Communication Facility and in connection with Billboard Advertising
in Makati City and Pulilan, Bulacan"(Deed of Assignment),through
which Sime Darby assigned, among others, its leasehold rights and
deposits made to Macgraphics pursuant to its lease contract over
the Magallanes billboard.
Sime Darby then notified Macgraphics of the assignment of the
Magallanes billboard in favor of Goodyear through a letter-notice
datedMay 3, 1996.
After submitting a new design for the Magallanes billboard to
feature its name and logo, Goodyear requested that Macgraphics
submit its proposed quotation for the production costs of the new
design. In a letterdated June 21, 1996 Macgraphics informed
Goodyear that the monthly rental of the Magallanes billboard
isP250,000.00 and explained that the increase in rental was in
consideration of the provisions and technical aspects of the
submitted design.
Goodyear replied on July 8, 1996 stating that due to budget
constraints, it could not accept Macgraphics offer to integrate the
cost of changing the design to the monthly rental. Goodyear stated
that it intended to honor the P120,000.00 monthly rental rate given
by Macgraphics to Sime Darby. It then requested that Macgraphics
send its quotation for the simple background repainting and re-
lettering of the neon tubing for the Magallanes billboard.
Macgraphics then sent a letter to Sime Darby, dated July 11, 1996,
informing the latter that it could not give its consent to the
assignment of lease to Goodyear. Macgraphics explained that the
transfer of Sime Darbys leasehold rights to Goodyear would
necessitate drastic changes to the design and the structure of the
neon display of the Magallanes billboard and would entail the
commitment of manpower and resources that it did not foresee at
the inception of the lease.
Attaching a copy of this letter to a correspondence dated July 15,
1996, Macgraphics advised Goodyear that any advertising service it
intended to get from them would have to wait until after the
expiration or valid pre-termination of the lease then existing with
Sime Darby.
On September 23, 1996, due to Macgraphics refusal to honor the
Deed of Assignment, Goodyear sent Sime Darby a letter,via
facsimile, demanding partial rescission of the Deed of Assignment
and the refund ofP1,239,000.00, the pro-rata value of Sime Darby's
leasehold rights over the Magallanes billboard.
As Sime Darby refused to accede to Goodyears demand for partial
rescission, the latter commenced Civil Case No. 97-561 with the
RTC. In its complaint, Goodyear alleged that Sime Darby [1] was
unable to deliver the object of the Deed of Assignment and [2] was
in breach of its warranty under Title VII, Section B, paragraph 2 of
the MOA, stating that "no consent of any third party with whom
Sime Darby has a contractual relationship is required in connection
with the execution and delivery of the MOA, or the consummation
of the transactions contemplated therein."
Including Macgraphics as an alternative defendant, Goodyear
argued that should the court find the partial rescission of the Deed
of Assignment not proper, it must be declared to have succeeded in
the rights and interest of Sime Darby in the contract of lease and
Macgraphics be ordered to pay it the amount ofP1,239,000.00.
ISSUE: Whether partial rescission of the Deed of Assignment is
proper.
HELD:
CIVIL LAW
The petition of Sime Darby remains bereft of any merit. Article 1649
of the New Civil Code provides:
Art. 1649. The lessee cannot assign the lease without the consent of
the lessor, unless there is a stipulation to the contrary. (n)
In an assignment of a lease, there is a novation by the substitution
of the person of one of the parties the lessee.The personality of the
lessee, who dissociates from the lease, disappears. Thereafter, a
new juridical relation arises between the two persons who remain
the lessor and the assignee who is converted into the new lessee.
The objective of the law in prohibiting the assignment of the lease
without the lessors consent is to protect the owner or lessor of the
leased property.
Broadly, a novation 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
(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.This requires 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.
While there is no dispute that the first requisite is present, the
Court, after careful consideration of the facts and the evidence on
record, finds that the other requirements of a valid novation are
lacking.A review of the lease contract between Sime Darby and
Macgraphics discloses no stipulation that Sime Darby could assign
the lease without the consent of Macgraphics.
Moreover, contrary to the assertions of Sime Darby, the records are
bereft of any evidence that clearly shows that Macgraphics
consented to the assignment of the lease. As aptly found by the RTC
and the CA, Macgraphics was never part of the negotiations
between Sime Darby and Goodyear.Neither did it give its conformity
to the assignment after the execution of the Deed of Assignment.
The consent of the lessor to an assignment of lease may indeed be
given expressly or impliedly. It need not be given simultaneously
with that of the lessee and of the assignee. Neither is it required to
be in any specific or particular form. It must, however, be clearly
given. In this case, it cannot be said that Macgraphics gave its
implied consent to the assignment of lease.
DENIED
GARCIA vs Llamas
Petitioner and Eduardo De Jesus borrowed P400,000.00 from
respondent. Both 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. The loan has long been
overdue and, despite repeated demands, both have failed and
refused to pay it. Hence, a complaint was filed against both.
Resisting the complaint, Garcia averred that he assumed no liability
because he signed merely as an accommodation party for De Jesus;
and that he is relieved from any liability arising from the note
inasmuch as the loan had been paid by De Jesus by means of a
check dated 17 April 1997; and that, in any event, the issuance of
the check and respondent’s acceptance thereof novated or
superseded the note.
Respondent answered that there was no novation to speak of
because the check bounced.
Issues:
1. Whether or not there was novation in the obligation
2. Whether or not the defense that petitioner was only an
accommodation party had any basis
Held:
1. No. 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 (Reyes v.
CA). Well-settled is the rule that novation is never presumed
(Security Bank v. Cuenca). Consequently, that which arises from a
purported change in the person of the debtor must be clear and
express. It is thus incumbent on petitioner to show clearly and
unequivocally that novation has indeed taken place. Petitioner
failed to do this. In the present case, petitioner has not shown that
he was expressly released from the obligation, that a third person
Novation may also be extinctive or modificatory. It is extinctive
was substituted in his place, or that the joint and solidary obligation
when an old obligation is terminated by the creation of a new one
was cancelled and substituted by the solitary undertaking of De
that takes the place of the former. It is merely modificatory when
Jesus.
the old obligation subsists to the extent that it remains compatible
with the amendatory agreement (Babst v. CA). Whether extinctive
or modificatory, novation is made either by changing the object or
Novation is a mode of extinguishing an obligation by changing its
the principal conditions, referred to as objective or real novation; or
objects or principal obligations, by substituting a new debtor in
by substituting the person of the debtor or subrogating a third
place of the old one, or by subrogating a third person to the rights
person to the rights of the creditor, an act known as subjective or
of the creditor (Idolor v. CA, February 7, 2001). Article 1293 of the
personal novation (Spouses Bautista v. Pilar Development
Civil Code defines novation as follows:
Corporation, 371 Phil. 533, August 17, 1999). For novation to take
place, the following requisites must concur:

“Art. 1293. Novation which consists in substituting a new debtor in

the place of the original one, may be made even without the
1) There must be a previous valid obligation.
knowledge or against the will of the latter, but not without the
consent of the creditor. Payment by the new debtor gives him rights 2) The parties concerned must agree to a new contract.
mentioned in articles 1236 and 1237.”
3) The old contract must be extinguished.

4) There must be a valid new contract (Security Bank v Cuenca,

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.
October 3, 2000)
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 (Article 1292, NCC). The test of
incompatibility is whether the two obligations can stand together,
each one with its own independent existence (Molino v. Security
Diners International Corporation, August 16, 2001).
2. No. The note was made payable to a specific person rather than
to bearer or to order — a requisite for negotiability under the
Negotiable Instruments Law (NIL). Hence, petitioner cannot avail
himself of the NIL’s provisions on the liabilities and defenses of an
accommodation party.

Even granting arguendo that the NIL was applicable, still, petitioner
would be liable for the promissory note. Under Article 29 of the NIL,
an accommodation party is liable for the instrument to a holder for
value even if, at the time of its taking, the latter knew the former to
be only an accommodation party. The relation between an
accommodation party and the party accommodated is, in effect,
one of principal and surety — the accommodation party being the
surety. It is a settled rule that a surety is bound equally and
absolutely with the principal and is deemed an original promissor
and debtor from the beginning