V.
Divisible and indivisible obligations (1223 to 1225) FACTS: On March 31, 1959, Makati Development Corporation sold
A. Concept
B. Effects
C. Kinds
E. Presumptions of divisibility and indivisibility
F. Divisibility and indivisibility in obligations not to do
VI. Obligations with a penal clause (1226 to 1230)
A. Substitute for indemnity for damages and payment of interest
B. Debtor not exempt from performance
C. Creditor cannot demand both performance and penalty
D. Creditor cannot collect other damages in addition to penalty
E. When penalty shall be equitably reduced
F. Nullity of principal obligation or penal clause
CASES:
MAKATI DEVELOPMENT CORP. VS. EMPIRE INSURANCE CO., 20
SCRA 557
a lot to Rodolfo P. Andal, in Urdaneta Village, Makati, Rizal, for
P55,615. A so-called "special condition" contained in the deed of
sale provides that the vendee shall construct and complete at least
50% of its residence on the property within two (2) years from
March 31, 1959 to the satisfaction of the vendor and, in the event
of its failure to do so, the bond which the vendee has delivered to
the vendor in the sum of P11,123.00 to insure faithful compliance
with the above special condition will be forfeited. Andal gave a
surety bond on April 10, 1959 wherein he, as principal, and the
Empire Insurance Company, as surety, jointly and severally,
undertook to pay the Makati Development Corporation the sum of
P12,000 in case Andal failed to comply with his obligation under
the deed of sale.
Andal sold the lot to Juan Carlos on January 18, 1960. As neither
Andal nor Juan Carlos built a house on the lot within the stipulated
period, the Makati Development Corporation, on April 3, 1961,
after the lapse of the two-year period, sent a notice of claim to the
Empire Insurance Co. advising it of Andal's failure to comply with
his undertaking. Demand for the payment of P12,000 was refused,
whereupon the Makati Development Corporation filed a complaint
in the Court of First Instance against the Empire Insurance Co. to
recover on the bond in the full amount, plus attorney's fees. In due
time, the Empire Insurance Co. filed its answer with a third-party
complaint against Andal. It asked that the complaint be dismissed
or, in the event of a judgment in favor of the Makati Development
Corporation, that judgment be rendered ordering Andal to pay the
Empire Insurance Co. whatever amount it maybe ordered to pay
the Makati Development Corporation, plus interest at 12%, from
the date of the filing of the complaint until said amount was fully
reimbursed, and attorney's fees.
In his answer, Andal admitted the execution of the bond but
alleged that the "special condition" in the deed of sale was
contrary to law, morals and public policy. He averred that, at any
rate, Juan Carlos had started construction of a house on the lot.
The lower court rendered judgment, sentencing the Empire
Insurance Co. to pay the Makati Development Corporation the
amount of P1,500, with interest at the rate of 12% from the time
of the filing of the complaint until the amount was fully paid, and
to pay attorney's fees in the amount of P500, and the
proportionate part of the costs. The court directed that in case the
amount of the judgment was paid by the Empire Insurance Co.,
Andal should in turn pay the former the sum of P1,500 with
interest at 12% from the time of the filing of the complaint to the
time of payment and to pay attorney's fees in the sum of P500 and
proportionate part of the costs. The Makati Development
Corporation appealed directly to this Court.
The appellant argues that Andal became liable for the full amount
of his bond upon his failure to build a house within the two-year
period which expired on March 31, 1961 and that the trial court
was without authority to reduce Andal's liability on the basis of
Carlos' construction of a house a month after the stipulated period
because there was no privity of contract between Carlos and the
Makati Development Corporation.
ISSUE: W/N Andal is liable for the full amount of his bond upon
his failure to comply with the special condition stipulated?
HELD:
No, While it is true that in obligations with a penal sanction the
penalty takes the place of damages and the payment of interest in
case of non-compliance and that the obligee is entitled to recover
upon the breach of the obligation without the need of proving
damages,it is nonetheless true that in certain instances a
mitigation of the obligor's liability is allowed. Thus article 1229 of
the Civil Code states:
The judge shall equitably reduce the penalty when the principal
obligation has been partly or irregularly complied with by the
debtor. Even if there has been no performance, the penalty may
also be reduced by the courts if it is iniquitous or unconscionable.
Trial court found that Juan Carlos had finished more than 50 per
cent of his house by April, 1961, or barely a month after the
expiration on March 31, 1961 of the stipulated period. There was
therefore a partial performance of the obligation within the
meaning and intendment of article 1229. The penal clause in this
case was inserted not to indemnify the Makati Development
Corporation for any damage it might suffer as a result of a breach
of the contract but rather to compel performance of the so-called
"special condition" and thus encourage home building among lot
owners in the Urdaneta Village.
Considering that a house had been built shortly after the period
stipulated, the substantial, if tardy, performance of the obligation,
having in view the purpose of the penal clause, fully justified the
trial court in reducing the penalty. Still it is insisted that Carlos'
construction of a house on the lot sold cannot be considered a
partial performance of Andal's obligation because Carlos bears no
contractual relation to the Makati Development Corporation.
Indeed the stipulation in this case to commence the construction
and complete at least 50 per cent of the vendee's house within two
years cannot be construed as imposing a strictly personal
obligation on Andal. To adopt such a construction would be to limit
Andal's right to dispose of the lot. There is nothing in the deed of
sale restricting Andal's right to sell the lot at least within the two-
year period and we think it plain that a reading of such a limitation
on one of the rights of ownership must rest on more explicit
language in the contract.
TAN vs. CA, 367 SCRA 571
FACTS:
Petition for review.
TAN OBTAINED 2 LOANS, EACH FOR P2,000,000 FROM CCP.
Executed a promissory note in amount of P3,411,421.32; payable
in 5 installments.
TAN failed to pay any installment on the said restructured loa.
In a letter, TAN requested and proposed to respondent CCP a
mode of paying the restructured loan
i. 20% of the principal amount
of the loan upon the respondent giving its conformity to his
proposal
ii. Balance on the principal
obligation payable 36 monthly installments until fully paid.
TAN requested for a moratorium on his loan obligation until the
following year allegedly due to a substantial deduction in the
volume of his business and on account of the peso devaluation.
i. No favorable response was
made to said letters.
ii. CCP demanded full payment,
within ten (10) days from receipt of said letter P6,088,735.03.
CCP FILED COMPLAINT collection of a sum of money
TAN interposed the defense that he accommodated a friend who
asked for help to obtain a loan from CCP.
i. Claimed that cannot find the
friend.
TAN filed a Manifestation wherein he proposed to settle his
indebtedness to CCP by down payment of P140,000.00 and to
issue1 2 checks every beginning of the year to cover installment
payments for one year, and every year thereafter until the balance
is fully paid.
i. CCP did not agree to the
petitioner’s proposals and so the trial of the case ensued.
TRIAL COURT ORDERED TAN TO PAY CCP P7,996,314.67,
representing defendant’s outstanding account as of August 28,
1986, with the corresponding stipulated interest and charges
thereof, until fully paid, plus attorney’s fees in an amount
equivalent to 25% of said outstanding account, plus P50,000.00,
as exemplary damages, plus costs.
REASONS:
i. Reason of loan for
accommodation of friend was not credible.
ii. Assuming, arguendo, that the
TAN did not personally benefit from loan, he should have filed a
3rd-party complaint against Wilson Lucmen
iii. 3 times the petitioner offered
to settle his loan obligation with CCP.
iv. TAN may not avoid his liability
to pay his obligation under the promissory note which he must
comply with in good faith.
v. TAN is estopped from denying
his liability or loan obligation to the private respondent.
TAN APPEALED TO CA, asked for the reduction of the penalties and
charges on his loan obligation.
Judgment appealed from is hereby AFFIRMED.
1. No alleged partial or irregular performance.
2. However, the appellate court modified the decision of the trial
court by deleting exemplary damages because not proportionate to
actual damage caused by the non-performance of the contract
ISSUES:
WON there are contractual and legal bases for the imposition of
the penalty, interest on the penalty and attorney’s fees.
TAN imputes error on CA in not fully eliminating attorney fees and
in not reducing the penalties considering that he made partial
payments on the loan.
And if penalty is to be awarded, TAN asking for non-imposition of
interest on the surcharges because compounding of these are not
included in promissory note.
No basis in law for the charging of interest on the surcharges for
the reason that the New Civil Code is devoid of any provision
allowing the imposition of interest on surcharges.
WON interest may accrue on the penalty or compensatory interest
without violating ART 1959: “Without prejudice to the provisions of
Article 2212, interest due and unpaid shall not earn interest.
However, the contracting parties may by stipulation capitalize the
interest due and unpaid, which as added principal, shall earn new
interest.”
TAN- No legal basis for the imposition of interest on the penalty
charge for the reason that the law only allows imposition of
interest on monetary interest but not the charging of interest on
penalty. Penalties should not earn interest.
WON TAN can file reduction of penalty due to made partial
payments.
Petitioner contends that reduction of the penalty is justifiable
under ART 1229: “The judge shall equitably reduce the penalty
when the principal obligation has been partly or irregularly
complied with by the debtor. Even if there has been no
performance, the penalty may also be reduced by the courts if it is
iniquitous or unconscionable.”
HELD
CA DECISION AFFIRMED with MODIFICATION in that the penalty
charge of two percent (2%) per month on the total amount due,
compounded monthly, is hereby reduced to a straight twelve
percent (12%) per annum starting from August 28, 1986. With
costs against the petitioner.
WON there are contractual and legal bases for the imposition of
the penalty, interest on the penalty and attorney’s fees. –YES.
WITH LEGAL BASES.
ART 1226: In obligations with a penal clause, the penalty shall
substitute the indemnity for damages and the payment of interests
in case of non-compliance, if there is no stipulation to the contrary.
Nevertheless, damages shall be paid if the obligor refuses to pay
the penalty or is guilty of fraud in the fulfillment of the obligation.
i. The penalty may be enforced
only when it is demandable in accordance with the provisions of
this Code.
CASE AT BAR: promissory note expressed the imposition of both
interest and penalties in case of default on the part of the
petitioner in the payment of the subject restructured loan.
PENALTY IN MANY FORMS:
i. If the parties stipulate penalty
apart monetary interest, two are different and distinct from each
other and may be demanded separately.
ii. If stipulation about payment
of an additional interest rate partakes of the nature of a penalty
clause which is sanctioned by law:
1. ART 2209: If the obligation consists in the payment of a sum
of money, and the debtor incurs in 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, which is six per cent per annum.
CASE AT BAR: Penalty charge of 2% per month began to accrue
from the time of default by the petitioner.
i. No doubt petitioner is liable
for both the stipulated monetary interest and the stipulated
penalty charge.
1. PENALTY CHARGE = penalty or compensatory interest.
WON interest may accrue on the penalty or compensatory interest
without violating ART 1959.
Penalty clauses can be in the form of penalty or compensatory
interest.
i. Thus, the compounding of the
penalty or compensatory interest is sanctioned by and allowed
pursuant to the above-quoted provision of Article 1959 of the New
Civil Code considering that:
1. There is an express stipulation in the promissory note (Exhibit
“A”) permitting the compounding of interest.
a. 5th paragraph of the said promissory note provides that:
“Any interest which may be due if not paid shall be added to the
total amount when due and shall become part thereof, the whole
amount to bear interest at the maximum rate allowed by law.”.
2. Therefore, any penalty interest not paid, when due, shall earn
the legal interest of twelve percent (12%) per annum, in the
absence of express stipulation on the specific rate of interest, as in
the case at bar.
ART 2212: “Interest due shall earn legal interest from the time it is
judicially demanded, although the obligation may be silent upon
this point.”
CASE AT BAR: interest began to run on the penalty interest upon
the filing of the complaint in court by CCP.
i. Hence, the courts did not err
in ruling that the petitioner is bound to pay the interest on the
total amount of the principal, the monetary interest and the
penalty interest.
WON TAN can file reduction of penalty due to made partial
payments. –YES. BUT NOT 10% REDUCTION AS SUGGESTED BY
PETITIONER.
REDUCED TO 2% REDUCTION:
i. PARTIAL PAYMENTS showed
his good faith despite difficulty in complying with his loan
obligation due to his financial problems.
1. However, we are not unmindful of the respondent’s long
overdue deprivation of the use of its money collectible.
The petitioner also imputes error on the part of the appellate court
for not declaring the suspension of the running of the interest
during period when the CCP allegedly failed to assist the petitioner
in applying for relief from liability
Alleges that his obligation to pay the interest and surcharge should
have been suspended because the obligation to pay such interest
and surcharge has become conditional
i. Dependent on a future and
uncertain event which consists of whether the petitioner’s request
for condonation of interest and surcharge would be recommended
by the Commission on Audit.
1. Since the condition has not happened due to the private
respondent’s reneging on its promise, his liability to pay the
interest and surcharge on the loan has not arisen.
COURT ANSWER:
i. Running of the interest and
surcharge was not suspended.
ii. CCP correctly asserted that it
was the primary responsibility of petitioner to inform the
Commission on Audit of his application for condonation of interest
and surcharge.
COUNTRY BANKERS INSURANCE vs. CA, G.R. 85161, 1991
FACTS: Respondent and petitioner entered into a lease agreement
for the term six (6) years over the Avenue, Broadway and Capitol
Theaters and the land on which they are situated. After more than
two (2) years of operation, the respondent lessor made demands
for the repossession of the said leased properties in view of the
Sy's arrears in monthly rentals and non-payment of amusement
taxes.
In pursuance of their latter agreement, Sy's arrears in rental were
reduced. However, the accrued amusement tax liability of the
three (3) theaters to the City Government of Cabanatuan City had
accumulated despite the fact that Sy had been deducting the
amount of P4,000.00 from his monthly rental. Sy filed the present
action for reformation of the lease agreement, damages and
injunction and prayed for the issuance of a preliminary injunction
to enjoin OVEC from entering and taking possession of the three
theaters.
OVEC on the other hand, alleged in its answer by way of
counterclaims that by reason of Sy's violation of the terms of the
subject lease agreement and became authorized to enter and
possess the three theaters in question and to terminate said
agreement. The trial court arrived at the conclusions that Sy is not
entitled to the reformation of the lease agreement and further
concluded that Sy was not entitled to the writ of preliminary
injunction issued in his favor after the commencement of the
action and that the injunction bond filed by Sy is liable for
whatever damages OVEC may have suffered by reason of the
injunction.
ISSUE: W/N Sy is entitled to reformation of the lease agreement?
HELD:
No, The repossession of the leased premises by OVEC after the
cancellation and termination of the lease was in accordance with
the stipulation of the parties in the said agreement and the law
applicable thereto and that the consequent forfeiture of Sy's cash
deposit in favor of OVEC was clearly agreed upon by them in the
lease agreement.
The court found no ambiguity in the provisions of the lease
agreement. It held that the provisions are fair and reasonable and
therefore, should be respected and enforced as the law between
the parties. It held that the cancellation or termination of the
agreement prior to its expiration period is justified as it was
brought about by Sy's own default in his compliance with the
terms of the agreement and not motivated by fraud or greed.
Chapter IV: Extinguishment of obligations
I. Modes of extinguishment (1231)
II. Payment of performance (1232 – 1261)
A. Concept
CASES:
ARRIETA vs. CA, 10 SCRA 79
FACTS: On May 19, 1952, Arrieta participated in the public bidding
called by the NARIC for the supply of the 20,000 metric tons of
Burmese rice. Arrieta and the NARIC entered into a contract of
Sale of Rice under the terms which the former obligated herself to
deliver the latter 20,000 metric ton of Burmese Rice and NARIC
committed itself to pay for the imported rice.
After a full month from the execution of the contract, NARIC took
the first open letter of credit forwarding to the Philippine National
Bank is Application for Commercial Letter Credit. On August 4,
1952, the Philippine National Bank informed NARIC that its
application for Letter Credit has been approved by the board of
directors with the condition that 50% of marginal cash deposit be
paid and that drafts are to be paid upon presentment and the Bank
represented that it “will hold application in abeyance pending
compliance with the stated condition. The application of the Letter
Credit was opened only on September 8, 1952 causing delay on
the contract.
ISSUE: Arrieta filed a breach of contract against NARIC for causing
delay upon the written agreement suing them for for $286,000.00.
NARIC disclaims responsibility for the delay in the opening letter
credit and filed a counterclaim on a third party defendant to hold it
liable asserting that it has suffered likewise by way of unrealized
profit damages in the total sum of $406,000.00 from the failure of
the contract to materialize?
HELD:
Under Article 11, not only the debtors guilty of fraud, negligence or
default in the performance of the decree liable; in general, every
debtor who fails in performance of his obligations is bound to
indemnify for the losses and damages caused thereby. The court
then disagrees that NARIC hold that the subsequent offer to
substitute Thailand rice for the originally contracted Burmese rice
has amounted to a waiver on Arrieta on whatever right she have
derived from the breach of contract. The decision appealed from is
hereby affirmed with the sole modification that the award should
be converted into the Philippine peso at the rate of exchange
prevailing at the time the obligation was incurred. The third party
was relieved of any liability under this suits no pronouncement as
to cost.
KALALO vs. LUZ, 34 SCRA 377
RELEVANT PROVISIONS: RA 529
DOCTRINE: Under Republic Act 529, if the obligation was incurred
prior to the enactment of the Act and one is required to pay in a
particular kind of coin or currency other than the Philippine
currency the same shall be discharged in Philippine currency
measured at the prevailing rate of exchange at the time the
obligation was incurred.
NATURE: Appeal from CFI Rizal decision
FACTS: 11/17/1959—Kalalo (an engineer) entered into an
agreement w/ Luz (an architect) under their firm names (O. A.
Kalalo & Associates and A.J. Luz & Associates, respectively) where
the former was to render engineering design services to the latter
for fees, as stipulated in the agreement
Pursuant to the agreement, Kalalo gave his services for several
projects.
12/11/1961—Kalalo sent a statement account asking for
P116,565.00 engineering fees
Also stated: P57K = Luz’s previous payment, thus P59,565.00=
actual balance
05/18/1962—Luz sent resume of fees to appellant, said they only
owe P10,861.08
06/14/1962—Luz sent a check w/ P10,861.08; Kalalo accepted but
refused to accept it as full payment for services rendered
08/10/1962—Kalalo filed a complaint against Luz
4 causes of action:
(1) $28K and P30,881.25 was due to him for his services;
(2) P17,000.00 as consequential and moral damages;
(3) P55Kas moral damages, attorney's fees and expenses of
litigation;
(4) P25K as actual damages, and also for attorney's fees and
expenses of litigation.
Note: $28K fee is in dollars because it was for the International
Research Institute project
Luz’s Answer: some of Kalalo’s services were not in accordance w/
the agreement and Kalalo’s claims were not justified by the
services actually rendered, and the amount they owe is
P10,861.08. Kalalo has no cause of action and is in estoppel
because of the statement of accounts, also Kalalo's claim regarding
one of the projects was premature because Luz had not yet been
paid for said project, and Kalalo’s services were not complete or
were performed in violation of the agreement and/or otherwise
unsatisfactory.
TC: authorized that the case be brought to a Commissioner since
the only question is on the assessment of the proper fees and the
balance due to Kalalo after deducting the admitted payments made
by Luz
Based on Commissioner’s report, TC rules that the fees due to
Kalalo are:
*($28K +P51,539.91) - sum they already paid] + the legal rate of
interest thereon from the filing of the complaint in the case until
fully paid for + P 8K Attorney’s fees
*$28K was to be converted into peso on the basis of the rate of
exchange of the U.S. dollar to the Philippine peso at the time of
payment of judgment as Certified by the Central Bank of the
Philippines
[note: case says sum they payed is P69,475.46 but if you add up
their previous payments mentioned in the case it’s just
P67,861.08… weird, maybe its lawphil]
Luz appealed to SC.
ISSUES:
(1) W/N Kalalos was in estoppel (because of statement of
accounts)?
(2) W/N $28K should be paid on the basis of the exchange rate at
the time of the payment (of fees in judgement) or at the time
when the research institute project became due and demandable?
(3) What is the correct amount Luz must pay Kalalos?
HELD:
(1) No, Statement of Accounts did not estop Kalalos because Luz
did not rely on it as the Commissioner’s report found. Under Art
1431 CC, in order that estoppel may apply the person, to whom
representations have been made and who claims the estoppel in
his favor must have relied or acted on such representations.
(2) AT THE TIME OF THE PAYMENT. Under Republic Act 529, if the
obligation was incurred prior to the enactment of the Act and one
is required to pay in a particular kind of coin or currency other
than the Philippine currency the same shall be discharged in
Philippine currency measured at the prevailing rate of exchange at
the time the obligation was incurred. Republic Act 529 does not
provide for the rate of exchange for the payment of obligation
incurred after the enactment of said Act. Thus, the rate of
exchange should be that prevailing at the time of payment for such
contracts.
(3) LOWER COURT DECISION AFFIRMED (i.e. the amount due is:
[($28K +P51,539.91) - sum they already paid] + the legal rate of
interest thereon from the filing of the complaint in the case until
fully paid for + P 8K Attorney’s fees)
PAPA vs. AU VALENCIA, 284 SCRA 643
FACTS: The case arose from a sale of a parcel of land allegedly
made to private respondent Penarroyo by petitioner acting as
attorney-in-fact of Anne Butte. The purchaser, through Valencia,
made a check payment in the amount of P40,000 and in cash,
P5,000. Both were accepted by petitioner as evidenced by various
receipts. It appeared that the said property has already been
mortgaged to the bank previously together with other properties of
Butte.
When Butte passed away, the private respondent Penarroyo now
demanded that the title to the property be conveyed to him,
however the bank refused. Hence, the filing of a suit for specific
performance by private respondents against the petitioner. The
lower court ruled in favor of the private respondents and ordered
herein petitioner the conveyance or the property or if not, its
payment. The petitioner appealed the lower court's decision
alleging that the sale was not consummated as he never encashed
the check given as part of the purchase price.
The Court of Appeals affirmed with modifications the lower court's
decision. It held that there was a consummated sale of the subject
property despite.
ISSUE: W/N the check is a valid tender of payment/Whether or not
there was a valid sale of the subject property?
HELD:
Yes, While it is true that the delivery of check produces payment
only when encashed (pursuant to Art. 1249, Civil Code), the rule is
otherwise if the debtor is prejudiced by the delay in presentment.
(Here in this case, the petitioner now alleges that he did not
present the check, ten years after the same was paid to him as
part of the purchase price of the property.)
Check acceptance implied an undertaking of due diligence in
presenting it for payment. If the person who receives it sustains
loss by want of this diligence, this will operated as actual payment
of the debt or obligation for which the check was given. The debtor
cannot now be held liable if non-presentment of the check was
through the fault of the creditor.
PAL vs. CA, 181 SCRA 557
THE FACTS:
Amelia Tan commenced a complaint for damages before the Court
of First Instance against Philippine Airlines, Inc. (PAL). The Court
rendered a judgment in favor of the former and against the latter.
PAL filed its appeal with the Court of Appeals (CA), and the
appellate court affirmed the judgment of the lower court with the
modification that PAL is condemned to pay the latter the sum of
P25, 000.00 as damages and P5, 000.00 as attorney’s fee.
Judgment became final and executory and was correspondingly
entered in the case, which was remanded to the trial court for
execution. The trial court upon the motion of Amelia Tan issued an
order of execution with the corresponding writ in favor of the
respondent. Said writ was duly referred to Deputy Sheriff Reyes
for enforcement.
Four months later, Amelia Tan moved for the issuance of an alias
writ of execution, stating that the judgment rendered by the lower
court, and affirmed with modification by the CA, remained
unsatisfied. PAL opposed the motion, stating that it had already
fully paid its obligation to plaintiff through the issuance of checks
payable to the deputy sheriff who later did not appear with his
return and instead absconded.
The CA denied the issuance of the alias writ for being premature.
After two months the CA granted her an alias writ of execution for
the full satisfaction of the judgment rendered, when she filed
another motion. Deputy Sheriff del Rosario is appointed special
sheriff for enforcement thereof.
PAL filed an urgent motion to quash the alias writ of execution
stating that no return of the writ had as yet been made by Deputy
Sheriff Reyes and that judgment debt had already been fully
satisfied by the former as evidenced by the cash vouchers signed
and received by the executing sheriff.
Deputy Sheriff del Rosario served a notice of garnishment on the
depository bank of PAL, through its manager and garnished the
latter’s deposit. Hence, PAL brought the case to the Supreme Court
and filed a petition for certiorari.
THE ISSUES:
WON an alias writ of execution can be issued without prior return
of the original writ by the implementing officer.
WON payment of judgment to the implementing officer as directed
in the writ of execution constitutes satisfaction of judgment.
WON payment made in checks to the sheriff and under his name is
a valid payment to extinguish judgment of debt.
THE RULING:
1. Affirmative. Technicality cannot be countenanced to defeat the
execution of a judgment for execution is the fruit and end of the
suit and is very aptly called the life of the law. A judgment cannot
be rendered nugatory by unreasonable application of a strict rule
of procedure. Vested right were never intended to rest on the
requirement of a return. So long as judgment is not satisfied, a
plaintiff is entitled to other writs of execution.
2. Negative. In general, a payment, in order to be effective to
discharge an obligation, must be made to the proper person.
Article 1240 of the Civil Code provides:
“Payment made to the person in whose favor the obligation has
been constituted, or his successor in interest, or any person
authorized to receive it.”

Under ordinary circumstances, payment by the judgment debtor in
the case at bar, to the sheriff should be valid payment to
extinguish judgment of debt.
However, under the peculiar circumstances of this case, the
payment to the absconding sheriff by check in his name did not
operate as a satisfaction of the judgment debt.
3. Negative. Article 1249 of the Civil Code provides:
“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”.
Unless authorized to do so by law or by consent of the obligee, a
public officer has no authority to accept anything other than
money in payment of an obligation under a judgment being
executed. Strictly speaking, the acceptance by the sheriff of the
petitioner’s checks does not, per se, operate as a discharge of the
judgment of debt.
A check, whether 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 or payment and may be refused receipt by the oblige or
creditor. Hence, the obligation is not extinguished.
THE TWIST: Payment in cash is logical, but it was not proper.
Payment in cash to the implementing officer may be deemed
absolute payment of judgment debt but the Court has never, in
the least bit, suggested that judgment debtors should settle their
obligations by turning over huge amounts of cash or legal tender
to the executing officers. Payment in cash would result in damage
or endless litigations each time a sheriff with huge amounts of
cash in his hands decides to abscond.
As a protective measure, the courts encourage the practice of
payment of check provided adequate controls are instituted to
prevent wrongful payment and illegal withdrawal or disbursement
of funds.
However, in the case at bar, it is out of the ordinary that checks
intended for a particular payee are made out in the name of
another. The issuance of the checks in the name of the sheriff
clearly made possible the misappropriation of the funds that were
withdrawn.
The Court of Appeals explained:
“Knowing as it does that the intended payment was for the
respondent Amelia Tan, the petitioner corporation, utilizing the
services of its personnel who are or should be knowledgeable
about the accepted procedure and resulting consequences of the
checks drawn, nevertheless, in this instance, without prudence,
departed from what is generally observed and done, and placed as
payee in the checks the name of the errant Sheriff and not the
name of the rightful payee. Petitioner thereby created a situation
which permitted the said Sheriff to personally encash said checks
and misappropriate the proceeds thereof to his exclusive benefit.
For the prejudice that resulted, the petitioner himself must bear
the fault…”
Having failed to employ the proper safeguards to protect itself, the
judgment debtor whose act made possible the loss had but itself to
blame.
B. Requisites
***Article 1302
***Article 1169
C. Application of payment
CASE:
PACULDO vs. REGALADO, 345 SCRA 134
FACTS: On December 27, 1990, petitioner Nereo Paculdo and
respondent Bonifacio Regalado entered into a contract of lease
over a parcel of land with a wet market building, located at
Fairview Park, Quezon City. The contract was for twenty five (25)
years, commencing on January 1, 1991 and ending on December
27, 2015. For the first five (5) years of the contract beginning
December 27, 1990, Nereo would pay a monthly rental of
P450,000, payable within the first five (5) days of each month with
a 2% penalty for every month of late payment.
Aside from the above lease, petitioner leased eleven (11) other
property from the respondent, ten (10) of which were located
within the Fairview compound, while the eleventh was located
along Quirino Highway Quezon City. Petitioner also purchased from
respondent eight (8) units of heavy equipment and vehicles in the
aggregate amount of Php 1, 020,000.
On account of petitioner’s failure to pay P361, 895.55 in rental for
the month of May, 1992, and the monthly rental of P450, 000.00
for the months of June and July 1992, the respondent sent two
demand letters to petitioner demanding payment of the back
rentals, and if no payment was made within fifteen (15) days from
the receipt of the letter, it would cause the cancellation of the
lease contract.
Without the knowledge of petitioner, on August 3, 1992,
respondent mortgaged the land subject of the lease contract,
including the improvements which petitioner introduced into the
land amounting to P35, 000,000.00, to Monte de Piedad Savings
Bank, as a security for a loan.
On August 12, 1992, and the subsequent dates thereafter,
respondent refused to accept petitioner’s daily rental payments.
Subsequently, petitioner filed an action for injunction and damages
seeking to enjoin respondents from disturbing his possession of
the property subject of the lease contract. On the same day,
respondent also filed a complaint for ejectment against petitioner.
The lower court rendered a decision in favor of the respondent,
which was affirmed in toto by the Court of Appeals.
ISSUE: W/N the petitioner was truly in arrears in the payment of
rentals on the subject property at the time of the filing of the
complaint for ejectment?
HELD:
No, the petitioner was not in arrears in the payment of rentals on
the subject property at the time of the filing of the complaint for
ejectment.
As found by the lower court there was a letter sent by respondent
to herein petitioner, dated November 19, 1991, which states that
petitioner’s security deposit for the Quirino lot, be applied as
partial payment for his account under the subject lot as well as to
the real estate taxes on the Quirino lot. Petitioner interposed no
objection, as evidenced by his signature signifying his conformity
thereto.
Meanwhile, in an earlier letter, dated July 15, 1991, respondent
informed petitioner that the payment was to be applied not only to
petitioner’s accounts under the subject land and the Quirino lot but
also to heavy equipment bought by the latter from respondent.
Unlike in the November letter, the July letter did not contain the
signature of petitioner.
Petitioner submits that his silence is not consent but is in fact a
rejection.
As provided in Article 1252 of the Civil Code, the right to specify
which among his various obligations to the same creditor is to be
satisfied first rest with the debtor.
In the case at bar, at the time petitioner made the payment, he
made it clear to respondent that they were to be applied to his
rental obligations on the Fairview wet market property. Though he
entered into various contracts and obligations with respondent, all
the payments made, about P11,000,000.00 were to be applied to
rental and security deposit on the Fairview wet market property.
However, respondent applied a big portion of the amount paid by
petitioner to the satisfaction of an obligation which was not yet due
and demandable- the payment of the eight heavy equipments.
Under the law, if the debtor did not declare at the time he made
the payment to which of his debts with the creditor the payment is
to be applied, the law provided the guideline; i.e. no payment is to
be applied to a debt which is not yet due and the payment has to
be applied first to the debt which is most onerous to the debtor.
The lease over the Fairview wet market is the most onerous to the
petitioner in the case at bar.
Consequently, the petition is granted.
D. Payment by cession
E. Dation in payment
CASE:
FILINVEST CREDIT CORP. vs. PHIL. ACETYLENE, G.R. L – 50449,
1982
FACTS: Acetylene Co. purchased a Chevrolet 1969 model from
Alexander Lim evidenced by a Deed of Sale, with a P20,000-
downpayment and a P35,247.80-balance, payable under the terms
and conditions of the promissory note at a monthly installment of
P1,036.70 for 34 months, due and payable on the first day of each
month starting December 1971 through and inclusive September
1, 1974 with 12% interest per annum on each unpaid installment,
and attorney's fees equivalent to 25% of the total of the
outstanding unpaid amount.
Acetylene Co. executed a chattel mortgage over the same motor
vehicle in favor of Lim as security for the payment of said
promissory note.
Lim assigned all his rights, title, and interests in the promissory
note and chattel mortgage to the Filinvest Finance Corporation by
virtue of a Deed of Assignment. Filinvest Finance Corporation
assigned all its rights, title, and interests on the aforesaid
promissory note and chattel mortgage to the new corporation,
Filinvest Credit Corporation which, which, in effect, the payment of
the unpaid balance owed by Acetylene Co. to Alexander Lim was
financed by Filinvest Credit.
Acetylene Co. failed to comply with the terms and conditions set
forth in the promissory note and chattel mortgage since it had
defaulted in the payment of nine successive installments.
Filinvest sent a demand letter to Acetylene to remit the amount in
full including interests and charges or return the mortgaged
property to Lim within five days from date of the letter.
Acetylene wrote back, advising Filinvest of its decision to return
the mortgaged property, which return shall be in full satisfaction of
its indebtedness pursuant to Art. 1484.
The mortgaged vehicle was returned to Filinvest with the
document "Voluntary Surrender with Special Power of Attorney to
Sell" executed by Acetylene.
Filinvest, however, could not sell the vehicle as there were unpaid
taxes on it, and thus requested Acetylene to settle the installments
in arrears and accruing interest of P4,232.21 on or before April 9,
1973.
Filinvest offered to deliver back the motor vehicle but Acetylene
refused to accept it.
Thus, Filinvest instituted an action for collection of a sum of money
with damages in the CFI of Manila.
Acetylene Co. avers that Filinvest has no cause of action against it
since its obligation towards Filinvest was extinguished when in
compliance with Filinvest’s demand letter, it returned the
mortgaged property to the Filinvest, and that assuming arguendo
that the return of the property did not extinguish its obligation, it
was nonetheless justified in refusing payment since the Filinvest is
not entitled to recover the same due to the breach of warranty
committed by the original vendor-assignor Lim.
The CFI ruled in favor of Filinvest. Hence, this appeal, certified by
the CA to SC due to only questions of law, by Acetylene Co.
Consistent with its stand in the CFI, Acetylene Co. reiterates its
main contention that Filinvest, after giving Acetylene Co. an option
either to remit payment in full plus stipulated interests and
charges or return the mortgaged motor vehicle, had elected the
alternative remedy of exacting fulfillment of the obligation, thus,
precluding the exercise of any other remedy provided for under
Article 1484 of the Civil Code of the Philippines:
"Article 1484. Civil Code In a contract of sale of personal property
the price of which is payable in installments, the vendor may
exercise any of the following remedies:
1) Exact fulfillment of the obligation, should the vendee fail to pay;
2) Cancel the sale, should the vendee's failure to pay cover two or
more installments;
3) Foreclose the chattel mortgage on the thing sold, if one has
been constituted, should the vendee's failure to pay cover two or
more installments.
In this case, he shall have no further action against the purchaser
to recover any unpaid balance of the price. Any agreement to the
contrary shall be void."
In support of the above contention, Acetylene Co. maintains that
when it opted to return, as in fact it did return, the mortgaged
motor vehicle to the Filinvest, said return necessarily had the
effect of extinguishing Acetylene Co.'s obligation for the unpaid
price to the Filinvest, construing the return to and acceptance by
the Filinvest of the mortgaged motor vehicle as a mode of
payment, specifically, dation in payment or dacion en pago which
according to Acetylene Co., virtually made Filinvest the owner of
the mortgaged motor vehicle by the mere delivery thereof, citing
Articles 1232, 1245, and 1497 of the Civil Code.
"Article 1232. Payment means not only the delivery of money but
also the performance, in any manner, of an obligation.
xxx
"Article 1245. Dation in payment, whereby property is alienated to
the creditor in satisfaction of a debt in money, shall be governed
by the law of sales.
xxx
"Article 1497. The thing sold shall be understood as delivered,
when it is placed in the control and possession of the vendee."
ISSUE/S:
1. W/n the return of the mortgaged motor vehicle to the appellee
by virtue of its voluntary surrender by the appellant totally
extinguished and/or cancelled its obligation to the appellee (dation
in payment)
HELD:
No, The mere return of the mortgaged motor vehicle by the
mortgagor, Acetylene Co., to the mortgagee, Filinvest, does not
constitute dation in payment or dacion en pago in the absence,
express or implied of the true intention of the parties.
[Dacion en pago] really partakes in one sense of the nature of
sale, that is, the creditor is really buying the thing or property of
the debtor, payment for which is to be charged against the
debtor's debt. As such, the essential elements of a contract of sale,
namely, consent, object certain, and cause or consideration must
be present. In its modern concept, what actually takes place in
dacion en pago is an objective novation of the obligation where the
thing offered as an accepted equivalent of the performance of an
obligation is considered as the object of the contract of sale, while
the debt is considered as the purchase price. In any case, common
consent is an essential prerequisite, be it sale or novation, to have
the effect of totally extinguishing the debt or obligation.
The evidence on the record fails to show that the mortgagee,
Filinvest, consented, or at least intended, that the mere delivery
to, and acceptance by him, of the mortgaged motor vehicle be
construed as actual payment, more specifically dation in payment
or dacion en pago.
If at all, only transfer of possession of the mortgaged motor
vehicle took place.
An examination of the language of the "Voluntary Surrender with
Special Power of Attorney To Sell" reveals that the possession of
the mortgaged motor vehicle was voluntarily surrendered by the
Acetylene Co. to the Filinvest authorizing the latter to look for a
buyer and sell the vehicle in behalf of the Acetylene Co. who
retains ownership thereof, and to apply the proceeds of the sale to
the mortgage indebtedness, with the undertaking of the Acetylene
Co. to pay the difference, if any, between the selling price and the
mortgage obligation. With the stipulated conditions as stated, the
Filinvest, in essence was constituted as a mere agent to sell the
motor vehicle which was delivered to the Filinvest, not as its
property, for if it were, he would have full power of disposition of
the property, not only to sell it as is the limited authority given him
in the special power of attorney.
ISSUE: W/N, as Acetylene Co. argued, by accepting the delivery of
the mortgaged motor vehicle, Filinvest is estopped from
demanding payment of the unpaid obligation?
HELD:
No, Filinvest never accepted the mortgaged motor vehicle in full
satisfaction of the mortgaged debt. Under the law, the delivery of
possession of the mortgaged property to the mortgagee, Filinvest,
can only operate to extinguish appellant's liability if the appellee
had actually caused the foreclosure sale of the mortgaged property
when it recovered possession thereof.
The fact of foreclosure and actual sale of the mortgaged chattel
that bar the recovery by the vendor of any balance of the
purchaser's outstanding obligation not satisfied by the sale. As
held by [the SC], if the vendor desisted, on his own initiative, from
consummating the auction sale, such desistance was a timely
disavowal of the remedy of foreclosure, and the vendor can still
sue for specific performance. This is exactly what happened here.
ISSUE: W/N the warranty for the unpaid taxes on the mortgaged
motor vehicle may be properly raised and imputed to or passed
over to Filinvest?
HELD:
No, The Deed of Sale between Alexander Lim and appellant and
the Deed of Assignment between Alexander Lim and appellee are
very clear on this point….If it appears subsequently that "there are
such counterclaims, offsets or defenses that may be interposed by
the debtor at the time of the assignment, such counterclaims,
offsets or defenses shall not prejudice the FILINVEST FINANCE
CORPORATION and I (Alexander Lim) further warrant and hold the
said corporation free and harmless from any such claims, offsets,
or defenses that may be availed of."
F. Tender of payment and consignation.
CASES:
DE GUZMAN vs. CA, 137 SCRA 730
TLG INTERNATIONAL CONTINENTAL ENTERPRISE vs. FLORES, 47
SCRA 437
FACTS: The CFI granted TLG International Continental Interprising
Inc.’s motion to intervene and admitted its "Complaint In
Intervention" in an action for declaratory relief involving the rights
of Bearcon Trading Co., Inc. as lessee of the premises (not stated
where) of defendants Juan Fabella et al. TLG intervened as
sublessee of Bearcon over the property, to protect its rights as
such sublessee and to enable it, during pendency of the case, to
make a consignation of the monthly rentals as it was "at a loss as
to who is lawfully and rightfully entitled to receive [them].”
As a consequence of the admission of the "Complaint In
Intervention”, TLG then deposited a total of P3,750 in monthly
rentals with the clerk of court of the CFI by way of consignation.
Bearcon’s complaint and TLG’s complaint in intervention were later
dismissed upon motion by defendants Juan Fabella et al., on the
ground that the subject matter could be better ventilated in the
ejectment case filed by Juan Fabella against Bearcon Trading Co.
Inc. then pending before the municipal court of Mandaluyong,
Rizal.
TLG filed its Motion to withdraw the sums it deposited, as "the
order dismissing the * * * case as well as the complaint in
intervention without a resolution having been made as to the right
of the plaintiff or the defendants to the rentals deposited by the
intervenor, left the intervenor without any recourse but to apply
for authority to withdraw the * * * amount * * * and turn over the
same to the defendants in accordance with the understanding
arrived at between the parties hereto". The CFI denied the motion
and later, TLG’s MR.
ISSUE:
W/N the CFI could authorize the withdrawal of the deposits
HELD:
Yes, The case was dismissed before the amount deposited was
either accepted by the creditor or a declaration made by the Court
approving such consignation. Such dismissal rendered the
consignation ineffectual (Bravo vs. Barreras, 92 Phil. 679, 681).
Under such circumstances, it was incumbent upon the CFI to have
allowed the withdrawal by TLG of the sums of money deposited by
it with the clerk of court (Art.1260, NCC).
The CFI nevertheless insists that it had no authority to authorize
its withdrawal since it "has not ordered intervenor to make" the
deposit. This contention ignores the fact that the deposit was
made by TLG as a consequence of the admission by the CFI of its
"Complaint In Intervention".
The deposit was made with and officially receipted by the Clerk of
Court. The deposit was made pursuant to Article 1258 of the new
Civil Code. It was therefore money received by the Clerk of Court
pursuant to Section 6 of the Judiciary Act. (Rep. Act 296 as
Amended). From the moment the deposit was made by TLG, "the
money remained under the control and jurisdiction of the court
and the former could not recover it without an express order of
restitution" (Manajero vs. Buyson Lampa).
SOCO vs. MILITANTE, 123 SCRA 160
PABUGAIS vs. SAHIJWANI, G.R. 156846, 2004
FACTS: Pursuant to an "Agreement And Undertaking", Pabugais,
in consideration of the amount P15,487,500.00, agreed to sell
to Sahijwani, a lot containing 1,239 square meters located at
Jacaranda Street, North Forbes Park, Makati City.
Sahijwani paid Pabugais the amount of P600,000.00 as
option/reservation fee and the balance of P14,887,500.00 to be
paid within 60 days from the execution of the contract,
simultaneous with delivery of the owner's duplicate Transfer
Certificate of Title in Sahijwani's name the Deed of Absolute Sale;
the Certificate of Non-Tax Delinquency on real estate taxes and
Clearance on Payment of Association Dues.
Paragraph 5 of the agreement said: “DEFAULT — In case the
FIRST PARTY [Sahijwani] fails to pay the balance of the purchase
price within the stipulated due date, the sum of P600,000.00 shall
be deemed forfeited, on the other hand, should the SECOND
PARTY [Pabugais] fail to deliver within the stipulated period the
documents hereby undertaken, the SECOND PARTY shall return
the sum of P600,000.00 with interest at 18% per annum.”
Pabugais failed to deliver the required documents. In compliance
with their agreement, he returned to Sahijwani the latter's
P600,000.00 option/reservation fee by way of Far East Bank &
Trust Company which was, however, dishonored.
According to Pabugais, he twice tendered to Sahijwani, through his
counsel, P672,900.00 (representing the P600,000.00
option/reservation fee plus 18% interest per annum computed
from December 3, 1993 to August 3, 1994) in the form of a check
but said counsel refused to accept the same (1st-via messenger;
2nd-via DHL). Because of these refusals, he wrote a letter saying
that he was consigning the amount tendered with the RTC Makati
City.
According to Sahijwani, his office received Pabugais's letter but
claimed that no check was appended thereto. He averred that
there was no valid tender of payment because no check was
tendered and the computation of the amount to be tendered was
insufficient, because Pabugais verbally promised to pay 3%
monthly interest and 25% attorney's fees as penalty for default, in
addition to the interest of 18% per annum on the P600, 000.00
option/reservation fee.
On November 29, 1996, the TC rendered a decision declaring the
consignation invalid for failure to prove that Pabugais tendered
payment to Sahijwani and that the latter refused to receive the
same. It further held that even assuming that Sahijwani refused
the tender, the same is justified because the manager’s check
allegedly offered by Pabugais was not legal tender, hence, there
was no valid tender of payment.
Pabugais appealed to the CA. On January 7, 2002, Pabugais filed
an Ex Parte Motion to Withdraw Consigned Money. Pabugais’s
motion to withdraw the amount consigned was denied by the CA
and the decision of the trial court was affirmed with modification
as to the amount of moral damages and attorney’s fees.
On MR, the CA declared the consignation as valid in an Amended
Decision. It held that the validity of the consignation had the effect
of extinguishing Pabugais’s obligation to return the
option/reservation fee to Sahijwani. Hence, Pabugais can no longer
withdraw the same.
Pabugais filed the instant petition for review contending that he
can withdraw the amount deposited with the trial court as a matter
of right because at the time he moved for the withdrawal thereof,
the CA has yet to rule on the consignation’s validity and the
Sahijwani had not yet accepted the same.
ISSUE: W/N there a valid consignation?
HELD:
Yes, The issues to be resolved in the instant case concerns one of
the important requisites of consignation, i.e, the existence of a
valid tender of payment. As testified by the counsel for Sahijwani,
the reasons why his client did not accept Pabugais’s tender of
payment were — (1) the check mentioned in the August 5, 1994
letter of Pabugais manifesting that he is settling the obligation was
not attached to the said letter; and (2) the amount tendered was
insufficient to cover the obligation. It is obvious that the reason for
Sahijwani’s non-acceptance of the tender of payment was the
alleged insufficiency thereof — and not because the said check was
not tendered to Sahijwani, or because it was in the form of
manager’s check. While it is true that in general, a manager’s
check is not legal tender, the creditor has the option of refusing or
accepting it. Payment in check by the debtor may be acceptable as
valid, if no prompt objection to said payment is made.
Consequently, Pabugais’s tender of payment in the form of
manager’s check is valid.
Anent the sufficiency of the amount tendered, it appears that only
the interest of 18% per annum on the P600,000.00
option/reservation fee stated in the default clause of the
“Agreement And Undertaking” was agreed upon by the parties.
The manager’s check in the amount of P672,900.00 which was
tendered but refused by Sahijwani, and thereafter consigned with
the court, was enough to satisfy the obligation.
ISSUE: W/N Pabugais withdraw the amount consigned as a matter
of right?
HELD:
No, His reliance on Article 1260 of the Civil Code is misplaced.
The amount consigned with the trial court can no longer be
withdrawn by Pabugais because Sahijwani’s prayer in his answer
that the amount consigned be awarded to him is equivalent to an
acceptance of the consignation, which has the effect of
extinguishing Pabugais’s obligation.
Moreover, Pabugais failed to manifest his intention to comply with
the “Agreement And Undertaking” by delivering the necessary
documents and the lot subject of the sale to Sahijwani in exchange
for the amount deposited. Withdrawal of the money consigned
would enrich Pabugais and unjustly prejudice Sahijwani.
NOTES (dicta, not raised before SC):
On December 20, 2001, Pabugais executed a “Deed of
Assignment” in favor of Atty. De Guzman, Jr., part of the
P672,900.00 consigned with the TC as partial payment of the
latter’s attorney’s fees.
On January 7, 2002, Atty. De Guzman, Jr. filed a “Motion to
Intervene,” praying that the amount consigned be released to him
by virtue of the Deed of Assignment.
SC: The withdrawal of the amount deposited in order to pay
attorney’s fees to Pabugais’s counsel, Atty. De Guzman, Jr.,
violates Article 1491 of the Civil Code which forbids lawyers from
acquiring by assignment, property and rights which are the object
of any litigation in which they may take part by virtue of their
profession.
Furthermore, Rule 10 of the Canons of Professional Ethics provides
that “the lawyer should not purchase any interest in the subject
matter of the litigation which he is conducting.” The assailed
transaction falls within the prohibition because the Deed assigning
the amount of P672,900.00 to Atty. De Guzman, Jr., as part of his
attorney’s fees was executed during the pendency of this case with
the Court of Appeals.
In his Motion to Intervene, Atty. De Guzman, Jr., not only asserted
ownership over said amount, but likewise prayed that the same be
released to him. That Pabugais knowingly and voluntarily assigned
the subject amount to his counsel did not remove their agreement
within the ambit of the prohibitory provisions. To grant the
withdrawal would be to sanction a void contract.
DALTON vs. FGR REALTY, G.R. 172577, 2011
III. Loss or impossibility (1262 to 1269)
A. Loss of thing due iv. Utilization could not have
cause deterioration because already used for 11 years.
v. Value of expenses been equal
B. Impossibility of performance to use of telephone lines.

TRIAL COURT
ORDERED REFORMATION OF AGREEMENT:
CASES: i. NATELCO to pay for electric
OCEANA vs. CA, 73 SCRA 637 polls sum of P10/pole from January 1989.
1. Contract eventually became unfair due to increase in volume
of subscribers without increase of telephone connections which are
NAGA TELEPHONE CO. vs. CA, 230 SCRA 351 free of charge to CASURECO.
FACTS: 2. REFORMATION OF CONTACT: cannot make another contract
NATELCO: telephone company rendering local and long distance but abolish inequities.
services in Naga. 3. Contract does not mention use of posts outside Naga City.
Entered into contract with Camarines Sur II Electric Cooperative Contract should be reformed including provision that for the use
(electrice power service): posts outside Naga.
i. “For the use in operation of
its telephone service, electric light posts of CASURECO II”. CA: agreed to TRIAL COURT but for different reasons:
ii. In return, free use of 10 Article 1267 applicable
telephone connections. Contract POTESTATIVE CONDITION, THUS VOID.
iii. Period: as long as NATELCO
needs electric light posts, CASURECO understands that contract
will terminate when they are forced to stop, abandon operation ISSUE:
and remove lightposts. Is Article 1267 applicable? YES
Has the filing of reformation of contract prescribed? NO.
CASURECO after 10 years: filed for reformation of contract with Is the period of contract, “as long as the party of the first part has
damages, not conforming to guidelines of National Electrification need for electrive light posts…” potestative? YES.
Administration (NEA)- reasonable compensation for use of posts.
i. Compensation is P10/posts HELD:
but consumption of telephone cables costs P2630. ARTICLE 1267, EVEN THOUGH NEVER RAISED BEFORE, IS
ii. NATELCO used 319 posts APPLICABLE.
without any contract at P10.00; refused to pay. ARTICLE 1267: Art. 1267. When the service has become so
iii. Poor servicing- damage not difficult as to be manifestly beyond the contemplation of the
less than P100,000. parties, the obligor may also be released therefrom, in whole or in
NATELCO part.
Compensation: PRESTATION: payment of money; a toll or duty; also, the
i. No cause of action for rendering of a service.
reformation of contract. Contract was one-sided unfair, and disadvantageous to plaintiff.
ii. Barred by prescription (10
years execution of contract) PRESCRIPTION HAS NOT YET LAPSED.
iii. Barred by estoppel.
What is reformed is not the contract itself, but the instrument
embodying the contract. It follows that whether the contract is
disadvantageous or not is irrelevant to reformation and therefore,
cannot be an element in the determination of the period for
prescription of the action to reform.
Article 1144: Action upon a written contract must be brought
within 10 years from the time the right of action accrues.
i. “From the time the right of
action accrues” not necessarily the date of execution of the
contract.
ii. As correctly ruled by
respondent court, private respondent's right of action arose
"sometime during the latter part of 1982 or in 1983 when
according to Atty. Luis General, Jr. . . ., he was asked by (private
respondent's) Board of Directors to study said contract as it
already appeared disadvantageous to (private respondent) in
1989.
iii. 10 years had not yet elapsed.
3. PERIOD OF CONTRACT IS POTESTATIVE, THUS INVALID.
a. Leaves the continued effectivity of the aforesaid agreement to
the latter's sole and exclusive will as long as plaintiff is in operation
b. Leaves leaves the effectivity and enjoyment of leasehold rights
to the sole and exclusive will of the lessee.
EASTERN TELECOMMUNICATIONS PHILIPPINES vs. EASTERN
TELECOMS EMPLOYEES UNION, G.R. 185665, 2012
COMGLASCO vs. SANTOS CAR CHECK CENTER CORP. G.R. 20289,
2015
FACTS: On August 16, 2000, respondent Santos Car Check Center
Corporation (Santos), owner of a showroom located at 75 Delgado
Street, in Iloilo City, leased out the said space to petitioner
Comglasco Corporation (Comglasco).
On October 4, 2001, Comglasco advised Santos through a letter2
that it was preterminating their lease contract effective December
1, 2001. Santos refused to accede to the pre-termination,
reminding Comglasco that their contract was for five years.
On January 15, 2002, Comglasco vacated the leased premises and
stopped paying any further rentals. Santos sent several demand
letters, which Comglasco completely ignored. On September 15,
2003, Santos sent its final demand letter, which Comglasco again
ignored. On October 20, 2003, Santos filed suit for breach of
contract.
On August 18, 2004, the trial court rendered its judgment in favor
of Santos. On February 14, 2005, Santos moved for execution
pending Comglasco’s appeal, which the trial court granted on May
12, 2005. In its Decision9 dated August 10, 2011, the Court of
Appeals (CA) affirmed the judgment of the RTC.
ISSUE: W/N a lessee may pre-terminate lease agreement under
Art. 1267 of the Civil Code?
HELD:
No, In Philippine National Construction Corporation v. CA (PNCC),
which also involves the termination of a lease of property by the
lessee “due to financial, as well as technical, difficulties,” the Court
ruled:
The obligation to pay rentals or deliver the thing in a contract of
lease falls within the prestation “to give”; hence, it is not covered
within the scope of Article 1266.
At any rate, the unforeseen event and causes mentioned by
petitioner are not the legal or physical impossibilities contemplated
in said article. Besides, petitioner failed to state specifically the
circumstances brought about by “the abrupt change in the political
climate in the country” except the alleged prevailing uncertainties
in government policies on infrastructure projects.
The principle of rebus sic stantibus neither fits in with the facts of
the case.
Under this theory, the parties stipulate in the light of certain
prevailing conditions, and once these conditions cease to exist, the
contract also ceases to exist. This theory is said to be the basis of
Article 1267 of the Civil Code, which provides:
Art. 1267. When the service has become so difficult as to be
manifestly beyond the contemplation of the parties, the obligor
may also be released therefrom, in whole or in part.
This article, which enunciates the doctrine of unforeseen events, is
not, however, an absolute application of the principle of rebus sic
stantibus, which would endanger the security of contractual
relations.
The parties to the contract must be presumed to have assumed
the risks of unfavorable developments. It is therefore only in
absolutely exceptional changes of circumstances that equity
demands assistance for the debtor.
In this case, petitioner wants this Court to believe that the abrupt
change in the political climate of the country after the EDSA
Revolution and its poor financial condition “rendered the
performance of the lease contract impractical and inimical to the
corporate survival of the petitioner.”
This Court cannot subscribe to this argument. As pointed out by
private respondents:
xxxx
Anent petitioner’s alleged poor financial condition, the same will
neither release petitioner from the binding effect of the contract of
lease.
As held in Central Bank v. Court of Appeals, cited by private
respondents, mere pecuniary inability to fulfill an engagement
does not discharge a contractual obligation, nor does it constitute
a defense to an action for specific performance.
Relying on Article 1267 of the Civil Code to justify its decision to
preterminate its lease with Santos, Comglasco invokes the 1997
Asian currency crisis as causing it much difficulty in meeting its
obligations. But in PNCC, the Court held that the payment of lease
rentals does not involve a prestation “to do” envisaged in Articles
1266 and 1267 which has been rendered legally or physically
impossible without the fault of the obligor-lessor. Article 1267
speaks of a prestation involving service which has been rendered
so difficult by unforeseen subsequent events as to be manifestly
beyond the contemplation of the parties.
To be sure, the Asian currency crisis befell the region from July
1997 and for sometime thereafter, but Comglasco cannot be
permitted to blame its difficulties on the said regional economic
phenomenon because it entered into the subject lease only on
August 16, 2000, more than three years after it began, and by
then Comglasco had known what business risks it assumed when it
opened a new shop in Iloilo City.
SO V FOOD FEST LAND, INC.
CASE LAW/ DOCTRINE:
When the service has become so difficult as to be manifestly
beyond the contemplation of the parties, the obligor may also be
released therefrom, in whole or in part.
Doctrine of unforeseen events, rebus sic stantibus : the parties
stipulate in the light of certain prevailing conditions, and once
these conditions cease to exist, the contract also ceases to exist.
Requisites for application of Art 1267

1. Event or change in circumstances could not have been foreseen
at the time of the execution of the contract
2. Makes the performance of the contract extremely difficult but
not impossible
3. Event must not be due to the act of any of the parties

4. Contract is for a future prestation
FACTS: Food Fest entered into a Contract of Lease with Daniel So
over a commercial space in San Antonio Village, Makati for a
period of 3 years. To be used to operate a KFC branch.
Food Fest was able to secure the necessary licenses and permits
for the year 1999, however failed to commence business
operations.
For the year 2000, its application for renewal of barangay business
clearance was held in abeyance until further study of its kitchen
facilities.
Food fest was unable to operate and fearing more losses, asked So
to terminate the contract, however, So did not accede and instead
offered help to secure authorization from barangay.
Aug. 2000- Food Fest again asked So to terminate lease, and in
fact stopped paying rentals.
So sent letters to Food Fest demanding payment of rental
arrearages, however Food Fest denied liability and started
removing its fixtures and equipment on the premises. Thus, So’s
complaint for ejectment and damages against Food Fest before the
MeTC of Makati.
MeTC-in favor of So
RTC- reversed MeTC decision; found that Food Fest already
vacated the leased premises before So filed the complaint for
ejectment; declared that Food Fest’s failure to commence business
operations resulted in the termination of its contractual obligations
to SO, including the obligation to pay rent.
CA- upheld RTC’s decision. It, however, declared that Food Fest’s
obligation to pay rent was not extinguished upon its failure to
secure permits to operate.
ISSUE: W/N Food Fest can invoke the principle of rebus sic
stantibus to release it from liability to pay rentals.
HELD:
As for Food Fest’s invocation of the principle of rebus sic stantibus
as enunciated in Article 1267 of the Civil Code to render the lease
contract functus officio, and consequently release it from
responsibility to pay rentals, the Court is not persuaded. Article
1267 provides: “Article 1267. When the service has become so
difficult as to be manifestly beyond the contemplation of the
parties, the obligor may also be released therefrom, in whole or in
part.”
the parties. The cause or essential purpose in a contract of lease is
the use or enjoyment of a thing. A party’s motive or particular
purpose in entering into a contract does not affect the validity or
existence of the contract; an exception is when the realization of
such motive or particular purpose has been made a condition upon
which the contract is made to depend. The exception does not
apply here. It is clear that the condition set forth in the preliminary
agreement pertains to the initial application of Food Fest for the
permits, licenses and authority to operate.
It should not be construed to apply to Food Fest’s subsequent
applications. Food Fest was able to secure the permits, licenses
and authority to operate when the lease contract was executed.
Its failure to renew these permits, licenses and authority for the
succeeding year, does not, however, suffice to declare the lease
functus officio, nor can it be construed as an unforeseen event to
warrant the application of Article 1267. Contracts, once perfected,
are binding between the contracting parties. Obligations arising
therefrom have the force of law and should be complied with in
good faith. Food Fest cannot renege from the obligations it has
freely assumed when it signed the lease contract.
POON vs. PRIME SAVINGS BANK, G.R. 183794, 2016
***Article 1189 (2)

This article, which enunciates the doctrine of unforeseen events, is

not, however, an absolute application of the principle of rebus sic
stantibus, which would endanger the security of contractual
relations. The parties to the contract must be presumed to have
assumed the risks of unfavorable developments. It is, therefore,
only in absolutely exceptional changes of circumstances that equity
demands assistance for the debtor. Food Fest claims that its failure
to secure the necessary business permits and licenses rendered
the impossibility and non-materialization of its purpose in entering
into the contract of lease, in support of which it cites the earlier-
quoted portion of the preliminary agreement dated July 1, 1999 of