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.

Ong Chua v Carr

GR No. 29512. January 17, 1929
Art. 1362 – Unilateral mistake.

Petitioner – Ong Chua

Respondents – Edward Carr et al

Facts:

·         In 1923, Ong Chua bought four properties of the spouses Henry E. Teck and Magdalena Lim. Chua executed a public document granting the spouses the right to repurchase within four years. But neither one of the documents was placed on record with the register of deeds.

·         In 1925, Edward Carr came to Atty. P.J. Moore for advice and assistance in the former’s desire to purchase coconut lands. Later, Moore informed Carr that he could buy the lots purchased by Chua from the spouses Teck and Lim.

·         After long negotiations, Chua agreed to sell the properties in question to Carr on the condition that the sale should be subject to the rights of Teck and Lim to reconvey the properties, and that said rights were to be respected by the vendee.

·         However, Atty. Moore told Carr that they would make the deed of sale to appear absolute, but that Carr was to bear in mind that the rights of Teck and Lim still existed, and that the deed and other documents must be left in Moore's possession until the expiration of the term for the right of repurchase.

·         Hence, the deed of sale did not include therein the condition that the sale was subject to Teck's and Lim's rights to repurchase. The deed was signed by Chua, who was unfamiliar of English, trusting Atty. Moore that such public document contained sufficient conditions as agreed.

·         In 1926, Atty. Moore got critically ill. While the Atty. was under medical treatment, Carr annoyed the former.  Carr demanded the Atty. to surrender the deed to him for registration to the register of deeds.

·         Teck offered to repurchase the property in question from Chua who thereupon demanded of Carr the reconveyance of the property to the spouses.  But Carr refused to do so, claiming that he had an absolute title to said property.

·         Upon learning that the deed in question contained no reference to the rights of reconveyance, Chua filed an action to reform the deed of the sale in accordance with the original agreement. Subsequent to his answer, Carr died. He was substituted by the administrator of his estate, Manuel Igual.

·         The CFI Zamboanga rendered the judgment in favor of Chua.

·         On appeal, Igual argued that the facts proven did not justify the reformation of the deed in question.

Issue:

          WoN the petitioner performs a fraudulent conduct and unfair advantage over Chua to casue for the reformation of the deed.

Held:

          Yes, the Court holds that the evidence is conclusive that the conduct of Carr constituted fraud and was calculated to obtain an unfair advantage over Chua.

          Under Art. 1362, reformation will be given "where there is a mistake on one side and fraud or unfair dealing on the other".

In the case at bar, Carr knew the contents of the deed and fully agreed to Moore's plan to place it in escrow until the expiration of the term for the repurchase or redemption of the land. But he violated his own agreement when he harassed Moore into giving him possession of the deed prematurely. He took immediate advantage of that circumstance and hastened to have the document presented to the register of deeds for the issuance of certificates of title. Hence, such conduct constitutes fraud and was calculated to obtain an unfair advantage over the plaintiff.

          Thus, the appealed judgement is AFFIRMED.

Prudential Bank v IAC

G.R. No. 74886. December 8, 1992
Art. 1358 – What must appear in a public document.

Petitioner – Prudential Bank

Respondents – IAC, Phil. Rayon Mills Inc. & Anacleto Chi

Facts:

·         Philippine Rayon Mills entered into a contract with Nissho Co., Ltd. of Japan for the importation of textile machineries under a five-year deferred payment plan.

·         To effect payment, Philippine Rayon applied for a commercial letter of credit with the Prudential Bank and Trust Company in favor of Nissho.

·         Then, Nissho issued drafts which were all paid by the Prudential Bank through its correspondent in Japan, the Bank of Tokyo, Ltd.  Philippine Rayon President Anacleto R. Chi, accepted two of these drafts while the other ten drafts were not.

·         Prudential Bank indorsed the shipping documents to the Philippine Rayon, which accepted the delivery.

·         To take delivery of the machineries, Prudential Bank and Philippine Rayon executed a trust receipt, signed by Chi in his capacity as President. Chi agreed that he is jointly and severally liable to the Prudential Bank should the Philippine Rayon fail to pay the total amount or any portion of the drafts issued by Nissho and paid for by Prudential Bank.

·         The obligation of the Philippine Rayon arising from the letter of credit and the trust receipt remained unpaid and unliquidated. Repeated formal demands yielded no result. Hence, Prudential Bank filed an action for the collection of the principal amount of P956,384.95 against Philippine Rayon and Chi.

·         The trial court ordered Philippine Rayon the sum of P153,645.22 with interest at 6% per annum from 1974 until fully paid, and dismissed the case against Chi.

·         The Prudential Bank argued that Chi is solidarily liable with Philippine Rayon in accordance with law and based on his signature on the solidary guaranty clause at the dorsal side of the trust receipt.

·         The appellate court sustained the trial court in all respects because the said contract was not executed and acknowledged before a notary public.

Issue:

          WoN a contract of guaranty should be signed and acknowledged before a notary public to render Chi liable.

Held:

          No, the Court holds that the acknowledgment before a notary public is not required by law to make a party liable on the instrument.

          Under Article 1358 of the Civil Code, a contract of guaranty does not have to appear in a public document.

          In the case at bar, the contract signed by Chi was a solidary guaranty clause. It was also admitted by Prudential Bank. With respect to a guaranty, which is a promise to answer for the debt or default of another, the law merely requires that it should be in writing. Otherwise, it would be unenforceable unless ratified. Unlike in surety, the acknowledgment of a surety before a notary public is required to make it a public document.

However, because the questioned provision is a solidary guaranty clause as distinguished from a contract of surety, the obligation of Chi is only that of a guarantor. Pursuant to other provisions of the law, the defense of exhaustion (excussion) may be raised by Chi before he may be held liable for the obligation.

          Thus, the petition is GRANTED. The rulings of the lower courts are REVERSED and SET ASIDE. But Anacleto Chi is DECLARED secondarily liable on the trust receipt, and is ordered to pay the face value thereof, with interest at the legal rate, if the writ of execution for the enforcement of the awards against Philippine Rayon Mills, Inc. is returned unsatisfied.

Timoteo Baluyot et al v CA

G.R. No. 122947. July 22, 1999.
Art. 1311 – Contracts take effect only between the parties, their assigns and heirs.

Petitioners – Timoteo Baluyot, Jaime Benito, Benigno Eugenio, Rolando Gonzales, Fortunato Fulgencio, and Cruz-na-Ligas Homesite Association, Inc.

Respondents – CA, LGU Quezon City & University of the Philippines

Facts:

·         The petitioners were residents of Barangay Cruz-na-Ligas, Diliman, Quezon City, and members of the Cruz-na-Ligas Homesite Association, Inc.

·         They claimed ownership of 42 hectares of lands owned by UP by reasons of occupation from time immemorial and of continuous possession. Thereafter, the U.P. Board of Regents approved the donation of about 9.2 hectares of the site directly to the residents. The area later was increased to 15.8 hectares.

·         But the donation failed because the residents demanded an area bigger than 15.8 hectares. Later, the Association proposed to accept the donation for the benefit of the residents.

·         The UP backed-out and resumed to negotiate the donation thru Quezon City Government under the terms disadvantageous or contrary to the rights of the bonafide residents.

·         The Association filed a complaint for specific performance and damages against UP. The complaint was later on amended to include QC Government with a writ of preliminary injunction to restrain UP from donating the area to the QC Government.

·         The RTC Quezon City granted the writ of preliminary injunction. Later, it lifted the Order after the UP assured the Association that the donation to the QC Government will be for the benefit of the residents of Cruz-Na-Ligas.

·         But UP insisted the dismissal of the case. The Association manifested its willingness on the condition that the area to be donated through QC Government be subdivided into lots to be given to the qualified residents together with the certificate of titles.

·         However, UP had continuously and unlawfully refused to comply the terms and conditions of the said donation. Instead, it revoked the donated property to be reverted to UP without judicial declaration.

·         The Association prayed a writ of preliminary injunction or at least a temporary restraining order be issued.

·         But the RTC denied the application on the ground that the plaintiffs are not parties to the deed of donation between UP & QC Government, and there was nothing to enforce because such deed was already validly revoked by the UP.

·         The CA overruled the trial court but dismissed the case because of the valid revocation of the deed of donation that rendered the Association’s primary cause of action inexistent.

Issue:

            WoN the petitioners have the right seek enforcement of donation on the basis that they are the intended beneficiaries of the donation to the Quezon City government although they were not parties to the deed of donation.

Held:

            Yes, the Court holds that the petitioners have the right seek enforcement of donation.

            Art. 1311, second paragraph, of the Civil Code provides: If a contract should contain some stipulation in favor of a third person, he may demand its fulfillment provided he communicated his acceptance to the obligor before its revocation. A mere incidental benefit or interest of a person is not sufficient. The contracting parties must have clearly and deliberately conferred a favor upon a third person.

            In the case at bar, all the elements of a cause of action contained in the amended complaint of petitioners. The allegations in the amended complaint are sufficient to bring petitioners’ action within the purview of the cited provision on stipulations pour autrui.

            Thus, the CA decision is REVERSED and the case is REMANDED to the RTC-QC for trial on the merits.

William Uy v CA

G.R. No. 120465. September 9, 1999
Art. 1311 – Contracts take effect only between the parties, their assigns and heirs.

Petitioner – William Uy & Rodel Roxas

Respondents – CA & National Housing Authority

Facts:

·         Uy and Roxas were agents authorized to sell eight parcels of land by the owners.

·         They sold the lands to the National Housing Authority (NHA) to be utilized and developed as a housing project.

·         The NHA Board approved the acquisition of said lands, with an area of 31.8231 hectares, at the cost of P23.867 million.  The parties executed a series of Deeds of Absolute Sale covering the subject lands.

·         But of the eight parcels of land, only five were paid for by the NHA because the Land Geosciences Bureau of the DENR reported that the remaining area is located at an active landslide area and not suitable for a housing project.

·         Then, the NHA cancelled the  sale over the three parcels of land and offered the amount of P1.225 million to the landowners as daños perjuicios.

·         Uy and Roxas filed in RTC Quezon City a Complaint for Damages against NHA and its GM.

·         The RTC rendered a decision declaring the cancellation of the contract to be justified and awarded damages to the petirioners the same amount initially offered by NHA.

·         They appealed to the CA, which reversed the judgment and dismissed the complaint for the reasons:

(a)  that since there was “sufficient justifiable basis” in cancelling the sale, “it saw no reason” for the award of damages; and

(b)  that petitioners were mere attorneys-in-fact and, therefore, not the real parties-in-interest in the action before the trial court.

·         But Uy and Roxas argued that they lodged the complaint not in behalf of their principals but in their own name as agents directly damaged by the termination of the contract for the losses of “unearned income” and advances.

Issue:

            WoN the petitioners are the real party-in-interest who stands to be benefited or injured by the judgment or the party entitled to the avails of the suit.

Held:

            No, the Court holds that Uy and Roxas are not parties to the contract of sale between their principals and NHA.

            Under Article 1311 of the Civil Code, Contracts take effect only between the parties, their assigns, and heirs, except in case where the rights and obligations arising from the contract are not transmissible by their nature, or by stipulation, or by provision of law. x x x.

If a contract should contain some stipulation in favor of a third person, he may demand its fulfillment provided he communicated his acceptance to the obligor before its revocation. A mere incidental benefit or interest of a person is not sufficient. The contracting parties must have clearly and deliberately conferred a favor upon a third person.

            In the case at bar, Uy and Roxas were mere agents of the owners of the land subject of the sale. they only render some service or do something in representation or on behalf of their principals. The rendering of such service did not make them parties to the contracts of sale executed in behalf of the latter.

            Moreover, they were the heirs of their principals, nor assignees to the rights under the contracts of sale. While they alleged that they made advances and that they suffered loss of commissions, they have not established any agreement granting them “the right to receive payment and out of the proceeds to reimburse [themselves] for advances and commissions before turning the balance over to the principal.

            Finally, it does not appear that petitioners are beneficiaries of a stipulation pour autrui under the second paragraph of Article 1311 of the Civil Code. Indeed, there is no stipulation in any of the Deeds of Absolute Sale “clearly and deliberately” conferring a favor to any third person.

            As petitioners are not parties, heirs, assignees, or beneficiaries of a stipulation pour autrui under the contracts of sale, they do not, under substantive law, possess the right they seek to enforce. Therefore, they are not the real parties-in-interest in this case.

            Thus, the petition is DENIED.

Reyes v CA

G.R. No. 94214. December 1, 1992
Art. 1338 – Fraud.

Petitioners – Consuelo Reyes, Mario Francisco & Marila Berceño

Respondents – CA, Jose Ortañez & Angel Aseoche.

Facts:

·         The subject of this controversy is a 4-unit apartment building located at Sampaloc, Manila, owned by Jose Ortañez.

·         Ortañez leased separately the units to the three petitioners and Angel Aseoche.

·         In 1980, Ortañez offered to sell the building to the said lessees for P150,000.00 and gave them 30 days within which to reply. But only Reyes and Aseoche indicated their interest in purchasing the units they were respectively occupying. The other two petitioners did not respond.

·         Reyes did not pursue her intention to purchase her unit. Aseoche negotiated with Ortañez, and was offered the option to buy the entire building.

·         Thereafter, Aseoche notified the petitioners in writing that he was now the owner of the whole building. Later, he told them to vacate their respective units within 90 days because the premises would be occupied by his son, brother and sister.

·         The petitioners filed a complaint against Aseoche and Ortañez for Annulment of Title/ Sale with Damages, later amended to include a prayer for Specific Performance.

·         The trial court rendered its decision on their favor, but was reversed by the CA.

·         The petitioners asserted that the sale between Aseoche and Ortañez was tainted with fraud and bad faith, which called for nullification.

Issue:

          WoN the fraud that vitiates a contract invoked by the peitioners be the “fraud” contemplated by Art. 1338 of the Civil Code.

Held:

          No, the Court holds that the fraud or bad faith as a ground for nullifying the contract between Ortañez and Aseoche is NOT the fraud contemplated by the said provision because they are strangers to the contracting parties. Hence, the petitioners are not entitled to such invocation.

          Under Art. 1338, There is fraud when, through insidious words or machinations of one of the contracting parties, the other is induced to enter into a contract which without them he would not have agreed to.

          In the case at bar, there was no evidence that Aseoche resorted to insidious words or machinations to induce Ortañez to enter into a contract with him, which constituted fraud. Moreover, the petitioners failed to establish that they authorized Aseoche to represent them in their negotiation. It is clear, however, that the petitioners decided to challenge the sale between the private respondents only because and after they were asked to vacate the subject property although they had not earlier manifested or pursued any interest in buying it when it was formally offered for sale to them.

          Thus, the petition is DENIED.

Heinzrich Theis v CA

G.R. No. 126013. February 12, 1997
Art. 1331 – When mistake may invalidate the contract.
Art. 1390 – Voidable contracts.

Petitioners – Heinzrich Theis &  Betty Theis

Respondents – CA, RTC & Calsons Development Corp.

Facts:

·         Calsons Development Corporation is the owner of three (3) adjacent parcels of land in Tagaytay City. Adjacent to parcel no.3 is a vacant lot denominated as parcel no.4, which was not owned by the CDC.

·         CDC constructed a two-storey house on parcel no.3, while parcel no. 1 and parcel no.2 remained idle.

·         However, an erroneous survey indicated the interchange of Transfer Certificate of Titles of the said properties, where parcel no.3 was erroneously located in parcel no.1 and the two idle lands in parcel.4.

·         Unaware of the mistake, CDC sold to the Theis parcel no.4 through the Deed of Sale. Thereafter, the Theis did not immediately occupy and take possession of the two (2) idle parcels of land because they went to Germany.

·         They went back to the Philippines and look over the vacant lots in Tagaytay to plan the construction of their house thereon. But they discovered that parcel no. 4 was owned by another person. They also discovered that the lots actually sold to them were parcel nos. 2 and 3, where a two-storey house was constructed.

·         The Theis insisted that they wanted parcel no. 4, but CDC argued that it could not have possibly sold the same to them for it did not own parcel no. 4 in the first place.

·         To remedy the mistake, offered parcel nos. 1 and 2 as these two were precisely the two vacant lots which private respondent owned and intended to sell when it entered into the transaction with petitioners.

·         The Theis rejected the good faith offer and refused to yield to reason, and insisted on taking parcel no. 3 upon which a two-storey house stands, in addition to parcel no. 2.

·         Such refusal of the Theis prompted CDC to make another offer, i.e. the return of an amount double the price paid by the former. But they still refused and stubbornly insisted in their stand.

·         CDC filed an action for annulment of deed of sale and reconveyance of the properties subject thereof.

·         The trial court rendered judgment in favor of CDC on the ground of mistake in the identification of the parcels of land intended to be the subject matter of said sale. The CA affirmed the said decision in toto.

Issue:

          WoN a contract may be annulled where the consent of one of the contracting parties was procured by mistake.

Held:

          Yes, the Court holds that where consent is given through mistake, the validity of the contractual relations between the parties is legally impaired. Hence, the contract can be annulled.

Under Art. 1331, in order that mistake may invalidate consent, it should refer to the substance of the thing which is the object of the contract, or to those conditions which have principally moved one or both parties to enter into the contract.

In the case at bar, there is a lack of full and correct knowledge about the thing. The mistake committed by the CDC in selling parcel no. 4 to the Theis falls within the said provision. Verily, such mistake invalidated its consent and as such, annulment of the deed of sale is proper.

“Art. 1390. The following contracts are voidable or annullable, even though there may have been no damage to the contracting parties:

(a)  x x x

(b)  Those where the consent is vitiated by mistake, violence, intimidation, undue influence, or fraud. 

x x x”

In the case at bar, CDC obviously committed an honest mistake in selling parcel no. 4. As correctly noted by the Court of Appeals, it is quite impossible for CDC to sell the lot in question as the same is not owned by it. The good faith of the CDC is evident in the fact that when the mistake was discovered, it immediately offered two other vacant lots to the Theis or to reimburse them with twice the amount paid. That petitioners refused either option left the CDC with no other choice but to file an action for the annulment of the deed of sale on the ground of mistake.

          Thus, the petition is DISMISSED.