Case Digests on Contracts

defendant Central Bank would issue a license to the contractor for authority to
buy foreign exchange at the preferred rate for the payment of said imports."

Case: George Batchelder vs. Central Bank of the Philippines, March 29, 1972, J. Fernando.
Facts: George Batchelder, who is an American citizen but permanently residing in the
Philippines, is engaged in the construction business. Batchelder, in compliance with Monetary
Board Resolution No. 857 (Filipino and resident American contractors undertaking construction
projects in US military bases in the Philippines shall be authorized to utilize 90% of the proceeds
of their contracts for the purchase of construction equipment, and etc.) and Monetary Board
Resolution No. 695 (Agent bank should, upon compliance with its terms, credit the contractors
accounts in pesos, the buying rate being governed by the appropriate rules and regulations.),
surrendered to the Central Bank through the latters authorized agents, his dollar earnings and
applied with the latter for license to utilize 90% of his surrendered earnings. However, the Central
Bank never heeded to the plaintiffs application arguing that the Monetary Board Resolutions
relied upon simply laid down policy without in any way giving rise to a valid and binding
agreement to which the law should give effect. The trial court found for Batchelder. On appeal,
Central Bank interposed an issue that there was no such contractual obligation between the
parties which will hold Central Bank liable therefore.
Issue: Whether there exist a contract between Central Bank and Batchelder, a dollar
earner by virtue of the Monetary Board Resolutions of the former.
Held: NO. What was done by the Central Bank was merely to issue in pursuance of its rulemaking power the resolutions. There is no question that the Central Bank as a public corporation
could enter into contracts. It is so provided for among the corporate powers vested in it. Thus:
"The Central Bank is hereby authorized to adopt, alter, and use a corporate seal which shall be
judicially noticed; to make contracts; to lease or own real personal property, and to sell or
otherwise dispose of the same; to sue and be sued; and otherwise to do and perform any and all
things that may be necessary or proper to carry out the purposes of this Act." No doubt would
have arisen therefore if defendant Central Bank, utilizing a power expressly granted, did enter
into a contract with plaintiff. It could have done so, but it did not do so.
Nor is this to deal unjustly with plaintiff. Defendant Central Bank in its motion to dismiss before
the lower court was quite explicit as to why under the circumstances, no right could be recognized
as possessed by him. As set forth in such pleading:
"We contend that Monetary Board Resolution No. 857, dated June 17, 1960, as
amended by Monetary Board Resolution No. 695, dated April 28, 1961, does not give
right to Filipino and resident American contractors undertaking construction projects in
U.S. military bases to reacquire at the preferred rate ninety per cent (90%) of the
foreign exchange sold or surrendered to defendant Central Bank thru the authorized
agent banks. Nor does said resolution serve as a general authorization or license
granted by the Central Bank to utilize the ninety per cent (90%) of their dollar earnings.
M.B. Resolution No. 857, as amended, merely laid down a general policy on the
utilization of the dollar earnings of Filipino and resident American contractors
undertaking projects in U.S. military bases, ... ."
Further, there is this equally relevant portion in such motion to dismiss:
"It is clear from the aforecited provisions of said memorandum that not all imports
against proceeds of contracts entered into prior to April 25, 1960 are entitled to the
preferred buying rate of exchange. Only imports against proceeds of contracts entered
into prior to April 25, 1960, not otherwise classified as dollar-to-dollar transactions, are
entitled to the preferred rate of exchange. It is for this reason that the contractor is
required to first file an application with defendant Central Bank (Import
Department) thru the Authorized Agent Banks, for the purpose of determining
whether the imports against proceeds of contracts entered into prior to April 25,
1960 are classified as dollar-to-dollar transactions (which are not entitled to the
preferred rate of exchange), or not (which are entitled to the preferred rate of
exchange), and that if said imports are entitled to the preferred rate of exchange,

Had there been greater care therefore on the part of the plaintiff to show why in his opinion he
could assert a right in accordance not with a contract binding on the Central Bank, because there
is none, but by virtue of compliance with rules and regulations of an administrative tribunal, then
perhaps a different outcome would have been justified.
The decision of the trial court is dismissed without prejudice.
Case: Republic of the Philippines vs. PLDT, January 27, 1969, J.B.L. Reyes.
Facts: PLDT first entered into an agreement whereby telephone messages, coming from the US
and received by RCAs domestic station could automatically be transferred to the lines of PLDT
and vice versa. Soon after, the Bureau of Telecommunications set up its own Government
Telephone System by utilizing its own appropriation and equipment and by renting trunk lines of
the PLDT to enable government offices to call private parties. Later on, the Bureau entered into
an agreement with RCA Communications, Inc. for a joint overseas telephone service whereby the
Bureau would convey radio-telephone overseas calls received by RCAs station to and from local
residents. PLDT complained into such agreement. With much demands for telephone servicing,
neither the Bureau and PLDT filled those demands. Hence, the Bureau had proposed to the
PLDT that both enter into an interconnecting agreement. The PLDT replied positively with
condition that the Bureau would submit to the jurisdiction of Public Service Commission and in
consideration of 37 % of the gross revenues. However, the Bureau disagreeable, commenced a
suit against PLDT praying for judgment commanding PLDT to execute a contract with it. Trial
court ruled for PLDT stating that the Bureau could not compel PLDT to enter into an agreement
with it because both parties were not in agreement.
Issue: Whether or not neither the court nor even the Republic through the Bureau of
Telecommunications can compel PLDT to enter into a contract with the latter.
Held: NO. Parties can not be coerced to enter into a contract where no agreement is had
between them as to the principal terms and conditions of the contract. Freedom to stipulate
such terms and conditions is of the essence of our contractual system, and by express
provision of the statute, a contract may be annulled if tainted by violence, intimidation, or
undue influence (Articles 1306, 1336, 1337, Civil Code of the Philippines). But the court a quo
has apparently overlooked that while the Republic may not compel the PLDT to celebrate a
contract with it, the Republic may, in the exercise of the sovereign power of eminent domain,
require the telephone company to permit interconnection of the government telephone system
and that of the PLDT, as the needs of the government service may require, subject to the
payment of just compensation to be determined by the court.
Case: R. Marino Corpus vs. CA and Juan David, June 30, 1980, J. Makasiar.
Facts: Corpus and Atty. Juan David are intimately related to each other, being close friends. In
fact, Corpus was called by Atty. David as Marino and latter to former as Juaning. Corpus was
once charged with an administrative case by several employees of Central Bank Export
Department of which he is the Director. By reason thereto, he was suspended and considered
resigned. Thru Atty. Alvarez, he filed Petition before CFI of Manila under Judge Lantin which was
dismissed for lack of exhaustion of administrative remedies. Hence, Atty. David was retained as
counsel by Marino Corpus in a case dismissed by Judge Lantin. Before the SC, David was able
to win the case. With that, Corpus wrote a letter to David and gave the latter a check worth
P2,000. But David replied and gave the check back to Corpus, writing, When I decided to render
professional services in your case, I was motivated by the value to me of the very intimate
relations which you and I have enjoyed xxx and was not primarily for professional fee xxx. When
you shall have obtained a decision which would have finally resolved the case in your favor,
remembering me then will make me happy. Corpus was able to get a favorable judgment
ordering his reinstatement and payment of back salaries and allowances. Marino Corpus
contends that respondent David is not entitled to attorney's fees because there was no contract to
that effect. On the other hand, respondent David contends that the absence of a formal contract
for the payment of the attorney's fees will not negate the payment thereof because the contract

may be express or implied, and there was an implied understanding between the petitioner and
private respondent that the former will pay the latter attorney's fees when a final decision shall
have been rendered in favor of the petitioner reinstating him to -his former position in the Central
Bank and paying his back salaries.
Issue: Whether or not there has been a contract between Corpus and Atty. David for the
payment of the latters attorneys fees.
Held: YES. While there was express agreement between petitioner Corpus and respondent
David as regards attorney's fees, the facts of the case support the position of respondent David
that there was at least an implied agreement for the payment of attorney's fees.
Petitioner's act of giving the check for P2,000.00 through his aforestated April 18, 1962 letter to
respondent David indicates petitioner's commitment to pay the former attorney's fees, which is
stressed by expressing that "I wish I could give more but as you know we were banking on a SC
decision reinstating me and reimbursing my back salaries This last sentiment constitutes a
promise to pay more upon his reinstatement and payment of his back salaries. Petitioner ended
his letter that he was "looking forward to a continuation of the case in the lower court, ... to which
the certiorari-mandamus-quo warranto case was remanded by the Supreme Court for further
proceedings.
Moreover, the payment of attorney's fees to respondent David may also be justified by virtue of
the innominate contract of facio ut des (I do and you give which is based on the principle that "no
one shall unjustly enrich himself at the expense of another." innominate contracts have been
elevated to a codal provision in the New Civil Code by providing under Article 1307 that such
contracts shall be regulated by the stipulations of the parties, by the general provisions or
principles of obligations and contracts, by the rules governing the most analogous nominate
contracts, and by the customs of the people. The rationale of this article was stated in the 1903
case of Perez vs. Pomar (2 Phil. 982). In that case, the Court sustained the claim of plaintiff
Perez for payment of services rendered against defendant Pomar despite the absence of an
express contract to that effect, thus:
It does not appear that any written contract was entered into between the
parties for the employment of the plaintiff as interpreter, or that any other
innominate contract was entered into but whether the plaintiffs services were
solicitedorwhethertheywereoffered to the defendant for his assistance,
inasmuch as these services were accepted and made use of by the latter, we
must consider that there was a tacit and mutual consent as to the rendition of
the services. This gives rise to the obligation upon the person benefited by
the services to make compensation therefor, since the bilateral obligation to
render service as interpreter, on the one hand, and on the other to pay for the
service rendered, is thereby incurred. (Arts. 1088, 1089, and 1262 of the Civil
Code).
xxxxxxxxx
... Whether the service was solicited or offered, the fact remains that Perez
rendered to Pomar services as interpreter. As it does not appear that he did
this gratuitously, the duty is imposed upon the defendant, he having accepted
the benefit of the service, to pay a just compensation therefor, by virtue of the
innominate contract of facio ut des implicitly established.
xxxxxxxxx
... because it is a well-known principle of law that no one should permitted to
enrich himself to the damage of another" (emphasis supplied; see also
Tolentino, Civil Code of the Philippines, p. 388, Vol. IV 119621, citing Estate
of Reguera vs. Tandra 81 Phil. 404 [1948]; Arroyo vs. Azur 76 Phil.
493119461; and Perez vs. Pomar. 2 Phil. 682 [1903]).
WE reiterated this rule in Pacific Merchandising Corp. vs. Consolacion Insurance & Surety Co.,
Inc. (73 SCRA 564 [1976]) citing the case of Perez v. Pomar, supra thus:
Where one has rendered services to another, and these services are
accepted by the latter, in the absence of proof that the service was rendered
gratuitously, it is but just that he should pay a reasonable remuneration

therefor because 'it is a well-known principle of law, that no one should be

permitted to enrich himself to the damage of another (emphasis supplied).
Case: Daisy Tiu vs. Platinum Plans Phil., Inc., February 28, 2007, J. Quisumbing.
Facts: Daisy Tiu was an employee of Platinum Plans whose business is pre-need industry. She
was the Division Marketing Director from 1987-1989, and later re-hired as Senior Assistant VicePresident and Territorial Operations Head in charge of its Hongkong and ASEAN operations, with
respect to the latter under a contract of employment for 5 years. However, stopped reporting to
work and eventually became employed with Professional Pension Plans which is also a pre-need
industry, being its Vice-President for Sales. Hence, Platinum sued Tiu for damages alleging that
the latter violated the non-involvement clause in her contract of employment which provides that,
8. NON INVOLVEMENT PROVISION The EMPLOYEE further undertakes that during his/her
engagement with EMPLOYER and in case of separation from the Company, whether voluntary or
for cause, he/she shall not, for the next TWO (2) years thereafter, engage in or be involved with
any corporation, association or entity, whether directly or indirectly, engaged in the same
business or belonging to the same pre-need industry as the EMPLOYER. However, Tiu
countered that the non-involvement clause is unenforceable for being against public policy. The
trial court sustained the validity of the non-involvement clause, stating that a contract in restraint
of trade is valid provided there is a limitation upon either time or place. CA affirmed the trial
courts decision.
Issue: Whether the non-involvement clause in this case is valid.
Held: YES. A non-involvement clause is not necessarily void for being in restraint of trade
as long as there are reasonable limitations as to time, trade, and place.
In this case, the non-involvement clause has a time limit: two years from the time petitioners
employment with respondent ends. It is also limited as to trade, since it only prohibits petitioner
from engaging in any pre-need business akin to respondents. More significantly, since petitioner
was the Senior Assistant Vice-President and Territorial Operations Head in charge of
respondents Hongkong and Asean operations, she had been privy to confidential and highly
sensitive marketing strategies of respondents business. To allow her to engage in a rival
business soon after she leaves would make respondents trade secrets vulnerable especially in a
highly competitive marketing environment. In sum, we find the non-involvement clause not
contrary to public welfare and not greater than is necessary to afford a fair and reasonable
protection to respondent.
In any event, Article 1306 of the Civil Code provides that parties to a contract 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.
Article 1159 of the same Code also provides that obligations arising from contracts have the force
of law between the contracting parties and should be complied with in good faith. Courts cannot
stipulate for the parties nor amend their agreement where the same does not contravene law,
morals, good customs, public order or public policy, for to do so would be to alter the real intent of
the parties, and would run contrary to the function of the courts to give force and effect thereto.
Not being contrary to public policy, the non-involvement clause, which petitioner and respondent
freely agreed upon, has the force of law between them, and thus, should be complied with in
good faith
Case: Emeterio Cui vs. Arellano University, May 30, 1961, J. Concepcion.
Facts: Emeterio Cui was enrolled in the College of Law in Arellano University and finished his law
studies up to and including the first semester of fourth year, during which period, his uncle,
Francisco Capistrano, the brother of Cuis mother, was the dean and legal counsel of such
University. Cui enrolled for the last semester of his law studies in Arellano but failed to pay his
tuition fees because his uncle Dean Capistrano has severed his connection to such school for
having accepted the deanship and chancellorship of the College of Law of Abad Santos
University. Cui also transferred to such latter law school and graduated to such school. It will be
noted that during those years of stay at Arellano, Cui was awarded scholarship grants for

scholastic merits so that his semestral tuition fees were returned to him after the ends of
semester and where his scholarship was granted to him. When Cui applied to take for the Bar
Examination, he needed transcripts of his records in Arellano but the latter denied until the former
will pay back the amount refunded to the former by Arellano citing this pertinent provision in a
contract which Cui signed every after grant of scholarship, "In consideration of the scholarship
granted to me by the University, I hereby waive my right to transfer to another school without
having refunded to the University (defendant) the equivalent of my scholarship cash. Cui raised
his defense into this Memorandum issued by the Director of Private Schools, as follow:
2. When students are given full or partial scholarships, it is understood that
such scholarships are merited and earned. The amount in tuition and other
fees corresponding to these scholarships should not be subsequently
charged to the recipient students when they decide to quit school or to
transfer to another institution. Scholarships should not be offered merely to
attract and keep students in a school.
3. Several complaints have actually been received from students who have
enjoyed scholarships, full or partial, to the effect that they could not transfer
to other schools since their credentials would not be released unless they
would pay the fees corresponding to the period of the scholarships. Where
the Bureau believes that the right of the student to transfer is being denied on
this ground, it reserves the right to authorize such transfer.
Issue: Whether the provision in the Contract between Cui and Arellano University whereby
the former waived his right to transfer to another school without refunding to the latter the
equivalent of his scholarship in cash is valid.
Held: NO. The stipulation whereby student cannot transfer to another school without
refunding scholarship cash is null and void. Scholarship are awarded in recognition of merit
not to keep outstanding students in school to bolster its prestige. In the understanding of that
university scholarships award is a business scheme designed to increase the business potential
of an education institution. Thus conceived it is not only inconsistent with sound policy but also
good morals. But what is morals? Manresa has this definition. It is good customs; those generally
accepted principles of morality which have received some kind of social and practical
confirmation. The practice of awarding scholarships to attract students and keep them in school is
not good customs nor has it received some kind of social and practical confirmation except in
some private institutions as in Arellano University. The University of the Philippines which
implements Section 5 of Article XIV of the Constitution with reference to the giving of free
scholarships to gifted children, does not require scholars to reimburse the corresponding value of
the scholarships if they transfer to other schools. So also with the leading colleges and
universities of the United States after which our educational practices or policies are patterned. In
these institutions scholarships are granted not to attract and to keep brilliant students in school
for their propaganda mine but to reward merit or help gifted students in whom society has an
established interest or a first lien. (Emphasis supplied.) In this case, scholarship award is a
business scheme designed to increase the business potential of an educational institution with
respect to Arellanos case.
Case: Ramon Saura vs. Estela Sindico, March 23, 1960, J.B.L. Reyes.
Facts: Ramon E. Saura and Estela P. Sindico were contesting for nomination as the official
candidate of the Nacionalista Party in the fourth district of Pangasinan in the congressional
elections of November 12, 1957. On August 23, 1957, the parties entered into a written
agreement bearing the same date, containing among other matters stated therein, a pledge that

Each aspirant shall respect the result of the aforesaid convention, i.e., no one of us
shall either run as a rebel or independent candidate after losing in said convention.
In the provincial convention held by the Nacionalista Party on August 31, 1957, Saura was
elected and proclaimed the Party's official congressional candidate for the aforesaid district of
Pangasinan. Nonetheless, Sindico, in disregard of the covenant, filed, on September 6, 1957, her
certificate of candidacy for the same office with the Commission on Elections, and she openly and
actively campaigned for her election. Wherefore, on October 5, 1957, plaintiff Saura commenced
this suit for the recovery of damages. Upon motion of the defendant, the lower court, in its order
of November 19, 1957, dismissed the complaint on the basis that the agreement sued upon is

null and void, in tat (1) the subject matter of the contract, being a public office, is not within the
commerce of man; and (2) the "pledge" was in curtailment of the free exercise of elective
franchise and therefore against public policy. Hence, this appeal.
Issue: Whether or not the agreement between Saura and Sindico is valid.
Held: NO. We agree with the lower court in adjudging the contract or agreement in question a
nullity. Among those that may not be the subject matter (object) of contracts are certain rights of
individuals, which the law and public policy have deemed wise to exclude from the commerce of
man. Among them are the political rights conferred upon citizens, including, but not limited to,
once's right to vote, the right to present one's candidacy to the people and to be voted to public
office, provided, however, that all the qualifications prescribed by law obtain. Such rights may not,
therefore, be bargained away curtailed with impunity, for they are conferred not for individual or
private benefit or advantage but for the public good and interest.
Constitutional and statutory provision fix the qualifications of persons who may be eligible for
certain elective public offices. Said requirements may neither be enlarged nor reduced by mere
agreements between private parties. A voter possessing all the qualifications required to fill an
office may, by himself or through a political party or group, present his candidacy without further
limitations than those provided by law.
Case: Leal vs. IAC and Vicente Santiago (Substituted by Salud Santiago), November 5,
1987, J. Sarmiento.
Facts: On March 21, 1941, a document entirely in Spanish language entitled as Compraventa
was executed by Vicente Santiago and his brother Luis Santiago in favor of Cirilo Leal (the
deceased father of herein petitioners), involving the three parcels of land, as per paragraph (b)
thereof states in translation as, "they shall not sell to others these three lots but only to the seller
Vicente Santiago or to his heirs or successors". However, pursuant to the Compraventa, the title
over those three parcels of land was cancelled and a new one was issued in the name of Cirilo
Leal who immediately took possession and exercised possession and ownership over those
lands which was inherited by herein petitioners after Cirilos death. These parcels of land were
either mortgaged or leased by petitioner-children of Cirilo to their co-petitioners. However, Vicente
Santiago approached the petitioners and offered re-purchase of subject properties in pursuant to
the Compraventa. Trial court dismissed the complaint for being premature. Court of Appeals
under Justice Paras affirmed the trial courts decision.
Issue: Whether or not the prohibition to sell to third parties pursuant to the Compraventa
is valid.
Held: NO. Contracts are generally binding between the parties, their assigns and heirs; however,
under Art. 1255 of the Civil Code of Spain, which is applicable in this instance, pacts, clauses,
and conditions which are contrary to public order are null and void, thus, without any binding
effect.
Parenthetically, the equivalent provision in the Civil Code of the Philippines is that of Art. 1306,
which states: "That 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. Public order signifies the public weal public policy. 5
Essentially, therefore, public order and public policy mean one and the same thing. Public policy
is simply the English equivalent of "order publico" in Art. 1255 of the Civil Code of Spain. 6
One such condition which is contrary to public policy is the present prohibition to self to third
parties, because the same virtually amounts to a perpetual restriction to the right of ownership,
specifically the owner's right to freely dispose of his properties. This, we hold that any such
prohibition, indefinite and stated as to time, so much so that it shall continue to be applicable
even beyond the lifetime of the original parties to the contract, is, without doubt, a nullity. In the
light of this pronouncement, we grant the petitioners' prayer for the cancellation of the annotations
of this prohibition at the back of their Transfer Certificates 'Title.
In the case before us, we cannot and any express or implied grant of a right to repurchase, nor
can we infer, from any word or words in the questioned paragraph, the existence of any such
right. The interpretation in the resolution (Justice Sison) is rather strained. The phrase "in case

case" of should be construed to mean "should the buyers wish to sell which is the plain and
simple import of the words, and not "the buyers should sell," which is clearly a contorted
construction of the same phrase. The resort to Article 1373 of the Civil Code of the Philippines is
erroneous. The subject phrase is patent and unambiguous, hence, it must not be given another
interpretation
But even assuming that such a right of repurchase is granted under the "Compraventa," the
petitioner correctly asserts that the same has already prescribed. Under Art. 1508 of the Civil
Code of Spain (Art,. 1606 of the Civil Code of the Philippines), the right to redeem or repurchase,
in the absence of an express agreement as to time, shall last four years from the date of the
contract. In this case then, the right to repurchase, if it was at four guaranteed under in the
"Compraventa," should have been exercise within four years from March 21, 1941 (indubitably
the date of execution of the contract), or at the latest in 1945.
In the respondent court's resolution, it is further ruled that the right to repurchase was given birth
by the condition precedent provided for in the phrase "siempre y cuando estos ultimos pueden
hacer la compra" (when the buyer has money to buy). In other words, it is the respondent court's
contention that the right may be exercised only when the buyer has money to buy. If this were so,
the second paragraph of Article 1508 would apply there is agreement as to the time, although
it is indefinite, therefore, the right should be exercised within ten years, because the law does not
favor suspended ownership. Since the alleged right to repurchase was attempted to be exercised
by Vicente Santiago only in 1966, or 25 years from the date of the contract, the said right has
undoubtedly expired.
The law provides that for conventional redemption to take place, the vendor should reserve, in no
uncertain terms, the right to repurchase the thing sold. Thus, the right to redeem must be
expressly stipulated in the contract of sale in order that it may have legal existence.
Case: Banco Filipino Savings and Mortgage Bank vs. Hon. Navarro and Florante Del Valle,
July 28, 1987, J. Melencio-Herrera.
Facts: On May 20, 1975, respondent Florante del Valle (the BORROWER) obtained a loan
secured by a real estate mortgage (the LOAN, for short) from petitioner BANCO FILIPINO 1 in the
sum of Forty-one Thousand Three Hundred (P41,300.00) Pesos, payable and to be amortized
within fifteen (15) years at twelve (12%) per cent interest annually. Hence, the LOAN still had
more than 730 days to run by January 2, 1976, the date when CIRCULAR No. 494 was issued by
the Central Bank.
Stamped on the promissory note evidencing the loan is an Escalation Clause, reading as follows:
I/We hereby authorize Banco Filipino to correspondingly increase the interest rate
stipulated in this contract without advance notice to me/us in the event law should be
enacted increasing the lawful rates of interest that may be charged on this particular
kind of loan.
The Escalation Clause is based upon Central Bank CIRCULAR No. 494 issued on January 2,
1976, the pertinent portion of which reads:
3. The maximum rate of interest, including commissions, premiums, fees and other
charges on loans with maturity of more than seven hundred thirty (730) days, by
banking institutions, including thrift banks and rural banks, or by financial intermediaries
authorized to engage in quasi-banking functions shall be nineteen percent (19%) per
annum.
xxx
xxx
xxx
7. Except as provided in this Circular and Circular No. 493, loans or renewals thereof
shall continue to be governed by the Usury Law, as amended."
On the strength of CIRCULAR No. 494 BANCO FILIPINO gave notice to the BORROWER on
June 30, 1976 of the increase of interest rate on the LOAN from 12% to 17% per annum effective
on March 1, 1976.
Contending that CIRCULAR No. 494 is not the law contemplated in the Escalation Clause of the
promissory note, the BORROWER filed suit against BANCO FILIPINO for "Declaratory Relief"
with respondent Court, praying that the Escalation Clause be declared null and void and that
BANCO FILIPINO be ordered to desist from enforcing the increased rate of interest on the
BORROWER's real estate loan.

For its part, BANCO FILIPINO maintained that the Escalation Clause signed by the BORROWER
authorized it to increase the interest rate once a law was passed increasing the rate of interest
and that its authority to increase was provided for by CIRCULAR No. 494.
In its judgment, respondent Court nullified the Escalation Clause and ordered BANCO FILIPINO
to desist from enforcing the increased rate of interest on the BORROWER's loan.
* On February 24, 1983, the parties represented by their respective counsel, not only moved to
withdraw the appeal on the ground that it had become moot and academic "because of recent
developments in the rules and regulations of the Central Bank," but also prayed that "the decision
rendered in the Court of First Instance be therefore vacated and declared of no force and effect
as if the case was never filed," since the parties would like to end this matter once and for all."
However, "considering the subject matter of the controversy in which many persons similarly
situated are interested and because of the need for a definite ruling on the question," the Court, in
its Resolution of February 24, 1983, impleaded the Central Bank and required it to submit its
Comment, and encouraged homeowners similarly situated as the BORROWER to intervene in
the proceedings.
Issue: Whether or not Banco Filipino can increase the interest rate on the loan from 12%
to 19% per annum under the Escalation clause.
Held: NO. It is clear from the stipulation between the parties that the interest rate may be
increased "in the event a law should be enacted increasing the lawful rate of interest that may be
charged on this particular kind of loan." " The Escalation Clause was dependent on an increase of
rate made by "law" alone.
CIRCULAR No. 494, although it has the effect of law, is not a law. "Although a circular duly issued
is not strictly a statute or a law, it has, however, the force and effect of law." 6 (Italics supplied). "An
administrative regulation adopted pursuant to law has the force and effect of law." 7 "That
administrative rules and regulations have the force of law can no longer be questioned. " 8
The distinction between a law and an administrative regulation is recognized in the Monetary
Board guidelines quoted in the letter to the BORROWER of Ms. Paderes of September 24, 1976
(supra). According to the guidelines, for a loan's interest to be subject to the increases provided in
CIRCULAR No. 494, there must be an Escalation Clause allowing the increase "in the event that
any law or Central Bank regulation is promulgated increasing the maximum interest rate for
loans." The guidelines thus presuppose that a Central Bank regulation is not within the term "any
law."
It is now clear that from March 17, 1980, escalation clauses to be valid should specifically
provide: (1) that there can be an increase in interest if increased by law or by the Monetary
Board; and (2) in order for such stipulation to be valid, it must include a provision for
reduction of the stipulated interest "in the event that the applicable maximum rate of
interest is reduced by law or by the Monetary Board."
Case: Spouses Mariano and Gilda Florendo vs. CA and Land Bank of the Philippines,
December 17, 1996, J. Panganiban.
Facts: Gilda Florendo (was) an employee of (Respondent Bank) from May 17, 1976 until August
16, 1984 when she voluntarily resigned. However, before her resignation, she applied for a
housing loan of P148,000.00, payable within 25 years from (respondent bank's) Provident Fund
on July 20, 1983. Florendo and Land Bank entered into a Housing Loan Agreement which the
former executed a Real Estate Mortgage and Promissory Note. Land Bank increased the interest
rate from 9% to 17% per annum pursuant to ManCom Resolution No. 85-08 and Provident Fund
Memorandum Circular proving that,
ManCom (Management Committee) Resolution No. 85-08, together with PF (Provident
Fund) Memorandum Circular No. 85-08, which escalated the interest rates on
outstanding housing loans of bank employees who voluntarily "secede" (resign) from
the Bank; the range of rates varied depending upon the number of years service
rendered by the employees concerned. The rates were made applicable to those who
had previously resigned from the bank as well as those who would be resigning in the
future.
And the same increase being stated in the real estate mortgage as follows,

The rate of interest charged on the obligation secured by this mortgage. . ., shall be
subject, during the life of this contract, to such an increase/decrease in accordance with
prevailing rules, regulations and circulars of the Central Bank of the Philippines as the
Provident Fund Board of Trustees of the Mortgagee may prescribe for its debtors and
subject to the condition that the increase/decrease shall only take effect on the date of
effectivity of said increase/decrease and shall only apply to the remaining balance of
the loan.
Florendo protested such increase. The trial court ruled in favor of the bank. However, Florendo
argued that, the increased rate of interest is onerous and was imposed unilaterally, without the
consent of the borrower-spouses. And that there is in fact no Central Bank rule, regulation or
other issuance which would have triggered an application of the escalation clause as to her
factual situation.
Issue: Whether or not the bank has valid and legal basis to impose an increased interest
rate on the petitioners housing loan.
Held: NO. In the case at bar, the loan was perfected on July 20, 1983. PD No. 116 became
effective on January 29, 1973. CB Circular No. 416 was issued on July 29, 1974. CB Circ. 504
was issued February 6, 1976. CB Circ. 706 was issued December 1, 1979. CB Circ. 905, lifting
any interest rate ceiling prescribed under or pursuant to the Usury Law, as amended, was
promulgated in 1982. These and other relevant CB issuances had already come into existence
prior to the perfection of the housing loan agreement and mortgage contract, and thus it may be
said that these regulations had been taken into consideration by the contracting parties when
they first entered into their loan contract. In light of the CB issuances in force at that time,
respondent bank was fully aware that it could have imposed an interest rate higher than 9% per
annum rate for the housing loans of its employees, but it did not. In the subject loan, the
respondent bank knowingly agreed that the interest rate on petitioners' loan shall remain at 9%
p.a. unless a CB issuance is passed authorizing an increase (or decrease) in the rate on such
employee loans and the Provident Fund Board of Trustees acts accordingly. Thus, as far as the
parties were concerned, all other onerous factors, such as employee resignations, which could
have been used to trigger an application of the escalation clause were considered barred or
waived. If the intention were otherwise, they especially respondent bank should have
included such factors in their loan agreement.
ManCom Resolution No. 85-08, which is neither a rule nor a resolution of the Monetary Board,
cannot be used as basis for the escalation in lieu of CB issuances, since paragraph (f) of the
mortgage contract very categorically specifies that any interest rate increase be in accordance
with "prevailing rules, regulations and circulars of the Central Bank . . . as the Provident Fund
Board . . . may prescribe." The Banco Filipino and PNB doctrines are applicable four-square in
this case. As a matter of fact, the said escalation clause further provides that the increased
interest rate "shall only take effect on the date of effectivity of (the) increase/decrease" authorized
by the CB rule, regulation or circular. Without such CB issuance, any proposed increased rate will
never become effective.
We
have
already
mentioned
(and
now
reiterate
our
holding
in
several
cases 15) that by virtue of CB Circular 905, the Usury Law has been rendered ineffective. Thus,
petitioners' contention that the escalation clause is violative of the said law is bereft of any merit.
On the other hand, it will not be amiss to point out that the unilateral determination and imposition
of increased interest rates by the herein respondent bank is obviously violative of the principle of
mutuality of contracts ordained in Article 1308 of the Civil Code. As this Court held in PNB: 16
In order that obligations arising from contracts may have the force of law
between the parties, there must be mutuality between the parties based on
their essential equality. A contract containing a condition which makes its
fulfillment dependent exclusively upon the uncontrolled will of one of the
contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555).
Hence, even assuming that the . . . loan agreement between the PNB and
the private respondent gave the PNB a license (although in fact there was
none) to increase the interest rate at will during the term of the loan, that
license would have been null and void for being violative of the principle of
mutuality essential in contracts. It would have invested the loan agreement

with the character of a contract of adhesion, where the parties do not bargain
on equal footing, the weaker party's (the debtor) participation being reduced
to the alternative "to take it or leave it" (Qua vs. Law Union & Rock Insurance
Co., 95 Phil 85). Such a contract is a veritable trap for the weaker party
whom the courts of justice must protect against abuse and imposition.
The respondent bank tried to sidestep this difficulty by averring that petitioner Gilda Florendo as a
former bank employee was very knowledgeable concerning respondent bank's lending rates and
procedures, and therefore, petitioners were "on an equal footing" with respondent bank as far as
the subject loan contract was concerned. That may have been true insofar as entering into the
original loan agreement and mortgage contract was concerned. However, that does not hold true
when it comes to the determination and imposition of escalated rates of interest as unilaterally
provided in the ManCom Resolution, where she had no voice at all in its preparation and
application.
To allay fears that respondent bank will inordinately be prejudiced by being stuck with this
"sweetheart loan" at patently concessionary interest rates, which according to respondent bank is
the "sweetest deal" anyone could obtain and is an act of generosity considering that in 1985
lending rates in the banking industry were peaking well over 30% p.a., 17 we need only point out
that the bank had the option to impose in its loan contracts the condition that resignation of an
employee-borrower would be a ground for escalation. The fact is it did not. Hence, it must live
with such omission.
Case: Aniceto Saludo Jr. vs. Security Bank Corporation, October 13, 2010, J. Perez.
Facts: On 30 May 1996, Booklight was extended an omnibus line credit facility 3 by SBC in the
amount of P10,000,000.00. Said loan was covered by a Credit Agreement 4 and a Continuing
Suretyship5 with petitioner as surety, both documents dated 1 August 1996, to secure full
payment and performance of the obligations arising from the credit accommodation.
Booklight drew several availments of the approved credit facility from 1996 to 1997 and faithfully
complied with the terms of the loan. On 30 October 1997, SBC approved the renewal of credit
facility of Booklight in the amount of P10,000,000.00 under the prevailing security lending rate. 6
From August 3 to 14, 1998, Booklight executed nine (9) promissory notes 7 in favor of SBC in the
aggregate amount of P9,652,725.00. For failure to settle the loans upon maturity, demands 8 were
made on Booklight and petitioner for the payment of the obligation but the duo failed to pay. As of
15 May 2000, the obligation of Booklight stood at P10,487,875.41, inclusive of interest past due
and penalty.9
On 16 June 2000, SBC filed against Booklight and herein petitioner an action for collection of
sum of money with the RTC. RTC ruled that Saludo is jointly and severally liable with Booklight.
CA affirmed in toto. Saludo argued that the Continuing Suretyship is a contract of adhesion and
that its participation thereto is only his signing the same.
Issue: Whether or not a lawyer can be excused from liability by arguing that the contract is
one of a contract of adhesion.
Held: NO. The lameness of petitioners stand is pointed up by his attempt to escape from liability
by labelling the Continuing Suretyship as a contract of adhesion.
A contract of adhesion is defined as one in which one of the parties imposes a ready-made form
of contract, which the other party may accept or reject, but which the latter cannot modify. One
party prepares the stipulation in the contract, while the other party merely affixes his signature or
his adhesion thereto, giving no room for negotiation and depriving the latter of the opportunity to
bargain on equal footing.
A contract of adhesion presupposes that the party adhering to the contract is a weaker party. That
cannot be said of petitioner. He is a lawyer. He is deemed knowledgeable of the legal implications
of the contract that he is signing.
It must be borne in mind, however, that contracts of adhesion are not invalid per se. Contracts of
adhesion, where one party imposes a ready-made form of contract on the other, are not entirely
prohibited. The one who adheres to the contract is, in reality, free to reject it entirely; if he
adheres, he gives his consent.

Case: Metropolitan Bank and Trust Company vs. Rogelio Reynado and Jose Adrandea,
August 9, 2010, J. Del Castillo.
Facts: On January 31, 1997, petitioner Metropolitan Bank and Trust Company charged
respondents before the Office of the City Prosecutor of Manila with the crime of estafa under
Article 315, paragraph 1(b) of the Revised Penal Code. In the affidavit of petitioners audit officer,
Antonio Ivan S. Aguirre, it was alleged that the special audit conducted on the cash and lending
operations of its Port Area branch uncovered anomalous/fraudulent transactions perpetrated by
respondents in connivance with client Universal Converter Philippines, Inc. (Universal). In their
defense, respondents denied responsibility in the anomalous transactions with Universal and
claimed that they only intended to help the Port Area branch solicit and increase its deposit
accounts and daily transactions.
Meanwhile, on February 26, 1997, petitioner and Universal entered into a Debt Settlement
Agreement whereby the latter acknowledged its indebtedness to the former in the total amount of
P50,990,976.27 as of February 4, 1997 and undertook to pay the same in bi-monthly
amortizations in the sum of P300,000.00 starting January 15, 1997, covered by postdated
checks, plus balloon payment of the remaining principal balance and interest and other charges,
if any, on December 31, 2001. The City Prosecutor and DOJ dismissed the case. Hence,
Metrobank filed a petition for certiorari and mandamus to CA. CA likewise affirmed the decisions
of the City Prosecutor and DOJ stating that, while novation does not extinguish criminal liability, it
may prevent the rise of such liability as long as it occurs prior to the filing of the criminal
information in court.
Issue: Whether or not the Debt Settlement Agreement between Metropolitan Bank and
Trust Company and Universal is tantamount to a novation of obligation by the latter to the
former which extinguishes the criminal liability for Estafa by the latter.
Held: NO. Initially, it is best to emphasize that novation is not one of the grounds prescribed by
the Revised Penal Code for the extinguishment of criminal liability. In a catena of cases, it was
ruled that criminal liability for estafa is not affected by a compromise or novation of contract. In
Firaza v. People and Recuerdo v. People, this Court ruled that in a crime of estafa,
reimbursement or belated payment to the offended party of the money swindled by the accused
does not extinguish the criminal liability of the latter. We also held in People v. Moreno and in
People v. Ladera that criminal liability for estafa is not affected by compromise or novation of
contract, for it is a public offense which must be prosecuted and punished by the Government on
its own motion even though complete reparation should have been made of the damage suffered
by the offended party. Similarly in the case of Metropolitan Bank and Trust Company v.
Tonda cited by petitioner, we held that in a crime of estafa, reimbursement of or compromise as
to the amount misappropriated, after the commission of the crime, affects only the civil liability of
the offender, and not his criminal liability.
Thus, the doctrine that evolved from the aforecited cases is that a compromise or settlement
entered into after the commission of the crime does not extinguish accuseds liability for estafa.
Neither will the same bar the prosecution of said crime. Accordingly, in such a situation, as in this
case, the complaint for estafa against respondents should not be dismissed just because
petitioner entered into a Debt Settlement Agreement with Universal. Even the OSG arrived at the
same conclusion:
Contrary to the conclusion of public respondent, the Debt Settlement Agreement entered into
between petitioner and Universal Converter Philippines extinguishes merely the civil aspect of the
latters liability as a corporate entity but not the criminal liability of the persons who actually
committed the crime of estafa against petitioner Metrobank. x x x
Case: Prudential Bank and Trust Company (BPI) vs. Liwayway Abasolo, September 27,
2010, J. Carpio Morales.
Facts: Leonor Valenzuela-Rosales inherited two parcels of land in Laguna which upon her death
were inherited by her heirs thereby appointing Liwayway Abasolo as their agent thru the SPA
empowering the latter to sell the properties. One, Corazon Marasigan expressed her interest in
buying that same properties but because she had no money yet she suggested the idea of first

mortgaging the properties to Prudential Bank and the proceeds of which would be paid directly to
Abasolo. On consultation with Prudential Banks employee named Norberto Mendiola, a Deed of
Absolute Sale was executed thereby transferring to Marasigan the property with assurance that
the proceeds thereof would be paid directly to Abasolo. When all went well with the loan, in the
absence of a written request for a bank guarantee, the PBTC released the proceeds of the loan
to Marasigan, whom latter despite repeated demands failedto pay the purchase price of the
properties. Marasigan only paid in kind but never the entire purchase price. Hence, Abasolo filed
a complaint for collection of sum of money and annulment of sale and mortgage with damages.
Marasigan, however, denied the existence of any agreement that the proceeds be paid to
Abasolo and that the payment in kind was already sufficient. RTC ruled in favor of Abasolo
ordering PBTC to pay Abasolo in the event that Marasigan failed to pay. CA affirmed.
Issue: Whether or not PBTC would be subsidiarily liable to Abasolo in the absence of any
contractual relationship between the two.
Held: NO. In the absence of a lender-borrower relationship between petitioner and Liwayway,
there is no inherent obligation of petitioner to release the proceeds of the loan to her. To a
banking institution, well-defined lending policies and sound lending practices are essential to
perform its lending function effectively and minimize the risk inherent in any extension of credit. In
order to identify and monitor loans that a bank has extended, a system of documentation is
necessary. Under this fold falls the issuance by a bank of a guarantee which is essentially a
promise to repay the liabilities of a debtor, in this case Corazon. It would be contrary to
established banking practice if Mendiola issued a bank guarantee, even if no request to that
effect was made.
The principle of relativity of contracts in Article 1311 of the Civil Code supports
petitioners cause:
Art. 1311. Contracts take effect only between the parties, their
assigns and heirs, except in case where the rights and obligations arising
from the contract are not transmissible by their nature, or by stipulation or by
provision of law. The heir is not liable beyond the value of the property he
received from the decedent.
If a contract should contain some stipulation in favor of a third
person, he may demand its fulfillment provided he communicated his
acceptance to the obligor before its revocation. A mere incidental benefit or
interest of a person is not sufficient. The contracting parties must have
clearly and deliberately conferred a favor upon a third person. (underscoring
supplied)
For Liwayway to prove her claim against petitioner, a clear and deliberate act of
conferring a favor upon her must be present. A written request would have sufficed to prove this,
given the nature of a banking business, not to mention the amount involved.
Since it has not been established that petitioner had an obligation to Liwayway, there is
no breach to speak of. Liwayways claim should only be directed against Corazon. Petitioner
cannot thus be held subisidiarily liable.
Case: Asian Cathay Finance and Leasing Corporation vs. Spouses Cesario Gravador and
Norma De Vera and Spouses Dumigpi, July 5, 2010, J. Nachura.
Facts: Asian Cathay Finance and Leasing Corporation (ACFLC) extended a loan of Eight
Hundred Thousand Pesos (P800,000.00) to respondent Cesario Gravador, with respondents
Norma de Vera and Emma Concepcion Dumigpi as co-makers. The loan was payable in sixty
(60) monthly installments of P24,400.00 each. To secure the loan, respondent Cesario executed
a real estate mortgage5 over his property in Sta. Maria, Bulacan. Respondents paid the initial
installment due in November 1999. However, they were unable to pay the subsequent ones.
Hence, petitioner filed a petition for extrajudicial foreclosure of mortgage. Respondent, however,
filed a suit for annulment of such mortgage claiming that the real estate mortgage is null and void.

They pointed out that the mortgage does not make reference to the promissory note dated
October 22, 1999. The promissory note does not specify the maturity date of the loan, the interest
rate, and the mode of payment; and it illegally imposed liquidated damages. The real estate
mortgage, on the other hand, contains a provision on the waiver of the mortgagors right of
redemption, a provision that is contrary to law and public policy. Respondents added that ACFLC
violated Republic Act No. 3765, or the Truth in Lending Act, in the disclosure statement that
should be issued to the borrower. RTC denied the application for TRO by respondent and
thereafter dismissed the complaint sustaining the validity of the promissory note and real estate
mortgage stating among others that, respondents are well-educated individuals who could
not feign naivet in the execution of the loan documents. It, therefore, rejected respondents
claim that ACFLC deceived them into signing the promissory note, disclosure statement, and
deed of real estate mortgage. The RTC further held that the alleged defects in the promissory
note and in the deed of real estate mortgage are too insubstantial to warrant the nullification of
the mortgage. It added that a promissory note is not one of the essential elements of a mortgage;
thus, reference to a promissory note is neither indispensable nor imperative for the validity of the
mortgage. CA reversed the trial courts decision.
Issue: Whether or not the subject promissory note and real estate mortgage is one of
contract of adhesion.
Held: YES. The supposed waiver by the mortgagors was contained in a statement made in fine
print in the REM. It was made in the form and language prepared by [petitioner]ACFLC while the
[respondents] merely affixed their signatures or adhesion thereto. It thus partakes of the nature of
a contract of adhesion. It is settled that doubts in the interpretation of stipulations in contracts of
adhesion should be resolved against the party that prepared them. This principle especially holds
true with regard to waivers, which are not presumed, but which must be clearly and convincingly
shown. [Petitioner] ACFLC presented no evidence hence it failed to show the efficacy of this
waiver.
Moreover, to say that the mortgagors right of redemption may be waived through a fine print in a
mortgage contract is, in the last analysis, tantamount to placing at the mortgagees absolute
disposal the property foreclosed. It would render practically nugatory this right that is provided by
law for the mortgagor for reasons of public policy. A contract of adhesion may be struck down as
void and unenforceable for being subversive to public policy, when the weaker party is completely
deprived of the opportunity to bargain on equal footing.
Case: Pepito Velasco, et al. vs. CA and GSIS, January 28, 1980, J. Barredo.
Facts: Sometime on November 10, 1965, Alta Farms secured from the GSIS a Three Million Two
Hundred Fifty Five Thousand Pesos (P3,255,000.00) loan and an additional loan of Five Million
Sixty-Two Thousand Pesos (P5,062,000.00) on October 5, 1967, to finance a piggery project.
These loans were secured by two mortgage. Alta Farms defaulted in the payment of its
amortizations presumably because of this that Alta Farms executed a Deed of Sale With
Assumption of Mortgage with Asian Engineering Corporation on July 10, 1969 but without the
previous consent or approval of the GSIS and in direct violation of the provisions of the
mortgage contracts. Even without the approval of the Deed of Sale With Assumption of Mortgage
by the GSIS, Asian Engineering Corporation executed an Exclusive Sales Agency, Management
and Administration Contract in favor of Laigo Realty Corporation, with the intention of converting
the piggery farm into a subdivision. And on October 20, 1969, Asian Engineering executed
another contract with Laigo, whereby Laigo was to undertake the development of the property
into a subdivision. Laigo, on the other hand, entered into a contract with Lumanlan to construct
for the home buyers, 20 houses on the subdivision. Another contract was entered into between
Laigo and Velasco for construction of the houses. However, when neither Laigo nor the individual
home buyers paid for the home constructed, Velasco wrote the GSIS to intercede for the unpaid
accounts of the home buyers. Contracts that were subsequently entered into by Laigo include
that of Delos Santos, Galang and Lumbang. However, GSIS categorically denied that the firm has
clear legal ground against Laigo having no privity of contract between petitioners. With the same
plight, herein petitioners filed a case against GSIS. The latter however, presented a defense
through the execution of Deed of Quitclaim and Undertaking by Laigo Realty.
Issue: Whether there is contractual privity between GSIS and Lumanlan and Velasco.

Held: YES. What is more, the reliance of GSIS on the Deed of Quitclaim of May 7, 1970 is to Our
mind misplaced. We have analyzed this document carefully, and We are of the considered view
that it is actually evidence against GSIS. Even if what is unnatural in ordinary business or
industrial experience were assumed, that is, that GSIS was unaware all along during the period of
their construction of the work then being done by petitioners - albeit it is possible there was no
express consent given to - by and thru the aforementioned deed of quitclaim, GSIS agreed to
receive and did actually receive the benefits of what petitioners had accomplished or would
accomplish under their contracts with Laigo., So much so, that the dispositive portion of the
quitclaim dead does not really relieve GSIS from liability to petitioners. Properly viewed,
GSIS virtually assumed under said deed, liability in regard to claims like those of
petitioners who might not be paid by Laigo albeit said liability has been made subject to
the reservation that it could seek indemnity from Laigo.
GSIS received Alta Farms' proposal about the conversion of their piggery project into a
subdivision (in which Laigo Realty's participation was mentioned) as early as February 5, 1970. It
was only in November, 1970 that it issued its "cease and desist" order. From all indications, the
jobs of petitioners were already practically finished then. And in the Joint Manifestation filed by
the parties with the trial court as late as February 20, 1976, GSIS made it clear that "defendant
(GSIS) up to the present has not collected from the house owners of the 63 houses built by the
plaintiffs notwithstanding the foreclosure proceedings and consolidation 6f ownership." Again, it is
thus obvious that GSIS assumed ownership of the houses built by petitioners and was benefited
by the same, and the fact that it has not collected any payment from the "house owners" or the
construction of the houses respectively occupied by them is of no moment insofar as its liability to
petitioners is concerned. Surely, it is not pretended that those "house owners" would be allowed
to enrich themselves at the expense of petitioners. Indeed, the term "house owners" is
inappropriate, if only because in Paragraph 16 of its Comment on the petition herein, GSIS
unequivocally state that "GSIS foreclosed the properties including all improvements (the houses
in 1970" and, thereby, became the owner of said houses.
Case: George Kauffman vs. PNB, Sept. 29, 1921, J. Street.
Facts: George A. Kauffman, was the president of a domestic corporation engaged chiefly in the
exportation of hemp from the Philippine Islands and known as the Philippine Fiber and Produce
Company, of which company the plaintiff apparently held in his own right nearly the entire issue of
capital stock. On February 5, 1918, the board of directors of said company, declared a dividend of
P100,000 from its surplus earnings for the year 1917, of which the plaintiff was entitled to the sum
of P98,000. This amount was accordingly placed to his credit on the books of the company, and
so remained until in October of the same year when an unsuccessful effort was made to transmit
the whole, or a greater part thereof, to the plaintiff in New York City.
In this connection it appears that on October 9, 1918, George B. Wicks, treasurer of the
Philippine Fiber and Produce Company, presented himself in the exchange department of the
Philippine National Bank in Manila and requested that a telegraphic transfer of $45,000 should be
made to the plaintiff in New York City, upon account of the Philippine Fiber and Produce
Company. Upon receiving this telegraphic message, the bank's representative in New York sent a
cable message in reply suggesting the advisability of withholding this money from Kauffman, in
view of his reluctance to accept certain bills of the Philippine Fiber and Produce Company. The
Philippine National Bank acquiesced in this and on October 11 dispatched to its New York agency
another message to withhold the Kauffman payment as suggested.
Meanwhile Wicks, the treasurer of the Philippine Fiber and Produce Company, cabled to
Kauffman in New York, advising him that $45,000 had been placed to his credit in the New York
agency of the Philippine National Bank; and in response to this advice Kauffman presented
himself at the office of the Philippine National Bank in New York City on October 15, 1918, and
demanded the money. By this time, however, the message from the Philippine National Bank of
October 11, directing the withholding of payment had been received in New York, and payment
was therefore refused.
Hence, Kauffman instituted a suit before the CFI of Manila to recover the sum.
Issue: Whether or not Kauffman has right of action against PNB.

Held: YES. In the case of Uy Tam and Uy Yet vs. Leonard (30 Phil., 471), is found an elaborate
dissertation upon the history and interpretation of the paragraph above quoted and so complete is
the discussion contained in that opinion that it would be idle for us here to go over the same
matter. Suffice it to say that Justice Trent, speaking for the court in that case, sums up its
conclusions upon the conditions governing the right of the person for whose benefit a contract is
made to maintain an action for the breach thereof in the following words:
So, we believe the fairest test, in this jurisdiction at least, whereby to determine whether the
interest of a third person in a contract is a stipulation pour autrui, or merely an incidental interest,
is to rely upon the intention of the parties as disclosed by their contract.
If a third person claims an enforcible interest in the contract, the question must be settled by
determining whether the contracting parties desired to tender him such an interest. Did they
deliberately insert terms in their agreement with the avowed purpose of conferring a favor upon
such third person? In resolving this question, of course, the ordinary rules of construction and
interpretation of writings must be observed. (Uy Tam and Uy Yet vs. Leonard, supra.)
Further on in the same opinion he adds: "In applying this test to a stipulation pour autrui, it
matters not whether the stipulation is in the nature of a gift or whether there is an obligation owing
from the promise to the third person. That no such obligation exists may in some degree assist in
determining whether the parties intended to benefit a third person, whether they stipulated for
him." (Uy Tam and Uy Yet vs. Leonard, supra.)
In the light of the conclusion thus stated, the right of the plaintiff to maintain the present action is
clear enough; for it is undeniable that the bank's promise to cause a definite sum of money to be
paid to the plaintiff in New York City is a stipulation in his favor within the meaning of the
paragraph above quoted; and the circumstances under which that promise was given disclose an
evident intention on the part of the contracting parties that the plaintiff should have the money
upon demand in New York City. The recognition of this unqualified right in the plaintiff to receive
the money implies in our opinion the right in him to maintain an action to recover it; and indeed if
the provision in question were not applicable to the facts now before us, it would be difficult to
conceive of a case arising under it.
It will be noted that under the paragraph cited a third person seeking to enforce compliance with a
stipulation in his favor must signify his acceptance before it has been revoked. In this case the
plaintiff clearly signified his acceptance to the bank by demanding payment; and although the
Philippine National Bank had already directed its New York agency to withhold payment when this
demand was made, the rights of the plaintiff cannot be considered to as there used, must be
understood to imply revocation by the mutual consent of the contracting parties, or at least by
direction of the party purchasing he exchange.
Case: Bonifacio Brothers Inc., et al. vs. Enrique Mora, et al., May 29, 1967, J. Castro.
Facts: Enrique Mora, owner of Oldsmobile sedan model 1956, bearing plate No. QC- mortgaged
the same to the H.S. Reyes, Inc., with the condition that the former would insure the automobile
with the latter as beneficiary. The automobile was thereafter insured on June 23, 1959 with the
State Bonding & Insurance Co., Inc., and motor car insurance policy A-0615 was issued to
Enrique Mora. During the effectivity of the insurance contract, the car met with an accident. The
insurance company then assigned the accident to the Bayne Adjustment Co. for investigation and
appraisal of the damage. Enrique Mora, without the knowledge and consent of the H.S. Reyes,
Inc., authorized the Bonifacio Bros. Inc. to furnish the labor and materials, some of which were
supplied by the Ayala Auto Parts Co. For the cost of labor and materials, Enrique Mora was billed
at P2,102.73 through the H.H. Bayne Adjustment Co. In the meantime, the car was delivered to
Enrique Mora without the consent of the H.S. Reyes, Inc., and without payment to the Bonifacio
Bros. Inc. and the Ayala Auto Parts Co. of the cost of repairs and materials. Upon the theory that
the insurance proceeds should be paid directly to them, the Bonifacio Bros. Inc. and the Ayala
Auto Parts Co. filed on May 8, 1961 a complaint with the Municipal Court of Manila against
Enrique Mora and the State Bonding & Insurance Co., Inc. for the collection of the sum of
P2,002.73.
Issue: Whether there is privity of contract between the Bonifacio Bros. Inc. and the Ayala
Auto Parts Co. on the one hand and the insurance company on the other.

Held: NO. In this connection, this Court has laid down the rule that the fairest test to determine
whether the interest of a third person in a contract is a stipulation pour autrui or merely an
incidental interest, is to rely upon the intention of the parties as disclosed by their contract. 4 In the
instant case the insurance contract does not contain any words or clauses to disclose an intent to
give any benefit to any repairmen or materialmen in case of repair of the car in question. The
parties to the insurance contract omitted such stipulation, which is a circumstance that supports
the said conclusion. On the other hand, the "loss payable" clause of the insurance policy
stipulates that "Loss, if any, is payable to H.S. Reyes, Inc." indicating that it was only the H.S.
Reyes, Inc. which they intended to benefit.
We likewise observe from the brief of the State Bonding & Insurance Company that it has
vehemently opposed the assertion or pretension of the appellants that they are privy to the
contract. If it were the intention of the insurance company to make itself liable to the repair shop
or materialmen, it could have easily inserted in the contract a stipulation to that effect. To hold
now that the original parties to the insurance contract intended to confer upon the appellants the
benefit claimed by them would require us to ignore the indespensable requisite that a stipulation
pour autrui must be clearly expressed by the parties, which we cannot do.
As regards paragraph 4 of the insurance contract, a perusal thereof would show that instead of
establishing privity between the appellants and the insurance company, such stipulation merely
establishes the procedure that the insured has to follow in order to be entitled to indemnity for
repair. This paragraph therefore should not be construed as bringing into existence in favor of the
appellants a right of action against the insurance company as such intention can never be
inferred therefrom.
Case : Miguel Florentino, et al. vs. Salvador Encarnacion, et al., Sept. 30, 1977, J. Guerrero.
Facts: Just after the death of Encarnacion FIorentino in 1941 up to last year and as had always
been the case since time immomorial the products of the land made subject matter of this land
has been used in answering for the payment for the religious functions specified in the Deed
Extrajudicial Partition belated August 24, 1947. This arrangement about the products answering
for the comment of expenses for religions functions as mentioned above was not registered in the
office of the Register of Deeds under Act No 3344, Act 496 or and, other system of registration.
The heirs, however, of Encarnacion filed with CFI of Ilocos Sur an application for registration of a
parcel of agricultural land and the revocation of the said provision in the Deed pertaining to the
products of such land subject to payment of religious functions expenses.
Issue: Whether or not the stipulation, arrangement or grant is revocable at the option of
the co-heirs.
Held: NO. We find that the trial court erred in holding that the stipulation, arrangement or grant
(Exhibit O-1) is revocable at the option of the co-owners. While a stipulation in favor of a third
person has no binding effect in itself before its acceptance by the party favored, the law does not
provide when the third person must make his acceptance. As a rule, there is no time at such third
person has after the time until the stipulation is revoked. Here, We find that the Church accepted
the stipulation in its favor before it is sought to be revoked by some of the co-owners, namely the
petitioners-appellants herein. It is not disputed that from the time of the with of Doa Encarnacion
Florentino in 1941, as had always been the case since time immemorial up to a year before the
firing of their application in May 1964, the Church had been enjoying the benefits of the
stipulation. The enjoyment of benefits flowing therefrom for almost seventeen years without
question from any quarters can only be construed as an implied acceptance by the Church of the
stipulation pour autrui before its revocation.
We hold that said stipulation is a stipulation pour autrui. A stipulation pour autrui is a stipulation in
favor of a third person conferring a clear and deliberate favor upon him, and which stipulation is
merely a part of a contract entered into by the parties, neither of whom acted as agent of the third
person, and such third person and demand its fulfillment provoked that he communicates his to
the obligor before it is revoked. The requisites are: (1) that the stipulation in favor of a third person
should be a part, not the whole, of the contract; (2) that the favorable stipulation should not be
conditioned or compensated by any kind of obligation whatever; and (3) neither of the contracting
bears the legal represented or authorization of third person.

To constitute a valid stipulation pour autrui it must be the purpose and intent of the stipulating
parties to benefit the third and it is not sufficient that the third person may be incidentally
benefited by the stipulation. The fairest test to determine whether the interest of third person in a
contract is a stipulation pour autrui or merely an incidental interest, is to rely upon the intention of
the parties as disclosed by their contract. In applying this test, it meters not whether the
stipulation is in the nature of a gift or whether there is an obligation owing from the promisee to
the third person. That no such obsorption exists may in some degree assist in determining
whether the parties intended to benefit a third person.
Case: Bank of America NT & SA vs. IAC and Air Cargo and Travel Corporation, Nov. 11,
1986, J. Melencio-Herrera.
Facts: Plaintiff Air Cargo and Travel Corporation is the owner of Account Number 19842-01-2
with defendant Bank of America. Defendant Toshiyuki Minami, President of plaintiff corporation in
Japan, is the owner of Account Number 24506-01-7 with defendant Bank. On March 10, 1981,
the Bank received a tested telex advise from Kyowa Bank of Japan stating, ADVISE PAY USDLS
23,595. TO YOUR A/C NBR 24506-01-7 OF A. C. TRAVEL CORPORATION MR. TOSHIYUKO
MINAMI and the Bank Credited the amount of US$23,595.00 to Account Number 24506-07-1
(should be 24506-01-7) owned, as aforesaid, by Minami. On March 12, 1981, Minami withdrew
the sum of P180,000.00 the equivalent in Philippine Pesos of the sum of US$23,595.00 from the
Bank on his Account Number 24506-07-1 (should be 24506-01-7). According to ACTC in its
Comment, in the early part of 1981, it was Tokyo Tourist Corporation in Japan which applied with
Kyowa Bank, Ltd. also based in Tokyo, Japan, for telegraphic transfer of the sum of
US$23,595.00 payable to ACTC's account with BANKAMERICA, Manila. When the tested telex
was received on May 10, 1981, employees of BANKAMERICA noted its patent ambiguity.
Notwithstanding, on the following day, BANKAMERICA credited the amount of US$23,595.00 to
the account of Minami. ACTC claimed that the amount should have been credited to its account
and demanded restitution, but BANKAMERICA refused. On February 18, 1982, ACTC filed suit
for damages against BANKAMERICA and Minami before the Trial Court in Pasig for the failure of
BANKAMERICA to restitute. Trial court decided in favor of the respondent. CA also affirmed.
Issue: Whether or not there was a stipulation pour autrui.
Held: YES. In Vargas Plow Factory, Inc. vs. Central Bank, it was held that "the opening of a letter
of credit in favor of the exporter becomes ultimately but the result of a stipulation pour autrui" (27
SCRA 84 [1969]). Similarly, when KYOWA asked BANK-AMERICA to pay an amount to a
beneficiary (either ACTC or Minami), the contract was between KYOWA and BANKAMERICA and it had a stipulation pour autrui.
It is our considered opinion that, in the tested telex, considered either as a patent ambiguity or as
a latent ambiguity, the beneficiary is Minami. The mention of Account No. 24506-01-7, as well as
the name of Minami, has to be given more weight than the mention of the name of ACTC.
BANKAMERICA could not have very well disregarded that account number. It could also be that
the mention of ACTC's name was a further identification of Minami, to prevent payment to a
possible another "Toshiyuko Minami" who may not be connected with ACTC. On the other hand, it
should be difficult to concede that, in the tested telex, Account No. 24506-01-7 was erroneously
written and should be substituted by Account No. 19842-01-2 in the name of ACTC.
It should be recalled that the tested telex originated from KYOWA at the behest of Tokyo Tourist
Corporation with whom ACTC had business dealings. Minami, on the other hand, was the liaison
officer of ACTC in Japan. As the entity responsible for the tested telex was Tokyo Tourist
Corporation, it can reasonably be concluded that if it had intended that the US$23,595.00 should
be credited to ACTC, upon learning that the amount was credited to Minami, it should have gone,
together with the representatives of ACTC, in protest to KYOWA and lodged a protest. Since that
was not done, it could well be that Tokyo Tourist Corporation had really intended its remittance to
be credited to Minami. The identity of the beneficiary should be in accordance with the
identification made by KYOWA, and ACTC cannot question that identification as it is not a party to
the arrangement between KYOWA and BANKAMERICA (see Manila Railroad Co. vs. Compaia
Trasatlantica, 38 Phil. 875 [1918]).

Case: Marimperio Campaia Naviera, S.A. vs. CA and Union Import and Export Corporation
and Philippine Traders Corporation, Dec. 14, 1987, J. Paras.
Facts: In 1964 Philippine Traders Corporation and Union Import and Export Corporation entered
into a joint business venture for the purchase of copra from Indonesia for sale in Europe. James
Liu President and General Manager of the Union took charge of the European market and the
chartering of a vessel to take the copra to Europe. Peter Yap of Philippine on the other hand,
found one P.T. Karkam in Dumai Sumatra who had around 4,000 tons of copra for sale. Exequiel
Toeg of Interocean was commissioned to look for a vessel and he found the vessel "SS Paxoi" of
Marimperio available. Philippine and Union authorized Toeg to negotiate for its charter but with
instructions to keep confidential the fact that they are the real charterers.
Consequently on March 21, 1965, in London England, a "Uniform Time Charter" for the hire of
vessel "Paxoi" was entered into by the owner, Marimperio Compania Naviera, S.A. through its
agents N. & J. Vlassopulos Ltd. and Matthews Wrightson, Burbridge, Ltd. to be referred to simply
as Matthews, representing Interocean Shipping Corporation, which was made to appear as
charterer, although it merely acted in behalf of the real charterers, private respondents herein.
The Charterer was however twice in default in its payments which were supposed to have been
done in advance. Hence, Union Import and Export Corporation and Philippine Traders
Corporation filed a complaint with the Court of First Instance of Manila, Branch VIII, against the
Unknown Owners of the Vessel "SS Paxoi" for specific performance with prayer for preliminary
attachment. CFI rendered its decision in favor of Marimperio and against UIEC. CA affirmed.
Issue: Whether or not UIEC has legal capacity to bring the suit for specific performance
against Marimperio based on the Charter Party.
Held: NO. It is obvious from the disclosure made in the charter party by the authorized broker,
the Overseas Steamship Co., Inc., that the real charterer is the Interocean Shipping Company
(which sublet the vessel to Union Import and Export Corporation which in turn sublet it to
Philippine Traders Corporation).
In a sub-lease, there are two leases and two distinct judicial relations although intimately
connected and related to each other, unlike in a case of assignment of lease, where the lessee
transmits absolutely his right, and his personality disappears; there only remains in the juridical
relation two persons, the lessor and the assignee who is converted into a lessee (Moreno,
Philippine Law Dictionary, 2nd ed., p. 594). In other words, in a contract of sub-lease, the
personality of the lessee does not disappear; he does not transmit absolutely his rights
and obligations to the sub-lessee; and the sub-lessee generally does not have any direct
action against the owner of the premises as lessor, to require the compliance of the
obligations contracted with the plaintiff as lessee, or vice versa (10 Manresa, Spanish Civil
Code, 438).
However, there are at least two instances in the Civil Code which allow the lessor to bring an
action directly (accion directa) against the sub-lessee (use and preservation of the premises
under Art. 1651, and rentals under Article 1652).
Art. 1651 reads:
Without prejudice to his obligation toward the sub-lessor, the sub-lessee is bound to the
lessor for all acts which refer to the use and preservation of the thing leased in the
manner stipulated between the lessor and the lessee.
Article 1652 reads:
The sub-lessee is subsidiarily liable to the lessor for any rent due from the lessee.
However, the sub-lessee shall not be responsible beyond the amount of rent due from
him, in accordance with the terms of the sub-lease, at the time of the extra-judicial
demand by the lessor.
Payments of rent in advance by the sub-lessee shall be deemed not to have been
made, so far as the lessor's claim is concerned, unless said payments were effected in
virtue of the custom of the place.
It will be noted however that in said two Articles it is not the sub-lessee, but the lessor, who can
bring the action. In the instant case, it is clear that the sub-lessee as such cannot maintain
the suit they filed with the trial court (See A. Maluenda and Co. v. Enriquez, 46 Phil. 916).
In the law of agency "with an undisclosed principal, the Civil Code in Article 1883 reads:

If an agent acts in his own name, the principal has no right of action against the
persons with whom the agent has contracted; neither have such persons against the
principal.
In such case the agent is the one directly bound in favor of the person with whom he
has contracted, as if the transaction were his own, except when the contract involves
things belonging to the principal.
The provisions of this article shag be understood to be without prejudice to the actions between
the principal and agent.
While in the instant case, the true charterers of the vessel were the private respondents herein
and they chartered the vessel through an intermediary which upon instructions from them did not
disclose their names. Article 1883 cannot help the private respondents, because although
they were the actual principals in the charter of the vessel, the law does not allow them to
bring any action against the adverse party and vice, versa.
Case: Geo Daywalt vs. La Corporacion De Los Padres Agustinos Recoletos, et al., J.
Street.
Facts: In the year 1902, Teodorica Endencia, an unmarried woman, resident in the Province of
Mindoro, executed a contract whereby she obligated herself to convey to Geo. W. Daywalt, a tract
of land situated in the barrio of Mangarin, municipality of Bulalacao, now San Jose, in said
province. It was agreed that a deed should be executed as soon as the title to the land should be
perfected by proceedings in the Court of Land Registration and a Torrens certificate should be
produced therefore in the name of Teodorica Endencia. A decree recognizing the right of
Teodorica as owner was entered in said court in August 1906, but the Torrens certificate was not
issued until later. The second contract was not immediately carried into effect for the reason that
the Torrens certificate was not yet obtainable and in fact said certificate was not issued until the
period of performance contemplated in the contract had expired. The Torrens certificate was in
time issued to Teodorica Endencia, but in the course of the proceedings relative to the registration
of the land, it was found by official survey that the area of the tract inclosed in the boundaries
stated in the contract was about 1.248 hectares of 452 hectares as stated in the contract. In view
of this development Teodorica Endencia became reluctant to transfer the whole tract to the
purchaser, asserting that she never intended to sell so large an amount of land and that she had
been misinformed as to its area.
This attitude of hers led to litigation in which Daywalt finally succeeded, upon appeal to the
Supreme Court, in obtaining a decree for specific performance; and Teodorica Endencia was
ordered to convey the entire tract of land to Daywalt pursuant to the contract of October 3, 1908,
which contract was declared to be in full force and effect. When the Torrens certificate was finally
issued in 1909 in favor of Teodorica Endencia, she delivered it for safekeeping to the defendant
corporation, and it was then taken to Manila where it remained in the custody and under the
control of P. Juan Labarga the procurador and chief official of the defendant corporation, until the
deliver thereof to the plaintiff was made compulsory by reason of the decree of the Supreme
Court in 1914.
Agustines then entered into some arrangement with Endencia with the use of the land. Daywalt,
however, sued Agustines for unlawfully inducing Endencia to refrain from the performance of her
contract for the sale of land in question.
Issue: Whether La Corporacion may be held liable to the vendee, beyond the value of the
use and occupation of the land by colluding with the vendor.
Held: NO. Whatever may be the character of the liability which a stranger to a contract may incur
by advising or assisting one of the parties to evade performance, there is one proposition upon
which all must agree. This is, that the stranger cannot become more extensively liable in
damages for the nonperformance of the contract than the party in whose behalf he
intermeddles. To hold the stranger liable for damages in excess of those that could be
recovered against the immediate party to the contract would lead to results at once
grotesque and unjust. In the case at bar, as Teodorica Endencia was the party directly bound by
the contract, it is obvious that the liability of the defendant corporation, even admitting that it has
made itself coparticipant in the breach of the contract, can in no even exceed hers. This leads us
to consider at this point the extent of the liability of Teodorica Endencia to the plaintiff by reason of
her failure to surrender the certificate of title and to place the plaintiff in possession.

It should in the first place be noted that the liability of Teodorica Endencia for damages resulting
from the breach of her contract with Daywalt was a proper subject for adjudication in the action
for specific performance which Daywalt instituted against her in 1909 and which was litigated by
him to a successful conclusion in this court, but without obtaining any special adjudication with
reference to damages. Indemnification for damages resulting from the breach of a contract is a
right inseparably annexed to every action for the fulfillment of the obligation (art. 1124, Civil
Code); and its is clear that if damages are not sought or recovered in the action to enforce
performance they cannot be recovered in an independent action. As to Teodorica Endencia,
therefore, it should be considered that the right of action to recover damages for the breach of the
contract in question was exhausted in the prior suit. However, her attorneys have not seen fit to
interpose the defense of res judicata in her behalf; and as the defendant corporation was not a
party to that action, and such defense could not in any event be of any avail to it, we proceed to
consider the question of the liability of Teodorica Endencia for damages without refernce to this
point.
The most that can be said with refernce to the conduct of Teodorica Endencia is that she refused
to carry out a contract for the sale of certain land and resisted to the last an action for specific
performance in court. The result was that the plaintiff was prevented during a period of
several years from exerting that control over the property which he was entitled to exert
and was meanwhile unable to dispose of the property advantageously.
Case: C.S. Gilchrist vs. E.A. Cuddy, et al. and Jose Fernandez Espejo and Mariano
Zaldarriaga, Feb. 18, 1915, J. Trent.
Facts: Cuddy, a resident of Manila, was the owner of the "Zigomar;" that Gilchrist was the owner
of a cinematograph theater in Iloilo; that in accordance with the terms of the contract entered into
between Cuddy and Gilchrist the former leased to the latter the "Zigomar" for exhibition in his
(Gilchrist's) theater for the week beginning May 26, 1913; and that Cuddy willfully violate his
contract in order that he might accept the appellant's offer of P350 for the film for the same
period. Espejo admitted that he knew that Cuddy was the owner of the film. He received a letter
from his agents in Manila dated April 26, assuring him that he could not get the film for about six
weeks. The arrangement between Cuddy and the appellants for the exhibition of the film by the
latter on the 26th of May were perfected after April 26, so that the six weeks would include and
extend beyond May 26.
Issue: Whether or not there was interference.
Held: YES. In the case at bar the only motive for the interference with the Gilchrist Cuddy
contract on the part of the appellants was a desire to make a profit by exhibiting the film in their
theater. There was no malice beyond this desire; but this fact does not relieve them of the
legal liability for interfering with that contract and causing its breach. It is, therefore, clear,
under the above authorities, that they were liable to Gilchrist for the damages caused by
their acts, unless they are relieved from such liability by reason of the fact that they did
not know at the time the identity of the original lessee (Gilchrist) of the film.
The liability of the appellants arises from unlawful acts and not from contractual
obligations, as they were under no such obligations to induce Cuddy to violate his
contract with Gilchrist. So that if the action of Gilchrist had been one for damages, it would be
governed by chapter 2, title 16, book 4 of the Civil Code. Article 1902 of that code provides that a
person who, by act or omission, causes damages to another when there is fault or negligence,
shall be obliged to repair the damage do done. There is nothing in this article which requires as a
condition precedent to the liability of a tort-feasor that he must know the identity of a person to
whom he causes damages. In fact, the chapter wherein this article is found clearly shows that no
such knowledge is required in order that the injured party may recover for the damage suffered.
But the fact that the appellants' interference with the Gilchrist contract was actionable did not of
itself entitle Gilchrist to sue out an injunction against them.
Case: Estate of K.H. Hemady, deceased vs. Luzon Surety Co., Inc., Nov. 28, 1956, J.B.L.
Reyes.
Facts: The Luzon Surety Co. had filed a claim against the Estate based on twenty different
indemnity agreements, or counter bonds, each subscribed by a distinct principal and by the
deceased K. H. Hemady, a surety solidary guarantor) in all of them, in consideration of the Luzon
Surety Co.s of having guaranteed, the various principals in favor of different creditors. The Luzon

Surety Co., prayed for allowance, as a contingent claim, of the value of the twenty bonds it had
executed in consideration of the counterbonds, and further asked for judgment for the unpaid
premiums and documentary stamps affixed to the bonds, with 12 per cent interest thereon. The
lower court dismissed the claims of Luzon Surety stating,
(1) that the premiums due and cost of documentary stamps were not contemplated under the
indemnity agreements to be a part of the undertaking of the guarantor (Hemady), since they were
not liabilities incurred after the execution of the counterbonds; and
(2) that whatever losses may occur after Hemadys death, are not chargeable to his
estate, because upon his death he ceased to be guarantor.
Issue: Whether or not Luzon Surety can file against the estate a contingent claim for
reimbursement.
Held: YES. Our conclusion is that the solidary guarantors liability is not extinguished by his
death, and that in such event, the Luzon Surety Co., had the right to file against the estate a
contingent claim for reimbursement. It becomes unnecessary now to discuss the estates liability
for premiums and stamp taxes, because irrespective of the solution to this question, the Luzon
Suretys claim did state a cause of action, and its dismissal was erroneous.
The foregoing concept is confirmed by the next Article 2057, that runs as follows:
ART. 2057. If the guarantor should be convicted in first instance of a crime involving
dishonesty or should become insolvent, the creditor may demand another who has all the
qualifications required in the preceding article. The case is excepted where the creditor has
required and stipulated that a specified person should be guarantor.
From this article it should be immediately apparent that the supervening dishonesty of the
guarantor (that is to say, the disappearance of his integrity after he has become bound) does not
terminate the contract but merely entitles the creditor to demand a replacement of the guarantor.
But the step remains optional in the creditor: it is his right, not his duty; he may waive it if he
chooses, and hold the guarantor to his bargain. Hence Article 2057 of the present Civil Code is
incompatible with the trial courts stand that the requirement of integrity in the guarantor or surety
makes the latters undertaking strictly personal, so linked to his individuality that the guaranty
automatically terminates upon his death.
The contracts of suretyship entered into by K. H. Hemady in favor of Luzon Surety Co. not being
rendered intransmissible due to the nature of the undertaking, nor by the stipulations of the
contracts themselves, nor by provision of law, his eventual liability thereunder necessarily passed
upon his death to his heirs. The contracts, therefore, give rise to contingent claims provable
against his estate under section 5, Rule 87 (2 Moran, 1952 ed., p. 437; chan
roblesvirtualawlibraryGaskell & Co. vs. Tan Sit, 43 Phil. 810, 814).
The most common example of the contigent claim is that which arises when a person is bound
as surety or guarantor for a principal who is insolvent or dead. Under the ordinary contract of
suretyship the surety has no claim whatever against his principal until he himself pays something
by way of satisfaction upon the obligation which is secured. When he does this, there instantly
arises in favor of the surety the right to compel the principal to exonerate the surety. But until the
surety has contributed something to the payment of the debt, or has performed the secured
obligation in whole or in part, he has no right of action against anybody no claim that could be
reduced to judgment. (May vs. Vann, 15 Pla., 553; chan roblesvirtualawlibraryGibson vs. Mithell,
16 Pla., 519; chan roblesvirtualawlibraryMaxey vs. Carter, 10 Yarg. [Tenn.], 521 Reeves vs.
Pulliam, 7 Baxt. [Tenn.], 119; Ernst vs. Nou, 63 Wis., 134.)
Case Discussions:
Contracts take effect only as between the parties, their assigns and heirs, except in the case
where the rights and obligations arising from the contract are not transmissible by their nature, or
by stipulation or by provision of law. While in our successional system the responsibility of the
heirs for the debts of their decedent cannot exceed the value of the inheritance they receive from
him, the principle remains intact that these heirs succeed not only to the rights of the deceased
but also to his obligations. The principle on which these decisions rest is not affected by the
provisions of the new Code of Civil Procedure, and, in accordance with that principle, the heirs of
a deceased person cannot be held to be third persons in relation to any contracts touching the
real estate of their decedent which comes in to their hands by right of inheritance; they take such
property subject to all the obligations resting thereon in the hands of him from whom they derive
their rights. The binding effect of contracts upon the heirs of the deceased party is not altered by

the provision in our Rules of Court that money debts of a deceased must be liquidated and paid
from his estate before the residue is distributed among said heirs (Rule 89). The reason is that
whatever payment is thus made from the estate is ultimately a payment by the heirs and
distributees, since the amount of the paid claim in fact diminishes or reduces the shares that the
heirs would have been entitled to receive.
General rule: A partys contractual rights and obligations are transmissible to the successors.
Ratio: The rule is a consequence of the progressive depersonalization of patrimonial rights and
duties that, as observed by Victorio Polacco, has characterized the history of these institutions.
From the Roman concept of a relation from person to person, the obligation has evolved into a
relation from patrimony to patrimony, with the persons occupying only a representative position,
barring those rare cases where the obligation is strictly personal, i.e., is contracted intuitu
personae, in consideration of its performance by a specific person and by no other. The transition
is marked by the disappearance of the imprisonment for debt.
Exceptions:
1. The nature of the obligation of the surety or guarantor does not warrant the conclusion
that his peculiar individual qualities are contemplated as a principal inducement for the
contract.
2. Intransmissibility by stipulation of the parties. Being exceptional and contrary to the
general rule, this intransmissibility should not be easily implied, but must be expressly
established, or at the very least, clearly inferable from the provisions of the contract
itself, and the text of the agreements sued upon nowhere indicate that they are nontransferable. Because under the law (Article 1311), a person who enters into a contract
is deemed to have contracted for himself and his heirs and assigns, it is unnecessary
for him to expressly stipulate to that effect; hence, his failure to do so is no sign that he
intended his bargain to terminate upon his death. Similarly, that the Luzon Surety Co.,
did not require bondsman Hemady to execute a mortgage indicates nothing more than
the companys faith and confidence in the financial stability of the surety, but not that
his obligation was strictly personal.
3. Not transmissible by operation of law.
a. The provision makes reference to those cases where the law expresses that
the rights or obligations are extinguished by death, as is the case in legal
support (Article 300), parental authority (Article 327), usufruct (Article 603),
contracts for a piece of work (Article 1726), partnership (Article 1830 and
agency (Article 1919). By contract, the articles of the Civil Code that regulate
guaranty or suretyship (Articles 2047 to 2084) contain no provision that the
guaranty is extinguished upon the death of the guarantor or the surety.
b.
Case: So Ping Bun vs. CA and Tek Hua Enterprises Corp. and Manuel Tiong, September 21,
1999, J. Quisumbing.
Facts: In 1963, Tek Hua Trading Co, through its managing partner, So Pek Giok, entered into
lease agreements with lessor Dee C. Chuan & Sons Inc. (DCCSI). Subjects of four (4) lease
contracts were premises located at Nos. 930, 930-Int., 924-B and 924-C, Soler Street, Binondo,
Manila. Tek Hua used the areas to store its textiles. The contracts each had a one-year term.
They provided that should the lessee continue to occupy the premises after the term, the lease
shall be on a month-to-month basis.
When the contracts expired, the parties did not renew the contracts, but Tek Hua continued to
occupy the premises. In 1976, Tek Hua Trading Co. was dissolved. Later, the original members of
Tek Hua Trading Co. including Manuel C. Tiong, formed Tek Hua Enterprising Corp., herein
respondent corporation.
So Pek Giok, managing partner of Tek Hua Trading, died in 1986. So Pek Giok's grandson,
petitioner So Ping Bun, occupied the warehouse for his own textile business, Trendsetter
Marketing.
On August 1, 1989, lessor DCCSI sent letters addressed to Tek Hua Enterprises, informing the
latter of the 25% increase in rent effective September 1, 1989. The rent increase was later on
reduced to 20% effective January 1, 1990, upon other lessees' demand. Again on December 1,
1990, the lessor implemented a 30% rent increase. Enclosed in these letters were new lease
contracts for signing. DCCSI warned that failure of the lessee to accomplish the contracts shall be
deemed as lack of interest on the lessee's part, and agreement to the termination of the lease.

Private respondents did not answer any of these letters. Still, the lease contracts were not
rescinded.
Petitioner refused to vacate. On March 4, 1992, petitioner requested formal contracts of lease
with DCCSI in favor Trendsetter Marketing. So Ping Bun claimed that after the death of his
grandfather, So Pek Giok, he had been occupying the premises for his textile business and
religiously paid rent. DCCSI acceded to petitioner's request. The lease contracts in favor of
Trendsetter were executed. In the suit for injunction, private respondents pressed for the
nullification of the lease contracts between DCCSI and petitioner. They also claimed damages.
Trial court ruled in annulling the contract of lease between So Ping Bun and Dee. CA upheld trial
courts decision.
Issue: Whether or not So Ping Bun is guilty of tortuous interference of contract.
Held: YES. The elements of tort interference are:
(1) existence of a valid contract;
(2) knowledge on the part of the third person of the existence of contract; and
(3) interference of the third person is without legal justification or excuse.
A duty which the law of torts is concerned with is respect for the property of others, and a cause
of action ex delicto may be predicated upon an unlawful interference by one person of the
enjoyment
by
the
other
of
his
private
property. This may pertain to a situation where a third person induces a party to renege on or
violate his undertaking under a contract. In the case before us, petitioner's Trendsetter Marketing
asked DCCSI to execute lease contracts in its favor, and as a result petitioner deprived
respondent corporation of the latter's property right. Clearly, and as correctly viewed by the
appellate court, the three elements of tort interference above-mentioned are present in the instant
case.
Authorities debate on whether interference may be justified where the defendant acts for the sole
purpose of furthering his own financial or economic interest. One view is that, as a general rule,
justification for interfering with the business relations of another exists where the actor's motive is
to benefit himself. Such justification does not exist where his sole motive is to cause harm to the
other. Added to this, some authorities believe that it is not necessary that the interferer's interest
outweigh that of the party whose rights are invaded, and that an individual acts under an
economic interest that is substantial, not merely de minimis, such that wrongful and malicious
motives are negatived, for he acts in self-protection. Moreover justification for protecting one's
financial position should not be made to depend on a comparison of his economic interest in the
subject matter with that of others. It is sufficient if the impetus of his conduct lies in a proper
business interest rather than in wrongful motives.
As early as Gilchrist vs. Cuddy, we held that where there was no malice in the interference of a
contract, and the impulse behind one's conduct lies in a proper business interest rather than in
wrongful motives, a party cannot be a malicious interferer. Where the alleged interferer is
financially interested, and such interest motivates his conduct, it cannot be said that he is an
officious or malicious intermeddler.
In the instant case, it is clear that petitioner So Ping Bun prevailed upon DCCSI to lease the
warehouse to his enterprise at the expense of respondent corporation. Though petitioner took
interest in the property of respondent corporation and benefited from it, nothing on record imputes
deliberate wrongful motives or malice on him.
Case: Nicolas Sanchez vs. Severina Rigos, June 14, 1972, J. Concepcion.
Facts: On April 3, 1961, plaintiff Nicolas Sanchez and defendant Severina Rigos executed an
instrument entitled "Option to Purchase," whereby Mrs. Rigos "agreed, promised and
committed ... to sell" to Sanchez the sum of P1,510.00, a parcel of land situated in the barrios of
Abar and Sibot, municipality of San Jose, province of Nueva Ecija, within two (2) years from said
date with the understanding that said option shall be deemed "terminated and elapsed," if
"Sanchez shall fail to exercise his right to buy the property" within the stipulated period. Inasmuch
as several tenders of payment of the sum of Pl,510.00, made by Sanchez within said period,
were rejected by Mrs. Rigos, on March 12, 1963, the former deposited said amount with the
Court of First Instance of Nueva Ecija and commenced against the latter the present action, for
specific performance and damages. Rigos contended that the contract between the parties "is a
unilateral promise to sell, and the same being unsupported by any valuable consideration, by

force of the New Civil Code, is null and void". Accordingly, on February 28, 1964, the lower court
rendered judgment for Sanchez, ordering Mrs. Rigos to accept the sum judicially consigned by
him and to execute, in his favor, the requisite deed of conveyance.
Issue: Whether or not there was a perfected contract of sale.
Held: YES. However, this Court itself, in the case of Atkins, Kroll and Co., Inc. v. Cua Hian Tek, 8
decided later that Southwestern Sugar & Molasses Co. v. Atlantic Gulf & Pacific Co., 9 saw no
distinction between Articles 1324 and 1479 of the Civil Code and applied the former where a
unilateral promise to sell similar to the one sued upon here was involved, treating such promise
as an option which, although not binding as a contract in itself for lack of a separate
consideration, nevertheless generated a bilateral contract of purchase and sale upon acceptance.
Speaking through Associate Justice, later Chief Justice, Cesar Bengzon, this Court said:
Furthermore, an option is unilateral: a promise to sell at the price fixed whenever the
offeree should decide to exercise his option within the specified time. After accepting
the promise and before he exercises his option, the holder of the option is not bound to
buy. He is free either to buy or not to buy later. In this case, however, upon accepting
herein petitioner's offer a bilateral promise to sell and to buy ensued, and the
respondent ipso facto assumed the obligation of a purchaser. He did not just get the
right subsequently to buy or not to buy. It was not a mere option then; it was a bilateral
contract of sale.
Lastly, even supposing that Exh. A granted an option which is not binding for lack of
consideration, the authorities hold that:
"If the option is given without a consideration, it is a mere offer of a contract
of sale, which is not binding until accepted. If, however, acceptance is made
before a withdrawal, it constitutes a binding contract of sale, even though the
option was not supported by a sufficient consideration. ... . (77 Corpus Juris
Secundum, p. 652. See also 27 Ruling Case Law 339 and cases cited.)
"It can be taken for granted, as contended by the defendant, that the option
contract was not valid for lack of consideration. But it was, at least, an offer to
sell, which was accepted by letter, and of the acceptance the offerer had
knowledge before said offer was withdrawn. The concurrence of both acts
the offer and the acceptance could at all events have generated a
contract, if none there was before (arts. 1254 and 1262 of the Civil Code)."
(Zayco vs. Serra, 44 Phil. 331.)
In other words, since there may be no valid contract without a cause or consideration, the
promisor is not bound by his promise and may, accordingly, withdraw it. Pending notice of
its withdrawal, his accepted promise partakes, however, of the nature of an offer to sell
which, if accepted, results in a perfected contract of sale.
Case: Tong Brothers Co vs. IAC and Juliano and Company, Dec. 21, 1987, J. Gutierrez Jr.
Facts: The petitioner is a registered general partnership engaged in the construction and repair
of vessels with drydocking facilities at Recodo Zamboanga del Sur while the private respondent is
a domestic corporation engaged in the coastwise shipping industry operating for that purpose the
vessel M/S Zamboanga-J.
Sometime in December, 1974, the private respondent allegedly contracted with the petitioner the
annual drydocking and repair of the Zamboanga-J. On the ground that the petitioner did not
complete and execute all the work necessary, essential and indispensable to rendering the vessel
seaworthy resulting in its deterioration and total loss, the private respondent filed a complaint
against the petitioner for specific performance and damages with the Court of First Instance of
Cotabato.
The petitioner denied that there was a perfected contract to repair Zamboanga-J between the two
parties.
Issue: Whether or not there was a perfected contract between the petitioner and the
private respondents to repair the vessel Zamboanga-J.

Held: NO. There was not yet a meeting of the minds as to the cause of the contract. The cause of
a contract has been defined "as the essential reason which moves the contracting parties to enter
into it (8 Manresa, 5th Edition, p. 450). In other words, the cause is the immediate, direct and
proximate reason which justifies the creation of an obligation thru the will of the contracting
parties (3 Castan, 4th Edition, p. 347)." (General Enterprises, Inc. v. Lianga Bay Logging Co.,
Inc., 11 SCRA 733, 739). For the private respondent, the cause of the contract was the repair of
its vessel Zamboanga-J while for the petitioner the cause would be its commitment to repair the
vessel and make it seaworthy. The telegrams dated January 17, January 20, and January 28,
1975 sent by the petitioner to the private respondent, however, indicate that the former had
not accepted the repair of Zamboanga-J, the reason being that the extent of the repair to
be made necessitated a major expense so that the petitioner insisted on the presence of
the private respondent for evaluation before it accepted the repair of the wooden vessel.
That the petitioner had not yet consented to the contract is evident when on January 28, 1975, it
sent a telegram stating: "... NO AGREEMENT AS TO THE EX TENT OF REPAIRS AND
PAYMENT WILL UNDOCK VESSEL." The fact that the private respondent who received this
telegram ignored it, confirms that there was no perfected contract to repair Zamboanga-J.
It is to be noted that despite its knowledge of Zamboanga-J having been undocked as early as
February 7, 1975 when the petitioner sent a telegram advising that Zamboanga-J undocked
already, " the private respondent took no action to save its vessel. Instead, its officers and crew
were ordered ashore and the vessel was left to rot and decay in the sea of Zamboanga. It was
only on July 28, 1975, after the lapse of almost six months, that the private respondent tried to
recover the value of its vessel from the petitioner.
Under the circumstances, we rule that the proximate cause of the total loss of Zamboanga-J was
the negligence of the private respondent. Breach of contract by the appellant could not have been
the proximate cause as there was no perfected contract between the parties to repair
Zamboanga-J. Hence, the private respondent is not entitled to recover damages against the
private respondent.
Case: Lorenzo Velasco and Socorro Velasco vs. CA and Magdalena Estate, Inc., June 29,
1973, J. Castro.
Facts: This is a suit for specific performance filed by Lorenzo Velasco against the Magdalena
Estate, Inc. on the allegation that on November 29, 1962 the plaintiff and the defendant had
entered into a contract of sale by virtue of which the defendant offered to sell the plaintiff and the
plaintiff in turn agreed to buy a parcel of land at No. 39 corner 6th Street and Pacific Avenue, New
Manila, this City, for the total purchase price of P100,000.00. It is alleged by the plaintiff that the
agreement was that the plaintiff was to give a down payment of P10,000.00 to be followed by
P20,000.00 and the balance of P70,000.00 would be paid in installments, the equal monthly
amortization of which was to be determined as soon as the P30,000.00 down payment had been
completed. It is further alleged that the plaintiff paid down payment of P10,000.00 on November
29, 1962 as per receipt No. 207848 and that when on January 8, 1964 he tendered to the
defendant the payment of the additional P20,000.00 to complete the P30,000.00 the defendant
refused to accept and that eventually it likewise refused to execute a formal deed of sale
obviously agreed upon. The plaintiff demands P25,000.00 exemplary damages, P2,000.00 actual
damages and P7,000.00 attorney's fees.
The defendant, in its Answer, denies that it has had any direct dealings, much less,
contractual relations with the plaintiff regarding the property in question, and contends
that the alleged contract is entirely unenforceable under the Statute of Frauds.
Issue: Whether or not a contract of sale was perfected although the parties did not agree
yet as to the manner of payment.
Held: NO. It is not difficult to glean from the aforequoted averments that the petitioners
themselves admit that they and the respondent still had to meet and agree on how and when the
down-payment and the installment payments were to be paid. Such being the situation, it cannot,
therefore, be said that a definite and firm sales agreement between the parties had been
perfected over the lot in question. Indeed, this Court has already ruled before that a definite
agreement on the manner of payment of the purchase price is an essential element in the
formation of a binding and unforceable contract of sale. 3 The fact, therefore, that the petitioners
delivered to the respondent the sum of P10,000 as part of the down-payment that they had to pay

cannot be considered as sufficient proof of the perfection of any purchase and sale agreement
between the parties herein under article 1482 of the new Civil Code, as the petitioners
themselves admit that some essential matter the terms of payment still had to be mutually
covenanted.
Case: Pentacapital Investment Corp. vs. Makilito Mahinay, July 5, 2010, J. Nachura.
Facts: Petitioner filed a complaint for a sum of money against respondent Makilito Mahinay
based on two separate loans obtained by the latter, amounting to P1,520,000.00 and
P416,800.00, or a total amount of P1,936,800.00. These loans were evidenced by two
promissory notes dated February 23, 1996. Despite repeated demands, respondent failed to pay
the loans, hence, the complaint. In his Answer with Compulsory Counterclaim, respondent
claimed that petitioner had no cause of action because the promissory notes on which its
complaint was based were subject to a condition that did not occur. While admitting that he
indeed signed the promissory notes, he insisted that he never took out a loan and that the notes
were not intended to be evidences of indebtedness. By way of counterclaim, respondent prayed
for the payment of moral and exemplary damages plus attorneys fees. In this case, respondent
denied liability on the ground that the promissory notes lacked consideration as he did not receive
the proceeds of the loan.
Issue: Whether or not the respondent is bound by the promissory note.
Held: YES. In its complaint for sum of money, petitioner prayed that respondent be ordered to
pay his obligation amounting to P1,936,800.00 plus interest and penalty charges, and attorneys
fees. This obligation was evidenced by two promissory notes executed by respondent.
Respondent, however, denied liability on the ground that his obligation was subject to a condition
that did not occur. He explained that the promissory notes were dependent upon the happening
of a remote event that the parties tried to anticipate at the time they transacted with each other,
and the event did not happen.36 He further insisted that he did not receive the proceeds of the
loan. To ascertain whether or not respondent is bound by the promissory notes, it must be
established that all the elements of a contract of loan are present. Like any other contract, a
contract of loan is subject to the rules governing the requisites and validity of contracts in general.
It is elementary in this jurisdiction that what determines the validity of a contract, in general, is the
presence of the following elements: (1) consent of the contracting parties; (2) object certain which
is the subject matter of the contract; and (3) cause of the obligation which is established.
Under Article 1354 of the Civil Code, it is presumed that consideration exists and is lawful
unless the debtor proves the contrary. Moreover, under Section 3, Rule 131 of the Rules of
Court, the following are disputable presumptions: (1) private transactions have been fair
and regular; (2) the ordinary course of business has been followed; and (3) there was
sufficient consideration for a contract. A presumption may operate against an adversary who
has not introduced proof to rebut it. The effect of a legal presumption upon a burden of proof is to
create the necessity of presenting evidence to meet the legal presumption or the prima facie case
created thereby, and which, if no proof to the contrary is presented and offered, will prevail. The
burden of proof remains where it is, but by the presumption, the one who has that burden
is relieved for the time being from introducing evidence in support of the averment,
because the presumption stands in the place of evidence unless rebutted.
In the present case, as proof of his claim of lack of consideration, respondent denied under oath
that he owed petitioner a single centavo. He added that he did not apply for a loan and that when
he signed the promissory notes, they were all blank forms and all the blank spaces were to be
filled up only if the sale transaction over the subject properties would not push through because
of a possible adverse decision in the civil cases involving them (the properties). He thus posits
that since the sale pushed through, the promissory notes did not become effective. Contrary to
the conclusions of the RTC and the CA, we find such proof insufficient to overcome the
presumption of consideration. The presumption that a contract has sufficient consideration cannot
be overthrown by the bare, uncorroborated and self-serving assertion of respondent that it has no
consideration. The alleged lack of consideration must be shown by preponderance of evidence.
Case: Agustino Ong Yiu vs. CA and Philippine Air Lines, Inc., June 29, 1979, J. MelencioHerrera.
Facts: On August 26, 1967, petitioner was a fare paying passenger of respondent Philippine Air
Lines, Inc. (PAL), on board Flight No. 463-R, from Mactan Cebu, bound for Butuan City. He was

scheduled to attend the trial of Civil Case No. 1005 and Spec. Procs. No. 1125 in the Court of
First Instance, Branch II, thereat, set for hearing on August 28-31, 1967. As a passenger, he
checked in one piece of luggage, a blue "maleta" for which he was issued Claim Check No. 2106R. The plane left Mactan Airport, Cebu, at about 1:00 o'clock P.M., and arrived at Bancasi airport,
Butuan City, at past 2:00 o'clock P.M., of the same day. Upon arrival, petitioner claimed his
luggage but it could not be found. The next day, the missing luggage was delivered to him but
with folder containing certain exhibits, transcripts and private documents in Civil Case No. 1005
and Sp. Procs. No. 1126 were missing, aside from two gift items for his parents-in-law. Petitioner
refused to accept the luggage. Dagorro returned it to the porter clerk, Maximo Gomez, who
sealed it and forwarded the same to PAL Cebu. Meanwhile, petitioner asked for postponement of
the hearing of Civil Case No. 1005 due to loss of his documents, which was granted by the Court.
Hence, Ong filed a complaint against PAL for damages for breach of contract of transportation.
Trial court found PAL to have acted in bad faith and awarded moral damages amounting to
80,000 and exemplary damages, 30,000, with attorneys fees, 5,000. However, CA only found
PAL guilty of simple negligence and revered the decision of trial court granting moral and
exemplary damages to Ong but ordered PAL to pay Ong the sum of 100.00, the baggage
liability assumed by the former under the condition of carriage at the back of the ticket.
Issue: Whether or not Ong and PAL entered into a contract which limited PALs liability on
lost documents of Ong.
Held: YES. We agree with the foregoing finding. The pertinent Condition of Carriage printed at
the back of the plane ticket reads:
8. BAGGAGE LIABILITY ... The total liability of the Carrier for lost or damaged
baggage of the passenger is LIMITED TO P100.00 for each ticket unless a passenger
declares a higher valuation in excess of P100.00, but not in excess, however, of a total
valuation of P1,000.00 and additional charges are paid pursuant to Carrier's tariffs.
There is no dispute that petitioner did not declare any higher value for his luggage, much less did
he pay any additional transportation charge.
But petitioner argues that there is nothing in the evidence to show that he had actually entered
into a contract with PAL limiting the latter's liability for loss or delay of the baggage of its
passengers, and that Article 1750* of the Civil Code has not been complied with.
While it may be true that petitioner had not signed the plane ticket, he is nevertheless bound by
the provisions thereof. "Such provisions have been held to be a part of the contract of carriage,
and valid and binding upon the passenger regardless of the latter's lack of knowledge or assent
to the regulation". It is what is known as a contract of "adhesion", in regards which it has been
said that contracts of adhesion wherein one party imposes a ready made form of contract on the
other, as the plane ticket in the case at bar, are contracts not entirely prohibited. The one who
adheres to the contract is in reality free to reject it entirely; if he adheres, he gives his consent.
And as held in Randolph v. American Airlines, 103 Ohio App. 172, 144 N.E. 2d 878; Rosenchein
vs. Trans World Airlines, Inc., 349 S.W. 2d 483, "a contract limiting liability upon an agreed
valuation does not offend against the policy of the law forbidding one from contracting against his
own negligence.
Considering, therefore, that petitioner had failed to declare a higher value for his baggage, he
cannot be permitted a recovery in excess of P100.00.Besides, passengers are advised not to
place valuable items inside their baggage but "to avail of our V-cargo service ". I t is likewise to be
noted that there is nothing in the evidence to show the actual value of the goods allegedly lost by
petitioner.
Case: Weldon Construction Corp. vs. CA and Manuel Cancio, Oct. 12, 1987, J. Cortes.
Facts: In 1961 Lucio Lee, whose name was later changed to Lucio Lee Rodriguez, was doing
business under the trade name Weldon Construction, the predecessor-in-interest of the herein
petitioner, WELDON CONSTRUCTION CORPORATION. The latter corporation was incorporated
in July, 1963 as a closed corporation composed of Lucio Tee (owner of Weldon Construction), his
wife, his sister and the latter's husband, and a cousin. The assets of Weldon Construction were
transferred to, and its liabilities assumed by the new corporation. Hence, the instant case was
brought by WELDON CONSTRUCTION CORPORATION as successor-in-interest of Weldon
Construction and Lucio Lee.

Prior to March 7, 1961, Lucio Lee drafted plans for a theater-apartment building which private
respondent Cancio intended to put up. Thereafter, on March 7, 1961, he submitted to the latter a
proposal for the supervision of the construction of said building on commission basis. The
proposal was signed not by Lee but by his office manager, Antonio Wong. The private respondent
never affixed his signature on the document.
Among the provisions Contained in the proposal was the setting up of a revolving fund of
P10,000.00 Pesos for the costs and expenditures to be incurred in the construction of the
building, such as materials and labor among others. The fund was to be replenished by the owner
of the building from time to time (Id). The proposal also provided for the payment to Weldon
Construction of a commission of ten per cent (10%) of the total cost of the building.
Issue: Whether or not the contract providing for the commission of Weldon was perfected.
Held: NO. In view of all the foregoing considerations this Court finds that the agreement between
the parties is the contract of construction for a stipulated price which is akin to a contract for a
piece of work defined in the aforequoted article. Both parties having fully performed their
reciprocal obligations in accordance with said contract, petitioner is estopped from invoking an
entirely different agreement so as to demand additional consideration. Once a contract has been
consummated, there is nothing left to be done or to be demanded by the parties thereto. All
obligations arising from the contract are extinguished.
As set by the parties, the consideration for the construction of the Gay Theater building is
P600,000.00 Pesos which amount has been fully paid by the private respondent. There is no
basis for the petitioner's demand for the payment of P62,378.83 Pesos as commission of
ten per cent (10%) of the total cost of construction.
The first proposal submitted by Weldon Construction for rendering service under a contract of
supervision (Exhibit "A") is simply that, a proposal. It never attained perfection as the contract
between the parties. Only an absolute or unqualified acceptance of a definite offer manifests the
consent necessary to perfect a contract (Article 1319, New Civil Code). The advance payment of
P10,000.00 Pesos was not an unqualified acceptance of the offer contained in the first proposal
(Exhibit "A") as in fact an entirely new proposal (Exhibit "4") was submitted by Weldon
Construction subsequently. If, as claimed by the petitioner, the parties had already agreed upon a
contract of supervision under Exhibit "A," why then was a second proposal made? Res ipsa
loquitur. The existence of the second proposal belies the perfection of any contract arising from
the first proposal .
Case: C & C Commercial Corp. vs. Antonio Menor (Acting as Gen. Manager of National
Waterworks and Sewerage Authority) and Members of the Committee on Pre-qualification,
NAWASA, Jan. 27, 1983, J. Aquino.
Facts: Judge Cloribel of the Court of First Instance of Manila in his decision dated March 1, 1967
in Civil Case No. 66750, a mandamus case, ordered the Acting General Manager of the National
Waterworks and Sewerage Authority and the members of the Committee on Pre-Qualification to
allow C & C Commercial Corporation to participate as a qualified bidder in the public bidding for
the supply of asbestos cement pressure pipes to the Nawasa in spite of the fact that it had a
pending tax case and had no tax clearance certificate. By virtue of that judgment, which became
final because the Nawasa did not appeal, C & C Commercial Corporation took part in the bidding.
When the bids were opened on May 18, 1967, it was found to be the lowest bidder. Judge
Cloribel in his order of August 23, 1967 granted the motion and ordered Menor and the
other Nawasa officials to award within ten days from notice the contract to C & C
Commercial Corporation as the lowest bidder. From that order, the Nawasa appealed to this
Court. Judge Cloribel approved its record on appeal in his order of November 9, 1967. Realizing
that the appeal would delay the award and that another bidder might be given the contract, C & C
Commercial Corporation filed in the lower court another petition for mandamus dated November
21, 1967 wherein it prayed that the Nawasa Board of Directors, its Committee of Awards and
Menor, its acting general manager, be restrained from awarding the contract to another bidder
and that they be ordered to award the contract to C & C Commercial Corporation.
Issue: Whether or not NAWASA can be compelled to award the contract to C & C as the
lowest bidder thereof.
Held: NO. It was not the ministerial duty of the Nawasa officials to award the contract to C & C
Commercial Corporation even if it was the lowest bidder, The Nawasa in its addendum No.1 to

the invitation to bid dated July 6, 1966 reserved the right "to reject the bid of any bidder" (p. 35,
Record
on
Appeal).
Therefore, a bidder whose bid is rejected has no cause for complaint nor a right to dispute the
award to another bidder (Esguerra & Sons vs. Aytona, 114 Phil. 1189; Surigao Mineral
Reservation Board vs. Cloribel, L-27072, July 31, 1968, 24 SCRA 491).
It should be noted that "advertisements for bidders are simply invitations to make proposals, and
the advertiser is not bound to accept the highest or lowest bidder, unless the contrary appears"
(Art. 1326, Civil Code). No such contrary intention appears in this case. Moreover, the Nawasa
was justified in not awarding the contract- to C & C Commercial Corporation because it had no
tax clearance certificate. It had a pending tax case in the Bureau of Internal Revenue. The award
to C & C Commercial Corporation would be in gross contravention of Administrative Order No. 66.
That was the ruling in Nawasa vs. Reyes, L-28597, February 29, 1968, 22 SCRA 905, where the
bidder was also the appellee herein, C & C Commercial Corporation. It was held therein that C &
C Commercial Corporation was disqualified under the said order to take part in the bidding to
supply the Nawasa with steel pipes because it had "tremendous tax liabilities".
Case: Vicente Tang vs. CA and Phil. American Life Insurance Company (PALIC), May 25,
1979, J. Abad Santos.
Facts: On September 25, 1965, Lee See Guat, a widow, 61 years old, and an illiterate who spoke
only Chinese, applied for an insurance on her life for P60,000 with the respondent Company. The
application consisted of two parts, both in the English language. The second part of her
application dealt with her state of health and because her answers indicated that she was healthy,
the Company issued her Policy No. 0690397, effective October 23, 1965, with her nephew
Vicente E. Tang, herein Petitioner, as her beneficiary,
On November 15, 1965, Lee See Guat again applied with the respondent Company for an
additional insurance on her life for P40,000. Considering that her first application had just been
approved, no further medical examination was made. On April 20, 1966, Lee See Guat died of
lung cancer. Thereafter, the beneficiary of the two policies, Vicente E. Tang claimed for their face
value in the amount of P100,000 which the insurance company refused to pay on the ground that
the insured was guilty of concealment and misrepresentation at the time she applied for the two
policies. Hence, the filing of Civil Case No. 90062 in the Court of First Instance of Manila which
dismissed the claim because of the concealment practised by the insured in violation of the
Insurance Law. CA affirmed the decision of the CFI.
Issue: Whether or not it is PALICs obligation to explain the terms of the contract to an
illiterate insured.
Held: NO. It should be noted that under Art. 1332 above quoted, the obligation to show that the
terms of the contract had been fully explained to the party who is unable to read or understand
the language of the contract, when fraud or mistake is alleged, devolves on the party seeking to
enforce it. Here the insurance company is not seeking to enforce the contracts; on the contrary, it
is seeking to avoid their performance. It is petitioner who is seeking to enforce them even as
fraud or mistake is not alleged. Accordingly, respondent company was under no obligation to
prove that the terms of the insurance contracts were fully explained to the other party. Even if we
were to say that the insurer is the one seeking the performance of the contracts by avoiding
paying the claim, it has to be noted as above stated that there has been no imputation of mistake
or fraud by the illiterate insured whose personality is represented by her beneficiary the petitioner
herein. In sum, Art. 1332 is inapplicable to the case at bar. Considering the findings of both the
CFI and Court of Appeals that the insured was guilty of concealment as to her state of health, we
have to affirm.
Case: Juanito Cario and Cirila Vicencio vs. CA and Pablo Encabo, Juanita De los Santos
and Land Authority, July 31, 1987, J. Padilla.
Facts: On 22 January 1954, Pablo Encabo formally applied with the Land Estates Division,
Bureau of Lands, to purchase a parcel of land designated as Lot 1, Block 4, Plan Psd-24819,
which was a part of the Tuason Estate purchased by the government pursuant to the provisions
of Commonwealth Act No. 539, for resale to bona fide tenants or occupants who are qualified to

own public land in the Philippines. Thereafter, Encabo, through petitioner Cirila Vicencio,
supposedly as "agent, " came to an agreement with Josue Quesada transferring rights over the
lot to the latter, conditioned on approval by the Land Tenure Administration (LTA, for short). The
transfer of rights by Encabo to Quesada was not put in writing but payment of the price for the
rights transferred was evidenced by receipts. In November (undated) 1958, Encabo executed a
Deed of Sale of House and Transfer of Rights (Exh. "D-1"), purportedly conveying to herein
petitioners (Juanito Cario and Cirila Vicencio), his rights over the lot, subject to approval of the
LTA. On 17 December 1958, Encabo wrote a letter to the LTA (Exh. "1") requesting permission to
transfer his rights. On 19 April 1960, Juanito Cario filed a petition with the LTA seeking approval
of the transfer to herein petitioners of rights to the lot in question on the basis of the Deed of Sale
of House and Transfer of Rights executed by Pablo Encabo (Exh. "D-1"). The petition of Juanito
Cario was docketed as LTA Case No. 490, to which respondent Pablo Encabo objected and filed
an Answer in opposition thereto. LTA ruled in maintaining the status quo. Cario appealed to
Office of the President and refused to give up possession of the land. Hence, Encobo filed an
action in CFI of Manila declaring them as owners. Lower court favored Encobo. CA affirmed.
Issue: Whether or not Deed of Sale of House and Transfer of Rights on which the
petitioners have based their application over the questioned lot is simulated and therefore
an inexistent deed of sale.
Held: YES. This Court finds that there is substantial and convincing evidence that Exhibit "D-1"
was a simulated deed of sale and transfer of rights, to warrant the affirmance of the decision of
the respondent Court of Appeals. The characteristic of simulation is the fact that the apparent
contract is not really desired or intended to produce legal effects nor in any way alter the judicial
situation of the parties.13 Under the circumstances surrounding their transaction, the parties knew
that the document Exhibit "D-1" was at once fictitious and simulated where none of the parties
intended to be bound thereby. Strongly indicative of the simulated character of Exhibit ,"D-1" is
the fact that the Carios could not produce the receipts evidencing their alleged payments to the
Land Authority for the disputed lot, nor were they able to produce the Agreement to Sell.
Contracts of sale are void and produce no effect whatsoever where the price, which appears
therein as paid, has in fact never been paid by the vendee to the vendor. A sale of land without
consideration, but intended merely to protect a party to a joint venture for the cash advances he
was to make for the realty subdivision that the parties wanted to put up, is null and void. The law
is clear on this matter. The Civil Code provides:
Art. 1409. The following contracts are inexistent and void from the beginning:
xxx
xxx
xxx
(2) Those which are absolutely simulated or fictitious;
xxx
xxx
xxx
These contracts cannot be ratified. Neither can the right to set up the defense of
illegality be waived.
Furthermore, even without going into the merits and/or validity of Exhibit "D-1", it is clear that
there has been no legal transfer of rights in favor of the Carios because neither the LTA nor the
Land Authority has approved or given due course to such transfer of rights. 25 The LTA never
waived its right to approve the transfer of rights. It only ruled that the status quo will be
maintained so long as the Court has not yet ruled on the authenticity of document Exhibit "D-1".
The ownership of the lot by the Carios is still contingent on the approval of the LTA upon their
compliance with all the requirements of the latter. Since no approval or due course has yet been
given by the LTA or LA to such transfer of rights, the document Exhibit "D-1" is not enforceable
against the latter.
Case: Manuel Lagunzad vs. Maria Soto Vda. De Gonzales and CA, Aug. 6, 1979, J.
Melencio-Herrera.
Facts: The present controversy stems from a "Licensing Agreement" entered into by and
between petitioner Manuel M. Lagunzad and private respondent Maria Soto Vda. de Gonzales on
October 5, 1961, which contract petitioner claims to be null and void for having been entered into
by him under duress, intimidation and undue influence.
The antecedental facts follow: Sometime in August, 1961, petitioner Manuel Lagunzad, a
newspaperman, began the production of a movie entitled "The Moises Padilla Story" under the
name of his own business outfit, the "MML Productions." It was based mainly on the copyrighted

but unpublished book of Atty. Ernesto Rodriguez, Jr., entitled "The Long Dark Night in Negros"
subtitled "The Moises Padilla Story," the rights to which petitioner had purchased from Atty.
Rodriguez in the amount of P2,000.00.
The book narrates the events which culminated in the murder of Moises Padilla sometime
between November 11 and November 17, 1951. Padilla was then a mayoralty candidate of the
Nacionalista Party (then the minority party) for the Municipality of Magallon, Negros Occidental,
during the November, 1951 elections. Governor Rafael Lacson, a member of the Liberal Party
then in power and his men were tried and convicted for that murder in People vs. Lacson, et al. In
the book, Moises Padilla is portrayed as "a martyr in contemporary political history."
Although the emphasis of the movie was on the public life of Moises Padilla, there were portions
which dealt with his private and family life including the portrayal in some scenes, of his mother,
Maria Soto Vda. de Gonzales, private respondent herein, and of one "Auring" as his girl friend.
On October 3, 1961, petitioner received a telephone call from one Mrs. Nelly Amante, half-sister
of Moises Padilla, objecting to the filming of the movie and the "exploitation" of his life.
On October 5, 1961, Mrs. Amante, for and in behalf of her mother, private respondent, demanded
in writing for certain changes, corrections and deletions in the movie. 5 Petitioner contends that he
acceded to the demands because he had already invested heavily in the picture to the extent of
mortgaging his properties, 6 in addition to the fact that he had to meet the scheduled target date
of the premiere showing.
On the same date, October 5, 1961, after some bargaining as to the amount to be paid, which
was P50,000.00 at first, then reduced to P20,000.00, 7 petitioner and private respondent,
represented by her daughters and Atty. Ernesto Rodriguez, at the law office of Jalandoni and
Jamir, executed a "Licensing Agreement". Petitioner takes the position that he was pressured into
signing the Agreement because of private respondent's demand, through Mrs. Amante, for
payment for the "exploitation" of the life story of Moises Padilla, otherwise, she would "call a
press conference declaring the whole picture as a fake, fraud and a hoax and would denounce
the whole thing in the press, radio, television and that they were going to Court to stop the
picture." Because petitioner refused to pay any additional amounts pursuant to the Agreement, on
December 22, 1961, private respondent instituted the present suit against him. The trial court
favored respondent. CA affirmed.
Issues:
(1)
(2)

Whether or not the Licensing Agreement was null and void.

Whether or not the consent of Petitioner in entering into such Licensing
Agreement was procured with duress, intimidation and undue influence.

Held:
(1) NO. Neither do we agree with petitioner's submission that the Licensing Agreement is null and
void for lack of, or for having an illegal cause or consideration. While it is true that petitioner had
purchased the rights to the book entitled "The Moises Padilla Story," that did not dispense with
the need for prior consent and authority from the deceased heirs to portray publicly episodes in
said deceased's life and in that of his mother and the members of his family. As held in Schuyler
v. Curtis, 14 "a privilege may be given the surviving relatives of a deceased person to protect his
memory, but the privilege exists for the benefit of the living, to protect their feelings and to prevent
a violation of their own rights in the character and memory of the deceased."
Petitioner's averment that private respondent did not have any property right over the life of
Moises Padilla since the latter was a public figure, is neither well taken. Being a public figure ipso
facto does not automatically destroy in toto a person's right to privacy. The right to invade a
person's privacy to disseminate public information does not extend to a fictional or novelized
representation of a person, no matter how public a figure he or she may be. 15 In the case at bar,
while it is true that petitioner exerted efforts to present a true-to-life story of Moises Padilla,
petitioner admits that he included a little romance in the film because without it, it would be a drab
story of torture and brutality.
(2) NO. We also find it difficult to sustain petitioner's posture that his consent to the Licensing
Agreement was procured thru duress, intimidation and undue influence exerted on him by private
respondent and her daughters at a time when he had exhausted his financial resources, the
premiere showing of the picture was imminent, and "time was of the essence." As held in
Martinez vs. Hongkong & Shanghai Bank, 17 it is necessary to distinguish between real duress
and the motive which is present when one gives his consent reluctantly. A contract is valid even
though one of the parties entered into it against his own wish and desires, or even against his

better judgment. In legal effect, there is no difference between a contract wherein one of the
contracting parties exchanges one condition for another because he looks for greater profit or
gain by reason of such change, and an agreement wherein one of the contracting parties agrees
to accept the lesser of two disadvantages. In either case, he makes a choice free and
untramelled and must accordingly abide by it. The Licensing Agreement has the force of law
between the contracting parties and since its provisions are not contrary to law, morals, good
customs, public order or public policy (Art. 1306, Civil Code), petitioner Should comply with it in
good faith.
Case: Liam Law vs. Olympic sawmill Co. and Elino Lee Chi, May 28, 1984, J. MelencioHerrera.
Facts: On or about September 7, 1957, plaintiff loaned P10,000.00, without interest, to defendant
partnership and defendant Elino Lee Chi, as the managing partner. The loan became ultimately
due on January 31, 1960, but was not paid on that date, with the debtors asking for an extension
of three months, or up to April 30, 1960.
On March 17, 1960, the parties executed another loan document. Payment of the P10,000.00
was extended to April 30, 1960, but the obligation was increased by P6,000.00. Defendants again
failed to pay their obligation by April 30, 1960 and, on September 23, 1960, plaintiff instituted this
collection case. Defendants admitted the P10,000.00 principal obligation, but claimed that the
additional P6,000.00 constituted usurious interest. Trial court favored Law and ordered herein
respondents to pay the former, the principal amount of 10,000 plus 6,000 by way of liquidated
damages.
Issue: Whether or not the additional P6,000 is recoverable.
Held: YES. Under Article 1354 of the Civil Code, in regards to the agreement of the parties
relative to the P6,000.00 obligation, "it is presumed that it exists and is lawful, unless the debtor
proves the contrary". No evidentiary hearing having been held, it has to be concluded that
defendants had not proven that the P6,000.00 obligation was illegal. Confirming the Trial Court's
finding, we view the P6,000.00 obligation as liquidated damages suffered by plaintiff, as of March
17, 1960, representing loss of interest income, attorney's fees and incidentals.
Case: Lao Sok vs. Lydia Sabaysabay, et al., Aug. 9, 1985, J. Gutierrez Jr.
Facts: Petitioner Lao Sok owned and operated the Shelton Department Store located at Carriedo
Street,
Quiapo,
Manila.
Private respondents, Lydia Sabaysabay, Amparo Mangulat, Rosita Salviejo, Nenita Ruinata,
Vilma Capillo and Virginia Sanorjo were all salesladies of the department store with a daily wage
of P14.00 each. On October 12, 1980, petitioner's store was razed by fire. He did not report the
loss of jobs of the salesladies which resulted from the burning of his department store to the
Regional Office of the Ministry of Labor. Petitioner promised the private respondents that he
would transfer them to his other department stores. Several weeks passed but petitioner still did
not fulfill his promise. The petitioner, however, told the respondents that he would give them their
separation pay and other benefits due them as soon as he collected the insurance proceeds
arising from his burned store. The private respondents accepted this offer of the petitioner.
Petitioner later collected the proceeds of his insurance but he did not give the private
respondents their separation pay and other benefits. Neither did he employ them in his other
stores as earlier promised. On May 14, 1981, the private respondents filed a complaint with the
Ministry of Labor and Employment charging the petitioner with illegal dismissal and non-payment
of their separation pay, allowance and incentive leave pay. Labor Arbiter favored herein
respondents. NLRC affirmed.
Issue: Whether or not a contract was perfected between the sales ladies and Lao Sok in
payment of formers separation pay.
Held: YES. Lao Sok made an offer which was duly accepted by the private respondents. There
was, therefore, a meeting of the minds between two parties whereby one bound himself with
respect to the other, to give something or to render some service (Article 1305, Civil Code). By
the unconditional acceptance of the offer that they would be paid separation pay, a contract was
therefore perfected. Petitioner contends that the contract though orally made is unenforceable

since
it
does
not
comply
with
the
Statute
of
Frauds.
This
contention
has
no
merit.
Contracts in whatever form they may have been entered into are binding on the parties unless
form is essential for the validity and enforceability of that particular contract. (See Lopez v. Auditor
General, 20 SCRA 655). We held in Shaffer v. Palma (22 SCRA 934):
xxx xxx xxx
... Whether the agreement is in writing or not is a question of evidence. Nevertheless,
even granting that the agreement is not in writing, this circumstance does not militate
against the validity or enforceability of said agreement, because contracts are binding
upon the parties in whatever form they may have been entered into unless the law
requires otherwise. (Article 1356, Civil Code; Lopez v. The Auditor General, et al., L25859, July 13, 1967; Pilar Gil Vdan de Murciano v. The Auditor General, et al., 103
Phil. 907). It is true that Article 1358 of the Civil Code provides that contracts involving
more than P500.00 must appear in writing, but nothing is said therein that such
requirement is necessary for their validity or enforceability. It has been held that the
writing required under Article 1358 is merely for convenience, (Thunga Chui v. Que
Bentac, 2 Phil. 561; Ng Hoc v. Tong Ho, 52 0,G., 4396) and so the agreement alleged
in the amended complaint in the present case can be enforced even if it may not be in
writing.
The requirement of writing for the offer made by Lao Sok is only for convenience and not
enforceability. In fact, the petitioner could be compelled to put the offer in writing, a step no longer
necessary
now
because
of
this
petition.
Case: Meliton Gallardo and Teresa Villanueva vs. IAC and Marta Villanueva, et al., Oct. 29,
1987, J. Paras.
Facts: A parcel of land situated in Cavinti, Laguna was owned and registered in the name of late
Pedro Villanueva. Herein petitioners claimed that the aforestated land was sold to them in a
private document, an unnotarized deed of sale written in Tagalog that was allegedly by the late
Villanueva. Subsequently, the Original Certificate of Title was cancelled on the basis of the private
document of sale (Exhibit "B") and a new certificate of title was issued in the name of the
petitioners. However, during the Second World War, the records as well as the Office of the
Register of Deeds of Laguna, where the original of their new transfer certificate of title was kept,
were completely burned. Accordingly, by virtue of an Affidavit of Reconstitution dated December
2, 1958 (Record on Appeal, Annex "DD," pp. 41-42) and upon presentation of the Owner's
Duplicate Certificate of Title, the title was administratively reconstituted and the Register of Deeds
of Laguna issued Transfer Certificate of Title No. RT-6293 (No. 23350) in the name of the
petitioners (Record on Appeal, Annex "B", pp. 7). On November 17, 1976, defendant Marta
Villanueva together with Pedro Villanueva, Jr., and Restituto R. Villanueva executed and filed an
Affidavit of Adverse Claim with the Office of the Register of Deeds of Laguna. petitioners
instituted court suit against the private respondent and her husband, Dr. Marcelo S. Agana, Sr. by
filing a complaint for Quieting of Title and Damages with the Court of First Instance of Laguna.
CFI of Laguna declared the deed of sale void ab initio. IAC affirmed. Petitioners claim that the
sale although not in a public document, is nevertheless valid and binding citing this Court's rulings
in the cases of Cauto v. Cortes, 8 Phil. 459, 460; Guerrero v. Miguel, 10 Phil. 52, 53; Bucton v.
Gabar 55 SCRA 499 wherein this Court ruled that even a verbal contract of sale of real estate
produces legal effects between the parties.
Issue: Whether or not the unnotarized deed of sale purportedly executed on August 10,
1937 by the primitive owner Pedro Villanueva, in favor of petitioners, can be considered as
a valid instrument for effecting the alienation by way of sale of a parcel of land registerd
under the Torrens System.
Held: NO. True, as argued by appellants, a private conveyance of registered property is valid as
between the parties. However, the only right the vendee of registered property in a private
document is to compel through court processes the vendor to execute a deed of conveyance
sufficient in law for purposes of registration. Plaintiffs-appellants' reliance on Article 1356 of the
Civil Code is unfortunate. The general rule enunciated in said Art. 1356 is that contracts are
obligatory, in whatever form they may have been entered, provided all the essential requisites for
their validity are present. The next sentence provides the exception, requiring a contract to be in

some form when the law so requires for validity or enforceability. Said law is Section 127 of Act
496 which requires, among other things, that the conveyance be executed "before the judge of a
court of record or clerk of a court of record or a notary public or a justice of the peace, who shall
certify such acknowledgment substantially in form next hereinafter stated."
Such law was violated in this case. The action of the Register of Deeds of Laguna in allowing the
registration of the private deed of sale was unauthorized and did not lend a bit of validity to the
defective private document of sale.
Upon consideration of the facts and circumstances surrounding the execution of the assailed
document, the trial court found that said private document (Exhibit "B") was null and void and that
it was signed by somebody else not Pedro Villanueva. Such findings of fact besides being based
on the records, were sustained by the Court of Appeals.
Case: Lim Yhi Luya vs. CA and Hind Sugar Company, Sept.11, 1980, J. Guerrero.
Facts: Petitioner Lim Yhi Luya is a businessman, resident of Lingayen, Pangasinan where he
operates a grocery store, hardware store and gasoline station. Private respondent Hind Sugar
Company is engaged in the manufacturing and marketing of sugar, its principal office located in
Manaoag, Pangasinan. Vice President and General Manager of respondent company is Atty.
Emiliano Abalos. His assistant is Generoso Bongato, while the cashier and accountant of the
company is Teodoro Garcia.
Petitioner and private respondent since 1958 have had business dealings with each other, the
company selling sugar to the petitioner and the latter has been supplying the company with
diesoline, gasoline, muriatic acid, sulfuric acid, other supplies and materials ordered on credit. On
November 12, 1970, petitioner received a telegram from Manager Abalos in the following tenor:
"Please come tomorrow morning without fail." (Exh. "B"). The following day, November 13, 1970,
petitioner proceeded to the company and in the office of Manager Abalos, the latter offered to sell
sugar at P37.00 per picul. The parties agreed to the purchase of 4,085 piculs of sugar at P35.00
per picul. With the terms as follows: TERMS: CASH UPON SIGNING OF THIS CONTRACT.
Between November 13, 1970 to January 27, 1971, petitioner withdrew from the company
warehouse in varying quantities a total amount of 3,735 piculs under substitute delivery orders,
leaving a balance of 350 piculs undelivered.
On January 22, 1971, the question of payment cropped out between the parties. Petitioner
claimed that he had paid P142,975.00 to the company officials, Cashier Garcia and Manager
Abalos on November 13. 1970 and as proof of his payment, he referred to the contract,
particularly to the stipulation stating "Terms: Cash upon sing of this contract." Respondent
company officials denied the claim of the petitioner, alleging that petitioner never paid for the
sugar on November 13, 1970 or at any time thereafter. An audit report or examination of the
books of the company made by External Auditor Victorino Daroya showed no payment by
petitioner.
On May 17, 1971, petitioner, as plaintiff below, filed the complaint against the defendant Hind
Sugar Company stating 6 causes of actions. The trial court favored Lim. But CA reversed.
Issue: Whether or not payment has already been made.
Held: YES. Considering the admitted fact that the contract of sale (Exhibit "A") was prepared in
the office of respondent company by Generoso Bongato, Assistant to the Manager of the
company, upon instruction of General Manager Emiliano L. Abalos who is a lawyer, and We are
now confronted with the varying or conflicting interpretations of the parties thereto, the
respondent company contending that the stipulation "Terms: Cash upon signing of this contract"
does not mean that the agreement was a cash transaction because no money was paid by the
petitioner at the time of the signing thereof, whereas the petitioner insists that it was a cash
transaction inasmuch as he paid cash amounting to P142,975.00 upon the signing of the
contract, the payment having been made at around 1:30 in the afternoon of November 13, 1970
to the cashier, Teodoro Garcia, and Manager Abalos although the sale was agreed to in the
morning of the same day, November 13, 1970, the conflicting interpretations have shrouded the
stipulation with ambiguity or vagueness. Then, the cardinal rule should and must apply, which is
that the interpretation shall not favor the party who caused the ambiguity (Art. 1377, New Civil
Code). We rule that in the instant case, the interpretation to be taken shall not favor the
respondent company since it is the party who caused the ambiguity in its preparation.

We do not agree with the meaning of the provision in the contract ascribed by the respondent
court in its decision that: "Stated in another way, the provision of the Contract in question means
that the payment of the P142,975.00 IS TO FOLLOW or IS TO BE MADE (and NOT WAS MADE)
upon the signing of said contract." As already drafted or drawn up, complete and finalized with all
the signatures thereon of the contracting parties and presented in court as Exhibit "A" without any
change whatsoever in the mode of payment, such provision plainly and simply means that the
payment was in CASH, and not on CREDIT. The ambiguity raised by the use of the words or
phrases in the questioned provision must be resolved and interpreted against the respondent
company.
In truth the stipulation in the contract which reads: "Terms: Cash upon signing of this contract" is
very clear and simple in its meaning, leaving no doubt in Our minds upon the intention of the
contracting parties, hence, the first rule of contract interpretation that the literal meaning of its
stipulation shall control, is the governing rule at hand. Resorting to Webster's Third New
International Dictionary, p. 2515, for the definition of the word "upon" which literally means,
among others, "10a (1): immediately following on; very soon after; ... b: on the occasion of at the
time of; ... " the clear import of the stipulation is that payment was made on the occasion of or at
the time of the signing of the contract and not that payment will follow the signing. We must adopt
the former meaning because it is such an interpretation that would most adequately render the
contract effectual, following Article 1373 of the New Civil Code which provides:
Art. 1373. If some stipulation of any contract should admit of several meanings, it shall
be understood as bearing that import which is most adequate to render it effectua.
The evidence for the petitioner establishes that after paying the cash consideration to Cashier
Garcia and Manager Abalos, the parties signed the contract and thereafter a signed copy of said
contract was given to petitioner and also the four (4) delivery orders covering the 4,085 piculs of
sugar sold. The questioned stipulation recites exactly the act of payment which is the paying of
the money on the occasion of or at the time of the signing. Respondent would have Us believe
that the stipulation does not mean what it conveys because petitioner has not paid cash after the
signing of the contract nor at any time thereafter. We cannot agree with the respondent for
otherwise the sanctity of the written contract can easily be violated and impugned, for otherwise
oral testimony would prevail over a written document to vary, alter or modify the written terms,
and most importantly, respondent's interpretation would render the stipulation ineffectual as a
mere agreement.
Case: Republic of the Philippines vs. Carmen M. Vda. De Castellvi, et al., Aug. 15, 1974, J.
Zaldivar.
Facts : Plaintiff-appellant, the Republic of the Philippines, (hereinafter referred to as the
Republic) filed, on June 26, 1959, a complaint for eminent domain against defendant-appellee,
Carmen M. Vda. de Castellvi, judicial administratrix of the estate of the late Alfonso de Castellvi
(hereinafter referred to as Castellvi), over a parcel of land situated in the barrio of San Jose,
Floridablanca, Pampanga. In its complaint, the Republic alleged, among other things, that the fair
market value of the above-mentioned lands, according to the Committee on Appraisal for the
Province of Pampanga, was not more than P2,000 per hectare, or a total market value of
P259,669.10; and prayed, that the provisional value of the lands be fixed at P259.669.10, that the
court authorizes plaintiff to take immediate possession of the lands upon deposit of that amount
with the Provincial Treasurer of Pampanga; that the court appoints three commissioners to
ascertain and report to the court the just compensation for the property sought to be expropriated,
and that the court issues thereafter a final order of condemnation.
On June 29, 1959 the trial court issued an order fixing the provisional value of the lands at
P259,669.10.
In her "motion to dismiss" filed on July 14, 1959, Castellvi alleged, among other things, that the
land under her administration, being a residential land, had a fair market value of P15.00 per
square meter, so it had a total market value of P11,389,485.00; that the Republic, through the
Armed Forces of the Philippines, particularly the Philippine Air Force, had been, despite repeated
demands, illegally occupying her property since July 1, 1956, thereby preventing her from using
and disposing of it, thus causing her damages by way of unrealized profits. This defendant
prayed that the complaint be dismissed, or that the Republic be ordered to pay her P15.00 per
square meter, or a total of P11,389,485.00, plus interest thereon at 6% per annum from July 1,
1956; that the Republic be ordered to pay her P5,000,000.00 as unrealized profits, and the costs
of the suit. The Republic argues that the "taking" should be reckoned from the year 1947

when by virtue of a special lease agreement between the Republic and appellee Castellvi,
the former was granted the "right and privilege" to buy the property should the lessor
wish to terminate the lease, and that in the event of such sale, it was stipulated that the fair
market value should be as of the time of occupancy; and that the permanent improvements
amounting to more that half a million pesos constructed during a period of twelve years on the
land, subject of expropriation, were indicative of an agreed pattern of permanency and stability of
occupancy by the Philippine Air Force in the interest of national Security.
Issue : Whether or not the value of the land should be computed at the time when the
Republic occupied the land as lessee.
Held : NO. The Republic's claim that it had the "right and privilege" to buy the property at the
value that it had at the time when it first occupied the property as lessee nowhere appears in the
lease contract. What was agreed expressly in paragraph No. 5 of the lease agreement was that,
should the lessor require the lessee to return the premises in the same condition as at the time
the same was first occupied by the AFP, the lessee would have the "right and privilege" (or
option) of paying the lessor what it would fairly cost to put the premises in the same condition as
it was at the commencement of the lease, in lieu of the lessee's performance of the undertaking
to put the land in said condition. The "fair value" at the time of occupancy, mentioned in the lease
agreement, does not refer to the value of the property if bought by the lessee, but refers to the
cost of restoring the property in the same condition as of the time when the lessee took
possession of the property. Such fair value cannot refer to the purchase price, for purchase was
never intended by the parties to the lease contract. It is a rule in the interpretation of contracts
that "However general the terms of a contract may be, they shall not be understood to
comprehend things that are distinct and cases that are different from those upon which the
parties intended to agree" (Art. 1372, Civil Code).
Case : Eastern Shipping Lines, Inc. Vs. Margarine-Verkaufs-Union GmbH, Sept. 27, 1979, J.
Teehankee. (Acting)
Facts: Respondent corporation, a West German corporation not engaged in business in the
Philippines, was the consignee of 500 long tons of Philippine copra in bulk with a total value of
US$ 108,750.00 shipped from Cebu City on board petitioner's (a Philippine corporation) vessel,
the SS "EASTERN PLANET" for discharge at Hamburg, Germany. Petitioner's bill of lading for the
cargo provided as follows:
... Except as otherwise stated herein and in - the Charter Party, this contract shag be
governed by the laws of the Flag of the Ship carrying the goods. In case of average,
same shall be adjusted according to York-Antwerp Rules of 1950.
While the vessel was off Gibraltar, a fire broke out aboard the and caused water damage to the
copra shipment in the amount of US$ 591.38. Petitioner corporation rejected respondent's claim
for payment of the and respondent filed on June 18, 1966 in the Manila court of first instance its
complaint against petitioner as defendant for recovery of the same and US$ 250.00 - attorney's
fees and expenses of litigation.
After trial, the lower court rejected petitioner's defense that did not exceed 5% of respondent's
interest in the cargo it was not liable under Philippine Law for the damage which I rendered
judgment on April 25, 1969 "ordering the defendant, Eastern Shipping Lines, Inc. to pay to the
plaintiff, Margarine-Verkaufs-Union GMBH, the sum of US$ 591.38, with interest at the legal rate
from the date of the filing of the complaint until fully paid, plus US$ 250.00 as attorney's fees and
the costs of the suit."
In this review on questions of law, petitioner reiterates as its first assignment t of error its
submittal that Article 848 of the Code of Commerce 1 which would bar claims for averages not
exceeding 5% of the claimant's interest should be applied rather than the lower court's ruling that
petitioner's bill of lading expressly contained "an agreement to the contrary," i.e. for the
application of the York-Antwerp Rules which provide for respondent's fun recovery of the damage
loss.
Issue: Whether Article 848 of the Code of Commerce which would bar claims for averages
not exceeding 5% of the claimants interest should be applied.

Held: NO. We hold that the lower court correctly ruled the cited codal article to be "not
applicable in this particular case for the reason that the bill of lading (Exhibit "F") contains
"an agreement to the contrary" for it is expressly provided in the last sentence of the first
paragraph (Exhibit "1-A") that "In case of average, same shall be adjusted according to
York-Antwerp Rules of 1950." The insertion of said condition is expressly authorized by
Commonwealth Act No. 65 which has adopted in toto the U.S. Carriage of Goods by Sea Act.
Now, it has not been shown that said rules limit the recovery of damage to cases within a certain
percentage or proportion that said damage may bear to claimant's interest either in the vessel or
cargo as provided in Article 848 of the Code of Commerce On the contrary, Rule 3 of said YorkAntwerp Rules expressly states that "Damage done to a ship and cargo, or either of them, by
water or otherwise, including damage by breaching or scuttling a burning ship, in extinguishing a
fire on board the ship, shall be made good as general average. ... "
There is a clear and irreconcilable inconsistency between the York-Antwerp Rules expressly
adopted by the parties as their contract under the bill of lading which sustains respondent's claim
and the codal article cited by petitioner which would bar the same. Furthermore, as correctly
contended by respondent, what is here involved is a contract of adhesion as embodied in the
printed bill of lading issued by petitioner for the shipment to which respondent as the consignee
merely adhered, having no choice in the matter, and consequently, any ambiguity therein must be
construed against petitioner as the author.

Alienations by onerous title are also presumed fraudulent when made by persons
against whom some judgment has been rendered in any instance or some writ of
attachment has been issued. The decision or attachment need not refer to the property
alienated and need not have been obtained by the party seeking rescission. (emphasis
supplied)
The above-quoted legal provision was totally disregarded by the appellate court, and there lies its
basic error.
Furthermore, the presumption of fraud established by the law in favor of petitioners is bolstered
by other indicia of bad faith on the part of the vendor and vendee. Thus (1) the vendee is the
son-in-law of the vendor. In the early case ofRegalado vs. Luchsinger & Co., 5 Phil. 625,
this Court held that the close relationship between the vendor and the vendee is one of
the known badges of fraud. (2) At the time of the conveyance, the vendee, Sotero, was
living with his father-in-law, the vendor, and he knew that there was a judgment directing
the latter to give a monthly support to his wife Isidora and that his father-in-law was
avoiding payment and execution of the judgment. 6 (3) It was known to the vendee that his
father-in-law had no properties other than those two parcels of land which were being sold
to him. 7 The fact that a vendor transfers all of his property to a third person when there is a
judgment against him is a strong indication of a scheme to defraud one who may have a valid
interest over his properties.

Case: Isidora Cabaliw and Soledad Sadorra vs. Sotero Sadorra, et al., June 11, 1975, J.
Munoz Palma.
Facts: Isidora Cabaliw was the wife of Benigno Sadorra by his second marriage solemnized on
May 5, 1915, before the Justice of the Peace of Bayambang, Pangasinan. This couple had a
daughter named Soledad Sadorra. During their marriage, the spouses acquired two (2) parcels of
land situated in Iniangan, Dupax, Nueva Vizcaya. Having been abandoned by her husband,
Isidora Cabaliw instituted an action for support with the Court of First Instance of Manila, entitled
"Isidora Cabaliw de Orden versus Benigno Sadorra" docketed therein as Civil Case No. 43193.
On January 30, 1933, judgment was rendered requiring Benigno Sadorra to pay his wife, Isidora
Cabaliw, the amount of P75.00 a month in terms of support as of January 1, 1933, and P150.00
in concept of attorney's fees and the costs.
Unknown to Isidora Cabaliw, on August 19, 1933, Benigno Sadorra executed two (2) deeds of
sale over the two parcels of land above described in favor of his son-in-law, Sotero Sadorra, the
latter being married to Encarnacion Sadorra, a daughter of Benigno Sadorra by his first marriage.
Because of the failure of her husband to comply with the judgment of support, Isidora Cabaliw
filed in Civil Case 43192 a motion to cite Benigno Sadorra for contempt and the Court of First
Instance of Manila in its Order of May 12, 1937, authorized Isidora to take possession of the
conjugal property, to administer the same, and to avail herself of the fruits thereof in payment of
the monthly support in arrears. With this order of the Court, Isidora proceeded to Nueva Vizcaya
to take possession of the aforementioned parcels of land, and it was then that she discovered
that her husband had sold them to his son-in-law Sotero. On February 1, 1940, Isidora filed with
the Court of First Instance of Nueva Vizcaya Civil Case No. 449 against her husband and Sotero
Sadorra for the recovery of the lands in question on the ground that the sale was fictitious; at the
same time a notice of lis pendens was filed with the Register of Deeds of Nueva Vizcaya.
In May of 1940, Benigno Sadorra died.

Case: Hongkong and Shanghai Banking Corporation vs. Ralph Pauli and Spouses Sally
Garganera and Mateo Garganera, May 30, 1988, J. Grio-Aquino.
Facts: On June 14, 1957, the Hongkong & Shanghai Banking Corporation filed a complaint
against the defendant Ralph Pauli, to collect the sum of P258,964.15. The decision having
become final, the Bank endeavored to execute it but the writs of execution were returned
unsatisfied because no leviable assets of Pauli could be located by the sheriffs.
Unknown to the Hongkong & Shanghai Bank, Pauli had on January 8, 1957 purchased from the
Philippine National Bank (PNB) a sugar cane plantation known as Hacienda Riverside (Lot No.
693 of Saravia Cadastre, Negros Occidental). To avoid discovery of the transaction by his
creditors, he did not register the deed of Sale. Six years later, on March 1, 1963, he fraudulently
sold the hacienda to his daughter, defendant-appellee Sally Garganera, and her husband Mateo
Garganera. The sale was registered on March 5, 1963. Transfer Certificate of Title No. 34425 was
issued to the Garganeras.
Having discovered that the sugar plantation belonged to Paul, the Hongkong and Shanghai Bank
filed on January 13, 1969 in the Court of First Instance of Manila a complaint for revival of the
1962 judgment in its favor in Civil Case No. 32799. However, Pauli and Garganera filed a motion
to dismiss on the ground of prescription and res judicata. Trial court granted the motion and was
affirmed by the CA.

Issue: Whether or not the sale by Benigno to Sotero Sadorra was valid.
Held: NO. The facts narrated in the first portion of this Decision which are not disputed,
convincingly show or prove that the conveyances made by Benigno Sadorra in favor of his son-inlaw were fraudulent. For the heart of the matter is that about seven months after a judgment was
rendered against him in Civil Case No. 43192 of the Court of First Instance of Manila and without
paying any part of that judgment, Benigno Sadorra sold the only two parcels of land belonging to
the conjugal partnership to his son-in-law. Such a sale even if made for a valuable consideration
is presumed to be in fraud of the judgment creditor who in this case happens to be the offended
wife.
Article 1297 of the old Civil Code which was the law in force at the time of the transaction
provides:
Contracts by virtue of which the debtor alienates property by gratuitous title are
presumed to be made in fraud of creditors.

Issues:
(1) Whether or not the action for annulment of sale has prescribed.
(2) Whether or not res judicata applies in the case at bar.
(3)
Held:
(1) YES. When a transaction involves registered land, the four-year period fixed in Article 1391
within winch to bring an action for annulment of the deed, shall be computed from the registration
of the conveyance (March 5, 1963) on the familiar theory that the registration of the document is
constructive notice of the conveyance to the whole world (Armentia vs. Patriarca, 18 SCRA 1253;
Avecilla vs. Yatco, 103 Phil. 666).
Plaintiff's submission that the four-year period commenced to run from the date when the Bank
obtained actual knowledge of the fraudulent sale of Pauli's land to the Garganeras (sometime in
1969) and that hence the four-year period for bringing an action to annul the sale had not yet
expired when it filed the action for annullment on February 17, 1971, is unacceptable. That theory
would diminish public faith in the integrity of torrens titles and impair commercial transactions
involving registered lands for it would render uncertain the computation of the period for the
prescription of such actions.
(2) NO. Civil Case No. 465, the action for annulment of the Sale is not barred by res judicata,
specifically, the prior judgment in Civil Case No. 75319, for revival of the judgment in the
collection suit, Civil Case No. 32799, for the subject matter and causes of action in the two cases

are different. The three (3) Identities required for the application of the bar by prior judgment:
Identity of parties, of subject matter and causes of action, are lacking.
Case: Eduardo Felipe, et al. vs. Heirs of Maximo Aldon, Feb. 16, 1983, J. Abad Santos.
Facts: Maximo Aldon married Gimena Almosara in 1936. The spouses bought several pieces of
land sometime between 1948 and 1950. In 1960-62, the lands were divided into three lots, 1370,
1371 and 1415 of the San Jacinto Public Land Subdivision, San Jacinto, Masbate.
In 1951, Gimena Almosara sold the lots to the spouses Eduardo Felipe and Hermogena V. Felipe.
The sale was made without the consent of her husband, Maximo.
On April 26, 1976, the heirs of Maximo Aldon, namely his widow Gimena and their children Sofia
and Salvador Aldon, filed a complaint in the Court of First Instance of Masbate against the
Felipes. The complaint which was docketed as Civil Case No. 2372 alleged that the plaintiffs
were the owners of Lots 1370, 1371 and 1415; that they had orally mortgaged the same to the
defendants; and an offer to redeem the mortgage had been refused so they filed the complaint in
order to recover the three parcels of land.
The defendants asserted that they had acquired the lots from the plaintiffs by purchase and
subsequent delivery to them. The trial court favored the Felipes as lawful owners thereto.
However, it was reversed by CA. Hence, this petition.
Issue: Whether or not the sale of land to the Felipes by one of the spouses is voidable.
Held: YES. The view that the contract made by Gimena is a voidable contract is supported
by the legal provision that contracts entered by the husband without the consent of the
wife when such consent is required, are annullable at her instance during the marriage
and within ten years from the transaction questioned. (Art. 173, Civil Code.)
According to Art. 1390 of the Civil Code, among the voidable contracts are "[T]hose where one of
the parties is incapable of giving consent to the contract." (Par. 1.) In the instant case-Gimena
had no capacity to give consent to the contract of sale. The capacity to give consent belonged not
even to the husband alone but to both spouses.
Gimena's contract is not rescissible for in such contract all the essential elements are untainted
but Gimena's consent was tainted. Neither can the contract be classified as unenforceable
because it does not fit any of those described in Art. 1403 of the Civil Code. And finally, the
contract cannot be void or inexistent because it is not one of those mentioned in Art. 1409 of the
Civil Code. By process of elimination, it must perforce be a voidable contract.
The voidable contract of Gimena was subject to annulment by her husband only during the
marriage because he was the victim who had an interest in the contract. Gimena, who was the
party responsible for the defect, could not ask for its annulment. Their children could not likewise
seek the annulment of the contract while the marriage subsisted because they merely had an
inchoate right to the lands sold.
The termination of the marriage and the dissolution of the conjugal partnership by the death of
Maximo Aldon did not improve the situation of Gimena. What she could not do during the
marriage, she could not do thereafter. The case of Sofia and Salvador Aldon is different. After the
death of Maximo they acquired the right to question the defective contract insofar as it deprived
them of their hereditary rights in their father's share in the lands. The father's share is one-half
(1/2) of the lands and their share is two-thirds (2/3) thereof, one-third (1/3) pertaining to the
widow.
Case: House International Building Tenants Association, Inc. vs. IAC, Centertown
Marketing Corp., et al., June 30, 1987, J. Cortes.
Facts: Petitioner House International Building Tenants Association, Inc. (ASSOCIATION, for
short) is a domestic non-stock, non-profit civic corporation, whose incorporators, directors and
members constitute the great majority of more than a hundred heads of families who are tenants
of long and good standing of the 14-storey House International Building located at 777 Ongpin
Street, Binondo, Manila. The land and the improvements thereon were formerly owned by Atty.
Felipe Ang who mortgaged the same to the Government Service Insurance System (hereinafter
referred to as GSIS) to secure payment of an obligation. After foreclosure of the mortgage and for
failure of Ang to exercise his right of redemption over the foreclosed property, the ownership
thereof was consolidated with the GSIS which subsequently sold it to Centertown Marketing
Corporation (CENTERTOWN, for short) in a deed of conditional sale, without notice to the

tenants of the building and without securing the prior clearance of the then Ministry of Human
Settlements.
As CENTERTOWN was not authorized by its Articles of Incorporation to engage in the real estate
business, it organized a sister corporation, with almost an the same incorporators and
stockholders, as CENTERTOWN'S, under the corporate name of Manila Towers Development
Corporation (TOWERS, for short) for the primary purpose of engaging in the real estate business.
Subsequently, CENTERTOWN assigned to its sister corporation TOWERS all its rights and
obligations under the Deed of Conditional Sale, with the consent and approval of the GSIS.
Thereafter, herein petitioner filed a complaint with the Regional Trial Court of Manila against
CENTERTOWN, TOWERS and GSIS for annulment of the deed of conditional sale and the
subsequent assignment thereof by CENTERTOWN to TOWERS. The complaint alleged in part
that the Deed of Conditional Sale is null and void ab initio for being ultra vires, since defendant
CENTERTOWN is not qualified to acquire real estate property or to engage in real estate
transactions. The court a quo dismissed the complaint and was affirmed by CA.
Issue: Whether or not House International Building Tenants Association can sue for
annulment of the deed of conditional sale between GSIS and Centertown.
Held: NO. The main thrust of the petitioner's challenge on the validity of the conditional sale is
that the contract is ultra vires because the respondent CENTERTOWN is not qualified to acquire
properties under its Articles of Incorporation. The petitioner has confused a void contract with an
ultra vires contract which is merely voidable.
We agree with the Court of Appeals that on this issue the provision of Art. 1397 of the Civil Code
is in point, thus:
Art. 1397. The action for the annulment of contracts may be instituted by all who are
thereby obliged principally or subsidiarily.
Petitioner is neither a party nor a privy to the Deed of Conditional Sale and the assignment
thereof: thus, it cannot assail the validity of the said contracts. In Ibaez vs. Hongkong and
Shanghai Bank, we said:
From these legal provisions it is deduced that it is the interest had in a given contract,
that is the determining reason of the right which lies in favor of the party obligated
principally or subsidiarily to enable him to bring an action for the nullity of the contract
in which he intervened, and, therefore, he who has no right in a contract is not entitled
to prosecute an action for nullity, for, according to the precedents established by the
courts, the person who is not a party to a contract, nor has any cause of action or
representation from those who intervened therein, is manifestly without right of action
and personality such as to enable him to assail the validity of the contract. (Decisions
of the supreme court of Spain, of April 18, 1901, and November 23, 1903, pronounced
in cases requiring an application of the preinserted article 1302 of the Civil Code.) (22
Phil. 572; 584).
Case: Marta Ortega vs. Daniel Leonardo, May 28, 1958, J. Bengzon.
Facts: Marta Ortega and Daniel Leonardo had an oral contract of sale of a parcel of land
occupied by the former located at San Andres, Malate Manila. Defendant, however, also asserted
a similar right, alleging occupancy of a portion of the land subsequent to plaintiff's. During the
investigation of such conflicting interests, defendant asked plaintiff to desist from pressing her
claim and definitely promised that if and when he succeeded in getting title to Lot I , he would sell
to her a portion thereof with an area of 55.60 square meters (particularly described) at the rate of
P25.00 per square meter, provided she paid for the surveying and subdivision of the Lot and
provided further that after he acquired title, she could continue holding the lot as tenant by paying
a monthly rental of P10.00 until said portion shall have been segregated and the purchase price
fully paid. Plaintiff accepted defendant's offer, and desisted from further claiming Lot I.
However, when defendant finally acquired title thereto; and that relying upon their agreement,
plaintiff caused the survey and segregation of the portion which defendant had promised to sell
incurring expenses therefor, said portion being now designated as Lot I-B in a duly prepared and
approved subdivision plan. On July 1954, after the plans of subdivision and segregation of the lot
had been approved by the Bureau of Lands, plaintiff tendered to defendant the purchase
price which the latter refused to accept, without cause or reason. Hence, Ortega sued
Leonardo for specific performance. The latter argued that the oral contract of sale is
unenforceable.

Issue: Whether or not the oral contract of sale is unenforceable.

Held: NO. It is admitted by both parties that an oral agreement to sell a piece of land is not
enforceable. (Art. 1403, Civil Code, Section 21, Rule 123, Rules of Court.) Plaintiff, however,
argues that the contract in question, although verbal, was partially performed because plaintiff
desisted from claiming the portion of lot I in question due to the promise of defendant to transfer
said portion to her after the issuance of title to defendant. The court thinks that even granting that
plaintiff really desisted to claim not on oral promise to sell made by defendant, the oral promise to
sell cannot be enforced. The desistance to claim is not a part of the contract of sale of the land.
Only in essential part of the executory contract will, if it has already been performed, make the
verbal contract enforceable, payment of price being an essential part of the contract of sale. the
above means that partial performance of a sale contract occurs only when part of the purchase
price is paid, it surely constitutes a defective statement of the law. American Jurisprudence in its
title "Statute of Frauds" lists other acts of partial performance, such as possession, the making of
improvements, rendition of services, payment of taxes, relinquishment of rights, etc.
Thus, it is stated that "The continuance in possession may, in a proper case, be sufficiently
referable to the parol contract of sale to constitute a part performance thereof. There may be
additional acts or peculiar circumstances which sufficiently refer the possession to the contract. . .
. Continued possession under an oral contract of sale, by one already in possession as a tenant,
has been held a sufficient part performance, where accompanied by other acts which
characterize the continued possession and refer it to the contract of purchase. Hence, as there
was partial performance, the principle excluding parol contracts for the sale of realty, does
not apply.
Case: Rosario Carbonnel vs. Jose Poncio, Ramon Infante and Emma Infante, May 12, 1958,
J. Concepcion.
Facts: Jose Poncio is the owner of a parcel of land which both Rosario Carbonell and Emma
Infante offered to buy. When Poncio was unable to keep up with the installments due on his
mortgage, he approached Carbonell and offered to sell the lot to the latter which the latter
accepted with the proposed price of 9.50 per square meter which Poncio accepted. Carbonell
and Poncio executed a document. And Carbonell paid Poncio 200 (out of P647). However, when
Carbonell was about to pay the balance, Poncio told Carbonell that he could not proceed with the
sale because he sold it already to Infante for P3,535 (for the assumption of his mortgage with
Republic Savings Bank). Carbonell sued Poncio and Infante to recover the land. Trial court
dismissed the complaint upon the ground that Carbonells cause of action is unenforceable.
Issue: Whether or not the sale of house and lot to Infante by Poncio was valid.
Held: We are of the opinion and so hold that the appeal is well taken. It is well settled in this
jurisdiction that the Statute of Frauds is applicable only to executory contracts (Facturan
vs. Sabanal, 81 Phil., 512), not to contracts that are totally or partially performed (Almirol, et
al., vs. Monserrat, 48 Phil., 67, 70; Robles vs. Lizarraga Hermanos, 50 Phil., 387; Diana vs.
Macalibo, 74 Phil., 70).
Subject to a rule to the contrary followed in a few jurisdictions, it is the accepted view
that part performance of a parol contract for the sale of real estate has the effect,
subject to certain conditions concerning the nature and extent of the acts constituting
performance and the right to equitable relief generally, of taking such contract from the
operation of the statute of frauds, so that chancery may decree its specific performance
or grant other equitable relief. It is well settled in Great Britain and in this country, with
the exception of a few states, that a sufficient part performance by the purchaser under
a parol contract for the sale of real estate removes the contract from the operation of
the statute of frauds. (49 Am. Jur. 722-723.)
In the words of former Chief Justice Moran: "The reason is simple. In executory contracts there is
a wide field for fraud because unless they be in writing there is no palpable evidence of the
intention of the contracting parties. The statute has precisely been enacted to prevent fraud."
(Comments on the Rules of Court, by Moran, Vol. III [1957 ed.], p. 178.) However, if a contract
has been totally or partially performed, the exclusion of parol evidence would promote fraud or
bad faith, for it would enable the defendant to keep the benefits already denied by him from the

transaction in litigation, and, at the same time, evade the obligations, responsibilities or liabilities
assumed or contracted by him thereby.
For obvious reasons, it is not enough for a party to allege partial performance in order to hold that
there has been such performance and to render a decision declaring that the Statute of Frauds is
inapplicable. But neither is such party required to establish such partial performance by
documentary proof before he could have the opportunity to introduce oral testimony on the
transaction. Indeed, such oral testimony would usually be unnecessary if there were documents
proving partial performance. Thus, the rejection of any and all testimonial evidence on partial
performance, would nullify the rule that the Statute of Frauds is inapplicable to contracts which
have been partly executed, and lead to the very evils that the statute seeks to prevent.
Hence, Carbonell then had superior right over Infante. The private document entitled, Contract
for lot which I bought from Jose Poncio was not such memorandum in writing within the
purview of the Statute of Frauds. The memorandum merely states that Poncio is allowed to stay
in the property which he had sold to Carbonell. There is no mention of the essential elements of a
contract of sale. Hence, from the terms of the contract, the sale of the property is already an
accomplished act.
Case: Bienvenido Babao, et al. vs. Florencio Perez, et al., Dec. 28, 1957, J. Bautista Angelo.
Facts: Plaintiff is the judicial administrator of the estate of the late Santiago Babao while
defendant Florencio Perez is the judicial administrator of the estate of the late Celestina Perez.
Celestina Perez was in her lifetime the owner of the parcel of land in question which was not
registered either under Act 496 or under the Spanish Mortgage law. Sometime in 1924 when the
deceased Santiago Babao married Maria Cleofe Perez, niece of Celestina Perez, the latter and
the former entered into a verbal agreement whereby Santiago Babao bound himself to improve
the land by leveling and clearing all the forest trees standing thereon and planting in lieu there of
coconuts, rice, corn and other crops such as bananas and bamboo trees, and to act at the same
time as administrator thereof during the lifetime of Celestina Perez, all expenses for labor, and
materials to be at his cost, in consideration of which Celestina in turn bound herself to convey to
Santiago Babao or, his wife of land, together with all the improvements thereon upon her
death. Pursuant to said verbal agreement, Santiago Babao in 1924 left his job as administrator of
the Llana Estate in San Juan, Batangas for which he was receiving a salary of P150 a month,
and started leveling and clearing the land having planted in an area of 50 hectares 50,000
coconuts trees, and rice and corn in another area of 70 hectares, leaving out only 50 hectares
unimproved, all of which having been administered by him from 1924 to 1946. However, in the
violation of the aforesaid verbal agreement, Celestina Perez, acting through Leovigildo
Perez, to whom she extended a power of Attorney to sell, sold few days before she died
about 127 hectares of the land in question in consequence of which Santiago Babao was
deprived of the possession and administration thereof from 1945. Said sales are fictitious
and were made clear violation of the oral agreement made between Celestina Perez and
Santiago Babao and as such the same are null and void. Hence, Babao sued the estate of
Celestina for the recovery of his share on the land.
Issue: Whether or not the verbal agreement between Santiago Babao and Celestina Perez
is enforceable.
Held: NO. This statute, formerly incorporated as Section 21 of Rule 123 of our Rules of Court, is
now found in Article 1403 of the new Civil Code, which provides, in so far as pertinent to this
case, as follows:
In the following cases an agreement hereafter made shall be enforceable by action
unless the same, or some note or memorandum thereof, be in writing, and subscribed
by the party charged or by his agent, evidence therefore, of the agreement cannot be
received without the writing, or secondary evidence of its contents;
(a) An agreement that by its terms is not to be performed within a year from the making
thereof.
(e) An agreement . . . for the sale of real property or of an interest therein.
Appellants contends that the alleged verbal agreement falls under the paragraphs (a) and (c)
above-quoted because the same may be considered as an agreement which by its terms is not to
be performed within one year from the making thereof, or one which involves a sale of real
property or of an interest therein. If this premise is correct, appellants contend, then the trial court

erred in allowing the introduction of parole evidence to prove the alleged agreement over the
vigorous objection of counsel for appellants.
That the alleged verbal agreement is one which by its terms is not to be performed within one
year is very apparent from the allegations of the complaint. Thus, it is therein alleged that the
agreement was allegedly made in 1924 and by its terms Santiago Babao bound himself (1) to
improve all the forest trees and planting thereon coconuts, rice, corn and other crops such as
bananas and bamboo trees, and (2) to act at the same time as administrator of said land and
improvements during the lifetime to Celestina Perez. And in consideration of such undertaking,
Celestina Perez "bound herself to give and deliver, either to Santiago Babao or his wife Cleofe
Perez, one-half () of the whole area of said land as improved with all the improvements thereon
upon her death". It is also alleged in the complaint that Celestina Perez died on August 24, 1947,
or 23 years after the making of the alleged agreement while Santiago Babao died on January 6,
1948. From the above terms, therefore, it is not difficult to see that the undertaking assumed by
Santiago Babao which was to clear, level and plant to coconut trees and other plants 156
hectares of forest land could not be accomplished in one year. In fact, the alleged improvements
were supposedly accomplished during the lifetime of Celestina, which lasted over a period of 23
years, and even then not all was cleared and planted but only a portion thereof. Another part of
his undertaking is that he is to administer the land during the lifetime of Celestina, and as we
have already said, her death occurred 23 years after the agreement.
Case: Felipe Cabague and Geronimo Cabague vs. Matias Auxilio and Socorro Auxilio, Nov.
26, 1952, J. Bengzon.
Facts: Felipe Cabague and his son Geronimo sued the defendant Matias Auxilio and his
daughter Socorro to recover damages resulting from defendants' refusal to carry out the
previously agreed marriage between Socorro and Geronimo.
The complaint alleged, in short: (a) that defendants promised such marriage to plaintiffs, provided
the latter would improve the defendants' house in Basud and spend for the wedding feast and the
needs of the bride; (b) that relying upon such promises plaintiffs made the improvement and
spent P700; and (c) that without cause defendants refused to honor their pledged word.
The defendants moved to dismiss, arguing that the contract was oral, unenforceable under the
rule of evidence hereinbefore mentioned. And the court dismissed the case. On appeal to the
Court of First Instance, the plaintiffs reproduced their complaint and defendants reiterated their
motion to dismiss.
Issues:
(1)
(2)
Held:
(1)
(2)

Whether or not Geronimo may sue Socorro for damages for the alleged breach
of mutual promise to marry.
Whether Felipes action may prosper in enforcing an agreement in consideration
of marriage.
YES. For breach of that mutual promise to marry, Geronimo may sue Socorro for
damages. This is such action, and evidence of such mutual promise is admissible.
NO. However Felipe Cabague's action may not prosper, because it is to enforce an
agreement in consideration of marriage. Evidently as to Felipe Cabague and Matias
Auxilio this action could not be maintained on the theory of "mutual promise to marry".
Neither may it be regarded as action by Felipe against Socorro "on a mutual promise to
marry."

Case: Suga Sotto Yuvienco, et al. Vs. Hon. Dacuycuy, Dely Rodriguez, et al., May 27, 1981,
J. Barredo.
Facts: The petitioners, thru Pedro Gamboa, owned the Sotto property (land and building)
situated at Tacloban City are willing to sell such property to private respondents (Yao King Ong)
with the following terms, I am therefore gluing you and the rest of the occupants until July 31,
1978 within it which to decide whether you want to buy the property. If I do not hear from you by
July 31, I will offer or close the deal with the other interested buyer. Xxx" The private respondents
accepted the same stating, PROPOSAL ACCEPTED ARRIVING TUESDAY MORNING WITH
CONTRACT PREPARE PAYMENT BANK DRAFT. Nonetheless, the alleged subsequent
agreement about the P2 M down and P4.5 M in 90 days may at best be deemed as a distinct
cause of action. And placed against the insistence of petitioners, as demonstrated in the two
deeds of sale taken by Atty. Gamboa to Tacloban, Annexes 9 and 10 of the answer of herein

respondents, that there was no agreement about 90 days, an issue of fact arose, which could
warrant a trial in order for the trial court to determine whether or not there was such an
agreement about the balance being payable in 90 days instead of the 30 days stipulated in
Annexes 9 and 10 above-referred to. Hence, private respondent filed a suit for specific
performance.
Issue: Whether herein Private Respondents claim is enforceable.
Held: NO. Our conclusion, therefore, is that although there was no perfected contract of sale in
the light of the letter of Atty. Gamboa of July 12, 1978 and the letter-reply thereto of Yao; it being
doubtful whether or not, under Article 1319 of the Civil Code, the said letter may be deemed as
an offer to sell that is "certain", and more, the Yao telegram is far from being an "absolute"
acceptance under said article, still there appears to be a cause of action alleged in Paragraphs 8
to 12 of the respondents' complaint, considering it is alleged therein that subsequent to the
telegram of Yao, it was agreed that the petitioners would sell the property to respondents for P6.5
M, by paving P2 M down and the balance in 90 days and which agreement was allegedly violated
when in the deeds prepared by Atty. Gamboa and taken to Tacloban, only 30 days were given to
respondents.
Hence, looking at the pose of respondents that there was a perfected agreement of purchase and
sale between them and petitioners under which they would pay in installments of P2 M down and
P4.5 M within ninety 90) days afterwards it is evident that such oral contract involving the "sale of
real property" comes squarely under the Statute of Frauds (Article 1403, No. 2(e), Civil Code.)
Case: Olegario Clarin vs. Alberto Rulona, Feb. 20, 1984, J. Gutirrez, Jr.
Facts: Petitioner sold ten hectares of his share of the disputed lot to him for P2,500.00. The
conditions of the sale were that a downpayment of P1,000.00 was to be made and then the
balance of P1,500.00 was to be paid in monthly installment of P100.00. Respondent delivered to
the petitioner a downpayment of P800.00 and on the first week of June the amount of P200.00
was also delivered thereby completing the downpayment of P1,000.00. On the first week of
August, another delivery was made by the respondent in the amount of P100.00 as payment for
the first installment. Respondent further alleged that despite repeated demands to let the sale
continue and for the petitioner to take back the six postal money orders, the latter refused to
comply.
In his answer, the petitioner alleged that while it is true that he had a projected contract of sale of
a portion of land with the respondent, such was subject to the following conditions: (1) that the
contract would be realized only if his co-heirs would give their consent to the sale of a
specific portion of their common inheritance from the late Aniceto Clarin before partition
of the said common property and (2) that should his co-heirs refuse to give their consent,
the projected contract would be discontinued or would not be realized. Petitioner further
contended that the respondent knew fully well the above terms and accepted them as conditions
precedent to the perfection or consummation of the contract; that respondent delivered the
amount of P1,000.00 as earnest money, subject to the above conditions and that the amount was
returned by the petitioner upon his learning definitely that his co-heirs and co-owners refused to
give their consent to the projected sale.
Respondent Rulona filed a complaint for specific performance and recovery of improvements on
the ground that the petitioner and his wife violated the terms of the agreement of sale by
returning by their own volition and without the consent of plaintiff, the amount of P1,100.00 in six
postal money orders, covering the downpayment of P1,000.00 and first installment of P100.00.
Trial court rendered judgment in favor of respondent. CA sustained.
Issue: Whether or not the contract of sale was perfected.
Held: YES. While it is true that Exhibits A and B are, in themselves, not contracts of sale, they
are, however, clear evidence that a contract of sale was perfected between the petitioner
and the respondent and that such contract had already been partially fulfilled and
executed. A contract of sale is perfected at the moment there is a meeting of minds upon the
thing which is the object of the contract and upon the price. (Article 1475, Civil Code; Phil. Virginia
Tobacco Administration v. De los Angeles, 87 SCRA 210). Such contract is binding in whatever
form it may have been entered into. (Lopez v. Auditor General, 20 SCRA 655).

Construing Exhibits A and B together, it can be seen that the petitioner agreed to sell and the
respondent agreed to buy a definite object, that is, ten hectares of land which is part and parcel of
Lot 20 PLD No. 4, owned in common by the petitioner and his sisters although the boundaries of
the ten hectares would be delineated at a later date. The parties also agreed on a definite price
which is P2,500.00. Exhibit B further shows that the petitioner has received from the respondent
as initial payment, the amount of P800.00. Hence, it cannot be denied that there was a perfected
contract of sale between the parties and that such contract was already partially executed when
the petitioner received the initial payment of P800.00. The latters acceptance of the payment
clearly showed his consent to the contract thereby precluding him from rejecting its binding effect.
(See Federation of United Namarco Distributors, Inc. v. National Marketing Corporation, 4 SCRA
884). With the contract being partially executed, the same is no longer covered by the
requirements of the Statute of Frauds in order to be enforceable. (See Khan v. Asuncion, 19
SCRA 996). Therefore, with the contract being valid and enforceable, the petitioner cannot avoid
his obligation by interposing that Exhibit A is not a public document. On the contrary, under Article
1357 of the Civil Code, the petitioner can even be compelled by the respondent to execute a
public document to embody their valid and enforceable contract.
The petitioners contention that he was only forced to receive money from the respondent due to
the insistence of the latter merits little consideration. It is highly improbable that the respondent
would give different sums on separate dates to the petitioner with no apparent reason, without a
binding assurance from the latter that the disputed lot would be sold to him. We agree with the
trial court and the appellate court that the payments were made in fulfillment of the conditions of
the sale, namely, a downpayment of P1,000.00 and the balance of P1,500.00, to be paid in
monthly installments of P100.00 each.
We, therefore, find no error in the lower courts holding that a contract of sale was perfected
between the petitioner and the respondent and that the sale did not depend on a condition that
the petitioners co-owners would have to agree to the sale.
Case: Bisaya Land Transportation Co, Antonio Cuenco and Benjamin Roa vs. Marciano
Sanchez, Aug. 31, 1987, J. Padilla.
Facts: In May 1975, Sanchez was appointed by BISTRANCO as shipping agent in Butuan City
for the vessel M/V Don Mariano. 2 The new Butuan City Agent 3 referred to in the letter "Exhibit "C"
was Marciano Sanchez. Later, on 12 March 1976, when BISTRANCO was under receivership,
Sanchez was appointed by its Receiver, Atty. Adolfo V. Amor, as acting shipping agent, also for
M/V Doa Remedies, in addition to M/V Doa Filomena, in the port of Butuan City "pending the
execution of the formal contract of agency. 4 When Sanchez was constituted as acting shipping
agent, he received the same commission as his predecessor, one ONG YUI who received 10%
for all freight and passenger revenues coming from Butuan City and 5 % for all freight going to
Butuan. 5
Thereafter, or on 27 July 1976, a formal Contract of Agency, marked as Exhibit "F", was executed
between BISTRANCO, represented by Receiver Atty. Adolfo V. Amor and Marciano C. Sanchez,
represented by his authorized representative Exequiel Aranas. On 30 July 1976, after Sanchez
found that Paragraph 16 of the Contract of agency was quite prejudicial to him, he executed with
BISTRANCO a Supplemental Shipping Agency Contract, marked as Exhibit "G", which was duly
signed by Receiver Atty. Adolfo V. Amor on behalf of BISTRANCO and Marciano C. Sanchez
himself. 6 But, both the Contract of Agency and the Supplemental Shipping Agency Contract were
never submitted by Atty. Adolfo Amor to the receivership court for its approval.
While the shipping business of BISTRANCO in Butuan City flourished, evidently to the mutual
benefit of both parties, on 26 December 1979, co-petitioner Benjamin G. Roa, as Executive VicePresident of BISTRANCO, wrote Sanchez a letter 10 advising him that, effective 1 January 1980,
BISTRANCO would commence operating its branch office in Butuan City. Realizing that the letter,
marked as Exhibit "FF", was in effect a repudiation of the Contracts, Sanchez filed an action for
specific performance with preliminary injunction and damages with the Regional Trial Court of
Cebu City on 28 December 1979. Trial court rendered judgment in favor of Sanchez and CA
affirmed.
Issue: Whether or not the contracts are unenforceable for want of authority and approval
from the receivership court.
Held: YES. In the case at bar, it is undisputed that Atty. Adolfo Amor was entrusted, as receiver,
with the administration of BISTRANCO and it business. But the act of entering into a contract is

one which requires the authorization of the court which appointed him receiver. Consequently, the
questioned Contracts can rightfully be classified as unenforceable for having been entered into by
one who had acted beyond his powers, due to Receiver Amor's failure to secure the court's
approval of said Contracts.
These unenforceable Contracts were nevertheless deemed ratified in the case at bar, based
upon the facts and circumstances on record which have led this Court to conclude that
BISTRANCO had actually ratified the questioned Contracts as follows:
(1) Reduce Sanchez commission;
(2) Failure to post a bond;
(3) Informing Sanchez that BISTRANCOis abiding strictly with the terms of the contract.
Case: Victorino Hernandez vs. CA and Substituted Heirs of Rev. Fr. Lucio Garcia, April 27,
1988, J. Narvasa.
Facts: Fr. Garcia 4 applied in 1959 for the registration in his name of Lots 1-A, 1-B, and 2 of Plan
Psu-172410-B in Bo. San Dionisio, Paraaque. His property adjoined that of Hernandez, and
since both estates were once owned by one Andres San Buenaventura, 5 no dividing boundaries
existed thereon until cadastral surveyors from the Bureau of Lands laid down official monuments
to mark the separation of the lots. These monuments were set along a line which the landowners
had previously agreed upon as representing the correct boundary between their estates. This
was in 1956. 6
Unknown to Hernandez, the Advance Plan Psu-172410-B submitted in Fr. Garcia's behalf to the
land registration court in 1959 included 220 square meters of land now disputed Lots ABC and
4057-A of Lot 1-B. This area fell beyond the stipulated boundaries of Fr. Garcia's land and
encroached pro tanto on the land of Hernandez (on which, it should be mentioned, his tenants
had been living for many years [decades, in fact] before the date of Fr. Garcia's application). 7
Allegedly lulled into complacency by the recentness of their agreement as to the limits of their
respective properties, and confident that the visible landmarks installed by the government
surveyors precluded any overstepping of those limits, Hernandez proffered no opposition to Fr.
Garcia's application, leaving the heirs of Andres San Buenaventura as the only oppositors
thereto.
It was not until the court had already ordered the registration of the lots in Fr. Garcia's name that
Hernandez discovered the anomaly in the application. He at once filed a petition for review of the
decree, but in view of the new trial ordered by the court upon motion of the heirs-oppositors, the
petition was dismissed on the ground of prematurity. 8 The court thereafter adjudged Fr. Garcia as
the owner of Lots 1-A and 2 and the heirs-oppositors as owners of Lot 1-B.
On appeal, however, the Court of Appeals declared Fr. Garcia absolute owner, by acquisitive
prescription, of an the lots.
Issue: Whether or not the Statute of Frauds is applicable.
Held: NO. Given the weight they deserve, the recorded facts prove Hernandez's entitlement to
the relief sought. The respondents' reliance on the Statute of Frauds to secure a contrary
judgment is misplaced. The Statute of Frauds finds no application to this case. Not every
agreement "affecting land" must be put in writing to attain enforceability. Under the Statute
of Frauds, Article 1403(2) (e) of the Civil Code, such formality is only required of contracts
involving leases for longer than one year, or for the sale of real property or of an interest therein.
Hernandez's testimony is thus admissible to establish his agreement with Fr. Garcia as to the
boundary of their estates. It is also to be noted that the presence of Hernandez's tenants on the
land within his side of the border, were this to be reckoned from the "mojones," further buttresses
his claim.
Case: Domingo Rubias vs. Isaias Batiller, May 29, 1973, J. Teehankee.
Facts: On August 31, 1964, plaintiff Domingo D. Rubias, a lawyer, filed a suit to recover the
ownership and possession of certain portions of lot under Psu-99791 located in Barrio General
Luna, Barotac Viejo, Iloilo which he bought from his father-in-law, Francisco Militante in 1956
against its present occupant defendant, Isaias Batiller, who illegally entered said portions of the
lot on two occasions in 1945 and in 1959. Plaintiff prayed also for damages and attorneys
fees. (pp. 1-7, Record on Appeal). In his answer with counter-claim defendant claims the
complaint of the plaintiff does not state a cause of action, the truth of the matter being that he and

his predecessors-in-interest have always been in actual, open and continuous possession since
time immemorial under claim of ownership of the portions of the lot in question.
Issue: Whether or not the contract of sale between appellant and his father-in-law, the late
Francisco
Militante over the property subject of Plan Psu-99791 was void because it was made when
plaintiff was counsel of his father-in-law in a land registration case involving the property
in dispute.
Held: YES. It is noteworthy that Caltan's rationale for his conclusion that fundamental
consideration of public policy render void and inexistent such expressly prohibited purchase (e.g.
by public officers and employees of government property intrusted to them and by justices,
judges, fiscals and lawyers of property and rights in litigation and submitted to or handled by
them, under Article 1491, paragraphs (4) and (5) of our Civil Code) has been adopted in a new
article of our Civil Code, viz, Article 1409 declaring such prohibited contracts as "inexistent and
void from the beginning."
Indeed, the nullity of such prohibited contracts is definite and permanent and cannot be cured by
ratification. The public interest and public policy remain paramount and do not permit of
compromise or ratification. In his aspect, the permanent disqualification of public and
judicial officers and lawyers grounded on public policy differs from the first three cases of
guardians, agents and administrators (Article 1491, Civil Code), as to whose transactions
it had been opined that they may be "ratified" by means of and in "the form of a new
contact, in which cases its validity shall be determined only by the circumstances at the
time the execution of such new contract. The causes of nullity which have ceased to exist
cannot impair the validity of the new contract. Thus, the object which was illegal at the time of the
first contract, may have already become lawful at the time of the ratification or second contract; or
the service which was impossible may have become possible; or the intention which could not be
ascertained may have been clarified by the parties. The ratification or second contract would then
be valid from its execution; however, it does not retroact to the date of the first contract."
Case: Benedicto Javier, as administrator of the estate of Eusebio Cruz vs. Dominga Cruz,
et al., Nov. 29, 1977, J. Fernandez.
Facts: Eusebio Cruz, who died on February 2, 1941 at the age of 100 years without leaving any
will nor compulsory heirs, was the absolute and exclusive owner of a parcel of mountainous and
unimproved land situated in sitio Matogalo, Taytay, Rizal which he inherited from his forebears,
described therein; that during his lifetime, Eusebio Cruz had been living with one Teodora Santos
'without the sanction of marriage"; that Teodora Santos had with her as distant relatives and
protegees the brothers Gregorio Cruz and Justo Cruz; that Gregorio Cruz was the father of Delfin
Cruz, deceased husband of defendant Dominga Vda. de Cruz and father of defendants Leonila,
Roman, Eliseo, Leberata and Melecio, all surnamed Cruz; that on January 16, 1941 Delfin
Cruz, by means of deceit and in collusion with persons among them his father Gregorio
Cruz made Eusebio Cruz, who could read and write, stamp his thumbmark on a deed of
sale of a portion of the land described in the complaint consisting of 26,577 square meters
for the sum of P700.00 in favor of said Delfin Cruz; that at that time Delfin Cruz did not have
theithin thirty days from submittal of the case for decision, but the validity of the law cannot be
seriously challenged."
Issue: Whether or not the deed of sale was valid.
Held: NO. The undisputed facts of record support the evidence of Javier that the deed of sale is
void and inexistent for lack of consent and consideration. It is a fact that on January 17, 1941,
when the deed was executed, Eusebio was almost 100 years old and was in a weak condition.
With that, it is obvious that Delfincould not have raised the amount of 700 as consideration of the
land supposedly sold to him by Eusebio. The consideration is not only grossly inadequate but
also shocking to the conscience. No sane person would sell the land for only about 40.00 per
hectare. The Court, thence, found Eusebio not voluntarily affix his thumb mark on the deed of
sale.
Case: Potenciano Menil and wife Crispina Nayve vs. CA, Agueda Garan, et al., July 31,
1978, J. Guerrero.

Facts: On November 3, 1955, Agueda Garan obtained a homestead patent over the land in
question. On February 4, 1956, Original Certificate of Title No. 220 was issued by the Register of
Deeds of Surigao in her name pursuant to the homestead patent. On May 7, 1960, within the
prohibitive 5-year period, Agueda Garan sold the land to movant Patenciano Manil for P415.00,
as evidenced by a deed of sale bearing the same date. But, for reasons not revealed in the
records, the contracting parties did not registered the deed of sale in the Registry of Deeds in
Surigao. Original Certificate of Title No. 220 was not cancelled and the land remained registered
in the name of Agueda Garan. On August 30, 1964, Agueda Garan executed another deeds of
sale over the same parcel of land in favor of the same vendee, Potenciano Menil, and for the
same price P415.00. On August 30, 1965, the contracting parties registered the second deed of
sale in the Registry of Deeds in Surigao. Original Certificate of Title No. 220 was cancelled, and
Transfer Certificate of Title No. T-60, in lieu thereof, was issued in the name of Potenciano Menil.
On February 28, 1966, Potenciano Menil mortgaged the land to the Development Bank of the
Philippines to secure an agricultural loan which the former obtained from the latter. Petitioners
were in possession of the land in question until sometime in 1967 when private respondents
Agueda Garan, Francisco Calanias, Miguel Nayve, Jr., Rufo Nayve, and Lucio Calanias forcibly
took possession of the said land, and filed against petitioners Civil Case No. 1692 for "Quieting of
Title" before Branch 11 of the Court of First Instance of Surigao del Norte.
Issue: Whether or not Menil can still recover the land from Garan.
Held: NO. It is not disputed by the parties that the contract of sale executed on May 7, 1960,
having been
executed less than 5 years from May 7, 1960, the date the homestead patent was awarded to
private respondent Agueda Garan, is null and void for being violative of Section 118 of C.A. 141
[Public Land Act] which provides:
Sec. 118. Except in favor of the government or any of its branches, units, or institutions,
lands acquired under free patent or homestead provisions shall not be subject to
encumbrance or alienation from the date of the approval of the application and for a
term of five years from and after the date of issuance of the patent or grant, nor shall
they become liable to the satisfaction of any debt contracted prior to the expiration of
said period, but the improvements or crops on the land may be mortgaged or pledged
to qualified persons, associations, or corporations.
It cannot be claimed that there are two contracts: one which is undisputably null and void, and
another, having been executed after the lapse of the 5-year prohibitory period, which is valid. The
second contract of sale executed on March 3, 1964 is admittedly a confirmatory deed of sale.
Even the petitioners concede this point. 3 Inasmuch as the contract of sale executed on May 7,
1960 is void for it is expressly prohibited or declared void by law [CA- 141, Section 118], it
therefore cannot be confirmed nor ratified. Article 1409 of the New Civil Code states:
Art. 1409. The following contracts are inexistent and void from the beginning:
(1) Those whose cause, object, or purpose is contrary to law, morals, good
customs, public order or public policy;
(2) Those which are absolutely simulated or fictitious;
(3) Those whose cause or object did not exist at the time of the transaction;
(4) Those whose object is outside the commerce of men;
(5) Those which contemplate an impossible service;
(6) Those where the intention of the parties relative to the principal object of
the contract cannot be ascertained;
(7) Those expressly prohibited or declared void by law.
These contracts cannot be ratified. Neither can the right to set up the
defense of illegality be waived.
Further, noteworthy is the fact that the second contract of sale over the said homestead in favor
of the same vendee, petitioner Potenciano Menil, is for the same price of P415.00. Clearly, the
unvarying term of the said contract is ample manifestation that the same is simulated and that no
object or consideration passed between the parties to the contract. It is evident from the whole
record of the case that the homestead had long been in the possession of the vendees upon the
execution of the first contract of sale on May 7, 1960; likewise, the amount of P415.00 had long
been paid to Agueda Garan on that same occasion. We find no evidence to the contrary.
Case: Director of Lands vs. Silveretra Ababa, et al., Feb. 27, 1979, J. Makasiar.

Facts: The adverse claimant, Atty. Alberto B. Fernandez was retained as counsel by petitioner,
Maximo Abarquez, in Civil Case No. R-6573 of the Court of First Instance of Cebu, entitled
"Maximo Abarquez vs. Agripina Abarquez", for the annulment of a contract of sale with right of
repurchase and for the recovery of the land which was the subject matter thereof. The Court of
First Instance of Cebu rendered a decision on May 29, 1961 adverse to the petitioner and so he
appealed to the Court of Appeals.
Litigating as a pauper in the lower court and engaging the services of his lawyer on a contingent
basis, petitioner, liable to compensate his lawyer whom he also retained for his appeal executed a
document on June 10, 1961 in the Cebuano-Visayan dialect whereby he obliged himself to give
to his lawyer one-half (1/2) of whatever he might recover from Lots 5600 and 5602 should the
appeal prosper.

to foreclose the mortgage on Hacienda Pulo. In the meantime, Patricio D. Tongoy and Luis
Tongoy executed on April 29, 1933 a Declaration of Inheritance wherein they declared
themselves as the only heirs of the late Francisco Tongoy and thereby entitled to the latter's
share in Hacienda Pulo. On March 13, 1934, Ana Tongoy, Teresa Tongoy, Mercedes Sonora,
Trinidad Sonora, Juan Sonora and Patricio Tongoy executed an "Escritura de Venta" (Exh.
2 or Exh. W), which by its terms transferred for consideration their rights and interests
over Hacienda Pulo in favor of Luis D.
Tongoy.

Issue: Whether or not the contract for a contingent fee is prohibited by Article 1491 of the
New Civil Code.

Held: NO. The negative answer to the aforesaid query is found in Articles 1409 and 1410 of the
New Civil Code. Said provisions state thus:
Art. 1409. The following contracts are inexistent and void from the beginning:
xxx xxx xxx
2) Those which are absolutely simulated or fictitious;
xxx xxx xxx
These contracts cannot be ratified. Neither can the right to set up the defense of
illegality be waived (emphasis supplied).
Art. 1410. The action or defense for the declaration of the inexistence of a contract
does not prescribe.
The characteristic of simulation is the fact that the apparent contract is not really desired nor
intended to produce legal effects nor in any way alter the juridical situation of the parties. Thus,
where a person, in order to place his property beyond the reach of his creditors, simulates a
transfer of it to another, he does not really intend to divest himself of his title and control of the
property; hence, the deed of transfer is but a sham. This characteristic of simulation was defined
by this Court in the case of Rodriguez vs. Rodriguez, No. L-23002, July 31, 1967, 20 SCRA 908.
A void or inexistent contract is one which has no force and effect from the very beginning, as if it
had never been entered into, and which cannot be validated either by time or by ratification (p.
592, Civil Code of the Philippines, Vol. IV, Tolentino, 1973 Ed.).
A void contract produces no effect whatsoever either against or in favor of anyone; hence, it does
not create, modify or extinguish the juridical relation to which it refers (p. 594, Tolentino, supra).
The following are the most fundamental characteristics of void or inexistent contracts:
1) As a general rule, they produce no legal effects whatsoever in accordance with the principle
"quod nullum est nullum producit effectum."
2) They are not susceptible of ratification.
3) The right to set up the defense of inexistence or absolute nullity cannot be waived or
renounced.
4) The action or defense for the declaration of their inexistence or absolute nullity is
imprescriptible.
5) The inexistence or absolute nullity of a contract cannot be invoked by a person whose
interests are not directly affected (p. 444, Comments and Jurisprudence on Obligations and
Contracts, Jurado, 1969 Ed.; emphasis supplied).
The nullity of these contracts is definite and cannot be cured by ratification. The nullity is
permanent, even if the cause thereof has ceased to exist, or even when the parties have
complied with the contract spontaneously (p. 595, Tolentino, supra).
In Eugenio vs. Perdido, et al., No. L-7083, May 19, 1955, 97 Phil. 41, this Court thus reiterated:
Under the existing classification, such contract would be "inexisting" and the
"action or defense for declaration' of such inexistence "does not prescribe'
(Art. 14 10 New Civil Code). While it is true that this is a new provision of the
New Civil Code, it is nevertheless a principle recognized since Tipton vs.
Velasco, 6 Phil. 67 that "mere lapse of time cannot give efficacy to contracts
that are null and void.
Consistently, this Court held that 11 where the sale of a homestead is nun and void, the action to
recover the same does not prescribe because mere lapse of time cannot give efficacy to the
contracts that are null and void and inexistent" (Angeles, et al. vs. Court of Appeals, et al., No. L11024, January 31, 1958, 102 Phil. 1006).
Evidently, therefore, the deeds of transfer executed in favor of Luis Tongoy were from the
very beginning absolutely simulated or fictitious, since the same were made merely for the

Held: NO. This contention is without merit. Article 1491 prohibits only the sale or assignment
between the lawyer and his client, of property which is the subject of litigation. As WE have
already stated. "The prohibition in said article a only to applies stated: " The prohibition in said
article applies only to a sale or assignment to the lawyer by his client of the property which is the
subject of litigation. In other words, for the prohibition to operate, the sale or t of the property must
take place during the pendency of the litigation involving the property" (Rosario Vda. de Laig vs.
Court of Appeals, et al., L-26882, November 21, 1978).
Likewise, under American Law, the prohibition does not apply to "cases where after completion of
litigation the lawyer accepts on account of his fee, an interest the assets realized by the litigation"
(Drinker, Henry S., Legal Ethics, p. 100 [1953], citing App. A, 280; N.Y. Ciu 714). "There is a clear
distraction between such cases and one in which the lawyer speculates on the outcome of the
matter in which he is employed" (Drinker, supra, p. 100 citing A.B.A. Op. 279).
A contract for a contingent fee is not covered by Article 1491 because the tranfer or
assignment of the property in litigation takes effect only after the finality of a favorable
judgment. In the instant case, the attorney's fees of Atty. Fernandez, consisting of one-half (1/2)
of whatever Maximo Abarquez might recover from his share in the lots in question, is contingent
upon the success of the appeal. Hence, the payment of the attorney's fees, that is, the transfer or
assignment of one-half (1/2) of the property in litigation will take place only if the appeal prospers.
Therefore, the tranfer actually takes effect after the finality of a favorable judgment rendered on
appeal and not during the pendency of the litigation involving the property in question.
Consequently, the contract for a contingent fee is not covered by Article 1491.
Case: Francisco Tongkoy (For Estate of Late Luis Tongkoy) vs. CA, Mercedes Sonora, et
al., June 28, 1983, J. Makasiar.
Facts: The first is Lot No. 1397 of the Cadastral Survey of Bacolod, otherwise known as
Hacienda Pulo, containing an area of 727,650 square meters and originally registered under
Original Certificate of Title No. 2947 in the names of Francisco Tongoy, Jose Tongoy, Ana Tongoy,
Teresa Tongoy and Jovita Tongoy in pro-indiviso equal shares. Said co-owners were all children
of the late Juan Aniceto Tongoy. The second is Lot No. 1395 of the Cadastral Survey of Bacolod,
briefly referred to as Cuaycong property, containing an area of 163,754 square meters, and
formerly covered by Original Certificate of Title No. 2674 in the name of Basilisa Cuaycong.
Of the original registered co-owners of Hacienda Pulo, three died without issue, namely: Jose
Tongoy, who died a widower on March 11, 1961; Ama Tongoy, who also died single on February
6, 1957, and Teresa Tongoy who also died single on November 3, 1949. The other two registered
co-owners, namely, Francisco Tongoy and Jovita Tongoy, were survived by children. On April 17,
1918, Hacienda Pulo was mortgaged by its registered co-owners to the Philippine National Bank
(PNB), Bacolod Branch, as security for a loan of P11,000.00 payable in ten (10) years at 8%
interest per annum. The mortgagors however were unable to keep up with the yearly
amortizations, as a result of which the PNB instituted judicial foreclosure proceedings over
Hacienda Pulo on June 18, 1931. To avoid foreclosure, one of the co-owners and
mortgagors, Jose Tongoy, proposed to the PNB an amortization plan that would enable
them to liquidate their account. But, on December 23, 1932, the PNB Branch Manager in
Bacolod advised Jose Tongoy by letter that the latter's proposal was rejected and that the
foreclosure suit had to continue. As a matter of fact, the suit was pursued to finality up to the
Supreme Court which affirmed on July 31, 1935 the decision of the CFI giving the PNB the right

Issue: Whether or not the rights of herein respondents over subject properties, which
were the subjects of simulated or fictitious transactions, have already prescribed.

purpose of restructuring the mortgage over the subject properties and thus preventing the
foreclosure by the PNB.
Considering the law and jurisprudence on simulated or fictitious contracts as aforestated, the
within action for reconveyance instituted by herein respondents which is anchored on the said
simulated deeds of transfer cannot and should not be barred by prescription. No amount of time
could accord validity or efficacy to such fictitious transactions, the defect of which is permanent.
There is no implied trust that was generated by the simulated transfers; because being fictitious
or simulated, the transfers were null and void ab initio-from the very beginning and thus vested no
rights whatsoever in favor of Luis Tongoy or his heirs. That which is inexistent cannot give life to
anything at all.
Case: Lita Enterprises, Inc. vs. Second Civil Cases Division, IAC, Nicasio Ocampo and
Francisca Garcia, April 27, 1984, J. Escolin.
Facts: Sometime in 1966, the spouses Nicasio M. Ocampo and Francisca Garcia, herein private
respondents, purchased in installment from the Delta Motor Sales Corporation five (5) Toyota
Corona Standard cars to be used as taxicabs. Since they had no franchise to operate taxicabs,
they contracted with petitioner Lita Enterprises, Inc., through its representative, Manuel
Concordia, for the use of the latter's certificate of public convenience in consideration of an initial
payment of P1,000.00 and a monthly rental of P200.00 per taxicab unit. To effectuate said
agreement, the aforesaid cars were registered in the name of petitioner Lita Enterprises, Inc,
Possession, however, remained with tile spouses Ocampo who operated and maintained the
same under the name Acme Taxi, petitioner's trade name.
Thereafter, in March 1973, respondent Nicasio Ocampo decided to register his taxicabs in his
name. He requested the manager of petitioner Lita Enterprises, Inc. to turn over the registration
papers to him, but the latter allegedly refused.
Issue: Whether or not the Spouses can recover the cars from Lita Enterprises.
Held: NO. Unquestionably, the parties herein operated under an arrangement, comonly
known as the "kabit system", whereby a person who has been granted a certificate of
convenience allows another person who owns motors vehicles to operate under such
franchise for a fee. A certificate of public convenience is a special privilege conferred by the
government . Abuse of this privilege by the grantees thereof cannot be countenanced. The "kabit
system" has been Identified as one of the root causes of the prevalence of graft and corruption in
the government transportation offices. In the words of Chief Justice Makalintal, "this is a
pernicious system that cannot be too severely condemned. It constitutes an imposition upon the
good faith of the government.
Although not outrightly penalized as a criminal offense, the "kabit system" is invariably recognized
as being contrary to public policy and, therefore, void and inexistent under Article 1409 of the Civil
Code, It is a fundamental principle that the court will not aid either party to enforce an illegal
contract, but will leave them both where it finds them. Upon this premise, it was flagrant error on
the part of both the trial and appellate courts to have accorded the parties relief from their
predicament. Article 1412 of the Civil Code denies them such aid. It provides:
ART. 1412. if the act in which the unlawful or forbidden cause consists does not
constitute a criminal offense, the following rules shall be observed;
(1) when the fault, is on the part of both contracting parties, neither may recover what
he has given by virtue of the contract, or demand the performance of the other's
undertaking.
The defect of inexistence of a contract is permanent and incurable, and cannot be cured by
ratification or by prescription. As this Court said in Eugenio v. Perdido, 2 "the mere lapse of time
cannot give efficacy to contracts that are null void."
The principle of in pari delicto is well known not only in this jurisdiction but also in the United
States where common law prevails. Under American jurisdiction, the doctrine is stated thus: "The
proposition is universal that no action arises, in equity or at law, from an illegal contract; no suit
can be maintained for its specific performance, or to recover the property agreed to be sold or
delivered, or damages for its property agreed to be sold or delivered, or damages for its violation.
The rule has sometimes been laid down as though it was equally universal, that where the parties
are in pari delicto, no affirmative relief of any kind will be given to one against the other."
Although certain exceptions to the rule are provided by law, We see no cogent reason why
the full force of the rule should not be applied in the instant case.

"Ex pacto illicito non oritur actio" [No action arises out of an illicit bargain] is the tune-honored
maxim that must be applied to the parties in the case at bar. Having entered into an illegal
contract, neither can seek relief from the courts, and each must bear the consequences of his
acts.
Case: Francisca Arsenal and Remedios Arsenal vs. IAC, Heirs of Torcuato Suralta, July 14,
1986, J. Gutierrez Jr.
Facts: On January 7, 1954, the defendant Filomeno Palaos secured OCT No. P-290 (Exh. A)
from the Register of Deeds of Bukidnon for Lot 81, Pls-112, consisting of 87,829 sq. m. more or
less, situated at former barrio of Kitaotao now a municipality of Bukidnon, by virtue of Homestead
Patent No. V-23602 granted to him.
On September 10, 1957, said Filomeno Palaos and his wife Mahina Lagwas executed in favor of
the plaintiff, Torcuato Suralta, sold four (4) hectares of the land embraced in his Torrens
Certificate for the sum of P 890.00, Philippine Currency, by means of a deed of acknowledged
before a Notary (Exh. C). Plaintiff Suralta immediately took possession of the four-hectare portion
of Lot 81 above-mentioned cultivated and worked the same openly, continuously and peacefully
up to the present time in concept of owner thereof. He built a house and introduced permanent
improvements thereon now valued at no less than P20,000.00.
Sometime in 1964, the defendant-spouses Francisca Arsenal and Remedio Arsenal became
tenants of an adjoining land owned by Eusebio Pabualan that is separated from the land in
question only by a public road. On March 14, 1967, said Filomeno Palaos and his wife executed a
notarial Deed of Sale (Exh. 1 for the defendant) in consideration of the amount of P800.00,
Philippine Currency, supposedly for the remaining three (3) hectares of their land without knowing
that the document covered the entirety of Lot 81 including the four-hectare portion previously
deeded by them to the plaintiff. The deed of sale was presented to the Office of the Commission
on National Integration at Malaybalay for approval because Palaos and his wife belong to the
cultural minorities and unlettered. The field representative and inspector of that office
subsequently approved the same (Exh. K and Exh. 2) without inspecting the land to determine
the actual occupants thereon.
On July 11, 1973, the plaintiff presented his Sales Contract in the Office of the Register of Deeds
but it was refused registration for having been executed within the prohibitive period of five years
from the issuance of the patent. In order to cure the defect, he caused Filomeno Palaos to sign a
new Sales Contract (Exh. D) in his favor before Deputy Clerk of Court Florentina Villanueva
covering the same four-hectare portion of Lot 81. In August 1973, the plaintiff caused the
segregation of his portion from the rest of the land by Geodetic Engineer Benito P. Balbuena, who
conducted the subdivision survey without protest from Francisca Arsenal who was notified
thereof. The subdivision plan (Exh. E) was approved by the Commissioner of Land Registration
on April 18, 1974.
On March 6, 1974, Torcuato Suralta filed a case against Filomeno Palaos, Mahina Lagwas,
Francisca Arsenal, Remedio Arsenal and the Register of Deeds of Bukidnon for the annulment of
Transfer Certificate of Title No. T-7879 issued to the Arsenals insofar as it covers the four-hectare
portion previously sold to him. In answer to the complaint, the Arsenals denied previous
knowledge of the sale to Suralta of the land in question. As a special defense, they assailed the
validity of the purchase by Suralta in 1957, pointing to the prohibition contained in the
Public Land Law against its disposal within the period of five years from the issuance of
the homestead patent. They also questioned the legality of the sale made to Suralta in 1957 by
Filomeno Palaos and Mahina Lagwas for not having been approved by the Commission on
National Integration despite the fact that Palaos and his wife belong to the cultural minorities, are
illiterates, and do not understand the English language in which the deed of sale in favor of
Suralta was written.
Issue: Whether or not the contract of sale executed in 1957 between respondents Palaos
and Suralta is null and void.
Held: YES. The law on the matter which is the Public Land Act (Commonwealth Act No. 141, as
amended) provides:

Sec. 118. Except in favor, of the Government or any of its branches, units or institutions, lands
acquired under free patent or homestead provisions shall not be subject to encumbrance or
alienation from the date of the approval of the application and for a term of five years from and
after the date of issuance of the patent or grant nor shall they become liable to the satisfaction of
any debt contracted prior to the expiration of said period, but the improvements or crops on the
land may be mortgaged or pledged to qualified persons, associations, or corporations.
No alienation, transfer, or conveyance of any homestead after five years and before twenty-five
years after issuance of title shall be valid without the approval of the Secretary of Agriculture and
Natural Resources, which approval shall not be denied except on constitutional and legal ground
(As amended by Com. Act No. 456, approved June 8, 1939).
xxx xxx xxx
Sec. 120. Conveyance and encumbrance made by persons belonging to the so-called 'nonChristian Filipinos' or national cultural minorities, when proper, shall be valid if the person making
the conveyance or encumbrance is able to read and can understand the language in which the
instrument or conveyance or encumbrance is written. Conveyances and encumbrances made by
illiterate non-Christians or literate non-Christians where the instrument of conveyance is in a
language not understood by the said literate non-Christian shall not be valid unless duly approved
by the Chairman of the Commission on National Integration. (As amended by Rep. Act No. 3872,
approved June 18, 1964).
xxx xxx xxx
Sec. 124. Any acquisition, conveyance, alienation, transfer, or other contract made or executed in
violation of any of the provisions of sections one hundred and eighteen, one hundred and twenty,
one hundred and twenty-one, one hundred and twenty-two, and one hundred twenty-three of this
Act shall be unlawful and null and void from its execution and shall produce the effect of annulling
and cancelling the grant, title, patent, or permit originally issued, recognized or confirmed,
actually or presumptively, and cause the reversion of the property and its improvements to the
State.
The above provisions of law are clear and explicit. A contract which purports of alienate, transfer,
convey or encumber any homestead within the prohibitory period of five years from the date of
the issuance of the patent is void from its execution. In a number of cases, this Court has held
that such provision is mandatory (De los Santos v. Roman Catholic Church of Midsayap, 94 Phil.
405).
Under the provisions of the Civil Code, a void contract is inexistent from the beginning. It cannot
be ratified neither can the right to set up the defense of its illegality be waived. (Art. 1409, Civil
Code).
To further distinguish this contract from the other kinds of contract, a commentator has stated
that:

person who is directly affected by a void contract may set up its nullity. In this case, it is precisely
the petitioners' interest in the disputed land which is in question.
As to whether or not the execution by the respondents Palaos and Suralta of another instrument
in 1973 cured the defects in their previous contract, we reiterate the rule that an alienation or sale
of a homestead executed within the five-year prohibitory period is void and cannot be confirmed
or ratified. This Court has on several occasions ruled on the nature of a confirmatory sale and the
public policy which proscribes it. In the case of Menil v. Court of Appeals (84 SCRA 413), we
stated that:
It cannot be claimed that there are two contracts: one which is undisputably null and void, and
another, having been executed after the lapse of the 5-year prohibitory period, which is valid. The
second contract of sale executed on March 3, 1964 is admittedly a confirmatory deed of sale.
Even the petitioners concede this point. (Record on Appeal, pp. 55-56). Inasmuch as the contract
of sale executed on May 7, 1960 is void for it is expressly prohibited or declared void by law (CA
141, Section 118), it therefore cannot be confirmed nor ratified.
Case: Manotok Realty, Inc. vs. CA and Felipe Madlangawa, April 30, 1987, J. Gutierrez Jr.
Facts: The private respondent Felipe Madlangawa claims that he has been occupying a parcel of
land in the Clara de Tambunting de Legarda Subdivision since 1949 upon permission being
obtained from Andres Ladores, then an overseer of the subdivision, with the understanding that
the respondent would eventually buy the lot.
On April 2, 1950, the owner of the lot, Clara Tambunting, died and her entire estate, including her
paraphernal properties which covered the lot occupied by the private respondent were placed
under custodia legis.
On April 22, 1950, the private respondent made a deposit for the said lot in the sum of P1,500.00
which was received by Vicente Legarda, husband of the late owner. As evidenced by the receipt
issued by Vicente Legarda, the lot consisted of an area of 240 square meters and was sold at
P30.00 per square meter. There, thus, remained an unpaid balance of P5,700.00 but the private
respondent did not pay or was unable to pay this balance because after the death of the testatrix,
Clara Tambunting de Legarda, her heirs could not settle their differences. Apart from the initial
deposit, no further payments were made from 1950.
On April 28, 1950, Don Vicente Legarda was appointed as a special administrator of the estate.
Meanwhile the private respondent remained in possession of the lot in question.
In its effort to clear the Tambunting Subdivision of its squatters and occupants, the petitioner
caused the publication of several notices in the Manila Times issues of January 1, 1966 and the
Taliba issues of January 2, and March 16, 1966, advising the occupants to vacate their respective
premises, otherwise, court action with damages would follow. In addition to these notices by
publication, the petitioner sent circulars to the occupants to vacate.
The private respondent was one of the many occupants who refused to vacate the lots they were
occupying, so that on April 26, 1968, the petitioner filed the action below to recover the said lot.
Issue: Whether or not the sale of the lot to Felipe Madlangawa is valid.

The right to set up the nullity of a void or non-existent contract is not limited to the parties as in
the case of annullable or voidable contracts; it is extended to third persons who are directly
affected by the contract. (Tolentino, Civil Code of the Philippines, Vol. IV, p. 604, [1973]).
Any person may invoke the inexistence of the contract whenever juridical effects founded thereon
are asserted against him. (Id. p. 595).
Concededly, the contract of sale executed between the respondents Palaos and Suralta in 1957
is void. It was entered into three (3) years and eight (8) months after the grant of the homestead
patent to the respondent Palaos in 1954.
Being void, the foregoing principles and rulings are applicable. Thus, it was erroneous for the trial
court to declare that the benefit of the prohibition in the Public Land Act "does not inure to any
third party." Such a sweeping declaration does not find support in the law or in precedents. A third

Held: NO. We are, therefore, led to the inevitable conclusion that the sale between Don Vicente
Legarda and the private respondent is void ab initio, the former being neither an owner nor
administrator of the subject property. Such being the case, the sale cannot be the subject of the
ratification by the Philippine Trust Company or the probate court. As was held in the case of
Arsenal v. Intermediate Appellate Court (143 SCRA 40, 49):
Under the provisions of the Civil Code, a void contract is inexistent from the
beginning. It cannot be ratified neither can the right to set up the defense of
its illegality be waived. (Art. 1409, Civil Code .
To further distinguish this contract from the other kinds of contract, a
commentator has stated that.
The right to set up the nullity of a void or non-existent
contract is not limited to the parties as in the case of
annuable or voidable contracts, it is extended to third

persons who are directly affected by the contract.

(Tolentino, Civil Code of the Philippines, Vol. IV, p. 604,
[1973]).
Any person may invoke the inexistence of the contract
whenever juridical affects founded thereon are asserted
against him. (Id. P. 595).
Section 1, Rule 89 of the Revised Rules of Court provides for the procedure on how a property in
custodia legis can be disposed of by sale:
Order of sale of personalty. Upon the application of the executor or
administrator, and on written notice to the heirs and other persons interested,
the court may order the whole or a part of the personal estate to be sold, if it
appears necessary for the purpose of paying debts, expenses of
administration, or legacies, or for the preservation of the property.
After the appointment of Don Vicente Legarda as administrator of the estate of Dona Clara
Tambunting, he should have applied before the probate court for authority to sell the disputed
property in favor of the private respondent. If the probate court approved the request, then Don
Vicente Legarda would have been able to execute a valid deed of sale in favor of the respondent.
Unfortunately, there was no effort on the part of the administrator to comply with the abovequoted rule of procedure nor on that of the respondent to protect his interests or to pay the
balance of the installments to the court appointed administrator.
Case: Cornelia Clanor Vda. De Portugal, et al. Vs. IAC and Hugo C. Portugal, March 25,
1988, J. Sarmiento.
Facts: Petitioner Cornelia Clanor and her late husband Pascual Portugal, during the lifetime of
the latter, were able to accumulate several parcels of real property. Among these were a parcel of
residential land situated in Poblacion, Gen. Trias, Cavite, designated as Lot No. 3201, consisting
of 2,069 square meters, more or less, and covered by T.C.T. No. RT-9355, in their names, and an
agricultural land located at Pasong Kawayan, Gen. Trias, Cavite, with an area of 43,587 square
meters, more or less, known as Lot No. 2337, and also registered in their names under T.C.T. No.
RT-9356 of the Registry of Deeds for the Province of Cavite.
Sometime in January, 1967, the private respondent Hugo Portugal, a son of the spouses,
borrowed from his mother, Cornelia, the certificates of title to the above-mentioned parcels of land
on the pretext that he had to use them in securing a loan that he was negotiating. Cornelia, the
loving and helpful mother that she was, assented and delivered the titles to her son. The matter
was never again brought up until after Pascual Portugal died on November 17, 1974. (Cornelia
herself died on November 12, 1987.) When the other heirs of the deceased Pascual Portugal, the
petitioners herein, for the purposes of executing an extra-judicial partition of Pascual's estate,
wished to have all the properties of the spouses collated, Cornelia asked the private respondent
for the return of the two titles she previously loaned, Hugo manifested that the said titles no
longer exist. When further questioned, Hugo showed the petitioners Transfer Certificate of Title
T.C.T. No. 23539 registered in his and his brother Emiliano Portugal's names, and which new
T.C.T. cancelled the two previous ones. This falsification was triggered by a deed of sale by which
the spouses Pascual Portugal and Cornelia Clanor purportedly sold for P8,000.00 the two parcels
of land adverted to earlier to their two sons, Hugo and Emiliano. Confronted by his mother of this
fraud, Emiliano denied any participation. And to show his good faith, Emiliano caused the
reconveyance of Lot No. 2337 previously covered by TCT No. RT-9356 and which was conveyed
to him in the void deed of sale. Hugo, on the other hand, refused to make the necessary
restitution thus compelling the petitioners, his mother and his other brothers and sisters, to
institute an action for the annulment of the controversial deed of sale and the reconveyance of
the title over Lot No. 3201 (the residential land).
Issue: Whether or not the deed of sale is valid.
Held: NO. The case at bar is not purely an action for reconveyance based on an implied or
constructive trust. Neither is it one for the annullment of a fraudulent contract. A closer scrutiny of
the records of the case readily supports a finding that fraud and mistake are not the only vices

present in the assailed contract of sale as held by the trial court. More than these, the alleged
contract of sale is vitiated by the total absence of a valid cause or consideration. The petitioners
in their complaint, assert that they, particularly Cornelia, never knew of the existence of the
questioned deed of sale. They claim that they came to know of the supposed sale only after the
private respondent, upon their repeated entreaties to produce and return the owner's duplicate
copy of the transfer certificate of title covering the two parcels of land, showed to them the
controversial deed. And their claim was immeasurably bolstered when the private respondent's
co-defendant below, his brother Emiliano Portugal, who was allegedly his co-vendee in the
transaction, disclaimed any knowledge or participation therein. If this is so, and this is not
contradicted by the decisions of the courts below, the inevitable implication of the allegations is
that contrary to the recitals found in the assailed deed, no consideration was ever paid at all by
the private respondent. Applying the provisions of Articles 1350, 1352, and 1409 of the new Civil
Code in relation to the indispensable requisite of a valid cause or consideration in any contract,
and what constitutes a void or inexistent contract, we rule that the disputed deed of sale is void
ab initio or inexistent, not merely voidable. And it is provided in Article 1410 of the Civil Code, that
'(T)he action or defense for the declaration of the inexistence of a contract does not prescribe.
But even if the action of the petitioners is for reconveyance of the parcel of land based on an
implied or constructive trust, still it has been seasonably filed. For as heretofore stated, it is now
settled that actions of this nature prescribe in ten years, the point of reference being the date of
registration of the deed or the date of the issuance of the certificate of titIe over the property. 4 In
this case, the petitioner commenced the instant action for reconveyance in the trial court on
October 26, 1976, or less than ten years from January 23, 1967 when the deed of sale was
registered with the Register of Deeds. 5 Clearly, even on this basis alone, the present action has
not yet prescribed.
Case: Heirs of Spouses Luis Yanas and Maria Aglimot (represented by Abraham Yanas) vs.
Heirs of Spouses Antonio Acaylar, et al., April 25, 1985, J. Aquino Jr.
Facts: This case is about the validity of the sale of land executed by Luis Yanas, an illiterate
Subano. Yanas, also known as Sulung Subano, had occupied, even before 1926, Lot No. 5408
with an area of 13 hectares located at Sitio Dionom (Lower Gumay), Barrio Sianib, Pinan
(Dipolog), Zamboanga del Norte (Exh. L). Through lawyer Leoncio S. Hamoy, Yanas claimed the
lot in the cadastral proceeding.
It is adjacent to the Dionom Creek and is about two kilometers from the national highway. He
planted the land to rice, corn, coconuts and fruit trees. He built houses thereon. He declared it for
tax purposes in his name. Judge Manalac on September 30, 1941 issued Decree No. N-11330
adjudicating Lot No. 5408 to Yanas "married to Maria Aglimot" (Exh. C).
Lawyer Valeriano S. Concha, Sr., an adjoining owner of Yanas since 1946, who became clerk of
court, testified that Yanas had always occupied the lot since 1946 up to his death in 1962 (103 tsn
June 4, 1970). His son filed an adverse claim for Yanas.
On August 7,1950 Yanas thumbmarked in Dapitan a deed of sale and conveyance wherein he
purportedly sold to Antonio L. Acaylar of Dapitan for P200 his 13-hectare land. The sale was
notarized on the following day, August 8. An instrumental witness was lawyer Hamoy. The sale
was approved by Governor Felipe B. Azcuna on May 15, 1953 or 33 months after the sale.
It is the theory of the heirs of Yanas that that deed of sale is fictitious and fraudulent because
what Yanas thumbmarked on August 7, 1950 was supposed to be a receipt attesting that he
owed Hamoy P 200 for his legal services. Hamoy allegedly taking advantage of his illiteracy,
made Yanas affix his thumbmark to a deed of sale in English (Exh. 2).
The decree issued by Judge Manalac in 1941 was registered only on June 5, 1954. On that day,
OCT No. 64 was issued to Yanas. On December 21, 1954 Acaylar registered the 1950 deed of
sale. He obtained TCT No. T-3338 (Exh. 5). How Acaylar came to have possession of the owner's
duplicate of OCT No. 64 and why it was not delivered to Yanas are not shown in the record.
When Yanas discovered that his title was cancelled, he caused on August 28, 1958 an adverse
claim to be annotated on Acaylar's title. He stated in his adverse claim that he never sold his land

and that the price of P200 was grossly inadequate because the land was worth not less than
P6,000 (Exh. D).
Yanas died in 1962. His widow, Maria Aglimot, also a Subano, and his children filed in 1963 an
action to declare void Acaylar's title. A notice of lis pendens was annotated on that title. Aglimot
died in 1965. The trial court found the sale to be valid and binding. The Appellate Court affirmed
the trial court's decision. The heirs of Yanas appealed to this Court.
Issue: Whether or not the deed of sale is valid.
Held: NO. We hold that the sale was fictitious and fraudulent. Among the badges of fraud and
fictitiousness taken collectively are the following: (1) the fact that the sale is in English, the
alleged vendor being illiterate; (2) the fact that his wife did not join in the sale and that her name
is indicated in the deed as "Maria S. Yanas" when the truth is that her correct name is Maria
Aglimot Yanas; (3) the obvious inadequacy of P200 as price for a 13-hectare land (P15.40 a
hectare); (4) the notarization of the sale on the day following the alleged thumbmarking of the
document; (5) the failure to state the boundaries of the lot sold; (6) the fact that the governor
approved it more than two years after the alleged sale; (7) its registration more than three years
later, and (8) the fact that the Acaylars were able to occupy only four hectares out of the 13
hectares and were eventually forcibly ousted therefrom by the children and agents of the vendor.
It was not a fair and regular transaction done in the ordinary course of business.
The fact that the alleged sale took place in 1950 and the action to have it declared void or
inexistent was filed in 1963 is immaterial. The action or defense for the declaration of the
inexistence of a contract does not prescribe (Art. 1410, Civil Code).

Case: Epifania Sarsosa Vda de Barsobia and Pacita Vallar vs. Victoriano Cuenco, April 16,
1982, J. Melencio-Herrera.
Facts: On September 5, 1936, Epifania Sarsosa then a widow, sold the land in controversy to a
Chinese, Ong King Po, for the sum of P1,050.00 (Exhibit "B"). Ong King Po took actual
possession and enjoyed the fruits thereof.
On August 5, 1961, Ong King Po sold the litigated property to Victoriano T. Cuenco (respondent
herein), a naturalized Filipino, for the sum of P5,000.00 (Exhibit "A"). Respondent immediately
took actual possession and harvested the fruits therefrom.
On March 6, 1962, Epifania "usurped" the controverted property, and on July 26, 1962, Epifania
(through her only daughter and child, Emeteria Barsobia), sold a one-half (1/2) portion of the land
in question to Pacita W. Vallar, the other petitioner herein (Exhibit "2"). Epifania claimed that it
was not her intention to sell the land to Ong King Po and that she signed the document of sale
merely to evidence her indebtedness to the latter in the amount of P1,050.00. Epifania has been
in possession ever since except for the portion sold to the other petitioner Pacita.
On September 19, 1962, respondent filed a Forcible Entry case against Epifania before the
Municipal Court of Sagay, Camiguin. The case was dismissed for lack of jurisdiction since, as the
laws then stood, the question of possession could not be properly determined without first settling
that of ownership.
On December 27, 1966, respondent instituted before the Court of First Instance of Misamis
Oriental a Complaint for recovery of possession and ownership of the litigated land, against
Epifania and Pacita Vallar (hereinafter referred to simply as petitioners).
In their Answer below, petitioners insisted that they were the owners and possessors of the
litigated land; that its sale to Ong King Po, a Chinese, was inexistent and/or void ab initio; and
that the deed of sale between them was only an evidence of Epifania's indebtedness to Ong King
Po.
Issue: Whether or not the sale of land is valid.
Held: YES. The facts stand, a parcel of coconut land was sold by its Filipino owner, petitioner
Epifania, to a Chinese, Ong King Po, and by the latter to a naturalized Filipino, respondent

herein. In the meantime, the Filipino owner had unilaterally repudiated the sale she had made to
the Chinese and had resold the property to another Filipino. The basic issue is: Who is the rightful
owner of the property?
There should be no question that the sale of the land in question in 1936 by Epifania to Ong King
Po was inexistent and void from the beginning (Art. 1409 [7], Civil Code) 6 because it was a
contract executed against the mandatory provision of the 1935 Constitution, which is an
expression of public policy to conserve lands for the Filipinos. Said provision reads:
Save in cases of hereditary succession, no private agricultural land shall be
transferred or assigned except to individuals, corporations, or associations,
qualified to acquire or hold lands of the public domain. 7
Had this been a suit between Epifania and Ong King Po, she could have been declared entitled
to the litigated land on the basis, as claimed, of the ruling in Philippine Banking Corporation vs.
Lui She, 8 reading:
... For another thing, and this is not only cogent but also important. Article
1416 of the Civil Code provides as an exception to the rule on pari delicto
that when the agreement is not illegal per se but is merely prohibited, and the
prohibition by the law is designed for the protection of the plaintiff, he may, if
public policy is thereby enhanced, recover what he has sold or delivered. ...
But the factual set-up has changed. The litigated property is now in the hands of a naturalized
Filipino. It is no longer owned by a disqualified vendee. Respondent, as a naturalized citizen, was
constitutionally qualified to own the subject property. There would be no more public policy to be
served in allowing petitioner Epifania to recover the land as it is already in the hands of a qualified
person. Applying by analogy the ruling of this Court in Vasquez vs. Giap and Li Seng Giap &
Sons: 9
... if the ban on aliens from acquiring not only agricultural but also urban
lands, as construed by this Court in the Krivenko case, is to preserve the
nation's lands for future generations of Filipinos, that aim or purpose would
not be thwarted but achieved by making lawful the acquisition of real estate
by aliens who became Filipino citizens by naturalization.
While, strictly speaking, Ong King Po, private respondent's vendor, had no rights of ownership to
transmit, it is likewise inescapable that petitioner Epifania had slept on her rights for 26 years
from 1936 to 1962. By her long inaction or inexcusable neglect, she should be held barred from
asserting her claim to the litigated property (Sotto vs. Teves, 86 SCRA 157 [1978]).
Case: Vicente Godinez, et al. Vs. Fong Pak Luen, et al., Jan. 27, 1983, J. Gutierrez Jr.
Facts: On September 30, 1966, the plaintiffs filed a complaint in the Court of First Instance of
Sulu alleging among others that they are the heirs of Jose Godinez who was married to Martina
Alvarez Godinez sometime in 1910; that during the marriage of their parents the said parents
acquired a parcel of land lot No. 94 of Jolo townsite with an area of 3,665 square meters as
evidenced by Original Certificate of Title No. 179 (D -155) in the name of Jose Godinez; that their
mother died sometime in 1938 leaving the plaintiffs as their sole surviving heirs; that on
November 27, 1941, without the knowledge of the plaintiffs, the said Jose Godinez, for valuable
consideration, sold the aforesaid parcel of land to the defendant Fong Pak Luen, a Chinese
citizen, which transaction is contrary to law and in violation of the Civil Code because the latter
being an alien who is inhibited by law to purchase real property; that Transfer Certificate Title No.
884 was then issued by the Register of Deeds to the said defendant, which is null and void ab
initio since the transaction constituted a non-existent contract; that on January 11, 1963, said
defendant Fong Pak Luen executed a power of attorney in favor of his co-defendant Kwan Pun
Ming, also an alien, who conveyed and sold the above described parcel of land to co-defendant
Trinidad S. Navata, who is aware of and with full knowledge that Fong Pak Luen is a Chinese
citizen as well as Kwan Pun Ming, who under the law are prohibited and disqualified to acquire
real property in this jurisdiction; that defendant Fong Pak Luen has not acquired any title or
interest in said parcel of land as the purported contract of sale executed by Jose Godinez alone
was contrary to law and considered non- existent, so much so that the alleged attorney-in-fact,
defendant Kwan Pun Ming had not conveyed any title or interest over said property and
defendant Navata had not acquired anything from said grantor and as a consequence Transfer
Certificate of Title No. 1322, which was issued by the Register of Deeds in favor of the latter is
null and void ab initio,- that since one-half of the said property is conjugal property inherited by
the plaintiffs from their mother, Jose Godinez could -not have legally conveyed the entire

property; that notwithstanding repeated demands on said defendant to surrender to plaintiffs the
said property she refused and still refuses to do so to the great damage and prejudice of the
plaintiffs; and that they were constrained to engage the services of counsel in the sum of
P2,000.00.1wph1.t The plaintiffs thus pray that they be adjudged as the owners of the parcel
of land in question and that Transfer Certificate of Title RT-90 (T-884) issued in the name of
defendant Fong Pak Luen be declared null and void ab initio,
Issue: Whether or not the contract is null and void.
Held: YES. The meaning of the above provision was fully discussed in Krivenko v. Register of
Deeds of Manila (79 Phil. 461) which also detailed the evolution of the provision in the public land
laws, Act No. 2874 and Commonwealth Act No. 141. The Krivenko ruling that "under the
Constitution aliens may not acquire private or agricultural lands, including residential lands" is a
declaration of an imperative constitutional policy. Consequently, prescription may never be
invoked to defend that which the Constitution prohibits. However, we see no necessity from the
facts of this case to pass upon the nature of the contract of sale executed by Jose Godinez and
Fong Pak Luen whether void ab initio, illegal per se or merely pro-exhibited.** It is enough to
stress that insofar as the vendee is concerned, prescription is unavailing. But neither can the
vendor or his heirs rely on an argument based on imprescriptibility because the land sold in 1941
is now in the hands of a Filipino citizen against whom the constitutional prescription was never
intended to apply. The lower court erred in treating the case as one involving simply the
application of the statute of limitations.
From the fact that prescription may not be used to defend a contract which the Constitution
prohibits, it does not necessarily follow that the appellants may be allowed to recover the property
sold to an alien. As earlier mentioned, Fong Pak Luen, the disqualified alien vendee later sold the
same property to Trinidad S. Navata, a Filipino citizen qualified to acquire real property.
Case : Donato Reyes Yap and Melitona Maravillas vs. Hon. Grageda and Jose Rico, March
28, 1983, J. Gutierrez Jr.
Facts: On April 12, 1939, Maximino Rico, for and in his own behalf and that of the minors Maria
Rico, Filomeno Rico, Prisco Rico, and Lourdes' Rico, executed a Deed of Absolute Sale (Annex
'A' to the complaint) over Lot 339 and a portion of Lot 327 in favor of the petitioner Donato Reyes
Yap who was then a Chinese national. Respondent Jose A. Rico is the eldest son of Maximino
Rico, one of the vendors in Annex 'A'.
Subsequently, the petitioner as vendee caused the registration of the instrument of sale and the
cancellation of Original Certificates of Title Nos. 29332 and 29410 and the consequent issuance
in his favor of Transfer Certificate of Title No. T-2433 covering the two lots subject matter of the
Contract of Sale.
After the lapse of nearly fifteen years from and after the execution of the deed of absolute sale,
Donato Reyes Yap was admitted as a Filipino citizen and allowed to take his oath of allegiance to
the Republic of the Philippines. He was, thereafter, issued Certificate of Naturalization No. 7, File
No. 19 of the Court of First Instance of Albay.
On December 1, 1967, the petitioner ceded the major portion of Lot No. 327 consisting of 1,078
square meters which he acquired by purchase under the deed of sale in favor of his engineer
son, Felix Yap, who was also a Filipino citizen because of the Filipino citizenship of his mother
and the naturalization of his father Donato Reyes Yap.
Subsequently, Lourdes Rico, aunt and co-heir of respondent Jose A. Rico. sold the remaining
portion of Lot 327 to the petitioner who had his rights thereon duly registered under Act 496.
Petitioner, Donato Reyes Yap, has been in possession of the lots in question since 1939, openly,
publicly, continuously, and adversely in the concept of owner until the present time. The petitioner
has one surviving son by his first marriage to a Filipino wife. He has five children by his second
marriage also to a Filipina and has a total of 23 grandchildren all of whom are Filipino citizens.
The respondent court considered Section 5, Article XIII of the 1935 Constitution that "no private
agricultural land shall be transferred or assigned except to individuals, corporations, or
associations qualified to acquire or hold lands of the public domain in the Philippines" to be an
absolute and unqualified prohibition and, therefore, ruled that a conveyance contrary to it would
not be validated nor its void nature altered by the subsequent naturalization of the vendee.
Issue: Whether or not the sale is valid.

Held: YES. The rulings in Vasquez v.Leng Seng Giap et al. (96 Phil. 447) and Sarosa Vda. de
Bersabia v. Cuenco (113 SCRA 547) sustain the petitioner's contentions. We stated in Sarosa
Vda de Bersabia:
There should be no question that the sale of the land in question in 1936 by
Epifania to Ong King Po was inexistent and void from the beginning (Art.
1409 [7], Civil Code) because it was a contract executed against the
mandatory provision of the 1935 Constitution, which is an expression of
public policy to conserve lands for the Filipinos. Said provision reads:
Save in cases of hereditary succession, no private
agricultural land shall be transferred or assigned except
to in. individuals, corporations, or associations, qualified
to acquire or hold lands of the public domain.
Had this been a suit between Epifania and Ong King Po she could have been
declared entitled to the litigated land on the basis, as claimed, of the ruling in
Philippine Banking Corporation vs. Lui She, reading:
... For another thing, and this is not only cogent but also
important. Article 1416 of the Civil Code provides as an
exception to the rule on pari delicto that when the
agreement is not illegal per se but is merely prohibited,
and the prohibition by the law is designed for the
protection of the plaintiff, he may, if public policy is
thereby enhanced, recover what he has sold or
delivered. ...
But the factual set-up has changed. The litigated property is now in the
hands of a naturalized Filipino. It is no longer owned by a disqualified
vendee. Respondent, as a naturalized citizen, was constitutionally qualified
to own the subject property. There would be no more public policy to be
served in allowing petitioner Epifania to recover the land as it is already in the
hands of a qualified person. Applying by analogy the ruling of this Court in
Vasquez vs. Giap and Leng Seng Giap & Sons:
... if the ban on aliens from acquiring not only agricultural
but also urban lands, as construed by this Court in the
Krivenko case, is to preserve the nation's lands for future
generations of Filipinos, that aim or purpose would not
be thwarted but achieved by making lawful the
acquisition of real estate by aliens who became Filipino
citizens by naturalization.
Only recently, we had occasion to reiterate the above rulings in Vicente Godines v. Fong Pak
Luen, et al. (G.R. No. L-36731, January 27, 1983).
Case: Jesus Pineda vs. Jose Dela Rama and CA, April 28, 1983, J. Gutierrez Jr.
Facts: Dela Rama is a practising lawyer whose services were retained by Pineda for the purpose
of making representations with the chairman and general manager of the National Rice and Corn
Administration (NARIC) to stop or delay the institution of criminal charges against Pineda who
allegedly misappropriated 11,000 cavans of palay deposited at his ricemill in Concepcion, Tarlac.
The NARIC general manager was allegedly an intimate friend of Dela Rama.
According to Dela Rama, petitioner Pineda has used up all his funds to buy a big hacienda in
Mindoro and, therefore, borrowed the P9,300.00 subject of his complaint for collection. In addition
to filling the suit to collect the loan evidenced by the matured promissory note, Dela Rama also
sued to collect P5,000.00 attorney's fees for legal services rendered as Pineda's counsel in the
case being investigated by NARIC.
The Court of First Instance of Manila decided Civil Case No. 45762 in favor of petitioner Pineda.
The court believed the evidence of Pineda that he signed the promissory note for P9,300.00 only
because Dela Rama had told him that this amount had already been advanced to grease the
palms of the 'Chairman and General Manager of NARIC in order to save Pineda from criminal
prosecution.
Issue: Whether or not Dela Rama can recover from Pineda.
Held: NO. We agree with the trial court which believed Pineda. It is indeed unusual for a lawyer
to lend money to his client whom he had known for only three months, with no security for the
loan and on interest. Dela Rama testified that he did not even know what Pineda was going to do

with the money he borrowed from him. The petitioner had just purchased a hacienda in Mindoro
for P210,000.00, owned sugar and rice lands in Tarlac of around 800 hectares, and had
P60,000.00 deposits in three banks when he executed the note. It is more logical to believe that
Pineda would not borrow P5,000.00 and P4,300.00 five days apart from a man whom he calls a
"fixer" and whom he had known for only three months.
Whether or not the supposed cash advances reached their destination is of no moment. The
consideration for the promissory note - to influence public officers in the performance of their
duties - is contrary to law and public policy. The promissory note is void ab initio and no cause of
action for the collection cases can arise from it.
Case: Conchita Liguez vs. CA and Maria Ngo Vda de Lopez, et al., Dec. 18, 1957, J.B.L.
Reyes.
Facts: The case began upon complaint filed by petitioner-appellant against the widow and heirs
of the late Salvador P. Lopez to recover a parcel of 51.84 hectares of land, situated in barrio
Bogac-Linot, of the municipality of Mati, Province of Davao. Plaintiff averred to be its legal owner,
pursuant to a deed of donation of said land, executed in her favor by the late owner, Salvador P.
Lopez, on 18 May 1943. The defense interposed was that the donation was null and void for
having an illicit causa or consideration, which was the plaintiff's entering into marital relations with
Salvador P. Lopez, a married man; and that the property had been adjudicated to the appellees
as heirs of Lopez by the court of First Instance, since 1949.
The Court of Appeals found that the deed of donation was prepared by the Justice of the Peace
of Mati, Davao, before whom it was signed and ratified on the date aforesaid. At the time, the
appellant Liguez was a minor, only 16 years of age. While the deed recites
That the DONOR, Salvador P. Lopez, for and in the consideration of his love and
affection for the said DONEE, Conchita Liguez, and also for the good and valuable
services rendered to the DONOR by the DONEE, does by these presents, voluntarily
give grant and donate to the said donee, etc. (Paragraph 2, Exhibit "A")
the Court of Appeals found that when the donation was made, Lopez had been living with the
parents of appellant for barely a month; that the donation was made in view of the desire of
Salvador P. Lopez, a man of mature years, to have sexual relations with appellant Conchita
Liguez; that Lopez had confessed to his love for appellant to the instrumental witnesses, with the
remark that her parents would not allow Lopez to live with her unless he first donated the land in
question; that after the donation, Conchita Liguez and Salvador P. Lopez lived together in the
house that was built upon the latter's orders, until Lopez was killed on July 1st, 1943, by some
guerrillas who believed him to be pro-Japanese.
It was also ascertained by the Court of Appeals that the donated land originally belonged to the
conjugal partnership of Salvador P. Lopez and his wife, Maria Ngo; that the latter had met and
berated Conchita for living maritally with her husband, sometime during June of 1943; that the
widow and children of Lopez were in possession of the land and made improvements thereon;
that the land was assessed in the tax rolls first in the name of Lopez and later in that of his
widow.; and that the deed of donation was never recorded.
Upon these facts, the Court of Appeals held that the deed of donation was inoperative, and null
and void (1) because the husband, Lopez, had no right to donate conjugal property to the plaintiff
appellant; and (2) because the donation was tainted with illegal cause or consideration, of which
donor and donee were participants.
Issue: Whether or not the deed of donation is void.
Held: Partly Yes. In our opinion, the Court of Appeals erred in applying to the present case the
pari delicto rule. First, because it can not be said that both parties here had equal guilt when we
consider that as against the deceased Salvador P. Lopez, who was a man advanced in years and
mature experience, the appellant was a mere minor, 16 years of age, when the donation was
made; that there is no finding made by the Court of Appeals that she was fully aware of the terms
of the bargain entered into by and Lopez and her parents; that, her acceptance in the deed of
donation (which was authorized by Article 626 of the Old Civil Code) did not necessarily imply
knowledge of conditions and terms not set forth therein; and that the substance of the testimony
of the instrumental witnesses is that it was the appellant's parents who insisted on the donation
before allowing her to live with Lopez. These facts are more suggestive of seduction than of
immoral bargaining on the part of appellant. It must not be forgotten that illegality is not
presumed, but must be duly and adequately proved.
In the second place, the rule that parties to an illegal contract, if equally guilty, will not be aided by
the law but will both be left where it finds them, has been interpreted by this Court as barring the

party from pleading the illegality of the bargain either as a cause of action or as a defense. Memo
auditor propriam turpitudinem allegans. The text of the articles makes it plain that the donation
made by the husband in contravention of law is not void in its entirety, but only in so far as it
prejudices the interest of the wife. In this regard, as Manresa points out (Commentaries, 5th Ed.,
pp. 650-651, 652-653), the law asks no distinction between gratuitous transfers and conveyances
for a consideration.
To determine the prejudice to the widow, it must be shown that the value of her share in the
property donated can not be paid out of the husband's share of the community profits. The
requisite data, however, are not available to us and necessitate a remand of the records to the
court of origin that settled the estate of the late Salvador P. Lopez.
The situation of the children and forced heirs of Lopez approximates that of the widow. As privies
of their parent, they are barred from invoking the illegality of the donation. But their right to a
legitime out of his estate is not thereby affected, since the legitime is granted them by the law
itself, over and above the wishes of the deceased. Hence, the forced heirs are entitled to have
the donation set aside in so far as in officious: i.e., in excess of the portion of free disposal (Civil
Code of 1889, Articles 636, 654) computed as provided in Articles 818 and 819, and bearing in
mind that "collationable gifts" under Article 818 should include gifts made not only in favor of the
forced heirs, but even those made in favor of strangers, as decided by the Supreme Court of
Spain in its decisions of 4 May 1899 and 16 June 1902. So that in computing the legitimes, the
value of the property to herein appellant, Conchita Liguez, should be considered part of the
donor's estate. Once again, only the court of origin has the requisite date to determine whether
the donation is inofficious or not.
With regard to the improvements in the land in question, the same should be governed by the
rules of accession and possession in good faith, it being undisputed that the widow and heirs of
Lopez were unaware of the donation in favor of the appellant when the improvements were
made.
Case: Philippine Banking Corp (representing the Estate of Justinia Santos Y Faustino) vs.
Lui She (in her own behalf and as administratrix of the intestate estate of Wong Heng),
Dec. 18, 1967, J. Castro.
Facts: On November 15, 1957, the parties entered into the lease contract for 50 years: that ten
days after, that is on November 25, they amended the contract so as to make it cover the entire
property of Justina Santos; that on December 21, less than a month after, they entered into
another contract giving Wong Heng the option to buy the leased premises should his pending
petition for naturalization be granted; that on November 18, 1958, after failing to secure
naturalization and after finding that adoption does not confer the citizenship of the adopting
parent on the adopted, the parties entered into two other contracts extending the lease to 99
years and fixing the period of the option to buy at 50 years.
which indubitably demonstrate that each of the contracts in question was designed to carry out
Justina Santos' expressed wish to give the land to Wong and thereby in effect place its ownership
in alien hands,1 about which we shall have something more to say toward the end of this
resolution. We concluded that "as the lease contract was part of a scheme to violate the
Constitution it suffers from the same infirmity that renders the other contracts void and can no
more be saved from illegality than the rest of the contracts."
Issue: Whether or not the contract is valid.
Held: NO. As for the 1959 wills, it is said that they manifest a desire to abide by the law, as is
evident from the statement therein that Wong's right to buy the land be allowed "anytime he or his
children should be entitled to buy lands in the Philippines (i.e., upon becoming Filipino citizens)".
It seems obvious, however, that this is nothing but a reiteration of the substance of the lease
contract and conditional option to buy which in compensation, as our decision demonstrates,
amount to a conveyance, the protestation of compliance with the law notwithstanding. In cases
like the one at bar, motives are seldom avowed and avowals are not always candid. The problem
is not, however, insuperable, especially as in this case the very witnesses for the defendantappellant testified that
Considering her age, ninety (90) years old at the time and her condition, she is a
wealthy woman, it is just natural when she said. "This is what I want and this will be
done." In particular reference to this contract of lease, when I said "This is not proper,
she said 'you just go ahead, you prepare that, I am the owner, and if there is
illegality, I am the only one that can question the illegality.'"6

The ambition of the old woman before her death, according to her revelation to me,
was to see to it that these properties be enjoyed, even to own them, by Wong Heng
because Doa Justina told me that she did not have any relatives, near or far, and she
considered Wong Heng as a son and his children her grandchildren; especially her
consolation in life was when she would hear the children reciting prayers in Tagalog. 7
She was very emphatic in the care of the seventeen (17) dogs and of the maids who helped her
much, and she told me to see to it that no one could disturb Wong Heng from those properties.
That is why we thought of adoption, believing that thru adoption Wong Heng might acquired
Filipino citizenship, being the adopted child of a Filipino citizen.
Case: Heirs of Marciana Avila vs. CA and Aladino Ch. Bacarrisas, Nov. 14, 1986, J. Paras.
Facts: In 1939, the Court of First Instance of Misamis Oriental, as a cadastral court, adjudicated
Lots 594 and 828 of the Cadastral Survey of Cagayan to Paz Chavez. But because Paz Chavez
failed to pay the property taxes of Lot 594, the government offered the same for sale at a public
auction. Marciana G. Avila, a teacher, wife of Leonardo Avila and the mother of the herein
petitioners, participated in and won the bidding. Despite the provision of Section 579 of the
Revised Administrative Code prohibiting public school teachers from buying delinquent
properties, nobody, not even the government questioned her participation in said auction sale. In
fact on February 20, 1940, after the expiration of the redemption period, the Provincial Treasurer
executed in her favor the final bill of sale. (Rollo, pp. 10-11).
Sometime in 1947, OCT Nos. 100 and 101, covering said Lots 594 and 828, were issued in favor
of Paz Chavez. In opposition thereto, private respondents filed a petition for review of the decrees
on August 25, 1947 at the Court of First Instance of Misamis Oriental, Branch II, in Cadastral
Case No. 17, Lot No. 594 entitled "The Director of Lands, Applicant v. Atanacia Abalde, et al.,
Claimants in Re: Petition for Review of Decree, Marciana G. Avila, Petitioner vs. Paz Chavez,
Respondents."
Issue: Whether or not the purchase of Avila is valid.
Held: NO. While it is true that Marciana Avila, their mother and predecessor-in-interest,
purchased the questioned property at a public auction conducted by the government; paid the
purchase price; and was issued a final bill of sale after the expiration of the redemption period, it
is however undisputed that such purchase was prohibited under Section 579 of the Revised
Administrative Code, as amended, which provides:
Section 579. Inhibition against purchase of property at tax sale.-Official and
employees of the Government of the Republic of the Philippines are
prohibited from purchasing, directly or indirectly, from the Government, any
property sold by the Government for the non-payment of any public tax. Any
such purchase by a public official or employee shall be void.
Thus, the sale to her of Lot 594 is void.
On the other hand, under Article 1409 of the Civil Code, a void contract is inexistent from the
beginning. It cannot be ratified neither can the right to set up the defense of its illegality be
waived. (Arsenal, et al. vs, The Intermediate Appellate Court. et al., G.R. No. 66696, July 14,
1986). Moreover, Marciana Avila was a party to an illegal transaction, and therefore, under Art.
1412 of the Civil Code, she cannot recover what she has given by reason of the contract or ask
for the fulfillment of what has been promised her.
Furthermore, in a registration case, the judgment confirming the title of the applicant and ordering
its registration in his name necessarily carries with it the delivery of possession which is an
inherent element of the right of ownership. (Abulocion et al. v. CFI of Iloilo, et al., 100 Phil. 553
[1956]). Hence, a writ of possession may be issued not only against the person who has been
defeated in a registration case but also against anyone unlawfully and adversely occupying the
land or any portion thereof during the land registration proceedings up to the issuance of the final
decree. It is the duty of the registration court to issue said writ when asked for by the successful
claimant. (Demorar v. Ibaez, etc., et al., 97 Phil. 72 [1955]; Abulocion et al v. CFI of Iloilo, et al.,
supra).
Under the circumstances, possession cannot be claimed by petitioners, because their
predecessor-in-interest besides being at fault is not the successful claimant in the registration
proceedings and hence not entitled to a writ of possession. As correctly stated by the Court of
Appeals when respondent Court issued the writ of execution as to Lot 594, there really was no
legal basis for the same, for Avila had not secured a decree, nor a judgment of confirmation of
title over said lot.

Case: Teja Marketing And/Or Angel Jaucian vs. IAC and Pedro N. Nale, March 9, 1987, J.
Paras.
Facts: On May 9, 1975, the defendant bought from the plaintiff a motorcycle with complete
accessories and a sidecar in the total consideration of P8,000.00 as shown by Invoice No. 144
(Exh. "A"). The records of the LTC show that the motorcycle sold to the defendant was first
mortgaged to the Teja Marketing by Angel Jaucian though the Teja Marketing and Angel Jaucian
are one and the same, because it was made to appear that way only as the defendant had no
franchise of his own and he attached the unit to the plaintiff's MCH Line. The agreement also of
the parties here was for the plaintiff to undertake the yearly registration of the motorcycle with the
Land Transportation Commission. Pursuant to this agreement the defendant on February 22,
1976 gave the plaintiff P90.00, the P8.00 would be for the mortgage fee and the P82.00 for the
registration fee of the motorcycle. The plaintiff, however failed to register the motorcycle on that
year on the ground that the defendant failed to comply with some requirements such as the
payment of the insurance premiums and the bringing of the motorcycle to the LTC for stenciling,
the plaintiff saying that the defendant was hiding the motorcycle from him. Lastly, the plaintiff
explained also that though the ownership of the motorcycle was already transferred to the
defendant the vehicle was still mortgaged with the consent of the defendant to the Rural Bank of
Camaligan for the reason that all motorcycle purchased from the plaintiff on credit was
rediscounted with the bank.
It also appears and the Court so finds that defendant purchased the motorcycle in question,
particularly for the purpose of engaging and using the same in the transportation business and for
this purpose said trimobile unit was attached to the plaintiffs transportation line who had the
franchise, so much so that in the registration certificate, the plaintiff appears to be the owner of
the unit. Furthermore, it appears to have been agreed, further between the plaintiff and the
defendant, that plaintiff would undertake the yearly registration of the unit in question with the
LTC. Thus, for the registration of the unit for the year 1976, per agreement, the defendant gave to
the plaintiff the amount of P82.00 for its registration, as well as the insurance coverage of the unit.
Eventually, petitioner Teja Marketing and/or Angel Jaucian filed an action for "Sum of Money with
Damages" against private respondent Pedro N. Nale in the City Court of Naga City. The City
Court rendered judgment in favor of petitioner. CA affirmed.
Issue: Whether or not Teja Marketing can recover from Pedro Nale.
Held: However, as the purchase of the motorcycle for operation as a trimobile under the
franchise of the private respondent Jaucian, pursuant to what is commonly known as the "kabit
system", without the prior approval of the Board of Transportation (formerly the Public Service
Commission) was an illegal transaction involving the fictitious registration of the motor vehicle in
the name of the private respondent so that he may traffic with the privileges of his franchise, or
certificate of public convenience, to operate a tricycle service, the parties being in pari delicto,
neither of them may bring an action against the other to enforce their illegal contract [Art. 1412
(a), Civil Code].
Unquestionably, the parties herein operated under an arrangement, commonly known as the
"kabit system" whereby a person who has been granted a certificate of public convenience allows
another person who owns motor vehicles to operate under such franchise for a fee. A certificate
of public convenience is a special privilege conferred by the government. Abuse of this privilege
by the grantees thereof cannot be countenanced. The "kabit system" has been Identified as one
of the root causes of the prevalence of graft and corruption in the government transportation
offices.
Although not outrightly penalized as a criminal offense, the kabit system is invariably recognized
as being contrary to public policy and, therefore, void and in existent under Article 1409 of the
Civil Code. It is a fundamental principle that the court will not aid either party to enforce an illegal
contract, but will leave both where it finds then. Upon this premise it would be error to accord the
parties relief from their predicament. Article 1412 of the Civil Code denies them such aid. It
provides:
Art. 1412. If the act in which the unlawful or forbidden cause consists does
not constitute a criminal offense, the following rules shall be observed:
1. When the fault is on the part of both contracting parties, neither may
recover that he has given by virtue of the contract, or demand, the
performance of the other's undertaking.
The defect of in existence of a contract is permanent and cannot be cured by ratification or by
prescription. The mere lapse of time cannot give efficacy to contracts that are null and void.

Case: Aurelio Briones vs. Primitivo Cammayo, et al., Oct. 4, 1971, J. Dizon.
Facts: Defendants executed the real estate mortgage, as security for the loan of P1,200.00 given
to defendant Primitivo P. Cammayo upon the usurious agreement that defendant pays to the
plaintiff and that the plaintiff reserve and secure, as in fact plaintiff reserved and secured himself,
out of the alleged loan of P1,500.00 as interest the sum of P300.00 for one year. That although
the mortgage contract was executed for securing the payment of P1,500.00 for a period of one
year, without interest, the truth and the real fact is that plaintiff delivered to the defendant Primitivo
P. Cammayo only the sum of P1,200.00 and withheld the sum of P300.00 which was intended as
advance interest for one year. That on account of said loan of P1,200.00, defendant Primitivo P.
Cammayo paid to the plaintiff during the period from October 1955 to July 1956 the total sum of
P330.00 which plaintiff, illegally and unlawfully refuse to acknowledge as part payment of the
account but as in interest of the said loan for an extension of another term of one year.
That said contract of loan entered into between plaintiff and defendant Primitivo P. Cammayo is a
usurious contract and is contrary to law, morals, good customs, public order or public policy and
is, therefore, in existent and void from the beginning (Art. 1407 Civil Code) Hence, Aurelio cannot
recover the principal obligation.
Issue: Whether the creditor is entitled to collect from the debtor the amount representing
the principal obligation.
Held: YES. We do not agree with such reasoning, Article 1411 of the New Civil Code is not new;
it is the same as Article 1305 of the Old Civil Code. Therefore, said provision is no warrant for
departing from previous interpretation that, as provided in the Usury Law (Act No. 2655, as
amended), a loan with usurious interest is not totally void only as to the interest.
True, as stated in Article 1411 of the New Civil Code, the rule of pari delicto applies where a
contract's nullity proceeds from illegality of the cause or object of said contract.
However, appellants fail to consider that a contract of loan with usurious interest consists of
principal and accessory stipulations; the principal one is to pay the debt; the accessory stipulation
is to pay interest thereon.
And said two stipulations are divisible in the sense that the former can still stand without the latter.
Article 1273, Civil Code, attests to this: "The renunciation of the principal debt shall extinguish the
accessory obligations; but the waiver of the latter shall leave the former in force."
The question therefore to resolve is whether the illegal terms as to payment of interest
likewise renders a nullity the legal terms as to payments of the principal debt. Article 1420
of the New Civil Code provides in this regard: "In case of a divisible contract, if the illegal
terms can be separated from the legal ones, the latter may be enforced."
In simple loan with stipulation of usurious interest, the prestation of the debtor to pay the principal
debt, which is the cause of the contract (Article 1350, Civil Code), is not illegal. The illegality lies
only as to the prestation to pay the stipulated interest; hence, being separable, the latter only
should be deemed void, since it is the only one that is illegal.