Comia, Alyssa Giesselle R.

JD – 4 (Civil Law Review – ObliCon)

Assignment No. 3

DIGESTS:

SPOUSES SILVESTRE and CELIA PASCUAL vs. RODRIGO V. RAMOS

G.R. No. 144712 July 4, 2002
DAVIDE, JR., C.J.:

FACTS: Petitioners Sps. Pascual, for and in consideration of ₱150,000, executed a

DOAS with Right to Repurchase, in favor of respondent Ramos, over two parcels of
land and improvements thereon covered by a TCT. This document was annotated at the
back of the title. Sps. Pascual did not exercise their right to repurchase the property
within the stipulated one-year period; hence, Ramos prayed that the title or ownership
over the subject parcels of land and improvements thereon be consolidated in his favor.

During the trial, among the documents offered in evidence by Ramos was a document
denominated as Sinumpaang Salaysay signed by Ramos and Silvestre Pascual, but not
notarized. It is stipulated therein that there would be an interest rate of 7% per month.

The RTC ruled in favor of petitioners and found that the transaction between the parties
was actually a loan in the amount of ₱150,000, the payment of which was secured by a
mortgage of the property covered by TCT. It also found that the Sps. Pascual had
overpaid the load considering the interest rate of 7% per annum.

Ramos moved for the reconsideration alleging that the trial court erred in using an
interest rate of 7% per annum in the computation of the total amount of obligation
because what was expressly stipulated in the Sinumpaang Salaysay was 7% per
month. Finding merit in the motion for reconsideration, the RTC modified its decision
and acknowledged that it had inadvertently declared the interest rate to be 7% per
annum when, in fact, the Sinumpaang Salaysay stipulated 7% per month. However, the
7% per month interest is too burdensome and onerous which led the court to unilaterally
reduce the interest rate from 7% per month to 5% per month. Upon appeal, the CA
affirmed in toto the RTC decision.

ISSUE: Whether or not the interest rate of 7% per month stated in the Sinumpaang
Salaysay, executed by Ramos and Silvestre Pascual, binding.

RULING: AFFIRMATIVE. It is a basic principle in civil law that parties are bound by the
stipulations in the contracts voluntarily entered into by them. Parties are free to stipulate
terms and conditions which they deem convenient provided they are not contrary to law,
morals, good customs, public order, or public policy.

The interest rate of 7% per month was voluntarily agreed upon by Ramos and the Sps.
Pascual. There is nothing from the records and, in fact, there is no allegation showing
that petitioners were victims of fraud when they entered into the agreement with Ramos.
Neither is there a showing that in their contractual relations with RAMOS, the
PASCUALs were at a disadvantage on account of their moral dependence, ignorance,
mental weakness, tender age or other handicap, which would entitle them to the vigilant
protection of the courts as mandated by Article 24 of the Civil Code.

With the suspension of the Usury Law and the removal of interest ceiling, the parties are
free to stipulate the interest to be imposed on loans. Absent any evidence of fraud,
undue influence, or any vice of consent exercised by Ramos on Sps. Pascual, the
interest agreed upon is binding upon them. This Court is not in a position to impose
upon parties contractual stipulations different from what they have agreed upon. It is not
the province of the court to alter a contract by construction or to make a new contract for
the parties; its duty is confined to the interpretation of the one which they have made for
themselves without regard to its wisdom or folly as the court cannot supply material
stipulations or read into the contract words which it does not contain. Thus, we cannot
supplant the interest rate, which was reduced to 5% per month without opposition on
the part of Ramos.
 CARMELA CUIZON vs. COURT OF APPEALS AND SPOUSES GERARDO AND
MARIA PARAY
G.R. No. 102096 August 22, 1996
TORRES, JR., J.:

FACTS: Plaintiff is a businesswoman engaged in general merchandising under the

trademark Tropic Philippines Food and was introduced to defendants-spouses Gerardo
and Maria Paray, who are in the real estate business by a mutual friend. Subsequently,
Maria Paray then proposed to Carmela Cuizon that Sps. Paray would execute SPA in
favor of plaintiff for five parcels of land owned by them, which the plaintiff is to mortgage
in her name using the same parcels of land as collaterals. Plaintiff acceded to the plans
after much persuasion on the agreement that Carmela Cuizon pay for the amortization
of the loans and that for whatever amounts covered by the loans released from time to
time, turned over to the defendants by plaintiff, the defendants will immediately convey
to the plaintiff, each lot within the amount received by them computed at a mutually
agreed price of P170.00 per square meter. As an inducement to the proposal and in
partial compliance with their agreement, defendants executed in favor of plaintiff a DOS
over Lot No. 800-A-1-B under TaxDec. Also, the spouses executed a notarized SPA
covering Lots Nos. 800-A-3, 800-A-2 and 800-A-4, all with TCTs.

For the several loans entered into by plaintiff a total amount of P492,002.04 was
actually received by plaintiff as against the total loan of P544,851.75. From the net
proceeds of P492,002.04, plaintiff remitted to defendants P198,000.00 which was duly
receipted. After plaintiff remitted the P20,000.00 (part of 198,000.00), Mrs. Paray
borrowed plaintiff’s title to a lot under TCT No. 8648 and in turn Mrs. Paray handed to
plaintiff the Deed of Sale for Lot No. 800-A-1-B, together with two documents, a Deed of
Agreement and a Supplemental Agreement for plaintiff to sign. The Supplemental
Agreement in effect prohibited plaintiff from selling the land unless with consent of
defendant spouses. Plaintiff initially refused to sign the Deed of Agreement as the
purchase price indicated P25,170.00 with a down payment of P20,000.00 but the
balance reflected was P33,380.00 instead of only P5,000.00, but upon defendants plea,
she affixed her signature and issued a post-dated check for P33,380.00 to
accommodate defendants with the understanding that those will be deducted from the
loan releases and her assurance that these documents won’t be notarized.

When petitioner demanded that a deed of sale be executed over Lot No. 800-A-1-A, the
lot which was adjacent to Lot No. 800-A-1-B, private respondents refused to convey
said lot claiming that an accounting or liquidation of the loans and the lands she used as
collaterals must first be made.

Petitioner then filed a complaint for specific performance with damages against private
respondents. The RTC ruled in favor of petitioner. Upon appeal, the CA annulled and
set aside the RTC decision and sustained the validity and effectiveness of the sale of
Lot 800-A-1-B in favor of petitioner; ordered private respondents to return to petitioner
the owner’s duplicate of TCT No. T-8648; ordered private respondents to execute a
Deed Of Absolute Sale in favor of appellee over Lot 800-A-1-A; ordered petitioner to
cause the discharge and free lots 800-A-2, 800-A-3 and 800-A-4 from mortgages, liens
and encumbrances and if she fails, she is ordered to pay their value at P300/sq. m.

ISSUE: Whether or not the stipulations provided for under the Deed of Sale are binding.

RULING: AFFIRMATIVE. In contractual relations, the law allows the parties much
leeway and considers their agreement to be the law between them. This is because
"courts cannot follow one every step of his life and extricate him from bad bargains . . .
relieve him from one-sided contracts, or annul the effects of foolish acts. In arriving at a
sensible meaning of the agreement of the parties, the first thrust of the Court is to
discover and ascertain the intention of the contracting parties. And in order to judge the
intention of the contracting parties, their contemporaneous and subsequent acts shall
be principally considered.

Respecting Lot No. 800-A-1-B, petitioner claims that the consideration for the same is
only P25,120.00 as reflected in the Deed of Sale of Real Property while private
respondents aver that it should be P53,380.00 as can be gleaned from the Deed of
Agreement. The Deed of Sale is duly notarized while the Deed of Agreement and the
Supplemental Agreement are not notarized. All the three documents are dated June 6,
1983.

It is well settled that in construing a written agreement, the reason behind and the
circumstances surrounding its execution are of paramount importance to place the
interpreter in the situation occupied by the parties concerned at the time the writing was
executed. Admittedly, the intention of the contracting parties should always prevail
because their will has the force of law between them. The respondent court apparently
failed to consider certain relevant facts and circumstances surrounding the execution of
the documents involved which, if appreciated, would clearly indicate the intention of the
parties and would result to a different conclusion.

First, the sale of Lot No. 800-A-1-B was an incentive given to petitioner who acquiesced
to the proposal of private respondents of securing loans for them by using their lands as
collaterals. As compared to the other five lots which had a price of P170.00 per square
meter, Lot No. 800-A-1-B had a lower cost of P25,120.00 precisely to serve as an
inducement of private respondents for petitioner to agree to their transaction.

Second, petitioner and private respondents in executing the Deed of Agreement did not
intend to be bound by the provisions thereof. The alleged balance of P33,380.00 was
indicated in the Deed of Agreement because private respondents wanted petitioner to
issue a postdated check for the same amount to pay the farmer’s obligations. Thus, the
UCPB check which was issued afterwards, was not intended for the payment of the
alleged balance of P33,380.00 as appearing in the Deed of Agreement but was made
by petitioner to enhance the standing of private respondents to their creditors.
Petitioner’s testimony in this regard is enlightening.
Third, private respondents did not deny any of these statements of petitioner. They gave
no sensible explanation regarding the discrepancy in the consideration between the
Deed of Sale and Deed of Agreement and no reason whatsoever was given as to why
the Deed of Agreement, unlike the Deed of Sale, was not notarized, although both had
the same date.

Considering these circumstances, we find that the Deed of Sale is the embodiment of
the parties’ true agreement. The consideration in the sale of Lot 800-A-1-B is
P25,120.00 only which as appearing on record was fully paid by petitioner. The Deed of
Agreement was executed merely to suit private respondents’ nefarious motive of
boosting their credit image with an understanding that it was not to become binding and
operative between themselves. At most it was a simulated agreement, which is not
really designed nor intended by the parties to produce legal effects. As a fictitious and
simulated agreement it lacks valid consent so essential to a valid and enforceable
contract.

Also, it is undisputed that the selling price of the real property involved as agreed upon
by the parties is P170.00 per square meter. That which is agreed to in a contract is the
law between the parties. Thus, obligations arising from contracts have the force of law
between the contracting parties and should be complied with in good faith. We cannot
make a new contract for the parties in the case at bar. Neither can "present market
value" result to a novation, which cannot be presumed; neither can we disturb the
consensuality of a contract of sale where the rights and obligations of the parties are
determined at the time it was entered into, but above all, courts are not to play as
decision-makers as to the terms of a business contract when it is not asked to play that
role. The sanctity of contracts must be respected and delicately preserved.
SPS. EDGAR AND DINAH OMENGAN vs. PHILIPPPINE NATIONAL BANK, HENRY
M. MONTALVO AND MANUEL S. ACIERTO
G.R. No. 161319 January 23, 2007
CORONA, J.:

FACTS: PNB Kalinga Branch approved petitioners-spouses' application for a revolving

credit line of P3 million which was secured by two residential lots covered by TCTs in
the name of Edgar Omengan married to Dinah Omengan.

The first P2.5 million was released by Branch Manager Henry Montalvo but the release
of the final half million was withheld because of a letter allegedly sent by Edgar's sisters
stating therein that the mortgaged land, while in the name of Edgar Omengan, is co-
owned by all the children of the late Roberto and Elnora Omengan and that the other
co-owners had a prior understanding with Edgar allowing him to make use of the
property as collateral, but he refuses to comply with such arrangement.

Eventually, the new branch manager Manuel Acierto released the remaining half million
pesos and recommended the approval of a P2 million increase in their credit line to the
Cagayan Valley Business Center Credit Committee which the latter approved provided
Edgar's sisters gave their conformity. However, petitioners failed to secure the consent
of Edgar's sisters; hence, PNB put on hold the release of the additional P2 million.

Consequently, Edgar Omengan demanded the release of the P2 million and claimed
that the condition for its release was not part of his credit line agreement with PNB
because it was added without his consent. PNB denied his request.

Petitioners filed a complaint for breach of contract and damages against PNB. The RTC
ruled in favor of petitioners. Upon appeal, the CA reversed and set aside the RTC
decision.

ISSUE: Whether or not there was breach of contract.

RULING: NEGATIVE. Breach of contract is the "failure without legal reason to comply
with the terms of a contract; [f]ailure, without legal excuse, to perform any promise
which forms the whole or part of the contract.”

The condition attached to the increase in credit line requiring petitioners to acquire the
conformity of Edgar's sisters was never acknowledged and accepted by petitioners.
Thus, as to the additional loan, no meeting of the minds actually occurred and no
breach of contract could be attributed to PNB. There was no perfected contract over the
increase in credit line.
 ABS-CBN BROADCASTING CORPORATION vs. HONORABLE COURT OF
APPEALS, REPUBLIC BROADCASTING CORP, VIVA PRODUCTION, INC., and
VICENTE DEL ROSARIO
G.R. No. 128690 January 21, 1999
DAVIDE, JR., CJ.:

FACTS: ABS-CBN and Viva executed a Film Exhibition Agreement whereby Viva gave
ABS-CBN an exclusive right to exhibit some Viva films. One of the provisions of the
agreement states that ABS-CBN shall have the right of first refusal to the next twenty-
four (24) Viva films for TV telecast under such terms as may be agreed upon by the
parties hereto, provided, however, that such right shall be exercised by ABS-CBN from
the actual offer in writing. Viva, through defendant Del Rosario, offered ABS-CBN,
through its vice-president Charo Santos-Concio, a total of 156 titles, proposing to sell to
ABS-CBN airing rights over 52 originals and 52 re-runs for P60,000,000.00 of which
P30,000,000.00 will be in cash and P30,000,000.00 worth of television spots.

Defendant Del Rosario and ABS-CBN general manager, Eugenio Lopez III, met to
discuss the package proposal of Viva. Mr. Lopez alleged that he and Mr. Del Rosario
agreed that ABS-CBN was granted exclusive film rights to fourteen (14) films for a total
consideration of P36 million; that he allegedly put this agreement as to the price and
number of films in a "napkin'' and signed it and gave it to Mr. Del Rosario. On the other
hand, Del Rosario denied having made any agreement with Lopez regarding the 14
Viva films; denied the existence of a napkin in which Lopez wrote something; and
insisted that what he and Lopez discussed at the lunch meeting was Viva's film package
offer of 104 for a total price of P60 million.

Eventually, defendant Del Rosario received through his secretary, a handwritten note
from Ms. Concio to which was attached a draft exhibition agreement, a counter-proposal
covering 53 films, 52 of which came from the list sent by defendant Del Rosario and one
film was added by Ms. Concio, for a consideration of P35 million. The said counter
proposal was however rejected by Viva's Board of Directors.

After the rejection of ABS-CBN and following several negotiations and meetings
defendant Del Rosario and Viva's President Teresita Cruz granted RBS the exclusive
right to air 104 Viva-produced and/or acquired films.

ABS-CBN filed before the RTC a complaint for specific performance against private
respondents RBS, Viva and Vicente Del Rosario. The RTC ruled in favor of RBS and
Viva and explained that there was no meeting of minds on the price and terms of the
offer. The alleged agreement between Lopez III and Del Rosario was subject to the
approval of the VIVA Board of Directors, and said agreement was disapproved during
the meeting of the Board. Hence, there was no basis for ABS-CBN's demand that VIVA
signed the 2nd Film Exhibition Agreement. Upon appeal, the CA agreed with the RTC
that the contract between ABS-CBN and VIVA had not been perfected, absent the
approval by the VIVA Board of Directors of whatever Del Rosario, it's agent, might have
agreed with Lopez III.
ISSUE: Whether or not there was a perfected contract between ABS-CBN and Viva.

RULING: NEGATIVE. Contracts that are consensual in nature are perfected upon mere
meeting of the minds. Once there is concurrence between the offer and the acceptance
upon the subject matter, consideration, and terms of payment a contract is produced.
The offer must be certain. To convert the offer into a contract, the acceptance must be
absolute and must not qualify the terms of the offer; it must be plain, unequivocal,
unconditional, and without variance of any sort from the proposal. A qualified
acceptance, or one that involves a new proposal, constitutes a counter-offer and is a
rejection of the original offer. Consequently, when something is desired which is not
exactly what is proposed in the offer, such acceptance is not sufficient to generate
consent because any modification or variation from the terms of the offer annuls the
offer.

When Mr. Del Rosario of VIVA met with Mr. Lopez of ABS-CBN at the Tamarind Grill on
2 April 1992 to discuss the package of films, said package of 104 VIVA films was VIVA's
offer to ABS-CBN to enter into a new Film Exhibition Agreement. But ABS-CBN, sent,
through Ms. Concio, a counter-proposal in the form of a draft contract proposing
exhibition of 53 films for a consideration of P35 million. This counter-proposal could be
nothing less than the counter-offer of Mr. Lopez during his conference with Del Rosario
at Tamarind Grill Restaurant. Clearly, there was no acceptance of VIVA's offer, for it
was met by a counter-offer which substantially varied the terms of the offer.

In the case at bar, ABS-CBN made no unqualified acceptance of VIVA's offer. Hence,
they underwent a period of bargaining. ABS-CBN then formalized its counter-proposals
or counter-offer in a draft contract, VIVA through its Board of Directors, rejected such
counter-offer. Even if it be conceded arguendo that Del Rosario had accepted the
counter-offer, the acceptance did not bind VIVA, as there was no proof whatsoever that
Del Rosario had the specific authority to do so.
 NATALIA P. BUSTAMANTE vs. SPOUSES RODITO F. ROSEL and NORMA A.
ROSEL
G. R. No. 126800 November 29, 1999
PARDO, J.:

FACTS: Norma Rosel entered into a loan agreement with petitioner Natalia Bustamante
and her late husband Ismael C. Bustamante secured by 70 sq. m. portion of the land
owned by the latter, inclusive of the apartment therein with an interest of 18% per
annum. The agreement contains that in the event the borrowers fail to pay, the lender
has the option to buy or purchase the collateral for a total consideration P200,000.00,
inclusive of the borrowed amount and interest therein.

When the loan was about to mature on March 1, 1989, respondents proposed to buy at
the pre-set price of P200,000.00, the 70 sq. m. parcel of land. Petitioner refused and
requested for extension of time to pay the loan and offered to sell to respondents
another residential lot located in QC, with the principal loan plus interest to be used as
down payment. Respondents refused to extend the payment of the loan and to accept
the lot as it was occupied by squatters and petitioner and her husband were not the
owners thereof but were mere land developers entitled to subdivision shares or
commission if and when they developed at least one half of the subdivision area.

On March 1, 1989, petitioner tendered payment of the loan to respondents which the
latter refused to accept, insisting on petitioners signing a prepared deed of absolute sale
of the collateral. As such, respondents filed a complaint for specific performance with
consignation against petitioner and her spouse before the RTC.

Nevertheless, on March 4, 1990, respondents sent a demand letter asking petitioner to

sell the collateral pursuant to the option to buy embodied in the loan agreement.

On the other hand, petitioner filed before the RTC a petition for consignation and
deposited the amount of P153,000.00.

The RTC denied the prayer for execution of the Deed of Sale to Convey the collateral in
plaintiffs favor and ordered defendants to pay the loan of P100,000.00 with interest
thereon at 18% per annum commencing on March 2, 1989, up to and until August 10,
1990, when defendants deposited the amount. Upon appeal, the CA reversed the ruling
of the RTC and ordered defendants to execute the necessary Deed of Sale in favor of
the plaintiffs.

ISSUE: Whether or not defendants shall executed the Deed of Sale in favor of plaintiffs.

RULING: NEGATIVE. Petitioner did not fail to pay the loan. We note the eagerness of
respondents to acquire the property given as collateral to guarantee the loan. The sale
of the collateral is an obligation with a suspensive condition. It is dependent upon the
happening of an event, without which the obligation to sell does not arise. Since the
event did not occur, respondents do not have the right to demand fulfillment of
petitioners obligation, especially where the same would not only be disadvantageous to
petitioner but would also unjustly enrich respondents considering the inadequate
consideration (P200,000.00) for a 70 square meter property situated at Congressional
Avenue, Quezon City.

Respondents argue that contracts have the force of law between the contracting parties
and must be complied with in good faith. There are, however, certain exceptions to the
rule, pactum commissorium being one. The elements of pactum commissorium are as
follows: (1) there should be a property mortgaged by way of security for the payment of
the principal obligation, and (2) there should be a stipulation for automatic appropriation
by the creditor of the thing mortgaged in case of non-payment of the principal obligation
within the stipulated period.

A significant task in contract interpretation is the ascertainment of the intention of the

parties and looking into the words used by the parties to project that intention. In this
case, the intent to appropriate the property given as collateral in favor of the creditor
appears to be evident, for the debtor is obliged to dispose of the collateral at the pre-
agreed consideration amounting to practically the same amount as the loan. In effect,
the creditor acquires the collateral in the event of non payment of the loan. This is within
the concept of pactum commissorium. Such stipulation is void.
SANTOS VENTURA HOCORMA FOUNDATION, INC. vs. ERNESTO V. SANTOS and
RIVERLAND, INC.
G.R. No. 153004 November 5, 2004
QUISUMBING, J.:

FACTS: Ernesto V. Santos and Santos Ventura Hocorma Foundation, Inc. (SVHFI)
executed a Compromise Agreement which amicably ended all their pending litigations.
The pertinent portions of the Agreement provides that SVHFI shall pay Santos P14.5
Million in the following manner: P1.5 Million immediately upon the execution of this
agreement; the balance of P13 Million shall be paid, whether in one lump sum or in
installments, at the discretion of the Foundation, within a period of not more than two (2)
years from the execution of this agreement.

In compliance with the Compromise Agreement, respondent Santos moved for the
dismissal of the civil cases. He also caused the lifting of the notices of lis pendens on
the real properties involved. For its part, SVHFI paid P1.5 million to Santos, leaving a
balance of P13 million.

Subsequently, the RTC approved the compromise agreement. Respondent Santos

applied with RTC for the issuance of a writ of execution of its compromise judgment
which was granted. As such, petitioner's real properties were auctioned and Riverland,
Inc. was the highest bidder. The Certificates of Sale issued for the properties provided
for the right of redemption within one year from the date of registration of the said
properties.

On June 2, 1995, Santos and Riverland Inc. filed a Complaint for Declaratory Relief and
Damages alleging that there was delay on the part of petitioner in paying the balance of
P13 million and that under the Compromise Agreement, the obligation became due on
October 26, 1992, but payment of the remaining P12 million was effected only on
November 22, 1994. Thus, respondents prayed that petitioner be ordered to pay legal
interest on the obligation, penalty, attorney's fees and costs of litigation. Furthermore,
they prayed that the aforesaid sales be declared final and not subject to legal
redemption.

The RTC dismissed respondents' complaint. Upon appeal, the CA reversed the RTC
and ordered, among others, SVHFI to pay Santos and Riverland, Inc. legal interest on
the principal amount of P13 million at the rate of 12% per annum from the date of
demand on October 28, 1992 up to the date of actual payment of the whole obligation

ISSUE: Whether or not respondents are entitled to legal interest.

RULING: A compromise is a contract whereby the parties, by making reciprocal

concessions, avoid a litigation or put an end to one already commenced. It is an
agreement between two or more persons, who, for preventing or putting an end to a
lawsuit, adjust their difficulties by mutual consent in the manner which they agree on,
and which everyone of them prefers in the hope of gaining, balanced by the danger of
losing. The general rule is that a compromise has upon the parties the effect and
authority of res judicata, with respect to the matter definitely stated therein, or which by
implication from its terms should be deemed to have been included therein. This holds
true even if the agreement has not been judicially approved.

In the case at bar, the Compromise Agreement was entered into by the parties on
October 26, 1990. It was judicially approved on September 30, 1991. Applying existing
jurisprudence, the compromise agreement as a consensual contract became binding
between the parties upon its execution and not upon its court approval. From the time a
compromise is validly entered into, it becomes the source of the rights and obligations
of the parties thereto. The purpose of the compromise is precisely to replace and
terminate controverted claims.

In accordance with the compromise agreement, the respondents asked for the dismissal
of the pending civil cases. The petitioner, on the other hand, paid the initial P1.5 million
upon the execution of the agreement. This act of the petitioner showed that it
acknowledges that the agreement was immediately executory and enforceable upon its
execution.

As to the remaining P13 million, the terms and conditions of the compromise agreement
are clear and unambiguous. The two-year period must be counted from October 26,
1990, the date of execution of the compromise agreement, and not on the judicial
approval of the compromise agreement on September 30, 1991. When respondents
wrote a demand letter to petitioner on October 28, 1992, the obligation was already due
and demandable. When the petitioner failed to pay its due obligation after the demand
was made, it incurred delay.

In the case at bar, the obligation was already due and demandable after the lapse of the
two-year period from the execution of the contract. The two-year period ended on
October 26, 1992. When the respondents gave a demand letter on October 28, 1992, to
the petitioner, the obligation was already due and demandable. Furthermore, the
obligation is liquidated because the debtor knows precisely how much he is to pay and
when he is to pay it.

The second requisite is also present. Petitioner delayed in the performance. It was able
to fully settle its outstanding balance only on February 8, 1995, which is more than two
years after the extra-judicial demand. Moreover, it filed several motions and elevated
adverse resolutions to the appellate court to hinder the execution of a final and
executory judgment, and further delay the fulfillment of its obligation.
NATIONAL COMMERCIAL BANK OF SAUDI ARABIA vs. COURT OF APPEALS and
PHILIPPINE BANKING CORPORATION
G.R. No. 124267 January 17, 2005
CARPIO-MORALES, J.:

FACTS: On December 7, 2004, the parties NCB and Metrobank, successor of PBC,
filed a joint motion before the SC for approval of an undated compromise agreement
which was executed for the purpose of ending the longstanding litigation between them.

The Compromise Agreement contains the following, among others:

1. As and by way of FULL, COMPLETE and FINAL SETTLEMENT and

SATISFACTION of all claims, charges, demands or causes of action, in law or in
contract, which NCB has against METROBANK, METROBANK shall pay the amount of
ONE MILLION EIGHT HUNDRED THOUSAND, United States Currency
(US$1,800,000.00);

2. That in consideration of the receipt of said amount NCB, its successors-in-interests,

representatives and assigns, forever and unconditionally releases, waives and
discharges METROBANK, its stockholders, directors, officers, agents, employees,
subsidiaries and affiliates, from any and all cause or causes of actions, sum or sums of
money, accounts, damages, claims and demands, in law, in contract or in equity, under
the prevailing laws and regulations, of whatever kind and nature, criminal, civil or
administrative, past, present or contingent, which NCB, its successors-in-interests,
representatives and assigns had, has, or may have against METROBANK, its
stockholders, directors, officers, agents, employees, subsidiaries and affiliates.

ISSUE: Whether or not the compromise agreement between the parties is valid.

RULING: AFFIRMATIVE. Under Article 1306 of the Civil Code, contracting parties may
establish such stipulations, clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals, good customs, public order,
or public policy. Thus, a compromise agreement whereby the parties make reciprocal
concessions to resolve their differences to thereby put an end to litigation is binding on
the contracting parties and is expressly acknowledged as a juridical agreement between
them. To have the force of res judicata, however, the compromise agreement must be
approved by final order of the court.

To be valid, the compromise agreement must be based on real claims and actually
agreed upon in good faith. Both conditions are present in the case at bar. In clear,
categorical language, each of the parties has manifested their desire, by forging the
Compromise Agreement, to abbreviate the legal battle and settle the case amicably to
both their satisfaction. As the Agreement is not contrary to law, public order, public
policy, morals or good customs, the same is hereby approved. The petition having
become moot and academic, it should thus now be dismissed.
 REBECCA C. YOUNG assisted by her husband ANTONIO GO vs.
COURT OF APPEALS, PH CREDIT CORP., PHIL. HOLDING, INC. FRANCISCO
VILLAROMAN, FONG YOOK LU, ELLEN YEE FONG and THE REGISTER OF
DEEDS OF MANILA
G.R. No. 79518 January 13, 1989
PARAS, J.:

FACTS: Defendant Philippine Holding, Inc. (PHI) is the former owner of a piece of land
and a two storey building erected thereon, consisting of six units; Unit 1350 which is
vacant, Unit 1352 occupied by Antonio Young, Unit 1354 by Rebecca C. Young, Unit
1356 by Chui Wan and Felisa Tan Yu, Unit 1358 by Fong Yook Lu and Ellen Yee Fong
and Unit 1360 by the Guan Heng Hardware.

PHI secured an order from the City Engineer of Manila to demolish the building. Antonio
Young, tenant of Unit 1352, filed an action to annul the City Engineer's demolition Order
before the RTC. As an incident in said case, the parties submitted a Compromise
Agreement to the Court on September 24, 1981. Paragraph 3 of said agreement
provides that Antonio S. Young and Rebecca Young and all persons claiming rights
under them bind themselves to voluntarily and peacefully vacate the premises which
they were occupying as lessees (Units 1352 and 1354, respectively) which are the
subject of the condemnation and demolition order and to surrender possession thereof
to the PHI within sixty (60) days from written notice, subject to the proviso that should
defendant decided to sell the subject property or portion thereof, "Antonio and Rebecca
C. Young have the right of first refusal thereof."

However, on September 17, 1981, PHI had previously sold the said property in the
compromise agreement by way of dacion in payment to PH Credit Corporation (PHCC).

In turn, PHCC on sold the property covered by TCT 152439 to the Blessed Land
Development Corporation represented by its President Antonio T. S. Young; and the
property covered by TCT 152440 embracing Units 1356, 1358 and 1360 to spouses
Fong Yook Lu and Ellen Yee Fong.

Thereafter, petitioner Rebecca C. Young and Sps. Yu filed a case for the annulment of
the sale in favor of spouses Fong Yook Lu and Ellen Yee Fong and for specific
performance and damages against the PHCC and PHI.

The RTC decided in favor of the defendants and against the plaintiffs, thus dismissing
the complaint together with defendants' counterclaims. Hence, this petition.

ISSUE: Whether or not petitioner can enforce a compromise agreement to which she
was not a party.

RULING: NEGATIVE. A compromise agreement cannot bind persons who are not
parties thereto. The pertinent portion of the Compromise Agreement reads:
Plaintiff Antonio T.S. Young and the Defendant PHI hereby agree to implead in this
action as necessary party-plaintiff, plaintiff's daughter Rebecca C. Young who is the
recognized lawful lessee of the premises known and identified as 1354 Soller St., Sta.
Cruz, Manila and whose written conformity appears hereunder.

From the terms of this agreement, the conditions are very clear, such as: (1) that
Rebecca C. Young shall be impleaded in the action and (2) that she shall signify her
written conformity thereto.

For unknown reasons, the above conditions were not complied with. The parties did not
make any move to implead Rebecca as necessary party in the case. Neither did her
written conformity appear in said agreement. While there is the printed name of
Rebecca C. Young appearing at the end of the joint motion for approval of the
Compromise Agreement, she did not affix her signature above her printed name, nor on
the left margin of each and every page thereof. In fact, on cross-examination, she
admitted that she was not a party to the case and that she did not sign the aforesaid
joint motion because it was not presented to her.
 RAMON MAGSAYSAY AWARD FOUNDATION vs.
THE COURT OF APPEALS and SALCEDO, DEL ROSARIO, BITO, MISA & LOZADA
G.R. No. L-55998 January 17, 1985
TEEHANKEE, J.:

FACTS: Private respondent law firm of Salcedo, Del Rosario, Bito, Misa and Lozada
(now Bito, Misa and Lozada) was the lessee of the whole 9th floor of petitioner's
building under a written five-year lease contract from March 11, 1968 to March 10, 1973
with express provisos against any extension or renewal by implication of the lease and
for the review of the rental rate at the end of the second year of the lease and every two
years thereafter.

Before the end of the fourth year of the lease, petitioner notified respondent that in
accordance with the rental adjustment clause, it was increasing the monthly rental rate
from P14.00 to P16.00 per square meter or a total monthly rental of P13,422.20.
Petitioner sent on May 16, 1973 the draft of a renewal lease contract covering a period
of two years from March 11, 1973 and providing for a rental rate of P17.00 per square
meter or a total of P14,261.30 per month. The parties negotiated and practically agreed
with regard to the rate per square meter but disagreed on the question of back rentals
due from respondent on the basis of the adjusted rate of P16.00 per square meter
corresponding to the last nine months of 1972.

On June 8, 1973, the private respondent returned the said draft to the petitioner
requesting that it be finalized but with the last sentence of paragraph 2 thereof to read
as follows: "The period from March 11, 1973 to June 10, 1973 shall be at the rate of
P16.00 per sq. m or P13,422.40 per month". On June 13, 1973, the petitioner sent back
the final draft to the private respondent with the correction suggested by the latter, but
with an added footnote reading: "Following the same rate of P16.00 per square meter or
P13,422.20 per month which took effect March 11, 1972."

On June 16, 1973, the private respondent returned to the petitioner said new lease
contract already signed by private respondent, after its deletion of the footnote. The
agreed monthly rental appearing on the said contract of lease was P14,261.30 at the
rate of P17.00 per square meter effective June 11, 1973. However, the monthly rental
for the period of three months from March 11, 1973 to June 10, 1973 was P13,422.20,
based on the P16.00 per square meter.

The private respondent began paying the new monthly rental based on P17.00 per
square meter starting June 11, 1973.

On January 20, 1975, the petitioner's counsel sent a letter to the private respondent
demanding that it vacate the premises not later than January 31, 1975, and that it pay
the rental in arrears amounting to P110,212.21.
On January 23, 1975, the private respondent wrote back stating that the petitioner has
not given any factual or legal basis for its claim for back rents and that the private
respondent had earlier given its position on the matter.

Petitioner filed a complaint for ejectment against the private respondent. The Court a
quo made ruled, among others, that a renewal of the contract of lease was perfected by
the parties covering a period of two years, from March 11, 1973 to March 10, 1975, with
the rate of rental fixed at P17.00 per square meter effective June 11, 1973. This was
affirmed by the CA.

ISSUE: Whether or not there had been a meeting of the minds between the parties on
the two-year renewal of their lease contract at the rate of P17.00 per square meter for
the period from March 11, 1973 thru March 10, 1975.

RULING: AFFIRMATIVE. It is noted that, even before the expiration on March 10,
1973, of the original 5-year term of the lease, the parties had been exchanging
communications regarding its renewal. These exchanges reached the point of
agreement on the conditions therefor, to wit:

1. The period of this Contract shall be for two (2) year(s) beginning March 11, 1973 and
terminating March 10, 1975, unless sooner terminated as elsewhere provided herein.
This Contract shall not be deemed extended or renewed by implication beyond the
aforesaid period for any cause or reason whatsoever, but only by negotiations on or
before ninety (90) days prior to the expiration of this Contract

2. LESSEE shall pay LESSOR for the use and occupancy of the premises hereby a
monthly rent of Pesos Fourteen Thousand Two Hundred Sixty-One & 30/100
(P14,261.30), Philippine Currency, during the term of this Contract effective June 11,
1973. This monthly rent is based on Pesos Seventeen (P17.00) per square meter. The
period from March 11, 1973 to June 10, 1973 shall be at the rate of P16.00 per square
meter or P13,422.40 per month.

The unilateral deletion of the footnote made by the private respondent from the final
draft of the new lease contract cannot detract from the meeting of the minds reached by
the parties insofar as its consideration and terms are concerned. The parties' dispute
over the increase of rental rate from P14.00 to P16.00 per square meter had no
relevance to the perfection of the agreement to renew the lease. In fact, during the
negotiations, although petitioner adverted to the arrearages in rental still due from the
private respondent, it appears that said claim had been treated as a distinct or separate
matter such that its resolution was not considered a condition precedent to the renewal
under negotiation.
 TECNOGAS* PHILIPPINES MANUFACTURING CORPORATION vs.
PHILIPPINE NATIONAL BANK
G.R. No. 161004 April 14, 2008
QUISUMBING, J.:

FACTS: On December 3, 1991, petitioner Tecnogas obtained from respondent PNB an

Omnibus Line of P35 million and a 5-year Term Loan of P14 million secured by a REM
over its parcel of land covered by a TCT. The REM authorized PNB to extrajudicially
foreclose the mortgage as the duly constituted attorney-in-fact of Tecnogas in case the
latter defaults on its obligations. It also provided that the mortgage will stand as a
security for any and all other obligations of Tecnogas to PNB, for whatever kind or
nature, and regardless of whether the obligations had been contracted before, during or
after the constitution of the mortgage.

When Tecnogas’ loans matured, PNB sent collection letters, but the latter only
proposed to pay its obligations by way of dacion en pago conveying the mortgaged
land. Eventually, PNB filed a petition for extrajudicial foreclosure of the REM in the RTC.

A day before the auction sale, Tecnogas filed RTC a complaint for annulment of
extrajudicial foreclosure sale, with application for the issuance of a TRO and writ of
preliminary injunction which was granted. Upon appeal, the CA held that Tecnogas’
proposal to pay through dacion en pago did not constitute payment as it was not
accepted by PNB. Thus, injunction was not proper as the extrajudicial foreclosure of the
REM was a necessary consequence of Tecnogas’ default in its loan obligations.
Tecnogas sought reconsideration, but it was denied. Hence, this petition.

ISSUE: Whether or not the proposal to pay by way of dacion en pago extinguished the
obligation of Tecnogas.

RULING: NEGATIVE. Dacion en pago is a special mode of payment whereby the

debtor offers another thing to the creditor who accepts it as equivalent of payment of an
outstanding obligation. The undertaking is really one of sale, that is, the creditor is really
buying the thing or property of the debtor, payment for which is to be charged against
the debtor’s debt. As such, the essential elements of a contract of sale, namely,
consent, object certain, and cause or consideration must be present. It is only when the
thing offered as an equivalent is accepted by the creditor that novation takes place,
thereby, totally extinguishing the debt.

Undeniably, Tecnogas’ proposal to pay by way of dacion en pago was not accepted by
PNB. Thus, the unaccepted proposal neither novates the parties’ mortgage contract nor
suspends its execution as there was no meeting of the minds between the parties on
whether the loan will be extinguished by way of dacion en pago. Necessarily, upon
Tecnogas’ default in its obligations, the foreclosure of the REM becomes a matter of
right on the part of PNB, for such is the purpose of requiring security for the loans.
 NENA LAZALITA* TATING vs. FELICIDAD TATING MARCELLA, represented by
SALVADOR MARCELLA, CARLOS TATING, and the COURT OF APPEALS
G.R. No. 155208 March 27, 2007
AUSTRIA-MARTINEZ, J.:

FACTS: Daniela Solano Vda. de Tating (Daniela) owns a parcel of land as evidenced
by TCT. Daniela sold the subject property to her granddaughter, petitioner Nena
Lazalita Tating (Nena). The contract of sale was embodied in a duly notarized Deed of
Absolute Sale. Subsequently, title over the subject property was transferred in the name
of Nena. She declared the property in her name for tax purposes and paid the real
estate taxes due thereon for the years 1972, 1973, 1975 to 1986 and 1988. However,
the land remained in possession of Daniela.

Consequently, Daniela executed a sworn statement claiming that she had actually no
intention of selling the property; the true agreement between her and Nena was simply
to transfer title over the subject property in favor of the latter to enable her to obtain a
loan by mortgaging the subject property for the purpose of helping her defray her
business expenses; she later discovered that Nena did not secure any loan nor
mortgage the property; she wants the title in the name of Nena cancelled and the
subject property reconveyed to her. Daniela died on July 29, 19888 leaving her children
as her heirs, namely: Ricardo, Felicidad, Julio, Carlos and Cirilo who predeceased
Daniela and was represented by herein petitioner.

Carlos informed Nena about the sworn statement executed by Daniela and as a
consequence, they are demanding the return of their rightful shares over the subject
property as heirs of Daniela but to no avail.

Carlos and Felicidad, represented by her son Salvador, filed a complaint with the RTC
against Nena for the nullification of the Deed of Absolute Sale executed by Daniela in
her favor, cancellation of the TCT in the name of Nena, and issuance of a new title and
tax declaration in favor of the heirs of Daniela.

The RTC ruled in favor of respondents and declared that the document of sale executed
between Daniela Solano Vda. de Tating and Nena Lazalita Tating is null and void for
being simulated. The CA affirmed the lower court’s decision.

ISSUE: Whether or not the DOAS executed by Daniela in favor of Nena is simulated.

RULING: AFFIRMATIVE. The CA and the trial court ruled that the contract of sale
between petitioner and Daniela is simulated. A contract is simulated if the parties do not
intend to be bound at all (absolutely simulated) or if the parties conceal their true
agreement (relatively simulated). The primary consideration in determining the true
nature of a contract is the intention of the parties. Such intention is determined from the
express terms of their agreement as well as from their contemporaneous and
subsequent acts.
In the present case, the main evidence presented by private respondents in proving
their allegation that the subject deed of sale did not reflect the true intention of the
parties thereto is the sworn statement of Daniela dated December 28, 1977. The trial
court admitted the said sworn statement as part of private respondents’ evidence and
gave credence to it. The CA also accorded great probative weight to this document.
 GAUDENCIO VALERIO for himself and as attorney-in-fact of BIENVENIDO
VALERIO, CONRADO VALERIO, DIONISIO VALERIO, EFEPANIA VALERIO and
CARLOTA DE LEON VALENZUELA vs. VICENTA REFRESCA, MARIANO
REFRESCA, DOMINGO REFRESCA, REMEDIOS REFRESCA, OLY REFRESCA,
LALET REFRESCA and BENITO REFRESCA
G.R. No. 163687 March 28, 2006
PUNO, J.:

FACTS: As early as 1963, spouses Alejandro and Vicenta Refresca started cultivating
the 6.5-hectare land owned by as tenants. In 1968, Narciso Valerio acquired ownership
over the land. In 1974, the Valerios entered into a leasehold contract with tenant
Alejandro Refresca whereby the latter was allowed to continue tilling the 6.5-hectare
land in exchange for fixed rentals.

Narciso Valerio, with the consent of his wife Nieves, executed a Deed of Sale whereby
he sold his 6.5-hectare landholding to his heirs, namely: Susana de Leon, Leslie de
Leon, petitioners Carlota de Leon Valenzuela, and Bienvenido, Dionisio, Conrado,
Gaudencio, and Efepania, all surnamed Valerio. Narciso likewise conveyed 511 sq. m.
of his landholding, known as Lot 428-A, in favor of his tenant Alejandro Refresca in
recognition of his long service and cultivation of the subject land. Eventually, Narciso
Valerio died.

The parties to the Deed of Sale, as co-owners, subdivided the 6.5-hectare land and
executed a Deed of Agreement of Subdivision. The same 511 sq. m. of land was
granted to tenant Alejandro Refresca. Individual titles were issued to the vendees.

Nieves Valerio, widow of Narciso, entered into another leasehold agreement with the
Refrescas over the 6.5-hectare landholding for the period 1984-1985 in exchange for
the latter’s payment of rentals. Eventually, Nieves Valerio and Alejandro Refresca died.

Thereafter, petitioners demanded that the respondents vacate the land and alleged that
the 511 sq. m. lot was given to the respondents on the condition that they will surrender
their tenancy rights over the entire land but respondents failed to do so. The DAR Legal
Div. recognized the right of respondent Vicenta Refresca, widow of tenant Alejandro, to
continue her peaceful possession and cultivation of the 6.5-hectare land.

Despite the DAR ruling, petitioners sent a demand letter to respondents to vacate the
land. Respondents refused which led to a filing of a complaint by petitioners for the
annulment of documents of transfer and title of Alejandro. They alleged, among others,
that the cause or consideration for the transfer of the 511 sq. m. lot to the Refrescas
was an agreement between Narciso and Alejandro that conveyance of said portion
would serve as disturbance compensation in favor of the latter; that as the cause for the
cession of the land was not complied with, the transfer of the 511 sq. m. lot to Alejandro
should be declared void as a contract without cause or consideration produced no
effect.
The RTC ruled in favor of petitioners and held that the Deed of Sale executed by
Narciso Valerio is absolutely simulated or fictitious and, as both parties were in pari
delicto, petitioners could not demand the surrender of the 511 sq. m. lot nor could
respondents retain possession thereof. The RTC ordered that the 511 sq. m. lot be
reverted to the estate of the deceased Valerio spouses. On appeal, the CA reversed the
decision of the RTC and ruled that the Deed of Sale was not absolutely, but relatively
simulated as the parties intended to be bound by it.

ISSUE: Whether or not the Deed of Sale between Narciso and Alejandro is absolutely
simulated or fictitious and produced no legal effect.

RULING: NEGATIVE. Article 1345 of the Civil Code provides that the simulation of a
contract may either be absolute or relative. In absolute simulation, there is a colorable
contract but it has no substance as the parties have no intention to be bound by it. The
main characteristic of an absolute simulation is that the apparent contract is not really
desired or intended to produce legal effect or in any way alter the juridical situation of
the parties. As a result, an absolutely simulated or fictitious contract is void, and the
parties may recover from each other what they may have given under the contract.
However, if the parties state a false cause in the contract to conceal their real
agreement, the contract is relatively simulated and the parties are still bound by their
real agreement. Hence, where the essential requisites of a contract are present and the
simulation refers only to the content or terms of the contract, the agreement is
absolutely binding and enforceable between the parties and their successors in interest.

In the case at bar, the records reveal that the clear intent of Narciso Valerio in executing
the 1975 Deed of Sale was to transfer ownership of the apportioned areas of his 6.5-
hectare land to petitioners as his heirs and to his tenant Alejandro. Although no
monetary consideration was received by landowner Narciso from any of the vendees, it
cannot be said that the contract was not supported by a cause or consideration or that
Narciso never intended to transfer ownership thereof.
 DEVELOPMENT BANK OF THE PHILIPPINES vs. BONITA O. PEREZ and
ALFREDO PEREZ
G.R. No. 148541 November 11, 2004
CALLEJO, SR., J.:

FACTS: DBP sent a letter to respondent Bonita Perez, informing the latter of the
approval of an industrial loans amounting to P214,000.00 and P21,000.00.
Respondents were made to sign four promissory notes covering the total amount of the
loan, P235,000.00. The promissory notes were to be paid in equal quarterly
amortizations and were secured by a mortgage contract covering real and personal
properties.

Due to the respondents' failure to comply with their amortization payments, the
petitioner decided to foreclose the mortgages that secured the obligation. However,
Mrs. Perez requested for a restructuring of their account which was granted. As such,
on May 6, 1982, the respondents signed another promissory note in the amount of
P231,000.00 at eighteen percent (18%) interest per annum, payable quarterly at
P12,553.27, over a period of ten years. This Promissory Note supersedes the
Promissory Note dated May 18, 1978 and stands secured by a mortgage contract
executed by the parties on the same date. For failure to meet the quarterly amortization
of the loan, the petitioner instituted foreclosure proceedings on the mortgages.
Respondents filed a Complaint for the nullification of the new promissory note and
alleged that the petitioner restructured the respondents’ obligation in bad faith.

The RTC upheld the validity of the new promissory note and ordered the respondents to
pay their obligation. Upon appeal, the CA modified the RTC decision and found that the
respondents did not voluntarily sign the restructured promissory note as they were only
forced to sign it for fear of having their mortgaged property foreclosed by the bank. It
ruled that the restructured promissory note which was prepared by the petitioner alone
was a contract of adhesion which violates the rule on mutuality of contracts.

ISSUE: Whether or not the new promissory note is voidable for not having been
voluntarily signed by the respondents and for being a contract of adhesion.

RULING: NEGATIVE. A contract of adhesion is so-called because its terms are

prepared by only one party while the other party merely affixes his signature signifying
his adhesion thereto. While we accede to the appellate court’s conclusion that the new
promissory note was in the nature of a contract of adhesion, we cannot fathom how this
can further the respondents’ case. It bears stressing that a contract of adhesion is just
as binding as ordinary contracts. It is true that we have, on occasion, struck down such
contracts as void when the weaker party is imposed upon in dealing with the dominant
bargaining party and is reduced to the alternative of taking it or leaving it, completely
deprived of the opportunity to bargain on equal footing. Nevertheless, contracts of
adhesion are not invalid per se; they are not entirely prohibited. The one who adheres to
the contract is in reality free to reject it entirely; if he adheres, he gives his consent.
SPS. FRANCISCO AND RUBY REYES vs. BPI FAMILY SAVINGS BANK, INC., and
MAGDALENA L. LOMETILLO
G.R. Nos. 149840-41 March 31, 2006
CORONA, J.:

FACTS: On March, 24, 1995, Sps. Reyes executed a REM on their property in Iloilo
City in favor of respondent BPI Family Savings Bank, Inc. (BPI-FSB) to secure a
P15,000,000 loan of Transbuilders Resources and Development Corporation
(Transbuilders).

However, Transbuilders failed to pay the loan within the stipulated period. As such, the
bank restructured the loan through a promissory note executed by Transbuilders in
favor of BPI-FSB which states:

1. The proceeds of the Note shall be applied to loan account no. 211083364; and

2. The new obligation of Transbuilders to respondent Bank for fifteen million

(P15,000,000.00) shall be paid in twenty (20) quarterly installments commencing on
September 28, 1996 and at an interest rate of eighteen (18%) per annum.

Sps. Reyes aver that they were not informed of the restructuring of Transbuilders’ loan.
In fact, when they learned of the new loan agreement, they wrote BPI-FSB requesting
the cancellation of their mortgage and the return of their certificate of title to the
mortgaged property. They claimed that the new loan novated the loan agreement of
March 24, 1995. Because the novation was without their knowledge and consent, they
were allegedly released from their obligation under the mortgage.

ISSUE: Whether or not there was a novation of the mortgage loan contract between
petitioners and BPI-FSB that would result in the extinguishment of petitioners’ liability to
the bank.

RULING: NEGATIVE. Novation is defined as the extinguishment of an obligation by the

substitution or change of the obligation by a subsequent one which terminates the first,
either by changing the object or principal conditions, or by substituting the person of the
debtor, or subrogating a third person in the rights of the creditor.6

Article 1292 of the Civil Code on novation further provides that in order that an
obligation may be extinguished by another which substitute the same, it is imperative
that it be so declared in unequivocal terms, or that the old and the new obligations be on
every point incompatible with each other.

The cancellation of the old obligation by the new one is a necessary element of novation
which may be effected either expressly or impliedly. While there is really no hard and
fast rule to determine what might constitute sufficient change resulting in novation, the
touchstone, however, is irreconcilable incompatibility between the old and the new
obligations. It is a well-settled rule that with respect to obligations to pay a sum of
money, the obligation 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.

BPI-FSB and Transbuilders only extended the repayment term of the loan from one
year to twenty quarterly installments at 18% interest per annum. There was absolutely
no intention by the parties to supersede or abrogate the old loan contract secured by
the real estate mortgage executed by petitioners in favor of BPI-FSB. In fact, the
intention of the new agreement was precisely to revive the old obligation after the
original period expired and the loan remained unpaid. The novation of a contract cannot
be presumed. In the absence of an express agreement, novation takes place only when
the old and the new obligations are incompatible on every point.
 AURORA FE B. CAMACHO vs. COURT OF APPEALS and ANGELINO BANZON
G.R. No. 127520 February 9, 2007
CALLEJO, SR., J.:

FACTS: Camacho was the owner of Lot 261, a 7.5-hectare parcel of land covered by
TCT. Camacho and respondent Atty. Angelino Banzon entered into a contract for legal
services denominated as a "Contract of Attorney’s Fee." Pursuant to the agreement,
Atty. Banzon sent a letter-proposal to the municipal council offering three sites for the
proposed public market which included Lot 261. Camacho executed a SPA giving Atty.
Banzon the authority to execute and sign for her behalf a Deed of Donation transferring
a 17,000-sq-m portion of Lot 261 to the municipal government of Balanga, Bataan. The
Deed of Donation was executed, which was later accepted by the local government unit
in Municipal Resolution No. 127.

Silvestre Tuazon had been an agricultural tenant in Lot 261 since World War II. On
August 22, 1968, Tuazon and Camacho entered into an "Agreement with Voluntary
Surrender" where Tuazon voluntarily surrendered his right as a tenant of the
landholding. Despite the agreement, however, Tuazon plowed a portion of the lot and
planted palay without Camacho’s consent. As such a complaint for forcible entry was
filed against Tuazon. The case was decided in favor of the plaintiffs and Tuazon was
ordered to vacate the lot. On appeal to the RTC issued a preliminary mandatory
injunction ordering Tuazon to "discontinue entering the subject premises until further
orders of the court."

Subsequently, plaintiffs, through Atty. Banzon, and Tuazon entered into an "Agreement
to Stay Court Order” wherein Tuazon was allowed to cultivate specific portions of the
property and to use the market’s water supply to irrigate his plants within the lot subject
to the market’s preferential rights. The parties also contracted that "the agreement shall
in no way affect the merits of the civil and car cases; and that no part shall be construed
as impliedly creating new tenancy relationship."

Eventually, Camacho filed a Manifestation in Civil Case declaring that she had
terminated the services of Atty. Banzon and had retained the services of new counsel,
Atty. Victor De La Serna.

Atty. Banzon filed a Complaint-in-Intervention in Civil Case No. 3512 and alleged that
Camacho had engaged his services as counsel in CAR Case No. 59 B’65 (where a
favorable decision was rendered) and in Civil Case No. 3512. Under the Contract of
Attorney’s Fee which they had both signed, Camacho would compensate him with a
5,000-sq-m portion of Lot 261 in case he succeeds in negotiating with the Municipality
of Balanga in transferring the projected new public market which had been set for
construction at the Doña Francisca Subdivision, all legal requirements having been
approved by a municipal resolution, the Development Bank of the Philippines, and the
National Urban Planning Commission. Atty. Banzon further claimed that as a
consequence of the seven cases filed by/against Camacho, she further bound herself
orally to give him a 1,000-sq-m portion of Lot 261 as attorney’s fee. He had also
acquired from Camacho by purchase an 80-sq-m portion of the subject lot as evidenced
by a Provisional Deed of Sale and from third parties an 800-sq-m portion. He further
declared that his requests for Camacho to deliver the portions of the subject lot
remained unheeded, and that of the seven cases he had handled for Camacho, four
had been decided in her favor while three are pending.

Eventually, Atty. Banzon and Tuazon entered into the following amicable settlement.

On August 14, 1977, Camacho and Tuazon entered into a Compromise Agreement,
whereby Camacho agreed to transfer a 1,000-sq-m portion of Lot 261-B in favor of
Tuazon; for his part, Tuazon moved to dismiss Civil Case No. 3805 and to remove all
the improvements outside the portion of the property which Camacho had agreed to
convey to him. Thus, the RTC rendered a partial decision approving the compromise
agreement.

Camacho then filed a Motion to Dismiss the Complaint-in-Intervention filed by Atty.

Banzon on the ground that the jurisdiction of the court to try the case ceased to exist
because the principal action had been terminated. The RTC ruled in favor of Atty.
Banzon. Upon appeal, the CA affirmed the RTC and held that there is a valid contract
between him and Atty. Banzon.

The CA likewise found the award of moral damages to be in order; that the discharge of
Atty. Banzon as counsel for Camacho was not justified and his discharge does not in
any way deprive him of his right to attorney’s fees. Lastly, the CA held that the RTC
erred in requiring Camacho to deliver Lot 261-B-1, since Atty. Banzon cannot demand a
portion of superior quality in the same way that appellant cannot transfer an inferior
quality.

On December 3, 1996, the CA issued a Resolution40 instituting petitioner Aurora Fe

Camacho as substitute for the deceased Aurora B. Camacho.

Atty. Banzon filed a Motion for Partial Reconsideration of the CA Decision, as well as a
Motion to Declare Decision Final insofar as Camacho was concerned. On the other
hand, Camacho moved to cancel the notice of lis pendens. In the meantime, petitioner
had filed the petition before this Court. Thus, the CA no longer acted on the motions on
the ground that it had already lost jurisdiction over the case.41

ISSUE: Whether or not there is a valid contract between Camacho and Atty. Banzon.

RULING: AFFIRMATIVE. The contract between Camacho and respondent is evidenced

by a written document signed by both parties denominated as Contract of Attorney’s
Fee. It is an established rule that written evidence is so much more certain and accurate
than that which rests in fleeting memory only; that it would be unsafe, when parties have
expressed the terms of their contract in writing, to admit weaker evidence to control and
vary the stronger, and to show that the parties intended a different contract from that
expressed in the writing signed by them. Moreover, the moment a party affixes her
signature thereon, he or she is bound by all the terms stipulated therein and is open to
all the legal obligations that may arise from their breach.

In the instant case, Camacho voluntarily signed the document evidencing the contract.
Camacho’s claim that the document was intended only to show respondent’s authority
to represent her with respect to the transaction is flimsy, since a special power of
attorney could just as easily have accomplished that purpose. In fact, Camacho did
execute a Special Power of Attorney after the Contract of Attorney’s Fee was executed,
and if Camacho were to be believed, the Contract of Attorney’s Fee should have been
immediately canceled thereafter since it was no longer needed. As correctly held by the
CA, Camacho was an experienced businesswoman, a dentistry graduate and is
conversant in the English language. We note that the words and phrases used in the
Contract of Attorney’s Fee are very simple and clear; thus, she cannot plead that she
did not understand the undertaking she had entered into. Considering that her
undertaking was to part with a 5,000-sq-m portion of her property, she should have
been more vigilant in protecting her rights.

Even assuming that the contract did not reflect the true intention of the parties as to
their respective obligations, it is nevertheless binding. The existence of the written
contract, coupled with Camacho’s admission that the signature appearing thereon was
hers, constitute ineluctable evidence of her consent to the agreement. It cannot be
overcome by mere denial and allegations that they did not intend to be bound thereby.
We also note that Camacho did not avail of the remedy of reformation of the instrument
in order to reflect what, according to her, was the true agreement.

The object of the contract is still certain despite the parties’ failure to indicate the
specific portion of the property to be given as compensation for services. In this case,
the object of the contract is the 5,000-sq-m portion of Lot 261, Balanga Cadastre. The
failure of the parties to state its exact location in the contract is of no moment; this is a
mere error occasioned by the parties’ failure to describe with particularity the subject
property, which does not indicate the absence of the principal object as to render the
contract void. Since Camacho bound herself to deliver a portion of Lot 261 to Atty.
Banzon, the description of the property subject of the contract is sufficient to validate the
same.

For the cause to be valid, it must be lawful such that it is not contrary to law, morals,
good customs, public order or public policy. There was thus nothing wrong with the
services which respondent undertook to perform under the contract. They are not
contrary to law, morals, good customs, public order or public policy.
SPOUSES LUIS M. ERMITAÑO and MANUELITA C. ERMITAÑO vs. THE COURT OF
APPEALS AND BPI EXPRESS CARD CORP.
G.R. No. 127246 April 21, 1999
QUISUMBING, J.:

FACTS: Petitioner Luis Ermitaño applied for a credit card from private respondent BPI
Express Card Corp. (BECC) with his wife, Manuelita, as extension cardholder.
Consequently, Manuelita's BECC credit card was lost. She informed the bank of the
loss. As such, she surrendered Luis' credit card and requested for replacement cards. In
her letter, Manuelita stated that she "shall not be responsible for any and all charges
incurred through the use of the lost card after August 29, 1989. However, when Luis
received his monthly billing statement from BECC dated September 20, 1989, the
charges included amounts for purchases made on August 30, 1989 through Manuelita's
lost card. Manuelita again wrote BECC disclaiming responsibility for those charges,
which were made after she had served BECC with notice of the loss of her card.

Despite the spouses' refusal to pay and the fact that they repeatedly exceeded their
monthly credit limit, BECC sent them a notice stating that their cards had been renewed
until March 1991. Notwithstanding, BECC continued to include in the spouses' billing
statements those purchases made through Manuelita's lost card which was protested by
Luis.

BECC pointed out to Luis the following stipulation in their contract:

In the event the card is lost or stolen, the cardholder agrees to immediately report its
loss or theft in writing to BECC . . . purchases made/incurred arising from the use of the
lost/stolen card shall be for the exclusive account of the cardholder and the cardholder
continues to be liable for the purchases made through the use of the lost/stolen BPI
Express Card until after such notice has been given to BECC and the latter has
communicated such loss/theft to its member establishments.

Luis stressed that the contract BECC was referring to was a contract of adhesion and
warned that if BECC insisted on charging him and his wife for the unauthorized
purchases, they will sue BECC for damages. This warning notwithstanding, BECC
continued to bill the spouses for said purchases.

Constrained, petitioners sued BECC for damages. The RTC ruled in their favor, stating
that there was a waiver on the part of BECC in enforcing the spouses' liability.
Moreover, the RTC observed that the contract between BECC and the Ermitaños was a
contract of adhesion, whose terms must be construed strictly against BECC, the party
that prepared it. Upon appeal, the CA stated that the spouses should be bound by the
contract, even though it was one of adhesion.

ISSUE: Whether or not the stipulations in the contract regarding the loss of the credit
card is valid.
RULING: NEGATIVE. Prompt notice by the cardholder to the credit card company of
the loss or theft of his card should be enough to relieve the former of any liability
occasioned by the unauthorized use of his lost or stolen card. The questioned
stipulation in this case, which still requires the cardholder to wait until the credit card
company has notified all its member-establishments, puts the cardholder at the mercy of
the credit card company which may delay indefinitely the notification of its members to
minimize if not to eliminate the possibility of incurring any loss from unauthorized
purchases. Or, as in this case, the credit card company may for some reason fail to
promptly notify its members through absolutely no fault of the cardholder. To require the
cardholder to still pay for unauthorized purchases after he has given prompt notice of
the loss or theft of his card to the credit card company would simply be unfair and
unjust. The Court cannot give its assent to such a stipulation which could clearly run
against public policy.
 EMMANUEL B. AZNAR vs. CITIBANK, N.A., (Philippines)
G.R. No. 164273 March 28, 2007
AUSTRIA-MARTINEZ, J.:

FACTS: Emmanuel B. Aznar (Aznar), is a holder of a Preferred Master Credit Card

(Mastercard) issued by Citibank with a credit limit of P150,000.00. As he and his wife,
Zoraida, planned to take their two grandchildren, Melissa and Richard Beane, on an
Asian tour, Aznar made a total advance deposit of P485,000.00 with Citibank with the
intention of increasing his credit limit to P635,000.00.

Aznar claims that when he presented his Mastercard in some establishments in

Malaysia, Singapore and Indonesia, Ingtan Tour and Travel Agency in Indonesia (to
purchase tickets to Bali) but the was not honoured for the reason that his card was
blacklisted by Citibank. Such dishonor forced him to buy the tickets in cash. He further
claims that his humiliation caused by the denial of his card was aggravated when Ingtan
Agency spoke of swindlers trying to use blacklisted cards.

Aznar filed a complaint for damages against Citibank claiming that Citibank fraudulently
or with gross negligence blacklisted his Mastercard which forced him, his wife and
grandchildren to abort important tour destinations and prevented them from buying
certain items in their tour. Citibank’s failure to comply with its obligation constitutes
gross negligence as it caused Aznar inconvenience, mental anguish and social
humiliation; the fine prints in the flyer of the credit card limiting the liability of the bank to
₱1,000.00 or the actual damage proven, whichever is lower, is a contract of adhesion
which must be interpreted against Citibank.

ISSUE: Whether or not the agreement between the parties is a contract of adhesion.

RULING: AFFIRMATIVE. On this point, the Court agrees with Aznar that the terms and
conditions of Citibank’s Mastercard constitute a contract of adhesion. It is settled that
contracts between cardholders and the credit card companies are contracts of
adhesion, so-called, because their terms are prepared by only one party while the other
merely affixes his signature signifying his adhesion thereto.

In this case, paragraph 7 of the terms and conditions states that "[Citibank is] not
responsible if the Card is not honored by any merchant affiliate for any reason x x x".
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.

Citibank also invokes paragraph 15 of its terms and conditions which limits its liability to
₱1,000.00 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.
 JUAN OLIVARES and DOLORES ROBLES vs. ESPERANZA DE LA CRUZ
SARMIENTO
G.R. No. 158384 June 12, 2008
CARPIO, J.:

FACTS: Sps. Sarmiento are the owners of a 230-square meter lot. They obtained a
loan from DBP in the amount of P12,000.00 for the construction of house over the land.
By way of security, Sarmiento spouses mortgaged the property to DBP. Respondent
failed to pay the amortization of the loan.

In 1979, respondent allegedly obtained a loan of P35,000.00 from Luis Boteros, a

neighbor in order to pay the loan with the DBP and prevent the foreclosure of the land.
Respondent alleged that instead of getting the amount, she authorized Boteros to pay
her loan with the DBP. Rspondent likewise accused Boterod of forging their signatures
in two deed of sales to make it appear the she and her husband Manuel, sold the
property snd the house to Boteros.

Boteros, on the other hand argued that respondent offered to sell their property to him
provided that he will pay the respondent's loan plus interests, to which he agreed. After
paying the required amount, DPB then issued a certification for cancellation of
mortgage. The two Deeds were reduced in writing signed by both Boteros and
respondent stating among others that the latter conveys the property to the former in
considerstion of P25,000.00.

The RD cancelled the previous title and a new one was issued in favor Boteros. Boteros
then sold the property to spouses Juan Olivares and Dolores Robles, petitioners herein.
It was alleged that respondent was among those who looked for interested buyers.
Olivares testified that respondent confirmed that she sold her property to Boteros. Due
to the sale made by Boteros, the property was then transferred in the name of
petitioners. After the transfer, petitioner demanded respondent to vacate the premises.
However, respondent requested a little more time. In view of the same, petitioner filed
an unlawful detainer complaint against respondent before the MTC.

The MTC ordered respondent and Manuel to vacate the premises. Respondent then
filed a civil case for recovery of possession against Boteros and petitioners. The RTC
dismissed the same. On appeal, the CA reversed the trial court's decision. Hence, this
petition.

ISSUE: Whether or not the subject deed of definite sale can be construed as an
equitable mortgage, and thereafter be declared null and void instead of being reformed.

RULING: NEGATIVE. The Court ruled that the parties intention is to enter a sale, not an
equitable mortgage. As found by the trial court, the requisites of a valid contract is
present. More so, in the prensent case, the Court noted that the property in question
was already mortgaged to the bank. And from the Deed of sale it was stated that the
consideration was for P2000 and then Boteros shall assume the obligations of
respondent. Prior to their sale, no evidence from the record appeared that respondent
had an existing loan from Boteros. In view of this, the Court ruled that no other
intentions were intended by the parties, rather than a sale. Respondent's possession of
the property after it was already sold to Boteros does not operate the same to be a
mortgage. In this case, Boteros merely tolerated the actuations of respondent to
possess the property. The petition is granted and the RTC decision is reinstated.
 REPUBLIC OF THE PHILIPPINES, REPRESENTED BY THE PRESIDENTIAL
COMMISSION ON GOOD GOVERNMENT vs. LEGAL HEIRS OF JOSE L. AFRICA
G.R. No. 205722, August 19, 2015
PERLAS-BERNABE, J.:

FACTS: The PCGG alleged that the defendants, in collaboration with each other,
siphoned funds from the national treasury to unjustly enrich themselves and the
Marcoses. With respect to Africa, the PCGG alleged that he collaborated with Benedicto
and several of the defendants in acting as conduits of the pilfered funds by laundering
the same using the banking facilities of Traders Royal Bank (TRB), of which Africa was
the Chairman of the Board of Directors, before remitting them to the Marcoses.

On August 20, 1987, the complaint was amended to implead Roman Cruz, Jr. as
defendant. Thereafter, or on November 3, 1990, the PCGG, through its Chairman,
David M. Castro, entered into a Compromise Agreement with Benedicto where the latter
undertook to cede to the government properties listed in Annex "A" thereof and transfer
to the government whatever rights he may have in the assets of the corporations listed
in Annex "B" thereof.

It also agreed to extend absolute immunity to Benedicto, the members of his family, and
the officers and employees of the listed corporations such that no criminal investigation
or prosecution would be undertaken against them for acts or omissions prior to
February 25, 1986. Among others, the Compromise Agreement explicitly stated that it
"covers the remaining claims and cases of the Philippine Government against
[Benedicto,] including his associates and nominees, namely: Julita C. Benedicto, Hector
T. Rivera, Lourdes V. Rivera, Miguel V. Gonzales, Pag-Asa San Agustin (Deceased),
Rocio B. Torres, Marciano Benedicto (Deceased), Romulo Benedicto, Francisca C.
Benedicto, Richard de Leon, Jose Montalvo, Jesus Martinez, Nestor Mata, Alberto
Velez, Zafiro Tanpinco, Dominador Pangilinan (Deceased), Mariano del Mundo and
Zacarias Amante." Notably, some of the defendants, including Africa, were not named
therein.

On February 23, 1996, respondents filed a motion seeking the dismissal of the case
against Africa, who had since died. Respondents asserted that Africa, who was then
merely the Chairman of TRB, should be exonerated since his supposed conspirators
had been exonerated by virtue of the Compromise Agreement.

ISSUE: Whether or not Africa and his heirs, respondents herein, may benefit from the
Compromise Agreement entered into between PCGG and Benedicto.

RULING: AFFIRMATIVE. A compromise is a contract whereby the parties, by making

reciprocal concessions, avoid litigation or put an end to one already commenced. The
cardinal rule in the interpretation of contracts such as compromise agreements is that "if
the terms of a contract are clear and leave no doubt upon the intention of the
contracting parties, the literal meaning of its stipulations shall control."
The Court has carefully and thoroughly perused the Compromise Agreement and found
no stipulation at all that would even resemble a provision in favor of Africa or the
respondents. On the contrary, what is obvious and glaring is the absence of any
provision clearly and deliberately extending the benefits of the Compromise Agreement
to them.

The foregoing circumstances established that the parties to the Compromise Agreement
deliberately excluded some defendants from its benefits, while including others. The
Court cannot, therefore, agree with the SB's conclusion that Africa should also benefit
from the Compromise Agreement merely because other defendants who were similarly
alleged to be officers of TRB benefited from it. The absence of Africa's name from the
list of the added beneficiaries could only mean that he was deliberately excluded from it.
Given the foregoing considerations, the Court is hard-pressed to rule against a finding
of a stipulation pour autrui in favor of Africa. The Compromise Agreement, taken in its
entirety, belies any intention of the parties to include Africa as one of its beneficiaries.
Considering that Africa was neither a party nor one of the intended beneficiaries of the
Compromise Agreement, and absent any stipulations pour autrui in his favor, the rule on
relativity of contracts, i.e., that only the parties thereto and their privies acquire rights
and assume obligations thereunder, prevails. No rule is more settled than that the
parties' intent is "embodied in the writing itself, and when the words are clear and
unambiguous the intent is to be discovered only from the express language of the
agreement."

In fine, the Court finds that the SB erred in ordering the dismissal of the case against
Africa, the latter not being a beneficiary to the Compromise Agreement, and absent any
showing that a common cause of action existed against all the defendants or that Africa
is an indispensable party to the case that would entitle him and his heirs, the
respondents herein, to benefit from the Compromise Agreement.
 SPOUSES IGNACIO F. JUICO and ALICE P. JUICO vs. CHINA BANKING
CORPORATION
G.R. No. 187678 April 10, 2013
VILLARAMA, JR., J.:

FACTS: Sps. Ignacio and Alice Juico obtained a loan of ₱10.3M from China Bank,
evidenced by two promissory notes and secured by a real estate mortgage. When they
failed to pay the monthly amortizations due, China Bank demanded the full payment of
the outstanding balance with accrued monthly interests. As of February 2001, the
amount due was ₱19.2M. The mortgaged property was sold at public auction with China
Bank as highest bidder for the amount of ₱10.3M.

Subsequently, Sps. Juico received a demand letter from China Bank for the payment of
₱8.9M, the amount of deficiency. As its demand remained unheeded, China Bank filed
a collection suit.

The RTC sustained the complaint, agreeing with China Bank that there remained a
balance of ₱8.9M since, before foreclosure, the total amount due was ₱19.2M inclusive
of principal, interests, penalties, and attorney’s fees. It further held that Ignacio’s claim
that he signed the promissory notes in blank cannot negate or mitigate his liability since
he admitted reading the promissory notes before signing them. Upon appeal, the CA
found as valid the stipulation in the promissory notes that interest will be based on the
prevailing rate.

ISSUE: Whether or not the increase interest rate is void for violating the mutuality of
contracts.

RULING: AFFIRMATIVE. The contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them. Article 1956 of the Civil Code
likewise ordains that "no interest shall be due unless it has been expressly stipulated in
writing." The binding effect of any agreement between parties to a contract is premised
on two settled principles: (1) that any obligation arising from contract has the force of
law between the parties; and (2) that there must be mutuality between the parties based
on their essential equality. Any stipulation regarding the validity or compliance of the
contract which is left solely to the will of one of the parties is invalid.

Escalation clauses refer to stipulations allowing an increase in the interest rate agreed
upon by the contracting parties. This Court has long recognized that there is nothing
inherently wrong with escalation clauses. Nevertheless, an escalation clause "which
grants the creditor an unbridled right to adjust the interest independently and upwardly,
completely depriving the debtor of the right to assent to an important modification in the
agreement" is void. A stipulation of such nature violates the principle of mutuality of
contracts. In a case, SC said that petitioner’s assent to the modifications in the interest
rates cannot be implied from their lack of response to the memos sent by respondent. It
is now settled that an escalation clause is void where the creditor unilaterally
determines and imposes an increase in the stipulated rate of interest without the
express conformity of the debtor. Such unbridled right given to creditors to adjust the
interest independently and upwardly would completely take away from the debtors the
right to assent to an important modification in their agreement and would also negate
the element of mutuality in their contracts.

However, the Court holds that the escalation clause in the instant case is still void
because it grants respondent the power to impose an increased rate of interest without
a written notice to petitioners and their written consent.

Respondent’s monthly telephone calls to petitioners advising them of the prevailing

interest rates would not suffice. A detailed billing statement based on the new imposed
interest with corresponding computation of the total debt should have been provided by
the respondent to enable petitioners to make an informed decision. An appropriate form
must also be signed by the petitioners to indicate their conformity to the new rates.
Compliance with these requisites is essential to preserve the mutuality of contracts. For
indeed, one-sided impositions do not have the force of law between the parties,
because such impositions are not based on the parties’ essential equality. In the
absence of consent on the part of the petitioners to the modifications in the interest
rates, the adjusted rates cannot bind them. Hence, we consider as invalid the interest
rates in excess of 15%, the rate charged for the first year. Based on the August 29,
2000 demand letter of China Bank, petitioners’ total principal obligation under the two
promissory notes which they failed to settle is P10,355,000. However, due to China
Bank’s unilateral increases in the interest rates from15% to as high as 24.50% and
penalty charge of 1/10 of 1% per day or 36.5% per annum for the period November 4,
1999to February 23, 2001, petitioners’ balance ballooned to P19,201,776.63. Note that
the original amount of principal loan almost doubled in only 16 months. The Court also
finds the penalty charges imposed excessive and arbitrary, hence the same is hereby
reduced to 1% per month or 12% per annum.

Based on jurisprudence, therefore, these points must be considered by creditors and

debtors in the drafting of valid escalation clauses. Firstly, as a matter of equity and
consistent with P.O. No. 1684, the escalation clause must be paired with a de-
escalation clause. Secondly, so as not to violate the principle of mutuality, the
escalation must be pegged to the prevailing market rates, and not merely make a
generalized reference to "any increase or decrease in the interest rate" in the event a
law or a Central Bank regulation is passed. Thirdly, consistent with the nature of
contracts, the proposed modification must be the result of an agreement between the
parties. In this way, our credit system would be facilitated by firm loan provisions that
not only aid fiscal stability, but also avoid numerous disputes and litigations between
creditors and debtors.