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Case: ESTANISLAO vs. GSIS (1421)
GR No. L-18717, L-19379, September 30, 1974
FACTS:
Plaintiffs Marcos Estanislao and his legal representatives filed two separate cases against various defendants including the Government Service Insurance System (GSIS), the People's Homesite and Housing Corporation (PHHC), the Department of Agriculture and Natural Resources (DANR), the Director of the Bureau of Lands, the Commissioner of Land Registration, the Register of Deeds of Rizal, the Register of Deeds of Quezon City, the Sheriff of Quezon City, the Provincial Sheriff of Rizal, and J. M. Tuason & Co., Inc.
The main issue in the case is the validity of the original Certificate of Title No. 735 in favor of the Tuasons.
The Court of First Instance dismissed the plaintiffs' claims, and the plaintiffs appealed the dismissal orders.
ISSUE:
Is the original Certificate of Title No. 735 in favor of the Tuasons valid?
HELD:
The Court ruled in favor of the defendants and affirmed the dismissal orders.
RATIO:
The Court cited the decision in Benin v. Tuason, which concluded that the plaintiffs' claims were without merit.
The Court emphasized the rights of innocent purchasers for value and the importance of respecting their rights.
The Court found that the plaintiffs were not parties to the deed of mortgage they sought to be declared null and void, and therefore, the defenses of illegality of contracts were not available to them.
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Case: FILINVEST LAND, INC. vs. ADIA, et al. (1416)
GR No. 192629, November 25, 2015
FACTS:
Filinvest Land, Inc. was ordered by the Court of Appeals to vacate properties and return transfer certificates of title to the respondents.
The case involves the validity of affidavits used by Filinvest to acquire possession of properties awarded to the respondents under the Comprehensive Land Reform Law (CARL).
The respondents were the registered owners of various parcels of land in Cavite, awarded to them under CARL.
In 1995, Filinvest acquired possession of these properties through affidavits executed by the respondents, in which they relinquished their rights over the properties for valuable consideration.
The respondents alleged that they surrendered possession with the understanding that Filinvest would develop the properties into a residential subdivision under a joint venture agreement (JVA).
However, Filinvest failed to develop the properties and refused to return the transfer certificates of title (TCTs) to the respondents.
The respondents filed a complaint for recovery of possession with damages against Filinvest.
The Regional Trial Court (RTC) ruled in favor of the respondents, ordering Filinvest to vacate the properties, return the TCTs, and pay attorney's fees.
Filinvest appealed to the Court of Appeals (CA), which affirmed the RTC's decision.
ISSUES:
Who between Filinvest and the respondents are the lawful possessors of the properties?
HELD:
The court ruled that the respondents are the lawful possessors of the properties and ordered Filinvest to vacate the properties and return the TCTs.
RATIO:
The court held that the affidavits used by Filinvest are void for violating Section 27 of the CARL, which prohibits the sale, transfer, or conveyance of awarded lands within ten years.
The court applied Article 1416 of the Civil Code, which provides an exception to the pari delicto doctrine when the contract is merely prohibited.
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Obligations and Contracts
Chapter 9: Void or Inexistent Contracts.
鉂わ笍ARTICLE 1421鉂わ笍
The defense of illegality of contracts is not available to third persons whose interest are not directly affected.
Persons entitled to raise defense of illegality or nullity.
In voidable (Art. 1397) and unenforceable contracts (Art. 1408), third persons are not allowed to bring an action to annul or to assail, as the case may be, said contracts. If the contract is illegal or void, however, even a third person may avail of the defense of illegality or set up its nullity as long as his interest is directly affected by the contract. (see Estanislao vs. GSIS, 60 SCRA; Art. 1177.)
Example:
H, husband, sold his parcel of land to W, his wife. Under the law, husband and wife cannot sell property to each other (Art. 1490) and such sale is, therefore, illegal and void. (Art. 1409 [7].) The purpose of the prohibition is to protect third persons who, relying upon supposed property of either spouse, enter into a contract with either of them only to find out that the property relied upon was transferred to the other spouse.
Under Article 1421, if T, a third person, became a creditor of H before the transaction, he can question the sale for the reason that his right or interest is directly affected. However, if he became a creditor after the transfer, the defense of illegality is not available to him.
Source:
The Obligations and Contracts by Hector De Leon
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Case: ECE REALTY and DEVELOPMENT, INC. vs. MANDAP (1393)
GR No. 196182, September 1, 2014
FACTS:
ECE Realty and Development, Inc. is a corporation engaged in the construction of condominium units.
In 1995, ECE Realty started the construction of a condominium project called Central Park Condominium Building in Pasay City.
The printed advertisements for the project falsely indicated that it was to be built in Makati City.
In December 1995, Rachel G. Mandap agreed to buy a unit from the project and made payments for reservation fee, downpayment, and monthly installments.
On June 18, 1996, Mandap and representatives of ECE Realty executed a Contract to Sell, which indicated that the condominium project is located in Pasay City.
More than two years later, Mandap demanded the return of her payments, claiming that she was misled by the false advertisements.
ECE Realty informed her that her unit was ready for inspection and occupancy.
Mandap filed a complaint with the Housing and Land Use Regulatory Board (HLURB) seeking the annulment of the contract and the return of her payments.
ISSUES:
Whether ECE Realty was guilty of fraud.
Whether such fraud is sufficient grounds to nullify the contract with Mandap.
HELD:
The Supreme Court ruled in favor of ECE Realty.
The misrepresentation made by the corporation in its advertisements did not constitute fraud that would warrant the annulment of the contract.
Mandap failed to prove that the location of the condominium project was the principal inducement for her to buy the unit.
Mandap proceeded to sign the Contract to Sell despite knowing that the property was located in Pasay City, not Makati City.
Even if there was fraud, Mandap's act of affixing her signature to the contract after acquiring knowledge of the property's actual location can be construed as an implied ratification of the contract.
The Court reinstated the decision of the HLURB dismissing Mandap's complaint and directing the parties to fulfill their sales contract.
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Obligations and Contracts
Chapter 7: Voidable Contracts.
鉂わ笍ARTICLE 1394鉂わ笍
Ratification may be effected by the guardian of the incapacitated person. (n)
WHO MAY RATIFY.
(1) A contract entered into by an incapacitated person may be ratified by:
a) the guardian; or
b) the injured party himself provided he is already capacitated.
As legal representative of their wards, guardians have the power to contract on their behalf. Hence, they may also ratify contracts entered into by their wards. (see Art. 1407)
(2) In case the contract is voidable on the ground of mistake, etc., ratification can be made by the party whose consent is vitiated.
Source:
The Obligations and Contracts by Hector De Leon
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Case: MULTI-VENTURES CAPITAL and MANAGEMENT CORP. vs. STALWART MANAGEMENT SERVICES CORP. (1359)
GR No. 157439, July 4, 2007
FACTS:
Multi-Ventures Capital and Management Corporation (petitioner) and Stalwart Management Services Corporation (respondent) are involved in a dispute over the nature of their contract.
On January 11, 1991, respondent obtained a loan from petitioner in the amount of P9,000,000.00, with interest.
The transaction was denominated as a sale, where petitioner bought Land Bank bonds from respondent at a discounted price, with the bonds serving as collateral for the loan.
Petitioner filed a complaint for reformation of the instrument, seeking to express the true intent of the parties, which is that the ostensible sale of the bonds is actually a loan agreement.
Respondent and its co-defendants denied petitioner's allegations and claimed that the transaction was a purchase of Land Bank bonds, not a loan.
The Regional Trial Court (RTC) ruled in favor of petitioner, ordering the instruments to be reformed as a contract of loan and not a contract of sale. The defendants were also ordered to pay the petitioner the sum of P11,557,972.60, plus interest and attorney's fees.
ISSUES:
Whether the contract between the parties is one of loan or sale.
HELD:
The Supreme Court denied the petition for lack of merit and upheld the Court of Appeals' (CA) decision that the transaction was a sale and not a loan.
Costs were imposed on the petitioner.
RATIO:
For an action for reformation of an instrument to prosper, there must be a meeting of the minds of the parties, the instrument must not express the true intention of the parties, and the failure to express the true intention must be due to mistake, fraud, inequitable conduct, or accident.
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Obligations and Contracts
Chapter 4: Reformation of Instruments.
鉂わ笍ARTICLE 1367鉂わ笍
When one of the parties has brought an action to enforce the instrument, he cannot subsequently ask for its reformation.
CASES WHEN REFORMATION NOT ALLOWED.
(1) Simple donations inter vivos where no condition is imposed.
Donation is an act of liberality whereby a person disposes gratuitously of a thing or right in favor of another, who accepts it. (Art. 725.) When the donor intends that the donation shall take effect during his lifetime, it is a donation inter vivos. It is distinguished from donation mortis causa in that this kind of donation takes effect after the donor's death.
a) In donation, the act is essentially gratuitous and the donee has, therefore, no just cause for complaint. The donor is not bound to correct a mistake or defects in the deed of donation which in the first place he was not bound to make. Of course, the donor may ask for the reformation of a deed of donation.
b) If the donation is conditional or is onerous in character, the deed may be reformed so that the true conditions imposed by the donor or the real intention of the parties might be expressed.
(2) Wills.
A will is an act whereby a person is permitted with the formalities prescribed by law to control to a certain degree the disposition of his estate, to take effect after his death. (Art. 783.)
Like a donation, the making of a will is a strictly personal and a free act (Arts. 784, 839.); hence, upon the death of the testator, the right to reformation is lost. Furthermore, a will may be revoked by the testator any time before his death. (Art. 820.)
(3) When the agreement is void.
If the agreement is void, there is nothing to reform. Reformation would be useless because the real agreement being void, it is unenforceable.
(4) When the party has brought an action to enforce the instrument.
Article 1367 is based on estoppel (Art. 1431.) or ratification. (see Arts. 1392, 1396.) When a party brings an action to enforce the contract, he admits its validity and that is expresses the true intention of the parties. The bringing of the action is thus inconsistent with reformaation.
Source:
The Obligations and Contracts by Hector De Leon
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Case: PHILIPPINE STEEL COATING vs. QUI脩ONES
GR No. 194533, April 19, 2017
FACTS:
Respondent Eduard Qui帽ones, owner of Amianan Motors, filed a complaint for damages against petitioner PhilSteel.
Qui帽ones alleged that PhilSteel offered their new product, primer-coated, long-span, rolled galvanized iron (G.I.) sheets, to him.
Qui帽ones expressed concerns about the compatibility of the product with the Guilder acrylic paint process used by Amianan Motors.
PhilSteel assured Qui帽ones that the product was compatible and even conducted laboratory tests to prove it.
Based on these assurances, Qui帽ones purchased the product and used it in the manufacture of bus units.
However, Qui帽ones later received complaints from customers about the paint peeling off, leading him to believe that the primer-coated sheets were incompatible with the paint process.
Qui帽ones filed a complaint against PhilSteel for damages.
ISSUES:
Whether PhilSteel made express warranties regarding the compatibility of their product with the respondent's painting process.
HELD:
The Supreme Court affirmed the decision of the Court of Appeals, ruling that PhilSteel made express warranties and is liable for damages due to the incompatibility of their product with the respondent's painting process.
RATIO:
The Court held that PhilSteel made express warranties, which were positive affirmations of fact that induced Qui帽ones to purchase the product.
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Obligations and Contracts
Chapter 2: Essential Requisites of Contracts.
Section 1. Consent.
鉂わ笍ARTICLE 1340鉂わ笍
The usual exaggerations in trade, when the other party had an opportunity to know the facts, are not in themselves fraudulent. (n)
Usual exaggerations in trade.
It is the natural tendency for merchants and traders to resort to exaggerations in their attempt to make a sale at the highest price possible. When the person dealing with them had an opportunity to know the facts, the usual exaggerations in trade are not in themselves fraudulent. The law allows considerable latitude to seller's statements or dealer's talk and experience teaches that it is exceedingly risky to accept it at its face value. Customers are expected to know how to take care of their concerns and to rely on their own independent judgment. Any person who relies on said exaggerations does so at his own peril.
In effect, the law does not consider such exaggerations, even if known as false by the party making them, as amounting to fraud that will affect the validity of the contract. To constitute fraud, the misrepresentation must be of a fact, past or present, and not a mere expression of an opinion.
Dealer's talk or Trader's talk are representations which do not appear on the face of the contract and these do not bind either party.
Examples:
Expressions or advertisements like:
"The cigarette that will give you the utmost smoking pleasure"
"You like it, it likes you"
"The refreshment of friendship"
"Do you want your child to get a high grades? Then, buy him X fountain pen."
"First in quality"
"The best in its class"
Source:
The Law on Obligations and Contracts by Hector De Leon
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Case: CALTEX PHILIPPINES vs PNOC SHIPPING
GR No. 150711, August 10, 2006
FACTS:
Caltex (Philippines), Inc. filed a complaint against PNOC Shipping and Transport Corporation (PSTC) to recover a judgment debt.
Caltex argued that PSTC is bound by an Agreement of Assumption of Obligations that requires PSTC to assume all the obligations of Luzon Stevedoring Corporation (LUSTEVECO), including the debt owed to Caltex.
The Agreement was entered into between PSTC and LUSTEVECO on July 6, 1979, and it stated that PSTC shall assume all the obligations of LUSTEVECO with respect to certain claims, including the debt owed to Caltex.
The case involved a judgment debt owed by LUSTEVECO to Caltex, which was affirmed by the Court of Appeals in 1985.
ISSUES:
Whether PSTC is bound by the Agreement when it assumed all the obligations of LUSTEVECO.
Whether Caltex is a real party in interest to file an action to recover from PSTC the judgment debt against LUSTEVECO.
HELD:
The Supreme Court ruled in favor of Caltex.
RATIO:
The Court held that PSTC is bound by the Agreement of Assumption of Obligations.
The Agreement clearly stated that PSTC shall assume all the obligations of LUSTEVECO, including the debt owed to Caltex.
PSTC cannot accept the benefits of the Agreement without assuming the obligations.
PSTC's refusal to honor its commitment would amount to defrauding the creditors of LUSTEVECO.
The Court also noted that the transfer of assets from LUSTEVECO to PSTC without the knowledge of its creditors could be considered fraudulent and rescissible.
Furthermore, the Court held that Caltex is a real party in interest to file an action against PSTC.
Although Caltex was not a party to the Agreement, it has a real interest in the performance of PSTC's obligations under the Agreement.
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Obligations and Contracts
Title II: Contracts.
Chapter 1. General Provision.
鉂わ笍ARTICLE 1313鉂わ笍
Creditors are protected in cases of contracts intended to defraud them. (n)
Right of the creditors to impugn contracts intended to defraud them.
Article 1313 is another qualification to the rule that contracts take effect only between the parties.
The creditor is given the right to impugn the contracts of debtor intended to defraud him. (Art. 1177.), Although he is not a party to the contract, he can sue to prevent the debtor from committing fraud against him.
Example:
D is indebted to C in the amount of P100,000. D sells a parcel of land to T with the knowledge of C in order that C may not attach the land in payment of his debt and D has no other property.
C, who is a stranger to the contract between D and T, is given by law the right to ask for the rescission or cancellation of the sale in order that he may be paid his claim. (see Arts. 1381[3], 1387.)
Source:
The Law on Obligations and Contracts by Hector De Leon
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Case: MONDRAGON vs SOLA (1279)
GR No. 174882, January 21, 2013
FACTS:
Mondragon Personal Sales, Inc. entered into a Contract of Services with Victoriano S. Sola, Jr. for a period of three years.
Sola was entitled to a commission or service fee based on the monthly sales.
Sola's wife had an existing debt with Mondragon.
Sola acknowledged and confirmed his wife's debt in a letter addressed to Mondragon's Vice-President for Finance.
Mondragon withheld Sola's service fees and applied them as partial payments to the debt.
ISSUES:
Whether or not Sola assumed wife's debt and obligated to pay it.
HELD:
The Supreme Court ruled in favor of Mondragon and ordered Sola to pay the remaining balance of his wife's debt.
RATIO:
Sola became a co-debtor of his wife's accountabilities with Mondragon based on his letter confirming the debt.
There was legal compensation between Mondragon and Sola, as both parties were principal obligors and creditors of each other.
Mondragon's act of withholding Sola's service fees and applying them to the debt was lawful.
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Obligations and Contracts
Chapter 4: Extinguishment of Obligations.
Section 5. Compensation.
鉂わ笍ARTICLE 1286鉂わ笍
Compensation takes place by operation of law, even though the debts may be payable at different places, but there shall be an indemnity for expenses of exchange or transportation to the place of payment. (1199a)
Compensation where debts payable at different places.
This article applies to legal compensation. The indemnity contemplated above does not refer to the difference in the value of the things in their respective places but to the expenses of monetary exchange (in case of money debts) and expenses of transportation (in case of things to be delivered). Once these expenses are liquidated, the debts also become compensable. The indemnity shall be paid by the person who raises the defense of compensation.
Foreign exchange has been defined as the conversion of an amount of money or currency of one (1) country into an equivalent amount of money or currency of another. (Berman Compania Incorporada vs Central Bank, 104 Phil. 877.) Exchange rate is the price of one currency expressed or quoted in relation to another currency.
Examples:
(1) A owes B $1,000 payable in New York. B owes A P50,000 (equivalent amount) payable in Manila.
If A claims compensation, he must pay for the expenses of exchange.
(2) A obliged himself to deliver to B 500 sacks of rice in Davao. B is also bound to deliver to A 100 sacks of rice of the same kind in Bulacan. The expenses for transportation of the rice to Davao amount to P4,000 and to Bulacan, P1,000.
If A claims compensation he must indemnify B the amount of P3,000 for the expenses of transportation of the rice to Davao.
Source:
The Law on Obligations and Contracts by Hector De Leon
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Case: DALTON vs FGR REALTY (1260)
GR No. 172577 January 19, 2011
FACTS:
Soledad Dalton consigned her rental payment for a property owned by Flora R. Dayrit in Cebu City.
The property was later sold to FGR Realty and Development Corporation (FGR).
Dalton and other lessees consigned their rental payments with the Regional Trial Court (RTC) without notifying Dayrit and FGR.
Dayrit and FGR withdrew the rental payments and reserved the right to question the validity of the consignation.
Dalton did not enter into a compromise agreement with Dayrit and FGR.
ISSUES:
Whether the consignation made by Dalton is valid.
Whether Dalton failed to pay rent.
HELD:
The Court of Appeals affirmed the RTC's decision.
The consignation made by Dalton was invalid.
Dalton failed to pay rent.
RATIO:
The requisites of a valid consignation were not met.
The requirements of prior notice of consignation and subsequent notice of consignation were not fulfilled.
Compliance with these requisites is mandatory and substantial compliance is not enough.
Dalton did not notify Dayrit and FGR of her intention to consign the rental payments, rendering the consignation void.
Dalton did not present sufficient evidence to prove that she continued to reside in the leased premises and used it for business purposes instead of as a dwelling place.
The mandatory nature of the requisites of a valid consignation was emphasized.
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Obligations and Contracts
Chapter 4: Extinguishment of Obligations.
Subsection 3. Tender of Payment and Consignation.
鉂わ笍ARTICLE 1259鉂わ笍
The expenses of consignation, when properly made, shall be charged against the creditor. (1179)
Creditors bears expenses of consignation.
The consignation is made necessary because of the fault or unjust refusal of the creditor to accept payment. That being the case, it is but just that the expenses should be charged against him.
Of course, the expenses are chargeable to the debtor if the consignation is not properly made.
When consignation deemed properly made.
In any of the following cases:
(1) When the creditor accepts the things or sum deposited, without objection, as payment of the obligation (par. 2, Art. 1260);
(2) When the creditor questions the validity of the consignation, and the court, after hearing, declares that it has been properly made; and
(3) When the creditor neither accepts nor questions the validity of the consignation, and the court after hearing, orders the cancellation of the obligation. (Art.1260, par.1)
Source:
The Law on Obligations and Contracts by Hector De Leon
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Case: WERR CORPORATION VS HIGHLANDS PRIME (1234)
G.R. No. 187543 (187580), February 8, 2017
FACTS:
Parties involved: Highlands Prime, Inc. (HPI) and Werr Corporation International (Werr)
HPI issued a Notice of Award/Notice to Proceed to Werr for the construction of residential units in Tagaytay Midlands Complex.
The parties entered into a General Building Agreement, which stated that Werr had to complete the project within 210 calendar days and that HPI would pay a lump sum contract price.
The agreement included provisions for payment, retention money, and liquidated damages for delays.
Werr commenced construction after receiving a downpayment from HPI.
The project was not completed on the agreed completion date, leading to several extensions.
HPI terminated the contract with Werr.
Werr demanded payment of the balance of the contract price.
HPI claimed deductions from the retention money for payments made to suppliers and additional costs incurred after termination.
The case was brought before the Construction Industry Arbitration Commission (CIAC).
ISSUES:
Whether the payments made to suppliers and contractors after the termination of the contract are chargeable against the retention money.
Whether the industry practice of computing liquidated damages only up to substantial completion of the project applies in the computation of liquidated damages.
Whether the cost of arbitration should be shared by both parties.
Whether HPI is entitled to attorney's fees and litigation expenses.
RULING:
The Supreme Court denied the consolidated petitions and affirmed the Court of Appeals' decision.
The Court held that the charges against the retention money were factual issues beyond the scope of review under Rule 45.
The industry practice of computing liquidated damages until substantial completion of the project applied.
Werr failed to prove that it achieved 95% completion rate before or at the time of contract termination, therefore, Werr was still liable for liquidated damages.
The Court agreed with the Court of Appeals' division of arbitration costs and the denial of attorney's fees and litigation expenses.
RATIO:
The charges against the retention money were factual issues beyond the scope of review under Rule 45, which limits the Supreme Court's review to questions of law.
The industry practice of computing liquidated damages until substantial completion of the project applied. However, Werr failed to prove that it achieved 95% completion rate before or at the time of contract termination, making them liable for liquidated damages.
The Court agreed with the Court of Appeals' division of arbitration costs, as it is within the discretion of the appellate court to modify the amount.
Attorney's fees and litigation expenses were denied as there was no showing of bad faith or malice on the part of HPI.
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Obligations and Contracts
Chapter 4: Extinguishment of Obligations.
Section 1. Payment or Performance.
鉂わ笍ARTICLE 1232鉂わ笍
Payment means not only the delivery of money but also the performance, in any other manner, of an obligation. (n)
Meaning of payment.
(1) In ordinary parlance or language, payment refers only to the delivery of money.
(2) As a legal mode of extinguishing an obligation, it has a much wider meaning. Payment may consist of not only the delivery of money but also the giving of a thing (other than money), the doing of an act, or not doing of an act.
When a debtor pays damages or penalty in lieu of the fulfillment of an obligation (see Art. 1226.), there is also payment in the sense used in Article 1232.
In law, payment and (specific) performance are synonymous (see Art. 1191.)
Source:
The Law on Obligations and Contracts by Hector De Leon
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