NOTE: Special forms of payment

(2) Application of payments, NCC 1252-1254

Sps. Sinamban vs. China Bank, G.R. No. 193890, March 11, 2015
FACTS:
On Februaiy 19, 1990, the spouses Danilo and Magdalena Manalastas (spouses Manalastas) executed a Real Estate
Mortgage (REM) in favor of respondent China Banking Corporation (Chinabank) over two real estate properties as
security for a loan from Chinabank. During the next few years, they executed several amendments to the mortgage
contract progressively increasing their credit line secured by the aforesaid mortgage. The spouses Manalastas executed
several promissory notes (PNs) in favor of Chinabank. In two of the PNs, petitioners Estanislao and Africa Sinamban
(spouses Sinamban) signed as co-makers.

Chinabank instituted extrajudicial foreclosure proceedings against the mortgage security. The foreclosure sale was
held on May 18, 1998, with Chinabank offering the highest bid of P4,600,000.00, but by then the defendants' total
obligations on the three promissory notes had risen to P5,401,975.00, before attorney's fees of 10% and auction
expenses, leaving a loan deficiency of P1,758,427.87.

On November 18, 1998, Chinabank filed a Complaint for sum of money against the spouses Manalastas and the spouses
Sinamban alleging that the spouses Manalastas reneged on their loan obligations under the PNs which they executed
in favor of Chinabank on different dates. In the complaint before the RTC, Chinabank prayed to direct the defendants
to jointly and severally settle the said deficiency.
ISSUE: Whether the liability of the Sps Manalastas and Sps Sinamban is solidary or joint
HELD: SOLIDARY. A co-maker of a PN who binds himself with the maker "jointly and severally" renders himself directly
and primarily liable with the maker on the debt, without reference to his solvency.

"A promissory note is a solemn acknowledgment of a debt and a formal commitment to repay it on the date and under
the conditions agreed upon by the borrower and the lender. A person who signs such an instrument is bound to honor
it as a legitimate obligation duly assumed by him through the signature he affixes thereto as a token of his good faith.
If he reneges on his promise without cause, he forfeits the sympathy and assistance of this Court and deserves instead
its sharp repudiation."

Employing words of common commercial usage and well-accepted legal significance, the three subject PNs uniformly
describe the solidary nature and extent of the obligation assumed by each of the defendants in Civil Case No. 11708,
to wit:

"FOR VALUE RECEIVED, I/We jointly and severally promise to pay to the CHINA BANKING CORPORATION or its order
the sum of PESOS x x x[.]" (Emphasis ours)

According to Article 2047 of the Civil Code,38 if a person binds himself solidarily with the principal debtor, the
provisions of Articles 1207 to 1222 of the Civil Code (Section 4, Chapter 3, Title I, Book IV) on joint and solidary
obligations shall be observed. Thus, where there is a concurrence of two or more creditors or of two or more debtors
in one and the same obligation, Article 1207 provides that among them, "[t]here is a solidary liability only when the
obligation expressly so states, or when the law or the nature of the obligation requires solidarity." It is settled that
when the obligor or obligors undertake to be "jointly and severally" liable, it means that the obligation is solidary. In
this case, the spouses Sinamban expressly bound themselves to be jointly and severally, or solidarily, liable with the
principal makers of the PNs, the spouses Manalastas.

Marquez v. Elisan Credit, G.R. No. 194642, April 06, 2015

Facts:
 Marquez obtained from Elisan Credit Corporation a loan payable in weekly installments and subject to annual
interest with monthly penalties and attorney’s in case of nonpayment. A chattel mortgage was also executed
stipulating that “the motor vehicle shall stand as a security for all other obligations of every kind already
incurred or which hereafter may be incurred”. The payment of that loan was acknowledged by both parties.
 Subsequently, Marquez obtained another loan evidenced by a promissory note with the same terms and
conditions as the first loan. When the second loan matured, there still remained an unpaid balance. Marquez
requested the creditor to pay the unpaid balance by daily installments until the loan is paid; the creditor
agreed. Thus, several months after the maturity of the loan, Marquez had already paid a total amount which
is greater than the amount of the principal.
 Despite such, the creditor filed a complaint for foreclosure of the CM on the ground that Marquez allegedly
failed to pay the principal of the second loan despite demand. It was also prayed that the unpaid balance plus
 accrued penalties and interests be paid because, allegedly, Marquez’ failure to pay upon maturity triggered
the imposition of monthly penalties and attorney’s fees.
 Marquez, citing Art 1176 and 1235 of the Civil Code, insists that his daily payments should be deemed to have
been credited against the principal, as the official receipts issued by the creditor were silent with respect to
the payment of interest and penalties.
Issue 1: W/N the creditor waived the payment of the interest
 No. The fact that the official receipts did not indicate whether the payments were made for the principal or
the interest does not prove that the creditor waived the interest. There is no presumption of waiver of interest
without any evidence showing that the creditor accepted the daily instruments as payments for the principal.
Issue 2: W/N the daily payments made by the debtor be applied to the interest
 Yes. Notwithstanding the fact it was not indicated in the receipts whether the payments were applied to the
principal or the interest, such failure should not be taken against the creditor. Under Article 1253 of the Civil
Code, if the debt produces interest, payment of the principal shall not be deemed to have been made until
the interests have been covered. Thus, the creditor in this case has a right to credit the payments to the
interest first.
Issue 3: W/N an order for foreclosure is proper
 No. Foreclosure in this case is without legal and factual basis because the chattel mortgage was already
extinguished when the obligation under the first loan was duly paid.
 A CM can only cover obligations existing at the time the mortgage is constituted. For a CM to cover debts yet
to be contracted, a fresh chattel mortgage may be executed or the old contract be amended conformably to
the form prescribed by the CM Law. Here, since there was no showing that a new agreement was executed,
the security can no longer apply to the second loan. The chattel mortgage was already extinguished because
being merely an accessory in nature, it cannot exist independently of the principal obligation.
 Although a promise expressed in a chattel mortgage to include debts that are yet to be contracted can be a
binding commitment that can be compelled upon, the security itself, however, does not come into existence
or arise until after a chattel mortgage agreement covering the newly contracted debt is executed either by
concluding a fresh chattel mortgage or by amending the old contract conformably with the form prescribed by
the Chattel Mortgage Law.
 Refusal on the part of the borrower to execute the agreement so as to cover the after-incurred obligation can
constitute an act of default on the part of the borrower of the financing agreement whereon the promise is
written, but the remedy of foreclosure can only cover the debts extant at the time of constitution and during
the life of the chattel mortgage sought to be foreclosed.
 The Chattel Mortgage Law requires the parties to the contract to attach an affidavit of good faith and execute
an oath that –
“… the mortgage is made for the purpose of securing the obligation specified in the conditions thereof, and
for no other purposes, and that the same is a just and valid obligation, and one not entered into for the
purposes of fraud.”
 It is obvious therefore that the debt referred in the law is a current, not an obligation that is yet merely
contemplated.
 The only obligation specified in the chattel mortgage contract was the first loan which the petitioner later
fully paid. By virtue of Section 3 of the Chattel Mortgage Law, the payment of the obligation automatically
rendered the chattel mortgage terminated; the chattel mortgage had ceased to exist upon full payment of the
first loan. Being merely an accessory in nature, it cannot exist independently of the principal obligation.
 The parties did not execute a fresh chattel mortgage nor did they amend the chattel mortgage to comply with
the Chattel Mortgage Law which requires that the obligation must be specified in the affidavit of good
faith. Simply put, there no longer was any chattel mortgage that could cover the second loan upon full
payment of the first loan. The order to foreclose the motor vehicle therefore had no legal basis.
Relevant Laws

Article 1176, Civil Code:

The receipt of the principal by the creditor, without reservation with respect to the interest, shall give rise to the
presumption that said interest has been paid.

Article 1235, Civil Code:

When the obligee accepts the performance of an obligation, knowing its incompleteness or irregularity, and without
expressing any protest or objection, the obligation is deemed fully complied with.

Article 1253, Civil Code:

If the debt produces interest, payment of the principal shall not be deemed to have been made until the interests
have been covered.
 (3) Cession, NCC 1255

(4) Tender of payment and consignation, NCC 1256-1261

Meat Packing Corp. v Sandiganbayan, 359 SCRA 409 (2001)

FACTS:
 Meat Packing Corporation of the Philippines (MPCP) is a corporation wholly-owned by GSIS. It is the owner of
3 parcels of land in Barrio Ugong, Pasig, as well as the meat processing and packing plant thereon.
 In 1975, MPCP and the Philippine Integrated Meat Corporation (PIMECO) entered into a lease-purchase
agreement for 28 years. The Agreement contained rescission clauses:
5. If for any reason whatsoever the LESSEE-VENDEE should fail or default in the payment of rentals
equivalent to the cumulative sum total of three (3) annual installments, this Agreement shall be
deemed automatically cancelled and forfeited without need of judicial intervention, and LESSOR-
VENDOR shall have the complete and absolute power, authority, and discretion, and without reservation
by the LESSEE-VENDEE, to dispose of, sell, transfer, convey, lease, assign, or encumber the project to
any person or persons, natural or juridical, in the same manner as if this lease- purchase arrangement
was never entered into. In the event of such cancellation or forfeiture, the LESSEE-VENDEE
unconditionally agrees that all forms of money paid or due from the LESSEE- VENDEE shall be considered
as rentals for the use and occupancy of the project, and the LESSEE-VENDEE hereby waives and forfeits
all rights to ask for and demand the return or reimbursement thereof.
 The lease-purchase agreement was for P93,695,552.59, at an annual rental rate of P3,346,269.70.
 In March 1986, PCGG sequestered all the assets, properties and records of PIMECO. The sequestration included
the meat packing plant and the lease-purchase agreement. This was because Peter Sabido is a stockholder of
PIMECO. Sabido is a crony of Marcos and in view of allegations of ill-gotten wealth, his properties were
sequestered by PCGG.
 In November 1986, MPCP gave PIMECO notice of rescission of the lease-purchase agreement for non- payment
of rentals in the year 1986.
 GSIS then asked PCGG to exclude the meat packing plant from the sequestered assets of PIMECO inasmuch as
the same is owned by MPCP. However, PCGG denied said request. MPCP likewise sought the turnover to it of
the plant on the ground that the lease-purchase agreement had already been rescinded. In this regard, PCGG
passed a resolution:
a) PCGG ordered the transfer of subject property, consisting of the meat packing complex (including the
MPCP property) to GSIS under the condition that the PCGG management team might continue its
operations for the purpose of completing the outstanding orders up to December 1988
b) Whatever claims PIMECO had to the complex under the lease-purchase agreement has been validly
rescinded by GSIS/ MPCP; and that the projected turn-over to GSIS will not adversely affect the ill-gotten
wealth case pending against “crony” Peter Sabido before the Sandiganbayan
c) Turn-over to GSIS has the ff. conditions: (1) joint PCGG-COA audit; (2) approval by the Sandiganbayan;
and (3) execution of a MOA
 However, the approval of Sandiganbayan was not obtained.
 Meanwhile, PCGG instituted with the Sandiganbayan on July 29, 1987 RP v. Sabido, a complaint for
reconveyance, reversion, accounting, restitution and damages. The complaint alleged that Peter Sabido
obtained, under favored and very liberal terms, huge loans from the GSIS in favor of PIMECO, among other
corporations, which was beneficially held and controlled by defendants Peter Sabido, Roberto S. Benedicto
and Luis D. Yulo; and that PIMECO was granted the monopoly to supply meat products in the Greater Manila
Area.
 Sabido filed in the case a Motion for the Issuance of a Writ of Preliminary Injunction against consummating the
projected turnover of PIMECO to the MPCP, alleging and showing that it will result in the dissipation of assets
which will cause irreparable injury to his rights and interests in the company in the event that the same was
not ill-gotten. Ruling in Sabido’s favor, the Sandiganbayan issued the writ.
 Hearings in Sandiganbayan ensued and in 1989, it issued a resolution:
a) PCGG gravely abused its discretion when it passed the resolution on the turn-over to GSIS/MPCP
b) PCGG Commissioner exceeded his authority when he executed a MOA with MPCP transferring the
management and operation of PIMECO to GSIS/ MPCP
c) Said turnovers are null and void ab initio
d) PCGG, its commissioners, officers, representatives and agents are permanently enjoined from
implementing the same turnovers or transfers
 In 1990, PIMECO filed a petition for declaratory relief with the Sandiganbayan against MPCP and PCGG, alleging
that from 1981 to 1985, PIMECO has been regularly paying the annual rentals and that prior to its sequestration
in 1986, PIMECO was able to pay MPCP. However, after its sequestration, the PCGG Management Team that
 took over the plant became erratic and irregular in its payments of the annual rentals to MPCP, thus presenting
the danger that PIMECO may be declared in default in the payment of rentals equivalent to three (3) annual
installments and causing the cancellation of the lease-purchase agreement. Hence, PIMECO prayed for a
declaration that it is no longer bound by the provisions of paragraph 5 of the agreement.
 In the meantime, PCGG tendered to MPCP two checks in the amounts of P3,000,000.00 and P2,000,000.00, or
a total of P5,000,000.00, representing partial payment of accrued rentals on the meat packing plant, which
MPCP refused to accept on the theory that the lease-purchase agreement had been rescinded. Thus, the PCGG
filed an Urgent Motion in the RP v. Subido praying that the Sandiganbayan order MPCP to accept the tendered
amount of P5,000,000.00.
 The Sandiganbayan set the aforesaid Urgent Motion for hearing. MPCP alleging that the Sandiganbayan had no
jurisdiction over it since it was not a party in RP v. Sabido, that its lease-purchase agreement with PIMECO has
been rescinded as early as November 1986; and that PIMECO was in arrears in the payment of rentals in the
amount of P12,378,171.06, which is more than the equivalent of three cumulative rentals at the annual rate
of P3,346,269.70.
 The Sandiganbayan ruled that the consignation was valid and ordered MPCP to accept the payment and issue
the corresponding receipt. In denying MPCP’s MR, the Sandiganbayan held that when the PCGG sequestered
the assets and records of PIMECO, including the lease-purchase agreement over MPCP’s meat packing plant, it
assumed the duty to preserve and conserve those assets and documents while they remained in its possession
and control. To rule otherwise would be unfair to PIMECO.
 The Sandiganbayan later dismissed PIMECO’s petition for declaratory relief, it appearing that while the unpaid
rentals as of January 27, 1991 have reached P7,530,036.21, PCGG's tender of payment and consignation of
P5,000,000.00 (which the Sandiganbayan upheld in RP v. Sabido averted the accumulation of the unpaid rentals
to three yearly rentals-installments. Consequently, the petition for declaratory relief has become moot and
academic.
 Hence, MPCP brought this petition for certiorari, mandamus and prohibition, arguing that the Sandiganbayan
did not have jurisdiction over its person since it was not a party to RP v. Sabido; that the Sandiganbayan
likewise did not acquire jurisdiction over PIMECO since it has not been served summons; and that the PCGG is
in estoppel because it has already admitted in its en banc resolutions that the lease-purchase agreement
between MPCP and PIMECO has been rescinded.
 Sabido argued that the Sandiganbayan correctly held that the MPCP voluntarily submitted itself to the court's
jurisdiction; that there was a valid consignation made by PCGG; and that the Sandiganbayan did not commit
grave abuse of discretion in issuing the assailed resolutions.
 PCGG also contended that MPCP voluntarily submitted itself to the jurisdiction of the Sandiganbayan; and that
the consignation was validly made.
ISSUES:
 WoN the consignation was validly made
o YES. There was prior tender by PCGG of P5,000,000.00 for payment of the rentals in arrears. MPCP’s
refusal to accept the same, on the ground merely that its lease- purchase agreement with PIMECO had
been rescinded, was unjustified. As found by the Sandiganbayan, from January 29, 1986 to January
30, 1990, PIMECO paid, and GSIS/MPCP received, several amounts due under the lease-purchase
agreement, such as annual amortizations or rentals, advances, insurance, and taxes, in total sum of
P15,921,205.83.
 WON PCGG is in estoppel because it has already admitted in its resolution that the lease-purchase agreement
between MPCP and PIMECO has been rescinded
o NO. Surely, the acceptance by MPCP and GSIS of such payments for rentals and amortizations negates
any rescission of the lease-purchase agreement.
o A closer perusal of the resolutions readily shows that the turn-over was explicitly made dependent on
certain conditions precedent, among which was the approval by the Sandiganbayan and the execution
of a Memorandum of Agreement between PCGG and MPCP. A Memorandum of Agreement was in fact
executed on April 28, 1989, although the same suffers from formal and substantial infirmities.
However, no approval was sought from the Sandiganbayan. On the contrary, the Sandiganbayan, in its
Resolution declaring the turn-over null and void, refused to honor the PCGG resolutions.
o Under the terms of the lease-purchase agreement, the amount of arrears in rentals or amortizations
must be equivalent to the cumulative sum of three annual installments, in order to warrant the
rescission of the contract. Therefore, it must be shown that PIMECO failed to pay the aggregate amount
of at least P10,038,809.10 before the lease-purchase agreement can be deemed automatically
cancelled. Assuming in the extreme that, as alleged by MPCP, the arrears at the time of tender on
January 30, 1991 amounted to P12,578,171.00, the tender and consignation of P5,000,000.00, which
had the effect of payment, reduced the back rentals to only P7,578,171.00, an amount less than the
equivalent of three annual installments. Thus, with the Sandiganbayan’s approval of the consignation
 and directive for MPCP to accept the tendered payment, the lease-purchase agreement could not be
said to have been rescinded.
NOTE: Does not include other issues:
1. WON Sandiganbayan has jurisdiction over MPCP even if it is not a party to RP v. Sabido:
 YES. MPCP is precluded from questioning the jurisdiction of the Sandiganbayan over its person,
considering that, as shown by the records, it actively participated in the discussion of the merits of
the said case, even going to the extent of seeking affirmative relief.
2. WON Sandiganbayan has acquired jurisdiction over PIMECO: NOT ADDRESSED

Allandale Sports Line, Inc. v. The Good Development Corp., GR No. 164521, Dec. 18, 2008
FACTS:
 Allandale Sportsline Inc (ASI) obtained a loan of P204,000 from The Good Development Corp (GDC) under a
Promissory Note signed by Melbarose Sasot (Pres) and Allandale Sasot (VP) of ASI, with Theresa Manipon,
as one of the three co-makers.
 The promissory note provides that the loan is payable in daily equal installments of P2,000 with interest as
26.002% per annum.
 In case of default in the payment of any installment, the entire balance of the obligation shall become
immediately due and demandable, and subject to liquidated penalty charge equivalent to 2% of the
principal
 To provide additional security, ASI and Melbarose executed a Deed of Mortgage in favor of GDC acceding that:
should the Mortgagors fail to comply with any of the terms of the promissory note and this mortgage
contract, the Mortgagee shall automatically have the absolute right without need of prior notice or
demand to forthwith judicially or extrajudicially forclose this mortgage xxx
 The properties subject of the mortgage are itemized in an inventory attached to the deed:
o List A- all the merchandise and stocks in trade found in the commercial establishment owned by ASI
and Melbarose, valued at P100,000
o List B- all the furniture, fixtures, appliances, equipment and other personal property found in said
business establishment, P3,500
o List C- one Toyota Corona, valued at P40,000; one Totoya Corolla, P35,000
 GD demanded that Melbarose pay the unpaid account of P179,000, or surrender the mortgaged chattels within
5 days from notice
 No payment was made, RTC filed a complaint for Replevin and/or Sum of Money with Damages against ASI,
Melbarose, Manipon, Florante Edrino and John Doe.
o Replevin- ordering the seizure of the above described chattels or personal propert with all accessories
and directing their transfer to Plaintiff for the purposes of foreclosure and or transfer to satisfy the
obligation in favor of the plaintiff
 RTC issued a Writ of Replivin, by virtue thereof, the Sheriff seized and delivered to the GDC one unit of Toyota
Corona and two appliances
 Dec. 2, 1991, GDC filed an Amended Complaint to include in its application for replevin the items under List
A. RTC issued an Alias Writ of Replevin, items seized and delivered to GDC
 Second Writ of Replevin was also issued over the Toyota Corolla, but records do not indicate that the Sheriff
made a return on the writ
 ASI and Melbarose filed their Answer with Counterclaim, contending that their loan obligation was only
P200,000, and after deducting the P18,000 which amount was retained by GDC as advance payment, and
P29,000 representing payments made from June 4, 1991 to July 8, 1991, their unpaid obligation was only
P171,000.
o That they repeatedly tendered payment, but GDC rejected their efforts for no valid reason
o That the unreasonable refusal to accept such payment relieved them of their loan obligation
 Manipon led a separate Answer in which she did not deny the authenticity of her signature on the Promissory
Note, but argued that she did not knowingly or voluntarily sign the instrument as a co-maker, for at that time
she was under the impression that the instrument she was signing was her own loan application with GDC
 GDC disclosed that after it obtained possession of the properties subject of the writs of replevin, it caused the
auction sale of some of them and realized proceeds amounting to P78,750.00 (No certificate of sale, but as
testified by respondent’s witness, Leonila Buenviaje)
 GDC presented a Statement of Account, which indicated that the total outstanding balance of the loan
obligation of ASI and Melbarose was reduced to P191,111.82 after the proceeds of the auction sale conducted
on June 19, 1992 in the amount of P78,750.00 was deducted from the earlier balance of P266,126.17
 RTC, in favor of GDC
 ASI, Sasot and Manipon appealed to CA, DENIED; Motion for Recon, denied
  SC: Petitioners contend that they were relieved of their obligation to pay GDC when they made several
attempts to tender payment but respondent refused to accept them without any valid reason.
 July 3, 1991- first tender of payment, Sasot sent GDC a PCIB check postdated Oct 31, 1991 of P171,000. Check
rejected because the amount was insufficient for as July 4, 1991, the balance of the principal loand was
P175,000, not P171,000, and its maturity was Sept. 13, not Oct. 31
 Oct. 15, 1997- tendered payment of P171,000 in cash, respondent refused due to insufficiency. Statement of
Account was sent to petitioner indicating that the total balance due was P228,071.61
 On October 29, 1991, petitioners tendered cash payment of P174,986.96, 338 8 but respondent still refused to
accept it for insufficiency of the amount.
ISSUE: WON TENDER OF PAYMENT AND RESPONDENT’S REFUSAL DISCHARGED PETITIONERS FROM THEIR OBLIGATION
HELD: NO
 Tender of payment, without more, produces no effect; rather, tender of payment must be followed by a
valid consignation in order to produce the effect of payment and extinguish an obligation
 Mere preparatory act to consignation. It is the manifestation of a desire by the debtor to comply with or pay
an obligation. If refused without just cause, the tender of payment will discharge the debtor of the obligation
to pay but only after a valid consignation of the sum due shall have been made with the proper court
 Consignation is the deposit of the proper amount with a judicial authority, before whom the debtor must
establish compliance with the following mandatory requirements:
(1) there was a debt due;
(2) the consignation of the obligation had been made because the creditor to whom tender of payment was
made refused to accept it, or because he was absent or incapacitated, or because several persons claim
to be entitled to receive the amount due, or because the title to the obligation has been lost;
(3) previous notice of the consignation had been given to the person interested in the performance of the
obligation;
(4) the amount due was placed at the disposal of the court; and
(5) after the consignation had been made, the person interested was notified thereof. Failure to prove any
of these requirements is enough ground to render a consignation ineffective.
 Petitioners did not allege or prove that after their tender of payment was refused by respondents, they
attempted or pursued consignation of the payment with the proper court.
 Their tender of payment not having been followed by a valid consignation, it produced no effect whatsoever,
least of all the extinguishment of the loan obligation.
 Therefore, the first issue of the validity or invalidity of their tender of payment is completely moot and
academic, for either way the discussion will go, it will lead to no other conclusion but that, without an
accompanying valid consignation, the tender of payment did not result in the payment and extinguishment
of the loan obligation. The Court cannot take cognizance of such a purely hypothetical issue.

Disclaimer: following issues, irrelevant to Oblicon pero ilagay at idiscuss ko na rin briefly kahit di ko naiintindihan
HAHAHHHA WAG NIYO NA ITO BASAHIN

FIRST ISSUE: Whether the parol evidence rule applies on the promissory note in question when the co-makers thereon
are total strangers to another
HELD: Lack of basis. Manipon did not join in the petition.
 The finding of the RTC, as affirmed by the CA, that she was a co-maker of Promissory Note and a real party-
in-interest is already final and conclusive. Petitioners cannot now question this finding by raising the defense
that Manipon signed the promissory note without knowledge of the nature of her liability under the instrument.
 Such defense is personal to Manipon and cannot be invoked by petitioners, unless it is shown that their interests
are so interwoven with and dependent on Manipon's as to be inseparable.

SECOND ISSUE: Was there a legal basis for RTC to grant respondent the relief of collecting the amount of P269,611.82
plus legal interest until full amount is paid, when respondents already covered P78,750
 As emphasized at the outset, the reliefs respondent prayed for in its Complaint and Amended Complaint are
in the alternative: delivery of the mortgaged properties preparatory to foreclosure or payment of the unpaid
loan
 NO, by causing the auction sale of the mortgaged properties, respondent effectively adopted and pursued the
remedy of extra-judicial foreclosure, using the writ of replevin as a tool to get hold of the mortgaged
properties. One effect of respondent's election of the remedy of extra-judicial foreclosure is its waiver of the
remedy of collection of the unpaid loan
 However, another effect of its election of the remedy of extra-judicial foreclosure is that whatever deciency
remains after applying the proceeds of the auction sale to the total loan obligation may still be recovered by
respondent
 THIRD ISSUE, DI PA RIN RELEVANT: Whether respondent instituted the proper action for deficiency amount or raised
or its claim at the pre-trial
 The Complaint and Amended Complaint reveals that respondent did not allege any deciency account. Nor
did it raise the matter in its PreTrial Brief. This is only to be expected because the auction sale of the
properties was apparently conducted long after it led its Complaint/Amended Complaint and Pre-trial Brief
 However, the Court notes that evidence on the deficiency amount was duly presented by respondent and
examined by petitioners (thru the testimonies and documentary evidences presented in court)
 The properties of petitioners which were seized by virtue of the Writs of Replevin were extra-judicially
foreclosed and sold at public auction by respondent in the exercise of its absolute right under the contract
entered into by the parties, without need of prior notice or demand to forthwith judicially or extra-judicially
foreclose this mortgage and proceed against all or any of the mortgaged rights, interests and properties for
the full satisfaction of the mortgagors' entire obligation to the mortgagee.
 Under the Deed of Mortgage, it is provided that in case of default, petitioners shall be liable for liquidated
collection charge in the amount equivalent to 25% of said outstanding obligation.

Sps. Cacyurin v AFPMB, G.R. No. 171298, April 15, 2013

Doctrine: Besides, as earlier stated, Article 1256 authorizes consignation alone, without need of prior tender of
payment, where the ground for consignation is that the creditor is unknown, or does not appear at the place of
payment; or is incapacitated to receive the payment at the time it is due; or when, without just cause, he refuses to
give a receipt; or when two or more persons claim the same right to collect; or when the title of the obligation has
been lost.
Facts:
 Petitioner Oscar Cacayorin filed an application with AFPMBAI to purchase a piece of property which the latter
owned in Puerto Princesa City, through a loan facility.
 On July 4, 1994, Oscar and his wife and the Rural Bank of San Teodoro executed a Loan and Mortgage
Agreement with the former as borrowers and the Rural Bank as lender, under the auspices of Pag-IBIG or Home
Development Mutual Fund’s Home Financing Program.
 The Rural Bank issued an August 22, 1994 letter of guaranty6 informing AFPMBAI that the proceeds of
petitioners’ approved loan in the amount of P77,418.00 shall be released to AFPMBAI after title to the property
is transferred in petitioners’ name and after the registration and annotation of the parties’ mortgage
agreement.
 AFPMBAI executed in petitioners’ favor a Deed of Absolute Sale, and a new title was issued in their name,
with the corresponding annotation of their mortgage agreement with the Rural Bank.
 Unfortunately, the Pag-IBIG loan facility did not push through and the Rural Bank closed and was placed under
receivership by the Philippine Deposit Insurance Corporation (PDIC). Meanwhile, AFPMBAI somehow was able
to take possession of petitioners’ loan documents and the title, while petitioners were unable to pay the
loan/consideration for the property.
 AFPMBAI made oral and written demands to petitioners.
 In July 2003, petitioners filed a Complaint for consignation of loan payment, recovery of title and cancellation
of mortgage annotation against AFPMBAI, PDIC and the Register of Deeds of Puerto Princesa City. Petitioners
alleged in their Complaint that as a result of the Rural Bank’s closure and PDIC’s claim that their loan papers
could not be located, they were left in a quandary as to where they should tender full payment of the loan
and how to secure cancellation of the mortgage annotation on title of the land.
 AFPMBAI filed a Motion to Dismiss13 claiming that petitioners’ Complaint falls within the jurisdiction of the
Housing and Land Use Regulatory Board (HLURB) and not the Puerto Princesa RTC, as it was filed by petitioners
in their capacity as buyers of a subdivision lot and it prays for specific performance of contractual and legal
obligations decreed under PD 957. It added that since no prior valid tender of payment was made by
petitioners, the consignation case was fatally defective and susceptible to dismissal.
TC: dismissed AFPMBAI motion
CA: reversed decision and sided with AFPMBAI
Issue/s:
1) Whether or not consignation is proper
2) Whether or not RTC has jurisdiction
Held:
1) Applying Article 1256 to the petitioners’ case as shaped by the allegations in their Complaint, the Court finds
that a case for consignation has been made out, as it now appears that there are two entities which petitioners
must deal with in order to fully secure their title to the property: 1) the Rural Bank (through PDIC), which is
the apparent creditor under the July 4, 1994 Loan and Mortgage Agreement; and 2) AFPMBAI, which is currently
in possession of the loan documents and the certificate of title, and the one making demands upon petitioners
 to pay. Clearly, the allegations in the Complaint present a situation where the creditor is unknown, or that
two or more entities appear to possess the same right to collect from petitioners. Whatever transpired
between the Rural Bank or PDIC and AFPMBAI in respect of petitioners’ loan account, if any, such that AFPMBAI
came into possession of the loan documents and TCT No. 37017, it appears that petitioners were not informed
thereof, nor made privy thereto.
2) On the question of jurisdiction, petitioners’ case should be tried in the Puerto Princesa RTC, and not the
HLURB. Consignation is necessarily judicial, as the Civil Code itself provides that consignation shall be made
by depositing the thing or things due at the disposal of judicial authority, thus: Art. 1258. Consignation shall
be made by depositing the things due at the disposal of judicial authority, before whom the tender of payment
shall be proved, in a proper case, and the announcement of the consignation in other cases. The consignation
having been made, the interested parties shall also be notified thereof.

The above provision clearly precludes consignation in venues other than the courts. Elsewhere, what may be
made is a valid tender of payment, but not consignation. The two, however, are to be distinguished. Tender
of payment must be distinguished from consignation. Tender is the antecedent of consignation, that is, an act
preparatory to the consignation, which is the principal, and from which are derived the immediate
consequences which the debtor desires or seeks to obtain. Tender of payment may be extrajudicial, while
consignation is necessarily judicial, and the priority of the first is the attempt to make a private settlement
before proceeding to the solemnities of consignation. (8 Manresa 325). While it may be true that petitioners’
claim relates to the terms and conditions of the sale of AFPMBAI’s subdivision lot, this is overshadowed by the
fact that since the Complaint in Civil Case No. 3812 pleads a case for consignation, the HLURB is without
jurisdiction to try it, as such case may only be tried by the regular courts.

Bonrostro v Juan, G.R. No. 172346, July 24, 2013

Doctrine: For a tender of payment to take effect it must be accompanied by the means of payment and debtor must
take immediate step to make a consignation.
Facts:
 Constancia Luna, as buyer, entered into a contract to sell with Bliss Development Corporation involving a
house located in Quezon City. A year after, Luna sold it to Lourdes Bonrostro under the ff. terms:

 The stipulated price of P1,250,000.00 shall be paid by the VENDEE to the VENDOR in the following manner:
 P200,000.00 upon signing x x x the Contract To Sell,
 P300,000.00 payable on or before April 30, 1993,
 P330,000.00 payable on or before July 31, 1993,
 P417,000.00 payable to the New Capitol Estate, for 15 years at [P6,867.12] a month

x x x In the event the VENDEE fails to pay the second installment on time, [t]he VENDEE will pay starting May
1, 1993 a 2% interest on the P300,000.00 monthly. Likewise, in the event the VENDEE fails to pay the amount
of P630,000.00 on the stipulated time, this CONTRACT TO SELL shall likewise be deemed cancelled and
rescinded and x x x 5% of the total contract price [of] P1,250,000.00 shall be deemed forfeited in favor of the
VENDOR. Unpaid monthly amortization shall likewise be deducted from the initial down payment in favor of
the VENDOR.”

 After execution of the contract, Bonrostro took possession of the property. However, except for P200,000.00
downpayment, she failed to pay subsequent amortization. Luna then filed before the RTC a Complaint for
Rescission of Contract and Damages. This is a petition for review on certiorari assailing the decision of CA
affirming with modification the decision of RTC in favor herein respondents.
Issue: WON delay in the payment of installment is a substantial breach of obligation as to warrant its rescission.
Ruling: No, in a contract to sell, payment of the price is a positive suspensive condition. Failure of which is not a
breach of contract warranting rescission under Article 1191 of the Civil Code, but rather just an event that prevents
the supposed seller from being bound to convey title to the supposed buyer. The contract to sell entered by the parties
refers to real property on installment basis, in which Art. 1191 cannot apply since they are governed by the Maceda
Law. However, there being no breach, Bonrostro is still not excused from being made liable for interest on the
installments due from the date of default until fully paid. Tender of payment, a manifestation by the debtor of a
desire to comply with or pay an obligation, asserted by Bonrostro for the accrual of interest to be suspended is not a
valid defense because for a tender of payment to take effect it must be accompanied by the means of payment and
debtor must take immediate step to make a consignation, the deposit of the proper amount with a judicial authority,
then interest is suspended from the time of such tender.

Del Carmen v Sabordo, G.R. No. 181723, Aug. 11, 2014

Doctrine: It is settled that compliance with the requisites of a valid consignation is mandatory. Failure to comply
strictly with any of the requisites will render the consignation void. One of these requisites is a valid prior tender of
payment.
Facts:
 Subsequently, the Suico spouses and their business partners failed to pay their loan obligations forcing DBP to
foreclose the mortgage. After the Suico spouses and their partners failed to redeem the foreclosed properties,
DBP consolidated its ownership over the same.
 Nonetheless, DBP later allowed the Suico spouses and Reginald and Beatriz Flores (Flores spouses), as
substitutes for Juliana Del Rosario, to repurchase the subject lots by way of a conditional sale for the sum of
P240,571.00.
 The Suico and Flores spouses were able to pay the downpayment and the first monthly amortization, but no
monthly installments were made thereafter. Threatened with the cancellation of the conditional sale, the
Suico and Flores spouses sold their rights over the said properties to herein respondents Restituto and Mima
Sabordo, subject to the condition that the latter shall pay the balance of the sale price. Subsequently,
respondents were able to repurchase the foreclosed properties of the Suico and Flores spouses.
 Respondents Restituto Sabordo (Restituto) filed with the then Court of First Instance of Negros Occidental an
original action for declaratory relief with damages and prayer for a writ of preliminary injunction raising the
issue of whether or not the Suico spouses have the right to recover from respondents Lots 506 and 514. The
court ruled that the petioners can exercise their option to purchase or redeem the subject lots from
respondents by paying the sum of P127,500.00.
 In the meantime, Toribio Suico (Toribio) died leaving his widow, Eufrocina, and several others, including
herein petitioner, as legal heirs. Later, they discovered that respondents mortgaged Lots 506 and 514 with
Republic Planters Bank (RPB) as security for a loan which, subsequently, became delinquent.
 Thereafter, claiming that they are ready with the payment of P127,500.00, but alleging that they cannot
determine as to whom such payment shall be made, petitioner and her co-heirs filed a Complaint with the
RTC of San Carlos City, Negros Occidental seeking to compel herein respondents and RPB to interplead and
litigate between themselves their respective interests on the abovementioned sum of money. The Complaint
also prayed that respondents be directed to substitute Lots 506 and 514 with other real estate properties as
collateral for their outstanding obligation with RPB and that the latter be ordered to accept the substitute
collateral and release the mortgage on Lots 506 and 514. Upon filing of their complaint, the heirs of Toribio
deposited the amount of P127,500.00 with the RTC of San Carlos City, Branch 59.
 Respondents filed their Answer with Counterclaim praying for the dismissal of the above Complaint on the
grounds that (1) the action for interpleader was improper since RPB is not laying any claim on the sum of
P127,500.00; (2) that the period within which the complainants are allowed to purchase Lots 506 and
514 had already expired; (3) that there was no valid consignation, and (4) that the case is barred by litis
pendencia or res judicata.
Issue: Whether the consignation made by the petitioners was a judicial deposit based on a final judgment and, as
such, does not require compliance with the requirements of Articles 1256 and 1257 of the Civil Code.
Ruling:
 The petition lacks merit. In the instant case, petitioner and her co-heirs, upon making the deposit with the
RTC, did not ask the trial court that respondents be notified to receive the amount that they have deposited.
In fact, there was no tender of payment. Instead, what petitioner and her co-heirs prayed for is that
respondents and RPB be directed to interplead with one another to determine their alleged respective rights
over the consigned amount; that respondents be likewise directed to substitute the subject lots with other
real properties as collateral for their loan with RPB and that RPB be also directed to accept the substitute real
properties as collateral for the said loan. Nonetheless, the trial court correctly ruled that interpleader is not
the proper remedy because RPB did not make any claim whatsoever over the amount consigned by petitioner
and her co-heirs with the court.
 It is settled that compliance with the requisites of a valid consignation is mandatory. Failure to comply strictly
with any of the requisites will render the consignation void. One of these requisites is a valid prior tender of
payment.
 Under Article 1256, the only instances where prior tender of payment is excused are: (1) when the creditor is
absent or unknown, or does not appear at the place of payment; (2) when the creditor is incapacitated to
receive the payment at the time it is due; (3) when, without just cause, the creditor refuses to give a receipt;
(4) when two or more persons claim the same right to collect; and (5) when the title of the obligation has
been lost. None of these instances are present in the instant case. Hence, the fact that the subject lots are
in danger of being foreclosed does not excuse petitioner and her co-heirs from tendering payment to
respondents, as directed by the court.
 B. Loss of Thing Due, NCC 1262-1269

1. Impossibility of Performance

(a) Original
(b) Supervening

C. Condonation or remission of the debt, NCC 1270-1274

Yam v CA, G.R. No. 104726, February 11, 1999

FACTS:
The parties herein entered into a Loan Agreement with Assumption of Solidary Liability. Petitioner subsequently
obtained a second Industrial Guarantee and Loan Fund. The petitioner had paid the first debt, it so happened that the
private respondent was placed under receivership. The petitioner made a partial payment to the second loan and the
private respondent sent an answer letter to the petitioner that their penalty charges will decreased provided that
they can pay on or before July 30, 1986. Because of the failure of the petitioner to pay the specific amount totaled
private respondent filed a complaint against the petitioner. The petitioner now contending that they had fully paid
their obligation where before July 2, 1986, Yam and his wife the president of the respondent’s corporation agreed to
waive the penalties and services charge provided petitioners paid the principal and interest.

ISSUE: Whether petitioners are liable for the payment of the penalties and service charges on their loan which, as of
July 31, 1986

RULING:
 In the case at bar, it is undisputed that the alleged agreement to condone P266,146.88 of the second IGLF
loan was not reduced in writing.
 Art. 1270, par. 2 of the Civil Code provides that express condonation must comply with the forms of donation.
Art. 748, par. 3 provides that the donation and acceptance of a movable, the value of which exceeds
P5,000.00, must be made in writing, otherwise the same shall be void.
Moreover, it is to be noted that the alleged agreement to condone the amount in question was supposedly entered
into by the parties sometime in July 1986, that is, after respondent corporation had been placed under receivership
on November 4, 1985. As held in. Thus, Sobrepeas had no authority to condone the debt.

Facts:
- May 10, 1979: The parties (petitioner and private respondent) entered into a Loan Agreement with Assumption
of Solidary Liability—the first Industrial Guarantee and Loan Fund (IGLF) between the two.
o P500,000.00 loan
o 12% annual interest
o 2% monthly penalty
o 1 ½ % monthly service charge
o 10% attorney’s fees
o Secured by a chattel mortgage on the printing machinery in petitioner’s establishment.
- Second IGLF (basically the same as the first one, except):
o P300,000.00 loan
o 14% annual interest
o 1% per annum service charge
- April 2, 1985: petitioners had paid their first loan (P500,000.00)
- November 4, 1985: PR was placed under receivership by the Central Bank:
o Ricardo Lirio—receiver
o Cristina Destajo—in-house examiner
- May 17, 1986: Pet made a partial payment of P50,000.00 on the second loan.
- June 18, 1986: Pet wrote a letter to PR proposing to settle their obligations, which was answered by the PR
on July 2 with a counter-offer that it would reduce the penalty charges (up to P140,000.00) provided
petitioners pay their obligations on or before July 30, 1986.
- July 31, 1986: Pet total liability amounted to P727,001.35.
o However, Pet sent a check to PR amounting only to P410,854.47 (Pilipinas Bank Check), with a notation
at the back stating “full payment of IGLF Loan”
o P410,854.47 = principal + (interest-P50,000.00 partial payment)
- Because of this, PR sent demand letters seeking payment of the balance of P266,146.88.
o Pet did not answer, so PR then filed a case in the RTC Manila for the collection of the sum plus
interests, penalties and service charges or, in the alternative, the foreclosure of the machineries.
 - Pet defense: sometime after receiving the counter-offer letter, Petitioner Yam (and wife ) met with Carlos
Sobrepenas, president of the PR corporation.
o The latter allegedly agreed to waive the penalties and service charges provided pet paid the principal
and interest (less the P50,000.00 partial payment). This was then the reason why there was such
notation at the back of the check.
- April 30, 1990: RTC decision: in favor of PR—pet ordered to pay the loan balance of P266,146.88 plus other
charges, failing in which the said machineries shall be foreclosed.
- Court of Appeals: affirmed in toto the decision of the Lower Court.
Issue: WoN petitioners are liable for the payment of the penalties and service charges on their loan—YES
HELD:
- Art. 1270, par. 2 of the CC express condonation must comply with the forms of donation.
o Art. 748, par.3 donation and acceptance of a movable, the value of which exceeds P5000.00, must
be made in writing, otherwise the same shall be void.
o Art. 417, par.1 obligations, actually referring to credits, are considered movable property
o With these laws in mind, and given the fact that said “agreement” to condone the other charges was
not reduced in writing, said agreement is void.
- Pet contention that the notation at the back is an evidence of the oral agreement is untenable.
o The notation merely states the petitioner’s intention in making the payment. In no way Is it binding
upon PR.
o It would have been a different story, however, if such was written in a receipt made by PR, as the
same would have been an admission against interest. If what pet said was true, then they should have
asked for a cert of full payment from PR!
- Cristina Destajo’s countersign is not a compelling evidence either.
o Destajo claimed that when she signed the voucher, she failed to note the notation written at the back.
o In any event, such countersigning only signifies acknowledgment of receipt of the payment. Destajo
does not have any authority to condone indebtedness, as her duties are limited only to “issuing official
receipts, preparing check vouchers and documentation.”
- Also, said agreement was entered into sometime in July 1986. It should be noted, however, that PR was placed
under receivership by the Central Bank on November 4, 1985.
o As held in Villanueva v. CA, the appointment of receiver operates to suspend the authority of a
[corporation]…over its property and effects, such authority being reposed in the receiver.” Thus,
Sobrepenas had no authority to condone the debt.
o By Pet’s own testimony it is proved that they indeed knew of such status of PR, so they cannot invoke
good faith in this case.
Judgment Affirmed.

Golez v. Nemeño, G.R. No. 178317, September 23, 2015

Facts: Spouses Ricardo and Elena C. Golez (Spouses Golez) have entered into a contract of lease with the owner of
the lot Meliton Nemeño (Meliton) on May 31, 1989. The property which was located in Zamboanga del Sur shall be
occupied by the Spouses Golez and and lieu of payment of rent the owner the lot have agreed to be paid by the Spouses
by constructing a building on the said lot.
On May 23, 1992, the building subject of the lease contract was burned down. Because of the destruction of the
building, respondent, on May 29, 1992, sent a letter to petitioners demanding the accumulated rentals for the leased
property from March 17, 1989 to June 17, 1992 totaling P78,000.00. As the demand was left unheeded, respondent
filed a complaint for collection of rentals plus damages before the Molave RTC.
Issue: Whether or not the petitioners liable to pay respondent for back rentals?
Held: The Supreme Court upheld the ruling of the trial court, in finding the Spouses Cortez liable to pay Meliton back
rentals.

The parties have entered into a contract of lease with modifications on the mode of payment, that instead of paying
the rent in the form of money, petitioners will withhold such payment and will apply the accumulated rent to the cost
of the building they built on the leased property. Thereafter, at the end of the lease period or until such time the cost
of the building has been fully covered by the rent accumulated, petitioners, as lessees will transfer the ownership of
said building to respondent. There is no dispute that petitioners used the property for several years for their own
benefit having operated a restaurant thereon. Therefore, it would be the height of injustice to deprive respondent of
compensation due him on the use of his property by petitioners

Thus the ruling of trial court is upheld that Spouses Cortez in accordance to the law, are still liable to deliver the
building to respondent
 Since they can no longer deliver the building which the contract obliged them to deliver, they are legally obliged to
pay the rentals for their use and enjoyment of the leased premises to prevent unjust enrichment on the part of
petitioners. The Spouses should pay rentals on the time they have used the property. Thus the payment of the rent
shall encompass only the time of the occupation of the property and since no evidence was produced that at the time
the building on the property was burned that the lots were used no rental fees shall be collected at the time of the
destruction of the property.

D. Confusion or merger of rights of the creditor, NCC 1275-1277

E. Compensation, NCC 1278-1290

Gan Tion v CA, 28 SCRA 235 (1969)

DOCTRINE: Compensation possible only when two parties are each other’s creditor and debtor
FACTS
1. 1961 – P filed an ejectment case against Ong Wan Sieng (OWS)
2. P contends that OWS was in default for 2 months of rent at 180/month
3. OWS contends that rent was only 160/month, and that he tried to pay P but was refused
4. CFI ruled in favor of OWS, awarding latter P500 in attorney’s fees
5. 1963 – P notified OWS that rent would increase 180/month, and demanded payment of unpaid rent amounting
to 4k from 1961-1963
6. OWS able to obtain writ of execution for P500 attorney’s fees
7. P complained that P500 should be considered partial legal compensation to him for the 4k debt owed by OWS
8. CA ruled against P, stating that P500 can only be considered legal compensation if P and OWS were creditors
and debtors of one another, but the P500 attorney’s fees did not belong to P but to his attorney, and therefore
the attorney was the creditor, not P
ISSUE: WON attorney’s fees can be subject of legal compensation
RULING:
1. Yes
a. P500 does not belong to attorney but to P
b. P is the proper creditor of the P500
c. P500 may properly be the subject of legal compensation against OWS’ debts
d. Unjust to ask P to pay P500 when OWS owes him 4k

CA decision reversed.

Mirasol v CA, 351 SCRA 44 (2001)

Facts: 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.
Issues:
(1) 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.
(2) Whether PD 579 and subsequent issuances thereof are unconstitutional.
(3) 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.

Montemayor v Millora, G.R. No. 168251, July 27, 2011

Facts: Respondent Atty. Vicente D. Millora (Vicente) obtained a loan of P400, 000.00 from petitioner Dr. Jesus M.
Montemayor (Jesus). The loan has a 2% interest and by this time, Vicente had already paid the amount of P108, 000.00
for the period July 24 to August 23, 1990.

Subsequently and with Vicente’s consent, the interest rate was increased to 3.5% or P10, 500.00 a month. From March
24, 1991 to July 23, 1991, or for a period of four months, Vicente was supposed to pay P42, 000.00 as interest but was
able to pay only P24, 000.00. Jesus made several demands for Vicente to settle his obligation but to no avail.

Jesus filed before the RTC of Quezon City. Atty. Vicente filed a COUNTERCLAIM against Jesus claiming that Atty.
Vicente was Jesus’ lawyer on several occasions and that in fact, Jesus owes Atty. Vicente attorney’s fees of not less
than P500, 000.00. Vicente claims that he was summarily dismissed from handling them when the instant complaint
for sum of money was filed.

On October 27, 1999 RTC ordered Vicente to pay Jesus his monetary obligation amounting to P300, 000.00 plus
interest of 12% from the time of the filing of the complaint on August 17, 1993 until fully paid ADDITIONALLY,
THERE WAS NO PRONOUNCMENT ON ATTORNEY’S FEES AND COST OF SUIT. Jesus filed a motion for reconsideration
at the CA but was denied.

Upon appeal to the higher court, Jesus contends that the trial court grievously erred in ordering the implementation
of the RTC’s October 27, 1999 Decision considering that same does fix the amount of attorney’s fees. According to
Jesus, such disposition leaves the matter of computation of the attorney’s fees uncertain and, hence, the writ of
execution cannot be implemented. In this regard, Jesus points out that not even the Sheriff who will implement said
Decision can compute the judgment awards. Besides, a sheriff is not clothed with the authority to render judicial
functions such as the computation of specific amounts of judgment awards.
Issue: Whether the absence of a specific amount in the decision representing respondent's counterclaim the same
could be validly offset against the specific amount of award mentioned in the decision in favor of the petitioner

 Jesus contends that for offsetting to apply, the two debts must be liquidated or ascertainable. However, the
trial court merely awarded to Vicente attorney’s fees based on quantum meruit without specifying the exact
amount thereof.
 We do not agree.
 For legal compensation to take place, the requirements set forth in Articles 1278 and 1279 of the Civil Code

ARTICLE 1278. Compensation shall take place when two persons, in their own right, are creditors and
debtors of each other.

ARTICLE 1279. In order that compensation may be proper, it is necessary:

 (1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor
of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same
kind, and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable
(5) That over neither of them there be any retention or controversy, commenced by third persons and
communicated in due time to the debtor.

 A debt is liquidated when its existence and amount are determined. Also, when the determination of the exact
amount depends only on a simple arithmetical operation. It is not necessary that it be admitted by the debtor.
Nor is it necessary that the credit appear in a final judgment in order that it can be considered as liquidated;
it is enough that its exact amount is known.

 In the instant case, both obligations are liquidated.

 Vicente has the obligation to pay his debt due to Jesus in the amount of P300,000.00 with interest at the rate
of 12% per annum counted from the filing of the instant complaint on August 17, 1993 until fully paid. Jesus,
on the other hand, has the obligation to pay attorney’s fees which the RTC had already determined to be
equivalent to whatever amount recoverable from Vicente. The said attorney’s fees were awarded by the
RTC on the counterclaim of Vicente on the basis of “quantum meruit” for the legal services he previously
rendered to Jesus.

There are 2 parts to the decision of RTC

 FIRST PART - The computation of the amount due to Jesus which is P300, 000.00 is to be multiplied by the
interest rate of 12%. The result thereof plus the principal of P300,000.00 is the total amount that Vicente
must pay Jesus.
 SECOND PART – The computation of attorney’s fees to Vicente. Vicente is entitled to attorney’s fees which is
equivalent to whatever amount recoverable from him by Jesus. Legal compensation or set-off then takes
place between Jesus and Vicente and both parties are on even terms such that there is actually nothing
left to execute and satisfy in favor of either party.
Ruling: WHEREFORE, instant Petition for Review on Certiorari is DENIED. The assailed Decision of the Court of Appeals
dated May 19, 2005 in CA-G.R. SP No. 81075 which dismissed the petition for certiorari seeking to annul and set aside
the Orders dated September 6, 2002 and October 2, 2003 of the Regional Trial Court of Quezon City, Branch 98 in
Civil Case No. Q-93-17255, is hereby AFFIRMED.
Notes: Counterclaim - In civil procedure, a party's claim is a counterclaim if the defending party has previously (in
the present action) made a claim against the claiming party.

Examples of counterclaims include: After a bank has sued a customer for an unpaid debt, the customer counterclaims
(sues back) against the bank for fraud in procuring the debt. The court will sort out the different claims in one lawsuit
(unless the claims are severed).

Quantum meruit - meaning "what one has earned". In the context of contract law, it means something along the lines
of "reasonable value of services".

Union Bank v DBP, G.R. No. 191555, January 20, 2014

Facts:
 Foodmasters, Inc. (FI) had outstanding loan obligations to both Union Bank’s predecessor-in-interest, Bancom
Development Corporation (Bancom), and to Development Bank of the Philippines (DBP).
 FI and DBP entered into a Deed of Cession of Property In Payment of Debt (dacion en pago) whereby the former
ceded in favor of the latter certain properties (including a processing plant) in consideration of the following:
(a) The full and complete satisfaction of FI’s loan obligations to DBP; and
(b) The direct assumption by DBP of FI’s obligations to Bancom in the amount of P17,000,000.00 (Assumed
Obligations).
 DBP, as the new owner of the processing plant, leased back for 20 years the said property to FI (Lease
Agreement) which was, in turn, obliged to pay monthly rentals to be shared by DBP and Bancom.
 DBP also entered into a separate agreement with Bancom (Assumption Agreement) whereby the former:
(a) Confirmed its assumption of FI’s obligations to Bancom; and
(b) Undertook to remit up to 30% of any and all rentals due from FI to Bancom which would serve as payment
of the assumed obligations, to be paid in monthly installments.
 On May 23, 1979, FI assigned its leasehold rights under the Lease Agreement to Foodmasters Worldwide, Inc.
(FW)
 On May 9, 1984, Bancom conveyed all its receivables, including DBP’s assumed obligations, to Union Bank.
 Claiming that the subject rentals have not been duly remitted despite its repeated demands, Union Bank filed
a collection case against DBP before the RTC.
 DBP countered that the obligations it assumed were payable only out of the rental payments made by FI. Since,
FI had yet to pay the same, DBP’s obligation to Union Bank had not arisen.
 RTC: Finding the complaint to be meritorious, RTC ordered:
(a) DBP to pay Union Bank the sum of P4,019,033.59, representing the amount of the subject rentals (which
constitutes 30% of FI’s [now FW’s] total rental debt), including interest until fully paid; and
(b) FW, as third-party defendant, to indemnify DBP, as third- party plaintiff, for its payments of the subject
rentals to Union Bank.
 RTC ruled that when DBP failed to remit the subject rentals to Union Bank, it defaulted on its assumed
obligations.
 CA: On May 27, 1994, CA Set aside the RTC’s ruling, and consequently ordered:
(a) FW to pay DBP the amount of P32,441,401.85 representing the total rental debt incurred under the
Lease Agreement, and
(b) DBP, after having been paid by FW its unpaid rentals, to remit 30% thereof to Union Bank.
 CA ruled that DBP did not default in its obligations to remit the subject rentals to Union Bank precisely because
it had yet to receive the rental payments of FW.
 Union Bank and DBP filed separate petitions for review on certiorari before the Supreme Court.
 SC: Denied both petitions in a Resolution. SC upheld the CA’s finding that while DBP directly assumed FI’s
obligations to Union Bank, DBP was only obliged to remit to the latter 30% of the lease rentals collected from
FW, from which any deficiency was to be settled by DBP not later than December 29, 1998.
 On May 16, 2001, Union Bank filed a motion for execution before the RTC, praying that DBP be directed to
pay the amount of P9,732,420.555 which represents the amount of the subject rentals (i.e., 30% of the FW’s
total rental debt in the amount of P32,441,401.85). DBP opposed Union Bank’s motion.
 On September 12, 2001, DBP filed its own motion for execution against FW.
 RTC: Granted both motions for execution of Union Bank and DBP on October 15, 2001 (Order of Execution).
As a result, a notice of garnishment against DBP were issued.
 DBP filed a motion for reconsideration averring that the RTC prematurely ordered DBP to pay the assumed
obligations to Union Bank before FW’s payment. The motion was denied. Thus, DBP’s deposits were eventually
garnished. DBP then filed a petition for certiorari before the CA.
 CA: Dismissed DBP’s petition, finding that the RTC did not abuse its discretion when it issued the October 15,
2001 Writ of Execution. DBP appealed the CA’s ruling before the SC.
 SC: On January 13, 2004, SC granted DBP’s appeal, and thereby reversed and set aside the CA’s ruling. SC
acknowledged that DBP’s obligation to Union Bank for remittance of the lease payments is contingent on FW’s
prior payment to DBP, and that any deficiency DBP had to pay by December 29, 1998 as per the Assumption
Agreement cannot be determined until after the satisfaction of FW’s own rental obligations to DBP.
 Accordingly, the SC:
(a) nullified the October 15, 2001 Writ of Execution and all related issuances thereto; and;
(b) ordered Union Bank to return to DBP the amounts it received pursuant to the said writ.
 Union Bank moved for reconsideration which was denied by the SC.
 DBP moved for the execution of the said decision before the RTC. The RTC then issued a writ of execution
(September 6, 2005 Writ of Execution), ordering Union Bank to return to DBP all funds it received pursuant to
the October 15, 2001 Writ of Execution.
 On September 13, 2005, Union Bank filed a Manifestation and Motion to Affirm Legal Compensation to the
RTC, praying that the RTC apply legal compensation between itself and DBP in order to offset the return of
the funds it previously received from DBP.
 Union Bank anchored its motion on two grounds, namely:
(a) on December 29, 1998, DBP’s assumed obligations became due and demandable; and
(b) considering that FW became non-operational and non-existent, DBP became primarily liable to the
balance of its assumed obligation, which as of Union Bank’s computation after its claimed set-off,
amounted to P1,849,391.87.
 RTC: Denied the above-mentioned motion for lack of merit. With Union Bank’s motion for reconsideration
having been denied, Union Bank filed a petition for certiorari with the CA.
 Pending resolution, Union Bank issued a Manager’s Check amounting to P52,427,250.00 in favor of DBP, in
satisfaction of the Writ of Execution dated September 6, 2005.
 CA: Dismissed Union Bank’s petition, finding no grave abuse of discretion on the RTC’s part. CA affirmed the
denial of its motion to affirm legal compensation considering that:
(a) the RTC only implemented the Supreme Court’s January 13, 2004 Decision which by then had already
attained finality;
 (b) DBP is not a debtor of Union Bank; and
(c) there is neither a demandable nor liquidated debt from DBP to Union Bank.
 Union Bank moved for reconsideration which was denied in a Resolution dated February 26, 2010; hence,
the instant petition.
Issue: W/N the CA correctly upheld the denial of Union Bank’s motion to affirm legal compensation.
Ruling:
 Yes. The petition is bereft of merit. Compensation is defined as a mode of extinguishing obligations whereby
two persons in their capacity as principals are mutual debtors and creditors of each other with respect to
equally liquidated and demandable obligations to which no retention or controversy has been timely
commenced and communicated by third parties. The requisites therefor are provided under Article 1279 of
the Civil Code which reads as follows:
 Art. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor
of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same
kind, and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third persons and
communicated in due time to the debtor.
 The rule on legal compensation is stated in Article 1290 of the Civil Code which provides that "when all the
requisites mentioned in Article 1279 are present, compensation takes effect by operation of law, and
extinguishes both debts to the concurrent amount, even though the creditors and debtors are not aware of
the compensation."
 Therefore, compensation could not have taken place between these debts for the apparent reason that
requisites 3 and 4 under Article 1279 of the Civil Code are not present. Since DBP’s assumed obligations to
Union Bank for remittance of the lease payments are – in the Court’s words – "contingent on the prior payment
thereof by FW to DBP," it cannot be said that both debts are due (requisite 3 of Article 1279 of the Civil Code).
Also, the Court observed that any deficiency that DBP had to make up for the full satisfaction of the assumed
obligations "cannot be determined until after the satisfaction of FW’s obligation to DBP." In this regard, it
cannot be concluded that the same debt had already been liquidated, and thereby became demandable
(requisite 4 of Article 1279 of the Civil Code). Thus, CA correctly upheld the denial of Union Bank’s motion to
affirm legal compensation.

First United v. Bayanihan, G.R. No. 164985, January 15, 2014

FACTS:
 Petitioner FUCC and petitioner Blue Star were associate construction firms sharing financial resources,
equipment and technical personnel on a case-to-case basis. From May 27, 1992 to July 8, 1992, they ordered
six units of dump trucks from respondent Bayanihan.
 On September 19, 1992, FUCC ordered from the respondent one unit of Hino Prime Mover that the respondent
delivered on the same date. On September 29, 1992, FUCC again ordered from the respondent one unit of
Isuzu Transit Mixer that was also delivered to the petitioners. For the two purchases, FUCC partially paid
in cash, and the balance through post-dated checks.
 Upon presentment of the checks for payment, the respondent learned that FUCC had ordered the payment
stopped. The respondent immediately demanded the full settlement of their obligation from the petitioners,
but to no avail. Instead, the petitioners informed the respondent that they were withholding payment of the
checks due to the breakdown of one of the dump trucks they had earlier purchased from respondent,
specifically the second dump truck delivered on May 27, 1992.
 Due to the refusal to pay, the respondent commenced this action for collection on April 29, 1993, seeking
payment of the unpaid balance in the amount of P735,000.00 represented by the two checks.
 Petitioners averred that they had stopped the payment on the two checks worth P735,000.00 because of the
respondent’s refusal to repair the second dump truck; and that they had informed the respondent of
the defects in that unit but the respondent had refused to comply with its warranty, compelling them to incur
expenses for the repair and spare parts. They prayed that the respondent return the price of
the defective dump truck worth P830,000.00 minus the amounts of their two checks worth P735,000.00, with
12% per annum interest on the difference of P90,000.00 from May 1993 until the same is fully paid; that the
respondent should also reimburse them the sum of P247,950.00 as their expenses for the repair of the dump
truck, with 12% per annum interest from December 16, 1992, the date of demand, until fully paid.
ISSUE: Whether or not petitioners could avail themselves of legal compensation.
HELD: NO. The Court held that petitioners could not avail of legal compensation because the claims of petitioners
against respondent were not liquidated and demandable.
 A debt is liquidated when its existence and amount are determined. Accordingly, an unliquidated claim set up as a
counterclaim by a defendant can be set off against the plaintiff’s claim from the moment it is liquidated by judgment.
Article 1290 of the Civil Code provides that when all the requisites mentioned in Article 1279 of the Civil Code are
present, compensation takes effect by operation of law, and extinguishes both debts to the concurrent amount. With
petitioners’ expenses for the repair of the dump truck being already established and determined with certainty by the
lower courts, it follows that legal compensation could take place because all the requirements were present. Hence,
the amount of P71,350.00 should be set off against petitioners’ unpaid obligation of P735,000.00, leaving a balance of
P663,650.00, the amount petitioners still owed to respondent.

Philippine Trust Company vs. Sps. Roxas, G.R. No. 171897, October 14, 2015
FACTS:
 The Spouses Roxas procured loans from Philippine Trust Company (PTC) to finance their real estate business,
which were secured by real estate mortgages on the Spouses Roxas' real properties. Subsequently, the Spouses
Roxas, PTC, and Roben Construction entered into "a contract of building construction," under which PTC
granted an additional loan to the Spouses Roxas. Such contract was superseded by a new "contract of building
construction" wherein Rosendo P. Dominguez, Jr. (Dominguez) substituted Roben Construction as the
contractor under the same terms and conditions of the previous contract. Spouses Roxas did not finish the
housing project due to financial difficulties resulting in non-payment of the loans.
 As a result, Dominguez sued PTC and Spouses Roxas for breach of contract. On the other hand, Spouses Roxas
in turn filed a complaint against Dominguez and the insurance company.
 In the first case, Spouses Roxas filed an answer with a cross-claim against PTC. PTC also filed an answer with
a counterclaim against Spouses Roxas for unpaid loan obligation and, in default of such payments, the
foreclosure of the real estate mortgages. The RTC ruled in favor of Dominguez and denied PTC’s counterclaim
for insufficiency of evidence without prejudice to the filing of a complaint against Spouses Roxas. Both PTC
and Spouses Roxas appealed to the CA but the same is still pending (CA-G.R. CV No.30340).
 PTC in the meantime filed a petition for extrajudicial foreclosure against Spouses Roxas in Bataan RTC. The
latter in turn filed an opposition and a complaint for damages with Preliminary Injunction which was granted
by the court. The CA affirmed the RTC’s decision. The decision became final and executory, prompting the
Spouses Roxas to file a motion for execution to enforce the judgment against PTC. PTC filed an Opposition
where it raised for the first time the defense of legal compensation to offset the judgment debt due to the
Spouses Roxas. The same was denied by the RTC. PTC filed two motions for reconsideration but both were
denied again. PTC filed a Petition for Certiorari with the CA which was dismissed. Hence, this Petition for
Review on Certiorari.
ISSUES:
1) Whether or not the defense of legal compensation can be raised for the first after the decision became final
and executory.
2) Whether or not PTC engaged in forum shopping.
RULING:
Anent the first issue, the SC ruled in the negative. PTC should have raised the argument of compensation at the trial
stage. Sec. 2, Rule 9 of the Rules of Court provides that:

Defenses and objections not pleaded either in a motion to dismiss or in the answer are deemed waived; except
the failure to state a cause of action which may be alleged in a later pleading, if one is permitted, or by motion
for judgment on the pleadings, or at the trial on the merits; but in the last instance, the motion shall be disposed
of as provided in section 5 of Rule 10 in the light of any evidence which may have been received. Whenever it
appears that the court has no jurisdiction over the subject-matter, it shall dismiss the action.

Although legal compensation takes place by operation of law, it must be alleged and proved as a defense by the debtor
who claims its benefits. Only after it is proved will its effects retroact to the moment when all the requisites under
Article 1279 of the Civil Code have concurred.

PTC's contention that it could not have raised legal compensation as a defense because it was not yet a debtor of the
Spouses Roxas when it filed its answer is unconvincing. Under Rule 8, Section 2 of the 1964 Rules of Court, "[a] party
may set forth two or more statements of a claim or defense alternatively or hypothetically, either in one cause of
action or defense or in separate causes of action or defenses." Thus, the defense of compensation would have been
proper and allowed under the rules even if PTC disclaimed any liability at the time it filed its answer. In Marquez v.
Valencia, 99 Phil. 740 [1956], cited in Arreza v. Diaz, Jr., G.R. No. 13343, August 30, 2001, 364 SCRA 88, 97, it was
held that when a defendant failed to set up such alternative defenses and chosen orelected to rely on one only, the
overruling thereof was a complete determination of the controversy between the parties, which bars a subsequent
 action based upon an unpleaded defense. Unmistakably, the rationale behind this is the proscription against the
splitting of causes of action.
In any case, even if PTC were excused from pleading compensation as a defense in its answer, PTC still failed to raise
this defense in its motion for reconsideration of the Bataan R TC decision and in its subsequent appeal. Hence, there
can be no other conclusion than that PTC is already estopped from raising the issue of legal compensation.

Anent the second issue, the SC ruled in the affirmative. PTC appears to have willfully engaged in forum shopping.
Forum Shopping exists when the elements of litis pendentia are present, viz: a) identity of parties, or at least such
parties as those representing the same interest in both actions; b) identity of rights asserted and relief prayed for, the
relief being founded on the same facts; and c) the identity of the two preceding particulars is such that any judgment
rendered in the other action, regardless of which party is successful, will amount to res judicate in the action under
consideration.

We find that the elements of litis pendentia – and, as a consequence, forum shopping – exists in this case. PTC’s claim
for legal compensation is founded on the same unpaid loan obligation now being litigated in CA-G.R. CV No. 30340.
Although that case originated from a complaint filed by Dominguez for breach of contract, PTC counterclaimed
the entire unpaid loan obligation, plus interest, owed to it by the Spouses Roxas. In other words, PTC had squarely
put in issue the matter of the Spouses Roxas' indebtedness arising from the loans the latter obtained from PTC. It is
immaterial that PTC's cause of action in the other case was set forth by way of a counterclaim, since the latter partakes
of the nature of a complaint by the defendant against the plaintiff. On the other hand, while the Main Case originally
involved a different subject matter and cause of action (i.e., the injunction against PTC's extrajudicial foreclosure
and the Spouses Roxas' claim for damages) as that embraced in CA-G.R. CV No. 30340, the primary issue raised by PTC
in its Opposition to the Motion for Execution, and subsequently in the petition for certiorari with the Court of Appeals
and the present petition, pertained to the same loan obtained by the Spouses Roxas. Thus, with respect to the Spouses
Roxas' indebtedness to PTC, there is a clear identity of parties, of subject matter, and of cause of action. Consequently,
once a final decision in CA-G.R. CV No. 30340 is rendered, it will constitute res judicata and bar further litigation on
the same loan obligation, including any dispute on the applicability or non-applicability of legal compensation.

F. Novation, NCC 1291 – 1304

1. Subjective or Personal

Starbright Sales v Philippine Realty Corporation, G.R. No. 177936, January 18, 2012
FACTS:
 Ramon Licup wrote Msgr. Domingo A. Cirilos, offering to buy three contiguous parcels of land in Parañaque
that The Holy See and Philippine Realty Corporation (PRC) owned for P1,240.00 per square meter.
 Licup accepted the responsibility for removing the illegal settlers on the land and enclosed a check for
P100,000.00 to "close the transaction." He undertook to pay the balance of the purchase price upon
presentation of the title for transfer and once the property has been cleared of its occupants.
 Msgr. Cirilos, representing The Holy See and PRC, signed his name on the conforme portion of the letter and
accepted the check.
 But the check could not be encashed due to Licup's stop-order payment. Licup wrote Msgr. Cirilos on April 26,
1988, requesting that the titles to the land be instead transferred to petitioner Starbright Sales Enterprises,
Inc. (SSE). He enclosed a new check for the same amount.
 SSE's representatives, Mr. and Mrs. Cu, did not sign the letter.
 On November 29, 1988 Msgr. Cirilos wrote SSE, requesting it to remove the occupants on the property and,
should it decide not to do this, Msgr. Cirilos would return to it the P100,000.00 that he received. On January
24, 1989 SSE replied with an "updated proposal." It would be willing to comply with Msgr. Cirilos' condition
provided the purchase price is lowered to P1,150.00 per square meter
 On January 26, 1989 Msgr. Cirilos wrote back, rejecting the "updated proposal." He said that other buyers
were willing to acquire the property on an "as is, where is" basis at P1,400.00 per square meter. He gave SSE
seven days within which to buy the property at P1,400.00 per square meter, otherwise, Msgr. Cirilos would
take it that SSE has lost interest in the same. He enclosed a check for P100,000.00 in his letter as refund of
what he earlier received.
 On February 4, 1989 SSE wrote Msgr. Cirilos that they already had a perfected contract of sale in the April 17,
1988 letter which he signed and that, consequently, he could no longer impose amendments such as the
removal of the informal settlers at the buyer's expense and the increase in the purchase price.
 SSE claimed that it got no reply from Msgr. Cirilos and that the next thing they knew, the land had been sold
to Tropicana Properties on March 30, 1989. On May 15, 1989 SSE demanded rescission of that sale.
 Meanwhile, on August 4, 1989 Tropicana Properties sold the three parcels of land to Standard Realty.
  Its demand for rescission unheeded, SSE 􀁄led a complaint for annulment of sale and reconveyance with
damages before the Regional Trial Court (RTC) of Makati, Branch 61, against The Holy See, PRC, Msgr. Cirilos,
and Tropicana Properties
 SSE alleged that Licup's original letter of April 17, 1988 to Msgr. Cirilos constituted a perfected contract. Licup
even gave an earnest money of P100,000.00 to "close the transaction."
 His offer to rid the land of its occupants was a "mere gesture of accommodation if only to expedite the transfer
of its title."
 Further, SSE claimed that, in representing The Holy See and PRC, Msgr. Cirilos acted in bad faith when he set
the price of the property at P1,400.00 per square meter when in truth, the property was sold to Tropicana
Properties for only P760.68 per square meter.
 Msgr. Cirilos maintained, on the other hand, that based on their exchange of letters, no contract of sale was
perfected between SSE and the parties he represented. And, only after the negotiations between them fell
through did he sell the land to Tropicana Properties.
TRIAL COURT:
 Parañaque RTC treated the April 17, 1988 letter between Licup and Msgr. Cirilos as a perfected contract of
sale between the parties. Msgr. Cirilos attempted to change the terms of contract and return SSE's initial
deposit but the parties reached no agreement regarding such change. Since such agreement was wanting, the
original terms provided in the April 17, 1988 letter continued to bind the parties.
COURT OF APPEALS:
 On appeal to the Court of Appeals (CA), the latter rendered judgment on November 10, 2006, 5 reversing the
Parañaque RTC decision. The CA held that no perfected contract can be gleaned from the April 17, 1988 letter
that SSE had relied on. Indeed, the subsequent exchange of letters between SSE and Msgr. Cirilos show that
the parties were grappling with the terms of the sale. Msgr. Cirilos made no unconditional acceptance that
would give rise to a perfected contract.

 As to the P100,000.00 given to Msgr. Cirilos, the CA considered it an option money that secured for SSE only
the privilege to buy the property even if Licup called it a "deposit." The CA denied SSE's motion for
reconsideration on May 2, 2007.
ISSUE: WoN there was novation?
SUPREME COURT:
 YES, when Licup ordered a stop-payment on his deposit and proposed in his April 26, 1988 letter to Msgr. Cirilos
that the property be instead transferred to SSE, a subjective novation took place.

 A subjective novation results through substitution of the person of the debtor or through subrogation of a third
person to the rights of the creditor. To accomplish a subjective novation through change in the person of the
debtor, the old debtor needs to be expressly released from the obligation and the third person or new debtor
needs to assume his place in the relation.

 Novation serves two functions — one is to extinguish an existing obligation, the

other to substitute a new one in its place — requiring concurrence of four 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.

 Notably, Licup and Msgr. Cirilos afixed their signatures on the original agreement embodied in Licup's letter
of April 26, 1988. No similar letter agreement can be found between SSE and Msgr. Cirilos.contract of sale as
between SSE and the owners. The succeeding exchange of letters between Mr. Stephen Cu, SSE's
representative, and Msgr. Cirilos attests to an ufinished negotiation. Msgr. Cirilos referred to his discussion
with SSE regarding the purchase as a "pending transaction."

 Cu, on the other hand, regarded SSE's first letter to Msgr. Cirilos as an "updated proposal." This proposal took
up two issues: which party would undertake to evict the occupants on the property and how much must the
consideration be for the property. These are clear indications that there was no meeting of the minds between
the parties. As it turned out, the parties reached no consensus regarding these issues, thus producing no
perfected sale between them.

 Parenthetically, Msgr. Cirilos did not act in bad faith when he sold the property to Tropicana even if it was for
a lesser consideration. More than a month had passed since the last communication between the parties on
February 4, 1989. It is not improbable for prospective buyers to offer to buy the property during that time.
  The P100,000.00 that was given to Msgr. Cirilos as "deposit" cannot be considered as earnest money Where the
parties merely exchanged offers and counteroffers, no contract is perfected since they did not yet give their
consent to such offers. Earnest money applies to a perfected sale.

 SSE cannot revert to the original terms stated in Licup's letter to Msgr. Cirilos
dated April 17, 1988 since it was not privy to such contract. The parties to it were Licup and Msgr. Cirilos.
Under the principle of relativity of contracts, contracts can only bind the parties who entered into it. It cannot
favor or prejudice a third person. Petitioner SSE cannot, therefore, impose the terms Licup stated in his April
17, 1988 letter
DISPOSITIVE:
WHEREFORE, the Court DISMISSES the petition and AFFIRMS the Court of Appeals Decision dated November 10, 2006 in
CA-G.R. CV 67366.
SO ORDERED.
Velasco, Jr., Peralta, Mendoza and Perlas-Bernabe, JJ., concur.

S.C. Megaworld Construction vs. Engr. Luis U. Parada, G.R. No. 183804, September 11, 2013
DOCTRINE: Novation is never presumed but must be clearly and unequivocally shown.

Novation is a mode of extinguishing an obligation by changing its objects or principal obligations, by substituting a
new debtor in place of the old one, or by subrogating a third person to the rights of the creditor. It is “the substitution
of a new contract, debt, or obligation for an existing one between the same or different parties.”

Art. 1293. Novation which consists in substituting a new debtor in the place of the original one, may be made even
without the knowledge or against the will of the latter, but not without the consent of the creditor. Payment by the
new debtor gives him rights mentioned in Articles 1236 and 1237.

In general, there are two modes of substituting the person of the debtor:
1. 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.
2. 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.
FACTS:
● SC Megaworld has a project known as Read-Rite project in Canlubang, Laguna
● It bought electrical lighting materials from Genlite Industries owned by Engineer Luis U. Parada
● It was unable to pay because of of nonpayment of its subcontractor Enviro Kleen
● Enviro Kleen paid Parada P250,000 on June 2, 1999, leaving P816,627 unpaid.
● Parada filed collection for money suit for the remaining amount from SC Megaworld
● SC Megaworld denied liability claiming that there was a valid novation whent Enviro Kleen paid in June.
TRIAL COURT: Favored Parada. SC Megaworld is liable.
WHEREFORE, judgment is hereby rendered for the [respondent].
[The petitioner] is hereby ordered to pay the [respondent] the following:
A. the sum of [P]816,627.00 representing the principal obligation due;
B. the sum equivalent to twenty percent (20%) per month of the principal obligation due from date of judicial
demand until fully paid as and for interest; and
C. the sum equivalent to twenty[-]five [percent] (25%) of the principal sum due as and for attorney’s fees and
other costs of suits.
COURT OF APPEALS:
● SC Megaworld further contends the case should have been dismissed by trial court, because it did not
impleaded Genlite Industries
● CA concurred with RTC and that Settled is the rule that litigants cannot raise an issue for the first time on
appeal as this would contravene the basic rules of fair play and justice.
ISSUE: Whether or not there was a valid novation? NO VALID NOVATION
SUPREME COURT:

 Novation is never presumed but must be clearly and unequivocally shown.

 The settled rule is that novation is never presumed, but must be clearly and unequivocally shown. In order for
a new agreement to supersede the old one, the parties to a contract must expressly agree that they are
subrogating their old contract in favor of a new one. Thus, the mere substitution of debtors will not result in
 novation, and the fact that the creditor accepts payments from a third person, who has assumed the obligation,
will result merely in the addition of debtors and not novation, and the creditor may enforce the obligation
against both debtors. If there is no agreement as to solidarity, the first and new debtors are considered
obligated jointly. As explained in Reyes v. CA
 The consent of the creditor to a novation by change of debtor is as indispensable as the creditor’s consent
in conventional subrogation in order that a novation shall legally take place. In this case, the two letters
there is nothing in the two (2) letters of the respondent to Enviro Kleen, dated April 14, 1999 and
June 16, 1999, which would imply that he consented to the alleged novation, and, particularly, that
he intended to release the petitioner from its primary obligation to pay him for its purchase of lighting
materials. The appellate court cited the RTC’s finding9 that the respondent informed Enviro Kleen
in his first letter that he had served notice to the petitioner that he would take legal action against
it for its overdue account, and that he retained his option to pull out the lighting materials and charge
the petitioner for any damage they might sustain during the pull-out

 “to effect a subjective novation by a change in the person of the debtor, it is necessary that the old debtor
be released expressly from the obligation, and the third person or new debtor assumes his place in the relation.
There is no novation without such release as the third person who has assumed the debtor’s obligation becomes
merely a co-debtor or surety. xxx. Novation arising from a purported change in the person of the debtor must
be clear and express xxx.”

 In the civil law setting, novatio is literally construed as to make new. So it is deeply rooted in the Roman Law
jurisprudence, the principle – novatio non praesumitur — that novation is never presumed. At bottom, for
novation to be a jural reality, its animus must be ever present, debitum pro debito — basically extinguishing
the old obligation for the new one.

 The trial court found that the respondent never agreed to release the petitioner from its obligation, and this
conclusion was upheld by the CA. We generally accord utmost respect and great weight to factual findings of
the trial court and the CA, unless there appears in the record some fact or circumstance of weight and
influence which has been overlooked, or the significance of which has been misinterpreted, that if considered
would have affected the result of the case. We find no such oversight in the appreciation of the facts below,
nor such a misinterpretation thereof, as would otherwise provide a clear and unequivocal showing that a
novation has occurred in the contract between the parties resulting in the release of the petitioner.
DISPOSITIVE:
 WHEREFORE, premises considered, the Decision dated April 30, 2008 of the Court of Appeals in CA-G.R. CV
No. 83811 is AFFIRMED with MODIFICATION. Petitioner S.C. Megaworld Construction and Development
Corporation is ordered to pay respondent Engr. Luis A. Parada, represented by Engr. Leonardo A. Parada, the
principal amount due of P816,627.00, plus interest at twelve percent (12%) per annum, reckoned from judicial
demand until June 30, 2013, and six percent (6%) per annum from July 1, 2013 until finality hereof, by way of
actual and compensatory damages. Thereafter, the principal amount due as adjusted by interest shall likewise
earn interest at six percent (6%) per annum until fully paid. The award of attorney’s fees is DELETED.

Magbanua v Uy, G.R. No. 161003, May 6, 2005

FACTS:
 As a final consequence of the final and executory decision of the Supreme Court which affirmed with
modification the decision of the NLRC, hearings were conducted to determine the amount of wage differentials
due the eight petitioners. The petitioners filed a Motion for Issuance of Writ of Execution. Rizalino Uy filed a
Manifestation requesting that the cases be terminated and closed, stating that the judgment award as
computed had been complied with to the satisfaction of petitioners. Said Manifestation was also signed by the
eight petitioners. Together with the manifestation is a Joint Affidavit dated May 5, 1997 of petitioners,
attesting to the receipt of payment from respondent and waiving all other benefits due them in connection
with their complaint. On October 20, 1997, six of the eight petitioners filed a Manifestation requesting that
the cases be considered closed and terminated as they are already satisfied of what they have received from
respondent. Together with said Manifestation is a Joint Affidavit in the local dialect, of the six petitioners
attesting that they have no more collectible amount from respondent and if there is any, they are abandoning
and waiving the same.
TRIAL COURT: N/A
COURT OF APPEALS:
ISSUE: Whether or not the final and executory judgment of the Supreme Court could be subject to compromise
settlement.
SUPREME COURT: Yes. There is no justification to disallow a compromise agreement, solely because it was entered
into after final judgment. The validity of the agreement is determined by compliance with the requisites and principles
 of contracts, not by when it was entered into. Petitioners voluntarily entered into the compromise agreement.
Circumstances also reveal that respondent has already complied with its obligation pursuant to the compromise
agreement. Having already benefited from the agreement, estoppel bars petitioners from challenging it.

Advantages of Compromise
A reciprocal concession inherent in a compromise agreement assures benefits for the contracting parties. For the
defeated litigant, obvious is the advantage of a compromise after final judgment. Liability arising from the judgment
may be reduced. As to the prevailing party, a compromise agreement assures receipt of payment. Litigants are
sometimes deprived of their winnings because of unscrupulous mechanisms meant to delay or evade the execution of
a final judgment.
The advantages of a compromise agreement appear to be recognized by the NLRC in its Rules of Procedure. As part of
the proceedings in executing a final judgment, litigants are required to attend a pre-execution conference to thresh
out matters relevant to the execution. In the conference, any agreement that would settle the final judgment in a
particular manner is necessarily a compromise.

Novation of an Obligation
The principle of novation supports the validity of a compromise after final judgment. Novation, a mode of extinguishing
an obligation, is done by changing the object or principal condition of an obligation, substituting the person of the
debtor, or surrogating a third person in the exercise of the rights of the creditor.

For an obligation to be extinguished by another, the law requires either of these two conditions: (1) the substitution
is unequivocally declared, or (2) the old and the new obligations are incompatible on every point. A compromise of a
final judgment operates as a novation of the judgment obligation, upon compliance with either requisite. In the
present case, the incompatibility of the final judgment with the compromise agreement is evident, because the latter
was precisely entered into to supersede the former.
DISPOSITIVE: WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against petitioners. SO
ORDERED.

Phil. Charter v Petroleum, G.R. No. 180898, April 18, 2012

DOCTRINE: In order that an obligation may be extinguished by another which substitutes the same, it is imperative
that it be so declared in unequivocal terms, or that the old and new obligation be in every point incompatible with
each other. Novation of a contract is never presumed. In the absence of an express agreement, novation takes place
only when the old and the new obligations are incompatible on every point.
FACTS:
1. Respondent Petroleum Distributors and Services Corporation (PDSC), through its president, Conrado P.
Limcaco, entered into a building contract with N.C. Francia Construction Corporation (FCC) for the
construction of a four-story commercial and parking complex located at MIA Road corner Domestic Road, Pasay
City, known as Park N Fly Building (Park N Fly). Under the contract, FCC agreed to undertake the construction
of Park N Fly for the price of ₱45,522,197.72.
2. Thee parties agreed that the construction work would begin on February 1, 1999. The project was divided into
two stages: Phase 1 of the construction work would be finished on May 17, 1999 and Phase 2 would begin on
May 18, 1999 and finish on October 20, 1999. The project should be turned over by October 21, 1999.
a. To ensure compliance with its obligation, FCCs individual officers signed the Undertaking of Surety
holding themselves personally liable for the accountabilities of FCC as well as executed a Performance
Bond totaling ₱6,828,329.00.
3. Phase 1 started but was delayed. Eventually FCC executed a deed of assignment, assigning a portion of its
receivables from Caltex Philippines, Inc. (Caltex), and a chattel mortgage, conveying some of its construction
equipment to PDSC as additional security for the faithful compliance with its obligation.
4. On even date, PDSC and FCC likewise executed a memorandum of agreement (MOA), wherein the parties
agreed to revise the work schedule of the project. As a consequence, Performance Bond No. 31915 was
extended up to March 2, 2000.
5. For failure of FCC to accomplish the project within the agreed completion period, PDSC informed FCC that it
was terminating their contract. PDSC sent demand letters to FCC and its officers for the payment of liquidated
damages amounting to ₱9,149,962.02 for the delay. In the same manner, PDSC wrote PCIC asking for
remuneration pursuant to Performance Bond No. 31915 but PDSC received no reply.
6. Hence, PDSC went to the RTC to file a complaint for damages, recovery of possession of personal property
and/or foreclosure of mortgage with prayer for the issuance of a writ of replevin and writ of attachment,
against FCC and its officers. PDSC later filed a supplemental complaint impleading PCIC, claiming coverage
under Performance Bond No. 31915 in the amount of ₱6,828,329.

FCC’s ARGUMENT:
  FCC denied any liability to PDSC claiming that any such claim by the latter had been waived, abandoned or
otherwise extinguished by the execution of the September 10, 1999 MOA. FCC claimed that in the said MOA,
PDSC assumed all the obligations originally reposed upon it. FCC further explained that the PERT-CPM agreed
upon by the parties covering the first phase of the work project was severely affected when PDSC deleted
several scopes of work and undertook to perform the same. In fact, the PERT-CPM was evaluated and it was
concluded that the delay was attributable to both of them. FCC added that after Phase I of the project, it
sent a progress billing in the amount of ₱939,165.00 but PDSC approved the amount of ₱639,165.00 only after
deducting the cost of the attributable delay with the agreement that from then on, PDSC should shoulder all
expenses in the construction of the building until completion; that FCC would provide the workers on the
condition that they would be paid by PDSC; and that it would allow PDSC free use of the construction
equipment that were in the project site.
TRIAL COURT: Ruled in favor of PDSC. Found found FCC guilty of delay when it failed to finish and turn over the
project on October 15, 1999. It pronounced FCC and PCIC jointly and severally liable and ordered them to pay PDSC
the amount of ₱9,000,000.00 as damages and ₱50,000.00 as attorney’s fees plus interest.
COURT OF APPEALS: CA modified the RTCs decision. The CA agreed that FCC incurred delay in the construction of the
project. It, however, found that the computation of the liquidated damages should be based on the reduced contract
price of ₱19,809,822.12. Only PCIC appealed the CAs decision. It became final and executory with regard to FCC and
the other parties in the case.
ISSUE: WON the principal contract was novated when PDSC and FCC executed the September 10, 1999 MOA, without
informing the surety, which, in effect, extinguished its obligation - NO
SUPREME COURT:
 A surety agreement has two types of relationship: (1) the principal relationship between the obligee and the
obligor; and (2) the accessory surety relationship between the principal and the surety. The obligee accepts
the surety’s solidary undertaking to pay if the obligor does not pay. Such acceptance, however, does not
change in any material way the obligees relationship with the principal obligor. Neither does it make the surety
an active party in the principal obligor-obligee relationship. It follows, therefore, that the acceptance does
not give the surety the right to intervene in the principal contract. The surety’s role arises only upon the
obligors default, at which time, it can be directly held liable by the obligee for payment as a solidary obligor.

 Furthermore, in order that an obligation may be extinguished by another which substitutes the same, it is
imperative that it be so declared in unequivocal terms, or that the old and new obligation be in every
point incompatible with each other. Novation of a contract is never presumed. In the absence of an express
agreement, novation takes place only when the old and the new obligations are incompatible on every point.

 Undoubtedly, a surety is released from its obligation when there is a material alteration of the principal
contract in connection with which the bond is given, such as a change which imposes a new obligation on the
promising party, or which takes away some obligation already imposed, or one which changes the legal effect
of the original contract and not merely its form. In this case, however, no new contract was concluded and
perfected between PDSC and FCC. A reading of the September 10, 1999 MOA reveals that only the revision
of the work schedule originally agreed upon was the subject thereof. The parties saw the need to adjust
the work schedule because of the various subcontracting made by PDSC. In fact, it was specifically stated
in the MOA that all other terms and conditions of the Building Contract of 27 January 1999 not inconsistent
herewith shall remain in full force and effect.
DISPOSITIVE: WHEREFORE, the petition is DENIED. The July 31, 2007 Decision and December 28, 2007 Resolution of
the Court of Appeals (CA) in CA-G.R. CV No. 82417 are AFFIRMED. The receivable in the amount of ₱2,793,000.00
acquired by PDSC from Caltex and the proceeds from the auction sale in the sum of ₱662,836.50 should be deducted
from the award of ₱3,882,725.13. SO ORDERED.

ACE Foods, Inc. v. Micro Pacific Technologies Co., Ltd., G.R. No. 200602, December 11, 2013

Arco Pulp v Lim, June 2014

DOCTRINE: Novation must be stated in clear and unequivocal terms to extinguish an obligation. It cannot be presumed
and may be implied only if the old and new contracts are incompatible on every point.
FACTS: Dan T. Lim works in the business of supplying scrap papers, cartons, and other raw materials, under the name
Quality Paper and Plastic Products, Enterprises, to factories engaged in the paper mill business.4 From February 2007
to March 2007, he delivered scrap papers worth 7,220,968.31 to Arco Pulp and Paper Company, Inc. (Arco Pulp and
Paper) through its Chief Executive Officer and President, Candida A. Santos.5 The parties allegedly agreed that Arco
Pulp and Paper would either pay Dan T. Lim the value of the raw materials or deliver to him their finished products of
equivalent value.

Dan T. Lim alleged that when he delivered the raw materials, Arco Pulp and Paper issued a post-dated check dated
April 18, 20077 in the amount of 1,487,766.68 as partial payment, with the assurance that the check would not bounce.
When he deposited the check on April 18, 2007, it was dishonored for being drawn against a closed account.

On the same day, Arco Pulp and Paper and a certain Eric Sy executed a memorandum of agreement10 where Arco Pulp
and Paper bound themselves to deliver their finished products to Megapack Container Corporation, owned by Eric Sy,
for his account. According to the memorandum, the raw materials would be supplied by Dan T. Lim, through his
company, Quality Paper and Plastic Products. The memorandum of agreement reads as follows:

Per meeting held at ARCO, April 18, 2007, it has been mutually agreed between Mrs. Candida A. Santos and Mr. Eric
Sy that ARCO will deliver 600 tons Test Liner 150/175 GSM, full width 76 inches at the price of ₱18.50 per kg. to
Megapack Container for Mr. Eric Sy’s account.

It has been agreed further that the Local OCC materials to be used for the production of the above Test Liners will be
supplied by Quality Paper & Plastic Products Ent., total of 600 Metric Tons at ₱6.50 per kg. (price subject to change
per advance notice). Quantity of Local OCC delivery will be based on the quantity of Test Liner delivered to Megapack
Container Corp. based on the above production schedule.

On May 5, 2007, Dan T.Lim sent a letter12 to Arco Pulp and Paper demanding payment of the amount of 7,220,968.31,
but no payment was made to him.

Dan T. Lim filed a complaint14 for collection of sum of money with prayer for attachment with the Regional Trial
Court, Branch 171, Valenzuela City, on May 28, 2007. Arco Pulp and Paper filed its answer15 but failed to have its
representatives attend the pre-trial hearing. Hence, the trial court allowed Dan T. Lim to present his evidence ex
parte.
TRIAL COURT: Sided with Arco Pulp. Arco Pulp and Paper and Eric Sy entered into the memorandum of agreement,
novation took place, which extinguished Arco Pulp and Paper’s obligation to Dan T. Lim.
COURT OF APPEALS: reversing and setting aside the judgment dated September 19, 2008 and ordering Arco Pulp and
Paper to jointly and severally pay Dan T. Lim the amount of ₱7,220,968.31 with interest at 12% per annum from the
time of demand; ₱50,000.00 moral damages; ₱50,000.00 exemplary damages; and ₱50,000.00 attorney’s fees.
SUPREME COURT: The trial court erroneously ruled that the execution of the memorandum of agreement constituted
a novation of the contract between the parties. When petitioner Arco Pulp and Paper opted instead to deliver the
finished products to a third person, it did not novate the original obligation between the parties.

The rules on novation are outlined in the Civil Code, thus:

Article 1291. Obligations may be modified by:

(1) Changing their object or principal conditions;
(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the creditor. (1203)

Article 1292. In order that an obligation may be extinguished by another which substitute the same, it is imperative
that it be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible
with each other. (1204)

Article 1293. Novation which consists in substituting a new debtor in the place of the original one, may be made even
without the knowledge or against the will of the latter, but not without the consent of the creditor. Payment by the
new debtor gives him the rights mentioned in Articles 1236 and 1237. (1205a)

Novation extinguishes an obligation between two parties when there is a substitution of objects or debtors or when
there is subrogation of the creditor. It occurs only when the new contract declares so "in unequivocal terms" or that
"the old and the new obligations be on every point incompatible with each other."

Novation was extensively discussed by this court in Garcia v. Llamas: Novation is a mode of extinguishing an obligation
by changing its objects or principal obligations, by substituting a new debtor in place of the old one, or by subrogating
a third person to the rights of the creditor. Article 1293 of the Civil Code defines novation as follows: "Art. 1293.
Novation which consists in substituting a new debtor in the place of the original one, may be made even without the
knowledge or against the will of the latter, but not without the consent of the creditor. Payment by the new debtor
gives him rights mentioned in articles 1236 and 1237."

In general, there are two modes of substituting the person of the debtor: (1) expromision and (2) delegacion. In
expromision, the initiative for the change does not come from — and may even be made without the knowledge of —
the debtor, since it consists of a third person’s assumption of the obligation. As such, it logically requires the consent
of the third person and the creditor. In delegacion, the debtor offers, and the creditor accepts, a third person who
consents to the substitution and assumes the obligation; thus, the consent of these three persons are necessary. Both
modes of substitution by the debtor require the consent of the creditor.

Novation may also be extinctive or modificatory. It is extinctive when an old obligation is terminated by the creation
of a new one that takes the place of the former. It is merely modificatory when the old obligation subsists to the
extent that it remains compatible with the amendatory agreement. Whether extinctive or modificatory, novation is
made either by changing the object or the principal conditions, referred to as objective or real novation; or by
substituting the person of the debtor or subrogating a third person to the rights of the creditor, an act known as
subjective or personal novation. For novation to take place, the following requisites must concur:

1) There must be a previous valid obligation.

2) The parties concerned must agree to a new contract.
3) The old contract must be extinguished.
4) There must be a valid new contract.

Novation may also be express or implied. It is express when the new obligation declares in unequivocal terms that the
old obligation is extinguished. It is implied when the new obligation is incompatible with the old one on every point.
The test of incompatibility is whether the two obligations can stand together, each one with its own independent
existence.

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

In the civil law setting, novatio is literally construed as to make new. So it is deeply rooted in the Roman Law
jurisprudence, the principle — novatio non praesumitur —that novation is never presumed.At bottom, for novation
tobe a jural reality, its animus must be ever present, debitum pro debito — basically extinguishing the old obligation
for the new one.39 (Emphasis supplied) There is nothing in the memorandum of agreement that states that with its
execution, the obligation of petitioner Arco Pulp and Paper to respondent would be extinguished. It also does not state
that Eric Sy somehow substituted petitioner Arco Pulp and Paper as respondent’s debtor. It merely shows that
petitioner Arco Pulp and Paper opted to deliver the finished products to a third person instead.

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

Novation must be expressly consented to. Moreover, the conflicting intention and acts of the parties underscore the
absence of any express disclosure or circumstances with which to deduce a clear and unequivocal intent by the parties
to novate the old agreement.

In this case, respondent was not privy to the memorandum of agreement, thus, his conformity to the contract need
not be secured. This is clear from the first line of the memorandum, which states:

Per meeting held at ARCO, April 18, 2007, it has been mutually agreed between Mrs. Candida A. Santos and Mr. Eric
Sy.

If the memorandum of agreement was intended to novate the original agreement between the parties, respondent
must have first agreed to the substitution of Eric Sy as his new debtor. The memorandum of agreement must also state
in clear and unequivocal terms that it has replaced the original obligation of petitioner Arco Pulp and Paper to
respondent. Neither of these circumstances is present in this case.

Petitioner Arco Pulp and Paper’s act of tendering partial payment to respondent also conflicts with their alleged intent
to pass on their obligation to Eric Sy. When respondent sent his letter of demand to petitioner Arco Pulp and Paper,
and not to Eric Sy, it showed that the former neither acknowledged nor consented to the latter as his new debtor.
These acts, when taken together, clearly show that novation did not take place. Since there was no novation,
 petitioner Arco Pulp and Paper’s obligation to respondent remains valid and existing. Petitioner Arco Pulp and Paper,
therefore, must still pay respondent the full amount of ₱7,220,968.31.
DISPOSITIVE: WHEREFORE, the petition is DENIED in part. The decision in CA-G.R. CV No. 95709 is AFFIRMED.

Petitioners Arco Pulp & Paper Co., Inc. and Candida A. Santos are hereby ordered solidarily to pay respondent Dan T.
Lim the amount of ₱7,220,968.31 with interest of 6% per annum at the time of demand until finality of judgment and
its full satisfaction, with moral damages in the amount of ₱50,000.00, exemplary damages in the amount of
₱50,000.00, and attorney's fees in the amount of ₱50,000.00.

SO ORDERED.

2. Objective or real
3. Mixed

G. Invalid payment, NCC 1243

H. Annulment
I. Rescission
J. Fulfillment of a Resolutory Condition
K. Prescription
L. Death in certain Instances
M. Renunciation by the creditor, NCC 6
N. Compromise
O. Arrival of a Resolutory Term
P. Mutual Desistance

Saura v DBP, April 27, 1972

Talampas vs. Moldex Realty, G.R. No. 170134, June 17, 2015
FACTS:
 DECEMBER 16, 1992 – AVT entered into a contract with MOLDEX for the development of a residential
subdivision owned by the latter known as METROGATE.
 AVT undertook to perform roadworks, earthworks, and site-grading and to procure materials, labor,
equipment, tools, and facilities for the contract price of PHP 10 500 000 where the MOLDEX paid PHP 500 000
as down payment.
 JANUARY 14, 1993 – the construction work on the METROGATE PROJECT started and was to last for 300 days.
 MAY 14, 1993 – METROGATE’s project manager, Engr. Almeida, asked AVT to suspend construction works for
one week, but lasted for three weeks.
 JUNE 1, 1993 – AVT inquired from Engr. Almeida if the project would still push through
 JUNE 16, 1993 – AVT received a letter from MOLDEX’s VP expressing their decision to terminate the contract
due to a particular “business decision.”
 AUGUST 18, 1993 – AVT demanded for the following: (a) PHP 1 485 000 as equipment rentals during the period
of suspension of construction works; (b) 2 100 000 (20% of contract price as cost of opportunity lost due to the
early termination but MOLDEX refused.
 NOVEMBER 5, 1993 – AVT filed a complaint for breach of contract and damages alleging that: (1) MOLDEX
breached their contract for unilaterally terminating their agreement; (2) fraud for disclosing their failure to
secure a conversion clearance certificate from the Department of Agrarian Reform which was the real reason
why MOLDEX terminated the contract.
TRIAL COURT: Rendered decision in favor of AVT awarding them all the amounts it prayed for, together with moral
damages (300k), exemplary damages (150k), attorney’s fees, and cost of suit.
COURT OF APPEALS:
  The CA reversed the RTC’s decision stating that the trial court failed to consider the letter of JUNE 15, 1993
where Engr. Po, Sr. (MOLDEX) and Jose Talampas (AVT) met to discuss the possibility of either suspending or
terminating the contract which allegedly showed AVT’s agreement to terminate the contract.
 The CA likewise ruled that the lack of the conversion certificate does not, on its own, amount to fraud.
ISSUE/S:
1. Whether the contract was unilaterally abrogated by MOLDEX without justifiable cause
2. Whether the lack of DAR conversion clearance and MOLDEX’ subsequent failure to disclose this as the true
reason for terminating the contract constitutes bad faith or fraud.
3. Whether AVT is entitled to damages for breach of contract

MOLDEX argues that:

 AVT is no longer entitled to payments since they have already agreed/consented to terminate their contract
in a meeting held on MAY 21, 1993 and in their letter requesting for the official letter of termination from
MOLDEX.
 AVT is also not entitled to further damages since it was already paid for: (a) contractor’s unpaid actual work
accomplished at the time of termination; (b) unrecouped cost of equipment mobilization and demobilization;
(c) release of all retention fees. And that by accepting these payments, AVT ratified, if not consented to, the
termination of the contract.
SUPREME COURT:
 The SC held first that MOLDEX failed to comply with its contract stipulations on unilateral termination when
it terminated their contract. And that it could not have validly and unilaterally terminated its contract since
it has not committed any of the stipulated acts of default.
 Paragraph 8 of their contract limits the instances when a party may unilaterally terminate their
agreement to:

Bankruptcy, insolvency, dissolution, assignment of assets to creditors. Violation of the Plans and
Specifications or the Owner’s Instructions; or incur delay of more than 15% in the prosecution of the
work

Failure to provide a qualified superintendent, competent workmen, or materials, or equipment

meeting the requirements of the Plans and Specifications.

 The SC held next that MOLDEX failed to prove AVT’s consent, expressly or impliedly, to the termination of the
contract.
 MOLDEX was not able to produce evidence of the meeting that allegedly took place on MAY 21, 1993.
They only presented the self-serving testimony of Engr. Po that such meeting took place. No document
or record of said meeting was presented.
 The request for an official termination letter by AVT does not necessarily equate to consent. It was
nothing more than a request for a final decision from the respondent.
 AVT’s acceptance of the several payments relating to the progress billings, cost of equipment
mobilization/demobilization, refund of insurance bonds from MOLDEX do not constitute ratification nor
consent to the contract’s termination.
 Despite receipt of payments, NO ABSOLUTE ACCEPTANCE of MOLDEX’ offer to terminate took place since
AVT still demanded the payment of equipment rentals, cost of opportunity lost, etc.
 Payments received were for finished and delivered works and for expenses incurred.
 AVT’s additional demands effectively made a qualified acceptance and counter-offer which MOLDEX did
not accept.

 The SC ruled next that AVT is entitled to the payment of equipment rentals during the suspension of work,
and the cost of opportunity lost.
 AVT cannot be faulted for the idling of his equipment on the project site since the suspension of the
work was supposedly temporary which compelled AVT to place the equipment on standby.
 AVT undeniably lost expected profits when it placed its equipment’s due to the uncertainty of the end
date of the suspension.
 The SC held that AVT is entitled to the payment for opportunity lost because of MOLDEX’ unilateral
termination of the contract. Article 2200 NCC provides that the indemnification for damages shall
include, not only the value of the loss suffered, but also the profits that the oblige failed to obtain.
 The SC however, modified the award. It should not be computed from the total contract price – as it
was initially computed as 20% of the entire 10 million – instead, the initial downpayment made by
 MOLDEX, and the several payments thereafter made due to the termination should be deducted from
the total contract price and from there, the 20% be computed.
 Thus, the total award for cost of opportunity cost is PHP 1 723 125.01, 20% of PHP 8 615 625.07

 The SC lastly ruled that no award for moral and exemplary damages and attorney’s fee should be made due to
the absence of fraud and bad faith on the part of MOLDEX.
DISPOSITIVE: WHEREFORE, premises considered, we GRANT the appeal and REVERSE and SET ASIDE the decision dated
June 27, 2005, and resolution dated October 21, 2005, of the Court of Appeals in CA-G.R. CV No. 64715.

Q. Unilateral Withdrawal

GBMLT Manpower vs. Malinao, G.R. No. 189262, July 6, 2015

FACTS:
● 06-2005, Malinao applied to GBMLT (GBMLT MANPOWER SERVICES, INC) for a job as teacher for deployment
abroad. She went through the application process and was interviewed by the president of an Ethiopian
university.
● Malinao was then endorsed to the post of accounting lecturer. GBMLT issued her a wage response slip, which
provided a monthly salary of USD900.
● Malinao paid GBMLT the processing and placement fees equivalent to her one-month salary. She also signed a
Contract of Employment for Foreign Academic Personnel (Contract of Employment) covering a period of
two academic years. The contract had been approved by the Philippine Overseas Employment Administration
(POEA).
● 12-2005, Malinao departed for Ethiopia. On arrival, she was informed by the Vice Minister of the Ministry of
Education that her credentials would have to be re-evaluated, because it appeared that she did not have a
master's degree. Respondent was given a new contract for signing, which at first she refused to sign.
However, upon reading that it was a duplicate of the original contract, she affixed her signature. She was
assigned to teach at the Alemaya University.
● 01-2006, she unilaterally decided to discontinue teaching the course in cooperative accounting that had
been assigned to her. The reason she gave was that auditing, not accounting, was her specialization. Another
lecturer took over the course, and respondent spent the rest of the semester without a teaching load
● 03-2006
○ 03-01, Alemaya University Academic and Research VP Tena Alamirew circulated a memo addressed to
the college faculties and Filipino teaching staff which states that the Ministry of Educ requires the
university to evaluate the credentials of the Filipino teaching staff and suggest an academic rank for
them pursuant to the national norm.
○ 03-15, another memo was issued lowering the ranks of most of the Filipino teaching staff and asking
them to sign a new contract reflecting a change in rank and salary where the designation was
lowered from lecturer → assistant lecturer with a monthly salary of USD600 (ay pucha!), by which
Malinao refused to sign the new contract together with her affected Fil colleagues went to the
Ministry of Education to protest the re-ranking. They also asked for an audience with VP Alamirew.
03-27, During the meeting, respondent raised her hand in order to be acknowledged to speak.
However, VP Alamirew told her, "You are not allowed to speak before this meeting. Alemaya University
does not need your services anymore, you are terminated, you are fired.” Later that afternoon, Vice
President Alamirew apologized to respondent for the retort, saying that she thought the latter was
the leader of the protest before the Ministry of Education.
○ 03-28, Malinao requested via letter for VP Alamirew to issue a notice of termination to her "in order
not to prolong [her] agony."
● 04-2006, was issued by Keno, Head of the Department of Accounting, informing the Faculty of Business and
Economics that from a students' petition, another instructor had been assigned to replace Malinao in Auditing
II hence, was again left idle. Attached to the memo was the class compliance on the performance of
respondent, together with the individual signatures of the students. Respondent checked the signatures and
found that some had signed twice, while two were not in her class (parang may power play na..)
○ Another memo of the same date was issued by Kassa, Dean of the Faculty of Business and Economics
(Dean Kassa) addressed to VP Alamirew. Dean Kassa indicated that the qualification of Malinao had
been highly debated as the faculty had never approved the recruitment of expatriate staff who were
bachelor's degree holders. He noted that this was the second time that the Dept of Accounting had to
replace Malinao in her course assignment, because "she has never handled any course effectively."
(fishy much? All these memos on the same day?! C’mon?! How obvious can you get?!!) Dean Kassa
requested VP Alamirew to take action, because keeping an idle expatriate staff was unacceptable.
 ○ Malinao took great offense at being referred to as a bachelor's degree holder, insisting that she was a
certified public accountant and a law graduate (CPA-Lawyer si madam!!!). She responded to the
memo on the same day stating that in the Philippines, a person who had a law degree and passed the
bar examinations has a degree more than a master's, but less than a doctorate. She recognized that
the university had the right to terminate her at any time, but insisted that there was no need to
discredit her (NAMAN!!).
○ Malinao received a notice of termination on the grounds of her incompetency and personal problems
from insulting Ethiopians. According to the notice Malinao was given as per Article X Sub-article 2 of
the contract, we are obliged to give you this three months advance notice as regards the contract
termination. In the meantime, however, Malinao was expected to duly carry the assignment which
shall be given by your Department.
○ So ayun nagsagutan sila sa letters tapos bongga si Malinao to quote:

“You cannot legally base your decision in terminating my contract on facts not proven. Your
statement that it will be difficult to expect positive contribution by keeping me here is a mere
speculation. In law, it must be conclusive, not speculative. It must be a fact that must be proved,
substantially and procedurally, as required by due process. If you really believe I am guilty as
charged, what could have prevented you anyway from enforcing it before the court of law? I am
ready to face any charges because I know I have not violated the rights of other people and the
law. I could have appreciated it better had you filed the case in court; at least I could have been
accorded my day in court.”

○ 04-17, While waiting for the 3-month pd to expire, Malinao was offered a post at the Internal Audit
Department by Alemaya University President Belay Kassa (President Kassa). She accepted the job
through a letter dated 19 April 2006 However, in another letter dated 27 April 2006 addressed to
President Kassa, respondent signified her change of mind and rejected the offered post at the
Internal Audit Department. She narrated that on her first day on the job, she was made to wait for
several hours, during the meeting they spoke in their local language etc.. (basta reklamdora din si ate,
malamang ang kulit nya eh! Pilit parin tinatanggap yung offer kahit obvious naman na may gagawin sa
kanyang anumalya.. Tanga lang..)
● 06-2006. Malinao got repatriated and later for the sum of 900 USD she signed a Quitclaim and Release dated
5 July 2006 in favor of GBMT discharging it from any claims
● 07-2006, respondent filed a complaint before the labor arbiter against petitioner as local agency and Alemaya
University as foreign principal. She sought full payment of the unexpired portion of the 2-yr contract, moral
and exemplary damages, and attorney's fees.
Ruling of the Labor Arbiter
● 03-2007, labor arbiter found respondent to have been unduly repatriated in breach of the employment
contract.
● GBMLT and Alemaya University were ordered to pay her in solidum the amounts of USD4,500 as unrealized
income — from which the amount paid to her under the Quitclaim and Release had already been deducted —
Php30,000 as moral damages, Php20,000 as exemplary damages, plus costs.

RULING OF THE NLRC

● The NLRC issued a Decision 63 dated 30 July 2008 dismissing Malinao’s complaint, because her claims had been
the subject of a valid release, waiver and quitclaim.
● NLRC ruled that respondent could no longer question the termination of her contract of employment after her
acceptance of the new offer of President Kassa to work at the Internal Audit Department. It found that the
termination of the contract did not take effect when respondent and the university agreed to the
continuance of her employment, albeit in another capacity. Thus, when respondent later wrote to President
Kassa that she did not want the new post after all and requested to be repatriated, it was she who terminated
the contract. Contrary to the ruling of the labor arbiter, respondent was not constructively dismissed.
● NLRC also sustained the validity of the Quitclaim and Release. It held that respondent was a certified public
accountant and bachelor of laws graduate who could hardly be "duped into signing any document that would
be detrimental to her cause, if she was not willing [to agree] to the terms and conditions [provided in] what
she was signing [or] entering into."
COURT OF APPEALS:
● CA found grave abuse of discretion on the part of the National Labor Relations Commission (NLRC) when the
latter reversed the decision of the labor arbiter, which granted respondent's money claims under her complaint
for illegal dismissal against petitioner. The CA Resolution denied petitioner's motion for reconsideration
● CA observed that while Malinao accepted the offer of President Kassa to work at the Internal Audit Department,
such arrangement was in the purview of a new contract of employment. A new contract was invalid without
 the approval of the POEA. According to the CA, Alemaya University was also guilty of substitution of
contracts when it required Malinao to sign a second contract upon her arrival in Ethiopia, and when it
attempted in vain to have her sign a third contract demoting her in rank and lowering her salary. Considering
that a representative of the Ethiopian government went to the Philippines to screen respondent and check her
qualifications, the review of her credentials in Ethiopia was "truly mind boggling."
ISSUE/S:
1. Whether respondent was illegally dismissed. NO, Malinao unilaterally withdraw the contract
2. Whether the Quitclaim and Release was valid. YES.
3. Whether petitioner's appeal was perfected on time. YES.
SUPREME COURT:
In this case, we find that respondent was not illegally dismissed. Article X of the POEA-approved Contract of
Employment, as well as the second contract given to respondent for signing upon her arrival in Ethiopia, provide that
the Contract of Employment may be terminated by either party for cause or at any time for no cause, as long as
a three-month notice is given to the other party. In the latter case, respondent shall still be fully engaged and
entitled to her salary and allowances for the three-month period provided in the notice of termination.

The Contract of Employment signed by respondent is first and foremost a contract, which has the force of law between
the parties as long as its stipulations are not contrary to law, morals, public order, or public policy. We had occasion
to rule that stipulations providing that either party may terminate a contract even without cause are legitimate if
exercised in good faith. Thus, while either party has the right to terminate the contract at will, it cannot not act
purposely to injure the other.

No bad faith was present with respect to the questions raised to Malinao’s credentials (no master’s degree) on either
and SC construed that it was all but a misunderstanding

Neither can we impute bad faith on the part of Alemaya University in the exercise of its right to terminate the Contract
of Employment at will for several reasons.

1. First, we regard the alleged statements of Vice President Alamirew during the meeting on 27 March 2006 as
an isolated personal incident that had nothing to do with the termination of respondent's employment. Vice
President Alamirew later apologized to respondent for the blunder and confessed it was because she thought
respondent led the group protest before the Ministry of Education.
2. while it was Vice President Alamirew who eventually issued the notice of termination, the ground cited therein
was respondent's supposed failure to handle her teaching load effectively. Respondent had previously caused
some inconvenience to the management of Alemaya University when she decided to discontinue teaching the
course assigned to her and spent the rest of the semester without any teaching load but still with pay. It also
alluded to her tendency to insult students, staff, management and Ethiopians in general.
3. respondent never denied the grounds cited in the notice of termination. In fact, in her letter dated 31 March
2006 addressed to Mr. Keno, she affirmed that the students "told [her] bluntly that they do not want [her]
style [of teaching]."

In the exercise of the right to terminate a contract without cause, one party need only to give the other prior written
notice as provided in the contract. Despite the grounds cited in the notice of termination, Alemaya University opted
to take the "no cause" route in terminating the Contract of Employment. In this case, the contract provided that
the other party be given a three-month advance notice, a requirement that Alemaya University complied with.

It is well to note that the right to terminate the Contract of Employment at will was also available to respondent,
who exercised that right when she signified her change of mind and rejected the job at the Internal Audit Department.
This detail was appreciated even by the labor arbiter who found that respondent had quit her job.

It cannot be denied that when respondent accepted the post offered at the Internal Audit Department, the parties
had decided to revert to the status quo ante of harmonious employment relationship and to do away with the previous
termination of her employment. Malinao made a belated unilateral declaration in her letter to President Kassa
dated 27 April 2006. Indeed, her declaration therein that "the advance notice of termination is still in force and
effect" 91 cannot operate to transfer responsibility for the termination of the Contract of Employment to Alemaya
University. Ultimately, it was she who terminated the Contract of Employment, and she cannot now claim that she
was illegally dismissed.
DISPOSITIVE: WHEREFORE, the Court of Appeals Decision dated 29 May 2009 and Resolution dated 24 August 2009 in
CA-G.R. SP No. 107378 are REVERSED and SET ASIDE. The Decision dated 30 July 2008 issued by the National Labor
Relations Commission in NLRC CA No. 052466-07 (5), dismissing respondent's complaint, is REINSTATED.
 SO ORDERED.

R. Change of Civil Status

S. Rebus Sic Stantibus, NCC 1267

Naga TelCo v CA, G.R. No. 107112, February 24, 1994

DOCTRINE: 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.

Article 1267 states in our law the doctrine of unforeseen events. This is said to be based on the discredited theory of
rebus sic stantibus in public international law; 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. Considering practical needs and
the demands of equity and good faith, the disappearance of the basis of a contract gives rise to a right to relief in
favor of the party prejudiced
PARTIES:
● Naga Telephone Co., Inc. (NATELCO) - is a telephone company rendering local as well as long distance
telephone service in Naga City
● Camarines Sur II Electric Cooperative, Inc. (CASURECO II) - is a private corporation established for the purpose
of operating an electric power service in the same city.

FACTS:
● Parties entered into a contract for the use by NATELCO in the operation of its telephone service the electric
light posts of CASURECO in Naga City.
○ NATELCO agreed to install, free of charge, 10 telephone connections for the use by CASURECO.
○ Contract astated: “the term or period of this contract shall be as long as the party of the first part
(petitioner) has need for the electric light posts” and once its terminated “the party of the second
part (private respondent) is forced to stop, abandoned its operation as a public service and it becomes
necessary to remove the electric light post”
● After the contract had been enforced for over 10 years, CASURECO filed in RTC Naga against NATELCO for
reformation of the contract with damages.

1ST CAUSE OF ACTION: contract is too one-sided in favor of petitioners;

(1) it is not in conformity with the guidelines of the National Electrification Administration (NEA)
(i.e. reasonable compensation for the use of the posts is P10.00 per post, per month);
(2) that after 11 years of petitioners' use of the posts, the telephone cables strung by them thereon have become
much heavier with the increase in the volume of their subscribers, worsened by the fact that their linemen bore
holes through the posts at which points those posts were broken during typhoons;
(3) that a post now costs as much as P2,630.00; so that justice and equity demand that the contract be reformed
to abolish the inequities thereon.

2ND CAUSE: starting with the year 1981, petitioners have used 319 posts outside Naga City without contract,
petitioners should pay private respondent for the use thereof the total amount of P267,960.00 from 1981 up to the
filing of its complaint (petitioners refused to pay despite demands).

3RD CAUSE: petitioners' poor servicing of 10 telephone units which had caused it great inconvenience and damages
(not less than P100,000.00 worth)

Petitioner’s Argument:
Complaint should be dismissed for not sufficiently stating cause of action, lapse of prescription period for action, and
estoppel. They also said that if they had refused to comply with private respondent's demands for payment for the use
of the posts outside Naga City, it was probably because private respondent asked for too much. They also said that
the mentioned 10 telephone units were high quality.

Both companies presented witnesses to support their allegations.

*Atty. Luciano M. Maggay, then a member of the Board of Directors of CASURECO and at the same time the legal
counsel of NATELCO.
TRIAL COURT:

Court held that contract has become disadvantageous to CASURECO due to increase in volume of NATELCO's
subscribers.
 ● Contract should be reformed to abolish the inequities.
● NATELCO should pay for the use of CASURECO’s posts at P10.00/post while the latter should pay the monthly
bills for the use of former’s phone lines in Naga.
● Amount should be computed from the date of filing of the complaint. Same has been held for the 2nd cause
of action.

While the 3rd cause of action was not sufficiently proven.

COURT OF APPEALS: affirmed RTC decision based on Art. 1267, saying that although the contract was fair to both
parties at the time of its execution (petitioner still had very limited capability back then), supervening circumstances
(petitioner's expansion) have made the contract too one-sided in favor of them to the great disadvantage of
respondents. Continued enforcement of the contract has gone beyond the contemplation of the latter; thus it should
be released therefrom. Equity demands certain economic equilibrium between the prestation the counter-prestation
& does not permit the unlimited impoverishment of one party for the benefit of the other by the excessive rigidity of
the principle of the obligatory force of contracts.
SUPREME COURT: YES. CASURECO sufficiently made out a cause of action under Art. 1267 with their evidence
(witnesses). Art 1267 speaks of service (meaning performance of the obligation) w/c has become so difficult. It doesn’t
require that the contract be for future service w/ future unusual change. Rather, it speaks of unforeseen events
wherein parties stipulate in the light of certain prevailing conditions & once these conditions cease to exist the
contract also ceases. Equity and good faith demand that when basis of the contract disappears, the prejudiced party
has a right to relief. (supervening event in this cast = petitioners increase in subscribers)
DISPOSITIVE: WHEREFORE, the petition is hereby DENIED. The decision of the Court of Appeals dated May 28, 1992
and its resolution dated September 10, 1992 are AFFIRMED

PNCC v CA, G.R. No. 116896, May 5, 1997

FACTS:
● Philippine National Construction Corporation (PNCC) entered into a Contract of Lease with the Raymundos.
The land to be rented is 30,000 sqm and it is to be utilized for their rock crushing plant.
● The monthly rate of rent is 20,000php which shall be increased yearly by 5%, and the lease shall be for a period
of 5 years from the date of issuance of the industrial clearance by the Ministry of Human Settlements. The
first annual rent in the amount of 240,000php shall be due and payable upon the execution of the contract of
lease.
● The contract shall be terminated by mutual agreement of the parties or upon the termination or expiration of
the period of lease. PNCC shall vacate the property at its expense.
● 7 January 1986 - PNCC obtained from the Ministry of Human Settlements a Temporary Use Permit for the
proposed rock crushing project which was valid for two years.
● 16 January 1986 - The Raymundos wrote to PNCC requesting payment of the first annual rent in the amount
of P240,000. They also assured PNCC that they had already stopped considering the proposals of other
aggregates plants to lease the property because of the existing contract with petitioner.
● PNCC then expressed its intention to terminate the contract as it had decided to cancel or discontinue with
the rock crushing project “due to financial, as well as technical, difficulties.”
● The Raymundos refused to accede to PNCC’s request for the pretermination of the lease contract. They insisted
on the performance of petitioner’s obligation and reiterated their demand for the payment of the first annual
rental.
● PNCC argued that it was only obliged to pay P20,000 as rental for the one-month period of lease, counted from
when the Industrial Permit was issued by the Ministry of Human Settlements up to when the Notice of
Termination was served on the Raymundos.
● The Raymundos instituted an action against PNCC for Specific Performance with Damages.
● Invoking Article 1266 and the principle of rebus sic stantibus, petitioner asserts that it should be
released from the obligatory force of the contract of lease because the purpose of the contract did not
materialize due to unforeseen events and causes beyond its control, i.e., due to the abrupt change in
political climate after the EDSA Revolution and financial difficulties.
TRIAL COURT: The trial was rescheduled several times and was thus extended for a year because of PNCC’s requests
for postmonement. On 12 April 1989, the RTC rendered a decision ordering PNCC to pay the Raymundos the amount
of P492,000 which represented the rentals for two years, with legal interest from 7 January 1986 until the amount was
fully paid.
COURT OF APPEALS: The CA affirmed the RTC’s decision.
ISSUE: Whether or not the principle of rebus sic stantibus is applicable in this case.
SUPREME COURT:
NO. The principle of rebus sic stantibus is NOT applicable in this case.
 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 PNCC are
not the legal or physical impossibilities contemplated in the said article. Besides, PNCC 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 dicult 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:
It is a matter of record that petitioner PNCC entered into a contract with private respondents on November 18,
1985. Prior thereto, it is of judicial notice that after the assassination of Senator Aquino on August 21, 1983, the
country has experienced political upheavals, turmoils, almost daily mass demonstrations, unprecedented,
ination, peace and order deterioration, the Aquino trial and many other things that brought about the hatred of
people even against crony corporations. On November 3, 1985, Pres. Marcos, being interviewed live on U.S.
television announced that there would be a snap election scheduled for February 7, 1986. On November 18, 1985,
notwithstanding the above, petitioner PNCC entered into the contract of lease with private respondents with
open eyes of the deteriorating conditions of the country.

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. CA, 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.

With regard to the non-materialization of PNCC’s particular purpose in entering into the contract of lease, as a general
principle, the motive or particular purpose of a party in entering into a contract does not affect the validity nor
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.
DISPOSITIVE: WHEREFORE, the instant petition is DENIED and the challenged decision of the Court of Appeals is
AFFIRMED in toto.

Osmena v SSS, G.R. No. 165272, September 13, 2007

So v FoodFest, G.R. No. 183268, April 7, 2010

FACTS:
● Food Fest Land Inc. (Food Fest) entered into a September 14, 1999 Contract of Lease with Daniel T. So (So)
over a commercial space in San Antonio Village, Makati City for a period of three years (1999-2002) on which
Food Fest intended to operate a Kentucky Fried Chicken carry out branch.
○ The lease shall not become binding upon us unless and until the government agencies concerned shall
authorize, permit or license us to open and maintain our business at the proposed Lease Premises.
We shall promptly make an application for permits, licenses and authority for our business and shall
exercise due diligence to obtain it, provided, however, that you shall assist us by submitting such
documents and papers and comply with such other requirements as the governmental agencies may
impose. We shall give notice to you when the permits, license and authorities have been obtained.
 We shall also notify you if any of the required permits, licenses and authorities shall not be be (sic)
given or granted within fifteen days (15) from your conform (sic)hereto. In such case, the agreement
may be canceled and all rights and obligations hereunder shall cease.
● In 1999, Food fest was able to secure the necessary licenses and permits but failed to commence business
operation
● In 2000, application of renewal of brgy clearance was held in abeyance. Still Food Fest was unable to operate,
intended to terminate the contract but at So’s advice, continued due to the offer of So to help in brgy
clearance
● Around August, Food Fest, for the second time, purportedly informed So of its intent to terminate the lease,
and it in fact stopped paying rent.
● Despite repeated demands, Food fest did not pay and start vacating the premises.
TRIAL COURT: On the merits, the RTC held that Food Fests failure to secure the authority to commence business
operations resulted in the termination of its contractual obligations to So, including the obligation to pay rent.
COURT OF APPEALS: On petition for review, the Court of Appeals, by Decision of April 18, 2008,[12] upheld the RTCs
jurisdiction over the complaint. It, however, declared that Food Fests obligation to pay rent was not extinguished
upon its failure to secure permits to operate.
ISSUE: Whether Food Fest should pay the remaining rent? NO.
SUPREME COURT:
Food Fests 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.

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 the parties.

The cause or essential purpose in a contract of lease is the use or enjoyment of a thing. A partys 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 Fests 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.
DISPOSITIVE: WHEREFORE, the Court of Appeals Decision of April 18, 2008 is AFFIRMED with MODIFICATION.

Food Fest is ORDERED to pay So liquidated damages in the amount equivalent to 25% of the total sum due and
demandable. Further, So is ORDERED to pay attorney’s fees in the amount equivalent to 25% of the total sum due and
demandable. In all other respects, the decision is AFFIRMED.

Comglasco Corporation v. Santos Car Check Center, G.R. No. 202989, March 25, 2015
Tagaytay Realty v. Gacutan, G.R. No. 160033, July 01, 2015
DOCTRINE: Rebus Sic Stantibus

For Article 1267 to apply, the following conditions should concur, namely: (a) the event or change in circumstances
could not have been foreseen at the time of the execution of the contract; (b) it makes the performance of the
contract extremely difficult but not impossible; (c) it must not be due to the act of any of the parties; and (d) the
contract is for a future prestation.

Mere inconvenience, or unexpected impediments, or increased expenses did not suffice to relieve the debtor from a
bad bargain.
FACTS:
1. The respondent Gacutan entered into a contract to sell with the petitioner for the purchase on installment of
a residential lot with an area of 308 square meters situated in the Foggy Heights Subdivision then being
developed by the petitioner.
2. Earlier, on June 30, 1976, the petitioner executed an express undertaking in favor of the respondent, as
follows:
“We hereby undertake to complete the development of the roads, curbs, gutters, drainage system, water
and electrical systems, as well as all the amenities to be introduced in FOGGY HEIGHTS SUBDIVISION,
such as, swimming pool, pelota court, tennis and/or basketball court, bath house, children's playground
and a clubhouse within a period of two years from 15 July 1976, on the understanding that failure on
their part to complete such development within the stipulated period shall give the VENDEE the option
to suspend payment of the monthly amortization on the lot/s he/she purchased until completion of such
development without incurring penalty interest.”
3. In a letter, the respondent notified the petitioner that he was suspending his amortizations because the
amenities had not been constructed in accordance with the undertaking.
4. Despite receipt of the respondent's other communications requesting updates on the progress of the
construction of the amenities so that he could resume his amortization, the petitioner did not reply but
instead, sent to him a statement of account demanding the balance of the price, plus interest and penalty.
Respondent refused to pay the interest and penalty.
5. The respondent sued the petitioner for specific performance in the HLURB, praying that the petitioner be
ordered to accept his payment of the balance of the contract without interest and penalty, and to deliver to
him the title of the property

PETITIONER’S ARGUMENT:
 Petitioner sought to be excused from performing its obligations under the contract, invoking Article 1267 of
the Civil Code as its basis. They argue that the non-construction was due to it having suffered extreme
economic hardships during the political and economic turmoil of the 1980s that the parties did not foresee
at the time they entered into their contract. Under Article 1267 of the Civil Code, equity demanded a certain
economic equilibrium between the prestation and the counter-prestation, and did not permit the unlimited
impoverishment of one party for the benefit of the other by the excessive rigidity of the principle of the
obligatory force of contracts and as the debtor, it should be partially excused or altogether released from its
obligations due to the extraordinary obstacles to the prestation, which could be overcome only by a sacrifice
that would be absolutely disproportionate, or with very grave risks, or by violating some important duties. It
contended that the depreciation of the Philippine Peso since the time of the execution of the contract, the
increase in the cost of labor and construction materials, and the increase in the value of the lot in question
were valid justifications for its release from the obligation to construct the amenities.
HLURB ARBITER & HLURB COMMISSIONER: In favor of respondent. Affirmed by HLURB Commissioner. MFR denied.
Office of the President affirmed HLURB Commissioner. MFR denied
COURT OF APPEALS: CA affirmed OP. MFR denied.
ISSUE: WON petitioner should be excused from performance of obligation - NO
SUPREME COURT: Under Section 20 of Presidential Decree No. 957, all developers, including the petitioner, are
mandated to complete their subdivision projects, including the amenities, within one year from the issuance of their
licenses.

There is no question that the petitioner did not comply with its legal obligation to complete the construction of the
subdivision project, including the amenities, within one year from the issuance of the license. Instead, it unilaterally
opted to suspend the construction of the amenities to avoid incurring maintenance expenses. In so opting, it was
not driven by any extremely difficult situation that would place it at any disadvantage, but by its desire to benefit
from cost savings. Such cost-saving strategy dissuaded the lot buyers from constructing their houses in the subdivision,
and from residing therein.

Considering that the petitioner's unilateral suspension of the construction of the amenities was intended to save itself
from costs, its plea for relief from its contractual obligations was properly rejected because it would thereby gain a
position of advantage at the expense of the lot owners like the respondent. Its invocation of Article 1267 of the Civil
Code, which provides that "(w)hen 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," was factually unfounded. For Article
1267 to apply, the following conditions should concur, namely: (a) the event or change in circumstances could
not have been foreseen at the time of the execution of the contract; (b) it makes the performance of the contract
extremely difficult but not impossible; (c) it must not be due to the act of any of the parties; and (d) the contract
is for a future prestation. The requisites did not concur herein because the difficulty of performance under Article
1267 of the Civil Code should be such that one party would be placed at a disadvantage by the unforeseen event. Mere
inconvenience, or unexepected impediments, or increased expenses did not suffice to relieve the debtor from a
bad bargain.

And, secondly, the unilateral suspension of the construction had preceded the worsening of economic conditions in
1983; hence, the latter could not reasonably justify the petitioner's plea for release from its statutory and contractual
obligations to its lot buyers, particularly the respondent. Besides, the petitioner had the legal obligation to complete
the amenities within one year from the issuance of the license (under Section 20 of Presidential Decree No. 957), or
within two years from July 15, 1976 (under the express undertaking of the petitioner). Hence, it should have complied
with its obligation by July 15, 1978 at the latest, long before the worsening of the economy in 1983.
DISPOSITIVE: WHEREFORE, the Court AFFIRMS the judgment promulgated on May 29, 2003 subject to the
MODIFICATIONS, as follows: (1) the respondent shall pay to the petitioner the amount of P19,965.60; (2) the petitioner
shall execute the deed of absolute sale covering the property, and shall deliver the property to the respondent together
with the pertinent certificate of title in accordance with the terms of their contract; and (3) the petitioner shall pay
the costs of suit. SO ORDERED

T. Want of Interest
U. Judicial Insolvency