Recent Case Digest in Obligations in Contract

CASE DIGESTS ON OBLIGATIONS AND CONTRACTS
FROM VOL. 707-710 OF THE SCRA

SUBMITTED BY:
Carvajal, Kim Apple S. Page 1

EDILBERTO U. VENTURA JR. vs.SPOUSES PAULINO and EVANGELINE ABUDA
G.R. NO: 202932
FACTS:
Socorro Torres and Esteban Abletes were married and both of them had children from
prior marriages: Esteban had a daughter named Evangeline Abuda and Socorro had a
son, who was the father of Edilberto U. Ventura, Jr. the petitioner in this case.
In 1978, Evangeline and Esteban operated small business establishments located at
Delpan Street, Tondo, Manila.
In 1997, Esteban sold the Vitas and Delpan properties to Evangeline and her husband,
Paulino Abuda
According to Edilberto, when Esteban was diagnosed with colon cancer sometime in
1993, he decided to sell the Delpan and Vitas properties to Evangeline. Evangeline
continued paying the amortizations on the two (2) properties situated in Delpan Street.
Esteban passed away on 11 September 1997, while Socorro passed away on 31 July
1999.
Leonora Urquila, the mother of Edilberto, discovered the sale. Edilberto filed a Petition
for Annulment of Deeds of Sale before the RTC-Manila. Edilberto alleged that the sale of
the properties was fraudulent because Estebans signature on the deeds of sale was
forged.

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Respondents, on the other hand, argued that because of Socorros prior marriage to
Crispin, her subsequent marriage to Esteban was null and void. Thus, neither Socorro
nor her heirs can claim any right or interest over the properties purchased by Esteban
and respondents.
ISSUE: W/O/N there was actual contribution from Esteban in the Delpan property

RULING:
Edilberto claims that Estebans actual contribution to the purchase of the Delpan property was
not sufficiently proven since Evangeline shouldered some of the amortizations.

Thus, the law
presumes that Esteban and Socorro jointly contributed to the acquisition of the Del pan
property.
We cannot sustain Edilberto s claim. Both the RTC-Manila and the CA found that the Delpan
property was acquired prior to the marriage of Esteban and Socorro.

Furthermore, even if
payment of the purchase price of the Delpan property was made by Evangeline, such payment
was made on behalf of her father. Article 1238 of the Civil Code provides:
Art. 1238. Payment made by a third person who does not intend to be reimbursed by the
debtor is deemed to be a donation, which requires the debtor s consent. But the payment is
in any case valid as to the creditor who has accepted it.

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Thus, it is clear that Evangeline paid on behalf of her father, and the parties intended that the
Delpan property would be owned by and registered under the name of Esteban.
During trial, the Abuda spouses presented receipts evidencing payments of the amortizations
for the Delpan property. On the other hand, Edilberto failed to show any evidence showing
Socorro s alleged monetary contributions. As correctly pointed out by the CA: settled is the rule
that in civil cases x x x the burden of proof rests upon the party who, as determined by the
pleadings or the nature of the case, asserts the affirmative of an issue. x x x. Here it is Appellant
who is duty bound to prove the allegations in the complaint which undoubtedly, he miserably
failed to do so.
PLANTERS DEVELOMENT BANK v SPOUSES LOPEZ
G.R. NO: 186332
FACTS:
Spouses Emesto and Florentina Lopez applied for and obtained a real estate loan in the
amount of 3,000,000.00 from Planters Bank. The loan was intended to finance the
construction of a four-story concrete dormitory building.
The loan agreement dated May 18, 1983 provided that the loan is payable for fourteen
(14) years and shall bear a monetary interest at twenty-one percent (21%) per annum
(p.a.). Furthermore, partial drawdowns on the loan shall be based on project
completion. To secure the payment of the loan, the spouses Lopez mortgaged a parcel
of land

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The parties signed an amendment to the loan agreement and the interest rate was
increased to twenty-three percent (23%) p.a. and the term of the loan was shortened to
three years. The parties executed a second amendment to the loan agreement. The
interest rate was further increased to twenty-five percent (25%) p.a. The contract also
provided that releases on the loan shall be subject to Planters Banks availability of
funds.
Meanwhile, the Philippine economy deteriorated and the price of the materials and the
cost of labor escalated. Eager to finish the project, the spouses Lopez obtained an
additional loan in the amount of P1,200,000.00 from Planters Bank.
They entered into a third amendment to the loan agreement. The amount of the loan
and the interest rate were increased to P4,200,000.00 and twenty-seven percent (27%)
p.a., respectively. Furthermore, the term of the loan was shortened to one year. The
spouses Lopez increased the amount secured by the mortgage to P4,200,000.00.
However, Planters Bank unilaterally increased the interest rate to thirty-two percent
(32%) p.a.
11

The spouses Lopez failed to avail the full amount of the loan because Planters Bank
refused to release the remaining amount of P700,000.00.
The spouses Lopez filed against Planters Bank complaint for rescission of the loan
agreements and for damages with the Regional Trial Court (RTC) of Makati City. They
alleged that they could not continue the construction of the dormitory building because
Planters Bank had refused to release the remaining loan balance.

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In defense, Planters Bank argued that the spouses Lopez had no cause of action. It
pointed out that its refusal to release the loan was the result of the spouses Lopezs
violations of the loan agreement, namely: (1) non-submission of the accomplishment
reports; and (2) construction of a six-story building. As a counterclaim, Planters Bank
prayed for the payment of the overdue released loan in the amount of P3,500,000.00,
with interest and damages.
Planters Bank foreclosed the mortgaged properties in favor of third parties after the
spouses Lopez defaulted on their loan.
ISSUE: W/O/N Planters Bank committed a breach of contract
Planters Bank only committed a slight or casual breach of the contract
Even assuming that Planters Bank substantially breached its obligation, the fourth paragraph of
Article 1191 of the Civil Code expressly provides that rescission is without prejudice to the
rights of third persons who have acquired the thing, in accordance with Article 1385 of the
Civil Code. In turn, Article 1385 states that rescission cannot take place when the things which
are the object of the contract are legally in the possession of third persons who did not act in
bad faith.
Furthermore, the spouses Lopezs failure to pay the overdue loan made them parties in default,
not entitled to rescission under Article 1191 of the Civil Code.

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The estate of Florentina Lopez shall pay Planters Bank the amount of P3,500,000.00 with 12%
monetary interest p.a. from June 22, 1984 until full payment of the obligation
Planters Bank and the spouses Lopez undertook reciprocal obligations when they entered into a
loan agreement. In reciprocal obligations, the obligation or promise of each party is the
consideration for that of the other. The mere pecuniary inability of one contracting party to
fulfill an engagement does not discharge the other contracting party of the obligation in the
contract. Planters Banks slight breach does not excuse the spouses Lopez from paying the
overdue loan in the amount of P3,500,000.00. Despite this finding, however, we cannot sustain
the imposition of the interest rate in the loan contract.
We are aware that the parties did not raise this issue in the pleadings. However, it is a settled
rule that an appeal throws the entire case open for review once accepted by this Court. This
Court has thus the authority to review matters not specifically raised or assigned as error by the
parties, if their consideration is necessary in arriving at a just resolution of the case.
In the present case, Planters Bank unilaterally increased the monetary interest rate to 32% p.a.
after the execution of the third amendment to the loan agreement. This is patently violative of
the element of mutuality of contracts. Our Civil Code has long entrenched the basic principle
that the validity of or compliance to the contract cannot be left to the will of one party.


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EDS MANUFACTURING INC v HEALTHCHECK INTL INC
G.R. NO: 162802
FACTS:
Healthcheck Inc. a 1-lcalth Maintenance Organization HMO) entered into a one-year
contract with DLSUMC in which HCI was to provide the employees of EMI and their
dependents as host of medical services and benefits
Only two months into the program, problems began. HCI notified EMI that its
accreditation with DLSUMC was suspended and advised it to avail of the services of
nearby accredited institutions.
Although HCI had yet to settle its accounts with it, DLSUMC resumed services. Despite
this commitment, HCI failed to preserve its credit standing with DLSUMC prompting the
latter to suspend its accreditation for a second time. A third suspension was still to
follow on and remained in force until the end of the contract period.
Complaints from EMI employees and workers were pouring in that their HMO cards
were not being honored by the DLSUMC and other hospitals and physicians. EMI
formally notified HCI that it was rescinding their April 1998 Agreement on account of
HCIs serious and repeated breach of its undertaking including but not limited to the
unjustified non-availability of services. It demanded a return of premium for the unused
period in the cost of P6 million.
What went in the way of the rescission of the contract, was the failure of EMI to collect
all the HMO cards of the employees and surrender them to HCI as stipulated in the

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Agreement. HCI had to tell EMI on that its employees were still utilizing the cards even
beyond the pretermination date set by EMI. It asked for the surrender of the cards so
that it could process the pretermination of the contract and finalize the reconciliation of
accounts.
Without responding to this reminder, EMI sent HCI two letters demanding for the
payment ofP5,884,205 as the 2/3 portion of the premium that remained unutilized after
the Agreement was rescinded in the previous September.
HCI pre-empted EMIs threat of legal action by instituting the present case before the
Regional Trial Court of Pasig. The cause of action it presented was the unlawful
pretermination of the contract and failure of EMI to submit to a joint reconciliation of
accounts and deliver such assets as properly belonged to HCI.
EMI responded with an answer alleging that HCI reneged on its duty to provide
adequate medical coverage after EMI paid the premium in full. Having rescinded the
contract, it claimed that it was entitled to the unutilized portion of the premium, and
that the accounting required by HCI could not be undertaken until it submitted the
monthly utilization reports mentioned in the Agreement.
RTC: The court ruled in favor of HCI. It found that EMIs rescission of the Agreement was
not done through court action or by a notarial act and was based on casual or slight
breaches of the contract. Moreover, despite the announced rescission, the employees
of EMI continued to avail of HCIs services.

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CA: Reversed the decision of the RTC and ruled that although Healthcheck International,
(HCI) substantially breached their agreement, it also appears that Eds Manufacturing,
Inc. (EMI) did not validly rescind the contract between them. Thus, the CA dismissed the
complaint filed by HCI, while at the same time dismissing the counterclaim filed by EMI.
EMI filed a Motion for Partial Reconsideration against said decision. However, the same
was denied in a Resolution dated March 16, 2004.
ISSUE: W/O/N There was a valid rescission of the agreement of the parties
RULING:
We rule in the negative.
First, Article 1191 of the Civil Code states:
The power to rescind obligations is implied in reciprocal ones, in case one of the obligors
should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation, with
the payment of damages in either case. He may also seek rescission, even after he has chosen
fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing
of a period.

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This is understood to be without prejudice to the rights of third persons who have acquired the
thing, in accordance with Articles 1385 and 1388 and the Mortgage Law.
The general rule is that rescission (more appropriately, resolution ) of a contract will not be
permitted for a slight or casual breach, but only for such substantial and fundamental
violations as would defeat the very object of the parties in making the agreement.
Thus, the rescission referred to in Article 1191, more appropriately referred to as resolution, is
on the breach of faith by one of the parties which is violative of the reciprocity between them.
In the present case, it is apparent that HCI violated its contract with EMI to provide medical
service to its employees in a substantial way. As aptly found by the CA, the various reports
made by the EMI employees from July to August 1998 are living testaments to the gross denial
of services to them at a time when the delivery was crucial to their health and lives.
However, although a ground exists to validly rescind the contract between the parties, it
appears that EMI failed to judicially rescind the same. In Iringan v. Court of Appeals,

this Court
reiterated the rule that in the absence of a stipulation, a party cannot unilaterally and
extrajudicially rescind a contract. A judicial or notarial act is necessary before a valid rescission
(or resolution) can take place. Thus
Clearly, a judicial or notarial act is necessary before a valid rescission can take place, whether or
not automatic rescission has been stipulated. It is to be noted that the law uses the phrase

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"even though" emphasizing that when no stipulation is found on automatic rescission, the
judicial or notarial requirement still applies.
x x x x
But in our view, even if Article 1191 were applicable, petitioner would still not be entitled to
automatic rescission. In Escueta v. Pando, we ruled that under Article 1124 (now Article 1191)
of the Civil Code, the right to resolve reciprocal obligations, is deemed implied in case one of
the obligors shall fail to comply with what is incumbent upon him. But that right must be
invoked judicially. The same article also provides: "The Court shall decree the resolution
demanded, unless there should be grounds which justify the allowance of a term for the
performance of the obligation."
This requirement has been retained in the third paragraph of Article 1191, which states that
"the court shall decree the rescission claimed, unless there be just cause authorizing the fixing
of a period."
Consequently, even if the right to rescind is made available to the injured party, the obligation
is not ipso facto erased by the failure of the other party to comply with what is incumbent upon
him.
The party entitled to rescind should apply to the court for a decree of rescission. The right
cannot be exercised solely on a partys own judgment that the other committed a breach of the
obligation. The operative act which produces the resolution of the contract is the decree of the

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court and not the mere act of the vendor. Since a judicial or notarial act is required by law for a
valid rescission to take place, the letter written by respondent declaring his intention to rescind
did not operate to validly rescind the contract.
What is more, it is evident that EMI had not rescinded the contract at all. As observed by the
CA, despite EMI s pronouncement, it failed to surrender the HMO cards of its employees
although this was required by the Agreement, and allowed them to continue using them
beyond the date of the rescission. The in-patient and the out-patient utilization reports
submitted by 1 ICI shows entries as late as March 1999, signifying that EMI employees 1 were
availing of the services until the contract period were almost over. The continued use by them
of their privileges under the contract, with the apparent consent of EMI, belies any intention to
cancel or rescind it, even as they felt that they ought to have received more than what they got.
NUCCIO SAVERIO v ALFONSO PUYAT
G.R. NO: 186433
FACTS:
The respondent granted a loan to NSI. The loan carried an interest rate of 17% per
annum, or at an adjusted rate of 25% per annum if payment is beyond the stipulated
period. The petitioners received a total amount of P300,000.00 and certain machineries
intended for their fertilizer processing plant business (business). The proposed business,
however, failed to materialize.

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Nuccio made personal payments amounting to P600,000.00. However, the petitioners
allegedly had an outstanding balance. When the petitioners defaulted in the payment of
the loan, the respondent filed a collection suit with the RTC, alleging mainly that the
petitioners still owe him the value of the machineries as shown by the Breakdown of
Account he presented.
The petitioners refuted the respondents allegation and insisted that they have already
paid the loan. They submitted that their remaining obligation to pay the machineries
value, if any, had long been extinguished by their business failure to materialize. They
posited that, even assuming without conceding that they are liable, the amount being
claimed is inaccurate, the penalty and the interest imposed are unconscionable, and an
independent accounting is needed to determine the exact amount of their liability.
The petitioners submit that the CA gravely erred in ruling that a proper accounting was
not necessary. They argue that the Breakdown of Account - which the RTC used as a
basis in awarding the claim, as affirmed by the CA - is hearsay since the person who
prepared it, Ramoncito P. Puyat, was not presented in court to authenticate it. They also
point to the absence of the awards computation in the RTC ruling, arguing that
assuming they are still indebted to the respondent, the specific amount of their
indebtedness remains undetermined, thus the need for an accounting to determine
their exact liability.


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ISSUE: W/O/N the respondent is entitled to the award of attorneys fees
RULING:
On the final issue of the award of attorneys fees, Article 1229 of the New Civil Code provides:
Article 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.
Under the circumstances of the case, we find the respondents entitlement to attorneys fees to
be justified. There is no doubt that he was forced to litigate to protect his interest, i.e., to
recover his money. We find, however, that in view of the partial payment of P600,000.00, the
award of attorneys fees equivalent to 25% should be reduced to 10% of the total amount due.
The award of appearance fee of P3,000.00 and litigation cost of P10,000.00 should, however,
stand as these are costs necessarily attendant to litigation.


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GATCHALIAN REALTY INC v EVELYN ANGELES
G.R. NO: 202358
FACTS:
Angeles purchased a house and lot from GRI valued at Php 750,000.00 and Php
450,000.00, respectively, with (24%) interest per annum to be paid by installment within
a period of ten years.
The house and lot were delivered to Angeles.Nonetheless, under the contracts to sell
executed between the parties, GRI retained ownership of the property until full
payment of the purchase price.
After sometime, Angeles failed to satisfy her monthly installments with GRI. According
to GRI, she was given at least 12 notices for payment in a span of 3 years but she still
failed to settle her account despite receipt of said notices and without any valid reason.
She was again given more time to pay her dues and likewise furnished with 3 notices
reminding her to pay her outstanding balance with warning of impending legal action
and/or rescission of the contracts, but to no avail. After giving a total of 51 months
grace period for both contracts and in consideration of the continued disregard of the
demands of GRI, Angeles was served with a notice of notarial rescission.
Angeles was furnished by GRI with a demand letter demanding her to pay the amount of
rentals for her use and occupation of the house and lot and to vacate the same. She was
informed in said letter that the fifty percent (50%) refundable amount that she is
entitled to has already been deducted with the reasonable value for the use of the

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properties or the reasonable rentals she incurred during such period that she was not
able to pay the installments due her.
For her continued failure to satisfy her obligations with GRI and her refusal to vacate the
house and lot, GRI filed a complaint for unlawful detainer against Angeles on 11
November 2003.
ISSUE: W/O/N The court a quo erred in holding that the actual cancellation of the contract
between the parties did not take place
RULING:
There was no actual cancellation of the contracts because of GRIs failure to actually
refund the cash surrender value to Angeles.
Cancellation of the contracts for the house and lot was contained in a notice of notarial
rescission dated 11 September 2003. The registry return receipts show that Angeles received
this notice on 19 September 2003. GRIs demand for rentals on the properties, where GRI offset
Angeles accrued rentals by the refundable cash surrender value, was contained in another
letter dated 26 September 2003. The registry return receipts show that Angeles received this
letter on 29 September 2003. GRI filed a complaint for unlawful detainer against Angeles on 11
November 2003, 61 days after the date of its notice of notarial rescission, and 46 days after the
date of its demand for rentals. For her part, Angeles sent GRI postal money orders in the total
amount ofP120,000.

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The MeTC ruled that it was proper for GRI to compensate the rentals due from Angeles
occupation of the property from the cash surrender value due to Angeles from GRI. The MeTC
stated that compensation legally took effect in accordance with Article 1290 of the Civil Code,
which reads: "When all the requisites mentioned in Article 1279 are present, compensation
takes effect by operation of law and extinguishes both debts to the concurrent amount, even
though the creditors and debtors are not aware of the compensation." In turn, Article 1279 of
the Civil Code provides:
In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time
a principal creditor of the other;
(2) That both debts consist of a sum of money, or if the things due are consumable,
they be of the same kind, and also of the same quality if the latter has been stated;
(3) That the two debts are due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by
third persons and communicated in due time to the debtor.

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However, it was error for the MeTC to apply Article 1279 as there was nothing in the contracts
which provided for the amount of rentals in case the buyer defaults in her installment
payments.
We cannot subscribe to GRIs view that it merely followed our ruling in Pilar Development
Corporation v. Spouses Villar (Pilar) when it deducted the cash surrender value from the rentals
due. In Pilar, the developer also failed to refund the cash surrender value to the defaulting
buyer when it cancelled the Contract to Sell through a Notice of Cancellation. It was this Court,
and not the developer, that deducted the amount of the cash surrender value from the accrued
rentals. Moreover, the developer in Pilar did not unilaterally impose rentals. It was the MeTC
that decreed the amount of monthly rent. Neither did the developer unilaterally reduce the
accrued rentals by the refundable cash surrender value. The cancellation of the contract took
effect only by virtue of this Courts judgment because of the developers failure to return the
cash surrender value.
This was how we ruled in Pilar:
According to R.A. 6552, the cash surrender value, which in this case is equivalent to fifty
percent (50%) of the total payment made by the respondent spouses, should be returned to
them by the petitioner upon the cancellation of the contract to sell on August 31, 1998 for the
cancellation to take effect. Admittedly, no such return was ever made by petitioner. Thus, the
said cash surrender value is hereby ordered deducted from the award owing to the petitioner
based on the MeTC judgment, and cancellation takes effect by virtue of this judgment.

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CONSOLIDATED INDUSTRIAL GASES INC. V ALABANG MEDICAL CENTER
G.R. NO: 181983
FACTS:
CIGI, as contractor and AMC, as owner, entered into a contract
4
whereby the former
bound itself to provide labor and materials for the installation of a medical gas pipeline
system for the first, second and third floors P9,856,725.18 which AMC duly paid in full.
The herein legal controversy arose after the parties entered into another agreement
continuation of the centralized medical oxygen and vacuum pipeline system in the
hospitals fourth & fifth floors (Phase 2 installation project) at the cost (P2,267,344.42).
This second contract followed the same terms and conditions of the contract for the
Phase 1 installation project. CIGI forthwith commenced installation works for Phase 2
while AMC paid the partial amount of (P1,000,000.00) with the agreement that the
balance shall be paid through progress billing and within fifteen (15) days from the date
of receipt of the original invoice sent by CIGI.
CIGI sent AMC Charge Sales Invoice No. 125847 as completion billing for the unpaid
balance of P1,267,344.42 for the Phase 2 installation project. When the sales invoice
was left unheeded, CIGI sent a demand letter to AMC. AMC, however, still failed to pay
thus prompting CIGI to file a collection suit before the RTC on September 15, 1998.
6

CIGI claimed that AMCs obligation to pay the outstanding balance of the contract price
for the Phase 2 installation project is already due and demandable pursuant to Article II,

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page 4 of the contract stating that the project shall be paid through progress billing
within fifteen (15) days from the date of receipt of original invoice.
In its Answer with Counterclaim,
7
AMC averred that its obligation to pay the balance of
the contract price has not yet accrued because CIGI still has not turned over a complete
and functional medical oxygen and vacuum pipeline system. AMC alleged that CIGI has
not yet tested Phases 1 and 2 which constitute one centralized medical oxygen and
vacuum pipeline system of the hospital despite substantial payments already made. As
counterclaim, AMC prayed for actual, moral and exemplary damages, and attorneys
fees.
ISSUE: W/O/N CIGIs demand for payment upon AMC is proper
RULING:
The subject installation contracts
bear the features of reciprocal
obligations.
"Reciprocal obligations are those which arise from the same cause, and in which each party is a
debtor and a creditor of the other, such that the obligation of one is dependent upon the
obligation of the other. They are to be performed simultaneously, so that the performance of
one is conditioned upon the simultaneous fulfillment of the other." In reciprocal obligations,
neither party incurs in delay if the other does not comply or is not ready to comply in a proper

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manner with what is incumbent upon him. From the moment one of the parties fulfils his
obligation, delay by the other begins.
Under the subject contracts, CIGI as contractor bound itself to install a centralized medical
oxygen and vacuum pipeline system for the first to fifth floors of AMC, which in turn, undertook
to pay the contract price therefore in the manner prescribed in the contract. Being reciprocal in
nature, the respective obligations of AMC and CIGI are dependent upon the performance of the
other of its end of the deal such that any claim of delay or non-performance can only prosper if
the complaining party has faithfully complied with its own obligation.
Here, CIGI complains that AMC refused to abide by its undertaking of full payment. While AMC
does not dispute its liability to pay the balance of P1,267,344.42 being claimed by CIGI, it
asserts, however that the same is not yet due because CIGI still has not turned over a complete
and functional medical oxygen and vacuum pipeline system. CIGI is yet to conduct a test run of
the installation and an orientation/seminar of AMC employees who will be involved in the
operation of the system. CIGI, on the other hand, does not deny that it failed to conduct the
agreed orientation/seminar and test run but it blames AMC for such omission and asserts that
the latter failed to heed CIGIs request for electrical facilities necessary for the test run. CIGI
also contends that its obligation is merely to provide labor and installation.
The Court has painstakingly evaluated the records of the case and based thereon, there can be
no other conclusion than that CIGIs allegations failed to muster merit. The Court finds that CIGI
did not faithfully complete its prestations and hence, its demand for payment cannot prosper

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based on the following grounds: (a) under the two installation contracts, CIGI was bound to
perform more prestations than merely supplying labor and materials; and (b) CIGI failed to
prove by substantial evidence that it requested AMC for electrical facilities as such, its failure to
conduct a test run and orientation/seminar is unjustified.


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CASE DIGESTS ON OBLIGATIONS AND CONTRACTS

FROM VOL. 707-710 OF THE SCRA

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