Case Digests - Contracts

8/17/2019 Case Digests - Contracts

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1CASE DIGESTS - CONTRACTS

Case: George Batchelder vs. Central Bank of the Philippines,March 29, 1972, J.Fernando.Facts: George Batchelder, who is an American citizen but permanently residing in thePhilippines, is engaged in the construction business. Batchelder, in compliance with

Monetary Board Resolution No. 857 ( Filipino and resident American contractorsundertaking construction projects in US military bases in the Philippines shall beauthorized to utilize 90% of the proceeds of their contracts for the purchase ofconstruction equipment, and etc.) and Monetary Board Resolution No. 695 (Agent

bank should, upon compliance with its terms, credit the contractor’s accounts in pesos,the buying rate being governed by the appropriate rules and regulations.), surrenderedto the Centr al Bank through the latter’s authorized agents, his dollar earnings andapplied with the latter for license to utilize 90% of his surrendered earnings. However,the Central Bank never heeded to the plaintiff’s application arguing that the MonetaryBoard Resolutions relied upon simply laid down policy without in any way giving riseto a valid and binding agreement to which the law should give effect. The trial courtfound for Batchelder. On appeal, Central Bank interposed an issue that there was nosuch contractual obligation between the parties which will hold Central Bank liabletherefore.

Issue: Whether th ere exist a contr act between Central Bank an d Batchelder, a doll ar

earner by vir tue of the M onetary Board Resolution s of the former.Held: NO. What was done by the Central Bank was merely to issue in pursuance of itsrule-making power the resolutions. There is no question that the Central Bank as a

public corporation could enter into contracts. It is so provided for among the corporate powers vested in it. Thus: "The Central Bank is hereby authorized to adopt, alter, anduse a corporate seal which shall be judicially noticed; to make contracts; to lease orown real personal property, and to sell or otherwise dispose of the same; to sue and besued; and otherwise to do and perform any and all things that may be necessary or

proper to carry out the purposes of this Act." No doubt would have arisen therefore ifdefendant Central Bank, utilizing a power expressly granted, did enter into a contractwith plaintiff. It could have done so, but it did not do so.

Nor is this to deal unjustly with plaintiff. Defendant Central Bank in its motion todismiss before the lower court was quite explicit as to why under the circumstances, noright could be recognized as possessed by him. As set forth in such pleading:"We contend that Monetary Board Resolution No. 857, dated June 17, 1960, asamended by Monetary Board Resolution No. 695, dated April 28, 1961, does not giveright to Filipino and resident American contractors undertaking construction projects inU.S. military bases to reacquire at the preferred rate ninety per cent (90%) of theforeign exchange sold or surrendered to defendant Central Bank thru the authorizedagent banks. Nor does said resolution serve as a general authorization or licensegranted by the Central Bank to utilize the ninety per cent (90%) of their dollar earnings.M.B. Resolution No. 857, as amended, merely laid down a general policy on theutilization of the dollar earnings of Filipino and resident American contractorsundertaking projects in U.S. military bases, ... ."Further, there is this equally relevant portion in such motion to dismiss:

"It is clear from the aforecited provisions of said memorandum that not all importsagainst proceeds of contracts entered into prior to April 25, 1960 are entitled to the

preferred buying rate of exchange. Only imports against p roceeds of contracts enteredinto prior to April 25, 1960, not otherwise classified as dollar-to-dollar transactions ,are entitled to the preferred rate of exchange. I t is for this reason that the contractor isrequired to first fil e an application with defendant Central Bank (I mportDepartment) th ru the Author ized Agent Banks, for the purpose of determin ingwhether the impor ts again st proceeds of contr acts entered into pri or to Apr il 25, 1960

are classifi ed as doll ar-t o-doll ar tran saction s (whi ch are not enti tled to the preferr edrate of exchange), or not (which ar e entitl ed to the preferred rate of exchange), andthat i f said import s are enti tled to the preferred rate of exchange, defendant CentralBank would i ssue a li cense to the contractor for authori ty to buy f oreign exchange atthe preferr ed rate for the payment of said imports." Had there been greater care therefore on the part of the plaintiff to show why in hisopinion he could assert a right in accordance not with a contract binding on the CentralBank, because there is none, but by virtue of compliance with rules and regulations ofan administrative tribunal, then perhaps a different outcome would have been justified.The decision of the trial court is dismissed without prejudice.

Case: Republic of the Philippines vs. PLDT, January 27, 1969, J.B.L. Reyes.Facts: PLDT first entered into an agreement whereby telephone messages, comingfrom the US and received by RCA’s domestic station could automatically betransferred to the lines of PLDT and vice versa. Soon after, the Bureau ofTelecommunications set up its own Government Telephone System by utilizing its ownappropriation and equipment and by renting trunk lines of the PLDT to enablegovernment offices to call private parties. Later on, the Bureau entered into anagreement with RCA Communications, Inc. for a joint overseas telephone servicewhereby the Bureau would convey radio- telephone overseas calls received by RCA’sstation to and from local residents. PLDT complained into such agreement. With muchdemands for telephone servicing, neither the Bureau and PLDT filled those demands.Hence, the Bureau had proposed to the PLDT that both enter into an interconnectingagreement. The PLDT replied positively with condition that the Bureau would submitto the jurisdiction of Public Service Commission and in consideration of 37 ½% of thegross revenues. However, the Bureau disagreeable, commenced a suit against PLDT

praying for judgment commanding PLDT to execute a contract with it. Trial courtruled for PLDT stating that the Bureau could not compel PLDT to enter into anagreement with it because both parties were not in agreement.

Issue: Whether or not neither the court nor even the Republic thr ough the Bur eau ofTelecommunications can compel PLD T to enter into a contract with the latter.

Held: NO. Parties can not be coerced to enter into a contract where no agreement ishad between them as to the principal terms and conditions of the contract. Freedom tostipulate such terms and conditions is of the essence of our contractual system,and by express provision of the statute, a contract may be annulled if tainted byviolence, intimidation, or undue influence(Articles 1306, 1336, 1337, Civil Code of


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the Philippines). But the court a quo has apparently overlooked that while the Republicmay not compel the PLDT to celebrate a contract with it, the Republic may, in theexercise of the sovereign power of eminent domain, require the telephone company to

permit interconnection of the government telephone system and that of the PLDT, asthe needs of the government service may require, subject to the payment of justcompensation to be determined by the court.

Case: R. Marino Corpus vs. CA and Juan David, June 30, 1980, J. Makasiar.

Facts: Corpus and Atty. Juan David are intimately related to each other, being closefriends. In fact, Corpus was called by Atty. David as Marino and latter to former as Juaning. Corpus was once charged with an administrative case by several employees ofCentral Bank Export Department of which he is the Director. By reason thereto, he wassuspended and considered resigned. Thru Atty. Alvarez, he filed Petition before CFI ofManila under Judge Lantin which was dismissed for lack of exhaustion ofadministrative remedies. Hence, Atty. David was retained as counsel by MarinoCorpus in a case dismissed by Judge Lantin. Before the SC, David was able to win thecase. With that, Corpus wrote a letter to David and gave the latter a check worthP2,000. But David replied and gave the check back to Corpus, writing, “ When Idecided to render professional services in your case, I was motivated by the value tome of the very intimate relations which you and I have enjoyed xxx and was not

primarily for professional fee xxx. When you shall have obtained a decision whichwould have finally resolved the case in your favor, remembering me then will make mehappy.” Corpus was able to get a favorable judgment ordering his reinstatement and

payment of back salaries and allowances. Marino Corpus contends that respondentDavid is not entitled to attorney's fees because there was no contract to that effect. Onthe other hand, respondent David contends that the absence of a formal contract for the

payment of the attorney's fees will not negate the payment thereof because the contractmay be express or implied, and there was an implied understanding between the

petitioner and private respondent that the former will pay the latter attorney's fees whena final decision shall have been rendered in favor of the petitioner reinstating him to -his former position in the Central Bank and paying his back salaries.

Issue: Whether or not th ere has been a contr act between Corpu s and Atty. Davi d forthe payment of the latter’s attorney’s fees.

Held: YES. While there was express agreement between petitioner Corpus andrespondent David as regards attorney's fees, the facts of the case support the position ofrespondent David that there was at least an implied agreement for the payment ofattorney's fees.Petitioner's act of giving the check for P2,000.00 through his aforestated April 18, 1962letter to respondent David indicates petitioner's commitment to pay the formerattorney's fees, which is stressed by expressing that "I wish I could give more but asyou know we were banking on a SC decision reinstating me and reimbursing my backsalaries This last sentiment constitutes a promise to pay more upon his reinstatementand payment of his back salaries. Petitioner ended his letter that he was "lookingforward to a continuation of the case in the lower court, ... to which the certiorari-

mandamus-quo warranto case was remanded by the Supreme Court for further proceedings.Moreover, the payment of attorney's fees to respondent David may also be justified byvirtue of the innominate contract of facio ut des (I do and you give which is based onthe principle that "no one shall unjustly enrich himself at the expense of another."innominate contracts have been elevated to a codal provision in the New Civil Code by

providing under Article 1307 that such contracts shall be regulated by the stipulationsof the parties, by the general provisions or principles of obligations and contracts, by

the rules governing the most analogous nominate contracts, and by the customs of the people. The rationale of this article was stated in the 1903 case of Perez vs. Pomar (2Phil. 982). In that case, the Court sustained the claim of plaintiff Perez for payment ofservices rendered against defendant Pomar despite the absence of an express contract tothat effect, thus:It does not appear that any written contract was entered into between the parties for theemployment of the plaintiff as interpreter, or that any other innominate contract wasentered into but whether the plaintiffs services were solicitedorwhethertheywereofferedto the defendant for his assistance, inasmuch as these services were accepted and madeuse of by the latter, we must consider that there was a tacit and mutual consent as to therendition of the services. This gives rise to the obligation upon the person benefited bythe services to make compensation therefor, since the bilateral obligation to renderservice as interpreter, on the one hand, and on the other to pay for the service rendered,is thereby incurred. (Arts. 1088, 1089, and 1262 of the Civil Code).x x x x x x x x x... Whether the service was solicited or offered, the fact remains that Perez rendered toPomar services as interpreter. As it does not appear that he did this gratuitously, theduty is imposed upon the defendant, he having accepted the benefit of the service, to

pay a just compensation therefor, by virtue of the innominate contract of facio ut desimplicitly established.x x x x x x x x x... because it is a well-known principle of law that no one should permitted to enrichhimself to the damage of another" (emphasis supplied; see also Tolentino, Civil Codeof the Philippines, p. 388, Vol. IV 119621, citing Estate of Reguera vs. Tandra 81 Phil.404 [1948]; Arroyo vs. Azur 76 Phil. 493119461; and Perez vs. Pomar. 2 Phil. 682[1903]).WE reiterated this rule in Pacific Merchandising Corp. vs. Consolacion Insurance &Surety Co., Inc . (73 SCRA 564 [1976]) citing the case of Perez v. Pomar, supra thus:Where one has rendered services to another, and these services are accepted by thelatter, in the absence of proof that the service was rendered gratuitously, it is but justthat he should pay a reasonable remuneration therefor because 'it is a well-known

principle of law, that no one should be permitted to enrich h imself to the damage ofanother (emphasis supplied).

Case: Daisy Tiu vs. Platinum Plans Phil., Inc.,February 28, 2007, J. Quisumbing.Facts: Daisy Tiu was an employee of Platinum Plans whose business is pre-needindustry. She was the Division Marketing Director from 1987-1989, and later re-hiredas Senior Assistant Vice-President and Territorial Operations Head in charge of its


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Hongkong and ASEAN operations, with respect to the latter under a contract ofemployment for 5 years. However, stopped reporting to work and eventually becameemployed with Professional Pension Plans which is also a pre-need industry, being itsVice-President for Sales. Hence, Platinum sued Tiu for damages alleging that the latterviolated the non-involvement clause in her contract of employment which providesthat, “8. NON INVOLVEMENT PROVISION – The EMPLOYEE further undertakesthat during his/her engagement with EMPLOYER and in case of separation from theCompany, whether voluntary or for cause, he/she shall not, for the next TWO (2) yearsthereafter, engage in or be involved with any corporation, association or entity, whetherdirectly or indirectly, engaged in the same business or belonging to the same pre-needindustry as the EMPLOYER.” However, Tiu countered that the non -involvementclause is unenforceable for being against public policy. The trial court sustained thevalidity of the non-involvement clause, stating that a contract in restraint of trade isvalid provided there is a limitation upon either time or place. CA affirmed the trialcourt’s decision.

Issue: Whether th e non-in volvement clau se in thi s case is vali d.

Held: YES. A non-involvement clause is not necessarily void for being in restraintof trade as long as there are reasonable limitations as to time, trade, and place. In this case, the non-involvement clause has a time limit: two years from the time

petitioner’s employment with respondent ends. It i s also limited as to trade, since itonly prohibits petitioner from engaging in any pre- need business akin to respondent’s.More significantly, since petitioner was the Senior Assistant Vice-President andTerritorial Operations Head in charge of respondent ’s Hongkong and Asean operations,she had been privy to confidential and highly sensitive marketing strategies ofrespondent’s business. To allow her to engage in a rival business soon after she leaveswould make respondent’s trade secrets vulnerable espec ially in a highly competitivemarketing environment. In sum, we find the non-involvement clause not contrary to

public welfare and not greater than is necessary to afford a fair and reasonable protection to respondent.In any event, Article 1306 of the Civil Code provides that parties to a contract mayestablish such stipulations, clauses, terms and conditions as they may deem convenient,

provided they are not contrary to law, morals, good customs, public order, or pub lic policy.Article 1159 of the same Code also provides that obligations arising from contractshave the force of law between the contracting parties and should be complied with ingood faith. Courts cannot stipulate for the parties nor amend their agreement where thesame does not contravene law, morals, good customs, public order or public policy, forto do so would be to alter the real intent of the parties, and would run contrary to thefunction of the courts to give force and effect thereto. Not being contrary to public

policy, the non-involvement clause, which petitioner and respondent freely agreedupon, has the force of law between them, and thus, should be complied with in goodfaith

Case: Emeterio Cui vs. Arellano University,May 30, 1961, J. Concepcion.

Facts: Emeterio Cui was enrolled in the College of Law in Arellano University andfinished his law studies up to and including the first semester of fourth year, duringwhich period, his uncle, Francisco Capistrano, the brother of Cui’s mother, was thedean and legal counsel of such University. Cui enrolled for the last semester of his lawstudies in Arellano but failed to pay his tuition fees because his uncle Dean Capistranohas severed his connection to such school for having accepted the deanship andchancellorship of the College of Law of Abad Santos University. Cui also transferredto such latter law school and graduated to such school. It will be noted that duringthose years of stay at Arellano, Cui was awarded scholarship grants for scholasticmerits so that his semestral tuition fees were returned to him after the ends of semesterand where his scholarship was granted to him. When Cui applied to take for the BarExamination, he needed transcripts of his records in Arellano but the latter denied untilthe former will pay back the amount refunded to the former by Arellano citing this

pertinent provision in a contract which Cui signed every after grant of scholarship, “"Inconsideration of the scholarship granted to me by the University, I hereby waive myright to transfer to another school without having refunded to the University(defendant) the equivalent of my scholarship cash.” Cui raised his defense into thisMemorandum issued by the Director of Private Schools, as follow:“2. When students are given full or partial scholarsh ips, it is understood that such

scholarships are merited and earned. The amount in tuition and other feescorresponding to these scholarships should not be subsequently charged to the recipientstudents when they decide to quit school or to transfer to another institution.Scholarships should not be offered merely to attract and keep students in a school.3. Several complaints have actually been received from students who have enjoyedscholarships, full or partial, to the effect that they could not transfer to other schoolssince their credentials would not be released unless they would pay the feescorresponding to the period of the scholarships. Where the Bureau believes that theright of the student to transfer is being denied on this ground, it reserves the right toauthorize such transfer.”

Issue: Whether the provision in the Contract between Cui and Ar ellano Un iversitywhereby the former waived his right to tr ansfer to another school with out r efundingto the latter the equi valent of hi s schol arship i n cash is vali d.

Held: NO. The stipulation whereby student cannot transfer to another schoolwithout refunding scholarship cash is null and void. Scholarship are awarded inrecognition of merit not to keep outstanding students in school to bolster its prestige . Inthe understanding of that university scholarships award is a business scheme designedto increase the business potential of an education institution . Thus conceived it is notonly inconsistent with sound policy but also good morals. But what is morals? Manresahas this definition. It is good customs; those generally accepted principles of moralitywhich have received some kind of social and practical confirmation. The practice ofawarding scholarships to attract students and keep them in school is not good customsnor has it received some kind of social and practical confirmation except in some

private institutions as in Arellano University. The University of the Philippines whichimplements Section 5 of Article XIV of the Constitution with reference to the giving of


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free scholarships to gifted children, does not require scholars to reimburse thecorresponding value of the scholarships if they transfer to other schools. So also withthe leading colleges and universities of the United States after which our educational

practices or policies are patterned. In these institutions scholarships are granted not toattract and to keep brilliant students in school for their propaganda mine but to rewardmerit or help gifted students in whom society has an established interest or a first lien.(Emphasis supplied.) In this case, scholarship award is a business scheme designed toincrease the business potential of an educational institution with respect to Arellano’scase.

Case: Ramon Saura vs. Estela Sindico,March 23, 1960, J.B.L. Reyes.Facts: Ramon E. Saura and Estela P. Sindico were contesting for nomination as theofficial candidate of the Nacionalista Party in the fourth district of Pangasinan in thecongressional elections of November 12, 1957. On August 23, 1957, the parties enteredinto a written agreement bearing the same date, containing among other matters statedtherein, a pledge that — Each aspirant shall respect the result of the aforesaid convention, i.e., no one of us shalleither run as a rebel or independent candidate after losing in said convention.In the provincial convention held by the Nacionalista Party on August 31, 1957, Saurawas elected and proclaimed the Party's official congressional candidate for theaforesaid district of Pangasinan. Nonetheless, Sindico, in disregard of the covenant,filed, on September 6, 1957, her certificate of candidacy for the same office with theCommission on Elections, and she openly and actively campaigned for her election.Wherefore, on October 5, 1957, plaintiff Saura commenced this suit for the recovery ofdamages. Upon motion of the defendant, the lower court, in its order of November 19,1957, dismissed the complaint on the basis that the agreement sued upon is null andvoid, in tat (1) the subject matter of the contract, being a public office, is not within thecommerce of man; and (2) the "pledge" was in curtailment of the free exercise ofelective franchise and therefore against public policy. Hence, this appeal.

Issue: Whether or not th e agreement between Saura and Sin dico is valid.

Held: NO. We agree with the lower court in adjudging the contract or agreement inquestion a nullity. Among those that may not be the subject matter (object) of contractsare certain rights of individuals, which the law and public policy have deemed wise toexclude from the commerce of man. Among them are the political rights conferredupon citizens, including, but not limited to, once's right to vote, the right to presentone's candidacy to the people and to be voted to public office, provided, however, thatall the qualifications prescribed by law obtain. Such rights may not, therefore, be

bargained away curtailed with impunity, for they are conferred not for individual or private benefit or advantage but for the public good and interest.Constitutional and statutory provision fix the qualifications of persons who may beeligible for certain elective public offices. Said requirements may neither be enlargednor reduced by mere agreements between private parties. A voter possessing all thequalifications required to fill an office may, by himself or through a political party orgroup, present his candidacy without further limitations than those provided by law.

Case: Leal vs. IAC and Vicente Santiago (Substit uted by Salu d Santiago), November 5, 1987, J. Sarmiento.Facts: On March 21, 1941, a document entirely in Spanish language entitled as“Compraventa” was executed by Vicente Santiago and his brother Luis Santiago infavor of Cirilo Leal ( the deceased father of herein petitioners), involving the three

parcels of land, as per paragraph (b) thereof states in translation as, “"they shall not sellto others these three lots but only to the seller Vicente Santiago or to his heirs orsuccessors". However, pursuant to the “ Compra venta”, the title over those three

parcels of land was cancelled and a new one was issued in the name of Cirilo Leal whoimmediately took possession and exercised possession and ownership over those landswhich was inherited by herein petitioners after Cir ilo’s death. These parcels of landwere either mortgaged or leased by petitioner-children of Cirilo to their co-petitioners.However, Vicente Santiago approached the petitioners and offered re-purchase ofsubject properties in pursuant to the Compraventa. Trial court dismissed the complaintfor being premature. Court of Appeals under Justice Paras affirmed the trial court’sdecision.

Issue: Whether or not the prohibiti on to sell to thir d parties pursuant to theCompraventa is vali d.

Held: NO. Contracts are generally binding between the parties, their assigns and heirs;however, under Art. 1255 of the Civil Code of Spain, which is applicable in thisinstance, pacts, clauses, and conditions which are contrary to public order are null andvoid, thus, without any binding effect.Parenthetically, the equivalent provision in the Civil Code of the Philippines is that ofArt. 1306, which states: "That contracting parties may establish such stipulations,clauses, terms and conditions as they may deem convenient, provided they are notcontrary to law, morals, good customs, public order, or public policy. Public ordersignifies the public weal — public policy. 5 Essentially, therefore, public order and

public policy mean one and the same thing. Public po licy is simply the Englishequivalent of "order publico" in Art. 1255 of the Civil Code of Spain. 6 One such condition which is contrary to public policy is the present prohibition to selfto third parties, because the same virtually amounts to a perpetual restriction to theright of ownership, specifically the owner's right to freely dispose of his properties.This, we hold that any such prohibition, indefinite and stated as to time, so much sothat it shall continue to be applicable even beyond the lifetime of the original parties tothe contract, is, without doubt, a nullity. In the light of this pronouncement, we grantthe petitioners' prayer for the cancellation of the annotations of this prohibition at the

back of their Transfer Certificates 'Title.In the case before us, we cannot and any express or implied grant of a right torepurchase, nor can we infer, from any word or words in the questioned paragraph, theexistence of any such right. The interpretation in the resolution (Justice Sison) is ratherstrained. The phrase "in case case" of should be construed to mean "should the buyerswish to sell which is the plain and simple import of the words, and not "the buyersshould sell," which is clearly a contorted construction of the same phrase. The resort to


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Article 1373 of the Civil Code of the Philippines is erroneous. The subject phrase is patent and unambiguous, hence, it must not be given another interpretationBut even assuming that such a right of repurchase is granted under the "Compraventa,"the petitioner correctly asserts that the same has already prescribed. Under Art. 1508 ofthe Civil Code of Spain (Art,. 1606 of the Civil Code of the Philippines), the right toredeem or repurchase, in the absence of an express agreement as to time, shall last fouryears from the date of the contract. In this case then, the right to repurchase, if it was atfour guaranteed under in the "Compraventa," should have been exercise within fouryears from March 21, 1941 (indubitably the date of execution of the contract), or at thelatest in 1945.In the respondent court's resolution, it is further ruled that the right to repurchase wasgiven birth by the condition precedent provided for in the phrase "siempre y cuandoestos ultimos pueden hacer la compra" (when the buyer has money to buy). In otherwords, it is the respondent court's contention that the right may be exercised only whenthe buyer has money to buy. If this were so, the second paragraph of Article 1508would apply — there is agreement as to the time, although it is indefinite, therefore, theright should be exercised within ten years, because the law does not favor suspendedownership. Since the alleged right to repurchase was attempted to be exercised byVicente Santiago only in 1966, or 25 years from the date of the contract, the said righthas undoubtedly expired.The law provides that for conventional redemption to take place, the vendor shouldreserve, in no uncertain terms, the right to repurchase the thing sold. Thus, the right toredeem must be expressly stipulated in the contract of sale in order that it may havelegal existence.

Case: Banco Filipino Savings and Mortgage Bank vs. Hon. Navarro and FloranteDel Valle, July 28, 1987, J. Melencio-Herrera.Facts: On May 20, 1975, respondent Florante del Valle (the BORROWER) obtained aloan secured by a real estate mortgage (the LOAN, for short) from petitioner BANCOFILIPINO 1 in the sum of Forty-one Thousand Three Hundred (P41,300.00) Pesos,

payable and to be amortized within fifteen (15) years at twelve (12%) per cent interestannually. Hence, the LOAN still had more than 730 days to run by January 2, 1976, thedate when CIRCULAR No. 494 was issued by the Central Bank.Stamped on the promissory note evidencing the loan is an Escalation Clause, readingas follows:I/We hereby authorize Banco Filipino to correspondingly increase the interest ratestipulated in this contract without advance notice to me/us in the event law should beenacted increasing the lawful rates of interest that may be charged on this particularkind of loan.The Escalation Clause is based upon Central Bank CIRCULAR No. 494 issued onJanuary 2, 1976, the pertinent portion of which reads:3. The maximum rate of interest, including commissions, premiums, fees and othercharges on loans with maturity of more than seven hundred thirty (730) days, by

banking institutions, including thrift banks and rural banks, o r by financial

intermediaries authorized to engage in quasi-banking functions shall be nineteen percent (19%) per annum.x x x x x x x x x7. Except as provided in this Circular and Circular No. 493, loans or renewals thereofshall continue to be governed by the Usury Law, as amended."On the strength of CIRCULAR No. 494 BANCO FILIPINO gave notice to theBORROWER on June 30, 1976 of the increase of interest rate on the LOAN from 12%to 17% per annum effective on March 1, 1976.Contending that CIRCULAR No. 494 is not the law contemplated in the EscalationClause of the promissory note, the BORROWER filed suit against BANCO FILIPINOfor "Declaratory Relief" with respondent Court, praying that the Escalation Clause bedeclared null and void and that BANCO FILIPINO be ordered to desist from enforcingthe increased rate of interest on the BORROWER's real estate loan.For its part, BANCO FILIPINO maintained that the Escalation Clause signed by theBORROWER authorized it to increase the interest rate once a law was passedincreasing the rate of interest and that its authority to increase was provided for byCIRCULAR No. 494.In its judgment, respondent Court nullified the Escalation Clause and ordered BANCOFILIPINO to desist from enforcing the increased rate of interest on the BORROWER'sloan.* On February 24, 1983, the parties represented by their respective counsel, not onlymoved to withdraw the appeal on the ground that it had become moot and academic"because of recent developments in the rules and regulations of the Central Bank," butalso prayed that "the decision rendered in the Court of First Instance be thereforevacated and declared of no force and effect as if the case was never filed," since the

parties would like to end this matter once and for all."However, "considering the subject matter of the controversy in which many personssimilarly situated are interested and because of the need for a definite ruling on thequestion," the Court, in its Resolution of February 24, 1983, impleaded the CentralBank and required it to submit its Comment, and encouraged homeowners similarlysituated as the BORROWER to intervene in the proceedings.

Issue: Whether or not Banco F ili pino can i ncrease the interest rate on the loan fr om12% to 19% per ann um un der the Escalation clause.

Held: NO. It is clear from the stipulation between the parties that the interest rate may be increased "in the event a law should be enacted increasing the lawful rate of interestthat may be charged on this particular kind of loan ." " The Escalation Clause wasdependent on an increase of rate made by "law" alone.CIRCULAR No. 494, although it has the effect of law, is not a law. "Although acircular duly issued is not strictly a statute or a law , it has, however, the force andeffect of law. "6 (Italics supplied). "An administrative regulation adopted pursuant tolaw has the force and effect of law. "7 "That administrative rules and regulations havethe force of law can no longer be questioned. "8 The distinction between a law and an administrative regulation is recognized in theMonetary Board guidelines quoted in the letter to the BORROWER of Ms. Paderes of

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September 24, 1976 ( supra ). According to the guidelines, for a loan's interest to besubject to the increases provided in CIRCULAR No. 494, there must be an EscalationClause allowing the increase "in the event that any law or Central Bank regulation is

promulgated increasing the maximum interest rate for loans." The guidelines thus presuppose that a Central Bank regulation is not within the te rm "any law."It is now clear that from March 17, 1980, escalation clauses to be valid shouldspecifically provide: (1) that there can be an increase in interest if increased bylaw or by the Monetary Board; and (2) in order for such stipulation to be valid, itmust include a provision for reduction of the stipulated interest "in the event thatthe applicable maximum rate of interest is reduced by law or by the MonetaryBoard."

Case: Spouses Mariano and Gilda Florendo vs. CA and Land Bank of thePhilippines, December 17, 1996, J. Panganiban.Facts: Gilda Florendo (was) an employee of (Respondent Bank) from May 17, 1976until August 16, 1984 when she voluntarily resigned. However, before her resignation,she applied for a housing loan of P148,000.00, payable within 25 years from(respondent bank's) Provident Fund on July 20, 1983. Florendo and Land Bank enteredinto a Housing Loan Agreement which the former executed a Real Estate Mortgageand Promissory Note. Land Bank increased the interest rate from 9% to 17% perannum pursuant to ManCom Resolution No. 85-08 and Provident Fund MemorandumCircular proving that,“ManCom (Management Committee) Resolution No. 85 -08, together with PF(Provident Fund) Memorandum Circular No. 85-08, which escalated the interest rateson outstanding housing loans of bank employees who voluntarily "secede" (resign)from the Bank; the range of rates varied depending upon the number of years servicerendered by the employees concerned. The rates were made applicable to those whohad previously resigned from the bank as well as those who would be resigning in thefuture.”And the same increase being stated in the real estate mortgage as follows,“The rate of interest charged on the obligation secured by this mortgage. . ., sha ll besubject, during the life of this contract, to such an increase/decrease in accordance with

prevailing rules, regulations and circulars of the Central Bank of the Philippines as theProvident Fund Board of Trustees of the Mortgagee may prescribe for its debtors andsubject to the condition that the increase/decrease shall only take effect on the date ofeffectivity of said increase/decrease and shall only apply to the remaining balance ofthe loan.” Florendo protested such increase. The trial court ruled in favor of the bank. However,Florendo argued that, the increased rate of interest is onerous and was imposedunilaterally, without the consent of the borrower-spouses. And that there is in fact noCentral Bank rule, regulation or other issuance which would have triggered anapplication of the escalation clause as to her factual situation.

Issue: Whether or not th e bank has valid and l egal basis to impose an i ncreasedinterest rate on the petitioner’s housing loan.

Held: NO. In the case at bar, the loan was perfected on July 20, 1983. PD No. 116 became effective on January 29, 1973. CB Circular No. 416 was issued on July 29 ,1974. CB Circ. 504 was issued February 6, 1976. CB Circ. 706 was issued December1, 1979. CB Circ. 905, lifting any interest rate ceiling prescribed under or pursuant tothe Usury Law, as amended, was promulgated in 1982. These and other relevant CBissuances had already come into existence prior to the perfection of the housing loanagreement and mortgage contract, and thus it may be said that these regulations had

been taken into considera tion by the contracting parties when they first entered intotheir loan contract. In light of the CB issuances in force at that time, respondent bankwas fully aware that it could have imposed an interest rate higher than 9% per annum rate for the housing loans of its employees, but it did not. In the subject loan, therespondent bank knowingly agreed that the interest rate on petitioners' loan shallremain at 9% p.a. unless a CB issuance is passed authorizing an increase (or decrease)in the rate on such employee loans and the Provident Fund Board of Trustees actsaccordingly . Thus, as far as the parties were concerned, all other onerous factors, suchas employee resignations, which could have been used to trigger an application of theescalation clause were considered barred or waived. If the intention were otherwise,they — especially respondent bank — should have included such factors in their loanagreement.ManCom Resolution No. 85-08, which is neither a rule nor a resolution of theMonetary Board, cannot be used as basis for the escalation in lieu of CB issuances,since paragraph (f) of the mortgage contract very categorically specifies that anyinterest rate increase be in accordance with "prevailing rules, regulations and circularsof the Central Bank . . . as the Provident Fund Board . . . may prescribe." The Banco

Filipino and PNB doctrines are applicable four-square in this case. As a matter of fact,the said escalation clause further provides that the increased interest rate "shall onlytake effect on the date of effectivity of (the) increase/decrease" authorized by the CBrule, regulation or circular. Without such CB issuance, any proposed increased rate willnever become effective.We have already mentioned (and now reiterate our holding in severalcases 15) that by virtue of CB Circular 905, the Usury Law has been renderedineffective. Thus, petitioners' contention that the escalation clause is violative of thesaid law is bereft of any merit.On the other hand, it will not be amiss to point out that the unilateral determination andimposition of increased interest rates by the herein respondent bank is obviouslyviolative of the principle of mutuality of contracts ordained in Article 1308 of the CivilCode. As this Court held in PNB : 16 In order that obligations arising from contracts may have the force of law between the

parties, there must be mutuality between the parties based on their essential equality. Acontract containing a condition which makes its fulfillment dependent exclusively uponthe uncontrolled will of one of the contracting parties, is void (Garcia vs. Rita Legarda,Inc., 21 SCRA 555). Hence, even assuming that the . . . loan agreement between thePNB and the private respondent gave the PNB a license (although in fact there wasnone) to increase the interest rate at will during the term of the loan, that license wouldhave been null and void for being violative of the principle of mutuality essential incontracts. It would have invested the loan agreement with the character of a contract of


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adhesion, where the parties do not bargain on equal footing, the weaker party's (thedebtor) participation being reduced to the alternative "to take it or leave it" (Qua vs.Law Union & Rock Insurance Co., 95 Phil 85). Such a contract is a veritable trap forthe weaker party whom the courts of justice must protect against abuse and imposition.The respondent bank tried to sidestep this difficulty by averring that petitioner GildaFlorendo as a former bank employee was very knowledgeable concerning respondent

bank's lending rates and procedures, and therefore, petitioners were "on an equalfooting" with respondent bank as far as the subject loan contract was concerned. Thatmay have been true insofar as entering into the original loan agreement and mortgagecontract was concerned. However, that does not hold true when it comes to thedetermination and imposition of escalated rates of interest as unilaterally provided inthe ManCom Resolution, where she had no voice at all in its preparation andapplication.To allay fears that respondent bank will inordinately be prejudiced by being stuck withthis "sweetheart loan" at patently concessionary interest rates, which according torespondent bank is the "sweetest deal" anyone could obtain and is an act of generosityconsidering that in 1985 lending rates in the banking industry were peaking well over30% p.a., 17 we need only point out that the bank had the option to impose in its loancontracts the condition that resignation of an employee-borrower would be a groundfor escalation. The fact is it did not. Hence, it must live with such omission.

Case: Aniceto Saludo Jr. vs. Security Bank Corporation, October 13, 2010, J.Perez.Facts: On 30 May 1996, Booklight was extended an omnibus line credit facilit y3 bySBC in the amount of P10,000,000.00. Said loan was covered by a Credit Agreemen t4 and a Continuing Suretyshi p5 with petitioner as surety, both documents dated 1 August1996, to secure full payment and performance of the obligations arising from the creditaccommodation.Booklight drew several availments of the approved credit facility from 1996 to 1997and faithfully complied with the terms of the loan. On 30 October 1997, SBC approvedthe renewal of credit facility of Booklight in the amount of P10,000,000.00 under the

prevailing security lending rate .6 From August 3 to 14, 1998, Booklight executed nine(9) promissory note s7 in favor of SBC in the aggregate amount of P9,652,725.00. Forfailure to settle the loans upon maturity, demand s8 were made on Booklight and

petitioner for the payment of the obligation but the duo failed to pay. As of 15 May2000, the obligation of Booklight stood at P10,487,875.41, inclusive of interest pastdue and penalty .9 On 16 June 2000, SBC filed against Booklight and herein petitioner an action forcollection of sum of money with the RTC. RTC ruled that Saludo is jointly andseverally liable with Booklight. CA affirmed in toto. Saludo argued that the ContinuingSuretyship is a contract of adhesion and that its participation thereto is only his signingthe same.

Issue: Whether or not a lawyer can be excused fr om li ability by argui ng that th econtract i s one of a contract of adh esion .

Held: NO. The lameness of petitioner’s stand is pointed up by his attempt to escapefrom liability by labelling the Continuing Suretyship as a contract of adhesion.A contract of adhesion is defined as one in which one of the parties imposes a ready-made form of contract, which the other party may accept or reject, but which the lattercannot modify. One party prepares the stipulation in the contract, while the other partymerely affixes his signature or his ‘adhesion’ thereto, giving no room for negotiationand depriving the latter of the opportunity to bargain on equal footing.A contract of adhesion presupposes that the party adhering to the contract is a weaker

party. That cannot be said o f petitioner. He is a lawyer. He is deemed knowledgeable ofthe legal implications of the contract that he is signing.It must be borne in mind, however, that contracts of adhesion are not invalid per se.Contracts of adhesion, where one party imposes a ready-made form of contract on theother, are not entirely prohibited. The one who adheres to the contract is, in reality, freeto reject it entirely; if he adheres, he gives his consent.

Case: Metropolitan Bank and Trust Company vs. Rogelio Reynado and JoseAdrandea, August 9, 2010, J. Del Castillo.Facts: On January 31, 1997, petitioner Metropolitan Bank and Trust Company chargedrespondents before the Office of the City Prosecutor of Manila with the crime of estafaunder Article 315, paragraph 1(b) of the Revised Penal Code. In the affidavit of

petitioner’s audit officer, Antonio Ivan S. Aguirre, it was alleged that the special auditconducted on the cash and lending operations of its Port Area branch uncoveredanomalous/fraudulent transactions perpetrated by respondents in connivance withclient Universal Converter Philippines, Inc. (Universal). In their defense, respondentsdenied responsibility in the anomalous transactions with Universal and claimed thatthey only intended to help the Port Area branch solicit and increase its deposit accountsand daily transactions.Meanwhile, on February 26, 1997, petitioner and Universal entered into a DebtSettlement Agreement whereby the latter acknowledged its indebtedness to the formerin the total amount of P50,990,976.27 as of February 4, 1997 and undertook to pay thesame in bi-monthly amortizations in the sum of P300,000.00 starting January 15,1997, covered by postdated checks, “plus balloon payment of th e remaining principal

balance and interest and other charges, if any, on December 31, 2001.” The CityProsecutor and DOJ dismissed the case. Hence, Metrobank filed a petition for certiorariand mandamus to CA. CA likewise affirmed the decisions of the City Prosecutor andDOJ stating that, while novation does not extinguish criminal liability, it may preventthe rise of such liability as long as it occurs prior to the filing of the criminalinformation in court.

Issue: Whether or not th e Debt Settlement Agr eement between M etropoli tan Ban kand Tr ust Company and Uni versal is tantamount to a novation of obligation by thelatter to the former which extingui shes the criminal liabil ity for Estafa by the latter.

Held: NO. Initially, it is best to emphasize that “ novation is not one of the grounds prescribed by the Revised Penal Code for the extinguishment of criminal liability.” In acatena of cases, it was ruled that criminal liability for estafa is not affected by a

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compromise or novation of contract. In F ir aza v. People and Recuerdo v. People , thisCourt ruled that in a crime of estafa, reimbursement or belated payment to the offended

party of the money swindled by the accused does no t extinguish the criminal liabilityof the latter. We also held in People v. Mor eno and in People v. L adera that “criminalliability for estafa is not affected by compromise or novation of contract, for it is a

public offense which must be prosecuted and punished by the Government on its ownmotion even though complete reparation should have been made of the damagesuffered by the offended party.” Similarly in the case of M etropolitan Bank and Tr ustCompany v. Tonda cited by petitioner, we held that in a crime of estafa,reimbursement of or compromise as to the amount misappropriated, after thecommission of the crime, affects only the civil liability of the offender, and not hiscriminal liability.Thus, the doctrine that evolved from the aforecited cases is that a compromise orsettlement entered into after the commission of the cr ime does not extinguish accused’sliability for estafa. Neither will the same bar the prosecution of said crime.Accordingly, in such a situation, as in this case, the complaint for estafa againstrespondents should not be dismissed just because petitioner entered into a DebtSettlement Agreement with Universal. Even the OSG arrived at the same conclusion:Contrary to the conclusion of public respondent, the Debt Settlement Agreemententered into between petitioner and Universal Converter Philippines extinguishesmerely the civil aspect of the latter’s liability as a corporate entity but not the criminalliability of the persons who actually committed the crime of estafa against petitionerMetrobank. x x x

Case: Prudential Bank and Trust Company (BPI) vs. Liwayway Abasolo,September 27, 2010, J. Carpio Morales.Facts: Leonor Valenzuela-Rosales inherited two parcels of land in Laguna which uponher death were inherited by her heirs thereby appointing Liwayway Abasolo as theiragent thru the SPA empowering the latter to sell the properties. One, CorazonMarasigan expressed her interest in buying that same properties but because she had nomoney yet she suggested the idea of first mortgaging the properties to Prudential Bankand the proceeds of which would be paid directly to Abasolo. On consultation withPrudential Bank’s employee named Norberto Mendiola, a Deed of Absolute Sale wasexecuted thereby transferring to Marasigan the property with assurance that the

proceeds thereof would be paid directly to Abasolo. When all went well with the loan,in the absence of a written request for a bank guarantee, the PBTC released the

proceeds of the loan to Marasigan, whom latter despite repeated demands failedto paythe purchase price of the properties. Marasigan only paid in kind but never the entire

purchase price. Hence, Abaso lo filed a complaint for collection of sum of money andannulment of sale and mortgage with damages. Marasigan, however, denied theexistence of any agreement that the proceeds be paid to Abasolo and that the paymentin kind was already sufficient. RTC ruled in favor of Abasolo ordering PBTC to payAbasolo in the event that Marasigan failed to pay. CA affirmed.

Issue: Whether or n ot PBTC woul d be subsidi ari ly li able to Abasolo in t he absenceof any contractual r elation ship between the two.

Held: NO. In the absence of a lender-borrower relationship between petitioner andLiwayway, there is no inherent obligation of petitioner to release the proceeds of theloan to her. To a banking institution, well-defined lending policies and sound lending

practices are essential to perform its lending function effectively and minimize the riskinherent in any extension of credit. In order to identify and monitor loans that a bankhas extended, a system of documentation is necessary. Under this fold falls theissuance by a bank of a guarantee which is essentially a promise to repay the liabilitiesof a debtor, in this case Corazon. It would be contrary to established banking practice ifMendiola issued a bank guarantee, even if no request to that effect was made.The principle of relativity of contracts in Article 1311 of the Civil Code supports

petitioner’s cause: Art. 1311. Contracts take effect only between the parties, their assigns and heirs, exceptin case where the rights and obligations arising from the contract are not transmissible

by their nature, or by stipulation or by provision of law. The heir is not liable beyondthe value of the property he received from the decedent.If a contract should contain some stipulation in favor of a third person, he may demandits fulfillment provided he communicated his acceptance to the obligor before itsrevocation. A mere incidental benefit or interest of a person is not sufficient. Thecontracting parties must have clearly and deliberately conferred a favor upon a third

person. (underscoring supplied)For Liwayway to prove her claim against petitioner, a clear and deliberate act ofconferring a favor upon her must be present. A written request would have sufficed to

prove this, given the nature of a banking business, not to mention the amount involved.Since it has not been established that petitioner had an obligation to Liwayway, there isno breach to speak of. Liwayway’s claim should only be directed against Co razon.Petitioner cannot thus be held subisidiarily liable.

Case: Asian Cathay Finance and Leasing Corporation vs. Spouses CesarioGravador and Norma De Vera and Spouses Dumigpi, July 5, 2010, J. Nachura.Facts: Asian Cathay Finance and Leasing Corporation (ACFLC) extended a loan ofEight Hundred Thousand Pesos (P800,000.00) to respondent Cesario Gravador, withrespondents Norma de Vera and Emma Concepcion Dumigpi as co-makers. The loanwas payable in sixty (60) monthly installments of P24,400.00 each. To secure the loan,respondent Cesario executed a real estate mortgag e5 over his property in Sta. Maria,Bulacan. Respondents paid the initial installment due in November 1999. However,they were unable to pay the subsequent ones. Hence, petitioner filed a petition forextrajudicial foreclosure of mortgage. Respondent, however, filed a suit for annulmentof such mortgage claiming that the real estate mortgage is null and void. They pointedout that the mortgage does not make reference to the promissory note dated October22, 1999. The promissory note does not specify the maturity date of the loan, theinterest rate, and the mode of payment; and it illegally imposed liquidated damages.The real estate mortgage, on the other hand, contains a provision on the waiver of themortgagor’s right of redemption, a provision that is contrary to law and public policy.Respondents added that ACFLC violated Republic Act No. 3765, or the Truth inLending Act, in the disclosure statement that should be issued to the borrower. RTC

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denied the application for TRO by respondent and thereafter dismissed the complaintsustaining the validity of the promissory note and real estate mortgage stating amongothers that, respondents are well-educated in dividu als who coul d not f eign n aivetéinthe execution of t he loan documents . It, therefore, rejected respondents’ claim thatACFLC deceived them into signing the promissory note, disclosure statement, anddeed of real estate mortgage. The RTC further held that the alleged defects in the

promissory note and in the deed of real estate mortgage are too insubstantial to warrantthe nullification of the mortgage. It added that a promissory note is not one of theessential elements of a mortgage; thus, reference to a promissory note is neitherindispensable nor imperative for the validity of the mortgage. CA reversed the trialcourt’s decision.

Issue: Whether or not th e subj ect promi ssory note and r eal estate mortgage is one ofcontract of adhesion .

Held: YES. The supposed waiver by the mortgagors was contained in a statementmade in fine print in the REM. It was made in the form and language prepared by[petitioner]ACFLC while the [respondents] merely affixed their signatures or adhesionthereto. It thus partakes of the nature of a contract of adhesion. It is settled that doubtsin the interpretation of stipulations in contracts of adhesion should be resolved againstthe party that prepared them. This principle especially holds true with regard towaivers, which are not presumed, but which must be clearly and convincingly shown.[Petitioner] ACFLC presented no evidence hence it failed to show the efficacy of thiswaiver.Moreover, to say that the mortgag or’s right of redemption may be waived through afine print in a mortgage contract is, in the last analysis, tantamount to placing at themortgagee’s absolute disposal the property foreclosed. It would render practicallynugatory this right that is provided by law for the mortgagor for reasons of public

policy. A contract of adhesion may be struck down as void and unenforceable for beingsubversive to public policy, when the weaker party is completely deprived of theopportunity to bargain on equal footing.

Case: Pepito Velasco, et al. vs. CA and GSIS,January 28, 1980, J. Barredo.Facts: Sometime on November 10, 1965, Alta Farms secured from the GSIS a ThreeMillion Two Hundred Fifty Five Thousand Pesos (P3,255,000.00) loan and anadditional loan of Five Million Sixty-Two Thousand Pesos (P5,062,000.00) on October5, 1967, to finance a piggery project. These loans were secured by two mortgage. AltaFarms defaulted in the payment of its amortizations presumably because of this thatAlta Farms executed a Deed of Sale With Assumption of Mortgage with AsianEngineering Corporation on July 10, 1969 but with out the previous consent orapproval of the GSIS and in direct violation of the provisions of the mortgagecontracts. Even without the approval of the Deed of Sale With Assumption ofMortgage by the GSIS, Asian Engineering Corporation executed an Exclusive SalesAgency, Management and Administration Contract in favor of Laigo RealtyCorporation, with the intention of converting the piggery farm into a subdivision. Andon October 20, 1969, Asian Engineering executed another contract with Laigo,

whereby Laigo was to undertake the development of the property into a subdivision.Laigo, on the other hand, entered into a contract with Lumanlan to construct for thehome buyers, 20 houses on the subdivision. Another contract was entered into betweenLaigo and Velasco for construction of the houses. However, when neither Laigo northe individual home buyers paid for the home constructed, Velasco wrote the GSIS tointercede for the unpaid accounts of the home buyers. Contracts that were subsequentlyentered into by Laigo include that of Delos Santos, Galang and Lumbang. However,GSIS categorically denied that the firm has clear legal ground against Laigo having no

privity of contract between pet itioners. With the same plight, herein petitioners filed acase against GSIS. The latter however, presented a defense through the execution ofDeed of Quitclaim and Undertaking by Laigo Realty.

Issue: Whether there is contractual privity between GSIS and L umanlan andVelasco.

Held: YES. What is more, the reliance of GSIS on the Deed of Quitclaim of May 7,1970 is to Our mind misplaced. We have analyzed this document carefully, and We areof the considered view that it is actually evidence against GSIS. Even if what isunnatural in ordinary business or industrial experience were assumed, that is, that GSISwas unaware all along during the period of their construction of the work then beingdone by petitioners - albeit it is possible there was no express consent given to - by andthru the aforementioned deed of quitclaim, GSIS agreed to receive and did actuallyreceive the benefits of what petitioners had accomplished or would accomplish undertheir contracts with Laigo., So much so, that the dispositi ve porti on of the qui tclai mdead does not r eally reli eve GSIS fr om li abil ity to petiti oners. Properly viewed, GSISvir tual ly assumed under said deed, li abil ity in r egard to clai ms li ke those ofpetition ers who might not be paid by Lai go albeit said li abil ity has been made subj ectto the reservati on that it coul d seek indemni ty from L aigo.GSIS received Alta Farms' proposal about the conversion of their piggery project into asubdivision (in which Laigo Realty's participation was mentioned) as early as February5, 1970. It was only in November, 1970 that it issued its "cease and desist" order. Fromall indications, the jobs of petitioners were already practically finished then. And in theJoint Manifestation filed by the parties with the trial court as late as February 20, 1976,GSIS made it clear that "defendant (GSIS) up to the present has not collected from thehouse owners of the 63 houses built by the plaintiffs notwithstanding the foreclosure

proceedings and conso lidation 6f ownership." Again, it is thus obvious that GSISassumed ownership of the houses built by petitioners and was benefited by the same,and the fact that it has not collected any payment from the "house owners" or theconstruction of the houses respectively occupied by them is of no moment insofar as itsliability to petitioners is concerned. Surely, it is not pretended that those "houseowners" would be allowed to enrich themselves at the expense of petitioners. Indeed,the term "house owners" is inappropriate, if only because in Paragraph 16 of itsComment on the petition herein, GSIS unequivocally state that "GSIS foreclosed the

properties including all improvements (the houses in 1970" and, thereby, became theowner of said houses.


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Case: George Kauffman vs. PNB,Sept. 29, 1921, J. Street.Facts: George A. Kauffman, was the president of a domestic corporation engagedchiefly in the exportation of hemp from the Philippine Islands and known as thePhilippine Fiber and Produce Company, of which company the plaintiff apparentlyheld in his own right nearly the entire issue of capital stock. On February 5, 1918, the

board of directors of said company, declared a dividend of P100,000 from its surplusearnings for the year 1917, of which the plaintiff was entitled to the sum of P98,000.This amount was accordingly placed to his credit on the books of the company, and soremained until in October of the same year when an unsuccessful effort was made totransmit the whole, or a greater part thereof, to the plaintiff in New York City.In this connection it appears that on October 9, 1918, George B. Wicks, treasurer of thePhilippine Fiber and Produce Company, presented himself in the exchange departmentof the Philippine National Bank in Manila and requested that a telegraphic transfer of$45,000 should be made to the plaintiff in New York City, upon account of thePhilippine Fiber and Produce Company. Upon receiving this telegraphic message, the

bank's representative in New York sent a cable message in rep ly suggesting theadvisability of withholding this money from Kauffman, in view of his reluctance toaccept certain bills of the Philippine Fiber and Produce Company. The Philippine

National Bank acquiesced in this and on October 11 d ispatched to its New Yorkagency another message to withhold the Kauffman payment as suggested.Meanwhile Wicks, the treasurer of the Philippine Fiber and Produce Company, cabledto Kauffman in New York, advising him that $45,000 had been placed to his credit inthe New York agency of the Philippine National Bank; and in response to this adviceKauffman presented himself at the office of the Philippine National Bank in New YorkCity on October 15, 1918, and demanded the money. By this time, however, themessage from the Philippine National Bank of October 11, directing the withholding of

payment had been received in New York, and payment was therefore refused.Hence, Kauffman instituted a suit before the CFI of Manila to recover the sum.

Issue: Whether or n ot Kauff man has ri ght of action against PNB.

Held: YES. In the case of Uy Tam and Uy Yet vs. Leonard (30 Phil., 471), is found anelaborate dissertation upon the history and interpretation of the paragraph above quotedand so complete is the discussion contained in that opinion that it would be idle for ushere to go over the same matter. Suffice it to say that Justice Trent, speaking for thecourt in that case, sums up its conclusions upon the conditions governing the right ofthe person for whose benefit a contract is made to maintain an action for the breachthereof in the following words:So, we believe the fairest test, in this jurisdiction at least, whereby to determinewhether the interest of a third person in a contract is a stipulation pour autrui, ormerely an incidental interest, is to rely upon the intention of the parties as disclosed bytheir contract.

If a third person claims an enforcible interest in the contract, the question must be settled by determining whether the contracting parties desired to tender him such aninterest. Did they deliberately insert terms in their agreement with the avowed purposeof conferring a favor upon such third person? In resolving this question, of course, the

ordinary rules of construction and interpretation of writings must be observed . (UyTam and Uy Yet vs. Leonard, supra .)Further on in the same opinion he adds: " In applying this test to a stipulation pourautrui, it matters not whether the stipulation is in the nature of a gift or whether thereis an obligation owing from the promise to the third person. That no such obligationexists may in some degree assist in determining whether the parties intended to benefita third person, whether they stipulated for him. " (Uy Tam and Uy Yet vs. Leonard,

supra .)In the light of the conclusion thus stated, the right of the plaintiff to maintain the

present action is clear enough; for it is undeniable that the bank's promise to cause adefinite sum of money to be paid to the plaintiff in New York City is a stipulation inhis favor within the meaning of the paragraph above quoted; and the circumstancesunder which that promise was given disclose an evident intention on the part of thecontracting parties that the plaintiff should have the money upon demand in New YorkCity. The recognition of this unqualified right in the plaintiff to receive the moneyimplies in our opinion the right in him to maintain an action to recover it; and indeed ifthe provision in question were not applicable to the facts now before us, it would bedifficult to conceive of a case arising under it.It will be noted that under the paragraph cited a third person seeking to enforcecompliance with a stipulation in his favor must signify his acceptance before it has

been revoked. In this case the plaintiff clearly signified his accep tance to the bank bydemanding payment; and although the Philippine National Bank had already directedits New York agency to withhold payment when this demand was made, the rights ofthe plaintiff cannot be considered to as there used, must be understood to implyrevocation by the mutual consent of the contracting parties, or at least by direction ofthe party purchasing he exchange.

Case: Bonifacio Brothers Inc., et al. vs. Enrique Mora, et al.,May 29, 1967, J.Castro.Facts: Enrique Mora, owner of Oldsmobile sedan model 1956, bearing plate No. QC-mortgaged the same to the H.S. Reyes, Inc., with the condition that the former wouldinsure the automobile with the latter as beneficiary. The automobile was thereafterinsured on June 23, 1959 with the State Bonding & Insurance Co., Inc., and motor carinsurance policy A-0615 was issued to Enrique Mora. During the effectivity of theinsurance contract, the car met with an accident. The insurance company then assignedthe accident to the Bayne Adjustment Co. for investigation and appraisal of thedamage. Enrique Mora, without the knowledge and consent of the H.S. Reyes, Inc.,authorized the Bonifacio Bros. Inc. to furnish the labor and materials, some of whichwere supplied by the Ayala Auto Parts Co. For the cost of labor and materials, EnriqueMora was billed at P2,102.73 through the H.H. Bayne Adjustment Co. In themeantime, the car was delivered to Enrique Mora without the consent of the H.S.Reyes, Inc., and without payment to the Bonifacio Bros. Inc. and the Ayala Auto PartsCo. of the cost of repairs and materials. Upon the theory that the insurance proceedsshould be paid directly to them, the Bonifacio Bros. Inc. and the Ayala Auto Parts Co.filed on May 8, 1961 a complaint with the Municipal Court of Manila against Enrique


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(should be 24506-01-7) owned, as aforesaid, by Minami. On March 12, 1981, Minamiwithdrew the sum of P180,000.00 the equivalent in Philippine Pesos of the sum ofUS$23,595.00 from the Bank on his Account Number 24506-07-1 (should be 24506-01-7). According to ACTC in its Comment, in the early part of 1981, it was TokyoTourist Corporation in Japan which applied with Kyowa Bank, Ltd. also based inTokyo, Japan, for telegraphic transfer of the sum of US$23,595.00 payable to ACTC'saccount with BANKAMERICA, Manila. When the tested telex was received on May10, 1981, employees of BANKAMERICA noted its patent ambiguity.

Notwithstanding, on the following day, BANKAMERICA credited the amount o fUS$23,595.00 to the account of Minami. ACTC claimed that the amount should have

been credited to its account and demanded restitution, but BANKAMERICA refused.On February 18, 1982, ACTC filed suit for damages against BANKAMERICA andMinami before the Trial Court in Pasig for the failure of BANKAMERICA to restitute.Trial court decided in favor of the respondent. CA also affirmed.

Issue: Whether or not there was a stipulation pour au trui .

Held: YES. In Vargas Plow Factory, Inc. vs. Central Bank, it was held that "theopening of a letter of credit in favor of the exporter becomes ultimately but the result ofa stipulation pour autrui " (27 SCRA 84 [1969]). Similarly, when KYOWA askedBANK-AMERICA to pay an amount to a beneficiary (either ACTC or Minami),the contract was between KYOWA and BANK-AMERICA and it had astipulation pour autrui. It is our considered opinion that, in the tested telex, considered either as a patentambiguity or as a latent ambiguity, the beneficiary is Minami. The mention of Account

No. 24506-01-7, as well as the name of Minami, has to be given more weight than themention of the name of ACTC. BANKAMERICA could not have very welldisregarded that account number. It could also be that the mention of ACTC's namewas a further identification of Minami, to prevent payment to a possible another"Toshiyuko Minami" who may not be connected with ACTC. On the other hand, itshould be difficult to concede that, in the tested telex, Account No. 24506-01-7 waserroneously written and should be substituted by Account No. 19842-01-2 in the nameof ACTC.It should be recalled that the tested telex originated from KYOWA at the behest ofTokyo Tourist Corporation with whom ACTC had business dealings. Minami, on theother hand, was the liaison officer of ACTC in Japan. As the entity responsible for thetested telex was Tokyo Tourist Corporation, it can reasonably be concluded that if ithad intended that the US$23,595.00 should be credited to ACTC, upon learning thatthe amount was credited to Minami, it should have gone, together with therepresentatives of ACTC, in protest to KYOWA and lodged a protest. Since that wasnot done, it could well be that Tokyo Tourist Corporation had really intended itsremittance to be credited to Minami. The identity of the beneficiary should be inaccordance with the identification made by KYOWA, and ACTC cannot question thatidentification as it is not a party to the arrangement between KYOWA andBANKAMERICA (see Manila Railroad Co. vs. Compañia Trasatlantica, 38 Phil. 875[1918]).

Case: Marimperio Campañia Naviera, S.A. vs. CA and Union Import and ExportCorporation and Philippine Traders Corporation, Dec. 14, 1987, J. Paras.Facts: In 1964 Philippine Traders Corporation and Union Import and ExportCorporation entered into a joint business venture for the purchase of copra fromIndonesia for sale in Europe. James Liu President and General Manager of the Uniontook charge of the European market and the chartering of a vessel to take the copra toEurope. Peter Yap of Philippine on the other hand, found one P.T. Karkam in DumaiSumatra who had around 4,000 tons of copra for sale. Exequiel Toeg of Interocean wascommissioned to look for a vessel and he found the vessel "SS Paxoi" of Marimperioavailable. Philippine and Union authorized Toeg to negotiate for its charter but withinstructions to keep confidential the fact that they are the real charterers.Consequently on March 21, 1965, in London England, a "Uniform Time Charter" forthe hire of vessel "Paxoi" was entered into by the owner, Marimperio Compania

Naviera, S.A. through its agents N. & J. Vlassopulos Ltd. and Matthews Wrightson,Burbridge, Ltd. to be referred to simply as Matthews, representing Interocean ShippingCorporation, which was made to appear as charterer, although it merely acted in behalfof the real charterers, private respondents herein.The Charterer was however twice in default in its payments which were supposed tohave been done in advance. Hence, Union Import and Export Corporation andPhilippine Traders Corporation filed a complaint with the Court of First Instance ofManila, Branch VIII, against the Unknown Owners of the Vessel "SS Paxoi" forspecific performance with prayer for preliminary attachment. CFI rendered its decisionin favor of Marimperio and against UIEC. CA affirmed.

Issue: Whether or not UI EC has legal capacity to brin g the suit for specifi cperfor mance against Mar imperi o based on the Charter Part y.

Held: NO. It is obvious from the disclosure made in the charter party by the authorized broker, the Overseas Steamship Co., Inc., that the real charterer is the InteroceanShipping Company (which sublet the vessel to Union Import and Export Corporationwhich in turn sublet it to Philippine Traders Corporation).In a sub-lease, there are two leases and two distinct judicial relations althoughintimately connected and related to each other, unlike in a case of assignment of lease,where the lessee transmits absolutely his right, and his personality disappears; thereonly remains in the juridical relation two persons, the lessor and the assignee who isconverted into a lessee (Moreno, Philippine Law Dictionary, 2nd ed., p. 594). In otherwords, in a contract of sub-lease, the personality of the lessee does not disappear;he does not transmit absolutely his rights and obligations to the sub-lessee; andthe sub-lessee generally does not have any direct action against the owner of thepremises as lessor, to require the compliance of the obligations contracted withthe plaintiff as lessee, orvice versa (10 Manresa, Spanish Civil Code, 438).However, there are at least two instances in the Civil Code which allow the lessor to

bring an action directly (accion directa) against the sub-lessee (use and preservation ofthe premises under Art. 1651, and rentals under Article 1652).


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corporation was not a party to that action, and such defense could not in any event beof any avail to it, we proceed to consider the question of the liability of TeodoricaEndencia for damages without refernce to this point.The most that can be said with refernce to the conduct of Teodorica Endencia is thatshe refused to carry out a contract for the sale of certain land and resisted to the last anaction for specific performance in court. The result was that the plaintiff wasprevented during a period of several years from exerting that control over theproperty which he was entitled to exert and was meanwhile unable to dispose ofthe property advantageously.

Case: C.S. Gilchrist vs. E.A. Cuddy, et al. and Jose Fernandez Espejo andMariano Zaldarriaga, Feb. 18, 1915, J. Trent.Facts: Cuddy, a resident of Manila, was the owner of the "Zigomar;" that Gilchrist wasthe owner of a cinematograph theater in Iloilo; that in accordance with the terms of thecontract entered into between Cuddy and Gilchrist the former leased to the latter the"Zigomar" for exhibition in his (Gilchrist's) theater for the week beginning May 26,1913; and that Cuddy willfully violate his contract in order that he might accept theappellant's offer of P350 for the film for the same period. Espejo admitted that he knewthat Cuddy was the owner of the film. He received a letter from his agents in Maniladated April 26, assuring him that he could not get the film for about six weeks . Thearrangement between Cuddy and the appellants for the exhibition of the film by thelatter on the 26th of May were perfected after April 26, so that the six weeks wouldinclude and extend beyond May 26.

Issue: Whether or n ot there was in terference.

Held: YES. In the case at bar the only motive for the interference with the Gilchrist — Cuddy contract on the part of the appellants was a desire to make a profit by exhibitingthe film in their theater. There was no malice beyond this desire; but this fact doesnot relieve them of the legal liability for interfering with that contract and causingits breach. It is, therefore, clear, under the above authorities, that they were liableto Gilchrist for the damages caused by their acts, unless they are relieved fromsuch liability by reason of the fact that they did not know at the time the identityof the original lessee (Gilchrist) of the film.The liability of the appellants arises from unlawful acts and not from contractualobligations, as they were under no such obligations to induce Cuddy to violate hiscontract with Gilchrist. So that if the action of Gilchrist had been one for damages, itwould be governed by chapter 2, title 16, book 4 of the Civil Code. Article 1902 of thatcode provides that a person who, by act or omission, causes damages to another whenthere is fault or negligence, shall be obliged to repair the damage do done. There isnothing in this article which requires as a condition precedent to the liability of a tort-feasor that he must know the identity of a person to whom he causes damages. In fact,the chapter wherein this article is found clearly shows that no such knowledge isrequired in order that the injured party may recover for the damage suffered.But the fact that the appellants' interference with the Gilchrist contract was actionabledid not of itself entitle Gilchrist to sue out an injunction against them.

Case: Estate of K.H. Hemady, deceased vs. Luzon Surety Co., Inc., Nov. 28, 1956,J.B.L. Reyes.Facts: The Luzon Surety Co. had filed a claim against the Estate based on twentydifferent indemnity agreements, or counter bonds, each subscribed by a distinct

principal and by the deceased K. H. Hemady, a surety solidary guarantor) in all ofthem, in consideration of the Luzon Surety Co.’s of having guaranteed, the various

principals in favor of different cred itors. The Luzon Surety Co., prayed for allowance,as a contingent claim, of the value of the twenty bonds it had executed in considerationof the counterbonds, and further asked for judgment for the unpaid premiums anddocumentary stamps affixed to the bonds, with 12 per cent interest thereon. The lowercourt dismissed the claims of Luzon Surety stating,(1) that the premiums due and cost of documentary stamps were not contemplatedunder the indemnity agreements to be a part of the undertaking of the guarantor(Hemady), since they were not liabilities incurred after the execution of thecounterbonds; and(2) that “whatever losses may occur after Hemady’s death, are not chargeable to hisestate, because upon his death he ceased to be guarantor.”

Issue: Whether or n ot Lu zon Sur ety can fi le against the estate a contingent clai m forreimbursement.

Held: YES. Our conclusion is that the solida ry guarantor’s liability is not extinguished by his death, and that in such event, the Luzon Surety Co., had the right to file againstthe estate a contingent claim for reimbursement. It becomes unnecessary now todiscuss the estate’s liability for premium s and stamp taxes, because irrespective of thesolution to this question, the Luzon Surety’s claim did state a cause of action, and itsdismissal was erroneous.The foregoing concept is confirmed by the next Article 2057, that runs as follows:“ART. 2057. — If the guarantor should be convicted in first instance of a crimeinvolving dishonesty or should become insolvent, the creditor may demand anotherwho has all the qualifications required in the preceding article. The case is exceptedwhere the creditor has required and stipulated that a specified person should beguarantor.” From this article it should be immediately apparent that the supervening dishonesty ofthe guarantor (that is to say, the disappearance of his integrity after he has become

bound) does not terminate the contract but merely entitles the creditor to demand areplacement of the guarantor. But the step remains optional in the creditor: it is hisright, not his duty; he may waive it if he chooses, and hold the guarantor to his bargain.Henc e Article 2057 of the present Civil Code is incompatible with the trial court’sstand that the requirement of integrity in the guarantor or surety makes the latter’sundertaking strictly personal, so linked to his individuality that the guarantyautomatically terminates upon his death.The contracts of suretyship entered into by K. H. Hemady in favor of Luzon Surety Co.not being rendered intransmissible due to the nature of the undertaking, nor by thestipulations of the contracts themselves, nor by provision of law, his eventual liability


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thereunder necessarily passed upon his death to his heirs. The contracts, therefore, giverise to contingent claims provable against his estate under section 5, Rule 87 (2 Moran,1952 ed., p. 437; Gaskell & Co. vs. Tan Sit, 43 Phil. 810, 814).“The most common example of the contigent claim is that which arises when a personis bound as surety or guarantor for a principal who is insolvent or dead. Under theordinary contract of suretyship the surety has no claim whatever against his principaluntil he himself pays something by way of satisfaction upon the obligation which issecured. When he does this, there instantly arises in favor of the surety the right tocompel the principal to exonerate the surety. But until the surety has contributedsomething to the payment of the debt, or has performed the secured obligation in wholeor in part, he has no right of action against anybody — no claim that could be reducedto judgment. (May vs. Vann, 15 Pla., 553; Gibson vs. Mithell, 16 Pla., 519; Maxey vs.Carter, 10 Yarg. [Tenn.], 521 Reeves vs. Pulliam, 7 Baxt. [Tenn.], 119; Ernst vs. Nou,63 Wis., 134.)”

Case Discussions:“Contracts take effect only as between the parties, their assigns and heirs, except in

the case where the rights and obligations arising from the contract are nottransmissible by their nature, or by stipulation or by provision of law.” While in our

successional system the responsibility of the heirs for the debts of their decedent cannotexceed the value of the inheritance they receive from him, the principle remains intactthat these heirs succeed not only to the rights of the deceased but also to hisobligations. “The principle on which these decisions rest is not affected by the

provisions of the new Code of Civil Procedure, and, in accordance with that principle,the heirs of a deceased person cannot be held to be “third persons” in relation to anycontracts touching the real estate of their decedent which comes in to their hands byright of inheritance; they take such property subject to all the obligations restingthereon in the hands of him from whom they derive their rights.” The binding effect ofcontracts upon the heirs of the deceased party is not altered by the provision in our

Rules of Court that money debts of a deceased must be liquidated and paid from hisestate before the residue is distributed among said heirs (Rule 89). The reason is thatwhatever payment is thus made from the estate is ultimately a payment by the heirs anddistributees, since the amount of the paid claim in fact diminishes or reduces the sharesthat the heirs would have been entitled to receive.

General rule: A party’s contractual rights and obligations are transmissible to thesuccessors. Ratio: The rule is a consequence of the p rogressive “depersonalization” of

patrimonial rights and duties that, as observed by Victorio Polacco, has characterizedthe history of these institutions. From the Roman concept of a relation from person to

person, the obligation has evolved into a relation from patrimony to patrimony, withthe persons occupying only a representative position, barring those ra

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