II.

Contracts
A. General
1. Definition
2. Elements of Contract
Batchelder vs CB (Bonet)
B. Fundamental Characteristics/Principles of Contracts
1. Consensuality of Contracts
Republic vs PLDT (Lean)
G.R. No. L-18841, January 27, 1969
FACTS: 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, subject to the rules and regulations of the PLDT, to enable
government offices to call private parties. One of the many rules prohibits the
public use of the service furnished the telephone subscriber for his private use.
PLDT disconnected the trunk lines being rented by the Bureau of
Telecommunications after it violated the conditions under which their Private
Branch Exchange (PBX) is inter-connected with the PLDT's facilities, referring to
the rented trunk lines, for the Bureau had used the trunk lines not only for the use
of government offices but even to serve private persons or the general public, in
competition with the business of the PLDT.
Plaintiff Republic commenced suit against the defendant, Philippine Long Distance
Telephone Company, in the Court of First Instance of Manila (Civil Case No.
35805), praying in its complaint for judgment commanding the PLDT to execute a
contract with plaintiff, through the Bureau, for the use of the facilities of
defendant's telephone system throughout the Philippines under such terms and
conditions as the court might consider reasonable, and for a writ of preliminary
injunction against the defendant company to restrain the severance of the existing
telephone connections and/or restore those severed.
ISSUE: Whether or not the defendant PLDT can be compelled to enter into a
contract with the plaintiff.
HELD: No. The parties cannot 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).

Corpus vs CA (Shey)
G.R. No. L-40424, June 30, 1980
FACTS: Atty. Juan T. David agreed to handle the case of R. Mariano Corpus though
there was no express agreement regarding attorneys fees. After securing the
reversal the order of dismissal of Corpus and remanding the case for further
proceedings, Corpus sent a check to David as payment for legal services in the
handling the case, expressing that, "I wish I could give more but as you know we
were banking on a SC decision reinstating me and reimburse my backstage I had
been wanting to offer some token of my appreciation of your legal fight for and in
my behalf, and it was only last week that I received something on account of a
pending claim."
However, the check was returned by David with the intention of getting paid after
the case is ruled with finality by the SC and Corpus gets his back salaries and
wages. (Your appreciation of the efforts I have invested in your case is enough
compensation therefor, however, when you shall have obtained a decision which
would have finally resolved the case in your favor, remembering me then will make
me happy. In the meantime, you will make me happier by just keeping the check).
When the case was remanded for further proceedings, the court rendered a
decision in favor of the Corpus, and ordering the reinstatement and the payment of
his back salaries and allowances, David's law office made a formal de command
upon the defendant for collection of 50% of the amount recovered by the defendant
as back salaries and other emoluments. Corpus refused to pay David contending
that since David refused the first check given by him, he gave his services
gratuitously.
ISSUE: Whether or not there exist an implied agreement regarding attorneys fee in
favor of Atty. David.
HELD: While there was no 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.
Payment of attorney's fees to respondent David may 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.

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.

Ejercito et al vs Oriental Assurance Corp (Ria)

2. Autonomy of Contracts

Daisy Tiu vs Platinum Plans (Arjay)

G.R. No. L-15127
May 30, 1961
EMETERIO CUI vs. ARELLANO UNIVERSITY
Facts
Emeterio Cui is a student and scholar of Arellano Universitys College of Law until
he reached fourth year, first semester. Cui, during all the time he was studying law
in AU was awarded scholarship grants, for scholastic merit, so that his semestral
tuition fees were returned to him after the semester ends. The scholarship grants
totaled P1,033.87.
For his last semester, however, he enrolled in Abad Santos University because his
uncle Francisco Capistrano served as the schools dean in the College of Law. He
graduated and sought to take the bar, but before he can get permission with the
Supreme Court to take the bar he must first secure his transcript of records from
Arellano University.
Arellano University refused to release the documents until Cui reimburse the
scholarship grants awarded to him pursuant to a clause in their contract which
states that:
"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.
(Sgd.)Emeterio Cui".
As he could not take the bar examination without those transcripts, Cui paid to AU
the said sum under protest.
On August 16, 1949, the Director of Private Schools issued Memorandum No. 38,
series of 1949 which states in clause No. 2 that: 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.
Cui filed a petition against Arellano University with the Bureau of Private School
pursuant to the memorandum. The Bureau ruled in favor of Cui. On appeal to the
RTC, the lower court ruled in favor of Arellano explaining that the provision is

valid, because the memorandum of the Director of Private Schools is not a law and
in turn the provisions thereof are advisory, not mandatory in nature.
Issue: Whether or not the provision on the contract of reimbursement between Cui
and Arellano, whereby the former waived his right to transfer to another school
without refunding to the latter the equivalent of his scholarships in cash, is valid.
No.
Held: The stipulation in question is contrary to public policy and, hence, null and
void.
How to determine public policy
In the case of Zeigel vs. Illinois Trust and Savings Bank, the court said: 'In
determining a public policy of the state, courts are limited to a consideration of the
Constitution, the judicial decisions, the statutes, and the practice of government
officers.'
It might take more than a government bureau or office to lay down or establish a
public policy, but courts consider the practices of government officials as one of
the four factors in determining a public policy of the state.
How to nullify contracts based on public policy
In Gabriel vs. Monte de Piedad, we read: 'In order to declare a contract void as
against public policy, a court must find that the contract as to consideration or the
thing to be done, contravenes some established interest of society, or is
inconsistent with sound policy and good morals or tends clearly to undermine the
security of individual rights.
The policy enunciated in Memorandum No. 38, s. 1949 is sound policy.
Scholarships are awarded in recognition of merit not to keep outstanding students
in school to bolster its prestige.
In the understanding of that university (Arellano), scholarships award is a business
scheme designed to increase the business potential of an education institution.
This understanding is not only inconsistent with sound policy but also good
morals.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.
Saura vs Sandico (Bonet)

Leal vs IAC (Lean)

G.R. No. L-65425, November 5, 1987
FACTS: On March 21, 1941,a document entitled "Compraventa," written entirely
in the Spanish language, involving three parcels of land, was executed by the
private respondent's predecessors-in-interest, Vicente Santiago and his brother,
Luis Santiago, in favor of Cirilio Leal the deceased father of some of the
petitioners, Pursuant to this "Compraventa," the title over the three parcels of land
in the name of the vendors was cancelled and a new one was issued in the name of
Cirilo Leal who immediately took possession and exercised ownership over the said
lands. When Cirilo died on December 10, 1959, the subject lands were inherited by
his six children, who are among the petitioners, and who caused the consolidation
and subdivision of the properties among themselves.
It was stipulated under Paragraph B of the "Compraventa" that the buyer (Leal)
shall not sell to others these three lots but only to the seller Vicente Santiago or to
his heirs or successors for the price of P5,600.00, when the latter shall be able to
buy it.
Sometime before the agricultural year 1966-1967, Vicente Santiago approached
the petitioners and offered re- repurchase the subject properties. Petitioners,
however, refused the offer. Consequently, Vicente Santiago instituted a complaint
for specific performance before the then Court of First Instance of Quezon City on
August 2, 1967.
ISSUE: Whether or not paragraph B of Compraventa is valid and binding, and
therefore the petitioners can be compelled to sell the three lots to Santiago.
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
sell 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

3. Mutuality of Contracts

Banco Filipino Savings vs Navarro (Shey)

G.R. No. L-46591, July 28, 1987
FACTS: On May 20, 1975, Florante del Valle obtained a loan secured by a real
estate mortgage from petitioner BANCO FILIPINO. 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.

January 2, 1976, Central Bank CIRCULAR No. 494 was issued. The pertinent
portion of which reads:
"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."
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.
ISSUE: Whether BANCO FILIPINO can increase the interest rate on the LOAN
from 12% to 17% per annum under the Escalation Clause.
HELD: 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." "That administrative rules and regulations
have the force of law can no longer be questioned. "

Another reason why BANCO FILIPINO cannot increase the interest rate on the
LOAN based on the Escalation Clause is that it lacks a de-escalation clause. The
absence of a de-escalation clause in the Escalation Clause in question provides
another reason why it should not be given effect because of its one-sidedness in
favor of the lender.

Florendo vs CA (Ria)
4. Obligatory Force of Contracts
New World Developers and Management vs AMA (Arjay)
5. Relativity of Contracts

G.R. No. 184041 October 13, 2010

Saludo Jr vs Security Bank
Facts
On 30 May 1996, Booklight was extended an omnibus line credit facility by
Security Bank in the amount of P10,000,000.00. Said loan was covered by a Credit
Agreement and a Continuing Suretyship with Atty. AnicetoSaludo Jr. acting as
surety. Booklight was able to comply with his obligations under this first credit
facility.
On 30 October 1997, SBC approved the renewal of credit facility of Booklight in
the amount of P10,000,000.00. Booklight defaulted in the payment of the loan
obligation amounting to P9,652,725.00under the second credit line. Booklight and
AttySaludo Jr failed to pay their obligation despite demand from Security Bank.
On 16 June 2000, SBC filed against Booklight and herein petitioner an action for
collection of sum of money with the RTC. Booklight was declared in default but
AttySaludo was able to serve and file an answer claiming that under the
Continuing Suretyship, it was the parties' understanding that his undertaking and
liability was merely as an accommodation guarantor of Booklight. He also claimed
that Booklight offered to pay SBC the partial payment of the loan and proposed the
restructuring of the obligation. He argued that the said offer to pay constitutes a
valid tender of payment which discharged Booklight's obligation to the extent of
the offer. RTC ruled that Saludo Jr is solidarily liable with Booklight under the
Continuing Surety agreement. The Court of Appeals affirmed in toto the ruling of
the RTC.
In filing an appeal with the Supreme Court, Atty. Saludo raises the following
defenses:
1. The first credit facility has a one-year term from 30 June 1996 to 30 June
1997 while the second credit facility runs from 30 October 1997 to 30
October 1998.
2. When the first credit facility expired, its accessory contract, the Continuing
Surety agreement likewise expired.
3. The second credit facility is not covered by the Continuing Suretyship, thus,
availments made in 1998 by Booklight are not covered by the Continuing
Suretyship.

4. The approval of the second credit facility necessitates the consent of

petitioner for the latter's Continuing Suretyship to be effective.
Issues:
Whether or not the continuing surety expired when the first credit facility
expired.No
Whether or not the prior consent of AttySaludo Jr is necessary on the second credit
facility considering the onerous and solidary liability of a surety. No
Held:
Saludos argument is contrary to the express waiver of his consent to such
renewal, contained in paragraph 12 of the Continuing Suretyship, which provides
in part:
12. Waivers by the Surety. - The Surety hereby waives: x xx (v) notice or consent to
any modification, amendment, renewal,extension or grace period granted by the
Bank to the Debtor with respect to the Credit Instruments.
The essence of a continuing surety has been highlighted in the case of Totanes v.
China Banking Corporation in this wise:
Comprehensive or continuing surety agreements are, in fact, quite commonplace in
present day financial and commercial practice. A bank or financing company which
anticipates entering into a series of credit transactions with a particular company,
normally requires the projected principal debtor to execute a continuing surety
agreement along with its sureties. By executing such an agreement, the principal
places itself in a position to enter into the projected series of transactions with its
creditor; with such suretyship agreement, there would be no need to execute a
separate surety contract or bond for each financing or credit accommodation
extended to the principal debtor.
In Gateway Electronics Corporation v. Asianbank Corporation, the Court
emphasized that "[b]y its nature, a continuing suretyship covers current and future
loans, provided that, with respect to future loan transactions, they are x xx `within
the description or contemplation of the contract of guaranty.'"

In essence, AttySaludo argues that he may not be held solidarily liable on

the second credit line on the ground that he was not a party to the second
credit line, pursuant to the concept of the relativity of contracts, but this
was refuted by the fact that he waived his right to be give consent for
succeeding credit transactions on the principal obligation and continuing
suretyships cover both current and future loans

Metropolitan Bank vs Reynaldo (Bonet)

Prudential Bank vs Abasolo (Lean)

G.R. No. 186738, September 27, 2010
FACTS: Liwayway Abasolo, respondent, by way of a Special Power of Attorney
(SPA) was authorized to sell empowering her to sell two parcels. Corazon
Marasigan wanted to buy the properties which were being sold, but as she had no
available cash, she broached the idea of first mortgaging the properties to
petitioner Prudential Bank and Trust Company (PBTC), the proceeds of which
would be paid directly to Liwayway. Liwayway agreed to the proposal.
Corazon and respondents consulted with PBTCs Head Office and its employee,
Norberto Mendiola, allegedly advised Liwayway to transfer the properties first to
Corazon for the immediate processing of Corazons loan application with assurance
that the proceeds thereof would be paid directly to her (respondent), and the
obligation would be reflected in a bank guarantee. Heeding Mendiolas advice,
respondent executed a Deed of Absolute Sale over the properties in favor of
Corazon, and Transfer Certificates of Title Nos. 164159 and 164160 were issued in
the name of Corazon.
Corazons application for a loan with PBTCs Tondo Branch was approved. In the
absence of a written request for a bank guarantee, the PBTC released the proceeds
of the loan to Corazon. However, despite repeated demands, Corazon failed to pay
the purchase price of the properties.
Respondent eventually accepted from Corazon partial payment in kind consisting
of one owner type jeepney and four passenger jeepneys,3 plus installment
payments, which, by the trial courts computation, totaled P665,000. In view of
Corazons failure to fully pay the purchase price, respondent filed a complaint for
collection of sum of money and annulment of sale and mortgage with damages,
against Corazon and PBTC (hereafter petitioner), before the Regional Trial Court
(RTC) of Sta. Cruz, Laguna. The RTC rendered judgment in favor of respondent
and against Corazon who was made directly liable to respondent, and against
petitioner who was made subsidiarily liable in the event that Corazon fails to pay.
The CA affirmed the trial courts decision with modification on the amount of the
balance of the purchase price.
ISSUE: Whether or not Prudential Bank is subsidiary liable.
HELD: 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.
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.

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.

Asian Cathay Finance and Leasing vs Spouses Cesario (Shey)

G.R. No. 186550, July 5, 2010
FACTS: On October 22, 1999, petitioner Asain Cathay Finance and Leasing
Corporation (ACFLC) extended a loan of Eight Hundred Thousand Pesos
(800,000.00) 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 24,000.00 each. To secure the loan, respondent Cesario
executed real estate mortgage over his property in Sta. Maria, Bulacan, covered by
Transfer Certificate of Title No. T-29234.
Respondents paid the initial installment due in November 1999. However, they
were unable to pay the subsequent ones. Consequently, on February 1, 2000,
respondents received a letter demanding payment of 1,871,480.00 within five (5)
days from receipt thereof. Respondents requested for an additional period to settle
their account, but ACFLC denied the request. Petitioner filed a petition for
extrajudicial foreclosure of mortgage with the Office of the Deputy Sherrif of
Malolos, Bulacan.
ISSUE: WON the Honorable Court of Appeals erred in invalidating the interest
rates imposed on the respondents loan, and the waiver of the right of redemption.
HELD: It is true that parties to a loan agreement have a wide latitude to stipulate
on any interest rate in view of Central Bank Circular No. 905, series of 1982, which
suspended the Usury Law ceiling on interest rate effective January 1, 1983.
However, interest rates, whenever unconscionable, may be equitably reduced or
even invalidated. In several cases,10 this Court had declared as null and void
stipulations on interest and charges that were found excessive, iniquitous and
unconscionable.
The imposition of an unconscionable rate of interest on a money debt, even if
knowingly and voluntarily assumed, is immoral and unjust. It is tantamount to a
repugnant spoliation and an iniquitous deprivation of property, repulsive to the
common sense of man. It has no support in law, in principles of justice, or in the
human conscience nor is there any reason whatsoever which may justify such
imposition as righteous and as one that may be sustained within the sphere of
public or private morals.
Stipulations authorizing the imposition of iniquitous or unconscionable interest are
contrary to morals, if not against the law. Under Article 1409 of the Civil Code,
these contracts are inexistent and void from the beginning. They cannot be ratified
nor the right to set up their illegality as a defense be waived. The nullity of the
stipulation on the usurious interest does not, however, affect the lenders right to
recover the principal of the loan. Nor would it affect the terms of the real estate
mortgage. The right to foreclose the mortgage remains with the creditors, and said

right can be exercised upon the failure of the debtors to pay the debt due. The debt
due is to be considered without the stipulation of the excessive interest. A legal
interest of 12% per annum will be added in place of the excessive interest formerly
imposed.12 The nullification by the CA of the interest rate and the penalty charge
and the consequent imposition of an interest rate of 12% and penalty charge of 1%
per month cannot, therefore, be considered a reversible error.

Gravador and Norma de Vera et al (Ria)

Velasco vs CA (Arjay)
G.R. No. 16454
September 29, 1921
George Kauffman vs PNB
Facts
George Kauffman is the President of Philippine Fiber and Produce Company and
holds almost entirely its share of stocks. Philippine Fiber declared dividends of
P100,000 from its surplus earnings and Kauffman was entitled to P98,000
therefrom. George Wicks treasurer of Philippine Fiber went to Philippine National
Bank in Manila and requested that a telegraphic transfer of $45,000 be made to
the plaintiff in New York City, upon account of the Philippine Fiber and Produce
Company. On the same day, PNB in Manila sent a cablegram to its New York
agency ordering it to pay George Kauffman $45,000 from the account of Philippine
Fiber. The bank's representative in New York sent a cable message in reply
suggesting the advisability of withholding this money from Kauffman, because
Kauffman allegedly refused to accept certain bills from Philippine Fiber. PNB
Manila gave its acquiescence to the reply. Wicks advised Kauffman that the
transfer has been made, but when Kauffman went to PNBs agent in New York, it
was refused payment of the $45,000.
Kauffman filed a case for recovery of sum of money against PNB. CFI ruled in favor
of Kauffman. PNB appealed. PNBs defense- Kauffman was not a party to the
contract with the bank for the transmission of this credit, thus no right of action
can be vested in him for the breach thereof.
Issue
Whether or not Kauffman can maintain an action against PNB for its
nonperformance of an undertaking between Philippine Fiber Produce company and
PNB. Yes.
(In other words, is the lack of privity with the contract on the part of the plaintiff
fatal to the maintenance of an action by him?)
Held.
The only express provision of law that has been cited as bearing directly on this
question is the second paragraph of article 1257 of the Civil Code. This provision
states an exception to the more general rule expressed in the first paragraph of the
same article to the effect that contracts are productive of effects only between the
parties who execute them.
The paragraph introducing the exception which we are now to consider is in these
words:

Should the contract contain any stipulation in favor of a third person, he may
demand its fulfillment, provided he has given notice of his acceptance to the
person bound before the stipulation has been revoked. (Art. 1257, par. 2, Civ.
Code.)
Justice Trent in Uy Tam and Uy Yet vs Leonard explained that:
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. (Stipulation pourautrui- a contract or
provision in a contract that confers a benefit on a third-party beneficiary)
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.

The right of Kauffman 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.
Bonifacio Bros vs Mora (Bonet)

Florentino vs Encarnacion (Lean)

G.R. No. L-27696, September 30, 1977
FACTS: On May 22, 1964, the petitioners-appellants Miguel Florentino, Remedios
Encarnacion de Florentino, Manuel Arce, Jose Florentino, Victorino Florentino,
Antonio Florentino, Remedior, Encarnacion and Severina Encamacion, and the
Petitioners-appellees Salvador Encamacion, Sr., Salvador Encamacion, Jr. and
Angel Encarnacion filed with the Court of First Instance of Ilocos Sur an
application for the registration under Act 496 of a parcel of agricultural land
located at Barrio Lubong Dacquel Cabugao Ilocos Sur. The said applicants had
acquired the aforesaid land thru and by inheritance from their predecessors in
interest, lately from their aunt, Doa Encarnacion Florentino who died in Vigan,
Ilocos Sur in 1941, and for which the said land was adjudicated to them by virtue
of the deed of extrajudicial partition dated August 24, 1947. A stipulation, marked
Exhibit O-1,is embodied in the deed of extrajudicial partition providing that the
fruits thereof shall serve to defray the religious expenses of the Church in the
preparation and celebration of the Holy Week, an annual Church function.
Applicant Miguel Florentino asked the court to include the said stipulation (Exhibit
O-1) as an encumbrance on the land sought to be registered, and cause the entry
of the same on the face of the title that will finally be issued. Petitioners-appellee
Salvador Encamacion, Sr., Salvador Encarnaciori, Jr. and Angel Encarriacion
opposed its entry on the title as an encumbrance and filed a manifestation seeking
to withdraw their application on their respective shares of the land sought to be
registered. The withdrawal was opposed by the petitioners-appellants.
The lower held that the stipulation embodied in Exhibit O on religious expenses is
just an arrangement stipulation, or grant revocable at the unilateral option of the
coowners. In fact, the oppositors Salvador Encarnacion, Sr., who is the only one of
the three oppositors who is a party to said Exhibit O (the two others, Salvador
Encarnacion, Jr. and Angel Encarnacion no parties to it) did revoke it as shown by
acts accompanying his refusal to have the same appear as an encumbrance on the
title to be issued. In fact, legally, the same can also be ignored or discararded by
will the three oppositors. The reasons are: First, if the said stipulation is pour
bodies in Exhibit O-1 is to be viewed as a stipulation pour autrui the same cannot
now be enforced because the Church in whose favor it was made has not
communicated its acceptance to the oppositors before the latter revoked it.
ISSUE: Whether or not the stipulation embodied in Exhibit O on religious expenses
is just an arrangement stipulation, or grant revocable at the unilateral option of
the coowners.
HELD: Held: The stipulation embodied on religious expenses is not revocable at
the unilateral option of the co-owners and is it binding to both parties.

The stipulation in part of an extrajudicial partition duly agreed and signed by the
parties, hence the same must bind the contracting parties thereto and its validity
or compliance cannot be left to the will of one of them (Art. 1308, N.C.C.). Under
Art 1311 of the New Civil Code, this stipulation takes effect between the parties,
their assign and heirs. The article provides:
Art. 1311. Contracts take effect only between the parties, their assigns and
heirs, except in cases 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 a 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.
In the case at bar, the determining point is whether the co-owners intended to
benefit the Church when in their extrajudicial partition of several parcels of land
inherited by them from Doa Encarnacion Florendo they agreed that with respect
to the land, the fruits thereof shall serve to defray the religious expenses. The
evidence on record shows that the true intent of the parties is to confer a direct
and material benefit upon the Church. The fruits of the aforesaid land were used
thenceforth to defray the expenses of the Church in the preparation and
celebration of the Holy Week.
We find that the trial court erred in holding that the stipulation, arrangement or
grant 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 will of
Doa Encarnacion Florentino in 1941, as had always been the case since time
immemorial up to a year before the filing 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.
The acceptance does not have to be in any particular form, even when the
stipulation is for the third person an act of liberality or generosity on the part of
the promisor or promise.

It need not be made expressly and formally. Notification of acceptance, other than
such as is involved in the making of demand, is unnecessary.
A trust constituted between two contracting parties for the benefit of a third
person is not subject to the rules governing donation of real property. The
beneficiary of a trust may demand performance of the obligation without having
formally accepted the benefit of the this in a public document, upon mere
acquiescence in the formation of the trust and acceptance under the second
paragraph of Art. 1257 of the Civil Code.
Bank of America vs IAC (Shey)
Marimperio vs CA (Ria)
Daywalt vs Corp de PP Agustinos (Arjay)
G.R. No. L-9356
February 18, 1915
C.S. Gilchrist vs E.A. Cuddy et al
Facts
*Zigomar is a 1911 French Film about a super-hero type character. It is based on
the stories of Lon Sazie and directed by Victorin-HippolyteJasset
E.A. Cuddy, a resident of Manila, was the owner of cinematograph (aka movie/film)
entitled "*Zigomar." C.S. Gilchrist was the owner of a cinematograph theater in
Iloilo. Cuddy and Gilchrist entered into a contract whereby the Cuddy would lease
Zigomar to Gilchrist for exhibition in the latters theater beginning May 26, 1913
and would last for 6 weeks. The contract price agreed upon was P125 for a week.
A few days prior to this Cuddy sent the money back to Gilchrist, saying that he had
made other arrangements with his film. It turns out that Cuddy entered into
another contract with Jose Fernandez Espejo and Mariano Zaldarriaga for the
lease of the cinematograph but at a higher rate of P350 for a week.
Gilchrist filed a petition for mandatory preliminary injunction and inhibitory
preliminary injunction with the CFI of Iloilo. The CFI granted the petition and
ordered Cuddy to deliver the reel for Zigomar to Gilchrist and restraining Espejo et
al to exhibit the film in their theater. Espejo filed a counter-claim against Gilchrist
for damages on the ground of wrongfully filing an injunction suit against them. The
CFI denied the counterclaim.
Issue:
Whether or not the Gilchrist is liable to pay damages to Espejo on the ground of
filing a wrongful suit. No (In fact Espejo and Zaldarriagaare liable to Gilchrist)
Held

On the issue of damages

The attendance, and, consequently, the receipts, at one of these cinematograph or
motion-picture theaters depends in no small degree upon the excellence of the
photographs, and it is quite common for the proprietor of the theater to secure an
especially attractive exhibit as his "feature film" and advertise it as such in order to
attract the public. This feature film is depended upon to secure a larger attendance
that if its place on the program were filled by other films of mediocre quality. It is
evident that the failure to exhibit the feature film will reduce the receipts of the
theater.
The right on the part of Gilchrist to enter into a contract with Cuddy for the lease
of the film must be fully recognized and admitted by all. That Cuddy was liable in
an action for damages for the breach of that contract, there can be no doubt.
Question now is whether Espejo and Zaldarriage are likewise liable for interfering
with the contract between Gilchrist and Cuddy, they not knowing at the time the
identity of one of the contracting parties?
Defense- Espejo claims that they had a right to interfere with the contract of
Gilchrist because there was no valid and binding contract between Cuddy and
Gilchrist and that, therefore, they had a right to compete with Gilchrist for the
lease of the film. However, the mere right to compete could not justify Espejos act
in intentionally inducing Cuddy to take away Gilchrist contractual rights.
Chief Justice Wells in Walker vs. Cronin said: "Everyone has a right to enjoy the
fruits and advantages of his own enterprise, industry, skill and credit. He has no
right to be free from malicious and wanton interference, disturbance or
annoyance. If disturbance or loss come as a result of competition, or the
exercise of like rights by others, it is damnum absque injuria, unless some
superior right by contract or otherwise is interfered with."
It is said that the ground on which the liability of a third party for
interfering with a contract between others rests, is that the interference was
malicious. The contrary view, however, is taken by the Supreme Court of the
United States in the case of Angle vs. Railway Co. (151 U. S., 1). The only motive
for interference by the third party in that case was the desire to make a profit to
the injury of one of the parties of the contract. There was no malice in the case
beyond the desire to make an unlawful gain to the detriment of one of the
contracting parties.
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 malicebeyond 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 lesseeof 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.
Estate of KH Hemady vs Luzon Surety (Bonet)
So Ping Bun vs CA (Lean)
C. Classification of Contracts
1.
2.
3.
4.
5.
6.
7.
8.
9.

According
According
According
According
According
According
According
According
According

to
to
to
to
to
to
to
to
to

degree of dependence
perfection
solemnity or form
purpose
nature of obligation produced
cause
risk
name
subject matter

D. Stages of Contracts
1. Negotiation
Sanchez vs Rigos (Shey)
2. Perfection
Tong Brothers vs CA (Ria)
Velasco vs CA (Arjay)
E. Essential Element of Contracts
1.
2.
3.
4.
5.

Consent of the contracting parties

Object certain which is subject matter of contracts
Cause of the obligation
Delivery
Due observance of the prescribed formalities

G.R. No. 175483, October 14, 2015

Clemente vs CA, Jalandoon
FACTS
Adela Shotwell owned three (3) adjoining parcels of land in Scout Ojeda Street,
Diliman, Quezon City, subdivided as Lots 32, 34 and 35-B.Among the improvements
on the properties was Adela's house (also referred to as the "big house"). During
her lifetime, Adela allowed her children and grandchildren to use and take
possession of the lots and its improvements.
Before going to the US, executed a deed of absolute sale over Lots 32 and 34, and
their improvements, in favor of Valentina Clemente (one of her grandchildren)
bearing on its face the price of P250,000.00. On the same day, Adela also executed
a special power of attorney (SPA) in favor of Valentina. Petitioner's authority under
the SPA included the power to administer, take charge and manage, for Adela's
benefit, the Properties and all her other real and personal properties in the
Philippines.
Adela went to the US with Valentina and when Valentina came back she registered
the sale over Lots 32 and 34 with the Registry of Deeds and thereafter TCT No.
19811 and TCT No. 19809 were then issued in her name for Lots 32 and 34. Adela
died while in the U.S. and she was succeeded by her children Annie Shotwell
Jalandoon, Carlos G. Shotwell ("Carlos Sr."), Anselmo G. Shotwell and Corazon S.
Basset.
Valentina sought to eject Annie and Carlos Sr., who were then staying on the
Properties. Due to this action, Adelas successors were informed of the deed of
sale between Adela and Valentina and sought to recover it via an action for
reconveyanceof property filed with the RTC of Quezon City. The RTC ruled in favor
of Adelas successors.
The CA agreed with the trial court that the contemporaneous and subsequent acts
of petitioner and her grandmother are enough to render the conveyances null and
void on the ground of being simulated. It also found that Adela retained and
continued to exercise dominion over the Properties even after she executed the
conveyances to petitioner. By contrast, petitioner did not exercise control over the
properties because she continued to honor the decisions of Adela. The CA also
affirmed the court a quo's finding that the conveyances were not supported by any
consideration.
ISSUE
Whether or not the deeds of sale executed by Adela in favor of Valentina Clemente
are null and void on the ground that it is simulated and without consideration.Yes
HELD
On the issue of simulated contracts

Article 1318 provides that there is no contract unless the following requisites
concur:
(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.
All these elements must be present to constitute a valid contract; the absence of
one renders the contract void. As one of the essential elements, consent when
wanting makes the contract non-existent. Consent is manifested by the meeting of
the offer and the acceptance of the thing and the cause, which are to constitute the
contract. A contract of sale is perfected at the moment there is a meeting of the
minds upon the thing that is the object of the contract, and upon the price. Here,
there was no valid contract of sale between petitioner and Adela because their
consent was absent. The contract of sale was a mere simulation.
Simulation takes place when the parties do not really want the contract they have
executed to produce the legal effects expressed by its wordings. Article 1345 of the
Civil Code provides that the simulation of a contract may either be absolute or
relative. The former takes place when the parties do not intend to be bound at all;
the latter, when the parties conceal their true agreement.
In short, in absolute simulation there appears to be a valid contract but there is
actually none because the element of consent is lacking. This is so because the
parties do not actually intend to be bound by the terms of the contract.
In determining the true nature of a contract, the primary test is the intention of the
parties. If the words of a contract appear to contravene the evident intention of the
parties, the latter shall prevail. Such intention is determined not only from the
express terms of their agreement, but also from the contemporaneous and
subsequent acts of the parties. This is especially true in a claim of absolute
simulation where a colorable contract is executed.
The lower courts considered the totality of the prior, contemporaneous and
subsequent acts of the parties
a) There was no indication that Adela intended to alienate her properties in
favor of petitioner. In fact, the letter of Adela to Dennis dated April 18,
1989[51] reveals that she has reserved the ownership of the Properties in
favor of Dennis.
b) Adela continued exercising acts of dominion and control over the properties,
even after the execution of the Deeds of Absolute Sale, and though she lived
abroad for a time. In Adela's letter dated August 25, 1989 to a certain Candy,
she advised the latter to stay in the big house. Also, in petitioner's letter to
her cousin Dennis dated July 3, 1989, she admitted that Adela continued to
be in charge of the Properties; that she has no "say" when it comes to the
Properties; that she does not intend to claim exclusive ownership of Lot 35-

B; and that she is aware that the ownership and control of the Properties are
intended to be consolidated in Dennis.
c) The SPA executed on the same day as the Deeds of Absolute Sale appointing
petitioner as administratrix of Adela's properties, including the Properties, is
repugnant to petitioner's claim that the ownership of the same had been
transferred to her.
d) The previous sales of the Properties to Dennis and Carlos, Jr. were
simulated. This history, coupled with Adela's treatment of petitioner, and the
surrounding circumstances of the sales, strongly show that Adela only
granted petitioner the same favor she had granted to Dennis and Carlos Jr.
The totality of the circumstances were sufficient to prove that the deed of sale was
simulated.
On the issue of lack of consideration
Although on their face, the Deeds of Absolute Sale appear to be supported by
valuable consideration, the RTC and the CA found that there was no money
involved in the sale.
Article 1471 of the Civil Code provides that "if the price is simulated, the sale is
void." Where a deed of sale states that the purchase price has been paid but in fact
has never been paid, the deed of sale is null and void for lack of consideration.
Thus, although the contracts state that the purchase price of P250,000.00 and
P60,000.00 were paid by petitioner to Adela for the Properties, the evidence shows
that the contrary is true, because no money changed hands. Apart from her
testimony, petitioner did not present proof that she paid for the Properties.
Pentacapital Investment Corp vs Mahinay (Bonet)
Ong Yiu vs CA (Lean)
Weldon vs CA (Shey)
C & C Comml Corp vs Menor (Ria)
Tang vs CA (Arjay)
G.R. No. L-47661

July 31, 1987

JUANITO CARIO and CIRILA VICENCIO vs. COURT OF APPEALS, PABLO ENCABO
and JUANITA DE LOS SANTOS, and LAND AUTHORITY

FACTS

Pablo Encabo applied with the Land Estates Division, Bureau of Lands, to purchase a parcel
of land designated as Lot 1, Block 4, Plan Psd-24819 pursuant to Commonwealth Act or An
Act Authorizing the President of the Philippines to Acquire Private Lands for Resale in
Small Lots. After Encabos application, came to an agreement with Josue Quesada
transferring rights over the lot to the latter with the help of one Cirila Vicencio acting as an
agent. 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 on which Cirila Vicencio
signed as a witness.
The Land Tenure Administration (LTA) issued a decision giving Encabo title over the parcel
of land. LTA and Encabo thereafter executed an Agreement to Sell. Quesada took
possession over the parcel of land and allowed Cirila Vicencio to occupy it. LTA learned of
Encabos agreement with Quesada and disapproved the same on the ground that Quesada
was not qualified to acquire the lot because he is already a lot owner.
Encabo then executed another deed of sale over the property this time in favor of Cirila
Vicencio, subject to the approval of the LTA. Later on, Encabo and Quesada executed a
document wherein Quesada purportedly resold to the Encabo the house and the rights over
the lot.
Juanito Carino, the husband of Cirila Vicencio, filed a petition to the LTA seeking approval
of the transfer of rights to the lot in question in their name on the basis of the Deed of Sale
of House and Transfer of Rights executed by Pablo Encabo. Pablo Encabo opposed. The LTA
dismissed the petition.
Juanito and Cirila retained their possession over the property, despite the decision of the
LTA. So Encabo filed an action in the Court of First Instance of Manila to declare them as
the owners of the lot and for the Carios to deliver the possession of the lot itself, and to
pay rentals for their occupancy of the properties plus attorney's fees. The RTC ruled in
favor of Encabo. On appeal with the CA, the appellate court affirmed the RTC on the
ground that the deed of sale executed by Encabo in favor of Cirila Vicencio was simulated
and therefore void.
ISSUE
Whether or not the deed of sale executed by Encabo in favor of Cirila Vicencio was
simulated, hence void and inexistent. Yes.
HELD
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, pursuant to Art 1409:
Art. 1409. The following contracts are inexistent and void from the beginning: x x x (2)
Those which are absolutely simulated or fictitious; x x x These contracts cannot be ratified.
Neither can the right to set up the defense of illegality be waived.
There is merit to the Encabos' claim that the simulated deed of sale in favor of the Carios
was executed in order to protect the money Quesada invested in the purchase of the rights
to the lot in question, which transfer of said lot to his name was later on disapproved by the
LTA. As can be gleaned from the testimony of Josue Quesada, he did this by putting Cirila
Vicencio as the vendee in the stipulated Deed of Sale, when in fact, Encabo and Quesada

meant her only as a dummy for the latter. To this effect Quesada testified, despite the
warning given to him by the court that his statement might incriminate him. Such candor in
the testimony of Quesada gives credibility to the Encabos claim.
From the testimonies of the witnesses, it can be deduced that Cirila Vicencio was privy to
all the transactions relating to the sale of the disputed lot between Encabo and Quesada so
that it is entirely possible for Cirila Vicencio to have been used by Encabo and Quesada as
their dummy in the simulated deed of sale and for Cirila Vicencio herself to lend a hand in
the scheme so as to protect the interests of Quesada, and in the process, protect herself as
she was occupying the disputed lot at the instance of Quesada. Even at the start, it was
Cirila Vicencio who introduced Quesada to the Encabos in connection with a house and the
right to the lot, which according to Cirila Vicencio, was being sold by Juanita de los SantosEncabo. Not only that, Cirila Vicencio signed as a witness on which are the receipts of
payment for the disputed lot by Quesada to Encabo.
Moreover, 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. 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" (Deed of Sale). 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.