Areza v Express Savings Bank GR No 176697

Facts:

Petitioners Cesar V. Areza and LolitaB. Areza maintained two bank deposits with respondent Express
Savings Bank’s Biñan branch: 1) Savings Account No. 004-01-000185-5 and 2) Special Savings Account
No. 004-02-000092-3.

They were engaged in the business of "buy and sell" of brand new and second-hand motor vehicles.
On 2 May 2000, they received an order from a certain Gerry Mambuay (Mambuay) for the purchase
of a second-hand Mitsubishi Pajero and a brand-new Honda CRV.

The buyer, Mambuay, paid petitioners with nine (9) Philippine Veterans Affairs Office (PVAO) checks
payable to different payees and drawn against the Philippine Veterans Bank (drawee), each valued at
Two Hundred Thousand Pesos (₱200,000.00) for a total of One Million Eight Hundred Thousand
Pesos (₱1,800,000.00).

About this occasion, petitioners claimed that Michael Potenciano (Potenciano), the branch manager
of respondent Express Savings Bank (the Bank) was present during the transaction and immediately
offered the services of the Bank for the processing and eventual crediting of the said checks to
petitioners’ account.4 On the other hand,Potenciano countered that he was prevailed upon to accept
the checks by way of accommodation of petitioners who were valued clients of the Bank.5

On 3 May 2000, petitioners deposited the said checks in their savings account with the Bank. The
Bank, inturn, deposited the checks with its depositary bank, Equitable-PCI Bank, in Biñan,Laguna.
Equitable-PCI Bank presented the checks to the drawee, the Philippine Veterans Bank, which
honored the checks.

On 6 May 2000, Potenciano informedpetitioners that the checks they deposited with the Bank
werehonored. He allegedly warned petitioners that the clearing of the checks pertained only to the
availability of funds and did not mean that the checks were not infirmed.6 Thus, the entire amount of
₱1,800,000.00 was credited to petitioners’ savings account. Based on this information, petitioners
released the two cars to the buyer.

Sometime in July 2000, the subjectchecks were returned by PVAO to the drawee on the ground that
the amount on the face of the checks was altered from the original amount of ₱4,000.00 to
₱200,000.00. The drawee returned the checks to Equitable-PCI Bank by way of Special Clearing
Receipts. In August 2000, the Bank was informed by Equitable-PCI Bank that the drawee dishonored
the checks onthe ground of material alterations. Equitable-PCI Bank initially filed a protest with the
Philippine Clearing House. In February 2001, the latter ruled in favor of the drawee Philippine
Veterans Bank. Equitable-PCI Bank, in turn, debited the deposit account of the Bank in the amount of
₱1,800,000.00.

The Bank insisted that they informed petitioners of said development in August 2000 by furnishing
them copies of the documents given by its depositary bank.7 On the other hand, petitioners
maintained that the Bank never informed them of these developments.

On 9 March 2001, petitioners issued a check in the amount of ₱500,000.00. Said check was
dishonored by the Bank for the reason "Deposit Under Hold." According topetitioners, the Bank
unilaterally and unlawfully put their account with the Bank on hold. On 22 March 2001, petitioners’
counsel sent a demand letter asking the Bank to honor their check. The Bank refused to heed their

1
request and instead, closed the Special Savings Account of the petitioners with a balance of
₱1,179,659.69 and transferred said amount to their savings account. The Bank then withdrew the
amount of ₱1,800,000.00representing the returned checks from petitioners’ savings account.

Acting on the alleged arbitrary and groundless dishonoring of their checks and the unlawful and
unilateral withdrawal from their savings account, petitioners filed a Complaint for Sum of Money
with Damages against the Bank and Potenciano with the RTC of Calamba.

Issue:

Petitioners insist that the Bank cannotbe considered a creditor of the petitioners because it should
have made a claim of the amount of ₱1,800,000.00 from Equitable-PCI Bank, its own depositary bank
and the collecting bank in this case and not from them.

Ruling:

Petitioners insist that the Bank cannotbe considered a creditor of the petitioners because it should
have made a claim of the amount of ₱1,800,000.00 from Equitable-PCI Bank, its own depositary bank
and the collecting bank in this case and not from them.

The Bank cannot set-off the amount it paid to Equitable-PCI Bank with petitioners’ savings account.
Under Art. 1278 of the New Civil Code, compensation shall take place when two persons, in their
own right, are creditors and debtors of each other. And the requisites for legal compensation are:

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.

It is well-settled that the relationship of the depositors and the Bank or similar institution is that of
creditor-debtor. Article 1980 of the New Civil Code provides that fixed, savings and current deposits
of money in banks and similar institutions shall be governed by the provisions concerning simple
loans. The bank is the debtorand the depositor is the creditor. The depositor lends the bank money
and the bank agrees to pay the depositor on demand. The savings deposit agreement between the
bank and the depositor is the contract that determines the rights and obligations of the parties. 33

But as previously discussed, petitioners are not liable for the deposit of the altered checks. The Bank,
asthe depositary and collecting bank ultimately bears the loss. Thus, there being no indebtedness to
the Bank on the part of petitioners, legal compensation cannot take place. DAMAGES

The Bank incurred a delay in informing petitioners of the checks’ dishonor. The Bank was informed of
the dishonor by Equitable-PCI Bank as early as August 2000 but it was only on 7 March 2001 when
the Bank informed petitioners that it will debit from their account the altered amount. This delay is

2
tantamount to negligence on the part of the collecting bank which would entitle petitioners to an
award for damages under Article 1170 of the New Civil Code which reads:

Art. 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay,
and those who in any manner contravene the tenor thereof, are liable for damages.

The damages in the form of actual or compensatory damages represent the amount debited by the
Bank from petitioners’ account.

3
Naga Telephone Co v CA 230 SCRA 351

Facts:

Petitioner Naga Telephone Co., Inc. (NATELCO) is a telephone company rendering local as well as long
distance telephone service in Naga City while private respondent 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.

On November 1, 1977, the parties entered into a contract (Exh. "A") for the use by petitioners in the
operation of its telephone service the electric light posts of private respondent in Naga City. In
consideration therefor, petitioners agreed to install, free of charge, ten (10) telephone connections
for the use by private respondent in the following places:

After the contract had been enforced for over ten (10) years, private respondent filed on January 2,
1989 with the Regional Trial Court of Naga City (Br. 28) C.C. No. 89-1642 against petitioners for
reformation of the contract with damages, on the ground that it is too one-sided in favor of
petitioners; that it is not in conformity with the guidelines of the National Electrification
Administration (NEA) which direct that the reasonable compensation for the use of the posts is
P10.00 per post, per month; that after eleven (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; 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.

In petitioners' answer to the first cause of action, they averred that it should be dismissed because
(1) it does not sufficiently state a cause of action for reformation of contract; (2) it is barred by
prescription, the same having been filed more than ten (10) years after the execution of the contract;
and (3) it is barred by estoppel, since private respondent seeks to enforce the contract in the same
action. Petitioners further alleged that their utilization of private respondent's posts could not have
caused their deterioration because they have already been in use for eleven (11) years; and that the
value of their expenses for the ten (10) telephone lines long enjoyed by private respondent free of
charge are far in excess of the amounts claimed by the latter for the use of the posts, so that if there
was any inequity, it was suffered by them.

Issue:

Petitioners assert earnestly that Article 1267 of the New Civil Code is not applicable primarily
because the contract does not involve the rendition of service or a personal prestation and it is not
for future service with future unusual change.

Ruling:

Article 1267 speaks of "service" which has become so difficult. Taking into consideration the rationale
behind this provision,9 the term "service" should be understood as referring to the "performance" of
the obligation. In the present case, the obligation of private respondent consists in allowing
petitioners to use its posts in Naga City, which is the service contemplated in said article.

4
Furthermore, a bare reading of this article reveals that it is not a requirement thereunder that the
contract be for future service with future unusual change. According to Senator Arturo M.
Tolentino,10 Article 1267 states in our law the doctrine of unforseen 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.

The ruling in the Occeña case is not applicable because we agree with respondent court that the
allegations in private respondent's complaint and the evidence it has presented sufficiently made out
a cause of action under Article 1267. We, therefore, release the parties from their correlative
obligations under the contract. However, our disposition of the present controversy does not end
here. We have to take into account the possible consequences of merely releasing the parties
therefrom: petitioners will remove the telephone wires/cables in the posts of private respondent,
resulting in disruption of their service to the public; while private respondent, in consonance with
the contract12 will return all the telephone units to petitioners, causing prejudice to its business. We
shall not allow such eventuality. Rather, we require, as ordered by the trial court: 1) petitioners to
pay private respondent for the use of its posts in Naga City and in the towns of Milaor, Canaman,
Magarao and Pili, Camarines Sur and in other places where petitioners use private respondent's
posts, the sum of ten (P10.00) pesos per post, per month, beginning January, 1989; and 2) private
respondent to pay petitioner the monthly dues of all its telephones at the same rate being paid by
the public beginning January, 1989. The peculiar circumstances of the present case, as distinguished
further from the Occeña case, necessitates exercise of our equity jurisdiction.13 By way of emphasis,
we reiterate the rationalization of respondent court that:

5
Comglasco v Santos Car Check GR No 202989

Facts:

On October 4, 2001, Comglasco advised Santos through a letter2 that it was pre-terminating their
lease contract effective December 1, 2001. Santos refused to accede to the pre-termination,
reminding Comglasco that their contract was for five years. On January 15, 2002, Comglasco vacated
the leased premises and stopped paying any further rentals. Santos sent several demand letters,
which Comglasco completely ignored. On September 15, 2003, Santos sent its final demand
letter,3 which Comglasco again ignored. On October 20, 2003, Santos filed suit for breach of
contract.4

Issue:

Comglasco insists that under Article 1267 of the Civil Code it is exempted from its obligation under
the contract, because its business setback is the "cause" contemplated in their lease which
authorized it to pre-terminate the same. Article 1267 provides:

Ruling:

In Philippine National Construction Corporation v. CA12 (PNCC), which also involves the termination of
a lease of property by the lessee "due to financial, as well as technical, difficulties,"13 the Court ruled:

The obligation to pay rentals or deliver the thing in a contract of lease falls within the prestation "to
give"; hence, it is not covered within the scope of Article 1266. At any rate, the unforeseen event and
causes mentioned by petitioner are not the legal or physical impossibilities contemplated in said
article. Besides, petitioner failed to state specifically the circumstances brought about by "the abrupt
change in the political climate in the country" except the alleged prevailing uncertainties in
government policies on infrastructure projects.1âwphi1

The principle of rebus sic stantibus neither fits in with the facts of the case. Under this theory, the
parties stipulate in the light of certain prevailing conditions, and once these conditions cease to exist,
the contract also ceases to exist. This theory is said to be the basis of Article 1267 of the Civil Code,
which provides:

Art. 1267. When the service has become so difficult as to be manifestly beyond the contemplation of
the parties, the obligor may also be released therefrom, in whole or in part.

This article, which enunciates the doctrine of unforeseen events, is not, however, an absolute
application of the principle of rebus sic stantibus, which would endanger the security of contractual
relations. The parties to the contract must be presumed to have assumed the risks of unfavorable
developments. It is therefore only in absolutely exceptional changes of circumstances that equity
demands assistance for the debtor.

In this case, petitioner wants this Court to believe that the abrupt change in the political climate of
the country after the EDSA Revolution and its poor financial condition "rendered the performance of
the lease contract impractical and inimical to the corporate survival of the petitioner."

6
This Court cannot subscribe to this argument. As pointed out by private respondents:

xxxx

Anent petitioner’s alleged poor financial condition, the same will neither release petitioner from the
binding effect of the contract of lease. As held in Central Bank v. Court of Appeals, cited by private
respondents, mere pecuniary inability to fulfill an engagement does not discharge a contractual
obligation, nor does it constitute a defense to an action for specific performance.14

Relying on Article 1267 of the Civil Code to justify its decision to pre-terminate its lease with Santos,
Comglasco invokes the 1997 Asian currency crisis as causing it much difficulty in meeting its
obligations. But in PNCC,15 the Court held that the payment of lease rentals does not involve a
prestation "to do" envisaged in Articles 1266 and 1267 which has been rendered legally or physically
impossible without the fault of the obligor-lessor. Article 1267 speaks of a prestation involving
service which has been rendered so difficult by unforeseen subsequent events as to be manifestly
beyond the contemplation of the parties. To be sure, the Asian currency crisis befell the region from
July 1997 and for sometime thereafter, but Comglasco cannot be permitted to blame its difficulties
on the said regional economic phenomenon because it entered into the subject lease only on August
16, 2000, more than three years after it began, and by then Comglasco had known what business
risks it assumed when it opened a new shop in Iloilo City.

This situation is no different from the Court’s finding in PNCC wherein PNCC cited the assassination
of Senator Benigno Aquino Jr. (Senator Aquino) on August 21, 1983 and the ensuing national political
and economic crises as putting it in such a difficult business climate that it should be deemed
released from its lease contract. The Court held that the political upheavals, turmoils, almost daily
mass demonstrations, unprecedented inflation, and peace and order deterioration which followed
Senator Aquino’s death were a matter of judicial notice, yet despite this business climate, PNCC
knowingly entered into a lease with therein respondents on November 18, 1985, doing so with open
eyes of the deteriorating conditions of the country. The Court rules now, as in PNCC, that there are
no "absolutely exceptional changes of circumstances that equity demands assistance for the
debtor."1

7
Tagaytay Realty v Gacutan GR No 160033

Facts:

On September 6, 1976, the respondent 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.5 Earlier, on June 30, 1976, the petitioner
executed an express undertaking in favor of the respondent, as follows:

In his letter dated November 12, 1979,7 the respondent notified the petitioner that he was
suspending his amortizations because the amenities had not been constructed in accordance with
the undertaking. 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,8 the
petitioner did not reply. Instead, on June 10, 1985, the petitioner sent to him a statement of account
demanding the balance of the price, plus interest and penalty.9 He refused to pay the interest and
penalty.

On October 4, 1990, 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.

In its answer,11 the petitioner sought to be excused from performing its obligations under the
contract, invoking Article 1267 of the Civil Code as its basis. 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.

Ruling:

To start with, the law is not on the side of the petitioner.

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. The provision reads:

Section 20. Time of Completion.- Every owner or developer shall construct and provide the facilities,
improvements, infrastructures and other forms of development, including water supply and lighting
facilities, which are offered and indicated in the approved subdivision or condominium plans,
brochures, prospectus, printed matters, letters or in any form of advertisement, within one year from
the date of the issuance of the license for the subdivision or condominium project or such other
period of time as maybe fixed by the Authority.

Pursuant to Section 30 of Presidential Decree No. 957,22 the amenities, once constructed, are to be
maintained by the developer like the petitioner until a homeowners’ association has been organized
to manage the amenities.

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

8
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.23 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.24 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.

9
Trans Pacific Ind v CA 235 SCRA 494

Facts:

Sometime in 1979, petitioner applied for and was granted several financial accommodations
amounting to P1,300,000.00 by respondent Associated Bank. The loans were evidenced and secured
by four (4) promissory notes, a real estate mortgage covering three parcels of land and a chattel
mortgage over petitioner's stock and inventories.

Unable to settle its obligation in full, petitioner requested for, and was granted by respondent bank, a
restructuring of the remaining indebtedness which then amounted to P1,057,500.00, as all the
previous payments made were applied to penalties and interests.

To secure the re-structured loan of P1,213,400.00, three new promissory notes were executed by
Trans-Pacific as follows: (1) Promissory Note No. TL-9077-82 for the amount of P1,050,000.00
denominated as working capital; (2) Promissory Note No. TL-9078-82 for the amount of P121,166.00
denominated as restructured interest; (3) Promissory Note No. TL-9079-82 for the amount of
P42,234.00 denominated similarly as restructured interest (Rollo. pp. 113-115).

The mortgaged parcels of land were substituted by another mortgage covering two other parcels of
land and a chattel mortgage on petitioner's stock inventory. The released parcels of land were then
sold and the proceeds amounting to P1,386,614.20, according to petitioner, were turned over to the
bank and applied to Trans-Pacific's restructured loan. Subsequently, respondent bank returned the
duplicate original copies of the three promissory notes to Trans-Pacific with the word "PAID"
stamped thereon.

Despite the return of the notes, or on December 12, 1985, Associated Bank demanded from Trans-
Pacific payment of the amount of P492,100.00 representing accrued interest on PN No. TL-9077-82.
According to the bank, the promissory notes were erroneously released.

Initially, Trans-Pacific expressed its willingness to pay the amount demanded by respondent bank.
Later, it had a change of heart and instead initiated an action before the Regional Trial Court of
Makati, Br. 146, for specific performance and damages. There it prayed that the mortgage over the
two parcels of land be released and its stock inventory be lifted and that its obligation to the bank be
declared as having been fully paid.

Issue:

RESPONDENT APPELLATE COURT ERRED IN HOLDING THAT WITH THE DELIVERY OF THE DOCUMENTS
EVIDENCING THE PRINCIPAL OBLIGATION, THE ANCILLARY OBLIGATION OF PAYING INTEREST WAS
NOT RENOUNCED CONTRARY TO THE PROVISIONS OF ART. 1273 OF THE CIVIL CODE AND THE
UNDISPUTED EVIDENCE ON RECORD.

Ruling:

The above disquisition finds no factual support, however, per review of the records. The presumption
created by the Art. 1271 of the Civil Code is not conclusive but merely prima facie. If there be no
evidence to the contrary, the presumption stands. Conversely, the presumption loses its legal efficacy

10
in the face of proof or evidence to the contrary. In the case before us, we find sufficient justification
to overthrow the presumption of payment generated by the delivery of the documents evidencing
petitioners indebtedness.

It may not be amiss to add that Article 1271 of the Civil Code raises a presumption, not of payment,
but of the renunciation of the credit where more convincing evidence would be required than what
normally would be called for to prove payment. The rationale for allowing the presumption of
renunciation in the delivery of a private instrument is that, unlike that of a public instrument, there
could be just one copy of the evidence of credit. Where several originals are made out of a private
document, the intendment of the law would thus be to refer to the delivery only of the
original original rather than to the original duplicate of which the debtor would normally retain a
copy. It would thus be absurd if Article 1271 were to be applied differently.

11
Silahis v IAC 180 SCRA 21

Facts:

A review of the record shows that on various dates in October, November and December, 1975,
Gregorio de Leon (De Leon for short) doing business under the name and style of Mark Industrial
Sales sold and delivered to Silahis Marketing Corporation (Silahis for short) various items of
merchandise covered by several invoices in the aggregate amount of P 22,213.75 payable within
thirty (30) days from date of the covering invoices. Allegedly due to Silahis' failure to pay its account
upon maturity despite repeated demands, de Leon filed before the then Court of First Instance of
Manila a complaint for the collection of the said accounts including accrued interest thereon in the
amount of P 661.03 and attorney's fees of P 5,000.00 plus costs of litigation.

The answer admitted the allegations of the complaint insofar as the invoices were concerned but
presented as affirmative defenses; [al a debit memo for P 22,200.00 as unrealized profit for a
supposed commission that Silahis should have received from de Leon for the sale of sprockets in the
amount of P 111,000.00 made directly to Dole Philippines, Incorporated by the latter sometime in
August 1975 without coursing the same through the former allegedly in violation of the usual
practice concerning sale of merchandise to Dole Philippines, Inc.; and [b] Silahis' claim that it is
entitled to return the stainless steel screen covered by Exhibits '6-A' and '6-B' which was found
defective by its client, Borden International, Davao City, and to have the corresponding amount
cancelled from its account with de Leon.

De Leon appealed from the said decision insofar as it directed partial compensation and its failure to
award interest on his principal claim as well as attomey's fees in his favor. In a decision dated March
1 7, 1986, 3 respondent Intermediate Appellate Court 4 set aside the decision of the lower court and
dismissed herein petitioner's (therein defendant- appellee's) counterclaim for lack of factual or legal
basis. The appellate court found that there was no agreement, verbal or otherwise, nor was there
any contractual obligation between De Leon and Silahis prohibiting any direct sales to Dole
Philippines, Inc. by de Leon; nor was there anything in the debit memo obligating de Leon to pay a
commission to Silahis for the sale of P 111,000.00 worth of sprockets to Dole Philippines although in
the past, the former did supply certain items to the latter for delivery to Dole Philippines,
Incorporated.

Issue:

whether or not private respondent is liable to the petitioner for the commission or margin for the
direct sale which the former concluded and consummated with Dole Philippines, Incorporated
without coursing the same through herein petitioner.

Ruling:

We have carefully gone over the record of this case particularly the debit memo upon which
petitioner's counterclaim rests and found nothing contained therein to show that private respondent
obligated himself to set-off or compensate petitioner's outstanding accounts with the alleged
unrealized commission from the assailed sale of sprockets in the amount of P 111,000.00 to Dole
Philippines, Inc.

12
It must be remembered that compensation takes place when two persons, in their own right, are
creditors and debtors to each other. Article 1279 of the Civil Code provides that: "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.

When all the requisites mentioned in Art. 1279 of the Civil Code are present, compensation takes
effect by operation of law, even without the consent or knowledge of the creditors and
debtors.5 Article 1279 requires, among others, that in order that legal compensation shall take place,
"the two debts be due" and "they be liquidated and demandable." Compensation is not proper
where the claim of the person asserting the set-off against the other is not clear nor liquidated;
compensation cannot extend to unliquidated, disputed claim existing from breach of contract. 6

Undoubtedly, petitioner admits the validity of its outstanding accounts with private respondent in
the amount of P 22,213.75 as contained in its answer. But whether private respondent is liable to pay
the petitioner a 20% margin or commission on the subject sale to Dole Philippines, Inc. is vigorously
disputed. This circumstance prevents legal compensation from taking place.

The Court agrees with respondent appellate court that there is no evidence on record from which it
can be inferred that there was any agreement between the petitioner and private respondent
prohibiting the latter from selling directly to Dole Philippines, Incorporated. Definitely, it cannot be
asserted that the debit memo was a contract binding between the parties considering that the same,
as correctly found by the appellate court, was not signed by private respondent nor was there any
mention therein of any commitment by the latter to pay any commission to the former involving the
sale of sprockets to Dole Philippines, Inc. in the amount of P 111,000.00. Indeed, such document can
be taken as self-serving with no probative value absent a showing or at the very least an inference,
that the party sought to be bound assented to its contents or showed conformity thereto.

In fact the letter written by private respondent's lawyer dated March 5,1975 7 in reply to petitioner's
letter dated February 19, 1976 transmitting its Debit Memo No. 1695 8 further strengthens private
respondent's stand that it never agreed to give petitioner any commission on the direct sale to Dole
Philippines, Inc. by its company because said letter denied any utilization of petitioners personnel
and facilities at its Davao Branch in th

13
Francia v CA 162 SCRA 753

Facts:

Engracio Francia is the registered owner of a residential lot and a two-story house built upon it
situated at Barrio San Isidro, now District of Sta. Clara, Pasay City, Metro Manila. The lot, with an area
of about 328 square meters, is described and covered by Transfer Certificate of Title No. 4739
(37795) of the Registry of Deeds of Pasay City.

On October 15, 1977, a 125 square meter portion of Francia's property was expropriated by the
Republic of the Philippines for the sum of P4,116.00 representing the estimated amount equivalent
to the assessed value of the aforesaid portion.

Since 1963 up to 1977 inclusive, Francia failed to pay his real estate taxes. Thus, on December 5,
1977, his property was sold at public auction by the City Treasurer of Pasay City pursuant to Section
73 of Presidential Decree No. 464 known as the Real Property Tax Code in order to satisfy a tax
delinquency of P2,400.00. Ho Fernandez was the highest bidder for the property.

Francia was not present during the auction sale since he was in Iligan City at that time helping his
uncle ship bananas.

On March 3, 1979, Francia received a notice of hearing of LRC Case No. 1593-P "In re: Petition for
Entry of New Certificate of Title" filed by Ho Fernandez, seeking the cancellation of TCT No. 4739
(37795) and the issuance in his name of a new certificate of title. Upon verification through his
lawyer, Francia discovered that a Final Bill of Sale had been issued in favor of Ho Fernandez by the
City Treasurer on December 11, 1978. The auction sale and the final bill of sale were both annotated
at the back of TCT No. 4739 (37795) by the Register of Deeds.

On March 20, 1979, Francia filed a complaint to annul the auction sale.

Issue:

Francia contends that his tax delinquency of P2,400.00 has been extinguished by legal compensation.
He claims that the government owed him P4,116.00 when a portion of his land was expropriated on
October 15, 1977. Hence, his tax obligation had been set-off by operation of law as of October 15,
1977.

Ruling:

There is no legal basis for the contention. By legal compensation, obligations of persons, who in their
own right are reciprocally debtors and creditors of each other, are extinguished (Art. 1278, Civil
Code). The circumstances of the case do not satisfy the requirements provided by Article 1279, to
wit:

(1) that each one of the obligors be bound principally and that he be at the same time a principal
creditor of the other;

xxx xxx xxx

14
(3) that the two debts be due.

xxx xxx xxx

This principal contention of the petitioner has no merit. We have consistently ruled that there can be
no off-setting of taxes against the claims that the taxpayer may have against the government. A
person cannot refuse to pay a tax on the ground that the government owes him an amount equal to
or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit
against the government.

In the case of Republic v. Mambulao Lumber Co. (4 SCRA 622), this Court ruled that Internal Revenue
Taxes can not be the subject of set-off or compensation.

There are other factors which compel us to rule against the petitioner. The tax was due to the city
government while the expropriation was effected by the national government. Moreover, the
amount of P4,116.00 paid by the national government for the 125 square meter portion of his lot
was deposited with the Philippine National Bank long before the sale at public auction of his
remaining property. Notice of the deposit dated September 28, 1977 was received by the petitioner
on September 30, 1977. The petitioner admitted in his testimony that he knew about the P4,116.00
deposited with the bank but he did not withdraw it. It would have been an easy matter to withdraw
P2,400.00 from the deposit so that he could pay the tax obligation thus aborting the sale at public
auction.

Petitioner had one year within which to redeem his property although, as well be shown later, he
claimed that he pocketed the notice of the auction sale without reading it.

15
SM Systems Corp v Camerino GR No. 1758591

Facts:

Victoria Homes, Inc. (Victoria Homes) was the registered owner of three (3) lots (subject lots),
covered by Transfer Certificate of Title (TCT) Nos. (289237) S-6135, S-72244, and (289236) S-35855,
with an area of 109, 451 square meters, 73,849 sq m, and 109,452 sq m, respectively.10 These lots are
situated in Barrio Bagbagan, Muntinlupa, Rizal (now Barangay Tunasan, Muntinlupa City, Metro
Manila).

Since 1967, respondents [Oscar], [Efren], [Cornelio], [Domingo] and (Nolasco] (herein represented by
his heirs) were farmers-tenants of Victoria Homes, cultivating and planting rice and com on the lots.

On February 9, 1983 and July 12, 1983, Victoria Homes, without notifying [the farmers], sold the
subject lots to Springsun Management Systems Corporation (Springsun), the predecessor-in-interest
of [SMS]. The Deeds of Sale were registered with the Registry of Deeds of Rizal. Accordingly, TCT Nos.
(289237) S-6135, (289236) S-35855, and S-72244 in the name of Victoria Homes were cancelled and,
in lieu thereof, TCT Nos. 120541, 120542, and 123872 were issued in the name of Springsun.
Springsun subsequently mortgaged the subject lots to Banco Filipino Savings and Mortgage Bank
(Banco Filipino) as security for its various loans amounting to ₱ll,545,000.00. When Springsun failed
to pay its loans, the mortgage was foreclosed extra-judicially. At the public auction sale, the lots were
sold to Banco Filipino, being the highest bidder, but they were eventually redeemed by Springsun.

On March 7, 1995, [the farmers] filed with the [RTC], Branch 256, Muntinlupa City, a complaint
against Springsun and Banco Filipino for Prohibition/Certiorari, Reconveyance/Redemption,
Damages, Injunction with Preliminary Injunction and Temporary Restraining Order or, simply, an
action for Redemption. On January 25, 2002, the RTC rendered a decision in favor of [the farmers],
authorizing them to redeem the subject lots from Springsun for the total price of ₱9,790,612.00. On
appeal to the CA, the appellate court affirmed the RTC decision with a modification on the award of
attorney's fees

On August 20, 2005, [SMS] and [the farmers] (except [Oscar]) executed a document, denominated
as Kasunduan,12 wherein the latter agreed to receive ₱300,000.00 each from the former, as
compromise settlement.

Issue:

1. Whether or not the Kasunduan effectively novated the judgment obligation.

Ruling:

The compromise agreements

executed by and between SMS and
four of the farmers are valid, thus,
a novation of the judgment in the
redemption case.

16
A compromise is a contract whereby the parties, by making reciprocal concessions, avoid a litigation
or put an end to one already commenced."35

Compromise is a form of amicable settlement that is not only allowed, but also encouraged in civil
cases. Contracting parties may establish such stipulations, clauses, terms, and conditions as they
deem convenient, provided that these are not contrary to law, morals, good customs, public order, or
public policy.36

Rights may be waived through a compromise agreement, notwithstanding a final judgment that has
already settled the rights of the contracting parties. To be binding, the compromise must be shown
to have been voluntarily, freely and intelligently executed by the parties, who had full knowledge of
the judgment.

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. As provided by the law on contracts, a valid
compromise must have the following elements: (1) the consent of the parties to the compromise; (2)
an object certain that is the subject matter of the compromise; and (3) the cause of the obligation
that is established.39

In the course of the proceedings of the instant case, the farmers themselves raised no challenge
relative to the existence of the elements of a valid contract. The execution of the compromise
agreements between SMS and four of the farmers is an undisputed fact. There are likewise no claims
of vitiated consent and no proof that the agreements were "rescissible, voidable, unenforceable, or
void."40 Moreover, the Court does not find the amount of ₱300,000.00 paid to each of the four
farmers as unconscionable especially in the fight of Efren's subsequent declaration that they tilled
the land on their own initiative, without procuring anybody's permission, and sans a harvest sharing
agreement.

17
Arco Pulp v Lim GR No 206806

Facts:

Dan T. Lim works in the business of supplying scrap papers, cartons, and other raw materials, under
the name Quality Paper and Plastic Products, Enterprises, to factories engaged in the paper mill
business.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.6

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.8 When he deposited the check on April 18, 2007, it was
dishonored for being drawn against a closed account.9

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.

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.13

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.16

On September 19, 2008, the trial court rendered a judgment in favor of Arco Pulp and Paper and
dismissed the complaint, holding that when 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.17

Dan T. Lim appealed18 the judgment with the Court of Appeals. According to him, novation did not
take place since the memorandum of agreement between Arco Pulp and Paper and Eric Sy was an
exclusive and private agreement between them. He argued that if his name was mentioned in the
contract, it was only for supplying the parties their required scrap papers, where his conformity
through a separate contract was indispensable.

Issue:

1. Whether the obligation between the parties was extinguished by novation

18
Ruling:

The memorandum of
agreement did not constitute
a novation of the original
contract

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."36

Novation was extensively discussed by this court in Garcia v. Llamas:37

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.

19
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.38 (Emphasis supplied)

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.40 (Emphasis supplied)

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:

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

20
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.

21
Bognot v RRI Lending GR No 180144

Facts:

RRI Lending Corporation (respondent) is an entity engaged in the business of lending money to its
borrowers within Metro Manila. It is duly represented by its General Manager, Mr. Dario J. Bernardez
(Bernardez).

Sometime in September 1996, the petitioner and his younger brother, Rolando A. Bognot
(collectively referred to as the "Bognot siblings"), applied for and obtained a loan of Five Hundred
Thousand Pesos (₱500,000.00) from the respondent, payable on November 30, 1996.4 The loan was
evidenced by a promissory note and was secured by a post dated check5 dated November 30, 1996.

Evidence on record shows that the petitioner renewed the loan several times on a monthly basis. He
paid a renewal fee of ₱54,600.00 for each renewal, issued a new post-dated checkas security, and
executed and/or renewed the promissory note previouslyissued. The respondent on the other hand,
cancelled and returned to the petitioner the post-dated checks issued prior to their renewal.

Sometime in March 1997, the petitioner applied for another loan renewal. He again executed as
principal and signed Promissory Note No. 97-0356 payable on April 1, 1997; his co-maker was again
Rolando. As security for the loan, the petitioner also issued BPI Check No. 0595236, 7 post dated to
April 1, 1997.8

Subsequently, the loan was again renewed on a monthly basis (until June 30, 1997), as shown by the
Official Receipt No. 7979 dated May 5, 1997, and the Disclosure Statement dated May 30, 1997 duly
signed by Bernardez. The petitioner purportedly paid the renewal fees and issued a post-dated check
dated June 30, 1997 as security. As had been done in the past, the respondent superimposed the
date "June 30, 1997" on the upper right portion of Promissory Note No. 97-035 to make it appear
that it would mature on the said date.

Several days before the loan’s maturity, Rolando’s wife, Julieta Bognot (Mrs. Bognot), went to the
respondent’s office and applied for another renewal of the loan. She issued in favor of the
respondent Promissory Note No. 97-051, and International Bank Exchange (IBE) Check No.
00012522, dated July 30, 1997, in the amount of ₱54,600.00 as renewal fee.

On the excuse that she needs to bring home the loan documents for the Bognot siblings’ signatures
and replacement, Mrs. Bognot asked the respondent’s clerk to release to her the promissory note,
the disclosure statement, and the check dated July 30, 1997. Mrs. Bognot, however, never returned
these documents nor issued a new post-dated check. Consequently, the respondent sent the
petitioner follow-up letters demanding payment of the loan, plus interest and penalty charges. These
demands went unheeded.

On November 27, 1997, the respondent, through Bernardez, filed a complaint for sum of money
before the Regional Trial Court (RTC) against the Bognot siblings. The respondent mainly alleged that
the loan renewal payable on June 30, 1997 which the Bognot siblings applied for remained unpaid;
that before June30, 1997, Mrs. Bognot applied for another loan extension and issued IBE Check No.
00012522 as payment for the renewal fee; that Mrs. Bognot convinced the respondent’s clerk to
release to her the promissory note and the other loan documents; that since Mrs. Bognot never
issued any replacement check, no loanextension took place and the loan, originally payable on June
30, 1997, became due on this date; and despite repeated demands, the Bognot siblings failed to pay
their joint and solidary obligation.

22
In his Answer,10 the petitioner claimed that the complaint states no cause of action because the
respondent’s claim had been paid, waived, abandoned or otherwise extinguished. He denied being a
party to any loan application and/or renewal in May 1997. He also denied having issued the BPI
check post-dated to June 30, 1997, as well as the promissory note dated June 30, 1997, claiming that
this note had been tampered. He claimed that the one (1) month loan contracted by Rolando and his
wife in November 1996 which was lastly renewed in March 1997 had already been fully paid and
extinguished in April 1997.

Ruling:

Jurisprudence tells us that one who pleads payment has the burden of proving it;17 the burden rests
on the defendant to prove payment, rather than on the plaintiff to prove non-payment.18 Indeed,
once the existence of an indebtedness is duly established by evidence, the burden of showing with
legal certainty that the obligation has been discharged by payment rests on the debtor.19

In the present case, the petitioner failed to satisfactorily prove that his obligation had already been
extinguished by payment. As the CA correctly noted, the petitioner failed to present any evidence
that the respondent had in fact encashed his check and applied the proceeds to the payment of the
loan. Neither did he present official receipts evidencing payment, nor any proof that the check had
been dishonored.

Although Article 1271 of the Civil Code provides for a legal presumption of renunciation of action (in
cases where a private document evidencing a credit was voluntarily returned by the creditor to the
debtor), this presumption is merely prima facieand is not conclusive; the presumption loses efficacy
when faced with evidence to the contrary.

Moreover, the cited provision merely raises a presumption, not of payment, but of the renunciation
of the credit where more convincing evidence would be required than what normally would be
called for to prove payment.21 Thus, reliance by the petitioner on the legal presumption to prove
payment is misplaced.

To reiterate, no cash payment was proven by the petitioner. The cancellation and return of the check
dated April 1, 1997, simply established his renewal of the loan – not the fact of payment.
Furthermore, it has been established during trial, through repeated acts, that the respondent
cancelled and surrendered the post-dated check previously issued whenever the loan is renewed.

23
The Petitioner’s BelatedClaim of Novation by Substitution May no Longer be Entertained

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.36

Article 1293 of the Civil Code defines novation as follows:

"Art. 1293. Novation which consists insubstituting a new debtor in the place of the originalone, 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."

To give novation legal effect, the original debtor must be expressly released from the obligation, and
the new debtor must assume the original debtor’s place in the contractual relationship. Depending
on who took the initiative, novation by substitution of debtor has two forms – substitution by
expromision and substitution by delegacion. The difference between these two was explained in
Garcia v. Llamas:37

"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."

In both cases, the original debtor must be released from the obligation; otherwise, there can be no
valid novation.38 Furthermore, novation by substitution of debtor must alwaysbe made with the
consent of the creditor.39

The petitioner contends thatnovation took place through a substitution of debtors when Mrs. Bognot
renewed the loan and assumed the debt. He alleged that Mrs. Bognot assumed the obligation by
paying the renewal fees and charges, and by executing a new promissory note. He further claimed
that she issued her own check40 to cover the renewal fees, which fact, according to the petitioner,
was done with the respondent’s consent.

Contrary to the petitioner’s contention, Mrs. Bognot did not substitute the petitioner as debtor. She
merely attempted to renew the original loan by executing a new promissory note41 and check. The
purported one month renewal of the loan, however, did not push through, as Mrs. Bognot did not
return the documents or issue a new post dated check. Since the loan was not renewed for another
month, the originaldue date, June 30,1997, continued to stand.

More importantly, the respondent never agreed to release the petitioner from his obligation. That
the respondent initially allowed Mrs. Bognot to bring home the promissory note, disclosure
statement and the petitioner’s previous check dated June 30, 1997, does not ipso factoresult in
novation. Neither will this acquiescence constitute an implied acceptance of the substitution of the
debtor.

In order to give novation legal effect, the creditor should consent to the substitution of a new debtor.
Novation must be clearly and unequivocally shown, and cannot be presumed.

Since the petitioner failed to show thatthe respondent assented to the substitution, no valid
novation took place with the effect of releasing the petitioner from his obligation to the respondent.

24
Moreover, in the absence of showing that Mrs. Bognot and the respondent had agreed to release the
petitioner, the respondent can still enforce the payment of the obligation against the original debtor.
Mere acquiescence to the renewal of the loan, when there is clearly no agreement to release the
petitioner from his responsibility, does not constitute novation.

25
Young v CA September 24 2014

Facts:

On November 7, 1961, the estates of Humiliano Rodriguez and Timoteo Rodriguez leased to Victor D.
Young a parcel of land consisting of 840 square meters and located at Colon Street, Cebu City, on
which the latter's building, then known as Liza Theater (later renamed Nation Theater), was standing.
The contract of lease contained the following stipulation: On December 18, 1961, exactly the same
contract was again executed by the same parties, except that the estate of Humiliano Rodriguez was
this time represented by Antolin A. Jariol, instead of Miguela Rodriguez, as one of the signatories.

During the period of the lease, the two estates were finally settled, and the land leased to Victor
Young was distributed among Fausta R. Jagdon, Amparo R. Casafranca, Miguela R. Jariol, the herein
private respondents, and Teresita R. Natividad. Natividad later sold her share, consisting of 223
square meters, to Johnny Young, son of Victor D. Young.

On November 5, 1982, or two days before the expiration of the first contract, the heirs (except
Natividad) filed a suit for specific performance against Victor D. Young to compel him to sell to them
his theater-building for P 135,000.00. They tendered this amount with the clerk of court by way of
consignation. They also sued Victor Young's son, Johnny, as an unwilling co-plaintiff.

The defendants contended that the plaintiffs had no cause of action because the complaint was
premature. The lease contract of November 7, 1961, had been novated by the second lease contract
dated December 18, 1961; hence, the lease was terminated on December 18, 1982, and not
November 7, 1982. Moreover, even if the lease ended on November 7, 1982, the action brought by
the respondent on November 5, 1982, was still premature because the plaintiffs had not yet then
notified Victor Young of the exercise of their option. The lease expired without a valid exercise of the
option and the lease contract was thus renewed for another 21 years.

Ruling:

A careful examination of the text of the two contracts will show that the only change introduced in
the second contract was the substitution by Antolin A. Jariol of his wife Miguela as signatory for the
estate of Humiliano Rodriguez. There was no express declaration in the second contract that it was
novating the first.

To determine if there was at least an implied novation because of a clear incompatibility between the
old and new contracts, we apply the rule that—

In order that there may be implied novation arising from incompatibility of the old and new
obligations, the change must refer to the object, the cause, or the principal conditions of the
obligation. In other words, there must be an essential change.

There was clearly no implied novation for lack of an essential change in the object, cause, or principal
conditions of the obligation. At most, the substitution of a signatory in the second contract can be
considered only an accidental modification which, according to Tolentino, "does not extinguish an
existing obligation. When the changes refer to secondary agreements, and not to the object or

26
principal conditions of the contract, there is no novation; such changes will produce modifications of
incidental facts, but will not extinguish the original obligation."3

Hence, he concludes, "it is not proper to consider an obligation novated by unimportant

modifications which do not alter its essence."4

There being no novation, the lease is properly deemed to have commenced on November 7, 1961,
and so ended 21 years later on November 7, 1982. It is significant that it was in fact from this first
date that Victor Young effectively started as lessee.

27
PSBank v Spouses Manalac GR No 145441

Facts:

On October 8, 1976, respondent-spouses Rodolfo and Rosita Mañalac (Mañalac) obtained a

P1,300,000.00 loan from PSBank covered by promissory note L.C. No. 76-269. As security for the
loan, Mañalac executed a Real Estate Mortgage in favor of the bank over 8 parcels of land covered by
TCT Nos. 417012, N-1348, N-1347, N-3267, N-8552, N-6162, 469843 and 343593.

In view of Mañalac’s inability to pay the loan installments as they fell due, their loan obligation was
restructured on October 13, 1977. Accordingly, Mañalac signed another promissory note
denominated as LC No. 77-232 for P1,550,000.00 payable to the order of PSBank with interest rate of
19% annum.4 To secure the payment of the restructured loan, Mañalac executed a Real Estate
Mortgage dated October 13, 1977 in favor of PSBank over the same aforementioned 8 real
properties.

On March 5, 1979, Mañalac and spouses Igmidio and Dolores Galicia, with the prior consent of
PSBank,5 entered into a Deed of Sale with Assumption of Mortgage involving 3 of the mortgaged
properties covered by TCT Nos. N-6162 (now N-36192), N-8552 (now TCT No. N-36193), and 469843
(now TCT No. N-36194).

Thereafter, the 3 parcels of land purchased by the Galicias, together with another property, were in
turn mortgaged by them to secure a P2,600,000.00 loan which they obtained from PSBank.
Specifically, the mortgaged properties include TCT Nos. N-36192, N-36193, N-36194, (formerly TCT
Nos. N-6162, N-8552 and 469843, respectively) and 75584.7 This loan is evidenced by Promissory
Note LC-79-36.8

On March 12, 1979, Mañalac paid PSBank P919,698.11 which corresponds to the value of the parcels
of land covered by TCT Nos. N-36192, N-36193, and N-36194, now registered in the name of the
spouses Galicia. Accordingly, PSBank executed a partial release of the real estate mortgage covered
by the aforesaid properties.9

On August 25, 1981, the spouses Galicia obtained a second loan from PSBank in the amount of
P3,250,000.00 for which they executed Promissory Note LC No. 81-108. They also executed a Real
Estate Mortgage in favor of the bank covering TCT Nos. N-36192, N-36193, N-36194, 75584 and
87690.10

Since Mañalac defaulted again in the payment of their loan installments and despite repeated
demands still failed to pay their past due obligation which now amounted to P1,804,241.76, PSBank
filed with the Office of the Provincial Sheriff of Rizal a petition for extrajudicial foreclosure of their 5
remaining mortgaged properties, specifically those covered by TCT Nos. 417012, N-1347, N-1348, N-
3267, and 343593.

Despite several postponements of the public auction sale, Mañalac still failed to pay their mortgage
obligation. Thus, on May 3, 1982, the foreclosure sale of the subject real properties proceeded with
PSBank as the highest bidder in the amount of P2,185,225.76.11 On the same date, the Certificate of
Sale was issued by the Acting Ex-Oficio Provincial Sheriff for Rizal province.12

Mañalac failed to redeem the properties hence titles thereto were consolidated in the name of
PSBank and new certificates of title were issued in favor of the bank, namely, TCT No. N-79995 in lieu

28
of TCT No. 343593; TCT No. 79996 in lieu of TCT No. 417012; TCT No. 79997 in lieu of TCT No. N-
3267; TCT No. N-79998 in lieu of TCT No. N-1347; and TCT No. N-79999 in lieu of TCT No. N-1348.

On December 16, 1983, Mañalac wrote the Chairman of the Board of PSBank asking information on
their request for the partial release of the mortgage covered by TCT Nos. N-36192, N-36193, N-
36194, and 417012 (now TCT No. 79996). TCT Nos. 36192, 36193, and 36194 were registered in the
name of the Galicias, and mortgaged to partially secure their outstanding loan from the bank.
Enclosed in the same letter is a Cashier’s Check for P1,200,000.00 with a notation which reads:

Upon receipt of the check, PSBank’s Acting Manager Lino L. Macasaet issued a typewritten receipt
with the inscription:

On December 19, 1983, the bank applied P1,000,000.00 of the P1,200,000.00 to the loan account of
the Galicias as payment for the arrearages in interest and the remaining P200,000.00 thereof was
applied to the expenses relative to the account of Mañalac.14

On May 23, 1985, the bank sold the property covered by TCT No. 79996 (previously TCT No. 343593)
to Ester Villanueva who thereafter sold it to Mañalac. On October 30, 1985, the land covered by TCT
No. 79995 was sold by the bank to Teresita Jalbuena.

Thereafter, or on October 20, 1986, Mañalac instituted an action for damages, docketed as Civil Case
No. 53967, before the Regional Trial Court of Pasig, Branch 161, against PSBank and its officers
namely Cezar Valenzuela, Alfredo Barretto and Antonio Viray, and spouses Alejandro and Teresita
Jalbuena.

The bank also filed a petition, docketed as LRC Case No. R-3951, before the Regional Trial Court of
Pasig, Branch 159, for the issuance of a writ of possession against the properties covered by TCT Nos.
N-79997, N-79998, and N-79999 (formerly TCT Nos. N-3267, N-1347, and N-1348) and the ejectment
of the respondents.

Issue:

On the issue of novation, the Court of Appeals held that novation occurred when PSBank applied
P1,000,000.00 of the P1,200,000.00 PCIB Check No. 002133 tendered by Mañalac to the loan
account of the Galicias and the remaining P200,000.00 thereof to Mañalac’s account. It held that
when the bank applied the amount of the check in accordance with the instructions contained
therein, there was novation of the previous mortgage of the properties. It further observed that the
bank was fully aware that the issuance of the check was conditional hence, when it made the
application thereof, it agreed to be bound by the conditions imposed by Mañalac.

Ruling:

Novation is the extinguishment of an obligation by the substitution or change of the obligation by a

subsequent one which extinguishes or modifies the first, either by changing the object or principal
conditions, or, by substituting another in place of the debtor, or by subrogating a third person in the
rights of the creditor. In order for novation to take place, the concurrence of the following requisites
is indispensable:

1. There must be a previous valid obligation,

29
2. There must be an agreement of the parties concerned to a new contract,

3. There must be the extinguishment of the old contract, and

4. There must be the validity of the new contract.26

The elements of novation are patently lacking in the instant case. Mañalac tendered a check for
P1,200,000.00 to PSBank for the release of 4 parcels of land covered by TCT Nos. N-36192, 36193,
and 36194, under the loan account of the Galicias and 417012 (now TCT No. 79996) under the loan
account of Mañalac. However, while the bank applied the tendered amount to the accounts as
specified by Mañalac, it nevertheless refused to release the subject properties. Instead, it issued a
receipt with a notation that the acceptance of the check is not a commitment on the part of the bank
to release the 4 TCTs as requested by Mañalac.

From the foregoing, it is obvious that there was no agreement to form a new contract by novating
the mortgage contracts of the Mañalacs and the Galicias. In accepting the check, the bank only
acceded to Mañalac’s instruction on whose loan accounts the proceeds shall be applied but rejected
the other condition that the 4 parcels of land be released from mortgage. Clearly, there is no mutual
consent to replace the old mortgage contract with a new obligation. 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.

Novation is never presumed, and the animus novandi, whether totally or partially, must appear by
express agreement of the parties, or by their acts that are too clear and unmistakable. The
extinguishment of the old obligation by the new one is a necessary element of novation, which may
be effected either expressly or impliedly. The term "expressly" means that the contracting parties
incontrovertibly disclose that their object in executing the new contract is to extinguish the old one.
Upon the other hand, no specific form is required for an implied novation, and all that is prescribed
by law would be an incompatibility between the two contracts. While there is really no hard and fast
rule to determine what might constitute to be a sufficient change that can bring about novation, the
touchstone for contrariety, however, would be an irreconcilable incompatibility between the old and
the new obligations.27

A fortiori, 3 of the 4 properties sought to be released from mortgage, namely, TCT Nos. N-36192, N-
36193, and N-36194, have already been sold by Mañalac to Galicia and are now registered in the
name of the latter who thereafter mortgaged the same as security to a separate loan they obtained
from the bank. Thus, without the consent of PSBank as the mortgagee bank, Mañalac, not being a
party to the mortgage contract between the Galicias and the bank, cannot demand much less
impose upon the bank the release of the subject properties. Unless there is a stipulation to the
contrary, the release of the mortgaged property can only be made upon the full satisfaction of the
loan obligation upon which the mortgage attaches. Unfortunately, Mañalac has not shown that the
P1,000,000.00 was sufficient to cover not only the accrued interests but also the entire indebtedness
of the Galicias to the bank.

Neither can Mañalac be deemed substitute debtor within the contemplation of Article 1293 of the
Civil Code, which states that:

Art. 1293. Novation which consists in substituting a new debtor in the place of the original one, may
be made 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. 28

30
In order to change the person of the debtor, the old one must be expressly released from the
obligation, and the third person or new debtor must assume the former’s place in the relation.
Novation is never presumed. Consequently, that which arises from a purported change in the person
of the debtor must be clear and express. It is thus incumbent on Mañalac to show clearly and
unequivocally that novation has indeed taken place.29 In Magdalena Estates Inc. v. Rodriguez,30 we
held that "the mere fact that the creditor receives a guaranty or accepts payments from a third
person who has agreed to assume the obligation, when there is no agreement that the first debtor
shall be released from responsibility, does not constitute a novation, and the creditor can still enforce
the obligation against the original debtor."

Mañalac has not shown by competent evidence that they were expressly taking the place of Galicia
as debtor, or that the latter were being released from their solidary obligation. Nor was it shown that
the obligation of the Galicias was being extinguished and replaced by a new one. The existence of
novation must be shown in clear and unmistakable terms.

Likewise, we hold that Mañalac cannot demand to repurchase the foreclosed piece of land covered
by TCT No. 417012 (now TCT No. 79996) from the bank. Its foreclosure and the consolidation of
ownership in favor of the bank and the resultant cancellation of mortgage effectively cancelled the
mortgage contract between Mañalac and the bank. Insofar as TCT No. 417012 is concerned, there is
no more existing mortgage to speak of. As the absolute owner of the foreclosed property, the
petitioner has the discretion to reject or accept any offer to repurchase.

Granting arguendo that a new obligation was established with the acceptance by the bank of the
PCIB Check and its application to the loan account of Mañalac on the condition that TCT No. 417012
would be released, this new obligation however could not supplant the October 13, 1977 real estate
mortgage executed by Mañalac, which, by all intents and purposes, is now a defunct and non-
existent contract. As mentioned earlier, novation cannot be presumed.

31
Metrobank v Rural Bank of Gerona GR No 159097

Facts:

RBG is a rural banking corporation organized under Philippine laws and located in Gerona, Tarlac. In
the 1970s, the Central Bank and the RBG entered into an agreement providing that RBG shall
facilitate the loan applications of farmers-borrowers under the Central Bank-International Bank for
Reconstruction and Development’s (IBRD’s) 4th Rural Credit Project. The agreement required RBG to
open a separate bank account where the IBRD loan proceeds shall be deposited. The RBG
accordingly opened a special savings account with Metrobank’s Tarlac Branch. As the depository
bank of RBG, Metrobank was designated to receive the credit advice released by the Central Bank
representing the proceeds of the IBRD loan of the farmers-borrowers; Metrobank, in turn, credited
the proceeds to RBG’s special savings account for the latter’s release to the farmers-borrowers.

On September 27, 1978, the Central Bank released a credit advice in Metrobank’s favor and
accordingly credited Metrobank’s demand deposit account in the amount of ₱178,652.00, for the
account of RBG. The amount, which was credited to RBG’s special savings account represented the
approved loan application of farmer-borrower Dominador de Jesus. RBG withdrew the ₱178,652.00
from its account.

On the same date, the Central Bank approved the loan application of another farmer-borrower,
Basilio Panopio, for ₱189,052.00, and credited the amount to Metrobank’s demand deposit account.
Metrobank, in turn, credited RBG’s special savings account. Metrobank claims that the RBG also
withdrew the entire credited amount from its account.

On October 3, 1978, the Central Bank approved Ponciano Lagman’s loan application for ₱220,000.00.
As with the two other IBRD loans, the amount was credited to Metrobank’s demand deposit account,
which amount Metrobank later credited in favor of RBG’s special savings account. Of the
₱220,000.00, RBG only withdrew ₱75,375.00.

On November 3, 1978, more than a month after RBG had made the above withdrawals from its
account with Metrobank, the Central Bank issued debit advices, reversing all the approved IBRD
loans.6 The Central Bank implemented the reversal by debiting from Metrobank’s demand deposit
account the amount corresponding to all three IBRD loans.

Upon receipt of the November 3, 1978 debit advices, Metrobank, in turn, debited the following
amounts from RBG’s special savings account: ₱189,052.00, ₱115,000.00, and ₱8,000.41. Metrobank,
however, claimed that these amounts were insufficient to cover all the credit advices that were
reversed by the Central Bank. It demanded payment from RBG which could make partial payments.
As of October 17, 1979, Metrobank claimed that RBG had an outstanding balance of ₱334,220.00. To
collect this amount, it filed a complaint for collection of sum of money against RBG before the RTC,
docketed as Civil Case No. 6028.

Ruling:

Based on these arrangements, the Central Bank’s immediate recourse, therefore should have been
against the farmers-borrowers and the RBG; thus, it erred when it deducted the amounts covered by
the debit advices from Metrobank’s demand deposit account. Under the Project Terms and
Conditions, Metrobank had no responsibility over the proceeds of the IBRD loans other than serving

32
as a conduit for their transfer from the Central Bank to the RBG once credit advice has been issued.
Thus, we agree with the CA’s conclusion that the agreement governed only the parties involved – the
Central Bank and the RBG. Metrobank was simply an outsider to the agreement. Our disagreement
with the appellate court is in its conclusion that no legal subrogation took place; the present case, in
fact, exemplifies the circumstance contemplated under paragraph 2, of Article 1302 of the Civil Code
which provides:

Art. 1302. It is presumed that there is legal subrogation:

(1) When a creditor pays another creditor who is preferred, even without the debtor’s knowledge;

(2) When a third person, not interested in the obligation, pays with the express or tacit approval of
the debtor;

(3) When, even without the knowledge of the debtor, a person interested in the fulfillment of the
obligation pays, without prejudice to the effects of confusion as to the latter’s share. [Emphasis
supplied.]

As discussed, Metrobank was a third party to the Central Bank-RBG agreement, had no interest
except as a conduit, and was not legally answerable for the IBRD loans. Despite this, it was
Metrobank’s demand deposit account, instead of RBG’s, which the Central Bank proceeded against,
on the assumption perhaps that this was the most convenient means of recovering the cancelled
loans. That Metrobank’s payment was involuntarily made does not change the reality that it was
Metrobank which effectively answered for RBG’s obligations.

Was there express or tacit approval by RBG of the payment enforced against Metrobank? After
Metrobank received the Central Bank’s debit advices in November 1978, it (Metrobank) accordingly
debited the amounts it could from RBG’s special savings account without any objection from
RBG.14 RBG’s President and Manager, Dr. Aquiles Abellar, even wrote Metrobank, on August 14, 1979,
with proposals regarding possible means of settling the amounts debited by Central Bank from
Metrobank’s demand deposit account.15 These instances are all indicative of RBG’s approval of
Metrobank’s payment of the IBRD loans. That RBG’s tacit approval came after payment had been
made does not completely negate the legal subrogation that had taken place.

Article 1303 of the Civil Code states that subrogation transfers to the person subrogated the credit
with all the rights thereto appertaining, either against the debtor or against third persons. As the
entity against which the collection was enforced, Metrobank was subrogated to the rights of Central
Bank and has a cause of action to recover from RBG the amounts it paid to the Central Bank, plus
14% per annum interest.

33
Astro Electronics v Phil Export GR No. 136729

Facts:

Astro was granted several loans by the Philippine Trust Company (Philtrust) amounting to
P3,000,000.00 with interest and secured by three promissory notes: PN NO. PFX-254 dated
December 14, 1981 for P600,000.00, PN No. PFX-258 also dated December 14, 1981 for P400,000.00
and PN No. 15477 dated August 27, 1981 for P2,000,000.00. In each of these promissory notes, it
appears that petitioner Roxas signed twice, as President of Astro and in his personal capacity.[2] Roxas
also signed a Continuing Surety ship Agreement in favor of Philtrust Bank, as President of Astro and
as surety.[3]

Thereafter, Philguarantee, with the consent of Astro, guaranteed in favor of Philtrust the payment of
70% of Astro's loan,[4] subject to the condition that upon payment by Philguanrantee of said amount,
it shall be proportionally subrogated to the rights of Philtrust against Astro.[5]

As a result of Astro's failure to pay its loan obligations, despite demands, Philguarantee paid 70% of
the guaranteed loan to Philtrust. Subsequently, Philguarantee filed against Astro and Roxas a
complaint for sum of money with the RTC of Makati.

In his Answer, Roxas disclaims any liability on the instruments, alleging, inter alia, that he merely
signed the same in blank and the phrases "in his personal capacity" and "in his official capacity" were
fraudulently inserted without his knowledge.

Issue:

In the present petition, the principal issue to be resolved is whether or not Roxas should be jointly
and severally liable (solidary) with Astro for the sum awarded by the RTC.

Ruling:

The three promissory notes uniformly provide: "FOR VALUE RECEIVED, I/We jointly, severally and
solidarily, promise to pay to PHILTRUST BANK or order..."[12] An instrument which begins with "I",
"We", or "Either of us" promise to pay, when signed by two or more persons, makes them solidarily
liable.[13] Also, the phrase "joint and several" binds the makers jointly and individually to the payee so
that all may be sued together for its enforcement, or the creditor may select one or more as the
object of the suit.[14] Having signed under such terms, Roxas assumed the solidary liability of a debtor
and Philtrust Bank may choose to enforce the notes against him alone or jointly with Astro.

Roxas' claim that the phrases "in his personal capacity" and "in his official capacity" were inserted on
the notes without his knowledge was correctly disregarded by the RTC and the Court of Appeals. It is
not disputed that Roxas does not deny that he signed the notes twice. As aptly found by both the
trial and appellate court, Roxas did not offer any explanation why he did so. It devolves upon him to
overcome the presumptions that private transactions are presumed to be fair and regular[15] and that
a person takes ordinary care of his concerns.[16] Aside from his self-serving allegations, Roxas failed to
prove the truth of such allegations. Thus, said presumptions prevail over his claims. Bare allegations,

34
when unsubstantiated by evidence, documentary or otherwise, are not equivalent to proof under
our Rules of Court.[17]

Roxas is the President of Astro and reasonably, a businessman who is presumed to take ordinary care
of his concerns. Absent any countervailing evidence, it cannot be gainsaid that he will not sign
document without first informing himself of its contents and consequences. Clearly, he knew the
nature of the transactions and documents involved as he not only executed these notes on two
different dates but he also executed, and again, signed twice, a "continuing Surety ship Agreement"
notarized on July 31, 1981, wherein he guaranteed, jointly and severally with Astro the repayment of
P3,000,000.00 due to Philtrust. Such continuing suretyship agreement even re-enforced his solidary
liability Philtrust because as a surety, he bound himself jointly and severally with Astro's obligation.
[18]
Roxas cannot now avoid liability by hiding under the convenient excuse that he merely signed the
notes in blank and the phrases "in personal capacity" and "in his official capacity" were fraudulently
inserted without his knowledge.

Lastly, Philguarantee has all the right to proceed against petitioner, it is subrogated to the rights of
Philtrust to demand for and collect payment from both Roxas and Astro since it already paid the
value of 70% of roxas and Astro Electronics Corp.'s loan obligation. In compliance with its contract of
"Guarantee" in favor of Philtrust.

Subrogation is the transfer of all the rights of the creditor to a third person, who substitutes him in all
his rights.[19] It may either be legal or conventional. Legal subrogation is that which takes place
without agreement but by operation of law because of certain acts.[20] Instances of legal subrogation
are those provided in Article 1302 of the Civil Code. Conventional subrogation, on the other hand, is
that which takes place by agreement of the parties.[21]

Roxas' acquiescence is not necessary for subrogation to take place because the instant case is one of
the legal subrogation that occurs by operation of law, and without need of the debtor's knowledge.
[22]
Further, Philguarantee, as guarantor, became the transferee of all the rights of Philtrust as against
Roxas and Astro because the "guarantor who pays is subrogated by virtue thereof to all the rights
which the creditor had against the debtor."

35
Carmelcraft v NLRC 186 SCRA 393

Facts:

The record shows that after its registration as a labor union, the Camelcraft Employees Union sought
but did not get recognition from the petitioners. Consequently, it filed a petition for certification
election in June 1987. On July 13, 1987, Camelcraft Corporation, through its president and general
manager, Carmen Yulo, announced in a meeting with the employees that it would cease operations
on August 13, 1987, due to serious financial losses. Operations did cease as announced. On August
17, 1987, the union filed a complaint with the Department of Labor against the petitioners for illegal
lockout, unfair labor practice and damages, followed the next day with another complaint for
payment of unpaid wages, emergency cost of living allowances, holiday pay, and other benefits. On
November 29, 1988, the Labor Arbiter declared the shutdown illegal and violative of the employees'
right to self-organization. The claim for unpaid benefits was also granted.

The contention of the petitioners that the employees are estopped from claiming the alleged unpaid
wages and other compensation must also be rejected. This claim is based on the waivers supposedly
made by the complainants on the understanding that "the management will implement
prospectively all benefits under existing labor standard laws." The petitioners argue that this
assurance provided the consideration that made the quitclaims executed by the employees valid.
They add that the waivers were made voluntarily and contend that the contract should be respected
as the law between the parties.chan

Ruling:

Even if voluntarily executed, agreements are invalid if they are contrary to public policy. This is
elementary. The protection of labor is one of the policies laid down by the Constitution not only by
specific provision but also as part of social justice. The Civil Code itself provides:

ART. 6. Rights may be waived, unless the waiver is contrary to law, public order, public policy, morals,
or good customs, or prejudicial to a third person with a right recognized by
law.chanroblesvirtualawlibrary chanrobles virtual law library

ART. 1306. The contracting parties may establish such stipulations, clauses, terms and conditions as
they may deem convenient, provided they are not contrary to law, morals, good customs, public
order, or public policy.

The subordinate position of the individual employee vis-a-vis management renders him especially
vulnerable to its blandishments and importunings, and even intimidations, that may result in his
improvidently if reluctantly signing over benefits to which he is clearly entitled. Recognizing this
danger, we have consistently held that quitclaims of the workers' benefits win not estop them from
asserting them just the same on the ground that public policy prohibits such waivers.

All told, the conduct of the petitioners toward the employees has been less than commendable.
Indeed, it is reprehensible. First, the company inveigled them to waive their claims to compensation
due them on the promise that future benefits would be paid (and to make matters worse, there is no
showing that they were indeed paid). Second, it refused to recognize the respondent union,
suggesting to the employees that they join another union acceptable to management. Third, it
threatened the employees with the closure of the company and then actually did so when the

36
employees insisted on their demands. All these acts reflect on the bona fides of the petitioners and
unmistakably indicate their ill will toward the employees.chanrobl

37
Felix Plazo Urban Poor Assn v Lipat GR No 182409

Facts:

On December 13, 1991, Lipat Sr., as represented by Lipat Jr., executed a Contract to Sell (CTS) in favor
of the petitioner, as represented by its President, Manuel Tubao (Tubao ), whereby the former
agreed to sell to the latter two parcels of land in Naga City covered by Transfer Certificates of Title
Nos. 12236 and 12237 (subject properties) for a consideration of ₱200.00 per square meter. 4

As stipulated in the CTS, the petitioner had 90 days to pay in full the purchase price of the subject
properties; otherwise, the CTS shall automatically expire. The period, however, elapsed without
payment of the full consideration by the petitioner.5

According to the petitioner, the 90-day period provided in the CTS was subject to the condition that
the subject properties be cleared of all claims from third persons considering that there were
pending litigations involving the same.6

Upon the expiry of the 90-day period, and despite the failure to clear the subject properties from the
claims of third persons, the petitioner contributed financial assistance for the expenses of litigation
involving the subject properties with the assurance that the CTS will still be enforced once the cases
are settled.7

In the meantime, the petitioner agreed to pay rental fees for their occupation of the subject
properties from 1992 to 1996.8

After the termination of the cases involving the subject properties, however, the respondents
refused to enforce the CTS on the ground that the same had expired and averred that there was no
agreement to extend its term.9

Consequently, the petitioner filed a case for Specific Performance and Damages with Prayer for the
Issuance of Preliminary Injunction against the respondents on June 10, 1997 before the Regional Trial
Court (RTC) of Naga City.10

For their defense, the respondents alleged that the CTS was not enforced due to the petitioner's
failure to pay the P200.00 per sq m selling price before the expiration of its term.11 As a result, the
members of the petitioner were required to pay rental fees corresponding to the area they occupy.1

Issue:

1. WHETHER OR NOT THE CA ERRED IN REVERSING THE TRIAL COURT'S DECISION THAT THE
PETITIONER CAN OBLIGE THE RESPONDENTS TO SELL THE PROPERTIES COVERED BY THE CTS,
THE CONTRACT BEING STILL EFFECTIVE;

Ruling:

The parties are bound to the stipulations they mutually agreed upon in the CTS

Indeed, the contract executed by the parties is the law between them. Consequently, from the time
the contract is perfected, all parties privy to it are bound not only to the fulfillment of what has been

38
expressly stipulated but likewise to all consequences which, according to their nature, may be in
keeping with good faith, usage and law.

Concededly, it is undisputed that the abovementioned contract is in the nature of a CTS. As such, the
obligation of the seller to sell becomes demandable only upon the occurrence of the suspensive
condition.29 In the present case, as correctly observed by the CA, the suspensive condition is the
payment in full of the purchase price by the petitioner prior to the expiration of the 90-day period
stipulated in their CTS, which the latter failed to do so.

In Spouses Garcia, et al. v. Court of Appeals, et al.,31 the Court emphasized that in a CTS, payment of
the full purchase price is a positive suspensive condition, failure of which is not considered a breach
of the same but an occurrence that prevents the obligation of the seller to transfer title from
becoming effective.32 Here, there is no dispute that the petitioner failed to pay the full purchase price
stipulated in the CTS on the date fixed therein. Thus, the respondents are within their rights to refuse
to enforce the same.

39
Acol v PCI Bank GR No 135149

Facts:
On August 20, 1982, petitioner Manuel Acol applied with respondent for a Bankard credit card
and extension.4 Both were issued to him shortly thereafter. For several years, he regularly used
this card, purchasing from respondent's accredited establishments and paying the corresponding
charges for such purchases.

Late in the evening of April 18, 1987, petitioner discovered the loss of his credit card. After
exhausting all efforts to find it, the first hour of the following day, April 19, 1987, a Sunday, he
called up respondent's office and reported the loss. The representative he spoke to told him that
his card would be immediately included in the circular of lost cards.

Again, on April 20, 1987, petitioner called up respondent to reiterate his report on the loss of his
card. He inquired if there were other requirements he needed to comply with in connection with
the loss. Respondent's representative advised him to put into writing the notice of loss and to
submit it, together with the extension cards of his wife and daughter. Petitioner promptly wrote a
letter dated April 20, 1987 confirming the loss and sent it to respondent which received it on April
22, 1987.

On April 21, 1987, a day before receiving the written notice, respondent issued a special
cancellation bulletin informing its accredited establishments of the loss of the cards of the
enumerated holders, including petitioner's.

Unfortunately, it turned out that somebody used petitioner's card on April 19 and 20, 1987 to buy
commodities worth P76,067.28. The accredited establishments reported the invoices for such
purchases to respondent which then billed petitioner for that amount.

Petitioner informed respondent he would not pay for the purchases made after April 19, 1987, the
day he notified respondent of the loss. Immediately after receiving his statement of account for
the period ending April 30, 1987, petitioner confirmed his exceptions to the billing in writing.

At first, respondent agreed to reverse the disputed billings, pending the result of an investigation
of petitioner's account. After the investigation and review, the respondent, through its Executive
Vice-President and General Manager, Atty. Serapio S. Gabriel, confirmed that it was not the
petitioner who used his Bankard on April 19 and 20, 1987.

Nonetheless, respondent reversed its earlier position to delete the disputed billings and insisted
on collecting within 15 days from notice. It alleged that it was the most "practicable procedure
and policy of the company." It cited provision no. 1 of the "Terms and Conditions Governing The
Issuance and Use of the Bankard" found at the back of the application form:

Petitioner, through his lawyer, wrote respondent to deny liability for the disputed charges. In short
order, however, respondent filed suit in the Regional Trial Court (RTC) of Manila 5 against
petitioner for the collection of P76,067.28, plus interest and penalty charges.

Issue:

The basic issue in this case is whether or not the contested provision in the contract (provision
no. 1 of the Terms and Conditions) was valid and binding on the petitioner, given that the contract
was one of adhesion.

40
Ruling:

It is worth noting that, just like the assailed provision in this case, the stipulation devised by
respondent BECC required two conditions before the cardholder could be relieved of
responsibility from unauthorized charges: (1) the receipt by the card issuer of a written notice
from the cardholder regarding the loss and (2) the notification to the issuer's accredited
establishments regarding such loss.

We struck down this stipulation as contrary to public policy and granted the Ermitaños' petition:

Prompt notice by the cardholder to the credit card company of the loss or theft of
his card should be enough to relieve the former of any liability occasioned by the
unauthorized use of his lost or stolen card. The questioned stipulation in this case,
which still requires the cardholder to wait until the credit card company has notified all its
member-establishments, puts the cardholder at the mercy of the credit card company
which may delay indefinitely the notification of its members to minimize if not to eliminate
the possibility of incurring any loss from unauthorized purchases. Or, as in this case, the
credit card company may for some reason fail to promptly notify its members through
absolutely no fault of the cardholder. To require the cardholder to still pay for the
unauthorized purchases after he has given prompt notice of the loss or theft of his
card to the credit card company would simply be unfair and unjust. The Court
cannot give its assent to such a stipulation which could clearly run against public
policy. (emphasis ours)

In this case, the stipulation in question is just as repugnant to public policy as that in Ermitaño. As
petitioner points out, the effectivity of the cancellation of the lost card rests on an act entirely
beyond the control of the cardholder. Worse, the phrase "after a reasonable time" gives the
issuer the opportunity to actually profit from unauthorized charges despite receipt of immediate
written notice from the cardholder.

Under such a stipulation, petitioner could have theoretically done everything in his power to give
respondent the required written notice. But if respondent took a "reasonable" time (which could
be indefinite) to include the card in its cancellation bulletin, it could still hold the cardholder liable
for whatever unauthorized charges were incurred within that span of time. This would have been
truly iniquitous, considering the amount respondent wanted to hold petitioner liable for.

Article 1306 of the Civil Code10 prohibits contracting parties from establishing stipulations contrary
to public policy. The assailed provision was just such a stipulation. It is without any hesitation
therefore that we strike it down.

41
Pitel v Tecson GR No 156966

Facts:

On various dates in 1996, Delfino C. Tecson applied for six (6) cellular phone subscriptions with
petitioner Pilipino Telephone Corporation (PILTEL), a company engaged in the
telecommunications business, which applications were each approved and covered, respectively,
by six mobiline service agreements.

On 05 April 2001, respondent filed with the Regional Trial Court of Iligan City, Lanao Del Norte, a
complaint against petitioner for a "Sum of Money and Damages." Petitioner moved for the
dismissal of the complaint on the ground of improper venue, citing a common provision in the
mobiline service agreements to the effect that -

The appellate court, however, would appear to anchor its decision on the thesis that the
subscription agreement, being a mere contract of adhesion, does not bind respondent on the
venue stipulation.

Ruling:

Indeed, the contract herein involved is a contract of adhesion. But such an agreement is not per
se inefficacious. The rule instead is that, should there be ambiguities in a contract of adhesion,
such ambiguities are to be construed against the party that prepared it. If, however, the
stipulations are not obscure, but are clear and leave no doubt on the intention of the parties, the
literal meaning of its stipulations must be held controlling.4

A contract of adhesion is just as binding as ordinary contracts. It is true that this Court has, on
occasion, struck down such contracts as being assailable when the weaker party is left with no
choice by the dominant bargaining party and is thus completely deprived of an opportunity to
bargain effectively. Nevertheless, contracts of adhesion are not prohibited even as the courts
remain careful in scrutinizing the factual circumstances underlying each case to determine the
respective claims of contending parties on their efficacy.

In the case at bar, respondent secured six (6) subscription contracts for cellular phones on
various dates. It would be difficult to assume that, during each of those times, respondent had no
sufficient opportunity to read and go over the terms and conditions embodied in the agreements.
Respondent continued, in fact, to acquire in the pursuit of his business subsequent subscriptions
and remained a subscriber of petitioner for quite sometime.

In Development Bank of the Philippines vs. National Merchandising Corporation,5 the contracting
parties, being of age and businessmen of experience, were presumed to have acted with due
care and to have signed the assailed documents with full knowledge of their import. The situation
would be no less true than that which obtains in the instant suit. The circumstances in Sweet
Lines, Inc. vs. Teves,6 wherein this Court invalidated the venue stipulation contained in the
passage ticket, would appear to be rather peculiar to that case. There, the Court took note of an
acute shortage in inter-island vessels that left passengers literally scrambling to secure
accommodations and tickets from crowded and congested counters. Hardly, therefore, were the
passengers accorded a real opportunity to examine the fine prints contained in the tickets, let
alone reject them.

A contract duly executed is the law between the parties, and they are obliged to comply fully and
not selectively with its terms. A contract of adhesion is no exception.

42
PNB v Padilla May 7 2004

Facts:

43
Honrado v GMA Network GR No 204702

Facts:

On 11December 1998, respondent GMA Network Films, Inc. (GMA Films) entered into a "TV
Rights Agreement" (Agreement) with petitioner under which petitioner, as licensor of 36 films,
granted to GMA Films, for a fee of ₱60.75 million, the exclusive right to telecast the 36 films for a
period of three years. Under Paragraph 3 of the Agreement, the parties agreed that "all betacam
copies of the [films] should pass through broadcast quality test conducted by GMA-7," the TV
station operated by GMA Network, Inc. (GMA Network), an affiliate of GMA Films. The parties
also agreed to submit the films for review by the Movie and Television Review and Classification
Board (MTRCB) and stipulated on the remedies in the event that MTRCB bans the telecasting
ofany of the films (Paragraph 4):

Two of the films covered by the Agreement were Evangeline Katorse and Bubot for which GMA
Films paid ₱1.5 million each.

In 2003, GMA Films sued petitioner in the Regional Trial Court of Quezon City (trial court) to
collect ₱1.6 million representing the fee it paid for Evangeline Katorse (₱1.5 million) and a
portion of the fee it paid for Bubot (₱350,000 ). GMA Films alleged that it rejected Evangeline
4

Katorse because "its running time was too short for telecast" and petitioner only remitted
5

₱900,000 to the owner of Bubot (Juanita Alano [Alano]), keeping for himself the balance of
₱350,000. GMA Films prayed for the return of such amount on the theory that an implied trust
arose between the parties as petitioner fraudulently kept it for himself.6

Petitioner denied liability, counter-alleging that after GMA Films rejected Evangeline Katorse, he
replaced it with another film, Winasak na Pangarap, which GMA Films accepted. As proof of such
acceptance, petitioner invoked a certification of GMA Network, dated 30 March 1999, attesting
that such film "is of good broadcast quality" (Film Certification). Regarding the fee GMA Films
7

paid for Bubot, petitioner alleged that he had settled his obligation to Alano. Alternatively,
petitioner alleged that GMA Films, being a stranger to the contracts he entered into with the
owners of the films in question, has no personality to question his compliance with the terms of
such contracts. Petitioner counterclaimed for attorney’s fees.

Issue:

The question is whether the CA erred in finding petitioner liable for breach of the Agreement and
breach of trust.

Ruling:

Petitioner maintains that the Film Certification issued by GMA Network attesting to the "good
broadcast quality" of Winasak na Pangarap amounted to GMA Films’ acceptance of such film. On
the other hand, GMA Films insists that such clearance pertained only to the technical quality of
the film but not to its content which it rejected because it found the film as "bomba" (bold). The
12

CA, working under the assumption that the ground GMA Films invoked to reject Winasak na
Pangarap was sanctioned under the Agreement, found merit in the latter’s claim. We hold that

44
regardless of the import of the Film Certification, GMA Films’ rejection of Winasak na Pangarap
finds no basis in the Agreement.

In terms devoid of any ambiguity, Paragraph 4 of the Agreement requires the intervention of
MTRCB, the state censor, before GMA Films can reject a film and require its replacement.
Specifically, Paragraph 4 requires that MTRCB, after reviewing a film listed in the Agreement,
disapprove or X-rate it for telecasting. GMA Films does not allege, and we find no proof on record
indicating, that MTRCB reviewed Winasak na Pangarap and X-rated it. Indeed, GMA Films’ own
witness, Jose Marie Abacan (Abacan), then Vice-President for Program Management of GMA
Network, testified during trial that it was GMA Network which rejected Winasak na Pangarap
because the latter considered the film "bomba." In doing so, GMA Network went beyond its
13

assigned role under the Agreement of screening films to test their broadcast quality and assumed
the function of MTRCB to evaluate the films for the propriety of their content. This runs counter to
the clear terms of Paragraphs 3 and 4 of the Agreement.

The Agreement, as its full title denotes ("TV Rights Agreement"), is a licensing contract, the
essence of which is the transfer by the licensor (petitioner) to the licensee (GMA Films), for a fee,
of the exclusive right to telecast the films listed in the Agreement. Stipulations for payment of
"commission" to the licensor is incongruous to the nature of such contracts unless the licensor
merely acted as agent of the film owners. Nowhere in the Agreement, however, did the parties
stipulate that petitioner signed the contract in such capacity. On the contrary, the Agreement
repeatedly refers to petitioner as "licensor" and GMA Films as "licensee." Nor did the parties
stipulate that the fees paid by GMA Films for the films listed in the Agreement will be turned over
by petitioner to the film owners. Instead, the Agreement merely provided that the total fees will be
paid in three installments (Paragraph 3).16

We entertain no doubt that petitioner forged separate contractual arrangements with the owners
of the films listed in the Agreement, spelling out the terms of payment to the latter. Whether or not
petitioner complied with these terms, however, is a matter to which GMA Films holds absolutely
no interest. Being a stranger to such arrangements, GMA Films is no more entitled to complain of
any breach by petitioner of his contracts with the film owners than the film owners are for any
breach by GMA Films of its Agreement with petitioner.

45