1. MALBAROSA V. COURT OF APPEALS G.R. No. 125761 Apr. 30, 2003. (Art.

1318)

FACTS: Petitioner Salvador P. Malbarosa, a high-ranking officer of corporations belonging to the SEADC
group of companies, intimated his desire to retire from the company and requested that his 1989 incentive
compensation as president of Philtectic Corporation be paid to him. On March 16, 1990, Da Costa
(President of SEADC insurance company) met with the petitioner and handed to him the original copy of
the March 14, 1990 Letter-offer for his consideration and conformity. The petitioner was dismayed when
he read the letter and learned that he was being offered an incentive compensation of only P251,057.67.
He told Da Costa that he was entitled to no less than P395,000 as incentive compensation. The petitioner
refused to sign the letter-offer. He received the original of the letter and wrote on the duplicate copy of the
letter-offer retained by Da Costa, the words: "Rec'd original for review purposes." Despite the lapse of
more than two weeks, the respondent had not received the original of the March 14, 1990 Letter-offer of
the respondent with the conformity of the petitioner. The respondent decided to withdraw its March 14,
1990 Offer. On April 3, 1996, the Board of Directors of the respondent approved a resolution to demand
from the petitioner for the return of the car issued to him and to take such an action in court against the
petitioner for the recovery of the motor vehicle.

On April 4, 1990, Philtectic Corporation, wrote the petitioner withdrawing the March 14, 1990 Letter-offer
of the respondent and demanding that the petitioner return the car and his membership certificate in the
Architectural Center, Inc. within 24 hours from his receipt thereof. The petitioner received the original copy
of the letter on the same day.

On April 7, 1990, the petitioner wrote the counsel of Philtectic Corporation informing the latter that he
cannot comply with said demand as he already accepted the March 14, 1990 Letter-offer of the
respondent when he affixed on March 28, 1990 his signature on the original copy of the letter-offer. The
petitioner enclosed a xerox copy of the original copy of the March 14, 1990 Letter-offer of the respondent,
bearing his signature. With the refusal of the petitioner to return the vehicle, the respondent, as plaintiff,
filed a complaint against the petitioner, as defendant, for recovery of personal property with replevin with
damages and attorney's fees.

The trial court issued an order for the issuance of a writ of replevin and stated that there existed no
perfected contract between the petitioner and the respondent on the latter's March 14, 1990 Letter-offer
for failure of the petitioner to effectively notify the respondent of his acceptance of said letter-offer before
the respondent withdrew the same. The respondent filed a motion for the amendment of the decision of
the trial court, praying that the petitioner should be ordered to pay to the respondent reasonable rentals
for the car.The CA affirmed the RTC’s decision. The Court of Appeals stated that the petitioner had not
accepted the respondent's March 14, 1990 Letter-offer before the respondent withdrew said offer on April
4, 1990.

ISSUES: (a) Whether there was a valid acceptance on his part of the March 14, 1990 Letter-offer of the
respondent; and (b) Whether there was an effective withdrawal by the respondent of said letter-offer.

HELD: Under Article 1318 of the Civil Code, the essential requisites of a contract are as follows:

Art. 1318. 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;
(3) Cause of the obligation which is established.

Under Article 1319 of the New Civil Code, the consent by a party is manifested by the meeting of the offer
and the acceptance upon the thing and the cause which are to constitute the contract. An offer may be
reached at any time until it is accepted. An offer that is not accepted does not give rise to a consent. The
contract does not come into existence.24 To produce a contract, there must be acceptance of the offer
which may be express or implied25 but must not qualify the terms of the offer. The acceptance must be
absolute, unconditional and without variance of any sort from the offer.26
The acceptance of an offer must be made known to the offeror.27 Unless the offeror knows of the
acceptance, there is no meeting of the minds of the parties, no real concurrence of offer and
acceptance.28 The offeror may withdraw its offer and revoke the same before acceptance thereof by the
offeree. The contract is perfected only from the time an acceptance of an offer is made known to the
offeror. If an offeror prescribes the exclusive manner in which acceptance of his offer shall be indicated by
the offeree, an acceptance of the offer in the manner prescribed will bind the offeror. On the other hand,
an attempt on the part of the offeree to accept the offer in a different manner does not bind the offeror as
the absence of the meeting of the minds on the altered type of acceptance.29 An offer made inter
praesentes must be accepted immediately. If the parties intended that there should be an express
acceptance, the contract will be perfected only upon knowledge by the offeror of the express acceptance
by the offeree of the offer. An acceptance which is not made in the manner prescribed by the offeror is not
effective but constitutes a counter-offer which the offeror may accept or reject.30 The contract is not
perfected if the offeror revokes or withdraws its offer and the revocation or withdrawal of the offeror is the
first to reach the offeree.31 The acceptance by the offeree of the offer after knowledge of the revocation
or withdrawal of the offer is inefficacious. The termination of the contract when the negotiations of the
parties terminate and the offer and acceptance concur, is largely a question of fact to be determined by
the trial court.32

In this case, the respondent made its offer through its Vice-Chairman of the Board of Directors, Senen
Valero. On March 16, 1990, Da Costa handed over the original of the March 14, 1990 Letter-offer of the
respondent to the petitioner. The respondent required the petitioner to accept the offer by affixing his
signature on the space provided in said letter-offer and writing the date of said acceptance, thus
foreclosing an implied acceptance or any other mode of acceptance by the petitioner. However, when the
letter-offer of the respondent was delivered to the petitioner on March 16, 1990, he did not accept or
reject the same for the reason that he needed time to decide whether to reject or accept the same.33
There was no contract perfected between the petitioner and the respondent corporation.34 Although the
petitioner claims that he had affixed his conformity to the letter-offer on March 28, 1990, the petitioner
failed to transmit the said copy to the respondent. It was only on April 7, 1990 when the petitioner
appended to his letter to the respondent a copy of the said March 14, 1990 Letter-offer bearing his
conformity that he notified the respondent of his acceptance to said offer. But then, the respondent,
through Philtectic Corporation, had already withdrawn its offer and had already notified the petitioner of
said withdrawal via respondent's letter dated April 4, 1990 which was delivered to the petitioner on the
same day. Indubitably, there was no contract perfected by the parties on the March 14, 1990 Letter-offer
of the respondent.

The petitioner's plaint that he was not accorded by the respondent reasonable time to accept or reject its
offer does not persuade. It must be underscored that there was no time frame fixed by the respondent for
the petitioner to accept or reject its offer. When the offeror has not fixed a period for the offeree to accept
the offer, and the offer is made to a person present, the acceptance must be made immediately.35 In this
case, the respondent made its offer to the petitioner when Da Costa handed over on March 16, 1990 to
the petitioner its March 14, 1990 Letter-offer but that the petitioner did not accept the offer. The
respondent, thus, had the option to withdraw or revoke the offer, which the respondent did on April 4,
1990.

Even if it is assumed that the petitioner was given a reasonable period to accept or reject the offer of the
respondent, the evidence on record shows that from March 16, 1990 to April 3, 1990, the petitioner had
more than two weeks which was more than sufficient for the petitioner to accept the offer of the
respondent. Although the petitioner avers that he had accepted the offer of the respondent on March 28,
1990, however, he failed to transmit to the respondent the copy of the March 14, 1990 Letter-offer bearing
his conformity thereto. Unless and until the respondent received said copy of the letter-offer, it cannot be
argued that a contract had already been perfected between the petitioner and the respondent.

2. ROBERN V. PEOPLES LANDLESS G.R. No. 173622 Mar. 11, 2012. (Stages of a Contract)
FACTS: Al-Amanah owned a 2000 sqm lot located in Magtu-od, Davao City. On December 12, 1992,
Al-Amanah Davao Branch, thru its OIC asked some of the members of PELA to desist from building
their houses on the lot and to vacate the same, unless they are interested to buy it. The informal
settlers thus expressed their interest to buy the lot at ₱100.00/sqm, which Al-Amanah turned down for
being far below its asking price. The informal settlers together with other members comprising PELA
offered to purchase the lot for ₱300,000.00, half of which shall be paid as down payment and the
remaining half to be paid within one year.

By May 3, 1993, PELA had deposited ₱150,000.00 as evidenced by four bank receipts. For the first
three receipts, the bank labelled the payments as "Partial deposit on sale of TCT No. 138914", while it
noted the 4th receipt as "Partial/Full payment on deposit on sale of asset TCT No. 138914." In the
meantime, the PELA members remained in the property and introduced further improvements.

On November 29, 1993, Al-Amanah, wrote to PELA informing the Head Office’s disapproval of PELA’s
offer to buy the said lot. Subsequent letters were sent demanding PELA to vacate the said lot. PELA
answered that it had already reached an agreement with Al-Amanah regarding the sale of the subject
lot based on their offered price. Meanwhile, acting on Robern’s undated written offer, Al-Amanah issued
a Recommendation Sheet indicating therein that Robern is interested to buy the lot for ₱400,000.00;
that it has already deposited 20% of the offered purchase price; that it is buying the lot on "as is" basis;
and, that it is willing to shoulder the relocation of all informal settlers therein. The board accepted
Robern’s offer. However, Robern withheld payments unless the issue between PELA and Al-Amanah
was resolved.

Petitioners stress that there was no sale between PELA and Al-Amanah, for neither a deed nor any
written agreement was executed. They aver that Dalig was a mere OIC of Al-Amanah’s Davao Branch,
who was never vested with authority by the board of directors of Al-Amanah to sell the lot. With regard
to the notation on the March 18, 1993 letter and the four bank receipts, Robern contends that these are
only in connection with PELA’s offer.

Petitioners likewise contend that Robern is a purchaser in good faith. The PELA members are mere
informal settlers. The title to the lot was clean on its face, and at the time Al-Amanah accepted
Robern’s offer, the latter was unaware of the alleged transaction with PELA. And when PELA later
represented to Robern that it entered into a transaction with Al-Amanah regarding the subject lot,
Robern even wrote Al-Amanah to inquire about PELA’s claim over the property. And when informed by
Al-Amanah that it rejected the offer of PELA and of its action of requesting assistance from the local
government to remove the occupants from the subject property, only then did Robern push through with
the sale.

PELA, on the other hand, claims that petitioners are not the proper parties who can assail the contract
of sale between it and the bank. It likewise argues that the Petition should be dismissed because the
petitioners failed to attach the material portions of the records that would support its allegations, as
required by Section 4, Rule 45 of the Rules of Court.

Aside from echoing the finding of the CA that Al-Amanah has a perfected contract of sale with PELA,
the latter further invokes the reasoning of the RTC and the CA (CA-G.R. SP No. 35238) in finding merit
in the issuance of the writ of preliminary injunction, that is, that there was ‘an apparent perfection of
contract (of sale) between the Bank and PELA.’44 Furthermore, PELA claims that Al-Amanah accepted
its offered price and the ₱150,000.00, thus barring the application of the Statute of Frauds as the
contract was already partially executed. As to the non-existence of a written contract evidencing the
same, PELA ascribes fault on the bank claiming that nothing happened despite its repeated follow-ups
for the OIC of Al-Amanah to execute the deed after payment of the ₱150,000.00 in May 1993.

ISSUE: Whether there was a perfected contract of sale between PELA and Al-Amanah, the resolution
of which will decide whether the sale of the lot to Robern should be sustained or not.
HELD: No. 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. Thus, for a contract of sale to be valid, all of the
following essential elements must concur: (a) consent or meeting of the minds; (b) determinate subject
matter; and c) price certain in money or its equivalent."

Here, there is no controversy annent the determinate subject matter, i.e. the 2,000 sqm lot. As for the
price, fixing it can never be left to the decision of only one of the contracting parties. "But a price fixed
by one of the contracting parties, if accepted by the other, gives rise to a perfected sale." As regards
consent, "when there is merely an offer by one party without acceptance of the other, there is no
contract." The decision to accept a bidder’s proposal must be communicated to the bidder. However, a
binding contract may exist between the parties whose minds have met, although they did not affix their
signatures to any written document, as acceptance may be expressed or implied. It "can be inferred
from the contemporaneous and subsequent acts of the contracting parties." Thus, we held:

The rule is that except where a formal acceptance is so required, although the acceptance must be
affirmatively and clearly made and must be evidenced by some acts or conduct communicated to the
offeror, it may be made either in a formal or an informal manner, and may be shown by acts, conduct,
or words of the accepting party that clearly manifest a present intention or determination to accept the
offer to buy or sell. Thus, acceptance may be shown by the acts, conduct, or words of a party
recognizing the existence of the contract of sale.

There is no perfected contract of sale between PELA and Al-Amanah for want of consent and
agreement on the price. After scrutinizing the testimonial and documentary evidence in the records of
the case, there is no proof of a perfected contract of sale between Al-Amanah and PELA. The parties
did not agree on the price and no consent was given, whether express or implied.

Contracts undergo three stages: (1) negotiation which begins from the time the prospective contracting
parties indicate interest in the contract and ends at the moment of their agreement; (2) perfection or
birth, which takes place when the parties agree upon all the essential elements of the contract; and (3)
consummation, which occurs when the parties fulfill or perform the terms agreed upon, culminating in
the extinguishment thereof."

In this case, the transaction between Al-Amanah and PELA remained in the negotiation stage. The
offer never materialized into a perfected sale, for no oral or documentary evidence categorically proves
that Al-Amanah expressed amenability to the offered ₱300,000.00 purchase price. Before the lapse of
the 1-year period PELA had set to pay the remaining ‘balance,’ Al-Amanah expressly rejected its
offered purchase price, although it took the latter around seven months to inform the former and this
entitled PELA to award of damages. Al-Amanah’s act of selling the lot to another buyer is the final nail
in the coffin of the negotiation with PELA. Clearly, there is no double sale, thus, we find no reason to
disturb the consummated sale between Al-Amanah and Robern.

3. METROPOLITAN BANK V. INTERNATIONAL EXCHANGE BANK G.R. No. 176008 AUG. 10 2011
(Art. 1381)

FACTS: Sacramento Steel Corporation (SSC) entered into a Credit Agreement with respondent
International Exchange Bank (IEB) on September 10, 2001 wherein the latter granted the former an
omnibus credit line in the amount of ₱60m, a loan of ₱20m and a subsequent credit line with a limit of
₱100m. As security for its loan obligations, SSC executed five separate deeds of chattel mortgage
constituted over various equipment found in its steel manufacturing plant. Subsequently, SSC defaulted
in the payment of its obligations. IEB's demand for payment went unheeded. Thus, IEB filed with the
RTC of Misamis Oriental an action for injunction for the purpose of enjoining SSC from taking out the
mortgaged equipment from its premises. Thereafter, IEB filed a Supplemental Complaint praying for the
issuance of a writ of replevin or, in the alternative, for the payment of SSC's outstanding obligations and
attorney's fees.
On the other hand, SSC filed with the same RTC a Complaint for annulment of mortgage and specific
performance for the purpose of compelling the IEB to restructure SSC's outstanding obligations. SSC
also prayed for the issuance of a TRO and writ of preliminary injunction to prevent IEB from taking any
steps to dispossess SSC of any equipment in its steel manufacturing plant as well as to restrain it from
foreclosing the mortgage on the said equipment. The RTC issued a TRO. IEB filed a petition for
extrajudicial foreclosure of chattel mortgage; SSC opposed.

Meanwhile, SSC entered into a Capacity Lease Agreement with petitioner Chuayuco Steel
Manufacturing Corporation (CSMC) which allowed the latter to lease and operate the former's cold
rolling mill and galvanizing plant for a period of five years. On October 21, 2004, petitioner Metropolitan
Bank and Trust Company (Metrobank) filed a motion for intervention contending that it has legal
interest in the properties subject of the litigation between IEB and SSC because it is a creditor of SSC
and that the mortgage contracts between IEB and SSC were entered into to defraud the latter's
creditors. Metrobank prayed for the rescission of the chattel mortgages executed by SSC in favor of
IEB. On January 21, 2005, CSMC filed an Omnibus Motion for intervention and for allowance to
immediately operate the cold rolling mill and galvanizing plant of SSC contending that its purpose in
intervening is to seek the approval of the court to operate the said plant pursuant to the Capacity Lease
Agreement it entered into with SSC. IEB filed its Opposition to the said Motion.

The RTC issued an Order admitting the motions for intervention filed by CSMC and Metrobank. IEB
filed a petition for certiorari, prohibition and mandamus with the CA assailing the RTC Orders.
Metrobank, CSMC and SSC filed their respective motions for reconsideration, but these were all denied
by the CA in its Resolution dated December 22, 2006. Hence, the instant petitions for review on
certiorari.

ISSUE: Whether the CA erred in ruling that its Complaint-in-Intervention is in the nature of an accion
pauliana.

HELD: The Court does not agree. A perusal of Metrobank's Complaint-in-Intervention would show that
its main objective is to have the chattel mortgages executed by SSC in favor of IEB rescinded. Under
Article 1381 of the Civil Code, an accion pauliana is an action to rescind contracts in fraud of creditors.

However, jurisprudence is clear that the following successive measures must be taken by a creditor
before he may bring an action for rescission of an allegedly fraudulent contract: (1) exhaust the
properties of the debtor through levying by attachment and execution upon all the property of the
debtor, except such as are exempt by law from execution; (2) exercise all the rights and actions of the
debtor, save those personal to him (accion subrogatoria); and (3) seek rescission of the contracts
executed by the debtor in fraud of their rights (accion pauliana). It is thus apparent that an action to
rescind, or an accion pauliana, must be of last resort, availed of only after the creditor has exhausted all
the properties of the debtor not exempt from execution or after all other legal remedies have been
exhausted and have been proven futile.

It does not appear that Metrobank sought other properties of SSC other than the subject lots alleged to
have been transferred in fraud of creditors. Neither is there any showing that Metrobank subrogated
itself in SSC's transmissible rights and actions. Without availing of the first and second remedies,
Metrobank simply undertook the third measure and filed an action for annulment of the chattel
mortgages. This cannot be done. Article 1383 of the New Civil Code is very explicit that the right or
remedy of the creditor to impugn the acts which the debtor may have done to defraud them is
subsidiary in nature. It can only be availed of in the absence of any other legal remedy to obtain
reparation for the injury. This fact is not present in this case. No evidence was presented nor even an
allegation was offered to show that Metrobank had availed of the abovementioned remedies before it
tried to question the validity of the contracts of chattel mortgage between IEB and SSC.

Metrobank also contends that in order to apply the concept of, and the rules pertaining to, accion
pauliana, the subject matter must be a conveyance, otherwise valid, which is undertaken in fraud of
creditors. Metrobank claims that since there is no conveyance involved in the contract of chattel
mortgage between SSC and IEB, which Metrobank seeks to rescind, the CA erred in ruling that the
latter's Complaint-in-Intervention is an accion pauliana.

The Court is not persuaded. In the instant case, the contract of chattel mortgage entered into by and
between SSC and IEB involves a conveyance of patrimonial benefit in favor of the latter as the
properties subject of the chattel mortgage stand as security for the credit it extended to SSC. In a very
recent case involving an action for the rescission of a real estate mortgage, while the Court found that
some of the elements of accion pauliana were not present, it found that a mortgage contract involves
the conveyance of a patrimonial benefit.

In sum, Metrobank may not be allowed to intervene and pray for the rescission of the chattel mortgages
executed by SSC in favor of IEB. The remedy being sought by Metrobank is in the nature of an accion
pauliana which, under the factual circumstances obtaining in the present case, may not be allowed.
Based on the foregoing, the Court finds no error in the ruling of the CA that the RTC committed grave
abuse of discretion in allowing Metrobank's intervention.

4. ROMAN CATHOLIC V. PANTE G.R. No. 174118, APR. 11, 2012 (Art. 1331)

FACTS: The Church owned a 32 sqm lot in Camarines Sur. On September 25, 1992, the Church
contracted with respondent Regino Pante for the sale of the lot (thru a Contract to Sell and to Buy) on
the belief that the latter was an actual occupant of the lot. The contract between them fixed the
purchase price at ₱11,200.00, with the initial ₱1,120.00 payable as down payment, and the remaining
balance payable in three years or until September 25, 1995.

On June 28, 1994, the Church sold in favor of the spouses Rubi a 215 sqm lot that included the lot
previously sold to Pante. The spouses Rubi asserted their ownership by erecting a concrete fence over
the lot sold to Pante, effectively blocking Pante and his family’s access from their family home to the
municipal road. As no settlement could be reached between the parties, Pante instituted with the RTC
an action to annul the sale between the Church and the spouses Rubi, insofar as it included the lot
previously sold to him.

The Church filed its answer with a counterclaim, seeking the annulment of its contract with Pante. The
Church alleged that its consent to the contract was obtained by fraud when Pante, in bad faith,
misrepresented that he had been an actual occupant of the lot sold to him, when in truth, he was
merely using it as a passageway from his house to the town proper. It contended that it was its policy to
sell its lots only to actual occupants. Since the spouses Rubi and their predecessors-in-interest have
long been occupying the 215 sqm lot that included the 32 sqm lot sold to Pante, the Church claimed
that the spouses Rubi were the rightful buyers.

The RTC ruled in favor of the Church. On appeal, the CA reversed and set aside the ruling of the RTC.
The CA characterized the contract between Pante and the Church as a contract of sale, since the
Church made no express reservation of ownership until full payment of the price was made. In fact, the
contract gave the Church the right to repurchase in case Pante fails to pay the installments within the
grace period provided; the CA ruled that the right to repurchase is unnecessary if ownership has not
already been transferred to the buyer. Even assuming that the contract had been a contract to sell, the
CA declared that Pante fulfilled the condition precedent when he consigned the balance within the
three-year period allowed under the parties’ agreement; upon full payment, Pante fully complied with
the terms of his contract with the Church. After recognizing the validity of the sale to Pante and noting
the subsequent sale to the spouses Rubi, the CA proceeded to apply the rules on double sales in
Article 1544 of the Civil Code. Since neither of the two sales was registered, the CA upheld the full
effectiveness of the sale in favor of Pante who first possessed the lot by using it as a passageway since
1963.
For the Church, the presence of fraud and misrepresentation that would suffice to annul the sale is the
primary issue that the tribunals below should have resolved. Instead, the CA opted to characterize the
contract between the Church and Pante, considered it as a contract of sale, and, after such
characterization, proceeded to resolve the case in Pante’s favor. The Church objects to this approach,
on the principal argument that there could not have been a contract at all considering that its consent
had been vitiated.

ISSUE: Whether there was fraud or misrepresentation existed vitiating the seller’s consent and
invalidating the contract

HELD: No. Consent is an essential requisite of contracts as it pertains to the meeting of the offer and
the acceptance upon the thing and the cause which constitute the contract. To create a valid contract,
the meeting of the minds must be free, voluntary, willful and with a reasonable understanding of the
various obligations the parties assumed for themselves. Where consent, however, is given through
mistake, violence, intimidation, undue influence, or fraud, the contract is deemed voidable. However,
not every mistake renders a contract voidable. The Civil Code clarifies the nature of mistake that
vitiates consent:

Article 1331. In order that mistake may invalidate consent, it should refer to the substance of the thing
which is the object of the contract, or to those conditions which have principally moved one or both
parties to enter into the contract.

Mistake as to the identity or qualifications of one of the parties will vitiate consent only when such
identity or qualifications have been the principal cause of the contract.

A simple mistake of account shall give rise to its correction.

For mistake as to the qualification of one of the parties to vitiate consent, two requisites must concur:
1. the mistake must be either with regard to the identity or with regard to the qualification of one of the
contracting parties; and
2. the identity or qualification must have been the principal consideration for the celebration of the
contract.

Contrary to the Church’s contention, the actual occupancy or residency of a buyer over the land does
not appear to be a necessary qualification that the Church requires before it could sell its land. Had this
been indeed its policy, then neither Pante nor the spouses Rubi would qualify as buyers of the 32 sqm
lot, as none of them actually occupied or resided on the lot.

Pante’s argument that, given the size of the lot, it could serve no other purpose than as a mere
passageway; it is unthinkable to consider that a 2x16-meter strip of land could be mistaken as anyone’s
residence. In fact, the spouses Rubi were in possession of the adjacent lot, but they never asserted
possession over the 2x16-meter lot when the 1994 sale was made in their favor; it was only then that
they constructed the concrete fence blocking the passageway.

It is unlikely that Pante could successfully misrepresent himself as the actual occupant of the lot; this
was a fact that the Church (which has a parish chapel in the same barangay where the lot was located)
could easily verify had it conducted an ocular inspection of its own property. The surrounding
circumstances actually indicate that the Church was aware that Pante was using the lot merely as a
passageway.

The records further reveal that the sales of the Church’s lots were made after a series of conferences
with the occupants of the lots. The then parish priest was apparently aware that Pante was not an
actual occupant, but nonetheless, he allowed the sale of the lot to Pante, subject to the approval of the
Archdiocese. Relying on Fr. Marcaida’s recommendation and finding nothing objectionable, Fr. Ragay
(the Archdiocese’s Oeconomous) approved the sale to Pante.

The above facts, establish that there could not have been a deliberate, willful, or fraudulent act
committed by Pante that misled the Church into giving its consent to the sale of the subject lot in his
favor. That Pante was not an actual occupant of the lot he purchased was a fact that the Church either
ignored or waived as a requirement. In any case, the Church was by no means led to believe or do so
by Pante’s act; there had been no vitiation of the Church’s consent to the sale of the lot to Pante.

From another perspective, any finding of bad faith, if one is to be made, should be imputed to the
Church. Without securing a court ruling on the validity of its contract with Pante, the Church sold the
subject property to the spouses Rubi. Article 1390 of the Civil Code declares that voidable contracts are
binding, unless annulled by a proper court action. From the time the sale to Pante was made and up
until it sold the subject property to the spouses Rubi, the Church made no move to reject the contract
with Pante; it did not even return the down payment he paid. The Church’s bad faith in selling the lot to
Rubi without annulling its contract with Pante negates its claim for damages.

In the absence of any vitiation of consent, the contract between the Church and Pante stands valid and
existing. Any delay by Pante in paying the full price could not nullify the contract, since (as correctly
observed by the CA) it was a contract of sale. By its terms, the contract did not provide a stipulation that
the Church retained ownership until full payment of the price. The right to repurchase given to the
Church in case Pante fails to pay within the grace period provided would have been unnecessary had
ownership not already passed to Pante.

5. METROPOLITAN FABRICS INC. V. PROSPERITY CREDIT G.R. 154390 MAR. 17 2014 (Art.
1342)

FACTS: Metropolitan Fabrics, Incorporated (MFI), a family corporation, owned a 5.8 hectare industrial
compound in Novaliches, Quezon City. The said lot was subdivided into 11 lots pursuant to a P2
million, 10–year 14% per annum loan agreement with Manphil Investment Corporation (Manphil) dated
April 6, 1983, with Manphil retaining four lots as mortgage security. The other seven lots were released
to MFI.

In July 1984, MFI sought from PCRI a loan in the amount of P3,443,330.52, the balance of the cost of
its boiler machine, to prevent its repossession by the seller the parties knew each other because they
are from the same fraternity. Without further checking on the background of Enrique and his business
and requiring him to submit a company profile and a feasibility study of MFI, Caleb recommended the
approval of the P3.44 million with an interest ranging from 24% to 26% per annum and a term of
between five and ten years. Even before the signing of the mortgage and loan documents, PCRI
released the P3.5 million loan to MFI. It found that the blank loan forms, consisting of the real estate
mortgage contract, promissory note, comprehensive surety agreement and disclosure statement, “had
no entries specifying the rate of interest and schedules of amortization.” On the same day, the forms
were signed and was allegedly witnessed by PCRI representatives.

As a gesture of the early release of the loan, the 7 titles with an aggregate area of 3.3665 hectares
were entrusted and alleged that MFI left it to PCRI to choose from among the 7 titles those which
would be sufficient to secure the P3.5 million. It was agreed that once PCRI had chosen the lots to be
covered by the mortgage, the defendants would return the remaining titles to the plaintiffs. Plaintiffs
also secured an additional loan of about P199,000.00 to pay for real estate taxes and other expenses.
The plaintiffs delivered to PCRI 24 checks, bearing no dates and amounts, to cover the amortization
payments. In September 1984, the first amortization check bounced for insufficient funds due to MFI’s
continuing business losses. It was then that the appellees allegedly learned that PCRI had filled up the
24 blank checks with dates and amounts that reflected a 35% interest rate per annum, instead of just
24%, and a two–year repayment period, instead of 10 years.
On September 4, 1986, MFI received a Notice of Sheriff’s Sale dated August 29, 1986, announcing the
auction of the seven lots on September 24, 1986 due to unpaid indebtedness of P10.5 million. MFI
protested the foreclosure and assured PCRI that they had found a serious buyer for three of the lots.
PCRI continued to dishonor their agreement.

The RTC declared the real estate mortgage and the subsequent foreclosure made by the defendants
on the plaintiffs’ properties as NULL and VOID. On appeal, the CA reversed and set aside the decision
of the RTC. Hence, this appeal.

Petitioners insist that respondents committed fraud when the officers of Metropolitan were made to sign
the deed of real estate mortgage in blank. Petitioners averred that the CA committed a reversible error
in not holding that the absence of consent made the deed of real estate mortgage void, not merely
voidable. In effect, they are now advancing that their consent was not merely vitiated by means of
fraud, but that there was complete absence of consent.

ISSUE: Whether or not the real estate mortgage is void for wanting consent or merely vitiated by
means of fraud.

HELD: On the issue of fraud, according to Article 1338 of the Civil Code, there is fraud when one of the
contracting parties, through insidious words or machinations, induces the other to enter into the
contract that, without the inducement, he would not have agreed to. Yet, fraud, to vitiate consent, must
be the causal (dolo causante), not merely the incidental (dolo incidente), inducement to the making of
the contract. Causal fraud is defined as “a deception employed by one party prior to or simultaneous to
the contract in order to secure the consent of the other.” Fraud cannot be presumed but must be proved
by clear and convincing evidence. Whoever alleges fraud affecting a transaction must substantiate his
allegation, because a person is always presumed to take ordinary care of his concerns, and private
transactions are similarly presumed to have been fair and regular. To be remembered is that mere
allegation is definitely not evidence; hence, it must be proved by sufficient evidence.

The genuineness and due execution of a deed of real estate mortgage that has been acknowledged
before a notary public are presumed. Any allegation of fraud and forgery against the deed must be
established by clear and competent evidence.

These circumstances tended to indicate that fraud was not attendant during the transactions between
the parties. Verily, as between the duly executed real estate mortgage and the unsubstantiated
allegations of fraud, the Court affords greater weight to the former.

On the issue of consent, the records show that petitioners really agreed to mortgage their properties as
security for their loan, and signed the deed of mortgage for the purpose. Thereafter, they delivered the
TCTs of the properties subject of the mortgage to respondents. Consequently, petitioners’ contention of
absence of consent had no firm moorings. It remained unproved. To begin with, they neither alleged
nor established that they had been forced or coerced to enter into the mortgage. Also, they had freely
and voluntarily applied for the loan, executed the mortgage contract and turned over the TCTs of their
properties. And, lastly, contrary to their modified defense of absence of consent, the testimony tended
at best to prove the vitiation of their consent through insidious words, machinations or
misrepresentations amounting to fraud, which showed that the contract was voidable. Where the
consent was given through fraud, the contract was voidable, not void ab initio. This is because a
voidable or annullable contract is existent, valid and binding, although it can be annulled due to want of
capacity or because of the vitiated consent of one of the parties.

With the contract being voidable, petitioners’ action to annul the real estate mortgage already
prescribed. Article 1390, in relation to Article 1391 of the Civil Code, provides that if the consent of the
contracting parties was obtained through fraud, the contract is considered voidable and may be
annulled within four years from the time of the discovery of the fraud. The discovery of fraud is
reckoned from the time the document was registered in the Register of Deeds in view of the rule that
registration was notice to the whole world. Thus, because the mortgage involving the seven lots was
registered on September 5, 1984, they had until September 5, 1988 within which to assail the validity of
the mortgage. But their complaint was instituted in the RTC only on October 10, 1991. Hence, the
action, being by then already prescribed, should be dismissed.

6. BERG V. MAGDALENA ESTATE G.R. No. L-3784 Oct. 7, 1953. ( Statute of Frauds)

FACTS: Since September 22, 1943, plaintiff and defendant were co owners pro indiviso of the property
known as Crystal Arcade in the proportion of one-third interest belonging to the former and two-thirds to
the latter. In the deed of sale executed by the parties on said date, they stipulated that, should either of
them decide to sell his or her share, the other party will have an irrevocable option to purchase it at the
seller's price. Then a disagreement ensued between the parties as to what really occurred concerning
the deal.

Berg claims that his negotiations with Hemady ended when an offer by the latter to the former to buy
his interest for the sum of P350,000, Hemady on the other hand claims that Berg offered to sell it to him
for P200,000 subject to the condition that the necessary permit be obtained from the United States
Treasury Department.

Defendant claims that, in spite of the acceptance of the offer, plaintiff refused to accept the payment of
the price, and for this refusal defendant suffered damages in the amount of P100,000. For these
reasons, the defendant asks for specific performance.

Plaintiff replied that the transaction referred to by the defendant in its special defense relative to the
property in litigation is not supported by any note or memorandum subscribed by the parties, as in fact
no such note or memorandum has been made evidencing the transaction, for which reason, plaintiff
claims, this transaction falls under the statute of frauds and cannot form the basis of the special
defense invoked by the defendant.

Aside from the testimony of Berg and Hemady, no document has been presented evidencing that
alleged agreement to sell, and so when defendant made attempts to prove, through the testimony of
Hemady, that plaintiff made an offer to sell his interest to defendant for the sum of P200,000, the
attempt met the vigorous opposition of plaintiff invoking the rule that such agreement can only be
established by a contract in writing, or by a note or memorandum subscribed by the party sought to be
charged, as prescribed by the statute of frauds. It was then that the defendant submitted in pieces of
evidence contending that these documents, read in connection with the option to sell, constitute a
written proof contemplated by said statute.
ISSUE: Whether said exhibits partake of the nature of a note or memorandum within the purview of
said statute as contended by defendant.

HELD: Yes. The Court is of the opinion that the applications marked exhibits "3" and "4", whether
considered separately or jointly, satisfy all the requirements of the statute as to contents and signature
and, as such, they constitute sufficient proof to evidence the agreement in question. In both
applications all the requirements of a contract are present, namely, the parties, the price or
consideration, and the subject-matter. In the application exhibit "3", Ernest Berg appears as the seller
and the Magdalena Estate Inc. as the purchaser, the former's interest in the Crystal Arcade as the
subject-matter, and the sum of P200,000 as the consideration. As the application appears signed by
Ernest Berg, the party sought to be charged by the obligation. In other words, it can clearly be implied
that between Ernest Berg and the Magdalena Estate Inc. there has been a clear agreement to sell said
property for P200,000. From the language of the application no other logical conclusion can be drawn
for if there has not been any previous agreement between the parties it is foolhardy to suppose that
Ernest Berg would take the trouble of filling an application with the Treasury Department of the United
States to secure a license to sell the property. the claim of Ernest Berg that the negotiations he had
with the Hemady ended with an offer on his part to buy his interest for P350,000 cannot be sustained,
for if such is the case it is indeed hard to comprehend why he should state in his application that he
was selling the property for P200,000. The fact that in the same application Berg also asked for license
to place the money in an account in his name, or in the name of the company he represents, and to
apply the same to the payment of the obligations of said company is of no consequence, nor does it
argue against the purpose of the application, for that request only means that, should the sale be
carried out, he would deposit the money in the name of the company and later would apply it to the
payment of its obligations.

There is no particular form of language or instrument is necessary to constitute a memorandum or note

in writing under the statute of frauds; any document or writing, formal or informal, written either for the
purpose of furnishing evidence of the contract or for another purpose, which satisfies all the
requirements of the statute as to contents and signature, is a sufficient memorandum or note. A
memorandum may be written as well as with lead pencil as with pen and ink. It may also be filled in on
a printed form.

The note or memorandum required by the statute of fraud need not be contained in a single document,
nor, when contained in two or more papers, need each paper to be sufficient as to contents and
signature to satisfy the statute. Two or more writings properly connected may be considered together,
matters missing or uncertain in one may be supplied or rendered certain by another, and their
sufficiency will depend on whether, taken together, they meet the requirement of the statute as to
contents and the requirements of the statute as to signature, as considered respectively.

The rule is frequently applied to two or more, or a series of letters or telegrams, or letters and telegrams
sufficiently connected to allow their consideration together; but the rule is not confined in its application
to letters and telegrams; any other documents can be read together when one refers to the other. Thus,
the rule has been applied so as to allow the consideration together, when properly connected, of a
letter and an order of court, a letter and order for goods, a letter and a deposition, letters or telegrams
and undelivered deeds, wills, corresponding and related papers, a check and a letter, a receipt and a
check, deeds and a map, a memorandum of agreement and a deed, a memorandum of sale and an
abstract of title, a memorandum of sale and a will, a memorandum of sale and a receipt, and a contract,
deed and instruction to a depository in escrow. The number of papers connected to make out a
memorandum is immaterial.

Finding no error in the decision appealed from, the same is hereby affirmed, with costs against
appellant.

7. ORDUNA V. FUENTEBELLA G.R. 176841 JUNE 29 2010 (Partially executed)

FACTS: Sometime in 1996, Gabriel Sr. sold a residential lot with an area of 74 sqm located at Fairview
Subdivision in Baguio City to petitioner Antonita Orduña, but no formal deed was executed to document
the sale. The contract price was apparently payable in installments as Antonita remitted from time to
time and Gabriel Sr. accepted partial payments. One of the Orduñas would later testify that Gabriel Sr.
agreed to execute a final deed of sale upon full payment of the purchase price.

As early as 1979, however, Antonita and her sons, Dennis and Anthony Orduña, were already
occupying the subject lot on the basis of some arrangement undisclosed in the records and even
constructed their house thereon. They also paid real property taxes for the house and declared it for tax
purposes, as evidenced by a tax declaration in which they place the assessed value of the structure at
PhP 20,090.
After the death of Gabriel Sr., his son, respondent Gabriel Jr., secured a title over the subject lot and
continued accepting payments from the petitioners. On December 12, 1996, Gabriel Jr. wrote Antonita
authorizing her to fence off the said lot and to construct a road in the adjacent lot. On December 13,
1996, Gabriel Jr. acknowledged receipt of a PhP 40,000 payment from petitioners. Through a letter
dated May 1, 1997, Gabriel Jr. acknowledged that petitioner had so far made an aggregate payment of
PhP 65,000, leaving an outstanding balance of PhP 60,000. A receipt Gabriel Jr. issued dated
November 24, 1997 reflected a PhP 10,000 payment. Despite all those payments made for the subject
lot, Gabriel Jr. would later sell it to Bernard Banta without the knowledge of petitioners.

Subsequently, Bernard sold to the Cids the subject lot for PhP 80,000. Shortly after his purchase of the
subject lot, Eduardo, through his lawyer, sent a letter addressed to the residence of Gabriel Jr.
demanding that all persons residing on or physically occupying the subject lot vacate the premises or
face the prospect of being ejected.

Petitioners went to the residence of Gabriel Jr. where they met his wife, Teresita, who informed them
about her having filed an affidavit-complaint against her husband and the Cids for falsification of public
documents on March 30, 2000. According to Teresita, her signature on the June 30, 1999 Gabriel Jr.–
Bernard deed of sale was a forgery. Teresita further informed the petitioners of her intent to honor the
aforementioned 1996 verbal agreement between Gabriel Sr. and Antonita and the partial payments
they gave her father-in-law and her husband for the subject lot.

On July 3, 2001, petitioners, joined by Teresita, filed a Complaint for Annulment of Title, Reconveyance
with Damages against the respondents before the RTC, specifically praying that the title in the name of
Eduardo be annulled. Corollary to this prayer, petitioners pleaded that Gabriel Jr.’s title to the lot be
reinstated and that petitioners be declared as entitled to acquire ownership of the same upon payment
of the remaining balance of the purchase price therefor agreed upon by Gabriel Sr. and Antonita.

The RTC ruled for the respondents and predicated its dismissal action on the basis of the following
grounds and/or premises:

1. Eduardo was a purchaser in good faith and, hence, may avail himself of the provision of Article
154422 of the Civil Code, which provides that in case of double sale, the party in good faith who is able
to register the property has better right over the property;

2. Under Arts. 135623 and 135824 of the Code, conveyance of real property must be in the proper
form, else it is unenforceable;

3. The verbal sale had no adequate consideration; and

4. Petitioners’ right of action to assail Eduardo’s title prescribes in one year from date of the issuance of
such title and the one-year period has already lapsed.

On appeal, the CA affirmed the RTC’s decision. Both courts are of the opinion that the contract is
unenforceable for non-compliance with the Statute of Frauds.

ISSUE: Whether the Statute of Frauds is applicable for partially executed contracts.

HELD: No. It is undisputed that Gabriel Sr., during his lifetime, sold the subject property to Antonita, the
purchase price payable on installment basis. Gabriel Sr. appeared to have been a recipient of some
partial payments. After his death, his son duly recognized the sale by accepting payments and issuing
what may be considered as receipts therefor. Gabriel Jr., in a gesture virtually acknowledging the
petitioners’ dominion of the property, authorized them to construct a fence around it. And no less than
his wife, Teresita, testified as to the fact of sale and of payments received.
Pursuant to such sale, Antonita and her two sons established their residence on the lot, occupying the
house they earlier constructed thereon. They later declared the property for tax purposes, as evidenced
by the issuance of a tax declaration in their or Antonita’s name, and paid the real estates due thereon,
obviously as sign that they are occupying the lot in the concept of owners.

The Statute of Frauds expressed in Article 1403, par. (2), of the Civil Code applies only to executory
contracts, i.e., those where no performance has yet been made. Stated a bit differently, the legal
consequence of non-compliance with the Statute does not come into play where the contract in
question is completed, executed, or partially consummated. The Statute of Frauds, in context, provides
that a contract for the sale of real property or of an interest therein shall be unenforceable unless the
sale or some note or memorandum thereof is in writing and subscribed by the party or his agent.
However, where the verbal contract of sale has been partially executed through the partial payments
made by one party duly received by the vendor, as in the present case, the contract is taken out of the
scope of the Statute.

The purpose of the Statute is to prevent fraud and perjury in the enforcement of obligations depending
for their evidence on the unassisted memory of witnesses, by requiring certain enumerated contracts
and transactions to be evidenced by a writing signed by the party to be charged. The Statute requires
certain contracts to be evidenced by some note or memorandum in order to be enforceable. The term
"Statute of Frauds" is descriptive of statutes that require certain classes of contracts to be in writing.
The Statute does not deprive the parties of the right to contract with respect to the matters therein
involved, but merely regulates the formalities of the contract necessary to render it enforceable.

Since contracts are generally obligatory in whatever form they may have been entered into, provided all
the essential requisites for their validity are present, the Statute simply provides the method by which
the contracts enumerated in Art. 1403 (2) may be proved but does not declare them invalid because
they are not reduced to writing. In fine, the form required under the Statute is for convenience or
evidentiary purposes only.

There can be no serious argument about the partial execution of the sale in question. The records show
that petitioners had, on separate occasions, given Gabriel Sr. and Gabriel Jr. sums of money as partial
payments of the purchase price. These payments were duly receipted by Gabriel Jr. To recall, in his
letter of May 1, 1997, Gabriel, Jr. acknowledged having received the aggregate payment of P65,000
from petitioners with the balance of P60,000 still remaining unpaid. But on top of the partial payments
thus made, possession of the subject of the sale had been transferred to Antonita as buyer. Owing thus
to its partial execution, the subject sale is no longer within the purview of the Statute of Frauds.

Lest it be overlooked, a contract that infringes the Statute of Frauds is ratified by the acceptance of
benefits under the contract. Evidently, Gabriel, Jr., as his father earlier, had benefited from the partial
payments made by the petitioners. Thus, neither Gabriel Jr. nor the other respondents—successive
purchasers of subject lots—could plausibly set up the Statute of Frauds to thwart petitioners’ efforts
towards establishing their lawful right over the subject lot and removing any cloud in their title. As it
were, petitioners need only to pay the outstanding balance of the purchase price and that would
complete the execution of the oral sale. Petition was GRANTED.

8. LL COMPANY V. HUANG CHAO CHUN G.R. 142378 Mar. 7, 2002 (Mutuality)

FACTS: This originated from an unlawful detainer case filed by petitioner before the MeTC of Quezon
City on October 9, 1996. Petitioner alleged that respondents Huang Chao Chun and Yang Tung Fa
violated their amended lease contract over a 1,112 sqm lot it owns when they did not pay the monthly
rentals in the total amount of P4,322,900.00. It also alleged that the amended lease contract already
expired on September 16, 1996 but respondents refused to surrender its possession plus the
improvements made thereon, and pay the rental arrearage despite repeated demands. The amended
lease contract was entered into by the parties sometime in August, 1991 and contained certain
provisions and one of which is the subject of the controversy is in paragraph 2 to wit:

The term of this lease is FIVE (5) YEARS from the effectivity of said lease, and with the option to
renew, specifically shall commence from September 15, 1991 and shall expire on September 16, 1996,
and may be adjusted depending upon the ejectment of tenants.

The MeTC ruled that the contract entered into by the parties may be extended by the lessees for
reasons of justice and equity, citing as its legal bases the case of Legarda Koh v. Ongsiaco and Cruz v.
Alberto. It also ruled that the corporation’s failure to pay the monthly rentals as they fell due was
justified by the fact that petitioner “refused to honor the basis of the rental increase as stated in their
Lease Agreement.”

The RTC affirmed the Decision of the MeTC dismissing the unlawful detainer case. It likewise agreed
that the Contract of Lease entered into by the parties could be extended unilaterally by the lessees for
another five years or until September 16, 2001, on the basis of justice and equity. It also held that the
parties had a reciprocal obligation: unless and until petitioner presented “the increased realty tax,”
private respondents were not under any obligation to pay the increased monthly rental. In addition, it
ruled that petitioner was not entitled to legal interest, and that the 25% increase provided in the
Contract of Lease should be based on the imposed real estate tax, not on the monthly rental.
The CA affirmed in toto the RTC’s dismissal of the unlawful detainer case and extension of the lease
period for another five years. It also reasoned that “the elliptical construction of paragraph 5 of the
Lease Contract made it awkward to the point of being ambiguous.” There being no agreement on the
“proven rent,” an ejectment suit based on “the non-payment of rents that were not agreed upon will not
lie.”

ISSUE: Whether the contract of lease can be unilaterally extended by the lesses without violating the
principle of mutuality.

HELD: No. The Court cannot authorize a unilateral increase in the rental rate, considering that (1) the
option to renew is reciprocal and, thus, the terms and conditions thereof — including the rental rate —
must likewise be reciprocal; and (2) the contracted clause authorizing an increase — "upon
presentation of the increased real estate tax to lessees" — has not been complied with by petitioner.

In the instant case, there was nothing in the aforesaid stipulation or in the actuation of the parties that
showed that they intended an automatic renewal or extension of the term of the contract. First,
demonstrating petitioner’s disinterest in renewing the contract was its letter dated August 23, 1996,
demanding that respondents vacate the premises for failure to pay rentals since 1993. As a rule, the
owner-lessor has the prerogative to terminate the lease upon its expiration. Second, the disagreement
of the parties over the increased rental rate and private respondents’ failure to pay it precluded the
possibility of a mutual renewal. Third, the fact that the lessor allowed the lessee to introduce
improvements on the property was indicative, not of the former’s intention to extend the contract
automatically, but merely of its obedience to its express terms allowing the improvements. After all, at
the expiration of the lease, those improvements were to "become its property."

A stipulation in a lease contract stating that its five-year term is subject to "an option to renew" shall be
interpreted to be reciprocal in character. Unless the language shows an intent to allow the lessee to
exercise it unilaterally, such option shall be deemed to benefit both the lessor and the lessee who must
both consent to the extension or renewal, as well as to its specific terms and conditions.

The Petition is GRANTED and the assailed Decision SET ASIDE. Respondents and all persons
claiming rights under them were ORDERED TO VACATE the subject premises and to restore peaceful
possession thereof to petitioner. They are also DIRECTED TO PAY the accrued rentals (based on the
stipulated rent) from October 1993 until such time that they vacate the subject property, with interest
 thereon at the legal rate. No pronouncement as to costs.

9. ALLIED BANKING CORPORATION, v.

COURT OF APPEALS, HON. JOSE C. DE GUZMAN, OSCAR D. TANQUECO, LUCIA D. TANQUECO-
MATIAS, RUBEN D. TANQUECO and NESTOR D. TANQUECO
G.R. No. 124290. January 16, 1998

FACTS: Felimon Tanquenco and Lucia Domingo-Tanquenco owned a lot in Quezon City that they leased
to the petitioner Allied Banking Corporation. In its Provision No. 1, the lease contract specifically states
that “the term of the lease shall be fourteen years commencing from April 1, 1978, and may be renewed
for a like term at the option of the lessee.” Allied constructed a building to be used as its office and, as
stipulated, the ownership of the building would be transferred to the lessors upon the contract’s expiration.
On February 1988, the lessor spouses executed a deed of donation over the subject property of their four
children, herein respondents, who accepted the donation.

On February 13, 1991, the Tanquenco children told Allied that they were no longer interested in extending
the lease, but Allied replied that it was exercising its option to renew their lease under the same terms
with additional proposals. An action for ejectment was filed against Allied, and the trial court granted the
same, declaring Provision No. 1 of the contract void for violating Article 1308 of the Civil Code which
provides “The contract must bind both contracting parties; its validity or compliance cannot be left to the
will of one of them.”

ISSUES:

1. Whether a stipulation in a contract of lease to the effect that the contract "may be renewed for a
like term at the option of the lessee" is void for being potestative or violative of the principle of
mutuality of contracts under Art. 1308 of the Civil Code and corollarily, what is the meaning of the
clause "may be renewed for a like term at the option of the lessee;"
2. Whether a lessee has the legal personality to assail the validity of a deed of donation executed
by the lessor over the leased premises.

RULING:

1. No, provision No. 1 is valid. Article 1308 of the Civil Code expresses what is known in law as
the principle of mutuality of contracts. It provides that "the contract must bind both the
contracting parties; its validity or compliance cannot be left to the will of one of them." This
binding effect of a contract on both parties is based on the principle that the obligations
arising from contracts have the force of law between the contracting parties, and there must
be mutuality between them based essentially on their equality under which it is repugnant to
have one party bound by the contract while leaving the other free therefrom. The ultimate
purpose is to render void a contract containing a condition which makes its fulfillment
dependent solely upon the uncontrolled will of one of the contracting parties.
An express agreement which gives the lessee the sole option to renew the lease is frequent
and subject to statutory restrictions, valid and binding on the parties. This option, which is
provided in the same lease agreement, is fundamentally part of the consideration in the
contract and is no different from any other provision of the lease carrying an undertaking on
the part of the lessor to act conditioned on the performance by the lessee. It is a purely
executory contract and at most confers a right to obtain a renewal if there is compliance with
the conditions on which the right is made to depend. The right of renewal constitutes a part of
the lessee’s interest in the land and forms a substantial and integral part of the agreement.

The fact that such option is binding only on the lessor and can be exercised only by the
lessee does not render it void for lack of mutuality. After all, the lessor is free to give or not to
give the option to the lessee. And while the lessee has a right to elect whether to continue
with the lease or not, once he exercises his option to continue and the lessor accepts, both
parties are thereafter bound by the new lease agreement. In the present case, the questioned
provision states that the lease "may be renewed for a like term at the option of the lessee."
The lessor is bound by the option he has conceded to the lessee. The lessee likewise
becomes bound only when he exercises his option and the lessor cannot thereafter be
excused from performing his part of the agreement.

With respect to the meaning of the clause "may be renewed for a like term at the option of the
lessee," we sustain petitioner’s contention that its exercise of the option resulted in the
automatic extension of the contract of lease under the same terms and conditions. As we see
it, the only term on which there has been a clear agreement is the period of the new contract,
i.e., fourteen (14) years, which is evident from the clause "may be renewed for a like term at
the option of the lessee," the phrase "for a like term" referring to the period. It is silent as to
what the specific terms and conditions of the renewed lease shall be.

In the case of Hicks v. Manila Hotel Company, a similar issue was resolved by this Court. It
was held that ‘such a clause relates to the very contract in which it is placed, and does not
permit the defendant upon the renewal of the contract in which the clause is found, to insist
upon different terms than those embraced in the contract to be renewed; and that ‘a
stipulation to renew always relates to the contract in which it is found and the rights granted
thereunder, unless it expressly provides for variations in the terms of the contract to be
renewed.’

In the lease contract under consideration, there is no provision to indicate that the renewal
will be subject to new terms and conditions that the parties may yet agree upon. It is to
renewal provisions of lease contracts of the kind presently considered that the principles
stated above squarely apply. ’As a general rule, in construing provisions relating to renewals
or extensions, where there is any uncertainty, the tenant is favored, and not the landlord,
because the latter, having the power of stipulating in his own favor, has neglected to do so;
and also upon the principle that every man’s grant is to be taken most strongly against
himself.

Fortunately for respondent lessors, ALLIED vacated the premises on 20 February 1993
indicating its abandonment of whatever rights it had under the renewal clause. Consequently,
what remains to be done is for ALLIED to pay rentals for the continued use of the premises
until it vacated the same, computed from the expiration of the original term of the contract on
31 March 1992 to the time it actually left the premises on 20 February 1993, deducting
 therefrom the amount of P68,400.00 consigned in court by ALLIED and any other amount
which it may have deposited or advanced in connection with the lease.

2. No, ALLIED cannot assail the validity of the deed of donation, not being a party thereto. A
person who is not principally or subsidiarily bound has no legal capacity to challenge the
validity of the contract. He must first have an interest in it. "Interest" within the meaning of the
term means material interest, an interest to be affected by the deed, as distinguished from a
mere incidental interest. Hence, a person who is not a party to a contract and for whose
benefit it was not expressly made cannot maintain an action on it, even if the contract, if
performed by the parties thereto would incidentally affect him, except when he is prejudiced
in his rights with respect to one of the contracting parties and can show the detriment which
could positively result to him from the contract in which he had no intervention. We find none
in the instant case.

WHEREFORE, the Decision of the Court of Appeals is REVERSED and SET ASIDE. Considering
that petitioner ALLIED BANKING CORPORATION already vacated the leased premises as of 20
February 1993, the renewed lease contract is deemed terminated as of that date.

10. SPOUSES IGNACIO F. JUICO and ALICE P. JUICO v. CHINA BANKING CORPORATION.
G.R. No. 187678               April 10, 2013

Facts: Spouses Ignacio F. Juico and Alice P. Juico (petitioners) obtained a loan from China Banking
Corporation (respondent) as evidenced by two Promissory Notes for the sums of P6,216,000 and
P4,139,000, respectively.  The loan was secured by a Real Estate Mortgage (REM) over petitioners'
property located at 49 Greensville St., White Plains, Quezon City
When petitioners failed to pay the monthly amortizations due, respondent demanded the full payment of
the outstanding balance with accrued monthly interests.
the amount due on the two promissory notes totaled P19,201,776.63 representing the principal, interests,
penalties and attorney's fees.  On the same day, the mortgaged property was sold at public auction, with
respondent as highest bidder for the amount of P10,300,000.
petitioners received[8] a demand letter[9] dated May 2, 2001 from respondent for the payment of
P8,901,776.63, the amount of deficiency after applying the proceeds of the foreclosure sale to the
mortgage debt.
Respondent filed a collection suit in the trial court.
In their Answer, petitioners admitted the existence of the debt but interposed, by way of special and
affirmative defense, that the complaint states no cause of action considering that the principal of the loan
was already paid when the mortgaged property was extrajudicially foreclosed and sold for P10,300,000.
By way of counterclaim, petitioners prayed that respondent be ordered to pay P100,000 in attorney's fees
and costs of suit. They insist that the interest rates were unilaterally imposed by the bank and thus violate
the principle of mutuality of contracts. They argue that the escalation clause in the promissory notes does
not give respondent the unbridled authority to increase the interest rate unilaterally. Any change must be
mutually agreed upon.
As of the date of the public auction, petitioners' outstanding balance was P19,201,776.63
On cross-examination, Ms. Yu reiterated that the interest rate changes every month based on the
prevailing market rate and she notified petitioners of the prevailing rate by calling them monthly before
their account becomes past due.
When asked if there was any written authority from petitioners for respondent to increase the interest rate
unilaterally, she answered that petitioners signed a promissory note indicating that they agreed to pay
interest at the prevailing rate.
Petitioner Ignacio F. Juico testified that prior to the release of the loan, he was required to sign a blank
promissory note and was informed that the interest rate on the loan will be based on prevailing market
rates.
The RTC ruled in favor of respondent.
It ruled that the amount realized at the auction sale was applied to the interest, conformably with Article
1253 of the Civil Code which provides that if the debt produces interest, payment of the principal shall not
be deemed to have been made until the interests have been covered.
The trial court further held that Ignacio's claim that he signed the promissory notes in blank cannot negate
or mitigate his liability since he admitted reading the promissory notes before signing them.
When the case was elevated to the CA, the latter affirmed the trial court's decision.
ISSUE: Whether the interest rates imposed upon them by respondent are valid.

RULING: The interest rates imposed were invalid.

The principle of mutuality of contracts is expressed in Article 1308 of the Civil Code, which provides:

Article 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to
the will of one of them. Article 1956 of the Civil Code likewise ordains that "no interest shall be due unless
it has been expressly stipulated in writing."

The binding effect of any agreement between parties to a contract is premised on two settled principles:
(1) that any obligation arising from contract has the force of law between the parties; and (2) that there
must be mutuality between the parties based on their essential equality. Any contract which appears to be
heavily weighed in favor of one of the parties so as to lead to an unconscionable result is void. Any
stipulation regarding the validity or compliance of the contract which is left solely to the will of one of the
parties, is likewise, invalid.

Escalation clauses refer to stipulations allowing an increase in the interest rate agreed upon by the
contracting parties. This Court has long recognized that there is nothing inherently wrong with escalation
clauses which are valid stipulations in commercial contracts to maintain fiscal stability and to retain the
value of money in long term contracts. Hence, such stipulations are not void per se.

Nevertheless, an escalation clause "which grants the creditor an unbridled right to adjust the interest
independently and upwardly, completely depriving the debtor of the right to assent to an important
modification in the agreement" is void. A stipulation of such nature violates the principle of mutuality of
contracts.24 Thus, this Court has previously nullified the unilateral determination and imposition by creditor
banks of increases in the rate of interest provided in loan contracts.

It is now settled that an escalation clause is void where the creditor unilaterally determines and imposes
an increase in the stipulated rate of interest without the express conformity of the debtor. Such unbridled
right given to creditors to adjust the interest independently and upwardly would completely take away
from the debtors the right to assent to an important modification in their agreement and would also negate
the element of mutuality in their contracts. 34While a ceiling on interest rates under the Usury Law was
already lifted under Central Bank Circular No. 905, nothing therein "grants lenders carte blanche authority
to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their
assets.

The provision in the promissory note authorizing respondent bank to increase, decrease or otherwise
change from time to time the rate of interest and/or bank charges "without advance notice" to petitioner,
"in the event of change in the interest rate prescribed by law or the Monetary Board of the Central Bank of
the Philippines," does not give respondent bank unrestrained freedom to charge any rate other than that
which was agreed upon. Here, the monthly upward/downward adjustment of interest rate is left to the will
of respondent bank alone. It violates the essence of mutuality of the contract.

We hold that the escalation clause is still void because it grants respondent the power to impose an
increased rate of interest without a written notice to petitioners and their written consent. Respondent’s
monthly telephone calls to petitioners advising them of the prevailing interest rates would not suffice. A
detailed billing statement based on the new imposed interest with corresponding computation of the total
debt should have been provided by the respondent to enable petitioners to make an informed decision.
An appropriate form must also be signed by the petitioners to indicate their conformity to the new rates.
Compliance with these requisites is essential to preserve the mutuality of contracts. For indeed, one-sided
impositions do not have the force of law between the parties, because such impositions are not based on
the parties’ essential equality.

Note that the original amount of principal loan almost doubled in only 16 months. The Court also finds the
penalty charges imposed excessive and arbitrary, hence the same is hereby reduced to 1% per month or
12% per annum.

WHEREFORE, the petition for review on certiorari is PARTLY GRANTED. Petitioners Spouses Ignacio F.
Juico and Alice P. Juico are hereby ORDERED to pay jointly and severally respondent China Banking
Corporation ₱4, 7 61 ,865. 79 representing the amount of deficiency inclusive of interest, penalty charge
and attorney's fees. Said amount shall bear interest at 12% per annum, reckoned from the time of the
filing of the complaint until its full satisfaction.

11.PHILIPPINE NATIONAL BANK

vs.
SPOUSES ENRIQUE MANALO & ROSALINDA JACINTO, ARNOLD J. MANALO, ARNEL J.
MANALO, and ARMA J. MANALO
G.R. No. 174433               February 24, 2014

FACTS: Respondent Spouses Enrique Manalo and Rosalinda Jacinto (Spouses Manalo) applied for an
All-Purpose Credit Facility in the amount of ₱1,000,000.00 with Philippine National Bank (PNB) to finance
the construction of their house. After PNB granted their application, they executed a Real Estate
Mortgage on November 3, 1993 in favor of PNB over their property as security for the loan. The credit
facility was renewed and increased several times over the years. On September 20, 1996, the credit
facility was again renewed for ₱7,000,000.00. As a consequence, the parties executed a Supplement to
and Amendment of Existing Real Estate Mortgage whereby another property was added as security for
the loan.

The additional security was registered in the names of respondents Arnold, Arnel, Anthony, and Arma, all
surnamed Manalo, who were their children. PNB claimed that their last recorded payment was made on
December, 1997. After the Spouses Manalo still failed to settle their unpaid account despite the two
demand letters, PNB foreclose the mortgage. During the foreclosure sale, PNB was the highest bidder for
₱15,127,000.00 of the mortgaged properties of the Spouses Manalo.
After more than a year after the Certificate of Sale had been issued to PNB, the Spouses Manalo
instituted this action for the nullification of the foreclosure proceedings and damages. The Spouses
Manalo insisted that: (1) the credit agreements they entered into with PNB were contracts of
adhesion;14 (2) no interest was due from them because their credit agreements with PNB did not specify
the interest rate, and PNB could not unilaterally increase the interest rate without first informing
them;15 and (3) PNB did not comply with the notice and publication requirements under Section 3 of Act
3135.16 On the other hand, PNB and Yuvienco did not file their briefs despite notice.
PNB and Antoninus Yuvienco countered that the ₱1,000,000.00 loan obtained by the Spouses Manalo
from Benito Tan had been credited to their account; that they did not make any assurances on the
restructuring and conversion of the Spouses Manalo’s loan into a long-term one; 7 that PNB’s right to
foreclose the mortgage had been clear especially because the Spouses Manalo had not assailed the
validity of the loans and of the mortgage; and that the Spouses Manalo did not allege having fully paid
their indebtedness.

The RTC rendered its decision in favor of PNB. The CA affirmed the decision of the RTC insofar as it
upheld the validity of the foreclosure proceedings initiated by PNB, but modified the Spouses Manalo’s
liability for interest. It directed the RTC to see to the recomputation of their indebtedness, and ordered that
should the recomputed amount be less than the winning bid in the foreclosure sale, the difference should
be immediately returned to the Spouses Manalo.

ISSUE: Whether or not the court of appeals correctly ruled that there was no mutuality of consent in the
imposition of interest rates on the respondent spouses’ loan despite the existence of facts and
circumstances clearly showing respondents’ assent to the rates of interest so imposed by PNB on the
loan.

RULING: Yes, there was no mutuality of consent.

The credit agreement executed succinctly stipulated that the loan would be subjected to interest at a rate
"determined by the Bank to be its prime rate plus applicable spread, prevailing at the current
month."31 This stipulation was carried over to or adopted by the subsequent renewals of the credit
agreement. PNB thereby arrogated unto itself the sole prerogative to determine and increase the interest
rates imposed on the Spouses Manalo. Such a unilateral determination of the interest rates contravened
the principle of mutuality of contracts embodied in Article 1308 of the Civil Code. 32

The Court has declared that a contract where there is no mutuality between the parties partakes of the
nature of a contract of adhesion, and any obscurity will be construed against the party who prepared the
contract, the latter being presumed the stronger party to the agreement, and who caused the obscurity.
PNB should then suffer the consequences of its failure to specifically indicate the rates of interest in the
credit agreement.

In Philippine Savings Bank v. Castillo, to wit: The unilateral determination and imposition of the increased
rates is violative of the principle of mutuality of contracts under Article 1308 of the Civil Code, which
provides that ‘[t]he contract must bind both contracting parties; its validity or compliance cannot be left to
the will of one of them.’ Any contract which appears to be heavily weighed in favor of one of the parties so
as to lead to an unconscionable result, thus partaking of the nature of a contract of adhesion, is void. Any
stipulation regarding the validity or compliance of the contract left solely to the will of one of the parties is
likewise invalid.

PNB could not also justify the increases it had effected on the interest rates by citing the fact that the
Spouses Manalo had paid the interests without protest, and had renewed the loan several times, and said
party’s silence cannot be construed as an acceptance thereof.
Lastly, the CA observed, and properly so, that the credit agreements had explicitly provided that prior
notice would be necessary before PNB could increase the interest rates. In failing to notify the Spouses
Manalo before imposing the increased rates of interest, therefore, PNB violated the stipulations of the
very contract that it had prepared. Hence, the varying interest rates imposed by PNB have to be vacated
and declared null and void, and in their place an interest rate of 12% per annum computed from their
default is fixed pursuant to the ruling in Eastern Shipping Lines, Inc. v. Court of Appeals.

Conformably with Nacar v. Gallery Frames and S.C. Megaworld Construction v. Parada, therefore, the
proper interest rates to be imposed in the present case are as follows:

1. Any amount to be refunded to the Spouses Manalo shall bear interest of 12% per annum
computed from March 28, 2006, the date of the promulgation of the CA decision, until June 30,
2013; and 6% per annum computed from July 1, 2013 until finality of this decision; and

2. The amount to be refunded and its accrued interest shall earn interest of 6% per annum until
full refund.

12. EQUITABLE PCI BANK V. NG SHEUNG NGOR G.R.NO. 171545, Dec. 19, 2007.
(Escalation Clause)

FACTS: Respondents Ng Sheung Ngor, Ken Appliance Division, Inc. and Benjamin E. Go filed an
action for annulment and/or reformation of documents and contracts against petitioner Equitable PCI
Bank (Equitable) and its employees in the RTC of Cebu. They claimed that Equitable induced them to
avail of its peso and dollar credit facilities by offering low interest rates so they accepted Equitable's
proposal and signed the bank's pre-printed promissory notes on various dates beginning 1996. They,
however, were unaware that the documents contained identical escalation clauses granting Equitable
authority to increase interest rates without their consent.

Equitable, in its answer, asserted that respondents knowingly accepted all the terms and conditions
contained in the promissory notes. In fact, they continuously availed of and benefited from Equitable's
credit facilities for five years.

The RTC upheld the validity of the promissory notes. It found that, in 2001 alone, Equitable restructured
respondents' loans amounting to $ 228,200 and ₱1,000,000. RTC, however, invalidated the escalation
clause because it violated the principle of mutuality of contracts. Nevertheless, it took judicial notice of
the steep depreciation of the peso during the intervening period and declared the existence of
extraordinary deflation. Consequently, the RTC ordered the use of the 1996 dollar exchange rate in
computing respondents' dollar-denominated loans. Lastly, because the business reputation of
respondents was allegedly severely damaged when Equitable froze their accounts, RTC awarded
moral and exemplary damages to them. Equitable and respondents filed their respective notices of
appeal but were denied. A writ of execution was thereafter issued and three real properties of Equitable
were levied upon. The CA granted Equitable's application for injunction. A writ of preliminary injunction
was correspondingly issued. Despite the injunction order of the CA, the properties of Equitable
previously levied upon were sold in a public auction on July 1, 2004. Respondents were the highest
bidders and certificates of sale were issued to them. Equitable moved to annul the auction sale.

ISSUE: Did the escalation clause violate the principle of mutuality of contracts?

HELD: Yes. Escalation clauses are not void per se. However, one "which grants the creditor an
unbridled right to adjust the interest independently and upwardly, completely depriving the debtor of the
right to assent to an important modification in the agreement" is void. Clauses of that nature violate the
principle of mutuality of contracts. Article 1308 of the Civil Code holds that a contract must bind both
contracting parties; its validity or compliance cannot be left to the will of one of them. A valid escalation
clause provides: that the rate of interest will only be (1) increased or (2) decreased if the applicable
maximum rate of interest is increased or decreased by law or by the Monetary Board.

The RTC found that Equitable's promissory notes uniformly stated:

If the subject promissory note is extended, the interest for subsequent extensions shall be at such rate
as shall be determined by the bank.

Equitable dictated the interest rates if the term (or period for repayment) of the loan was extended.
Respondents had no choice but to accept them. This was a violation of Article 1308 of the Civil Code.
Furthermore, the assailed escalation clause did not contain the necessary provisions for validity, that is,
it neither provided that the rate of interest would be increased only if allowed by law or the Monetary
Board, nor allowed de-escalation. For these reasons, the escalation clause was void.

13. LA VISTA ASSOCIATION INCORPORATION V. CA GR. NO. 95252 Sep. 5, 1997. (Relativity)

FACTS: This case stemmed from the easement of right-of-way over Mangyan Road which serves as
the boundary between LA VISTA on one side and ATENEO on the other. It bends towards the east and
ends at the gate of Loyola Grand Villas Subdivision. The road has been the subject of an endless
dispute. The area comprising the 15-meter wide roadway was originally part of a vast tract of land
owned by the Tuasons which sold to Philippine Building Corporation (PBC) a portion of their
landholdings (1.3m sqm) by virtue of a Deed of Sale with Mortgage. Paragraph 3 of the deed provides
that “the boundary line between the property herein sold and the adjoining property of the VENDORS
shall be a road 15 meters wide, one-half of which shall be taken from the property herein sold to the
VENDEE and the other half from the portion adjoining belonging to the VENDORS.”

The parties and their respective predecessors-in-interest intended to establish an easement of right-of-
way over Mangyan Road for their mutual benefit, both as dominant and servient estates. This is quite
evident when: (a) the Tuasons and the Philippine Building Corporation in 1949 stipulated in par. 3 of
their Deed of Sale with Mortgage that the "boundary line between the property herein sold and the
adjoining property of the VENDORS shall be a road fifteen (15) meters wide, one-half of which shall be
taken from the property herein sold to the VENDEE and the other half from the portion adjoining
belonging to the vendors;" (b) the Tuasons in 1951 expressly agreed and consented to the assignment
of the land to, and the assumption of all the rights and obligations by ATENEO, including the obligation
to contribute seven and one-half meters of the property sold to form part of the 15-meter wide roadway;
(c) the Tuasons in 1958 filed a complaint against MARYKNOLL and ATENEO for breach of contract
and the enforcement of the reciprocal easement on Mangyan Road, and demanded that MARYKNOLL
set back its wall to restore Mangyan Road to its original width of 15 meters, after MARYKNOLL
constructed a wall in the middle of the 15-meter wide roadway; (d) LA VISTA President Manuel J.
Gonzales admitted and clarified in 1976, in a letter to ATENEO President Fr. Jose A. Cruz, S.J., that
"Mangyan Road is a road fifteen meters wide, one-half of which is taken from your property and the
other half from the La Vista Subdivision. So that the easement of a right-of-way on your 7 1/2 m. portion
was created in our favor and likewise an easement of right-of-way was created on our 7 1/2 m. portion
of the road in your favor;" (e) LA VISTA, in its offer to buy the hillside portion of the ATENEO property in
1976, acknowledged the existence of the contractual right-of-way as it manifested that the mutual right-
of-way between the Ateneo de Manila University and La Vista Homeowners' Association would be
extinguished if it bought the adjacent ATENEO property and would thus become the owner of both the
dominant and servient estates; and, (f) LA VISTA President Luis G. Quimson, in a letter addressed to
the Chief Justice, received by this Court on 26 March 1997, acknowledged that "one-half of the whole
length of (Mangyan Road) belongs to La Vista Assn., Inc. The other half is owned by Miriam (Maryknoll)
and the Ateneo in equal portions;"
On Dec. 7, 1951 PBC, which was then acting for and in behalf of Ateneo de Manila University
(ATENEO) in buying the properties from the Tuasons, sold, assigned and formally transferred in a
Deed of Assignment with Assumption of Mortgage, with the consent of the Tuasons, the subject
parcel of land to ATENEO which assumed the mortgage.

The Tuasons developed a part of the estate adjoining the portion sold to PBC into a residential village
known as La Vista Subdivision. Thus the boundary between LA VISTA and the portion sold to
Philippine Building Corporation was the 15-meter wide roadway known as the Mangyan Road.

ATENEO sold to MARYKNOLL the western portion of the land adjacent to Mangyan Road.
MARYKNOLL then constructed a wall in the middle of the 15-meter wide roadway making one-half of
Mangyan Road part of its school campus. The Tuasons objected and later filed a complaint before the
CFI of Rizal for the demolition of the wall. Subsequently, in an amicable settlement, MARYKNOLL
agreed to remove the wall and restore Mangyan Road to its original width of 15 meters.

Meanwhile, the Tuasons developed its 7.5-meter share of the 15-meter wide boundary. ATENEO
deferred improvement on its share and erected instead an adobe wall on the entire length of the
boundary of its property parallel to the 15-meter wide roadway. On 30 January 1976 ATENEO informed
LA VISTA of the former's intention to develop some 16 hectares of its property along Mangyan Road
into a subdivision. In response, LA VISTA clarified certain aspects with regard to the use of Mangyan
Road. LA VISTA offered to buy under specified conditions the property ATENEO was intending to
develop. One of the conditions stipulated by the LA VISTA President was that “it is the essence of the
offer that the mutuaI right of way between the Ateneo de Manila University and La Vista Homeowners'
Association will be extinguished.” The offer of LA VISTA to buy was not accepted by ATENEO. Instead,
ATENEO offered to sell the property to the public subject to the condition that the right to use the 15-
meter roadway will be transferred to the vendee who will negotiate with the legally involved parties
regarding the use of such right as well as the development costs for improving the access road.

LA VISTA became one of the bidders. However it lost to Solid Homes, Inc., in the bidding. Thus on Oct.
29, 1976 ATENEO executed a Deed of Sale in favor of Solid Homes, Inc., over parcels of land covering
a total area of 124,424 sqm subject, among others, to the condition that —

7. The VENDOR hereby passes unto the VENDEE, its assigns and successors-in-interest the privileges
of such right of way which the VENDOR acquired, and still has, by virtue of the Deeds mentioned in the
immediately preceeding paragraph hereof; provided, that the VENDOR shall nonetheless continue to
enjoy said right of way privileges with the VENDEE, which right of way in favor of the VENDOR shall be
annotated on the pertinent road lot titles. However it is hereby agreed that the implementation of such
right of way shall be for the VENDEE's sole responsibility and liability, and likewise any development of
such right of way shall be for the full account of the VENDEE. In the future, if needed, the VENDOR is
therefore free to make use of the aforesaid right of way, and/or Mangyan Road access, but in such a
case the VENDOR shall contribute a pro-rata share in the maintenance of the area.

Subsequently, Solid Homes, Inc., developed a subdivision now known as Loyola Grand Villas and
together they now claim to have an easement of right-of-way along Mangyan Road through which they
could have access to Katipunan Avenue.

LA VISTA informed Solid Homes, Inc., that they could not recognize the right-of-way over Mangyan
Road because, first, PBC and its assignee ATENEO never complied with their obligation of providing
the Tuasons with a right-of-way on their 7.5-meter portion of the road and, second, since the property
was purchased for commercial purposes, Solid Homes, Inc., was no longer entitled to the right-of-way
as Mangyan Road was established exclusively for ATENEO in whose favor the right-of-way was
originally constituted. LA VISTA, after instructing its security guards to prohibit agents and assignees of
Solid Homes, Inc., from traversing Mangyan Road, then constructed one-meter high cylindrical
concrete posts chained together at the middle of and along the entire length of Mangyan Road thus
preventing the residents of LOYOLA from passing through.

Solid Homes, Inc., complained to LA VISTA but the concrete posts were not removed. To gain access
to LOYOLA through Mangyan Road an opening through the adobe wall of ATENEO was made and
some six (6) cylindrical concrete posts of LA VISTA were destroyed. LA VISTA then stationed security
guards in the area to prevent entry to LOYOLA through Mangyan Road.

On 17 December 1976, to avert violence, Solid Homes, Inc., instituted a civil case in the CFI of Rizal
and prayed that LA VISTA be joined from preventing and obstructing the use and passage of LOYOLA
residents through Mangyan Road. LA VISTA in turn filed a third-party complaint against ATENEO.

The trial court issued a preliminary injunction in favor of Solid Homes, Inc., directing LA VISTA to desist
from blocking and preventing the use of Mangyan Road. The injunction order of 14 September 1983
was however nullified and set aside on 31 May 1985 by IAC. Thus in a petition for review on certiorari,
Solid Homes, Inc., assailed the nullification and setting aside of the preliminary injunction issued by the
trial court.

Meanwhile, the RTC of Quezon City rendered a decision on the merits in Civil Case affirming and
recognizing the easement of right-of-way along Mangyan Road in favor of Solid Homes, Inc., and
ordering LA VISTA to pay damages.

LA VISTA assails the Decision of respondent Court of Appeals affirming in toto the Decision of the trial
court which rendered a judgment on the merits and recognized an easement of right-of-way along
Mangyan Road, permanently enjoining LA VISTA from closing to Solid Homes, Inc., and its successors-
in-interest the ingress and egress on Mangyan Road.

ISSUE: Whether LA VISTA the parties and their respective predecessors-in-interest intended to
establish an easement of right-of-way over Mangyan Road for their mutual benefit, both as dominant
and servient estates

HELD: Yes, from the facts of the foregoing, the parties concerned had indeed constituted a voluntary
easement of right-of-way over Mangyan Road and, like any other contract, the same could be
extinguished only by mutual agreement or by renunciation of the owner of the dominant estate.

The contractual stipulations in the deed of sale between the Tuason Family and the Philippine Building
Corporation (paragraph 3) which were incorporated in the deed of assignment with assumption of
mortgage by the Philippine Building Corporation in favor of Ateneo (first paragraph, page 4 of the deed)
as well as in the deed of sale dated October 24, 1976 when the property was ultimately transferred by
Ateneo to plaintiff-appellee. Like any other contractual stipulation, the same cannot be extinguished
except by voluntary rescission of the contract establishing the servitude or renunciation by the owner of
the dominant lots. The free ingress and egress along Mangyan Road created by the voluntary
agreement between Ateneo and Solid Homes, Inc., is thus legally demandable (Articles 619 and 625,
New Civil Code) with the corresponding duty on the servient estate not to obstruct the same so much
so that —

When the owner of the servient tenement performs acts or constructs works impairing the use of the
servitude, the owner of the dominant tenement may ask for the destruction of such works and the
restoration of the things to their condition before the impairment was committed, with indemnity for
damages suffered (3 Sanchez Roman 609). An injunction may also be obtained in order to restrain the
owner of the servient tenement from obstructing or impairing in any manner the lawful use of the
servitude.

Moreover, the contention that there is no contract between LA VISTA and Solid Homes, Inc., and thus
the court could not have declared the existence of an easement created by the manifest will of the
parties, is devoid of merit. The predecessors-in-interest of both LA VISTA and Solid Homes, Inc., i.e.,
the Tuasons and the Philippine Building Corporation, respectively, clearly established a contractual
easement of right-of-way over Mangyan Road. When the Philippine Building Corporation transferred its
rights and obligations to ATENEO the Tuasons expressly consented and agreed thereto. Meanwhile,
the Tuasons themselves developed their property into what is now known as LA VISTA. On the other
hand, ATENEO sold the hillside portions of its property to Solid Homes, Inc., including the right over the
easement of right-of-way. In sum, when the easement in this case was established by contract, the
parties unequivocally made provisions for its observance by all who in the future might succeed them in
dominion.

14. DKC HOLDINGS CORP V. CA G.R. No. 118248. Apr. 5, 2000. (Art. 1311)

FACTS: The subject of the controversy is a 14,021 sqm parcel of land which was originally owned by
private respondent Victor U. Bartolome’s deceased mother, Encarnacion Bartolome. This lot was in
front of one of the textile plants of the petitioner and, as such, was seen by the latter as a potential
warehouse site.

On March 16, 1988, petitioner entered into a Contract of Lease with Option to Buy with Encarnacion
Bartolome, whereby petitioner was given the option to lease or lease with purchase the subject land,
which option must be exercised within a period of two years counted from the signing of the Contract. In
turn, petitioner undertook to pay P3,000.00 a month as consideration for the reservation of its option.
Within the two-year period, petitioner shall serve formal written notice upon the lessor Encarnacion
Bartolome of its desire to exercise its option. The contract also provided that in case petitioner chose to
lease the property, it may take actual possession of the premises. In such an event, the lease shall be
for a period of six years, renewable for another six years, and the monthly rental fee shall be
P15,000.00 for the first six years and P18,000.00 for the next six years, in case of renewal.

Petitioner regularly paid the monthly P3,000.00 provided for by the Contract to Encarnacion until her
death in January 1990. Thereafter, petitioner coursed its payment to private respondent Victor
Bartolome, being the sole heir of Encarnacion. Victor, however, refused to accept these payments and
in 1990, he executed an Affidavit of Self-Adjudication over all the properties of Encarnacion, including
the subject lot. Because Victor refused again the rent payment, Petitioner opened a Savings Account
with China Bank in the name of Victor Bartolome and deposited the P15,000.00 rental fee for March as
well as P6,000.00 reservation fees for the months of February and March. Petitioner also tried to
register and annotate the Contract on the title of Victor to the property. Although respondent Register of
Deeds accepted the required fees, he nevertheless refused to register or annotate the same or even
enter it in the day book or primary register.

Thus, on April 23, 1990, petitioner filed a Complaint for specific performance and damages against
Victor and the Register of Deeds and prayed for the surrender and delivery of possession of the subject
land in accordance with the Contract terms; the surrender of title for registration and annotation thereon
of the Contract; and the payment of P500,000.00 as actual damages, P500,000.00 as moral damages,
P500,000.00 as exemplary damages and P300,000.00 as attorney’s fees.

After trial on the merits, the RTC of Valenzuela, rendered its Decision dismissing the Complaint and
ordering petitioner to pay Victor P30,000.00 as attorney’s fees. On appeal the CA affirmed the
Decision.

ISSUE: Whether the contract entered into between DKC Holdings and Respondent’s mother is
transmissible.

HELD: Yes. ARTICLE 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.

The general rule, therefore, is that heirs are bound by contracts entered into by their predecessors-in-
interest except when the rights and obligations arising therefrom are not transmissible by (1) their
nature, (2) stipulation or (3) provision of law.

In this case, there is neither contractual stipulation nor legal provision making the rights and obligations
under the contract intransmissible. More importantly, the nature of the rights and obligations therein
are, by their nature, transmissible.

Among contracts which are intransmissible are those which are purely personal, either by provision of
law, such as in cases of partnerships and agency, or by the very nature of the obligations arising
therefrom, such as those requiring special personal qualifications of the obligor. It may also be stated
that contracts for the payment of money debts are not transmitted to the heirs of a party, but constitute
a charge against his estate. Thus, where the client in a contract for professional services of a lawyer
died, leaving minor heirs, and the lawyer, instead of presenting his claim for professional services under
the contract to the probate court, substituted the minors as parties for his client, it was held that the
contract could not be enforced against the minors; the lawyer was limited to a recovery on the basis of
quantum meruit.

In American jurisprudence, where acts stipulated in a contract require the exercise of special
knowledge, genius, skill, taste, ability, experience, judgment, discretion, integrity, or other personal
qualification of one or both parties, the agreement is of a personal nature, and terminates on the death
of the party who is required to render such service."

It has also been held that a good measure for determining whether a contract terminates upon the
death of one of the parties is whether it is of such a character that it may be performed by the
promissor’s personal representative. Contracts to perform personal acts which cannot be as well
performed by others are discharged by the death of the promissor. Conversely, where the service or act
is of such a character that it may as well be performed by another, or where the contract, by its terms,
shows that performance by others was contemplated, death does not terminate the contract or excuse
nonperformance.

In this case, there is no personal act required from the late Encarnacion Bartolome. Rather, the
obligation of Encarnacion in the contract to deliver possession of the subject property to petitioner upon
the exercise by the latter of its option to lease the same may very well be performed by her heir Victor.

As early as 1903, it was held that “He who contracts does so for himself and his heirs." In 1952, it was
ruled that if the predecessor was duty-bound to reconvey land to another, and at his death the
reconveyance had not been made, the heirs can be compelled to execute the proper deed for
reconveyance. This was grounded upon the principle that heirs cannot escape the legal consequence
of a transaction entered into by their predecessor-in-interest because they have inherited the property
subject to the liability affecting their common ancestor.

It is futile for Victor to insist that he is not a party to the contract because of the clear provision of Article
1311 of the Civil Code. Indeed, being an heir of Encarnacion, there is privity of interest between him
and his deceased mother. He only succeeds to what rights his mother had and what is valid and
binding against her is also valid and binding as against him.

In this case, the subject matter of the contract is likewise a lease, which is a property right. The death of
a party does not excuse nonperformance of a contract which involves a property right, and the rights
and obligations thereunder pass to the personal representatives of the deceased. Similarly,
nonperformance is not excused by the death of the party when the other party has a property interest in
the subject matter of the contract.
Under both Article 1311 of the Civil Code and jurisprudence, therefore, Victor is bound by the subject
Contract of Lease with Option to Buy.

15. KAUFFMAN VS. PNB 42 PR 182 Sep. 29, 1921 (Stipulation Pour Autri)

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. He was informed that the total
cost of said transfer, including exchange and cost of message, would be P90,355.50. Accordingly,
Wicks, as treasurer of the Philippine Fiber and Produce Company, thereupon drew and delivered a
check for that amount on the Philippine National Bank; and the same was accepted by the officer
selling the exchange in payment of the transfer in question. As evidence of this transaction a document
was made out and delivered to Wicks, which is referred to by the bank's assistant cashier as its official
receipt.

On the same day the Philippine National Bank dispatched to its New York agency a cablegram to the
following effect:

Pay George A. Kauffman, New York, account Philippine Fiber Produce Co., $45,000. (Sgd.)
PHILIPPINE NATIONAL BANK, Manila.

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.

In view of these facts, the plaintiff Kauffman instituted the present action in the Court of First Instance of
the city of Manila to recover said sum, with interest and costs; and judgment having been there entered
favorably to the plaintiff, the defendant appealed.

Among additional facts pertinent to the case we note the circumstance that at the time of the
transaction above-mentioned, the Philippines Fiber and Produce Company did not have on deposit in
the Philippine National Bank money adequate to pay the check for P90,355.50, which was delivered in
payment of the telegraphic order; but the company did have credit to that extent, or more, for overdraft
in current account, and the check in question was charged as an overdraft against the Philippine Fiber
and Produce Company and has remained on the books of the bank as an interest-bearing item in the
account of said company.

It is furthermore noteworthy that no evidence has been introduced tending to show failure of
consideration with respect to the amount paid for said telegraphic order. It is true that in the defendant's
answer it is suggested that the failure of the bank to pay over the amount of this remittance to the
plaintiff in New York City, pursuant to its agreement, was due to a desire to protect the bank in its
relations with the Philippine Fiber and Produce Company, whose credit was secured at the bank by
warehouse receipts on Philippine products; and it is alleged that after the exchange in question was
sold the bank found that it did not have sufficient to warrant payment of the remittance. In view,
however, of the failure of the bank to substantiate these allegations, or to offer any other proof showing
failure of consideration, it must be assumed that the obligation of the bank was supported by adequate
consideration.

In this court the defense is mainly, if not exclusively, based upon the proposition that, inasmuch as the
plaintiff Kauffman was not a party to the contract with the bank for the transmission of this credit, no
right of action can be vested in him for the breach thereof. "In this situation," — we here quote the
words of the appellant's brief, — "if there exists a cause of action against the defendant, it would not be
in favor of the plaintiff who had taken no part at all in the transaction nor had entered into any contract
with the plaintiff, but in favor of the Philippine Fiber and Produce Company, the party which contracted
in its own name with the defendant."

ISSUE: Whether the plaintiff can maintain an action against the bank for the nonperformance of said
undertaking. 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: Yes, the right of action exists, and the judgment must be affirmed.

Article 1257 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.)

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. If a third person claims an enforceable interest in the contract, the question must be settled by
determining whether the contracting parties desired to tender him such an interest. 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.

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 PNB 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.

16. INTEGRATED PACKAGING CORP VS. CA G.R. No. 115117. June 8, 2000

FACTS: Petitioner and private respondent executed an order agreement whereby private respondent
bound itself to deliver to petitioner 3,450 reams of printing paper under certain schedules. The materials
were to be paid within a minimum of 30 days and maximum of 90 from delivery. Later, on June 7, 1978,
petitioner entered into a contract with Philippine Appliance Corporation (Philacor) to print three volumes
of "Philacor Cultural Books" for delivery on the certain dates with a minimum of 300,000 copies at a
price of P10.00 per copy or a total cost of P3,000,000.00.

As of July 30, 1979, private respondent had delivered to petitioner 1,097 reams of printing paper out of
the total 3,450 reams stated in the agreement. Petitioner alleged it wrote private respondent to
immediately deliver the balance because further delay would greatly prejudice petitioner. From June 5,
1980 and until July 23, 1981, private respondent delivered again to petitioner various quantities of
printing paper amounting to P766,101.70. However, petitioner encountered difficulties paying private
respondent said amount. Accordingly, private respondent made a formal demand upon petitioner to
settle the outstanding account. On July 23 and 31, 1981 and August 27, 1981, petitioner made partial
payments totalling P97,200.00 which was applied to its back accounts covered by delivery invoices
dated September 29-30, 1980 and October 1-2, 1980.

Meanwhile, petitioner entered into an additional printing contract with Philacor. Unfortunately, petitioner
failed to fully comply with its contract with Philacor for the printing of books. Thus, Philacor demanded
compensation from petitioner for the delay and damage it suffered on account of petitioner's failure.

On August 14, 1981, private respondent filed with the RTC of Caloocan City a collection suit against
petitioner for the sum of P766,101.70, representing the unpaid purchase price of printing paper bought
by petitioner on credit.

In its answer, petitioner denied the material allegations of the complaint. By way of counterclaim,
petitioner alleged that private respondent was able to deliver only 1,097 reams of printing paper which
was short of 2,875 reams, in total disregard of their agreement; that private respondent failed to deliver
the balance of the printing paper despite demand therefor, hence, petitioner suffered actual damages
and failed to realize expected profits; and that petitioner's complaint was prematurely filed.

After filing its reply and answer to the counterclaim, private respondent moved for admission of its
supplemental complaint, which was granted. In said supplemental complaint, private respondent
alleged that subsequent to the enumerated purchase invoices in the original complaint, petitioner made
additional purchases of printing paper on credit amounting to P94,200.00. Private respondent also
averred that petitioner failed and refused to pay its outstanding obligation although it made partial
payments in the amount of P97,200.00 which was applied to back accounts, thus, reducing petitioner's
indebtedness to P763,101.70.

The trial court rendered judgment declaring that petitioner should pay private respondent the sum of
P763,101.70 representing the value of printing paper delivered. However, the lower court also found
petitioner's counterclaim meritorious. It ruled that were it not for the failure or delay of private
respondent to deliver printing paper, petitioner could have sold books to Philacor and realized profit of
P790,324.30 from the sale. It further ruled that petitioner suffered a dislocation of business on account
of loss of contracts and goodwill as a result of private respondent's violation of its obligation, for which
the award of moral damages was justified.

On appeal, CA reversed and set aside the judgment of the trial court. The appellate court ordered
petitioner to pay private respondent the sum of P763,101.70 representing the amount of unpaid printing
paper delivered by private respondent to petitioner, with legal interest thereon from the date of the filing
of the complaint until fully paid.4 However, the appellate court deleted the award of P790,324.30 as
compensatory damages as well as the award of moral damages and attorney's fees, for lack of factual
and legal basis.

ISSUES:
(1) Whether or not private respondent violated the order agreement, and;
(2) Whether or not private respondent is liable for petitioner's breach of contract with Philacor.

HELD: Private respondent did not violate the order agreement it had with petitioner. Likewise, private
respondent could not be held liable for petitioner's breach of contract with Philacor. It follows that there
is no basis to hold private respondent liable for damages.

Petitioner contends, firstly, that private respondent violated the order agreement when the latter failed
to deliver the balance of the printing paper on the dates agreed upon. The transaction between the
parties is a contract of sale whereby private respondent (seller) obligates itself to deliver printing paper
to petitioner (buyer) which, in turn, binds itself to pay therefor a sum of money or its equivalent (price).
Both parties concede that the order agreement gives rise to a reciprocal obligations such that the
obligation of one is dependent upon the obligation of the other. Reciprocal obligations are to be
performed simultaneously, so that the performance of one is conditioned upon the simultaneous
fulfillment of the other. Thus, private respondent undertakes to deliver printing paper of various
quantities subject to petitioner's corresponding obligation to pay, on a maximum 90-day credit, for these
materials. Note that in the contract, petitioner is not even required to make any deposit, down payment
or advance payment, hence, the undertaking of private respondent to deliver the materials is
conditional upon payment by petitioner within the prescribed period. Clearly, petitioner did not fulfill its
side of the contract as its last payment in August 1981 could cover only materials covered by delivery
invoices dated September and October 1980. This contention lacks factual and legal basis, hence,
bereft of merit.

There is no dispute that the agreement provides for the delivery of printing paper on different dates and
a separate price has been agreed upon for each delivery. It is also admitted that it is the standard
practice of the parties that the materials be paid within a minimum period of thirty (30) days and a
maximum of ninety (90) days from each delivery.9 Accordingly, the private respondent's suspension of
its deliveries to petitioner whenever the latter failed to pay on time, as in this case, is legally justified
under the second paragraph of Article 1583 of the Civil Code which provides that:

When there is a contract of sale of goods to be delivered by stated installments, which are to be
separately paid for, and the seller makes defective deliveries in respect of one or more installments, or
the buyer neglects or refuses without just cause to take delivery of or pay for one or more installments,
it depends in each case on the terms of the contract and the circumstances of the case, whether the
breach of contract is so material as to justify the injured party in refusing to proceed further and suing
for damages for breach of the entire contract, or whether the breach is severable, giving rise to a claim
for compensation but not to a right to treat the whole contract as broken.

In this case, petitioner's evidence failed to establish that it had paid for the printing paper covered by
the delivery invoices on time. Consequently, private respondent has the right to cease making further
delivery, hence the private respondent did not violate the order agreement. On the contrary, it was
petitioner which breached the agreement as it failed to pay on time the materials delivered by private
respondent. Respondent appellate court correctly ruled that private respondent did not violate the order
agreement.
On the second assigned error, petitioner contends that private respondent should be held liable for
petitioner's breach of contract with Philacor. This claim is manifestly devoid of merit.

As correctly held by the appellate court, private respondent cannot be held liable under the contracts
entered into by petitioner with Philacor. Private respondent is not a party to said agreements. It is also
not a contract pour autrui. Aforesaid contracts could not affect third persons like private respondent
because of the basic civil law principle of relativity of contracts which provides that contracts can only
bind the parties who entered into it, and it cannot favor or prejudice a third person, even if he is aware
of such contract and has acted with knowledge thereof.

Indeed, the order agreement entered into by petitioner and private respondent has not been shown as
having a direct bearing on the contracts of petitioner with Philacor. As pointed out by private respondent
and not refuted by petitioner, the paper specified in the order agreement between petitioner and private
respondent are markedly different from the paper involved in the contracts of petitioner with Philacor.
Furthermore, the demand made by Philacor upon petitioner for the latter to comply with its printing
contract is dated February 15, 1984, which is clearly made long after private respondent had filed its
complaint on August 14, 1981. This demand relates to contracts with Philacor dated April 12, 1983 and
May 13, 1983, which were entered into by petitioner after private respondent filed the instant case.

WHEREFORE, the instant petition is DENIED. The decision of the Court of Appeals is AFFIRMED.
Costs against petitioner.

17. LAGON VS. CA. G.R. No. 119107 March 18, 2005 ( Art 1340)

FACTS: On June 23, 1982, petitioner Jose Lagon purchased from the estate of Bai Tonina Sepi,
through an intestate court, two parcels of land located in Sultan Kudarat. A few months after the sale,
private respondent Menandro Lapuz filed a complaint for torts and damages against the petitioner
before the RTC of Sultan Kudarat. Plaintiff, claimed that he entered into a contract of lease with the late
Bai Tonina Sepi Mengelen Guiabar over three parcels of land beginning 1964. One of the provisions
agreed upon was for private respondent to put up commercial buildings which would, in turn, be leased
to new tenants. The rentals to be paid by those tenants would answer for the rent private respondent
was obligated to pay Bai Tonina Sepi for the lease of the land. In 1974, the lease contract ended but
since the construction of the commercial buildings had yet to be completed, the lease contract was
allegedly renewed.

When Bai Tonina Sepi died, private respondent started remitting his rent to the court-appointed
administrator of her estate. But when the administrator advised him to stop collecting rentals from the
tenants of the buildings he constructed, he discovered that the petitioner representing himself as the
new owner of the property, had been collecting rentals from the tenants. He thus filed a complaint
against the latter, accusing the petitioner of inducing the heirs of Bai Tonina Sepi to sell the property to
him, thereby violating his leasehold rights over it.

In his answer to the complaint, petitioner denied that he induced the heirs of Bai Tonina to sell the
property to him, contending that the heirs were in dire need of money to pay off the obligations of the
deceased. He also denied interfering with private respondent's leasehold rights as there was no lease
contract covering the property when he purchased it; that his personal investigation and inquiry
revealed no claims or encumbrances on the subject lots.

Petitioner claimed that before he bought the property, he went to Atty. Benjamin Fajardo, the lawyer
who allegedly notarized the lease contract between private respondent and Bai Tonina Sepi, to verify if
the parties indeed renewed the lease contract after it expired in 1974. Petitioner averred that Atty.
Fajardo showed him four copies of the lease renewal but these were all unsigned. To refute the
existence of a lease contract, petitioner presented in court a certification from the Office of the Clerk of
Court confirming that no record of any lease contract notarized by Atty. Fajardo had been entered into
their files. Petitioner added that he only learned of the alleged lease contract when he was informed
that private respondent was collecting rent from the tenants of the building.

Finding the complaint for tortuous interference to be unwarranted, petitioner filed his counterclaim and
prayed for the payment of actual and moral damages.

The Court a quo rendered judgment declaring the "Contract of Lease" executed by Bai Tonina Sepi
Mangelen Guiabar in favor of the plaintiff to be authentic and genuine and as such valid and binding for
a period of ten (10) years; Declaring the plaintiff as the lawful owner of the commercial buildings found
on the aforesaid lots and he is entitled to their possession and the collection (of rentals) of the said
commercial buildings within the period covered by this "Contract of Lease" in his favor; Ordering the
defendant to pay to the plaintiff rentals of the commercial buildings, Moral damages, Actual or
compensatory damages, Exemplary or corrective damages, Temperate or moderate damages, Nominal
damages, Attorney's fees, Expenses of litigation, plus interest; and for failure of the defendant to
deposit with the Court all the rentals he had collected from the 13 tenants or occupants of the
commercial buildings in question, the plaintiff is hereby restored to the possession of his commercial
buildings for a period of 73 months which is the equivalent of the total period for which he was
prevented from collecting the rentals from the tenants or occupants of his commercial buildings from
October 1, 1978 up to October 31, 1984, and for this purpose a Writ of Preliminary Injunction is hereby
issued, but the plaintiff is likewise ordered to pay to the defendant the monthly rental of P700.00 every
end of the month for the entire period of 73 months. This portion of the judgment should be considered
as a mere alternative should the defendant fail to pay the amount of P506,805.56. The counterclaim
was dismissed.

Before the appellate court, petitioner disclaimed knowledge of any lease contract between the late Bai
Tonina Sepi and private respondent. On the other hand, private respondent insisted that it was
impossible for petitioner not to know about the contract since the latter was aware that he was
collecting rentals from the tenants of the building. While the appellate court disbelieved the contentions
of both parties, it nevertheless held that, for petitioner to become liable for damages, he must have
known of the lease contract and must have also acted with malice or bad faith when he bought the
subject parcels of land.mThe CA modified the decision and deleted all the damages.

ISSUE: Whether the purchase by petitioner of the subject property, during the supposed existence of
private respondent's lease contract with the late Bai Tonina Sepi, constitute tortious interference for
which petitioner should be held liable for damages.

HELD: Article 1314 of the Civil Code provides that any third person who induces another to violate his
contract shall be liable for damages to the other contracting party. The tort recognized in that provision
is known as interference with contractual relations.7 The interference is penalized because it violates
the property rights of a party in a contract to reap the benefits that should result therefrom.

The elements of tortuous interference with contractual relations: (a) existence of a valid contract; (b)
knowledge on the part of the third person of the existence of the contract and (c) interference of the
third person without legal justification or excuse.

As regards the first element, the existence of a valid contract must be duly established. To prove this,
private respondent presented in court a notarized copy of the purported lease renewal. While the
contract appeared as duly notarized, the notarization thereof, however, only proved its due execution
and delivery but not the veracity of its contents. Nonetheless, after undergoing the rigid scrutiny of
petitioner's counsel and after the trial court declared it to be valid and subsisting, the notarized copy of
the... lease contract presented in court appeared to be incontestable proof that private respondent and
the late Bai Tonina Sepi actually renewed their lease contract. Settled is the rule that until overcome by
clear, strong and convincing evidence, a notarized document continues to be... prima facie evidence of
the facts that gave rise to its execution and delivery.
The second element, on the other hand, requires that there be knowledge on the part of the interferer
that the contract exists. Knowledge of the subsistence of the contract is an essential element to state a
cause of action for tortious interference. A defendant in such a case cannot be made liable for
interfering with a contract he is unaware of. While it is not necessary to prove actual knowledge, he
must nonetheless be aware of the facts which, if followed by a reasonable inquiry, will lead to a
complete disclosure of the contractual relations and rights of the parties in the contract.

In this case, petitioner claims that he had no knowledge of the lease contract. His sellers (the heirs of
Bai Tonina Sepi) likewise allegedly did not inform him of any existing lease contract. The contention of
petitioner meritorious. He conducted his own personal investigation and inquiry, and unearthed no
suspicious circumstance that would have made a cautious man probe deeper and watch out for any
conflicting claim over the property. An examination of the entire property's title bore no indication of the
leasehold interest of private respondent. Even the registry of property had no record of the same.

Assuming ex gratia argumenti that petitioner knew of the contract, such knowledge alone was not
sufficient to make him liable for tortuous interference. Which brings us to the third element. Petitioner
may be held liable only when there was no legal justification or excuse for his action or when his
conduct was stirred by a wrongful motive. To sustain a case for tortuous interference, the defendant
must have acted with malice\ or must have been driven by purely impious reasons to injure the plaintiff.
In other words, his act of interference cannot be justified.

Furthermore, the records do not support the allegation of private respondent that petitioner induced the
heirs of Bai Tonina Sepi to sell the property to him. The word "induce" refers to situations where a
person causes another to choose one course of conduct by persuasion or intimidation. The records
show that the decision of the heirs of the late Bai Tonina Sepi to sell the property was completely of
their own volition and that petitioner did absolutely nothing to influence their judgment. Private
respondent himself did not proffer any evidence to support his claim. In short, even assuming that
private respondent was able to prove the renewal of his lease contract with Bai Tonina Sepi, the fact
was that he was unable to prove malice or bad faith on the part of petitioner in purchasing the property.
Therefore, the claim of tortuous interference was never established.

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 the actor's 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 the others. It is sufficient if the impetus of his conduct lies in a proper business interest rather than in
wrongful motives.

Petitioner's purchase of the subject property was merely an advancement of his financial or economic
interests, absent any proof that he was enthused by improper motives. In the very early case of
Gilchrist v. Cuddy,21 the Court declared that a person is not a malicious interferer if his conduct is
impelled by a proper business interest. In other words, a financial or profit motivation will not
necessarily make a person an officious interferer liable for damages as long as there is no malice or
bad faith involved.

In sum, SC ruled that, inasmuch as not all three elements to hold petitioner liable for tortuous
interference are present, petitioner cannot be made to answer for private respondent's losses. This
case is one of damnun absque injuria or damage without injury. "Injury" is the legal invasion of a legal
right while "damage" is the hurt, loss or harm which results from the injury. There can be damage
without injury where the loss or harm is not the result of a violation of a legal duty. Petition was
GRANTED.