Philippine American General Insurance Co., Inc. v. Mutuc

No. L-19632. November 13, 1974
Art 1306. The contracting parties may establish stipulations not contrary to law, morals, good customs, public order or public policy.

Petitioner: Philippine American General Insurance Co., Inc

Respondents: Manuel C. Mutuc, Doroteo Q. Mojica, and Fausto S. Alberto

Facts:

·         Philippine American General Insurance Co., Inc. (PAGI) executed in behalf of defendant Mutuc, as principal, a surety bond in favor of the Maersk Line. The surety company guaranteed the faithful performance by said Mutuc of his duties as crewmember of the vessel of the Maersk Line, and more particularly, that he would not desert said vessel while he was engaged as crewmember.

·         Defendant Mutuc, Mojica, and appellant Alberto, executed an indemnity agreement in favor of PAGI. The parties agreed to jointly and severally indemnify plaintiff PAGI for any cost incurred by the latter in consequence of having become surety of any of them. It was further agreed that in case of any extension or renewal of the bond, they equally bind themselves under the same terms and conditions without the necessity of executing another indemnity agreement and waived their right to be notified of any renewal or extension of the bond which may be granted under the indemnity agreement.

·         The duration of surety bond was only for a year but at the instance of defendant Mutuc, it was renewed for three successive one year periods without the consent of Alberto.

·         According to the letter of the Immigration and Naturalization Service, Mutuc was not aboard the vessel M/S Merit Maersk when it departed from New York and was presumed to be a deserter. Maersk Line asked PAGI for the remittance of the forfeited bond of P1,000. PAGI wrote a letter to the defendants Mojica and Alberto demanding the payment of the amount of P1,000 in accordance with the indemnity agreement. Alberto refused on the ground that the stipulation as to “any extension” without the need for his being notified was null and void being contrary to law, morals, good customs, public order or public policy.  

Issue:

            WoN the stipulation as to “any extension” without the need for his being notified was null and void being contrary to law, morals, good customs, public order or public policy.

           

Held:

            No, the Supreme Court holds that there was nothing that did offend public policy or public order when such an arrangement was explicitly provided for.

            Article 1306 provides “The 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.”

Contracts, which are the private laws of the contracting parties, should be fulfilled according to the literal sense of their stipulations.  If their terms are clear and leave no room for doubt as to the intention of the contracting parties, for contracts are obligatory, no matter what their form may be, whenever the essential requisites for their validity are present.

In the case at bar, Alberto agreed in advance to any extension without the need for notification. Such stipulation was explicitly provided for and is not against the law, morals, good customs, public policy or public order.

           Thus, the decision of the lower court is AFFIRMED.

Valencia Hardwood v CA

G.R. No. 102316. June 30, 1997

Art. 1306 – The contracting parties may establish such stipulations, clauses, terms and conditions NOT contrary to law, morals, good customs, public order or public policy.

Facts:

·         Plaintiff Valenzuela Hardwood and Industrial Supply, Inc. entered into an agreement with the defendant Seven Brothers Shipping Corporation, whereby the latter undertook to load on board its vessel M/V Seven Ambassador the former’s lauan round logs numbering 940 at the port of Maconacon, Isabela for shipment to Manila.

·         Valenzuela insured the logs against loss and/or damage with South Sea Surety and Insurance Co., Inc. for P2,000,000.00 and the latter issued its Marine Cargo Insurance Policy No. 84/24229 for P2,000,000.00.

·         Valenzuela tendered a check as payment for premium on the insurance policy. The following day MV Seven Ambassador sank.

·         A check for P5,625.00 to cover payment of the premium and documentary stamps due on the policy was tendered due to the insurer, but was not accepted. Instead, the South Sea Surety cancelled the insurance policy it issued as of the date of the inception for non-payment of the premium due in accordance with Section 77 of the Insurance Code.

·         Valenzuela filed formal claims against South Sea Surety and Seven Brothers.

Issue:

WoN the contract of private carriage entered by the Valenzuela Hardwood with Seven Brothers is valid within the purview of Article 1306 of the New Civil Code.

Held:

Yes, the Court holds that the parties are at liberty to establish stipulations in their contract provided that they are not divergent to law, morals, good customs, public order, or public policy.

Pursuant to Article 1306 of the Civil Code, such stipulation is valid because it is freely entered into by the parties and the same is not contrary to law, morals, good customs, public order, or public policy.

The court stress that in a contract of private carriage, the parties may freely stipulate their duties and obligations which perforce would be binding on them. Unlike in a contract involving a common carrier, private carriage does not involve the general public. Hence, the stringent provisions of the Civil Code on common carriers protecting the general public cannot justifiably be applied to a ship transporting commercial goods as a private carrier. Consequently, the public policy embodied therein is not contravened by stipulations in a charter party that lessen or remove the protection given by law in contracts involving common carriers.

Manila Bay Club Corp v CA

G.R. No. 110015 October 13, 1995

Civil Code, Art. 1306 – The contracting parties may establish such stipulations, clauses, terms and conditions NOT contrary to law, morals, good customs, public order or public policy.

Facts:

Sabenianos as owners-lessors and Manila Bay Club Corporation as lessee executed ten-year lease contract.

But the lease agreement was short-lived because the Sabenianos unilaterally terminated the lease due to the following contract violations:

(a)  For unpaid accumulated rentals in arrears;

(b)  For using the leased premises for gambling and prostitution; and

(c)   Failure to insure the leased building.

They invoked the "Special Clause" of the lease contract that in case the MBCC fail or neglect to perform or comply with the stipulations, the lease contract shall become automatically terminated and cancelled and the said premises shall be peacefully vacated by the LESSEE.

The "Special Clause" of the lease contract as found in paragraph 19 thereof to justify their action. It reads:

19. If the rental herein stipulated or any part thereof at any time, shall be in arrears or unpaid, or if the tenant shall at any time fail or neglect to perform or comply with any of the covenants, conditions, agreements or restrictions stipulated or if the tenants shall become bankrupt or insolvent or shall compound with his creditors, then and in any of such above cases, this lease contract shall become automatically terminated and cancelled and the said premises shall be peacefully vacated by the LESSEE for the LESSOR to hold and enjoy henceforth as if these presents have not been made and it shall be lawful for the LESSOR or any person duly authorized in his behalf, without any formal notice or demand to enter into and upon said leased premises or any part thereof without prejudice on the part of the LESSOR to exercise all rights on the contract of lease and those given by law. And upon such cancellation of the contract, the LESSEE hereby grants to the LESSOR the legal right to enter and take possession of the leased premises as though the term of the lease contract has expired.

 The trial court abandoned the first two grounds for lack of sufficient evidence, but found MBCC violated the "insurance clause" (paragraph 22) of the contract, which CA affirmed.

MBCC argued that Sabenianos cannot unilaterally rescind the lease contract because its purported violation of the "insurance clause" was merely slight or casual.

Issue:

WoN the strict compliance with the "insurance clause" is mandatory to result in the automatic termination and cancellation of the lease in case of non-observance.

Held:

          Yes, the Supreme Court finds petitioner's failure to comply with the mandatory requirement of insuring the building shall result in the automatic termination and cancellation of the lease as stipulated in their contract.

          Article 1306 of the New Civil Code provides that the 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.

In the case at bar, it can be fairly judged from the tenor of the contract that the parties intended mandatory compliance with all the provisions of the contract. Certainly, there is nothing wrong if the parties to the lease contract agreed on certain mandatory provisions concerning their respective rights and obligations, such as the procurement of the insurance and the rescission clause.

          Thus, the petition is DENIED for lack of merit.

De Luna v Abrigro

G.R. No. L-57455, January 18, 1990

Civil Code, Art. 1306 – The contracting parties may establish such stipulations, clauses, terms and conditions NOT contrary to law, morals, good customs, public order or public policy.

Facts:

Prudencio de Luna donated a portion of lot in favor to the Luzonian University Foundation, Inc, as embodied in a Deed of Donation Intervivos.

The donation was subject to certain terms and conditions and provided for the automatic reversion to the donor of the donated property in case of violation or non-compliance, couched in the following terms:

xxx xxx xxx.

11. That violation of any of the conditions herein provided shall cause the automatic reversion of the donated area to the donor, his heirs, assigns and representatives, without the need of executing any other document for that purpose and without obligation whatever on the part of the DONOR.

The foundation failed to comply the conditions of the donation so that Prudencio revived the said donation in favor of the foundation subject to terms and conditions, again with automatic reversion clause in case of violation thereof.

After the death of Prudencio, his heirs filed a complaint for the cancellation of the donation and the reversion of the donated land to them, alleging that the terms and conditions of the donation were not complied with by the foundation.

In its answer, the foundation claimed of partial and substantial compliance with the conditions of the donation and that was granted an indefinite extension of time.

The trial court dismissed the complaint by reason of prescription.

The petitioners brought the instant petition for review, contending that onerous donations are governed by the rules on contracts and not by the rules on donations, so that the automatic reversion of the donated area to the donor in case of violation of any of the conditions is effective without the need of executing any other document for that purpose as stipulated in the donation.

Issue:

WoN the stipulation of automatic reversion in the Deed of Donation is valid and binding upon the foundation who voluntarily consented thereto.

Held:

          Yes, the Supreme Court holds that stipulation not being contrary to law, morals, good customs, public order or public policy, is valid and binding upon the foundation.

Under Article 1306 of the New Civil Code, the parties to a contract have the right "to establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order or public policy."

          In the case at bar, the validity of the stipulation in the contract providing for the automatic reversion of the donated property to the donor upon non-compliance cannot be doubted. It is in the nature of an agreement granting a party the right to rescind a contract unilaterally in case of breach, without need of going to court.

Thus, the petition is GRANTED. Respondent judge is ordered to conduct a trial on the merits to determine the propriety of the revocation of the subject donation.