CIV DIGEST _1249-1307_

CIVIL LAW REVIEW DIGESTS – Balane Alcisso, Antonio, Arriola, Cajucom, Calalang, Claudio, Escueta, Fajardo, Imperial, Juaquino, Martin, Martinez, Mendoza, Noel, Plazo Raso, Rosales, Sia, Siron, Venzuela

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ARTICLE 1249

TIBAJIA v CA

FACTS:

Eden Tan filed a collection case against the spouses Norberto and Carmen Tibajia docketed as civil case no. 54863 in the RTC of Pasig. A writ of preliminary attachment issued by the trial court and the sheriff made a return stating that a deposit made by the Tibajia spouses in another case (RTC Caloocan) had been garnished. RTC Pasig rendered a decision against the spouses Tibajia and ordered them to pay Eden Tan an amount in excess of Php 300,000.00. This decision became final after it was affirmed with modification (amount of moral and exemplary damages only) by the CA. Thus Eden Tan filed a motion for execution and the garnished funds were levied upon.

Spouses Tibajia then paid to Deputy Sheriff Bolima the amount of Php 398,483.70. Php 262,750.00 was in the form of a cashier’s check. Eden Tan refused payment and insisted that the garnished funds be withdrawn from to satisfy judgment. Spouses Tibajia moved that the RTC lift the writ of execution contending that the judgment debt had already been paid. RTC denied the motion saying that payment by check is not valid as a check is not legal tender. CA affirmed the RTC ruling.

ISSUE:

Whether or not a check (even a cashier’s check) is legal tender.

HELD:

NO.

The applicable laws to the case at bar are as follows:

Art. 1249. The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency, then in the currency which is legal tender in the Philippines.

The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the effect of payment only when they have been cashed, or when through the fault of the creditor they have been impaired.

In the meantime, the action derived from the original obligation shall be held in abeyance.

b. Section 1 of Republic Act No. 529, as amended, which provides:

Sec. 1. Every provision contained in, or made with respect to, any obligation which purports to give the obligee the right to require payment in gold or in any particular kind of coin or currency other than Philippine currency or in an amount of money of the Philippines measured thereby, shall be as it is hereby declared against public policy null and void, and of no effect, and no such provision shall be contained in, or made with respect to, any obligation thereafter incurred. Every obligation heretofore and hereafter incurred, whether or not any such provision as to payment is contained therein or made with respect thereto, shall be discharged upon payment in any coin or currency which at the time of payment is legal tender for public and private debts.

c. Section 63 of Republic Act No. 265, as amended (Central Bank Act) which provides:

Sec. 63. Legal character — Checks representing deposit money do not have legal tender power and their acceptance in the payment of debts, both public and private, is at the option of the creditor: Provided, however, that a check which has been cleared and credited to the account of the creditor shall be equivalent to a delivery to the creditor of cash in an amount equal to the amount credited to his account.

Also in PAL vs. CA and Roman Catholic Bishop of Malolos vs. IAC, the Supreme Court said:

A check, whether a manager's check or ordinary check, is not legal tender, and an offer of a check in payment of a debt is not a valid tender of payment and may be refused receipt by the obligee or creditor.

CITIBANK v SABENIANO

***disclaimer: I made a digest for the 2006 case since that’s the date stated in the syllabus but there is already a 2008 case of Citibank v. Sabeniano. Also, it is a very long case. I only discussed the issue pertinent to Article 1249 of the Civil Code.

FACTS:


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Petitioner Citibank, NA (formerly known as the First National City Bank) is a banking corporation duly authorized and existing under the laws of the USA and licensed to do commercial banking activities and perform trust functions in the Philippines. Petitioner Investor’s Finance Corporation, which did business under the name and style of FNCB Finance, was an affiliate company of Citibank, specifically handling money market placements for its clients.

Respondent Sabeniano was a client of both Citibank and FNCB.

Sabeniano filed a complaint for Accounting, Sum of Money and Damages” against petitioners before the RTC of Makati City. Sabeniano claimed to have substantial deposits and money market placements with the petitioners as well as money market placements with the Ayala Investment and Development Corporation (AIDC), the proceeds of which were supposedly deposited automatically and directly to respondent’s accounts with petitioner Citibank. Respondent alleged tat petitioners refused to return her deposits and the proceeds of her money market placements despite her repeated demands.

In their joint answer, petitioners admitted that respondent had deposits and money market placements with them including dollar accounts. However, they allege that the respondent later obtained several loans from Citibank for which she executed Promissory notes and secured by a declaration of pledge for her dollar account in Citibank‐Geneva and Deeds of Assignment for her money market placements with petitioner FNCB Finance. When respondent failed to pay her loans despite repeated demands by Citibank, Citibank exercised its right to off‐set or compensate respondent’s outstanding loans with her deposits and money market placement pursuant to the declaration of pledge and deeds of assignment. Citibank claimed that they informed respondent of the foregoing compensation through letters. They were surprised when 6 years later, respondent made repeated requests for the withdrawal of respondent’s deposit and money market placements with petitioners. Petitioners, thus, prayed for dismissal of the Complaint and for the award of AME damages and attorney’s fees.

TC declared illegal, null and void the setoff effected by Citibank of Sabeniano’s dollar deposit with Citibank and ordered Citibank to refund the said amount to the plaintiff with legal interest. TC also declared that Sabeniano was indebted to Citibank and order Sabeniano to pay. However, Sabeniano was not required to pay interest and penalty charges from the time the illegal setoff was effected.

CA

ISSUE: Whether checks are legal tender

Ruling: NO In support of respondent's assertion that she had already paid whatever loans she may have had with petitioner Citibank, she presented as evidence Provisional Receipts No. 19471, dated 11 August 1978, and No. 12723, dated 10 November 1978, both of petitioner Citibank and signed by Mr. Tan, for the amounts of P500,744.00 andP500,000.00, respectively. While these provisional receipts did state that Mr. Tan, on behalf of petitioner Citibank, received respondent's checks as payment for her loans, they failed to specifically identify which loans were actually paid. Petitioner Citibank was able to present evidence that respondent had executed several PNs in the years 1978 and 1979 to cover the loans she secured from the said bank. Petitioner Citibank did admit that respondent was able to pay for some of these PNs, and what it identified as the first and second sets of PNs were only those which remained unpaid. It thus became incumbent upon respondent to prove that the checks received by Mr. Tan were actually applied to the PNs in either the first or second set; a fact that, unfortunately, cannot be determined from the provisional receipts submitted by respondent since they only generally stated that the checks received by Mr. Tan were payment for respondent's loans.

Mr. Tan, in his deposition, further explained that provisional receipts were issued when payment to the bank was made using checks, since the checks would still be subject to clearing. The purpose for the provisional receipts was merely to acknowledge the delivery of the checks to the possession of the bank, but not yet of payment. This bank practice finds legitimacy in the pronouncement of this Court that a check, whether an MC or an ordinary check, is not legal tender and, therefore, cannot constitute valid tender of payment. In Philippine Airlines, Inc. v. Court of Appeals, this Court elucidated that:

Since a negotiable instrument is only a substitute for money and not money, the delivery of such an instrument does not, by itself, operate as payment. A check, whether a manager's check or ordinary check, is not legal tender, and an offer of a check in payment of a debt is not a valid tender of payment and may be refused receipt by the obligee or creditor. Mere delivery of checks does not discharge the obligation under a judgment. The obligation is not extinguished and remains suspended until the payment by commercial document is actually realized (Art. 1249, Civil Code, par. 3).

In the case at bar, the issuance of an official receipt by petitioner Citibank would have been dependent on whether the checks delivered by respondent were actually cleared and paid for by the drawee banks.


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BPI v ROXAS

FACTS

Gregorio Roxas, as trader, delivered stocks of vegetable oil to Spouses Rodrigo and Marissa Cawili. As payment to Roxas, the latter signed a personal check amounting to PHP348,805.50 which was dishonored by the drawee bank when respondent tried to encash.

The Petitioner Spouses Cawili thereafter begged understanding and replaced the bounced check with a cashier's check from Bank of the Philippine Islands.

The cashier's check was drawn against the account of Marissa Cawili. The Cashier Checks was sent to respondent by Rodrigo Cawili.

Again, when Gregorio tried to encash the Cashier Check, it was dishonored on the ground that the account of Marissa was closed on the same date that respondent tried to encash.

Gregorio thereafter filed a complaint with the Regional Trial Court for collection praying that Spouses Cawili pay him the amount of the chack, damages and cost of the suit.

The RTC in its decision held that Petitioner is liable to pay the face value of the cashier's checka mounting to PHP 384, 805.50.

On appeal, the CA affirmed the decision of the RTC. Hence, the filingof the Petition for Certiorari by the petitioner.

ISSUE

(the case is replete with are negotiable instruments issues, but our concern is article 1249)1

w/n BPI is liable to the Spouses Cawili for the Cashier’s check that was drawn upon the account of Marissa’s closed account.

1 Art. 1249. The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency, then in the currency which is legal tender in the Philippines.

The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the effect of payment only when they have been cashed, or when through the fault of the creditor they have been impaired.

In the meantime, the action derived from the original obligation shall be held in the abeyance. (1170)

HELD

BPI is liable.

The SC emphasizes that the disputed check is a cashier’s check. In International Corporate Bank v. Spouses Gueco, Court held that a cashier’s check is really the bank’s own check and may be treated as a promissory note with the bank as the maker. The check becomes the primary obligation of the bank which issues it and constitutes a written promise to pay upon demand.

The SC then cited In New Pacific Timber & Supply Co. Inc. v. Señeris, where it stated “well‐known and accepted practice in the business sector that a cashier’s check is deemed as cash.” This is because the mere issuance of a cashier’s check is considered acceptance thereof.

In view of the above pronouncements, BPI became liable to respondent from the moment it issued the cashier’s check. Having been accepted by Cawili, subject to no condition whatsoever, BPI should have paid the same upon presentment by the former. This is notwithstanding the fact that Marissa’s account was closed.


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ARTICLE 1250

TELANGTAN v US LINES

FACTS:

On June 22, 1981, respondent U.S. Lines filed a suit against petitioner Telengtan seeking payment of demurrage charges plus interest and damages.

The complaint alleged that between the years 1979 and 1980, goods belonging to petitioner Telengtan loaded on containers aboard its (respondent's ) vessels arrived in Manila from U.S. ports.After the 10‐day free period, petitioner still failed to withdraw its goods from the containers wherein the goods had been shipped. Continuing, respondent U.S. Lines alleged that petitioner incurred on all those shipments a demurrage in the total amount of P94,000.00 which the latter refused to pay despite repeated demands.

In its amended answer with compulsory counterclaim, petitioner Telengtan, as defendant, disclaims liability for the demanded demurrage, alleging that it has never entered into a contract nor signed an agreement to be bound by any rule on demurrage. Petitioner Telengtan likewise maintains that, absent an obligation to pay respondent who made no proper or legal demands in the first place, there is justifiable reason to refuse payment of the latter's unwarranted claims.

By way of counterclaim, petitioner states that, upon arrival of the conveying vessels, it presented the Bills of Lading (B/Ls) and all other pertinent documents covering seven shipments and demanded from respondent delivery of all the goods covered by the aforesaid B/Ls, only to be informed that respondent US Lines had already unloaded the goods from the container vans, stripped them of their contents and then stored in warehouses.

Petitioner Telengtan further states that respondent had refused to deliver the goods covered by the B/Ls and required petitioner to pay the amount of P123,738.04 before the goods can be released. Petitioner demands that respondent be ordered to pay the aforestated amount with interest.

After due proceedings, the trial court ruled for respondent U.S. Lines, as plaintiff therein, and accordingly rendered judgment, as follows:

WHEREFORE, in view of all the foregoing, the Court finds [petitioner] liable to [respondent] for demurrage incurred in the amount of P99,408.00 which sum will bear interest at the legal rate from the date of the filing of the complaint till full payment thereof plus attorney's fees in the amount of 20% of the total sum due, all

of which shall be recomputed as of the date of payment in accordance with the provisions of Article 1250 of the Civil Code.Exemplary damages in the amount of P80,000.00 are also granted.The counterclaim is dismissed.Costs against [petitioner]

Undaunted, Petitioner raised the issue to the CA. Unfortunately, the CA affirmed the RTC decision.

ISSUE:

w/n Art 1250 comes into play into recomputing the amounts owed by Telengtan to US Lines2

HELD:

The SC denies the application of Art 1250 in the instant case. No extraordinary inflation occurred during these periods. The devaluation of the Philippine Peso was a standard and normal depreciation.

Note that in calling for the application of Art 1250, respondent US Lines urged that judicial notice be taken of the succeeding devaluations of the peso vis‐‐vis the US dollar since the time the proceedings began in 1981. According to respondent, the computation of the amount thus due from the petitioner should factor in such peso devaluations.

Extraordinary inflation or deflation, as the case may be, exists when there is an unusual increase or decrease in the purchasing power of the Philippine peso which is beyond the common fluctuation in the value of said currency, and such increase or decrease could not have been reasonably foreseen or was manifestly beyond the contemplation of the parties at the time of the establishment of the obligation. Extraordinary inflation can never be assumed; he who alleges the existence of such phenomenon must prove the same.

The Court holds that there has been no extraordinary inflation within the meaning of Article 1250 of the Civil Code. Accordingly,there is no plausible reason for ordering the payment of an obligation in an amount different from what has been agreed upon because of the purported supervention of extraordinary inflation.

2 Art. 1250. In case an extraordinary inflation or deflation of the currency stipulated should supervene, the value of the currency at the time of the establishment of the obligation shall be the basis of payment, unless there is an agreement to the contrary.


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As it were, respondent was unable to prove the occurrence of extraordinary inflation since it filed its complaint in 1981. Indeed, the record is bereft of any evidence, documentary or testimonial, that inflation, especially an extraordinary one, existed. Even if the price index of goods and services may have risen during the intervening period, this increase, without more, cannot be considered as resulting to 'extraordinary inflation as to justify the application of Article 1250.

The erosion of the value of the Philippine peso in the past three or four decades, starting in the mid‐sixties, is characteristics of most currencies. And while the Court may take judicial notice of the decline in the purchasing power of the Philippine currency in that span of time, such downward trend of the peso cannot be considered as the extraordinary phenomenon contemplated by Article 1250 of the Civil Code. Furthermore, absent an official pronouncement or declaration by competent authorities of the existence of extraordinary inflation during a given period, as here, the effects of extraordinary inflation, if that be the case, are not to be applied.

Lest it be overlooked, Article 1250 clearly provides that the value of the peso at the time of the establishment of the obligation shall control and be the basis of payment of the contractual obligation, unless there is agreement to the contrary.It is only when there is a contrary agreement that extraordinary inflation will make the value of the currency at the time of payment, not at the time of the establishment of obligation, the basis for payment.

To be sure, neither the trial court, the CA nor respondent has pointed to any provision of the covering B/Ls whence respondent sourced its contractual right under the premises where the defining agreement to the contrary is set forth. Needless to stress, the Court sees no need to speculate as to the existence of such agreement, the burden of proof on this regard being on respondent.

ULTIMATELY, the SC affirmed the decision of the CA requiring that Telengtan pay US Lines as sum of money BUT with the MODIFICATION that the order for recomputation as of the date of payment in accordance with the provisions of Article 1250 of the Civil Code be deleted.


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ARTICLE 1256

SOCO v MILITANTE

FACTS:

On January 1973, Soco leased her commercial building to Francsico for a monthly rental of P800 for a period of 10 years. After some time, Francisco noticed that Soco did not anymore send her collector for the payment of rentals and at times there were payments made but no receipts were issued. This prompted Francisco to send his payment over to Soco through an arrangement with his bank, Commercial Bank and Trust Company, wherein the bank would issue checks in favor of Soco and deliver the same through the messengerial services of FAR Corporation. Starting May 1977 however, Soco claimed that she had not received any rental payments from Francisco.

In view of this alleged non‐payment of rent, Soco through her lawyer sent a letter dated November 23, 1978 to Francisco serving notice to the latter 'to vacate the premises leased.' In answer, Francisco informed Soco that all payments of rental due her were in fact paid by Commercial Bank and Trust Company through the Clerk of Court of the City Court of Cebu. However, Soco still filed the case of Illegal Detainer against Francisco.

During trial, it was alleged that when Soco learned that Francisco had sub‐leased a portion of the building to NACIDA at a monthly rental of more than P3,000, she tried to look for ways and means to terminate the contract. The CFI found that due to Soco’s intent to eject Francisco, she did not accept the latter’s payments delivered by FAR Corporation, which prompted Francisco to instruct the Bank to deposit the rentals with the Court. It was also proven that Soco was notified numerous times of the fact of deposit of the rental payments. Furthermore, during cross‐examination, Soco admitted that she knew that the rental payments were deposited in court but she qualified that the said deposit did not include payments for the months of May, June, July and August of 1977. Nonetheless, for the aforesaid months, the CFI found the certification of the Bank that the rentals were properly paid and received by Soco more credible.

Thus, the City Court (MTC) ruled in favor of Soco. On appeal, the CFI ruled in favor of Francisco and found that there was substantial compliance of the requisites of consignation, hence his payments were valid and effective. Consequently, Francisco cannot be ejected from the leased premises for non‐payment of rentals.

ISSUE: W/N the consignation of the rentals was valid and effective.

HELD: NO.

The essential requisites of a valid consignation must be complied with fully and strictly in accordance with the law, Arts. 1256 to 1261 of the Civil Code. These Articles must be accorded a mandatory construction since the very language of the codal provisions requires absolute compliance with the essential requisites. Substantial compliance is not enough for that would render only a directory construction to the law. The use of the words "shall" and "must" which are imperative, operating to impose a duty which may be enforced, positively indicate that all the essential requisites of a valid consignation must be complied with. The Civil Code Articles expressly and explicitly direct what must be essentially done in order that consignation shall be valid and effectual. Art. 1256, of the Civil Code provides that if the creditor to whom tender of payment has been made refuses without just cause to accept it, the debtor shall be released from responsibility by the consignation of the thing or sum due. Consignation is the act of depositing the thing due with the court or judicial authorities whenever the creditor cannot accept or refuses to accept payment and it generally requires a prior tender of payment. However, in the following cases, consignation alone shall release the debtor from responsibility: (1) When the creditor is absent or unknown, or does not appear at the place of payment; (2) When he is incapacitated to receive the payment at the time it is due; (3) When, without just cause, he refuses to give a receipt; (4) When two or more persons claim the same right to collect; (5) When the title of the obligation has been lost. In order that consignation may be effective, the debtor must first comply with certain requirements prescribed by law. The debtor must show (1) that there was a debt due; (2) that the consignation of the obligation had been made because the creditor to whom tender of payment was made refused to accept it, or because he was absent or incapacitated, or because several persons claimed to be entitled to receive the amount due (Art. 1176, Civil Code); (3) that previous notice of the consignation had been given to the person interested in the performance of the obligation (Art. 1177, Civil Code); (4) that the amount due was placed at the disposal of the court (Art. 1178, Civil Code); and (5) that after the consignation had been made the person interested was notified thereof (Art. 1178, Civil Code). Failure in any of these requirements is enough ground to render a consignation ineffective. Without the notice first announced to the persons interested in the fulfillment of the obligation, the consignation as a payment is void. In order to be valid, the tender of payment must be made in lawful currency. While payment in check by the debtor may be acceptable as valid, if no prompt objection to said payment is made the fact that in previous years payment in check was accepted does not place its creditor in estoppel from requiring the debtor to pay his obligation in cash. Thus, the tender of a check to pay for an obligation is not a valid tender of payment thereof.


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In this case, the SC found that Francisco failed to fulfill the required processes before consignation can be made because of:

(1) Failure to tender payment of the monthly rentals, except that of June 1977. (2) Failure to notify Soco prior to consignation. The purpose of this notice is in order to give

the creditor an opportunity to reconsider his unjustified refusal and to accept payment thereby avoiding consignation and the subsequent litigation. This previous notice is essential to the validity of the consignation and its lack invalidates the same.

(3) Failure to notify Soco after consignation has been made. This requirement is to enable the creditor to withdraw the goods or money deposited. It would be unjust to make him suffer the risk for any deterioration, depreciation or loss of such goods or money by reason of lack of knowledge of the consignation

(4) Failure to prove actual deposit or consignation of the monthly rentals, except for the months of May and June 1977.

Thus, the SC ruled in favor of Soco.

NOTE: To distinguish –

Tender of payment is the antecedent of consignation, that is, an act preparatory to the consignation, which is the principal, and from which are derived the immediate consequences which the debtor desires or seeks to obtain. Tender of payment may be extrajudicial, while consignation is necessarily judicial, and the priority of the first is the attempt to make a private settlement before proceeding to the solemnities of consignation.

PASRICHA v LUIS DIZON REALTY

Facts: Contract of Lease between Petitioners and Respondent for Rooms 22, 24, 32, 33, 34, 35 (San Luis Building in Ermita, Manila). The general manager dealing with the petitioner changed from Francis Pacheco to Roswinda Bautista. After which, petitioners continuously refused to pay rent which accrued to a total of P916,585.58. After final demand of a lawyer, respondent filed ejectment with the MeTC. Petitioners claim they refused to pay rentals because of the internal squabble in the company of who is authorized to receive rent. In fact, they prepared the monthly vouchers for the rentals. Moreover, they were prevented to use some of the rooms and this constitutes as waiver for the company to collect rentals. Petitioners further averred that the controversy hasn’t been referred to a barangay conciliation.

MeTC ‐ petitioners’ non‐payment of rentals is unjustified. Petitioners should have deposited their payment in the name of respondent company. However, case was dismissed because of Ms. Bautista’s alleged lack of authority to sue on behalf of the corporation.

RTC – upon appeal, court affirmed non‐payment is unjustified. However, Ms. Bautista, even w/o a board resolution, apparently has apparent authority from her position as General Manager/Treasurer. Ordered petitioners to vacate property and pay rentals and attorney’s fees.

CA – affirmed RTC but deleted attorney’s fees. SC – petitioners insist that respondent company has no standing to sue as a

juridical person in view of the suspension and eventual revocation of its certificate of registration.

Main issue: W/N petitioner was justified to refuse payment of rentals Held: No. Petitioners should have availed of Art. 1256

Article 1256. If the creditor to whom tender of payment has been made refuses without just cause to accept it, the debtor shall be released from responsibility by the consignation of the thing or sum due. Consignation alone shall produce the same effect in the following cases: x x x x (4) When two or more persons claim the same right to collect;

x x x x

In the instant case, consignation alone would have produced the effect of payment of the rentals. The rationale for consignation is to avoid the performance of an obligation becoming more onerous to the debtor by reason of causes not imputable to him. Petitioners claim that they made a written tender of payment and actually prepared vouchers for their monthly rentals. But that was insufficient to constitute a valid tender of payment. Even assuming that it was valid tender, still, it would not constitute payment for want of consignation of the amount. Well‐settled is the rule that tender of payment must be accompanied by consignation in order that the effects of payment may be produced. Other Issue: W/N respondent corporation had capacity to sue. YES. Although SEC revoked its license, records show that it commenced the action long before the revocation of its license. Besides, SEC later set aside its order of suspension and revocation of respondent’s certificate, rendering the issue moot and academic. Ms. Bautista had capacity to sue. Although Ms. Bautista initially failed to show that she had the capacity to sign the verification and institute the ejectment case on behalf of the company, when confronted with such question, she immediately presented the Secretary’s Certificate confirming her authority to represent the company.


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GO CINCO v CA

Facts: Spouses Go Cinco obtained a P700,000 loan from Maasin Traders Lending Corporation (MTLC). With the 3% monthly interest (36% annual interest) payable within 6 months, the loan ballooned to P1,071,256.66. The loan was also secured by a real estate mortgage. Manuel Cinco, the husband, applied for a loan with PNB and offered the same property as collateral. PNB gave the condition that the REM by MTLC should be released first before the bank can release the funds. Manuel approached Ester Servacio, MTLC’s President, informing her of the loan from PNB that will be used to pay the loan to her company. Manuel executed SPA to authorize Ester to collect the funds from PNB. However, when she came to PNB to collect, she was outraged by the fact that the same property was used as collateral and she refused to release the REM. As the loan was already due, she nstituted foreclosure proceedings against the spouses. Spouses Go Cinco filed an action for specific performance, damages, and preliminary injunction before the RTC. They claimed that the assignment of the proceeds of the PNB loan amounted to the payment of the MTLC loan. Ester claims that she only authorized to collect the proceeds of the loan and not to apply it as payment to her company’s loan. Issue: W/N assignment of the PNB loan proceeds already amounted to payment of the MTLC loan. Ruling: ARTICLE 1256. If the creditor to whom tender of payment has been made refuses without just cause to accept it, the debtor shall be released from responsibility by the consignation of the thing or sum due. The court finds that Ester’s refusal of the payment was without basis. A subsequent mortgage is recognized as valid by law and by commercial practice, subject to the prior rights of previous mortgages. However, court cannot agree with Manuel’s position that this refusal had the effect of payment that extinguished his obligation to MTLC. In short, a refusal without just cause is not equivalent to payment; to have the effect of payment and the consequent extinguishment of the obligation to pay, the law requires the companion acts of tender of payment and consignation. No completed tender of payment and consignation took place sufficient to constitute payment. However, court also finds that under the circumstances, the spouses Go Cinco have undertaken, at the very least, the equivalent of a tender of payment that cannot but have legal effect. Since payment was available and was unjustifiably refused, justice and equity

demand that the spouses Go Cinco be freed from the obligation to pay interest on the outstanding amount from the time the unjust refusal took place


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ARTICLE 1267

LAGUNA v MANABAT

FACTS:

On January 20, 1956, a contract was executed whereby the Biñan Transportation Company leased to the Laguna‐Tayabas Bus Company at a monthly rental of P2,500.00 its certificates of public convenience over the lines known as Manila‐Biñan, Manila‐Canlubang and Sta. Rosa‐Manila, and to the Batangas Transportation Company its certificate of public convenience over the line known as Manila‐Batangas Wharf, together with one "International" truck, for a period of five years, renewable for another similar period, to commence from the approval of the lease contract by the Public Service Commission. On the same date the Public Service Commission provisionally approved the lease contract on condition that the lessees should operate on the leased lines in accordance with the prescribed time schedule and that such approval was subject to modification or cancellation and to whatever decision that in due time might be rendered in the case.

Sometime after the execution of the lease contract, the plaintiff Biñan Transportation Company was declared insolvent in Special Proceedings No. B‐30 of the Court of First Instance of Laguna, and Francisco C. Manabat was appointed as its assignee. From time to time, the defendants paid the lease rentals up to December, 1957, with the exception of the rental for August 1957, from which there was deducted the sum of P1,836.92 without the consent of the plaintiff. This deduction was based on the ground that the employees of the defendants on the leased lines went on strike for 6 days in June and another 6 days in July, 1957, and caused a loss of P500 for each strike, or a total of P1,000.00; and that in Civil Case No. 696 of the Court of First Instance of Batangas, Branch II, judgment was rendered in favor of defendant Batangas Transportation Company against the Biñan Transportation Company for the sum of P836.92. The assignee of the plaintiff objected to such deduction, claiming that the contract of lease would be suspended only if the defendants could not operate the leased lines due to the action of the officers, employees or laborers of the lessor but not of the lessees, and that the deduction of P836.92 amounted to a fraudulent preference in the insolvency proceedings as whatever judgment might have been rendered in favor of any of the lessees should have been filed as a claim in said proceedings. The defendants neither refunded the deductions nor paid the rentals beginning January, 1958, notwithstanding demands therefor made from time to time. At first, the defendants assured the plaintiff that the lease rentals would be paid, although it might be delayed, but in the end they failed to comply with their promise.

On February 18, 1958, the Batangas Transportation Company and Laguna‐Tayabas Bus Company separately filed with the Public Service Commission a petition for authority to suspend the operation on the lines covered by the certificates of public convenience leased to each of them by the Biñan Transportation Company. The defendants alleged as reasons the reduction in the amount of dollars allowed by the Monetary Board of the Central Bank of the Philippines for the purchase of spare parts needed in the operation of their trucks, the alleged difficulty encountered in securing said parts, and their procurement at exorbitant costs, thus rendering the operation of the leased lines prohibitive. The defendants further alleged that the high cost of operation, coupled with the lack of passenger traffic on the leased lines resulted in financial losses. For these reasons they asked permission to suspend the operation of the leased lines until such time as the operating expenses were restored to normal levels so as to allow the lessees to realize a reasonable margin of profit from their operation. PSC granted the suspension.

On May 19, 1959, plaintiff Biñan Transportation Company represented by Francisco C. Manabat, assignee, filed this action against defendants Laguna Tayabas Bus Company and Batangas Transportation Company for the recovery of the sum of P42,500 representing the accrued rentals for the lease of the certificates of public convenience of the former to the latter, corresponding to the period from January 1958, to May 1959, inclusive, plus the sum of P1,836.92 which was deducted by the defendants from the rentals due for August, 1957, together with all subsequent rentals from June, 1959, that became due and payable; P5,000.00 for attorney's fees and such corrective and exemplary damages as the court may find reasonable.

ISSUE:

W/N Petitioner is entitled to a reduced amount of rentals on the subject matter of the lease was allegedly not used by them as a result of the suspension of operations on the lines authorized by the Public Service Commission? N

RULING:

Where a person by his contract charges himself with an obligation possible to be performed, he must perform it, unless the performance is rendered impossible by the act of God, by the law, or by the other party, it being the rule that in case the party desires to be excused from the performance in the event of contingencies arising, it is his duty to provide therefor in his contract. Hence, performance is not excused by subsequent inability to perform, by unforeseen difficulties, by unusual or unexpected expenses, by danger, by inevitable accident, by breaking of machinery, by strikes, by sickness, by failure of a party to avail himself of the benefits tobe had under the contract, by weather conditions, by financial


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stringency or bystagnation of business. Neither is performance excused by the fact that the contract turns out to be hard and improvident, unprofitable, or impracticable, ill‐advised, or even foolish, or less profitable, unexpectedly burdensome.

Petitioners, it must be recalled, promised to pay the accrued rentals in due time. Later, however, when they believed they found a convenient excuse for escaping their obligation, they reneged on their earlier promise. Moreover, petitioners' option to suspend operation on the leased lines appears malicious.

Since, by the lease, the lessee was to have the advantage of casual profits of the leased premises, he should run the hazard of casual losses during the term and not lay the whole burden upon the lessor.

The suspension of operation on the leased lines was conceived as a scheme to lessen operation costs with the expectation of greater profit. The petitioners are thus not entitled to reduced rentals.

OCCENA v JABSON (borrowed from A)

Facts: Private respondent Tropical Homes, Inc. entered into a subdivision contract with

petitioners wherein respondent guaranteed petitioners (as landowners of a 55,330 square meter parcel of land in Davao City) an amount equivalent to 40% of all cash receipts from the sale of the subdivision lots. Respondent filed a complaint for modification of the terms and conditions of the contract with petitioners, alleging that: - “due to the increase in price of oil and its derivatives and the concomitant

worldwide spiralling of prices, which are not within the control of plaintiff, of all commodities including basis raw materials required for such development work, the cost of development has risen to levels which are unanticipated, unimagined and not within the remotest contemplation of the parties at the time said agreement was entered into and to such a degree that the conditions and factors which formed the original basis of said contract, have been totally changed;”

- “further performance by the plaintiff under the contract will result in situation where defendants would be unustly enriched at the expense of the plaintiff; will cause an inequitous distribution of proceeds from the sales of subdivided lots in manifest actually result in the unjust and intolerable exposure of plaintiff to implacable losses, all such situations resulting in an unconscionable, unjust and immoral situation contrary to and in violation of the primordial concepts of good faith, fairness and equity which should pervade all human relations.”

Petitioners insist that the worldwide increase in prices cited by respondent does not constitute a sufficient cause of action for modification of the subdivision contract.

Issue/Held:

Does the increase in prices constitute a sufficient cause of action of for modification of the subdivision contract? No.

Rationale: ART. 1267 of the Civil Code:

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

Respondent's complaint for modification of contract manifestly has no basis in law and therefore states no cause of action. Under the particular allegations of respondent's complaint and the circumstances therein averred, the courts cannot even in equity grant the relief sought.

While respondent court correctly cited in its decision the Code Commission's report giving the rationale for Article 1267 of the Civil Code, to wit: “[t]he general rule is that impossibility of performance releases the obligor. However, it is submitted that when the service has become so difficult as to be manifestly beyond the contemplation of the parties, the court should be authorized to release the obligor in whole or in part. The intention of the parties should govern and if it appears that the service turns out to be so difficult as have been beyond their contemplation, it would be doing violence to that intention to hold the obligor still responsible,” the respondent court misapplied the same to respondent's complaint.

If respondent's complaint were to be released from having to comply with the subdivision contract, assuming it could show at the trial that the service undertaken contractually by it had "become so difficult as to be manifestly beyond the contemplation of the parties", then respondent court's upholding of respondent's complaint and dismissal of the petition would be justifiable under the cited codal article. Without said article, respondent would remain bound by its contract under the prevailing doctrine that performance therewith is not excused "by the fact that the contract turns out to be hard and improvident, unprofitable, or unexpectedly burdensome", since in case a party desires to be excused from performance in the event of such contingencies arising, it is his duty to provide it in the contract.

However, respondent's complaint seeks not release from the subdivision contract but that the court render judgment in modifying the terms and conditions of the contract by fixing the proper shares that should pertain to the herein parties out of the gross proceeds from the sales of subdivided lots of subject subdivision.

The cited article does not grant the courts this authority to remake, modify or revise the contract or to fix the division of shares between the parties as contractually stipulated with the force of law between the parties, so as to substitute its own terms for those covenanted by the parties themselves.


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NAGA TELEPHONE v CA

Facts:

Naga Telephone Co., Inc. (NATELCO) is a telephone company rendering local as well as long distance telephone service in Naga City while private respondent Camarines Sur II Electric Cooperative, Inc. (CASURECO II) is a private corporation established for the purpose of operating an electric power service in the same city. The parties entered into a contract (Exh. "A") for the use by petitioners in the operation of its telephone service the electric light posts of private respondent in Naga City. In consideration therefor, petitioners agreed to install, free of charge, ten (10) telephone connections for the use by private respondent. The contract provided that:

(a) That the term or period of this contract shall be as long as the party of the first part has need for the electric light posts of the party of the second part it being understood that this contract shall terminate when for any reason whatsoever, the party of the second part is forced to stop, abandoned [sic] its operation as a public service and it becomes necessary to remove the electric lightpost; x x x

After the contract had been enforced for over ten (10) years, private respondent filed on January 2, 1989 with the Regional Trial Court of Naga City (Br. 28) C.C. No. 89‐1642 against petitioners for reformation of the contract with damages, on the ground that it is too one‐sided in favor of petitioners; that it is not in conformity with the guidelines of the National Electrification Administration (NEA) which direct that the reasonable compensation for the use of the posts is P10.00 per post, per month; that after eleven (11) years of petitioners' use of the posts, the telephone cables strung by them thereon have become much heavier with the increase in the volume of their subscribers, worsened by the fact that their linemen bore holes through the posts at which points those posts were broken during typhoons; that a post now costs as much as P2,630.00; so that justice and equity demand that the contract be reformed to abolish the inequities thereon.

Issue:

1. Whether or not Art. 1267 is applicable. 2. Whether or not the ruling in Occena is applicable.

Ruling:

1. Yes. NATELCO claims it’s not since contract in this case doesn’t involve rendition of service/personal prestation and it’s not for future service w/future unusual change. It invokes Occena vs. Jabson. And the article was never raised by CASURECO.

The provision speaks of service (meaning performance of theobligation) w/c has become so difficult. It doesn’t require that the contract be for future service w/future unusual change. Rather, it speaks of unforeseen events or the discredited theory of rebus sic stantibus in public international law wherein parties stipulate in the light of certain prevailing conditions & once these conditions cease to exist the contract also ceases. Equity & good faith demand that when basis of the contract disappears, the prejudiced party has a right to relief.

Fact that this provision was not raised by the parties in their pleadings & was never subject of trial is immaterial. Court has discretion to consider an unassigned error that is closely related to an error properly assigned as long as the consideration is necessary in arriving at a just decision. The material allegations of fact in the complaint & not the legal conclusion made or the prayer that determines the relief to w/c the plaintiff is entitled and plaintiff is entitled to as much relief as the facts warrant although that relief is not specifically prayed for. NATELCO was given the opportunity to present its evidence WRT this matter when they were given

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

The chance to answer the issue of WON the contract has become too one‐sided in its favor & too iniquitous, unfair & disadvantageous to CASURECO.

2. No. The case provides that Art. 1267 doesn’t authorize the courts to remake, modify or revise the contract or to fix the division of shares between the parties as contractually stipulated w/the force of law between the parties. Complaint for the modification of contract was dismissed for failure to state a cause of action.

In this case, CASURECO’s complaint & evidence it presented sufficiently made out a cause of action under Art. 1267.

Parties are released from their correlative obligations under the contract. But taking into account the possible consequences of merely releasing the parties from the contract, the SC decided to uphold the trial court ruling WRT payment for use of post and the phone lines so as not disrupt the basic & essential services being rendered by both companies and to avoid unjust enrichment by NATELCO at the expense of CASURECO

MAGAT v CA

Facts:

Santiago Guerrero was the President of Guerrero Transport Services, which won the bid for the operation of a fleet of taxicabs in Subic. Guerrero is to provide 160 radio‐controlled taxi


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service within the Naval Base. When Pres. Marcos proclaimed Martial Law, he issued LOI No. 1 which mandated the seizure and control of all privately owned newspapers, magazines, RADIO, and television facilities and other media of communication. Pursuant to this, the Radio Control Office issued Admin. Circ. 4 which suspended the application the acceptance and processing of application for radio station construction and permits to own radio transmitters or transceivers.

Guerrero and Victorino Magat, GM of Spectrum Electronic Laboratories, entered into a contract for the purchase of transceivers FOB Yokohama. Magat was to deliver the transceivers within 60‐90 days after receiving notice from Guerrero of the assigned radio frequency taking note of the Govt regulations. A naval officer confirmed that Guerrero won the bid [for the operation in Subic]. Isidro Aligada of Reliance Group Engineers, informed Magat that a radio frequency has not yet been assigned to Guerrero but he advised Magat to proceed Magat to inform the supplier to proceed with production pending frequency information. Guerrero then informed Aligada of the frequency assigned by the Subic Naval Base authorities and instructed him to proceed with the order thru Spectrum. Aligada then relayed this information to Magat. Guerrero then applied for a letter of credit with Metrobank but this was not pursued. Magat informed Guerrero that should the contract with the Japanese supplier be cancelled, the latter would forfeit 30% of the deposit and charge a cancellation fee. Unable to get the letter of credit, the contract was cancelled. Magat then filed a complaint for damages against Guerrero for breach of contract. Guerrero moved to dismiss the complaint which the RTC granted. Magat filed a petition for review with the SC which reversed and remanded the case. The RTC ruled in favor of the Heirs of Magat [Victorino died so he was substituted by the heirs]. On appeal the CA dismissed the complaint hence the case at bar.

Issue: W/N the contract was void because the subject matter [transceivers] were contraband items prohibited by the LOI and Admin Ciricular

Held: NO! Contract valid. Transceivers NOT contraband

Contraband refers to any property which is unlawful to produce or to possess or to goods which are exported/imported to a country against its laws. There was nothing in the LOI or the Circular which prohibits the importation of transceivers. The LOI and the Circular did not render them illegal per se. It only suspended the acceptance and processing of the applications for. Processing and importation were legal provided one has the necessary license for it. Transceivers were not prohibited but merely regulated goods. The LOI or the Circular did not render the transceivers outside the commerce of man. they were valid objects of the contract.

As to the breach of contract

Guerrero was prevented from securing a letter of credit because a permit to import the transceivers was denied by the Radio Control Board. The office of the Pres also explained that radios were “banned like guns during martial law”. The law however provides that “when the service required by the contract has become so manifestly beyond the contemplation of the parties, the obligor may be released therefrom in whole or in part. Guerrero’s inability to secure a L/C and to comply with his obligation was a direct consequence of the denial of the permit to import. Hence he cannot be faulted. Even if there was breach, there should not be any award of damages as there was no bad faith on his part.


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ARTICLE 1291

FOUNDATION SPECIALISTS v BETONVAL

FACTS On separate dates, Foundation Specialists, Inc. (FSI) and Betonval Ready Concrete, Inc. (Betonval) executed 3 contracts for the delivery of ready mixed concrete by Betonval to FSI. The basic stipulations were:

(a) for FSI to supply the cement to be made into ready mixed concrete; (b) for FSI to pay Betonval within seven days after presentation of the invoices plus 30% interest p.a. in case of overdue payments and (c) a credit limit of P600,000 for FSI.

Betonval delivered the ready mixed concrete pursuant to the contracts but FSI failed to pay its outstanding balances. As an accommodation to FSI, Betonval extended the 7 day credit period to 45 days. Betonval informed FSI that further defaults would leave it no other choice but to impose the stipulated interest for late payments and take appropriate legal action to protect its interest. FSI sent Betonval a proposed schedule of payments devised with a liability for late payments fixed at 24% p.a. Thereafter, FSI paid Betonval according to the terms of its proposed schedule of payments. It was able to reduce its debt, inclusive of the 24% annual interest computed from the due date of the invoices. Nevertheless, it failed to fully settle its obligation. Betonval thereafter filed an action for sum of money and damages in the RTC. It also applied for the issuance of a writ of preliminary attachment alleging that FSI employed fraud when it contracted with Betonval and that it was disposing of its assets in fraud of its creditors. FSI denied Betonval’s allegations and moved for the dismissal of the complaint. The amount claimed was allegedly not due and demandable because they were still reconciling their respective records. RTC ruled for Betonval. FSI and Stronghold separately filed motions for reconsideration while Betonval filed a motion for clarification and reconsideration. RTC denied the motions for reconsideration of Betonval and Stronghold. All parties appealed to the Court of Appeals (CA). In its appeal, Betonval assailed the award of actual damages as well as the imposition of legal interest at only 12%, instead of 24% as agreed on. CA upheld the RTC order with modification. That FSI should pay Betonval the value of unpaid ready mixed concrete at 24% p.a. interest plus legal interest at 12%. ISSUE: Wether the grant to FSI of a 45‐day credit extension novated the contracts insofar as FSI’s obligation to pay any interest was concerned? NO RATIO:

1. NOVATION. Novation is one of the modes of extinguishing an obligation. It is done by the substitution or change of the obligation by a subsequent one which extinguishes the first, either by changing the object or principal conditions, or by substituting the person of the debtor, or by subrogating a third person in the rights of the creditor.

Novation may either be extinctive or modificatory, much being dependent on the nature of the change and the intention of the parties.

A. Extinctive novation is never presumed; there must be an express intention to

novate; in cases where it is implied, the acts of the parties must clearly demonstrate their intent to dissolve the old obligation as the moving consideration for the emergence of the new one. Implied novation necessitates that the incompatibility between the old and new obligation be total on every point such that the old obligation is completely superceded by the new one. The test of incompatibility is whether they can stand together, each one having an independent existence; if they cannot and are irreconcilable, the subsequent obligation would also extinguish the first. An extinctive novation would thus have the twin effects of, first, extinguishing an existing obligation and, second, creating a new one in its stead. This kind of novation presupposes a confluence of four essential requisites: (1) a previous valid obligation, (2) an agreement of all parties concerned to a new contract, (3) the extinguishment of the old obligation, and (4) the birth of a valid new obligation.

B. Novation is merely modificatory where the change brought about by any

subsequent agreement is merely incidental to the main obligation (e.g., a change in interest rates or an extension of time to pay; in this instance, the new agreement will not have the effect of extinguishing the first but would merely supplement it or supplant some but not all of its provisions.)

The obligation to pay a sum of money is not novated by an instrument that expressly recognizes the old, changes only the terms of payment, adds other obligations not incompatible with the old ones or the new contract merely supplements the old one.

2. CASE AT BAR. The grant by Betonval to FSI of a 45‐day credit extension did not novate

the contracts so as to extinguish the latter. There was no incompatibility between them. There was no intention by the parties to supersede the obligations under the contracts. In fact, the intention of the 45‐day credit extension was precisely to revive the old obligation after the original period expired with the obligation unfulfilled. The grant of a 45‐day credit period merely modified the contracts by extending the period within which FSI was allowed to settle its obligation. Since the contracts remained the source of FSI’s obligation to Betonval, the stipulation to pay 30% p.a. interest likewise remained.


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Parties are bound by the express stipulations of their contract as well as by what is required by the nature of the obligation in keeping with good faith, usage and law. Corollarily, if parties to a contract expressly provide for a particular rate of interest, then that interest shall be applied. It is clear that Betonval and FSI agreed on the payment of interest. It is beyond comprehension how Betonval’s prayer for a 24% interest on FSI’s balance could have resulted in a situation as if no interest rate had been agreed upon. Besides, FSI’s proposed schedule of payments referring to Betonval’s statement of account, contained computations of FSI’s arrears and billings with 24% p.a. interest. There can be no other conclusion but that Betonval had reduced the imposable interest rate from 30% to 24% p.a. and this reduced interest rate was accepted, albeit impliedly, by FSI when it proposed a new schedule of payments and, in fact, actually made payments to Betonval with 24% p.a. interest. By its own actions, therefore, FSI is estopped from questioning the imposable rate of interest. The imposition of a 12% p.a. interest on the award to Betonval (in addition to the 24% p.a. interest) in the assailed judgment is proper. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest shall be 12% p.a. from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.


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ARTICLE 1306

REPUBLIC v PLDT

Facts:

Sometime in 1933, the defendant, PLDT, and the RCA Communications, Inc., entered into an agreement whereby telephone messages, coming from the United States and received by RCA's domestic station, could automatically be transferred to the lines of PLDT; and vice‐versa. PLDT gave notice to RCA to terminate their contract on 2 February 1958.

Soon after its creation in 1947, the Bureau of Telecommunications set up its own Government Telephone System by utilizing its own appropriation and equipment and by renting trunk lines of the PLDT to enable government offices to call private parties. Its application for the use of these trunk lines was in the usual form of applications for telephone service, containing a statement, above the signature of the applicant, that the latter will abide by the rules and regulations of the PLDT. One of the many rules prohibits the public use of the service furnished the telephone subscriber for his private use.

On 5 March 1958, the plaintiff, through the Director of Telecommunications, entered into an agreement with RCA Communications, Inc., for a joint overseas telephone service whereby the Bureau would convey radio‐telephone overseas calls received by RCA's station to and from local residents.

On 7 April 1958, the defendant Philippine Long Distance Telephone Company, complained to the Bureau of Telecommunications that said bureau was violating the conditions referring to the rented trunk lines, for the Bureau had used the trunk lines not only for the use of government offices but even to serve private persons or the general public, in competition with the business of the PLDT. When the PLDT received no reply, it disconnected the trunk lines being rented by the Bureau.

At that time, the Bureau was maintaining 5,000 telephones and had 5,000 pending applications for telephone connection. The PLDT was also maintaining 60,000 telephones and had also 20,000 pending applications.

Plaintiff Republic commenced suit against the defendant, Philippine Long Distance Telephone Company, in the Court of First Instance of Manila praying in its complaint for judgment commanding the PLDT to execute a contract with plaintiff, through the Bureau, for the use of the facilities of defendant's telephone system throughout the Philippines under such terms and conditions as the court might consider reasonable, and for a writ of preliminary

injunction against the defendant company to restrain the severance of the existing telephone connections and/or restore those severed.

Issue:

1. Whether PLDT may be compelled to enter into an agreement with the Republic

2. Whether PLDT was justified in disconnecting the lines of the Republic for the alleged violation of using the lines for public use

Ruling:

1. NO. The parties cannot be coerced to enter into a contract where no agreement is had between them as to the principal terms and conditions of the contract. Freedom to stipulate such terms and conditions is of the essence of our contractual system.

HOWEVER, the lower court has apparently overlooked that while the Republic may not compel the PLDT to celebrate a contract with it, the Republic may, in the exercise of the sovereign power of eminent domain, require the telephone company to permit interconnection of the government telephone system and that of the PLDT, as the needs of the government service may require, subject to the payment of just compensation to be determined by the court. It is unquestionable that real property may, through expropriation, be subjected to an easement of right of way. The use of the PLDT's lines and services to allow inter‐service connection between both telephone systems is not much different. In either case private property is subjected to a burden for public use and benefit. Ultimately, the beneficiary of the interconnecting service would be the users of both telephone systems, so that the condemnation would be for public use.

The Bureau of Telecommunications, under section 78 (b) of Executive Order No. 94, may operate and maintain wire telephone or radio telephone communications throughout the Philippines by utilizing existing facilities in cities, towns, and provinces under such terms and conditions or arrangement with present owners or operators as may be agreed upon to the satisfaction of all concerned; but there is nothing in this section that would exclude resort to condemnation proceedings where unreasonable or unjust terms and conditions are exacted, to the extent of crippling or seriously hampering the operations of said Bureau.

2. NO. Executive Order No. 94, Series of 1947, reorganizing the Bureau of Telecommunications, expressly empowered the latter in its Section 79, subsection (b), to "negotiate for, operate and maintain wire telephone or radio telephone communication service throughout the Philippines", and, in subsection (c), "to prescribe, subject to approval by the Department Head, equitable rates of charges for messages handled by the system


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and/or for time calls and other services that may be rendered by the system". Nothing in these provisions limits the Bureau to non‐commercial activities or prevents it from serving the general public. It is a well‐known rule that erroneous application and enforcement of the law by public officers do not block subsequent correct application of the statute and that the Government is never estopped by mistake or error on the part of its agents..

Also, there are other reasons to allow the Republic for continuing its telephone lines with PLDT. First, the competition is merely hypothetical, the demand for telephone service being very much more than the supposed competitors can supply. As previously noted, the PLDT had 20,000 pending applications at the time, and the Bureau had another 5,000. The telephone company's inability to meet the demands for service are notorious even now. Second, the charter of the defendant expressly provides “SEC. 14. The rights herein granted shall not be exclusive, and the rights and power to grant to any corporation, association or person other than the grantee franchise for the telephone or electrical transmission of message or signals shall not be impaired or affected by the granting of this franchise. And third, as the trial court correctly stated, "when the Bureau of Telecommunications subscribed to the trunk lines, defendant knew or should have known that their use by the subscriber was more or less public and all embracing in nature, that is, throughout the Philippines, if not abroad." The acceptance by the defendant of the payment of rentals, despite its knowledge that the plaintiff had extended the use of the trunk lines to commercial purposes, continuously since 1948, implies assent by the defendant to such extended use. Since this relationship has been maintained for a long time and the public has patronized both telephone systems, and their interconnection is to the public convenience, it is too late for the defendant to claim misuse of its facilities, and it is not now at liberty to unilaterally sever the physical connection of the trunk lines. Where private property is by the consent of the owner invested with a public interest or privilege for the benefit of the public, the owner can no longer deal with it as private property only, but must hold it subject to the right of the public in the exercise of that public interest or privilege conferred for their benefit.

It is clear that the main reason for the objection of the PLDT lies in the fact that said appellant did not expect that the Bureau's telephone system would expand with such rapidity as it has done; but this expansion is no ground for the discontinuance of the service agreed upon.

CUI v ARELLANO UNIVERSITY

Facts:

Plaintiff Cui enrolled with Defendant University as a scholar for his preparatory law course. When his uncle, Dean Capistrano left Arellano University as Dean and went to the College of

Law of Abad Santos, Cui followed. After graduating in law from Abad Santos University he applied to take the bar examination. To secure permission to take the bar he needed the transcripts of his records in defendant Arellano University. Plaintiff petitioned the latter to issue to him the needed transcripts. The defendant refused until after he had paid back the P1,033 87 which was his tuition when he was still enrolled with Arellano.

Before he was actually given his scholarship, Cui had to sign the following agreement:

"In consideration of the scholarship granted to me by the University, I hereby waive my right to transfer to another school without having refunded to the University (defendant) the equivalent of my scholarship cash.

(Sgd.) Emeterio Cui".

It is admitted that, on August 16, 1949, the Director of Private Schools issued Memorandum No. 38, series of 1949, on the subject of "Scholarship," addressed to "All heads of private schools, colleges and universities," reading:

X X X

2. When students are given full or partial scholarships, it is understood that such scholarships are merited and earned. The amount in tuition and other fees corresponding to these scholarships should not be subsequently charged to the recipient students when they decide to quit school or to transfer to another institution. Scholarships should not be offered merely to attract and keep students in a school.

X X X

Notwithstanding, the University refused to issue said transcript of records, unless said refund were made. As above stated, plaintiff was, accordingly, constrained to pay, and did pay under protest, said sum of P1,033.87, in order that he could take the bar examination.

Issue:

Whether the above quoted provision of the contract between plaintiff and the defendant, whereby the former waived his right to transfer to another school without refunding to the latter the equivalent of his scholarships in cash, is valid or not.


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Ruling: NO.

In order to declare a contract void as against public policy, a court must find that the contract as to consideration or the thing to be done, contravenes some established interest of society, or is inconsistent with sound policy and good morals or tends clearly to undermine the security of individual rights. The policy enunciated in Memorandum No. 38, s. 1949 is sound policy. Scholarship are awarded in recognition of merit not to keep outstanding students in school to bolster its prestige. In the understanding of that university scholarships award is a business scheme designed to increase the business potential of an education institution. Thus conceived it is not only inconsistent with sound policy but also good morals. But what is morals? Manresa has this definition. It is good customs; those generally accepted principles of morality which have received some kind of social and practical confirmation. The practice of awarding scholarships to attract students and keep them in school is not good customs nor has it received some kind of social and practical confirmation except in some private institutions as in Arellano University. In these institutions scholarships are granted not to attract and to keep brilliant students in school for their propaganda mine but to reward merit

or help gifted students in whom society has an established interest or a first lien.

SAURA v SINDICO

Ramon Saura and Estela Sindico were contesting for nomination as the official candidate of the Nacionalista Party in the 4th district of Pangasinan in the congressional elections. The parties entered into a written agreement, containing a pledge that — “Each aspirant shall respect the result of the aforesaid convention, i.e., no one of us shall either run as a rebel or independent candidate after losing in said convention.” In the provincial convention held by the Nacionalista Party, Saura was elected and proclaimed the Party's official congressional candidate for the aforesaid district of Pangasinan. Nonetheless, Sindico, in disregard of the covenant, filed her certificate of candidacy for the same office with the COMELEC, and she openly and actively campaigned for her election. Wherefore, Saura commenced this suit for the recovery of damages. The lower court dismissed the complaint on the basis that the agreement sued upon is null and void, in that (1) the subject matter of the contract, being a public office, is not within the commerce of man; and (2) the "pledge" was in curtailment of the free exercise of elective franchise and therefore against public policy. ISSUE: w/n the agreement is null and void. YES. Among those that may not be the subject matter (object) of contracts are certain rights of individuals, which the law and public policy have deemed wise to exclude from the

commerce of man. Among them are the political rights conferred upon citizens, including, but not limited to, once's right to vote, the right to present one's candidacy to the people and to be voted to public office, provided, however, that all the qualifications prescribed by law obtain. Such rights may not, therefore, be bargained away curtailed with impunity, for they are conferred not for individual or private benefit or advantage but for the public good and interest. Constitutional and statutory provisions fix the qualifications of persons who may be eligible for certain elective public offices. Said requirements may neither be enlarged nor reduced by mere agreements between private parties. A voter possessing all the qualifications required to fill an office may, by himself or through a political party or group, present his candidacy without further limitations than those provided by law. In the case at hand, we certainly cannot entertain plaintiff's action, which would result in limiting the choice of the electors to only those persons selected by a small group or by party boses.

REGINO v PANGASINAN COLLEGES

FACTS:

This is a petition for review under rule 45 on pure questions of law. Petitioner Khristine Rea M. Regino was a first year computer science student at Respondent Pangasinan Colleges of Science and Technology (PCST). During the second semester of school year 2001‐2002, she enrolled in the subjects logic and statistics under Respondents Rachelle A. Gamurot and Elissa Baladad, respectively, as teachers. That semester, PCST held a fund raising campaign dubbed the "Rave Party and Dance Revolution," the proceeds of which were to go to the construction of the school's tennis and volleyball courts.

Each student was required to pay for two tickets at the price of P100 each. The project was allegedly implemented by recompensing students who purchased tickets with additional points in their test scores; those who refused to pay were denied the opportunity to take the final examinations. Financially strapped and prohibited by her religion from attending dance parties and celebrations, Regino refused to pay for the tickets. As a result, Gamurot and Baladad allegedly disallowed her from taking the tests.The two teachers unrelentingly defended their positions as compliance with PCST's policy.

Petitioner thus failed a Complaint5 for damages against PCST, Gamurot and Baladad. Respondents filed a Motion to Dismiss6 on the ground of Petitioner's failure to exhaust administrative remedies. The action was dismissed on the ground of lack of cause of action. The trial court noted that the instant controversy involved a higher institution of learning, two of its faculty members and one of its students. Thus, it argued that an action should have been filed first with the CHED. Regino thus filed the present petition essentially questioning


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the application by the trial court of the principle of exhaustion of administrative remedies. Nevertheless, the Supreme Court implied from the petition a second issue of whether the Complaint stated sufficient cause(s) of action.

ISSUE:

1. Is the dismissal based on the principle of exhaustion of administrative remedies proper?

2. Does Petitioner have a cause of action based on contract? 3. Does she have a cause of action based on tort? 4. Is the principle of academic freedom a proper defense for Respondents?

HELD:

1. No. Petitioner is not asking for the reversal of the policies of PCST. Neither is she demanding it to allow her to take her final examinations; she was already enrolled in another educational institution. A reversal of the acts complained of would not adequately redress her grievances; under the circumstances, the consequences of respondents' acts could no longer be undone or rectified. Also, Administrative agencies are not courts; they are neither part of the judicial system, nor are they deemed judicial tribunals. Specifically, the CHED does not have the power to award damages. Hence, petitioner could not have commenced her case before the Commission. Lastly, the issue is purely legal and well within the jurisdiction of the trial court.17 Petitioner's action for damages inevitably calls for the application and the interpretation of the Civil Code, a function that falls within the jurisdiction of the courts.

2. Yes. In previous cases, the Court has characterized the relationship between the school and the student as a contract in which a student, once admitted by the school, is considered enrolled for one semester. This was modified by a holding that the contractual relationship between the school and the student is not only semestral in duration, but for the entire period the latter is expected to complete it. The school‐student relationship is also reciprocal. Thus, it has consequences appurtenant to and inherent in all contracts of such kind ‐‐ it gives rise to bilateral or reciprocal rights and obligations. The school undertakes to provide students with education sufficient to enable them to pursue higher education or a profession. On the other hand, the students agree to abide by the academic requirements of the school and to observe its rules and regulations. The terms of the school‐student contract are defined at the moment of its inception ‐‐ upon enrolment of the student. Standards of academic performance and the code of behavior and discipline are usually set forth in manuals distributed to new students at the start of every school year. Further, schools inform prospective enrollees the amount of fees and the terms of payment. Thus, students expect that upon their payment of tuition fees, satisfaction of the set academic standards, completion of academic

requirements and observance of school rules and regulations, the school would reward them by recognizing their "completion" of the course enrolled in. Corollarily, the Court has also held that barring any violation of the rules on the part of the students, an institution of higher learning has a contractual obligation to afford its students a fair opportunity to complete the course they seek to pursue. Nevertheless, in a previous case, the Court recognized the need of a school to fund its facilities and to meet astronomical operating costs. In that case, the Court upheld the imposition by school of a "land purchase deposit" in the amount of P50,000 per student to be used for the "purchase of a piece of land and for the construction of new buildings and other facilities x x x which the school would transfer [to] and occupy after the expiration of its lease contract over its present site.” The difference of that said case from the present one, however, is the fact that in the former, the imposition of the fee was made only after prior consultation and approval by the parents of the students. In the present case, the Respondents imposed the assailed revenue‐raising measure belatedly, in the middle of the semester. It exacted the dance party fee as a condition for the students' taking the final examinations, and ultimately for its recognition of their ability to finish a course. The fee, however, was not part of the school‐student contract entered into at the start of the school year. Hence, it could not be unilaterally imposed to the prejudice of the enrollees. The Court also hinged its ruling on the fact that the school‐student contract is imbued with public interest, considering the high priority given by the Constitution to education.

3. Yes. Generally, liability for tort arises only between parties not otherwise bound by a contract. An academic institution, however, may be held liable for tort even if it has an existing contract with its students, since the act that violated the contract may also be a tort. The Court cited the case of Cangco, thus: “When such a contractual relation exists the obligor may break the contract under such conditions that the same act which constitutes a breach of the contract would have constituted the source of an extra‐contractual obligation had no contract existed between the parties.”

4. No. The Court said that once a school has, in the name of academic freedom, set its standards, these should be meticulously observed and should not be used to discriminate against certain students. After accepting them upon enrollment, the school cannot renege on its contractual obligation on grounds other than those made known to, and accepted by, students at the start of the school year. In the end, the Court instructed the trial court to reinstate the complaint and proceed with the case.


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DUNCAN v GLAXO

Facts: Petitioner Pedro A. Tecson (Tecson) was hired by respondent Glaxo Wellcome Philippines, Inc. (Glaxo) as medical representative where he had undergone training and orientation. Thereafter, Tecson signed a contract of employment which stipulates, among others, that he agrees to study and abide by existing company rules; to disclose to management any existing or future relationship by consanguinity or affinity with co‐employees or employees of competing drug companies and should management find that such relationship poses a possible conflict of interest, to resign from the company. Subsequently, Tecson entered into a romantic relationship with Bettsy, an employee of Astra Pharmaceuticals (Astra), a competitor of Glaxo. Tecson and Bettsy subsequently got married. This led Glaxo to terminate Tecson: Glaxo gave Tecson the option to convince Bettsy to resign Tecson asked for time to comply since they are waiting for a good redundancy offer of

Astra to Besty Tecson subsequently requested to transfer to milk division of Glaxo, but denied Brought the issue before the grievance machinery, but failed to agree Brought the matter for conciliation before the National Conciliation and Mediation

Board but still failed to agree. Glaxo offered Php 50k as separation pay. Tecson filed a Petition for Certiorari with the CA ruling in favor of Glaxo. Petitioner’s argument: Petitioners contend that Glaxo’s policy against employees marrying employees of competitor companies violates the equal protection clause of the Constitution because it creates invalid distinctions among employees on account only of marriage. They claim that the policy restricts the employees’ right to marry.

Respondent’s argument: In its Comment on the petition, Glaxo argues that the said policy is a valid exercise of its management prerogatives and does not violate the equal protection clause. Glaxo insists that it has a genuine interest in ensuring that its employees avoid any activity, relationship or interest that may conflict with their responsibilities to the company. It likewise asserts that the policy does not prohibit marriage per se but only proscribes existing or future relationships with employees of competitor companies, and is therefore not violative of the equal protection clause. It maintains that considering the nature of its business, the prohibition is based on valid grounds. Glaxo said that the marriage posed a real and potential conflict of interest. Astra’s products were in direct competition with 67% of the products sold by Glaxo. Hence, Glaxo’s enforcement of the foregoing policy in Tecson’s case was a valid exercise of its management prerogatives. In any case, Tecson was given several months to remedy the situation, and was even encouraged not to resign but to ask his wife to resign form Astra instead.

Glaxo also points out that Tecson can no longer question the assailed company policy because when he signed his contract of employment, he was aware that such policy was stipulated therein. In said contract, he also agreed to resign from respondent if the management finds that his relationship with an employee of a competitor company would be detrimental to the interests of Glaxo. (Please refer to the originals regarding the stipulation in the contract)

Issue: Whether the condition in the employment contract regarding the Glaxo’s policy prohibiting its employees from marrying an employee of a competitor company is valid

Ruling: Yes. Ratio: Glaxo has a right to guard its trade secrets, manufacturing formulas, marketing strategies and other confidential programs and information from competitors, especially so that it and Astra are rival companies in the highly competitive pharmaceutical industry. The prohibition against personal or marital relationships with employees of competitor companies upon Glaxo’s employees is reasonable under the circumstances because relationships of that nature might compromise the interests of the company. In laying down the assailed company policy, Glaxo only aims to protect its interests against the possibility that a competitor company will gain access to its secrets and procedures. That Glaxo possesses the right to protect its economic interests cannot be denied. No less than the Constitution recognizes the right of enterprises to adopt and enforce such a policy to protect its right to reasonable returns on investments and to expansion and growth. Indeed, while our laws endeavor to give life to the constitutional policy on social justice and the protection of labor, it does not mean that every labor dispute will be decided in favor of the workers. The law also recognizes that management has rights which are also entitled to respect and enforcement in the interest of fair play.

In any event, from the wordings of the contractual provision and the policy in its employee handbook, it is clear that Glaxo does not impose an absolute prohibition against relationships between its employees and those of competitor companies. Its employees are free to cultivate relationships with and marry persons of their own choosing. What the company merely seeks to avoid is a conflict of interest between the employee and the company that may arise out of such relationships. As succinctly explained by the appellate court, thus:

The policy being questioned is not a policy against marriage. An employee of the company remains free to marry anyone of his or her choosing. The policy is not aimed at restricting a personal prerogative that belongs only to the individual. However, an employee’s personal decision does not detract the employer from exercising management prerogatives to ensure maximum profit and business success. . .


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The Court of Appeals also correctly noted that the assailed company policy which forms part of respondent’s Employee Code of Conduct and of its contracts with its employees, such as that signed by Tescon, was made known to him prior to his employment. Tecson, therefore, was aware of that restriction when he signed his employment contract and when he entered into a relationship with Bettsy. Since Tecson knowingly and voluntarily entered into a contract of employment with Glaxo, the stipulations therein have the force of law between them and, thus, should be complied with in good faith."29 He is therefore estopped from questioning said policy. STAR PAPER v SIMBOL

FACTS: Star Paper Corporation had an anti‐nepotism company policy that provided that the company: 1. Could not hire anyone related to an employee within the 3rd civil degree, and 2. If two employees decided to get married, one would have to resign. Ronald Simbol fell for Alma Dayrit and resigned prior to the marriage because of the policy. Wilfreda Comia resigned immediately after marrying Howard Comia. Lorna Estrella resigned after being impregnated by Luisito Zuniga, a married man. According to these respondents, they were compelled by the company to resign. Subsequently, they filed a complaint for unfair labor practice, constructive dismissal, separation pay. They averred that the is illegal and contravenes Article 136 of the Labor Code [“It shall be unlawful for an employer to require as a condition of employment or continuation of employment that a woman employee shall not get married, or to stipulate expressly or tacitly that upon getting married, a woman employee shall be deemed resigned or separated, or to actually dismiss, discharge, discriminate or otherwise prejudice a woman employee merely by reason of her marriage.”] The Labor Arbiter dismissed their claim, saying that the policy was a valid exercise of management prerogative, and that an employer is free to regulate, according to his own discretion and judgment all the aspects of employment. The NLRC upheld the decision. The CA reversed the decision of the NLRC and LA and ordered Simbol, Dayrit and Estrella reinstated with backwages. ISSUE: Whether the policy is violative of Article 136 of the Labor Code. HELD: The policy is illegal. Unless the employer can prove that the reasonable demands of the business require a distinction based on marital status and there is no better available or acceptable policy which would accomplish the business purpose, an employer may not discriminate against an employee based on the identity of the employee’s spouse. This is known as the “bona fide occupational qualification exception.” To justify a bona fide occupational qualification, the employer must prove two factors: (1) that the employment qualification is reasonably related to the operation of the job involved; and, (2) that there is a factual basis for believing that all or substantially all persons meeting the qualification would be unable to properly perform the duties of the job. Another

requirement is that a policy must be reasonable under the circumstances to qualify as a valid exercise of management prerogative. There is no reasonable necessity in this case. Petitioners’ sole contention that "the company did not just want to have two (2) or more of its employees related between the third degree by affinity and/or consanguinity" is lame. That the second paragraph was meant to give teeth to the first paragraph of the questioned rule is evidently not the valid reasonable business necessity required by the law. Petitioners contend that their policy “may appear to be contrary to Article 136 of the Labor Code but it assumes a new meaning if read together with the first paragraph of the rule. The rule does not require the woman employee to resign. The employee spouses have the right to choose who between them should resign. Further, they are free to marry persons other than co‐employees. Hence, it is not the marital status of the employee, per se, that is being discriminated.” This does not inspire assent. The policy still fails the test of reasonableness. The policy is premised on the mere fear that employees married to each other will be less efficient. If we uphold the questioned rule the employer can create policies based on an unproven presumption of a perceived danger at the expense of an employee’s right to security of tenure. Lastly, the absence of a statute expressly prohibiting marital discrimination in our jurisdiction cannot benefit the petitioners. The protection given to labor in our jurisdiction is vast and we cannot prudently draw inferences from the legislature’s silence that married persons are not protected under our Constitution and declare valid a policy based on a prejudice or stereotype. Thus, for failure of petitioners to present undisputed proof of a reasonable business necessity, we rule that the questioned policy is an invalid exercise of management prerogative.

ACOL v PCCCI

FACTS:

Petitioner Acol applied and was issued by respondent a Bankard credit card and extensions. For several years, he regularly used this card until it was lost. The day after the loss, he called up respondent's office and reported it. He reiterated his report and was advised to put into writing the notice of loss and to submit it and the extension cards. Petitioner promptly wrote a letter confirming the loss and sent it to respondent. A day before receiving the written notice, respondent issued a special cancellation bulletin informing its accredited establishments of the loss of the cards of the enumerated holders, including petitioner's.

Unfortunately, somebody used petitioner's card to buy commodities worth P76K which was billed to petitioner. Petitioner refused to pay and confirmed his exceptions to the billing in writing. At first, respondent agreed to reverse the disputed billings, and after an investigation


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and review, the respondent confirmed that it was not the petitioner who used his Bankard for said purchases.

Nonetheless, respondent reversed its earlier position and insisted on collecting citing provision no. 1 of the "Terms and Conditions Governing The Issuance and Use of the Bankard" found at the back of the application form:

xxx Holder's responsibility for all charges made through the use of the card shall continue until the expiration or its return to the Card Issuer or until a reasonable time after receipt by the Card Issuer of written notice of loss of the Card and its actual inclusion in the Cancellation Bulletin. xxx

Respondent filed suit in the RTC of Manila against petitioner for the collection of P76K, plus interest and penalty charges. The RTC dismissed the case and denied the MR. The CA reversed and denied the MR. Thus, this petition for review on certiorari.

ISSUE:

W/N provision no. 1 of the Terms and Conditions was valid and binding on the petitioner? NO.

RATIO:

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

Under such a stipulation, petitioner could have theoretically done everything in his power to give respondent the required written notice. But if respondent took a "reasonable" time (which could be indefinite) to include the card in its cancellation bulletin, it could still hold the cardholder liable for whatever unauthorized charges were incurred within that span of time. Article 1306 of the Civil Code prohibits contracting parties from establishing stipulations contrary to public policy. The assailed provision was just such a stipulation.

AZNAR v CITIBANK

Facts:

Petitioner Aznar is a holder of a Preferred Master Credit Card issued by respondent Citibank. It has a credit limit of P150,000. Petitioner deposited P485,000 to his credit card in

order to increase its credit limit to P635,000 because he and his family was going to take an Asian tour.

Using his credit card, petitioner purchased the plane tickets worth P237,000 and left for their destinations. While on tour, he used his credit card in several establishments but was dishonoured. And when he tried to use his credit card to purchase plane tickets to Bali in Ingtan Agency, it was again dishonoured for reason that it was allegedly blacklisted. He was forced to use cash and was even allegedly insulted by Ingtan Agency personnel by branding them as swindlers for using a blacklisted card.

When he returned in the Phils, he lodged a complaint before the RTC against respondent for blacklisting his credit card and also asked for damages for humiliation. To support his claim, he presented computer print‐out, denominated as ON‐LINE AUTHORIZATIONS FOREIGN ACCOUNT ACTIVITY REPORT (Report), issued to him by Ingtan Agency with the signature of one Victrina Elnado Nubi (Nubi) which shows that his card in question was "DECL OVERLIMIT" or declared over the limit.

Citibank denied the allegation that it blacklisted Aznar’s card. It also contended that under the terms and conditions governing the issuance and use of its credit cards, Citibank is exempt from any liability for the dishonor of its cards by any merchant affiliate, and that its liability for any action or incident which may be brought against it in relation to the issuance and use of its credit cards is limited to P1,000.00 or the actual damage proven whichever is lesser.

Initially, the RTC ruled in favour of respondent for failure to prove the due execution and genuineness of the Report presented by Aznar. Respondent was also able to present a monthly bulletin containing the names of blacklisted clients but nowhere in the list was the name of Aznar. Between the report and the bulletin, the court gave more credence to the bulletin. This case was reraffled to another RTC judge who reconsidered the decision and ruled in favour of Aznar. The CA reversed and found for respondent.

ISSUE

There are a lot of issues related to evidence but the one pertinent to Art 1306 is:

Whether the stipulation limiting the liability of any action to P1,000 and at the same time exempting respondent from any liability due to the dishonour of the card by any merchant affiliate is valid.

HELD:


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No. While it is true that Citibank may have no control of all the actions of its merchant affiliates, and should not be held liable therefor, it is incorrect, however, to give it blanket freedom from liability if its card is dishonored by any merchant affiliate for any reason. Such phrase renders the statement vague and as the said terms and conditions constitute a contract of adhesion, any ambiguity in its provisions must be construed against the party who prepared the contract, in this case Citibank. (Cotract of adhesion refers to a contract where only one party prepares it and the other party can just accept or reject it.)

Citibank also invokes paragraph 15 of its terms and conditions which limits its liability to P1,000.00 or the actual damage proven, whichever is lesser.

Again, such stipulation cannot be considered as valid for being unconscionable as it precludes payment of a larger amount even though damage may be clearly proven. This Court is not precluded from ruling out blind adherence to the terms of a contract if the attendant facts and circumstances show that they should be ignored for being obviously too one‐sided.

The invalidity of the terms and conditions being invoked by Citibank, notwithstanding, the Court still cannot award damages in favor of petitioner. The underlying basis for the award of tort damages is the premise that an individual was injured in contemplation of law; thus there must first be a breach before damages may be awarded and the breach of such duty should be the proximate cause of the injury. In culpa contractual or breach of contract, moral damages are recoverable only if the defendant has acted fraudulently or in bad faith, or is found guilty of gross negligence amounting to bad faith, or in wanton disregard of his contractual obligations.

We do not dispute the findings of the lower court that private respondent suffered damages as a result of the cancellation of his credit card. However, there is a material distinction between damages and injury. Injury is the illegal invasion of a legal right; damage is the loss, hurt, or harm which results from the injury; and damages are the recompense or compensation awarded for the damage suffered. Thus, there can be damage without injury to those instances in which the loss or harm was not the result of a violation of a legal duty. In such cases, the consequences must be borne by the injured person alone, the law affords no remedy for damages resulting from an act which does not amount to a legal injury or wrong. These situations are often called damnum absque injuria.

In this case, petitioner was not able to substantiate the due execution of the Report of Credit overlimit. He was not able to show that NUBI was the one who actually prepared the report and in what capacity which could fall under the exception in the Rules of Evidence Rule 130 Sec. 43 as one done in the course of ordinary business. Also the fact that, he was able to purchase plane tickets for the Asian tour worth P 237,000 above his original credit limit of P150,000 means that respondent did not act in bad faith in not crediting his initial deposit.

MACALINAO v BPI

FACTS

Petitioner Ileana Macalinao was an approved cardholder of BPI Mastercard, one of the credit card facilities of respondent. She made some purchases through the use of the said credit card and defaulted in paying for said purchases. She subsequently received a letter from respondent, demanding payment of the amount of PhP 141,518.34.

Under the Terms and Conditions Governing the Issuance and Use of the BPI Credit and BPI Mastercard (TCGIUBCBM), the charges or balance thereof remaining unpaid after the payment due date indicated on the monthly Statement of Accounts shall bear interest at the rate of 3% per month and an additional penalty fee equivalent to another 3% per month.

For failure of petitioner to settle her obligations, respondent sued her and her husband, Danilo SJ Macalinao, for collection of sum of money, before the MeTC of Makati.

MeTC ‐ in favor of respondent; interest rate and penalty charge of 2% per month

RTC ‐ affirmed the above decision in toto

CA ‐ only petitioner appealed since her husband already passed away; affirmed with modification: interest and penalty charges of 3% per month

ISSUE

Whether the interest rate and penalty charge stipulated in the contract between the parties and followed by the CA should be applied.

RULING

NO. The interest rate and penalty charge of 3% per month should be equitably reduced to 2% per month or 24% per annum.

In the TCGIUBCBM, there was a stipulation on the 3% interest rate. Nevertheless, it should be noted that this is not the first time that this Court has considered the interest rate of 36% per annum as excessive and unconscionable. In Chua vs. Timan,

The stipulated interest rates of 7% and 5% per month imposed on respondents’ loans must be equitably reduced to 1% per month or 12% per annum. We need not unsettle the principle we had affirmed in a plethora of cases that stipulated interest rates of 3% per month and


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higher are excessive, iniquitous, unconscionable and exorbitant. Such stipulations are void for being contrary to morals, if not against the law. While C.B. Circular No. 905‐82, which took effect on January 1, 1983, effectively removed the ceiling on interest rates for both secured and unsecured loans, regardless of maturity, nothing in the said circular could possibly be read as granting carte blanche authority to lenders to raise interest rates to levels which would either enslave their borrowers or lead to a hemorrhaging of their assets.

Since the stipulation on the interest rate is void, it is as if there was no express contract thereon. Hence, courts may reduce the interest rate as reason and equity demand.

The same is true with respect to the penalty charge. Under the TCGIUBCBM, it was also stated therein that respondent BPI shall impose an additional penalty charge of 3% per month. Pertinently, Article 1229 of the Civil Code states:

Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. Even if there has been no performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable.

In exercising this power to determine what is iniquitous and unconscionable, courts must consider the circumstances of each case since what may be iniquitous and unconscionable in one may be totally just and equitable in another.

In the instant case, the records would reveal that petitioner Macalinao made partial payments to respondent BPI, as indicated in her Billing Statements. Further, the stipulated penalty charge of 3% per month or 36% per annum, in addition to regular interests, is indeed iniquitous and unconscionable.

CASTRO v TAN

FACTS:

Spouses Tan mortgage a certain parcel of land to Spouses Castro in exchange for P30,000 loan. They agreed that the interest would be 5% per month compounded monthly. They also agreed that the loan will be paid within 6 months.

Spouses Tan was not able to pay the loan because the husband died. Thereafter, the wife offered to pay the P30,000 loan and the portion of the interest but Spouses Castro refused and demanded that he be paid the accumulated sum of P359,000.

In 1999, the Spouses Castro instituted foreclosure proceeding to which they became the highest bidders. Thus title was consolidated in their names and after a writ of possession was issued, the Sheriff ejected the Spouses Tan.

The Spouses Tan then filed a complaint to the RTC of Bulacan for the nullification of the mortgage and foreclosure plus damages alleging that the interest contained in their agreement was unconscionable.

The Trial Court rendered a decision in favor of the Spouses Castro but reduced the interest to 12% per annum (as opposed to 5% per month or 60% per annum). The CA upheld the decision of the Trial Court, hence this petition for Certiorari

Petitioners allege that the Kasulatan was entered into by the parties freely and voluntarily.

They maintain that there was already a meeting of the minds between the parties as regards the principal amount of the loan, the interest thereon and the property given as security for the payment of the loan, which must be complied with in good faith. Hence, they assert that the Court of Appeals should have given due respect to the provisions of the Kasulatan. They also stress that it is a settled principle that the law will not relieve a party from the effects of an unwise, foolish or disastrous contract, entered into with all the required formalities and with full awareness of what he was doing.

ISSUE

Whether or not the Court gravely abused its discretion in lowering the interest rate to 12% per annum.

HELD. NO.

While we agree with petitioners that parties to a loan agreement have wide latitude to stipulate on any interest rate, it is also worth stressing that interest rates whenever unconscionable may still be declared illegal.

Freedom of contract is not absolute. The same is understood to be subject to reasonable legislative regulation aimed at the promotion of public health, morals, safety and welfare. One such legislative regulation is found in Article 1306 of the Civil Code which allows the contracting parties to "establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order or public policy."


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We hold the 5% monthly interest to be excessive, iniquitous, unconscionable and exorbitant, contrary to morals, and the law. It is therefore void ab initio for being violative of Article 1306.

TIU v PLATINUM PLANS

FACTS: PPI is a domestic company engaged in the pre‐need industry. Tiu was its Division Marketing Director from 1987‐1989. In 1993, Tiu was again rehired as Senior Assistant VP & Territorial Operations Head for its HK and Asean operations. They executed an employment contract valid for 5 years. However, in 1995, Tiu stopped reporting for work. Later that year, it was found that she was now the VP for Sales of Professional Pension Plans, Inc., PPI’s direct competitor. PPI sought a claim for damages for Tiu’s breach of contract, specifically the Non‐Involvement Clause, which prohibits her from joining a competitor within 2 years from her separation from PPI. The trial court ruled in favor of PPI, stating that a non‐involvement clause is valid, provided, there is a limitation upon either the time or the place. The CA affirmed, as Tiu agreed to the contract and its entirety on her own volition. Thus, binding herself to fulfill not only what was expressly stipulated in the contract, but also all its consequences that were not against good faith, usage, and law. ISSUE: W/N the non‐involvement clause is valid? HELD: Yes. The non‐involvement clause is valid. A non‐involvement clause is not necessarily void for being in restraint of trade as long as there are reasonable limitations as to time, trade and place. The non‐involvement clause has a time limit: 2 years from the time petitioner’s employment with respondent ends. It is also limited as to trade, since it only prohibits petitioner from engaging in any pre‐need business akin to respondent’s. Petitioner held a position which she was privy to confidential and highly sensitive marketing strategies. To allow her to engage in a rival business soon after she leaves would make respondent’s trade secrets vulnerable, specially in a highly competitive marketing environment.

In any event, Article 1306 of the Civil Code provides that parties to a contract may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy. Article 1159 of the same Code also provides that obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. Courts cannot stipulate for the parties nor amend their agreement where the same does not contravene law, morals, good customs, public order or public policy, for to do so would be to alter the real intent of the parties, and would run contrary to the function of the courts to give force and effect thereto. Not being contrary to public policy, the non‐involvement clause, which petitioner and respondent freely agreed upon, has the force of law between them, and thus, should be complied with in good faith.

CIV DIGEST _1249-1307_

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