Arellano University Case Rules on Validity of Scholarship Contracts

FEBRUARY 6, 2017 CASES 188-197 PG.
511-515 DE LEON
G.R. No. L-15127 May 30, 1961
EMETERIO CUI, plaintiff-appellant,

vs.
ARELLANO UNIVERSITY, defendant-appellee.
G.A.S. Sipin, Jr., for plaintiff-appellant.

E. Voltaire Garcia for defendant-appellee.
CONCEPCION, J.:
Appeal by plaintiff Emeterio Cui from a decision of the Court of First Instance of Manila, absolving defendant
Arellano University from plaintiff's complaint, with costs against the plaintiff, and dismissing defendant's counter
claim, for insufficiency of proof thereon.
In the language of the decision appealed from:
The essential facts of this case are short and undisputed. As established by the agreement of facts
Exhibits X and by the respective oral and documentary evidence introduced by the parties, it appears
conclusive that plaintiff, before the school year 1948-1949 took up preparatory law course in the
defendant University. After finishing his preparatory law course plaintiff enrolled in the College of Law of
the defendant from the school year 1948-1949. Plaintiff finished his law studies in the defendant
university up to and including the first semester of the fourth year. During all the school years in which
plaintiff was studying law in defendant law college, Francisco R. Capistrano, brother of the mother of
plaintiff, was the dean of the College of Law and legal counsel of the defendant university. Plaintiff
enrolled for the last semester of his law studies in the defendant university but failed to pay his tuition
fees because his uncle Dean Francisco R. Capistrano having severed his connection with defendant
and having accepted the deanship and chancellorship of the College of Law of Abad Santos University,
plaintiff left the defendant's law college and enrolled for the last semester of his fourth year law in the
college of law of the Abad Santos University graduating from the college of law of the latter university.
Plaintiff, during all the time he was studying law in defendant university was awarded scholarship
grants, for scholastic merit, so that his semestral tuition fees were returned to him after the ends of
semester and when his scholarship grants were awarded to him. The whole amount of tuition fees paid
by plaintiff to defendant and refunded to him by the latter from the first semester up to and including the
first semester of his last year in the college of law or the fourth year, is in total P1,033.87. After
graduating in law from Abad Santos University he applied to take the bar examination. To secure
permission to take the bar he needed the transcripts of his records in defendant Arellano University.
Plaintiff petitioned the latter to issue to him the needed transcripts. The defendant refused until after he
had paid back the P1,033 87 which defendant refunded to him as above stated. As he could not take
the bar examination without those transcripts, plaintiff paid to defendant the said sum under protest.
This is the sum which plaintiff seeks to recover from defendant in this case.
Before defendant awarded to plaintiff the scholarship grants as above stated, he was made to sign the
following contract covenant and agreement:
"In consideration of the scholarship granted to me by the University, I hereby waive my right to transfer
to another school without having refunded to the University (defendant) the equivalent of my
scholarship cash.
(Sgd.) Emeterio Cui".

FEBRUARY 6, 2017 CASES 188-197 PG. 511-515 DE LEON
It is admitted that, on August 16, 1949, the Director of Private Schools issued Memorandum No. 38, series of
1949, on the subject of "Scholarship," addressed to "All heads of private schools, colleges and universities,"
reading:
1. School catalogs and prospectuses submitted to this, Bureau show that some schools offer full or
partial scholarships to deserving students for excellence in scholarship or for leadership in extra-
curricular activities. Such inducements to poor but gifted students should be encouraged. But to
stipulate the condition that such scholarships are good only if the students concerned continue in the
same school nullifies the principle of merit in the award of these scholarships.
2. When students are given full or partial scholarships, it is understood that such scholarships are
merited and earned. The amount in tuition and other fees corresponding to these scholarships should
not be subsequently charged to the recipient students when they decide to quit school or to transfer to
another institution. Scholarships should not be offered merely to attract and keep students in a school.
3. Several complaints have actually been received from students who have enjoyed scholarships, full or
partial, to the effect that they could not transfer to other schools since their credentials would not be
released unless they would pay the fees corresponding to the period of the scholarships. Where the
Bureau believes that the right of the student to transfer is being denied on this ground, it reserves the
right to authorize such transfer.
that defendant herein received a copy of this memorandum; that plaintiff asked the Bureau of Private Schools
to pass upon the issue on his right to secure the transcript of his record in defendant University, without being
required to refund the sum of P1,033.87; that the Bureau of Private Schools upheld the position taken by the
plaintiff and so advised the defendant; and that, this notwithstanding, the latter refused to issue said transcript
of records, unless said refund were made, and even recommended to said Bureau that it issue a written order
directing the defendant to release said transcript of record, "so that the case may be presented to the court for
judicial action." As above stated, plaintiff was, accordingly, constrained to pay, and did pay under protest, said
sum of P1,033.87, in order that he could take the bar examination in 1953. Subsequently, he brought this
action for the recovery of said amount, aside from P2,000 as moral damages, P500 as exemplary damages,
P2,000 as attorney's fees, and P500 as expenses of litigation.
In its answer, defendant reiterated the stand it took, vis-a-vis the Bureau of Private Schools, namely, that the
provisions of its contract with plaintiff are valid and binding and that the memorandum above-referred to is null
and void. It, likewise, set up a counterclaim for P10,000.00 as damages, and P3,000 as attorney's fees.
The issue in this case is whether the above quoted provision of the contract between plaintiff and the
defendant, whereby the former waived his right to transfer to another school without refunding to the latter the
equivalent of his scholarships in cash, is valid or not. The lower court resolved this question in the affirmative,
upon the ground that the aforementioned memorandum of the Director of Private Schools is not a law; that the
provisions thereof are advisory, not mandatory in nature; and that, although the contractual provision "may be
unethical, yet it was more unethical for plaintiff to quit studying with the defendant without good reasons and
simply because he wanted to follow the example of his uncle." Moreover, defendant maintains in its brief that
the aforementioned memorandum of the Director of Private Schools is null and void because said officer had
no authority to issue it, and because it had been neither approved by the corresponding department head nor
published in the official gazette.
We do not deem it necessary or advisable to consider as the lower court did, the question whether plaintiff had
sufficient reasons or not to transfer from defendant University to the Abad Santos University. The nature of the
issue before us, and its far reaching effects, transcend personal equations and demand a determination of the
case from a high impersonal plane. Neither do we deem it essential to pass upon the validity of said
Memorandum No. 38, for, regardless of the same, we are of the opinion that the stipulation in question is
contrary to public policy and, hence, null and void. The aforesaid memorandum merely incorporates a sound
principle of public policy. As the Director of Private Schools correctly pointed, out in his letter, Exhibit B, to the
defendant,
There is one more point that merits refutation and that is whether or not the contract entered into
between Cui and Arellano University on September 10, 1951 was void as against public policy. In the
case of Zeigel vs. Illinois Trust and Savings Bank, 245 Ill. 180, 19 Ann. Case 127, the court said: 'In
determining a public policy of the state, courts are limited to a consideration of the Constitution, the
judicial decisions, the statutes, and the practice of government officers.' It might take more than a
government bureau or office to lay down or establish a public policy, as alleged in your communication,
but courts consider the practices of government officials as one of the four factors in determining a
public policy of the state. It has been consistently held in America that under the principles relating to
the doctrine of public policy, as applied to the law of contracts, courts of justice will not recognize or
uphold a transaction which its object, operation, or tendency is calculated to be prejudicial to the public
welfare, to sound morality or to civic honesty (Ritter vs. Mutual Life Ins. Co., 169 U.S. 139; Heding vs.
Gallaghere 64 L.R.A. 811; Veazy vs. Allen, 173 N.Y. 359). If Arellano University understood clearly the
real essence of scholarships and the motives which prompted this office to issue Memorandum No. 38,
s. 1949, it should have not entered into a contract of waiver with Cui on September 10, 1951, which is a
direct violation of our Memorandum and an open challenge to the authority of the Director of Private
Schools because the contract was repugnant to sound morality and civic honesty. And finally, in Gabriel
vs. Monte de Piedad, Off. Gazette Supp. Dec. 6, 1941, p. 67 we read: 'In order to declare a contract
void as against public policy, a court must find that the contract as to consideration or the thing to be
done, contravenes some established interest of society, or is inconsistent with sound policy and good
morals or tends clearly to undermine the security of individual rights. The policy enunciated in
Memorandum No. 38, s. 1949 is sound policy. Scholarship are awarded in recognition of merit not to
keep outstanding students in school to bolster its prestige. In the understanding of that university
scholarships award is a business scheme designed to increase the business potential of an education
institution. Thus conceived it is not only inconsistent with sound policy but also good morals. But what is
morals? Manresa has this definition. It is good customs; those generally accepted principles of morality
which have received some kind of social and practical confirmation. The practice of awarding
scholarships to attract students and keep them in school is not good customs nor has it received some
kind of social and practical confirmation except in some private institutions as in Arellano University.
The University of the Philippines which implements Section 5 of Article XIV of the Constitution with
reference to the giving of free scholarships to gifted children, does not require scholars to reimburse the
corresponding value of the scholarships if they transfer to other schools. So also with the leading
colleges and universities of the United States after which our educational practices or policies are
patterned. In these institutions scholarships are granted not to attract and to keep brilliant students in
school for their propaganda mine but to reward merit or help gifted students in whom society has an
established interest or a first lien. (Emphasis supplied.)
WHEREFORE, the decision appealed from is hereby reversed and another one shall be entered sentencing
the defendant to pay to the plaintiff the sum of P1,033.87, with interest thereon at the legal rate from
September 1, 1954, date of the institution of this case, as well as the costs, and dismissing defendant's
counterclaim. It is so ordered.
G.R. No. L-82499 October 13, 1989
CAPITOL MEDICAL CENTER, INC., and DRA. THELMA NAVARRETE CLEMENTE, petitioners,
vs.
THE COURT OF APPEALS, HON. IGNACIO SALVADOR, in his capacity as Presiding Judge of Branch 77
of the Regional Trial Court of the National Capital Region (Quezon City), MONINA REYES-
VALENZUELA, PABLO L. DAMASO, LINA M. ABLANG, MA. TERESITA ROQUE, AMBROSIO LAZOL,
DIOSDADO YAP, FLORDELIZA SINGSON, SARAH P. PELOBELLO JOEL H. GILLEGO, AGNES A. DE
VEGA, NORAIDA Y. MAGALONG, AUGENCIO PAPA, IMELDA SIMBILLO, MAXIMO CALDERON and
ROSALIE FLORIDA C. ILAGA, respondents.
Samson S. Alcantara for petitioners.
Law Firm of Raymundo A. Armovit for private respondents.
GRINO-AQUINO, J.:
At bottom, the only issue in this case is whether a school that, after due notice to the Secretary of Education,
Culture and Sports, closed at the end of the first semester of the school year 1987-1988, because its teachers
and students declared a strike, refusing to hold classes and take examinations, may be forced to reopen by the
courts at the instance of the striking students.
Some fourteen (14) years ago, the petitioner Capitol Medical Center, Inc. (or CMCI), a hospital corporation,
organized, opened, and operated the Capitol Medical Center College (CMCC or "the College") beside its
hospital, the Capitol Medical Center (hereafter "the Hospital") in Quezon City. It offered a four-year nursing
course, a two-year midwifery course, and a two-year medical secretarial course. In the first semester of the
school year 1987-88, 900 students were enrolled in various courses in the college.
Half-way through the first semester in 1987, the college faculty, led by the Dean of Nursing, demanded that
they be granted vacation and sick leave privileges similar to those enjoyed by hospital personnel. Dialogues
were held but no agreement was reached between the faculty and the school administration, headed by the
president, Dr. Thelma Navarette-Clemente, who was concurrently also the chairman of the CMCI Board.
At a meeting of the CMCI Board on September 15, 1987, Dr. Clemente reported the deteriorating relationship
between the CMCC administration and the teachers, which, from a simple disagreement, had degenerated into
open hostility. She feared that the situation may give rise to mass action by the students, because the faculty,
exercising their moral influence over the students, had enlisted the latter's sympathy and support for their
cause.
The Board resolved to authorize her, as president of the College, to close it at the end of the first semester if
the antagonism of the faculty and students toward the college administration should become uncontrollable.
The minutes of that meeting of the CMC Board disclose the following action taken by the Board:
CMC College
The chairman rported on the developing antagonism between the Dean and a good number of
the Faculty on the one hand, and the CMC Administration on the other hand on economic
matters, more particularly the demand of the faculty for similar vacation and sick leave privileges
as hospital personnel, and that despite of dialogs (sic), the faculty does not show any conformity
to the difference. She fears that this antagonisms might later on develop into mass actions and
demonstrations, wherein students who are under the influence of the dean and the faculty will
show by concrete manifestation sympathy for the faculty demands.
After a thorough discussion of the possible effect of these mass demonstrations especially if
done in front of hospital premises, on patients confined in the hospital, and the possibility of this
antagonism being manifested during the making of the rounds of patients by CMCC Nursing
Students when being conducted Related Learning Experiences (RLE) the board unanimously
approved the following resolution:
Res. No. 87-86 to authorize the Chairman in his (sic) capacity as President of CMC College, to
close the college at the end of the first semester, should the antagonism described by her
become uncontrollable. (p. 79, Rollo.)
During the next thirty (30) days, the rift between the administration and the faculty aggravated. The school
administration scheduled the holding of the final semestral examinations on October 14 to 19, 1987, but the
teachers defiantly and - unilaterally "postponed" them. On the scheduled dates for the examinations, the
students joined their teachers in a noisy demonstration in front of the hospital (Annexes O,P,Q, and R, pp. 146-
147, Rollo). As the demonstrations disturbed the peace and quiet of the hospital and fearful of possible
subversive action by hostile student nurses which might endanger the safety and lives of the patients in the
hospital, an emergency special meeting was held by the CMCI Board on October 17, 1987. It unanimously
resolved "to close the school effective at the end of the first semester of this school year, 1987-88" (p. 269,
Rollo). Starting on that date, the following announcement was posted in several places on the school premises:
ANNOUNCEMENT
ALL STUDENTS, PLEASE BE INFORMED OF THE TOTAL CLOSURE OF CAPITOL MEDICAL

CENTER COLLEGE AFTER THE END OF THE FIRST SEMESTER OF SCHOOL YEAR 1987-
88. PLEASE SEE POSTED LETTER INFORMING THE DECS OF SAID DECISION, BSN I-IV,
MID-WIFERY I-II AND JUNIOR SECRETARIAL STUDENTS ARE THEREFORE ADVISED TO
SEEK THEIR EVENTUAL TRANSFER TO OTHER SCHOOLS FOR THE SECOND
SEMESTER.
HERE IS A PARTIAL LIST OF SCHOOLS WILLING TO ACCEPT STUDENTS TRANSFEREES:
1. ARELLANO UNIVERSITY
2. DE OCAMPO COLLEGE OF NURSING
3. FATIMA COLLEGE OF NURSING
4. ST. JUDE COLLEGE OF NURSING
5. DE LOS SANTOS COLLEGE OF NURSING
1. FAMILY CLINIC COLLEGE OF NURSING
2. CMC COLLEGE ADMINISTRATION
(p. 131, Rollo.)
On October 20,1987, Dr. Clemente informed the Department of Education, Culture & Sports (DECS) that the
school would be permanently closed at the end of the first semester.
CAPITOL MEDICAL CENTER, INC.
October 20, 1987
The Honorable Lourdes R. Quisumbing
Secretary of Education Culture and Sports
Manila
Through the Regional Director
Mrs. Modesta Boquiren
National Capital Region
Quezon City
Dear Madam Secretary:
Greetings!
Please be informed that in an emergency special meeting of our Board of Directors held on
October 17, 1987 it was unanimously resolved to close the Capitol Medical Center College,
effective at the end of first semester of this school year 1987-1988.
The recurring problems between our corporation on the one hand and the Dean, Faculty and
student body of the college, on the other hand, which was has resulted in the non- holding up to
now, of final examinations for the first semester of this school year, has gotten out of hand.
Kindly advise us of the procedure to effect the immediate closure resolution of our board.
Thank you.
Very truly yours,
(SGD) THELMA NAVARRETE-CLEMENTE
M.D., M.H.A., Chairman of the Board and President
(p. 269, Rollo; italics ours.)
As the DECS did not reply promptly, Dr. Clemente on October 29, 1987, sent another letter to DECS Secretary
Lourdes Quisumbing reinforcing CMCI's resolve to "cease operation of school immediately effective as of the
end of the first semester of the current school year 1987-88." The letter reads as follows:
October 29, 1987
The Honorable Lourdes R. Quisumbing
Secretary of Education, Culture and Sports

Manila
Dear Madam Secretary:
Greetings!
This is to reinforce our earlier letter, dated October 20, 1987, informing your honorable office of
the corporate decision of our Board of Directors to cease operation of the Capitol Medical
Center College immediately effective as of the end of the first semester of the current school
year, 1987-1988.
The decision as embodied in the corporate resolution contemplates in no uncertain terms

the immediate and total cessation of all education activities due to the following cogent reasons:
1. Mismanagement of the school administration and mishandling of corporate

policies by the Dean, extending down to the lower administrative levels.
2. Failure of the school to produce the quality of education that may be

reasonably expected or desired as evidenced by the poor quality of instruction it
gives, the deficient program of guidance it maintains, and the poor performance
of its graduates over the past few years.
3. The increasing costs of operation and maintenance of school facilities.
4. Considering the fact that the school is only a minor subsidiary of the hospital
corporation, its continued operation and dependent existence will as projected,
greatly impair the economic viability of the institution and ultimately affect health
care delivery and other vital medical services of the hospital to the community
and the general public.
For the above reasons, we feel there are no legal impediments against the immediate and
complete closure of the school under the purview of the Corporation Code.
Since there are quite a number of Nursing and Midwifery Schools in the community who would
be more than willing to take in our students, we will help undertake arrangements with these
schools for their transfer, together with the assistance of your good office of course.
Finally, we are very well aware of the requirements of the Labor Laws concerning the faculty
members and other support personnel who are already permanent with at least three years of
service. We shall settle these in due time under its proper forum.
Very truly yours,
(SGD) THELMA NAVARRETE-CLEMENTE, M.D., M.H.A.
President
Chairman, Board of Directors
(p. 270-271, Rollo; emphasis supplied.)

The Department of Labor and Employment (DOLE) was likewise notified of the termination of the services of
the faculty and other support personnel of the college "thirty days hence" as required by Article 284 of the
Labor Code (p. 272, Rollo).
It appears that on October 26, 1987, or three (3) days before Dr. Clemente wrote her second letter, DECS
Regional Director Modesta Boquiren had written the following reply which was received later:
October 26,1987
The Chairman of the Board and President
CAPITOL MEDICAL CENTER COLLEGE
Sct. Magbanua Cor. Panay Avenue, Quezon City
Dear Madam:
This has reference to your letter dated October 20, 1 987 requesting for a gradual phasing out of all courses
effective June 1988 according to the following schedules:
June 1988 - No 1st year
June 1989 - No 2nd year
June 1990 - No 3rd year
June 1991 - No 4th year
This Office interposes no objection to your request provided that the school administrators can comply with the
requirements of the Department of Labor and Employment regarding the benefits of faculty members and
support personnel who are already permanent and who have already served the school for three or more
years.
Pursuant to regulations, after all the courses shall have been phased out, the school cannot reopen unless the
corporate status is changed from a stock corporation to a non-stock corporation.
Very truly yours,
(SGD) Illegible
MODESTA G. BOQUIREN
Director
(p. 256, Rollo; emphasis supplied.)
Evidently, Director Boquiren failed to comprehend that Dr. Clemente did not request for permission to
"gradually phase out" the school but merely informed the DECS of the school administration's decision to effect
the "immediate and complete closure" of the school. As the DECS did not react to her second letter, CMCCI
proceeded with the closure of the college.
The teachers, students and their parents, a representative of the DECS and the school administration,
thereafter, held a series of dialogues to persuade CMCCI to open the school for one more semester or until the
end of the school year. An agreement was prepared by the DECS but CMCCI wanted to include a written
stipulation binding the students and their parents to hold no more strikes, rallies, or demonstrations until the
end of the school year. Since the latter did not sign the agreement, the school did not reopen.
The college and the DECS have assisted in effecting the transfer of some 411 students to other schools (p. 15,
Rollo).
THE CASE
On December 2, 1987, fifteen (15) students and parents purporting to represent the 900 students of the CMCC
filed a class suit (Civil Case No. 52429) against "Capitol Medical Center College" and petitioner Dr. Clemente,
in the Regional Trial Court of Quezon City praying for the reopening of the Capitol Medical Center College
which had been closed effective at the end of the first semester of the school year 1987-1988 (p. 208, Rollo).
As the complaint (Annex A) prayed for the issuance of a writ of preliminary mandatory injunction, the court set
the hearing of the application on December 9, 1987. As agreed at the hearing, an opposition was filed by
CMCC on December 14,1987 (p. 257, Rollo).
On the same day, the lower court granted the writ of preliminary mandatory injunction and directed the
defendants "to reopen (the) school and allow plaintiffs students to enroll in their respective course[s] ... " It fixed
the plaintiffs' bond in the sum of P50,000 (pp. 85 and 273, Rollo). The order reads as follows:
Plaintiffs' petition for the issuance of a Writ of Preliminary Mandatory Injunction having been
heard by the Court, the plaintiffs appearing by their lawyer, Atty. Raymundo Armovit and the
defendants by their attorney, Atty. Samson Alcantara and no sufficient cause to the contrary
being shown, the Court finds that this is a proper case for injunction and the writ prayed for
should issue; WHEREFORE, the Court hereby orders that a Writ of Preliminary Mandatory
Injunction issue against the defendants directing them to re-open school and allow plaintiffs'
students to enroll in their respective courses of study and to perform such other acts in the tenor
and under the terms and conditions set forth in paragraph 8 in the complaint filed in this action,
upon the filing of an injunction bond in the amount of FIFTY THOUSAND PESOS (P50,000.00)
within three (3) days from receipt of this order. (p. 84, Rollo.)
The petitioners filed a motion for reconsideration of the above order (p. 87, Rollo) but the court denied their
motion (p. 95, Rollo).
In due time, the petitioners elevated the order to the Court of Appeals on a petition for certiorari with
preliminary injunction (CA-G.R. SP No. 13626, p. 96, Rollo). The Court of Appeals issued a restraining order
and directed the respondents to comment on the petition.
After hearing the parties in oral argument, the Court of Appeals rendered a decision on February 15,1988
holding that the respondent RTC Judge did not abuse his discretion in issuing the order of preliminary
mandatory injunction because the petitioners had no right to suddenly close the school for the enrollment of the
students created a binding contract between them and the school for the latter to continue operating until the
former shall have finished their courses (p. 120, Rollo).
On February 26,1988, the petitioners filed a motion for reconsideration and re-hearing which was held on
March 3,1988 (p. 127, Rollo).
Nevertheless, on March 8,1988, the Court of Appeals denied petitioner's motion for reconsideration (p. 154,
Rollo). Hence, this petition for review.
The petition for review has merit.
The sole object of a preliminary injunction, whether prohibitory or mandatory, is to preserve the status quo until
the merits of the case can be heard. The status quo is the last actual peaceable uncontested status which
preceded the controversy (Rodulfa vs. Alfonso, 76 Phil. 225). It may only be resorted to by a litigant for the
preservation or protection of his rights or interests and for no other purpose during the pendency of the
principal action (Calo vs. Roldan, 76 Phil. 445). It should only be granted if the party asking for it is clearly
entitled thereto (Climaco vs. Macaraeg, 4 SCRA 930; Subido vs. Gopengco 27 SCRA 455; Police Commission
vs. Bello, 37 SCRA 230).
Inasmuch as a mandatory injunction tends to do more than to maintain the status quo, it is generally improper
to issue such an injunction prior to the final hearing (Manila Electric Railroad and Light Co. vs. Del Rosario, 22
Phil. 433). It may, however, issue "in cases of extreme urgency; where the right is very clear; where
considerations of relative inconvenience bear strongly in complainant's favor; where there is a willful and
unlawful invasion of plaintiffs right against his protest and remonstrance, the injury being a continuing one; and
where the effect of the mandatory injunction is rather to re-establish and maintain a pre-existing continuing
relation between the parties, recently and arbitrarily interrupted by the defendant, than to establish a new
relation. Indeed, the writ should not be denied the complainant when he makes out a clear case free from
doubt and dispute." (Commissioner of Customs vs. Cloribel, et al., 19 SCRA 235.)
The questions that we might ask are:
(1) What was the status quo before the private respondents filed their complaint "for specific
performance" on December 2, 1987?
(2) Do the private respondents have a clear legal right to demand the reopening of the school?
The status quo on December 2, 1987 was that the school was already closed. CMCC was closed effective at
the end of the first semester, i.e, the first week of November 1987.
What was the status quo prior to the closure of the school? There were no classes. The school was deserted.
The teachers and students were on strike; they refused to attend classes and held noisy rallies in front of the
CMC hospital instead.
That was the status quo before the private respondents filed Civil Case No. 52429. The writ of preliminary
mandatory injunction was issued by the trial court not to restore that status quo, but to restore conditions
preceding the status quo, i.e., to reopen and resume the holding of classes which the private respondents
themselves (plaintiffs in Civil Case No. 52429) by their mass actions had disrupted. In issuing the writ of
preliminary injunction for that purpose, the trial court committed a grave abuse of discretion for it allowed the
writ to be used by the plaintiffs to undo the mischief that they themselves had initiated.
The teachers, by refusing to teach, and the students, by refusing to attend classes, made the continued
operation of the CMCC futile and untenable. The college had no reason to remain open under the situation
which the private respondents themselves brought about.
Did the private respondents have a clear legal right to reopen the school and to be readmitted therein?
The Court of Appeals answered that question affirmatively on the theory that "the initial enrollment" of the
students (meaning their enrollment in the first year of their chosen courses) created "a binding contract"
between the students and the school, by which the latter became "legally and morally bound to continue
operating the school until such enrollees shall have finished their courses.
The Court of Appeals presumably, but erroneously, relied on paragraph 137, Sec. IV of the Manual of
Regulations for Private Schools, which provides:
Every student has the right to enroll in any school, college or university upon meeting its specific
requirements and reasonable regulations, provided, that except in the case of academic
delinquency and violation of disciplinary regulations, the student is presumed to be qualified for
enrollment for the entire period he is expected to complete his course without prejudice to his
right to transfer.
The meaning of this provision is that the school, after having accepted a student for enrollment in a given
course may not expel him or refuse to re-enroll him until he completes his course, except when he is
academically deficient or has violated the rules of discipline. He is presumed to be qualified to study there for
the entire period it will take to complete his course.
However, there is no contract between him and the school for the latter to remain open for the entire duration
of his course. Section VII, paragraph No. 137, of the Manual of Regulations for Private Schools provides:
137. When a student registers in a school, it is understood that he is enrolling for the entire
school year for elementary and secondary courses, and for the entire semester for collegiate
course. A student who transfers or otherwise withdraws, in writing, within two weeks after the
beginning of classes and who has already paid the pertinent tuition and other school fees in full
or for any length of time longer than one month may be charged ten per cent of the total amount
due for the term if he withdraws within the first week of classes, or twenty per cent if within the
second week of classes, regardless of whether or not he has actually attended classes. The
student may be charged all the school fees in full if he withdraws anytime after the second week
of classes. However, if the transfer or withdrawal is due to a justifiable reason, the student shall
be charged the pertinent fees only up to and including the last month of attendance.
The contract between the college and a student who is enrolled and pays the fees for a semester, is for the
entire semester only, not for the entire course. The law does not require a school to see a student through to
the completion of his course. If the school closes or is closed by proper authority at the end of a semester, the
student has no cause of action for breach of contract against the school.
Thus did this Court rule in "Alcuaz, et al. vs. Philippine School of Business Administration, Quezon City
Branch, et al.," G.R. No. 76353, promulgated on May 2, 1988, a case which involved some students and
teachers who had participated in mass actions and rallies in the respondent school and who were respectively
denied re-admission for enrollment, and re-appointment to teaching positions in the school:
It is beyond dispute that a student once admitted by the school is considered enrolled for one
semester. It is provided in Paragraph 137 Manual of Regulations for Private Schools, that when
a college student registers in a school, it is understood that he is enrolling for the entire
semester. Likewise, it is provided in the Manual, that the 'written contracts' required for college
teachers are for 'one semester.' It is thus evident that after the close of the first semester, the
PSBA-QC no longer has any existing contract either with the students or with the intervening
teachers. Such being the case, the charge of denial of due process is untenable. It is a time-
honored principle that contracts are respected as the law between the contracting parties
(Henson vs. Intermediate Appellate Court, et al., G.R. No. 72456, February 19,1987, citing:
Castro vs. Court of Appeals, 99 SCRA 722; Escano vs. Court of appeals, 1 00 SCRA 197). The
contract having been terminated, there is no more contract to speak of. The school cannot be
compelled to enter into another contract with said students and teachers. The courts, be they
the original trial court or the appellate court, have no power to make contracts for the parties.'
(Henson vs. Intermediate Appellate Court, et al., supra. (p. 12 of the decision.)
Significantly, in Alcuaz only some students and teachers left their classrooms to hold rallies in the school
premises. The majority remained in the classrooms. The school did not cease to operate. In this case,
however, all the teachers and students struck and abandoned their classes.
In Alcuaz, the mass assemblies and barricades were held for three days. In the CMCC case, the "strike" began
on October 14 and continued until the end of the semester.
In Alcuaz, the school did not close but it nevertheless refused to re-admit the offending students and teachers.
In this case, the school has closed completely.
If in Alcuaz, this Court recognized the right of the school to refuse admission to students guilty of breaches of
discipline, and of the peace, its right to close when the entire faculty and student population have boycotted
their classes, may not be denied. The irony for the school in this case is that it was forced to close by student
action, and is now being forced to reopen by student action also, assisted by the lower court. We cannot
sanction the order of the lower court which gave aid and comfort to the students who paralyzed the operation
of the school by their mass actions forcing it to shut down altogether. We cannot approve a situation which
would place a school at the mercy of its students.
We, therefore, hold that the lower court gravely abused its discretion in compelling the CMCC to reopen and
re-admit the striking students for enrollment in the second semester of their courses. Since their contracts with
the school were terminated at the end of the first semester of 1987, and as the school has already ceased to
operate, they have no "clear legal right" to re-enroll and the school has no legal obligation to reopen and
readmit them. No provision in the Education Act of 1982, nor in the Manual of Regulations for Private Schools
can be, or has been, cited to support the novel view that a school is obligated to remain open until its students
have completed their courses therein. Indeed, neither is there a law or rule that obligates a student who has
enrolled in a school, to remain there until he finishes his course. On the contrary he may transfer at any time to
any school that is willing to accept him.
But even if it can be supposed that the enrollment of a student creates an implied "binding contract" with the
school to educate him for the entire course, since a contract creates reciprocal rights and obligations, the
obligation of the school to educate a student would imply a corresponding obligation on the part of the student
to study and obey the rules and regulations of the school. When students breach that supposed contract by
refusing to attend their classes, preferring to take to the streets to mount a noisy demonstration against their
school, the latter may cancel the contract and close its doors. Its action would neither be arbitrary nor unfair.
It was the trial court that acted arbitrarily or with grave abuse of discretion in ordering the school to reopen and
re-admit the striking students and teachers in spite of their refusal to desist from continuing their disruptive
mass actions against the school.
WHEREFORE, the petition for review is granted. The decision dated May 15,1988 of the Court of Appeals in
CA-G.R. SP No. 13626 is hereby set aside. The order and writ of preliminary mandatory injunction issued by
the Regional Trial Court of Quezon City, Branch 77, in Civil Case No. Q-52429 are hereby annulled and set
aside. Costs against the private respondents.
SO ORDERED.
G.R. No. L-9506 June 30, 1956
SY SUAN and PRICE INCORPORATED, petitioners,

vs.
PABLO L. REGALA, respondent.
Jose C. Reyes for petitioners.

Zavalla, Bautista and Nuevas for respondent.
ENDENCIA, J.:
Appeal by certiorari against the decision of the Court of Appeals adjudging respondent Pablo L. Regala the
sum of P6,998.85, with legal interest, said to be the unpaid balance due him from petitioners Sy Suan and
Price Incorporated, as a result of their verbal contract whereby the said petitioners agreed to pay 10% of the
value of the licenses which respondent might obtain from the defunct Import Control Commission for the
importation of industrial starch for candy manufacture, plus P500 as attorney's fees, and costs.
The facts of the case as found by the Court of Appeals are as follows:
That on April 11, 1953, defendant Sy Suan, who was at the time president and general manager of his
co-defendant [Price Incorporated] and owner of practically all the capital stock of said corporation,
executed in favor of plaintiff a special power of attorney authorizing the latter to prosecute the former's
applications for import licenses with the Import Control Office per Exhibit "B." At the time of the
execution of the said power of attorney, defendants had pending in the Import Control Office the
following applications: Application No. 001705 for industrial starch in the sum of $16,477.34 filed on
April 6, 1953 in the name of defendant, Price Incorporated; Application No. 001797 for industrial starch
in the sum of $21,678.48 filed on April 6, 1953 in the name of defendant Price Incorporated; and
Application No. 001800 for industrial starch in the sum of $15,778.11 filed on April 6, 1953 in the name
of defendant Price Incorporated (Exh. "A"). Pursuant to said special power of attorney, plaintiff followed
up and prosecuted the above-mentioned applications with and through the different offices and
divisions of the Import Control Office, conferring with the corresponding Import Control officials. On or
about May 19, 1953, the Import Control Office issued the following licenses as a result of the effort
made by the herein plaintiff: License No. 15030 on Application No. 001795; License No. 15029 of
Application No. 001797; and License No. 15028 on Application No. 001800, the amount of which had
been reduced to $11,838.50.
Shortly before the execution of the special power of attorney above reffered to, plaintiff and defendant
Sy Suan agreed verbally that plaintiff's services for securing the said licenses would be paid or
compensated with ten (10%) per cent of the total value of the amounts approved on the said
applications. On May 19, 1953, upon the release of the afore-mentioned licenses, defendants paid the
plaintiff the sum of P3,000.00 on account of the latter's services.
Under the facts above set forth and from the briefs submitted, the main issue in this appeal is the validity of the
parole contract of remuneration which petitioners assail as contravening public policy and interest, hence null
and void ab initio.
Petitioners argue that the 10% commission sought by respondent and granted by the Court of Appeals is in
inimical to public policy in that it tends to increase the cost of production of candies which they manufacture;
that this increase will necessarily be passed on to the consuming public by way of increased prices, thus
frustrating the avowed purpose of the government to lighten the burden of the people and to place essential
consumers goods such as candies within the reach of the masses; that if the giving of 10% to intermediaries in
the procurement of import licenses is sanctioned, this practice would serve as a deterrent, rather than an
incentive, to the creation of new industries encourage by the government, as it would syphon off a substantial
percentage of the capital invested by the fledging industries to the private pockets of so-called "tenpercenters;"
and that inasmuch as the granting of licenses depends solely upon the merits of each application, the
intervention of such intermediaries would tend to influence and corrupt the judgment of the government
agencies processing the application.
Against this argument, respondent claims that the contract in question is not violative of sound public policy;
that a contract should not be declared void as against public policy except when the cases is clear and free
from doubt and the injury to the public is substantial and not theoretical or problematical; that the usual and
most important function of courts of justice is rather to maintain and enforce contracts than to enable parties
thereto to escape their obligation on the pretext of public policy, unless it clearly appears that they contravene
public right or public welfare; and that contracts, when entered into freely and voluntarily, should be enforced
by courts of justice.
Upon careful consideration of the contentions of both parties, we find undeniable that the contract in question
sought to be enforced by the respondent and assailed by the petitioners as null and void for being against
public policy is what is commonly known as 10% contracts which the press decries and the public condemns
as inimical to public interest. We can take judicial notice that this kind of contract sprouted as a result of the
controls imposed by the government on imports and dollar allocations, despite the enunciated government
policy that applications for imports and foreign exchange should be considered and acted upon strictly on the
basis of merit of each application and without the intervention of intermediaries, which policy is revealed, by
Sections 15 and 18 of Republic Act 650 which read:
SEC. 15. The president may summarily bar firms or individuals from filing applications for import and/or
from doing business in the Philippines for any of the following acts:
1. . . . .
2. . . . .
3. The payment to any public official, directly or indirectly, of any fee, premium or compensation other
than those allowed by laws or regulations, in connection with the issuance or granting of quota
allocations or licenses.
SEC. 18. The penalty or fine of not less than two thousand pesos (P2,000) nor more than twenty
thousand pesos (P20,000) or imprisonment of not less than two years nor more than five years, or both
such fine and imprisonment at the discretion of the Court shall be imposed upon persons who may be
found guilty of the following acts:
1. . . . .
2. . . . .
3. The receiving or accepting by any public official or employee directly or indirectly, of fees, premiums
or compensation of any kind other than those allowed by law or by the rules and regulations, for the
performance of any act or service connected with the issuance of import license or quota allocation.
If the granting of import licenses or quota allocations depended solely upon the merits of each application,
there being a prohibition to firms or individuals applying for such licenses or quota allocations from paying "to
any public official, directly or indirectly, of any fee, premium or compensation other than those allowed by law
or regulations, in connection with the issuance or granting of quota allocations or licenses," and these officials
are equally prohibited from "receiving or accepting, directly or indirectly, of fees, premiums or compensations of
any kind other than those allowed by law or by the rules and regulations, for the performance of any act or
service connected with the issuance of import license or quota allocation," certainly the intervention or
intermediaries, such as herein respondent, would be unwarranted and uncalled for, as such intervention would
not render an unmeritorious application deserving, nor undeserving applications meritorious, but would serve
no other purpose than to influence or possibly corrupt, in unmeritorious cases, the judgment of the public
official or officials performing an act or service connected with the issuance of import license or quota
allocation an eventuality which the law precisely sought to avoid.
The present case is similar to that of Mathew S. Tee vs. Tacloban Electric & Ice Plant Co., Inc., et al.,* L-11980,
February 14, 1959. In that case, Mathew S. Tee was approached by the agents of the Tacloban Electric for him
to secure dollar allocation from the Central Bank for the company, upon payment of the "standard fee" of 10%
of the value of the allocation obtained. Tee filed the necessary papers, followed them up for six months, and
finally obtained the allocation of $243,500.00 for the company. Upon failure to collect his 10%, Tee filed the
appropriate action with the Court of First Instance of Manila, where defendants moved to dismiss the
complaint, which was granted, on the ground that the contract was null and void ab initio as being against
public morals and public policy. On appeal, we sustained the dismissal and held that said contract was really
contrary to good customs, public order and public policy. The doctrine laid down in that case is certainly
applicable to the present, as both involve the collection of 10% of the value of the license that may have been
obtained.
Respondent claims, however, that there is no evidence showing that the contract in question has violated any
public policy. We do not agree to this, as the very contract in question is self-evident. As we have cited in the
aforementioned case.
It is a general rule that agreements against public policy are illegal and void. Under the principles
relating to the doctrine of public policy, as applied to the law of contracts, courts of justice will not
recognize or uphold any transaction which, in its object operation, or tendency, is calculated to be
prejudicial to the public welfare, to sound morality, or to civic honesty. The test is whether the parties
have stipulated for something inhibited by the law or inimical to, or inconsistent with, the public welfare.
An agreement is against public policy if it is injurious to the interests of the public, contravenes some
established interest of society, violates some public statute, is against good morals, ends to interfere
with the public welfare or society, or as it is sometimes put, if it is at war with the interests of society and
is in conflict with the morals of the time. An agreement either to do anything which, or not to do anything
the omission of which, is in any degree clearly injurious to the public and an agreement of such a
nature that it cannot be carried into execution without reaching beyond the parties and exercising an
injurious influence over the community at large are against public policy. There are many things which
the law does not prohibit, in the sense of attaching penalties, but which are so mischievous in their
nature and tendency that on grounds of public policy they cannot be admitted as the subject of a valid
contract. The question whether a contract is against public policy depends upon its purpose and
tendency, and not upon the fact that no harm results from it. In other words all agreements the purpose
of which is to create a situation which tends to operate to the detriment of the public interest are against
public policy and void, whether in the particular case the purpose of the agreement is or is not
effectuated. For a particular undertaking to be against public policy actual injury need not be shown; it
is enough if the potentialities for harm are present. (12 Am. Jur., pp. 662-664)
On the other hand, Articles 1306 and 1409 of the new Civil Code provide:
ART. 1306. 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.
ART. 1409. The following contracts are inexistent and void from the beginning:
(1) Those whose cause, object or purpose is contrary to law, morals, good customs, public order or
public policy.
Wherefore, the decision of the Court of Appeals is hereby reversed, without costs.
G.R. No. L-11980 February 14, 1959
MATHEW S. TEE, plaintiff-appellant,

vs.
TACLOBAN ELECTRIC AND ICE PLANT CO., INC., CHAN BUN CHIT and VICTORIANO CHAN, defendants-
appellees.
Diokno and Sison for appellant.

Ferdinand E. Marcos for appellees.
CONCEPTION, J.:
Plaintiff Mathew S. Tee seeks to recover, from defendants Tacloban Electric and Ice Plant Co., Inc., Victoriano
Chan and Chan Bun Chit, the amount of P48,700 representing ten (10%) per cent of a $243,500 allocation
allegedly secured by said plaintiff from the Central Bank of the Philippines in addition to the sum of P10,000,
by way of expenses of litigation and attorney's fees, with costs against said defendants. In paragraphs 2, 3, 4,
and 5 of his complaint alleges that:
2. On or about August, 1955, defendant Tacloban Electric and Ice Plant Co., Inc., acting through
defendants Chan Bun Chit and Victoriano Chan, approached plaintiff and, informing him that they
needed foreign exchange allocation for the purchase of machineries and other supplies for the
expansion of the Tacloban Electric and Ice Plant Co., Inc., they requested plaintiff to prepare, file and
work for the approval of the application for the said foreign exchange, knowing plaintiff had much
experience therein, and promising to pat plaintiff the usual fee for his work, to which plaintiff agreed.
3. In compliance with the said agreement, plaintiff worked for a period of six (6) months, more or less,
accomplishing papers, filing them and following up the papers in the different government offices to
which they were referred in order to obtain the necessary foreign exchange allocation, as a result of
which the Central Bank granted an allocation of ($243,500.00) TWO HUNDRED FORTY-THREE
THOUSAND FIVE HUNDRED DOLLARS;
4. The usual, standard fee for the services performed by plaintiff is TEN PERCENTUM (10%) of the
value of the allocation obtained, which in this case amounts to (P48,700.00) FORTY-EIGHT
THOUSAND SEVEN HUNDRED PESOS;
5. Plaintiff has demanded payment from defendants, but the latter have failed and refused, without
justifiable cause, to comply with plaintiff's demands.
Defendants filed separate motions to dismiss, predicated upon the ground, among others, that the contract
reffered to in the complaints is null and void ab initio. After appropriate proceedings, the Court of First Instance
of Manila granted these motions and dismissed the case. Hence, this appeal by plaintiff, who maintains that:
1. The trial court erred in dismissing plaintiff's complaint, without requiring defendants to answer or
hearing plaintiff's evidence, on the ground that plaintiff's demand for compensation for the services he
had rendered in preparing and working for the approval of defendants' application for foreign exchange
is "unenforceable under the statute of fraud's because of the denials of defendants to recognize that
said services have been rendered in their favor and benefit." (Resolution, Record on Appeal, p. 120.)
2. The trial court further erred in ruling, without giving plaintiff an opportunity to present his evidence,
and despite the allegations of plaintiff's complaint to the contrary, that "it was not he (plaintiff) who had
obtained the dollar allocation for the defendants" (Record on Appeal, pp. 121-122), and for that reason,
dismissing his complaint.
3. The trial court likewise erred in dismissing plaintiff's complaint on the ground that the aforesaid
contract "is invalid and void" because it is "contrary to law and public morals" (Record on Appeal,
p.121).
4. The trial court finally erred in dismissing the complaint as to defendants Victoriano Chan and Chan
Bun Chit, on the ground that they acted merely "as intermediaries or attorney in fact of the defendant
Tacloban Electric and Ice Plant, Inc., and, at the same time, dismissing the complaint as to the
defendant Electric & Ice Plant, Inc. because "it could not be held liable for the acts of an agent or
intermediary" (Record on Appeal, pp. 122-123).
The main issue in this case is the validity of the contract relied in the complaint. The lower court pronounced it
void in the following language:
It is gleaned from the above cited paragraphs of the complaint that a contract of agency existed
between plaintiff and defendants. Such contract being contrary to law and public morals same is invalid
and void and could not therefore be enforced against defendants. Article 1409 of the Civil Code
prohibits such contract and Section 14 of the Central Bank Charter and Act 265 of the Republic prohibit
and punish any person except the interested party to work for and in behalf of the party interested to
obtain dollar allocation's approval. Consequently, the claim of plaintiff being not only prohibited by law
for being against public policy and morals but likewise punishable by the same legal provisions, said
claim is void and unenforceable. (Record on Appeal, 121.)
We are fully in agreement with this view. According to plaintiff's complaint, he agreed "to prepare, file and work
for, the approval of the application" for foreign exchange of the Tacloban Electric & Ice Plant Co., Inc., and "in
compliance" with said agreement, he "worked for", and secured the corresponding allocation, "accomplishing
the papers, filing them, and following up the papers in the different government offices to which they were
referred." Section 3 of Article IV of Central Bank Circular No. 44, provides:
Authorized Agent Banks are hereby instructed to inform their clients that under no circumstances
should any applicant, his agent or other representative, follow up an application with the Central Bank
or Bankers Committee. All information concerning applications, including actions taken thereon by the
Monetary Board or the Bankers' Committee, shall be communicated to the applicants by their
respective Authorized Agent Banks. (Emphasis ours.)
Pursuant to this circular, all applications for foreign exchange shall be made through authorized agent banks,
which are the only parties authorized to deal with the Central Bank or the Bankers Committee in connection
therewith. Consistently with this scheme, plan or pattern, the circular declares that, "under no circumstances
should any applicant, his agent, and representatives follow up an application with the Central Bank." Plaintiff's
alleged contract to work for the approval of the foreign exchange application in question and the services he
claims to have performed in pursuance of this contract, "following up the papers in the different governments
offices to which they were referred" one of which is the Central Bank are inconsistent with the law
(Republic Act No. 265, as amended) creating the Central Bank upon the issued and, hence, contrary to
the public policy thus adopted. In short, said contract is "inexistent and void from the beginning." (Article 1409
(1), Civil Code of the Philippines).
Besides, the agreement under consideration is contrary to good customs and public order, for public interest
demands that applications for foreign exchange be considered, acted upon and disposed of strictly on the
basis of the merits and demerits of each case. In other words, the exigencies of public welfare require that the
proceedings for the determination of said application be conducted in the most impersonal and impartial
manner to forestall favoritism or the commission of other irregularities in relation thereto, or, at least, to
minimize the opportunities therefor or the possibility thereof which is evidently, the purpose of the
aforementioned circular, requiring that all applications for foreign exchange be filed with agents banks and that
all representations relative thereto be made, not by the "applicant, his agent or other representative", but
through said agent banks.
El orden publico, que no significa aqui el material mantenimiento de la paz publica, representa el
interes publico, social y deley en el derecho privado, lo permanente y essencial de las instituciones, lo
que, aun favoreciendo a algun individuo en quien se concreta al derecho, no peuede quedar a su
arbitro. (Manresa, 5.a ed, Tomo VIII, Volumen II, p. 289.)
SEC. 167. Generally. It is a general rule that agreements against public policy are illegal and void.
Under the principles relating to the doctrine of public policy, as applied to the law of contracts, courts of
justice will not recognize or uphold any transaction which, in its object, operation, or tendency, is
calculated to be prejudicial to the public welfare, to sound morality, or to civic honesty. The test is
whether the parties have stipulated for something inhibited by the law or inimical to, or inconsistent
with, the public welfare. An agreement is against public policy if it is injurious to the interest of the
public, contravenes some established interest of society, violates some public statute, is against good
morals, tends to interfere with the public welfare or safety, or as it is sometimes put, if it is a war with
the interests of society and is in conflict with the morals of the time. An agreement either to do anything
which, or not to do anything the omission of which, is in any degree, clearly injurious to the public and
an agreement of such nature that it cannot be carried into execution without reaching beyond the
parties and exercising an injurious influence over the community at large are against public policy.
There are many things which the law does not prohibit, in the sense of attaching penalties, but which
are so mischievous in their nature and tendency that on grounds of public policy they cannot be
admitted as the subject of a valid contract. The question whether a contract is against public policy
depends upon its purpose and tendency, and not upon the fact that no harm results from it. In other
words, all agreements the purpose of which is to create a situation which tends to operate to the
detriment of the public are against public policy and void, whether in the particular case the purpose of
the agreement is or not effectuated. For a particular undertaking to be against public policy actual need
not be shown; it is enough if the potentialities for harm are present. . . . (12 Am. Jr., pp. 663-664.)
The foregoing conclusion renders a determination of the other issues raise in the appeal unnecessary.
Wherefore, the resolution appealed from is hereby affirmed, with costs against plaintiff-appellant. Let the
Solicitor General be furnished a certified copy of this decision for such action, if any, as may be appropriate
under pertinent laws. It is so ordered.
G.R. No. L-20175 October 30, 1967
MARIA A. GARCIA, ET AL., petitioners,

vs.
RITA LEGARDA, INC., respondent.
Picazo and Agcaoili for petitioners.

Gregorio Fajardo for respondent.
DIZON, J.:
Appeal taken by the spouses Maria A. Garcia and Marcelino A. Timbang hereinafter referred to as
petitioners from the decision of the Court of Appeals in CA-G.R. No. 27194-R reversing the one rendered on
January 9, 1960 by the Court of First Instance of Manila in Civil Case No. 1962 entitled "Maria A. Garcia, et al.
vs. Rita Legarda, Inc." The latter is a corporation organized under Philippine laws, and is engaged in the sale
and resale of residential lots in Manila and suburbs. We shall refer to it hereinafter as the respondent.
On May 20, 1953 the petitioners instituted the civil case mentioned above against the respondent to have
certain contracts numbered 322, 324, and 965 declared as existing and subsisting; to compel the respondent
to accept payments tendered by them; and to recover moral and exemplary damages and attorney's fees in
the amounts of P6,000.00 and P1,500.00, respectively.
The three causes of action alleged in their complaint involved the three parcels of land subject matter of the
contracts aforesaid. Each had an area of about 150 square meters, and formed part of the Rita Legarda Estate
situated in Manila, and subdivided into lots sold on installment basis.
(1) Contract to Sell No. 322 (Exhs. A and A-1) covering Lot 40, Block 8-CC, was executed by the respondent in
favor of Emiliano Orellana on March 1, 1947. On June 26, 1947, the latter transferred all his rights, and interest
thereunder to Encarnacion Vito who, in turn, on November 3 of the same year, made a similar transfer of rights
in favor of Delfin Bacho. Finally, on May 29, 1948, Bacho also transferred all his rights and interest to the
petitioners.
(2) On March 1, 1947, Contract to Sell No. 324 (Exh. 2) covering Lot No. 20, Block 5-CC was executed by
respondent in favor of Jesusa Felix. Two months later, Felix, with the written consent of the respondent, sold
her rights and interest to petitioners.
(3) Contract to Sell No. 965 (Exh. 3) covering Lot No. 27, Block 5-CC was executed by the respondent in favor
of Angela Alvarez Solomon on January 8, 1948. With the written consent of the former, Solomon also sold her
rights and interest to the petitioners on May 11, 1948.
In its answer to the complaint, the respondent averred that in relation to the Contracts to Sell Nos. 822, 965
and 324, petitioners paid on November 7, 1951 the 53rd, 43rd and 53rd installments, respectively,
corresponding to the installments for the month of July, 1951; that the petitioners, as of June 11, 1952, had
failed to pay the stipulated monthly installments for Contracts Nos. 322 and 324 corresponding to the period
from August, 1951 through June, 1952, and in the case of Contract No. 965, from August, 1951 through May,
1952; that despite several demands for payment of arrears made between December, 1951 and June, 1952 by
the respondent, the petitioners had failed to pay the amounts due; and that upon the expiration of the 90-day
grace period on June 11, 1952 stipulated in the sixth paragraph of the contracts, the respondent had cancelled
them. The answer also prayed for an award of damages and attorney's fees in the sum of P2,000.00.
On April 20, 1954 the petitioners filed a reply denying that they were in arrears as to their obligations under the
three contracts and, further averred as affirmative defense that the cancellation thereof was unlawful and
arbitrary.
After trial the Court rendered judgment declaring Contracts Nos. 322, 324 and 965 as existing and subsisting;
ordering the respondent to accept the payments tendered by the petitioners and to pay attorney's fees in the
sum of P1,500.00. but denied the award of moral and exemplary damages. From this decision the respondent
appealed to the Court of Appeals from whose decision reversing that of the lower court the instant appeal
was taken.
Petitioners now urge Us, in turn, to reverse the decision of the Court of Appeals, claiming that the latter had
committed the following errors:
I. The Honorable Court of Appeals erred in declaring that the respondent Rita Legarda, Inc. had not
waived its rights to cancel its contracts with the petitioners on the ground that it had previously
accepted late payments of the installments due on such contracts.
II. The Honorable Court of Appeals erred in declaring that par. 9 of the contracts in question is not in
violation of Art. 1308 of the New Civil Code.
III. The Honorable Court of Appeals erred in not declaring that the respondent Rita Legarda, Inc., after
having tolerated and accepted previously late payments on the installments due on the contracts,
suddenly and without suitable warning and giving of further opportunity to pay the same could not and
should not have precipitously decided to forfeit, as it actually forfeited, all the payments which have
already been made to it by petitioners.
IV. The Honorable Court of Appeals erred in reversing and in not affirming the decision of the Court of
First Instance of Manila in its entirety.
The second assignment of error is based on petitioners' contention that the questioned stipulations of the
contracts are in violation of the provisions of Article 1308 of the New Civil Code, while the first and third are
based on the claim that the respondent having previously accepted late payments of installments due on the
contracts aforesaid, must be deemed to have waived its right to cancel said contracts on the ground of late
payment of installments, and that, at any rate, after having tolerated and accepted said late payments, it was
arbitrary on its part to cancel the contracts suddenly and without suitable warning. The fifth and last
assignment of error is merely a consequence of the others.
Article 1308 of the New Civil Code reads as follows:
The contract must bind both contracting parties; its validity or compliance cannot be left to the will of
one of them.
The above legal provision is a virtual reproduction of Article 1256 of the old Civil Code but it was so phrased as
to emphasize the principle that the contract must bind both parties. This, of course, is based firstly, on the
principle that obligations arising from contracts have the force of law between the contracting parties and
secondly, that there must be mutuality between the parties based on their essential equality to which is
repugnant to have one party bound by the contract leaving the other free therefrom (8 Manresa 556). Its
ultimate purpose is to render void a contract containing a condition which makes its fulfillment dependent
exclusively upon the uncontrolled will of one of the contracting parties.
Paragraph 6 of the contracts in question which is the one claimed to be violative of the legal provision above
quoted reads as follows:
SIXTH In case the party of the SECOND PART fails to satisfy any monthly installments, or any other
payments herein agreed upon, he is granted a month of grace within which to make the retarded
payment, together with the one corresponding to the said month of grace; it is understood, however,
that should the month of grace herein granted to the party of the SECOND PART expire, without the
payments corresponding to both months having been satisfied, an interest of 10% per annum will be
charged on the amounts he should have paid; it is understood further, that should a period of 90 days
elapse, to begin from the expiration of the month of grace herein mentioned, and the party of the
SECOND PART has not paid all the amounts he should have paid with the corresponding interest up to
that date, the party of the FIRST PART has the right to declare this contract cancelled and of no effect,
and as consequence thereof, the party of the FIRST PART may dispose of the parcel or parcels of land
covered by this contract in favor of other persons, as if this contract had never been entered into. In
case of such cancellation of this contract, all the amounts paid in accordance with this agreement
together with all the improvements made on the premises, shall be considered as rents paid for the use
and occupation of the above mentioned premises, and as payment for the damages suffered by failure
of the party of the SECOND PART to fulfill his part of this agreement; and the party of the SECOND
PART hereby renounces all his right to demand or reclaim the return of the same and obliges himself to
peacefully vacate the premises and deliver the same to the party of the FIRST PART.
The above stipulation, to our mind, merely gives the vendor "the right to declare this contract cancelled and of
no effect" upon fulfillment of the conditions therein set forth. It does not leave the validity or compliance of the
contract entirely "to the will of one of the contracting parties"; the stipulation or agreement simply says that in
case of default in the payment of installments by the vendee, he shall have (1) "a month of grace", and that (2)
should said month of grace expire without the vendee paying his arrears, he shall have another "period of 90
days" to pay "all the amounts he should have paid", etc., then the vendor "has the right to declare this contract
cancelled and of no effect." We have heretofore upheld the validity of similar stipulations. In Taylor vs. Ky Tieng
Piao, etc., 43 Phil. 873, 876-878 the ruling was that a contract expressly giving to one party the right to cancel,
the same if a resolutory condition therein agreed upon similar to the one under consideration is not
fulfilled, is valid, the reason being that when the contract is thus cancelled, the agreement of the parties is in
reality being fulfilled. Indeed, the power thus granted can not be said to be immoral, much less unlawful, for it
could be exercised not arbitrarily but only upon the other contracting party committing the breach of
contract of non-payment of the installments agreed upon. Obviously, all that said party had to do to prevent the
other from exercising the power to cancel the contract was for him to comply with his part of the contract. And
in this case, after the maturity of any particular installment and its non-payment, the contract gave him not
only a month grace but an additional period of 90 days.
Having arrived at the above conclusions, We now come to the question of whether or not by having previously
accepted payments of overdue installments the respondent had waived its right to declare the contracts
cancelled and of no effect.
In this connection the record shows that on June 11, 1952 when the Contracts to Sell Nos. 234 and 965 were
cancelled, the vendees were ten months in arrears and that in the case of contract to Sell No. 322 the vendees
had never resumed payment of a single installment from the date when, upon their petition, said contract was
reinstated on September 28, 1952. The contracts under consideration are not of absolute sale but mere
contracts to sell on installment. They give the respondent's (vendor) the right to declare the contracts
cancelled and of no effect as in fact it did upon fulfillment of certain conditions. All said conditions so
the record shows have been fulfilled. Consequently, respondent's (vendor) right to cancel the contracts can
not be doubted.
That prior to the cancellation it had in fact accepted payment of installments in arrears was but another act of
forbearance on its part to give the petitioners an additional opportunity to keep the contracts alive. Rather than
give rise to the presumption that by such act of humanity it waived its right to cancel the contracts, it
strengthens its right to do so, considering that even after such act of accommodation beneficial to the
petitioners, the latter subsequently defaulted again and again in the fulfillment of their obligation.
It is, of course, painful for the petitioners to lose not only the right they had acquired under the contracts but
also whatever amounts they had already paid thereunder, but such consequences had been foreseen by the
contracting parties. To avoid them, all that petitioners had to do as already said heretofore was to comply
with their part of the bargain. Having failed to do so, they really have no valid reason to complain. That one
contracting party appears to have made a poor bargain is no reason for setting aside the agreement
(Fernandez vs. Manila Railroad, 14 Phil. 274, 287).
WHEREFORE, the appealed judgment being in accordance with law and the facts of the case, the same is
hereby affirmed.
[G.R. No. 124290. January 16, 1998]
ALLIED BANKING CORPORATION, petitioner, vs. COURT OF APPEALS, HON.

JOSE C. DE GUZMAN, OSCAR D. TANQUECO, LUCIA D. TANQUECO-
MATIAS, RUBEN D. TANQUECO and NESTOR D. TANQUECO, respondents
DECISION
BELLOSILLO, J .:
There are two (2) main issues in this petition for review: namely, (a) whether a stipulation in a
contract of lease to the effect that the contract "may be renewed for a like term at the option of the
lessee" is void for being potestative or violative of the principle of mutuality of contracts under Art.
1308 of the Civil Code and, corollarily, what is the meaning of the clause "may be renewed for a like
term at the option of the lessee;" and, (b) whether a lessee has the legal personality to assail the
validity of a deed of donation executed by the lessor over the leased premises.
Spouses Filemon Tanqueco and Lucia Domingo-Tanqueco owned a 512-square meter lot located
at No. 2 Sarmiento Street corner Quirino Highway, Novaliches, Quezon City, covered by TCT No.
136779 in their name. On 30 June 1978 they leased the property to petitioner Allied Banking
Corporation (ALLIED) for a monthly rental of P1,000.00 for the first three (3) years, adjustable by 25%
every three (3) years thereafter. The lease contract specifically states in its Provision No. 1 that "the
[1]
term of this lease shall be fourteen (14) years commencing from April 1, 1978 and may be renewed
for a like term at the option of the lessee."
Pursuant to their lease agreement, ALLIED introduced an improvement on the property consisting
of a concrete building with a floor area of 340-square meters which it used as a branch office. As
stipulated, the ownership of the building would be transferred to the lessors upon the expiration of the
original term of the lease.
Sometime in February 1988 the Tanqueco spouses executed a deed of donation over the subject
property in favor of their four (4) children, namely, private respondents herein Oscar D. Tanqueco,
Lucia Tanqueco-Matias, Ruben D. Tanqueco and Nestor D. Tanqueco, who accepted the donation in
the same public instrument.
On 13 February 1991, a year before the expiration of the contract of lease, the Tanquecos notified
petitioner ALLIED that they were no longer interested in renewing the lease.
ALLIED replied that it was exercising its option to renew their lease under the same terms with
[2]
additional proposals. Respondent Ruben D. Tanqueco, acting in behalf of all the donee-lessors,
[3]
made a counter-proposal. ALLIED however rejected the counter-proposal and insisted on Provision
[4]
No. 1 of their lease contract.
When the lease contract expired in 1992 private respondents demanded that ALLIED vacate the
premises. But the latter asserted its sole option to renew the lease and enclosed in its reply letter a
cashiers check in the amount of P68,400.00 representing the advance rental payments for six (6)
months taking into account the escalation clause.Private respondents however returned the check to
ALLIED, prompting the latter to consign the amount in court.
An action for ejectment was commenced before the Metropolitan Trial Court of Quezon City. After
trial, the MeTC-Br. 33 declared Provision No. 1 of the lease contract void for being violative of Art.
1308 of the Civil Code thus -
x x x but such provision [in the lease contract], to the mind of the Court, does not add
luster to defendants cause nor constitutes as an unbridled or unlimited license or
sanctuary of the defendant to perpetuate its occupancy on the subject property. The basic
intention of the law in any contract is mutuality and equality. In other words, the validity of
a contract cannot be left at (sic) the will of one of the contracting parties. Otherwise, it
infringes (upon) Article 1308 of the New Civil Code, which provides: The contract must
bind both contracting parties; its validity or compliance cannot be left to the will of one of
them x x x x Using the principle laid down in the case of Garcia v. Legarda as cornerstone,
it is evident that the renewal of the lease in this case cannot be left at the sole option or
will of the defendant notwithstanding provision no. 1 of their expired contract. For
that would amount to a situation where the continuance and effectivity of a
contract will depend only upon the sole will or power of the lessee, which is repugnant to
the very spirit envisioned under Article 1308 of the New Civil Code x x x x the theory
adopted by this Court in the case at bar finds ample affirmation from the principle echoed
by the Supreme Court in the case of Lao Lim v. CA, 191 SCRA 150, 154, 155.
On appeal to the Regional Trial Court, and later to the Court of Appeals, the assailed decision
was affirmed.[5]
On 20 February 1993, while the case was pending in the Court of Appeals, ALLIED vacated the
leased premises by reason of the controversy. [6]
ALLIED insists before us that Provision No. 1 of the lease contract was mutually agreed upon
hence valid and binding on both parties, and the exercise by petitioner of its option to renew the
contract was part of their agreement and in pursuance thereof.
We agree with petitioner. Article 1308 of the Civil Code expresses what is known in law as
the principle of mutuality of contracts. It provides that "the contract must bind both the
contracting parties; its validity or compliance cannot be left to the will of one of them." This binding
effect of a contract on both parties is based on the principle that theobligations arising from
contracts have the force of law between the contracting parties, and there must be mutuality between
them based essentially on their equality under which it is repugnant to have one party bound
by the contract while leaving the other free therefrom. The ultimate purpose is to render void a
contract containing a condition which makes its fulfillment dependent solely upon the uncontrolled will
of one of the contracting parties.
An express agreement which gives the lessee the sole option to renew the lease is frequent and
subject to statutory restrictions, valid and binding on the parties. This option, which is provided in the
same lease agreement, is fundamentally part of the consideration in the contract and is no different
from any other provision of the lease carrying an undertaking on the part of the lessor to act
conditioned on the performance by the lessee. It is a purely executory contract and at most confers a
right to obtain a renewal if there is compliance with the conditions on which the right is made to
depend. The right of renewal constitutes a part of the lessees interest in the land and forms a
substantial and integral part of the agreement.
The fact that such option is binding only on the lessor and can be exercised only by the lessee
does not render it void for lack of mutuality. After all, the lessor is free to give or not to give the option
to the lessee. And while the lessee has a right to elect whether to continue with the lease or not, once
he exercises his option to continue and the lessor accepts, both parties are thereafter bound by the
new lease agreement. Their rights and obligations become mutually fixed, and the lessee is entitled
to retain possession of the property for the duration of the new lease, and the lessor may hold him
liable for the rent therefor. The lessee cannot thereafter escape liability even if he
should subsequentlydecide to abandon the premises. Mutuality obtains in such a contract and
equality exists between the lessor and the lessee since they remain with the same faculties in respect
to fulfillment.
[7]
The case of Lao Lim v. Court of Appeals relied upon by the trial court is not applicable here. In
[8]
that case, the stipulation in the disputed compromise agreement was to the effect that the lessee
would be allowed to stay in the premises "as long as he needs it and can pay the rents." In the
present case, the questioned provision states that the lease"may be renewed for a like term at the
option of the lessee." The lessor is bound by the option he has conceded to the lessee. The lessee
likewise becomes bound only when he exercises his option and the lessor cannot thereafter be
excused from performing his part of the agreement.
Likewise, reliance by the trial court on the 1967 case of Garcia v. Rita Legarda, Inc., is [9]
misplaced. In that case, what was involved was a contract to sell involving residential lots, which gave
the vendor the right to declare the contract cancelled and of no effect upon the failure of the vendee
to fulfill any of the conditions therein set forth. In the instant case, we are dealing with a contract of
lease which gives the lessee the right to renew the same.
With respect to the meaning of the clause "may be renewed for a like term at the option of the
lessee," we sustain petitioner's contention that its exercise of the option resulted in the automatic
extension of the contract of lease under the same terms and conditions. The subject contract simply
provides that "the term of this lease shall be fourteen (14) years and may be renewed for a like term
at the option of the lessee." As we see it, the only term on which there has been a clear agreement is
the period of the new contract, i.e., fourteen (14) years, which is evident from the clause "may be
renewed for a like term at the option of the lessee," the phrase "for a like term" referring to the
period. It is silent as to what the specific terms and conditions of the renewed lease shall be. Shall it
be the same terms and conditions as in the original contract, or shall it be under the terms and
conditions as may be mutually agreed upon by the parties after the expiration of the existing lease?
In Ledesma v. Javellana this Court was confronted with a similar problem. In that case the
[10]
lessee was given the sole option to renew the lease, but the contract failed to specify the terms and
conditions that would govern the new contract. When the lease expired, the lessee demanded an
extension under the same terms and conditions. The lessor expressed conformity to the renewal of
the contract but refused to accede to the claim of the lessee that the renewal should be under the
same terms and conditions as the original contract. In sustaining the lessee, this Court made the
following pronouncement:
x x x in the case of Hicks v. Manila Hotel Company, a similar issue was resolved
by this Court. It was held that 'such a clause relates to the very contract in which it is
placed, and does not permit the defendant upon the renewal of the contract in which the
clause is found, to insist upon different terms than those embraced in the contract to be
renewed;' and that 'a stipulation to renew always relates to the contract in which it is found
and the rights granted thereunder, unless it expressly provides for variations in the terms
of the contract to be renewed.'
The same principle is upheld in American Law regarding the renewal of lease
contracts. In 50 Am. Jur. 2d, Sec. 1159, at p. 45, we find the following citations: 'The rule is
well-established that a general covenant to renew or extend a lease which makes no
provision as to the terms of a renewal or extension implies a renewal or extension upon
the same terms as provided in the original lease.'
In the lease contract under consideration, there is no provision to indicate that the renewal
will be subject to new terms and conditions that the parties may yet agree upon. It is to
renewal provisions of lease contracts of the kind presently considered that the principles
stated above squarely apply. We do not agree with the contention of the appellants that if
it was intended by the parties to renew the contract under the same terms and conditions
stipulated in the contract of lease, such should have expressly so
stated in the contractitself. The same argument could easily be interposed by the
appellee who could likewise contend that if the intention was to renew the contract of
lease under such new terms and conditions that the parties may agree upon, the contract
should have so specified. Between the two assertions, there is more logic in the latter.
The settled rule is that in case of uncertainty as to the meaning of a provision

granting extension to a contract of lease, the tenant is the one favored and not the
landlord. 'As a general rule, in construing provisions relating to renewals or extensions,
where there is any uncertainty, the tenant is favored, and not the landlord, because the
latter, having the power of stipulating in his own favor, has neglected to do so; and
also upon the principle that every man's grant is to be taken most strongly against
himself (50 Am Jur. 2d, Sec. 1162, p. 48; see also 51 C.J.S. 599).'
Besides, if we were to adopt the contrary theory that the terms and conditions to be embodied in
the renewed contract were still subject to mutual agreement by and between the parties, then the
option - which is an integral part of the consideration for the contract - would be rendered
worthless. For then, the lessor could easily defeat the lessee's right of renewal by simply imposing
unreasonable and onerous conditions to prevent the parties from reaching an agreement, as in the
case at bar. As in a statute no word, clause, sentence, provision or part of a contract shall be
considered surplusage or superfluous, meaningless, void, insignificant or nugatory, if that can be
reasonably avoided. To this end, a construction which will render every word operative is to be
preferred over that which would make some words idle and nugatory. [11]
Fortunately for respondent lessors, ALLIED vacated the premises on 20 February 1993 indicating
its abandonment of whatever rights it had under the renewal clause.Consequently, what remains to
be done is for ALLIED to pay rentals for the continued use of the premises until it vacated the same,
computed from the expiration of the original term of the contract on 31 March 1992 to the time it
actually left the premises on 20 February 1993, deducting therefrom the amount
of P68,400.00 consigned in court by ALLIED and any other amount which it may have deposited
or advanced in conection with the lease. Since the old lease contract was deemed renewed under the
same terms and conditions upon the exercise by ALLIED of its option, the basis of the computation of
rentals should be the rental rate provided for in the existing contract.
Finally, ALLIED cannot assail the validity of the deed of donation, not being a party thereto. A
person who is not principally or subsidiarily bound has no legal capacity to challenge the validity
of the contract. He must first have an interest in it. "Interest" within the meaning of the term means
[12]
material interest, an interest to be affected by the deed, as distinguished from a mere

incidental interest. Hence, a person who is not a party to a contract and for whose benefit it was not
expressly made cannot maintain an action on it, even if the contract, if performed by the parties
thereto would incidentally affect him, except when he is prejudiced in his rights with respect to one
[13]
of the contracting parties and can show the detriment which could positively result to him from the
contract in which he had no intervention. We find none in the instant case.
[14]
WHEREFORE, the Decision of the Court of Appeals is REVERSED and SET ASIDE. Considering
that petitioner ALLIED BANKING CORPORATION already vacated the leased premises as of 20
February 1993, the renewed lease contract is deemed terminated as of that date. However, petitioner
is required to pay rentals to respondent lessors at the rate provided in their existing contract, subject
to computation in view of the consignment in court of P68,400.00 by petitioner, and of such other
amounts it may have deposited or advanced in connection with the lease.
SO ORDERED.
G.R. No. L-264 October 4, 1946
VICENTE SINGSON ENCARNACION, plaintiff-appellee,

vs.
JACINTA BALDOMAR, ET AL., defendants-appellants.
Bausa and Ampil for appellants.

Tolentino and Aguas for appellee.
HILADO, J.:
Vicente Singson Encarnacion, owner of the house numbered 589 Legarda Street, Manila, some six years ago
leased said house to Jacinto Baldomar and her son, Lefrado Fernando, upon a month-to-month basis for the
monthly rental of P35. After Manila was liberated in the last war, specifically on March 16, 1945, and on April 7,
of the same year, plaintiff Singson Encarnacion notified defendants, the said mother and son, to vacate the
house above-mentioned on or before April 15, 1945, because plaintiff needed it for his offices as a result of the
destruction of the building where said plaintiff had said offices before. Despite this demand, defendants
insisted on continuing their occupancy. When the original action was lodged with the Municipal Court of Manila
on April 20, 1945, defendants were in arrears in the payment of the rental corresponding to said month, the
agrees rental being payable within the first five days of each month. That rental was paid prior to the hearing of
the case in the municipal court, as a consequence of which said court entered judgment for restitution and
payment of rentals at the rate of P35 a month from May 1, 1945, until defendants completely vacate the
premises. Although plaintiff included in said original complaint a claim for P500 damages per month, that claim
was waived by him before the hearing in the municipal court, on account of which nothing was said regarding
said damages in the municipal court's decision.
When the case reached the Court of First Instance of Manila upon appeal, defendants filed therein a motion to
dismiss (which was similar to a motion to dismiss filed by them in the municipal court) based upon the ground
that the municipal court had no jurisdiction over the subject matter due to the aforesaid claim for damages and
that, therefore, the Court of First Instance had no appellate jurisdiction over the subject matter of the action.
That motion to dismiss was denied by His Honor, Judge Mamerto Roxas, by order dated July 21, 1945, on the
ground that in the municipal court plaintiff had waived said claim for damages and that, therefore, the same
waiver was understood also to have been made in the Court of First Instance.lawphil.net
In the Court of First Instance the graveman of the defense interposed by defendants, as it was expressed
defendant Lefrado Fernando during the trial, was that the contract which they had celebrated with plaintiff since
the beginning authorized them to continue occupying the house indefinetly and while they should faithfully fulfill
their obligations as respects the payment of the rentals, and that this agreement had been ratified when
another ejectment case between the parties filed during the Japanese regime concerning the same house was
allegedly compounded in the municipal court. The Court of First Instance gave more credit to plaintiff's witness,
Vicente Singson Encarnacion, jr., who testified that the lease had always and since the beginning been upon a
month-to-month basis. The court added in its decision that this defense which was put up by defendant's
answer, for which reason the Court considered it as indicative of an eleventh-hour theory. We think that the
Court of First Instance was right in so declaring. Furthermore, carried to its logical conclusion, the defense thus
set up by defendant Lefrado Fernando would leave to the sole and exclusive will of one of the contracting
parties (defendants in this case) the validity and fulfillment of the contract of lease, within the meaning of article
1256 of the Civil Code, since the continuance and fulfillment of the contract would then depend solely and
exclusively upon their free and uncontrolled choice between continuing paying the rentals or not, completely
depriving the owner of all say in the matter. If this defense were to be allowed, so long as defendants elected to
continue the lease by continuing the payment of the rentals, the owner would never be able to discontinue it;
conversely, although the owner should desire the lease to continue, the lessees could effectively thwart his
purpose if they should prefer to terminate the contract by the simple expedient of stopping payment of the
rentals. This, of course, is prohibited by the aforesaid article of the Civil Code. (8 Manresa, 3d ed., pp. 626,
627; Cuyugan vs. Santos, 34 Phil., 100.)
During the pendency of the appeal in the Court of First Instance and before the judgment appealed from was
rendered on October 31, 1945, the rentals in areas were those pertaining to the month of August, 1945, to the
date of said judgment at the rate of P35 a month. During the pendency of the appeal in that court, certain
deposits were made by defendants on account of rentals with the clerk of said court, and in said judgment it is
disposed that the amounts thus deposited should be delivered to plaintiff.
Upon the whole, we are clearly of opinion that the judgment appealed from should be, as it is hereby, affirmed,
with the costs of the three instances to appellants. So ordered.
G.R. No. L-13463 November 9, 1918
H. C. LIEBENOW, plaintiff-appellant,
vs.
THE PHILIPPINE VEGETABLE OIL COMPANY, defendant-appellee.
Kincaid & Perkins for appellant.

Hartigan & Welch for appellee.
STREET, J.:
This action was instituted by the plaintiff, H. C. Liebenow, on May 11, 1917, in the Court of First Instance of the
city of Manila against the defendant, the Philippine Vegetable Oil Company, a corporation engaged in the
manufacture of coconut oil in the city of Manila. The purpose of the proceeding is to recover a sum of money to
which the plaintiff considers himself entitled by way of a bonus in addition to the salary earned by him while in
the employment of the defendant company as superintendent of its factory in the district of Nagtahan, city of
Manila. At the hearing in the Court of First Instance judgment was entered against the plaintiff, absolving the
defendant from the complaint, and the plaintiff has appealed.
The contract under which the plaintiff rendered the service to which reference has been made is expressed in
a letter of March 17, 1914, written by the president of the Philippine Vegetable Oil Company to Liebenow as
follows:
We hereby confirm conversation had on yesterday by our Mr. Vorster and yourself to the effect that this
company engages your services as superintendent of its factory at Nagtahan for the period of one year
from April 1st, 1914, at a monthly compensation of P500 (five hundred pesos) and living quarters and
such further amount in the way of bonus as the board of directors may see fit to grant you.
In conformity with this agreement, the plaintiff entered upon the discharge of his duties as superintendent of
the factory aforesaid on April 1, 1914, and continued to render service in this capacity not only for the period of
one year specified in the contract, but for an additional period of four months, or until August 1, 1916, when his
services terminated. At some time during the course of this employment, the exact date of which does not
appear, the monthly salary of P500 was raised to P750, but the contract was not otherwise changed. After the
employment ceased the defendant company continued to deliver to the plaintiff each month a check for P750,
the equivalent of the salary he had been receiving. These payments were continued until the total sum of
P4,500 had been thus paid.
The plaintiff alleges in his complaint that by reason of his skill and ability the defendant's plant was made much
more productive and its profits thereby enormously increased. It is not denied that the service rendered was
satisfactory to the company, and the court found that during the time the plaintiff was employed as
superintendent the output of the plant had increased and the cost of operation had diminished, with
consequent profit to the defendant company.
It is the plaintiff's contention that the stipulation contained in the letter of March 17, 1914, to the effect that the
plaintiff should receive such further amount in the way of bonus, over and above salary, as the board of
directors might see fit to grant has not been satisfied. The P4,500, which he received in the form of a monthly
check of P750 for six successive months after the termination of his services, seems to be considered by the
plaintiff purely in the light of a free gift, and it is insisted that this money was not paid to him in satisfaction, in
whole or in part, of the stipulated bonus. We cannot concur in this suggestion. It is true that the directors did
not by anticipation declare that these payments should be considered in the light of a "bonus;" and a resolution
to this effect was not adopted by them until after the trial in the Court of First Instance had commenced. This
circumstance we consider unimportant. The money thus paid was in addition to salary; and it came from the
same source and was paid by the same authority as any bonus that might have been awarded to him. The fact
that the money was not so labelled is immaterial.
The plaintiff, however, contends that he is entitled to a bonus to be fixed by the court as a reasonable
participation in the increased profits of the factory under his care, taking into consideration his technical skill
and the greater output resulting therefrom. He believes that the increased profits of the enterprise due directly
to this efficiency amounted to at least P100,000; and he suggests, as the lowest proper minimum that he
should be awarded an amount sufficient to raise his salary for the whole period to the sum of P12,000 per
annum, the amount supposedly paid to his predecessor. This last suggestion is based on the circumstance
that, upon a certain occasion, he talked to the company's manager about the amount of the bonus which he
would expect to receive and informed the manager that he would not be satisfied with less than his
predecessor had been accustomed to receive. The manager, so the plaintiff says, expressed his conformity
with this idea.
The solution of the case makes it necessary to consider the legal effect of the stipulation inserted in the
contract in question to the effect that the plaintiff should be entitled to such further amount in the way of bonus
as the board of directors might see fit to grant.
We see no reason to doubt that a promise of this character creates a legal obligation binding upon the
promisor, although in its actual results it may not infrequently prove to be illusory. Such a promise is not, in our
opinion, nugatory, under article 1115 of the Civil Code, as embodying a condition dependent exclusively upon
the will of the obligor. Nor can it be held invalid under article 1256 of the same Code, which declares that the
validity and performance of a contract cannot be left to the will of one of the contracting parties. The
uncertainty of the amount to be paid by way of bonus is also no obstacle to the validity of the contract (article
1273, Civil Code); since the contract itself specifies the manner in which the amount payable is to be
determined, namely, by the exercise of the judgment and discretion of the employer.
The validity of the promise being conceded, the question which arises next is: What is necessary to satisfy it?
Upon this point it must be obvious that the obligation can only be satisfied when something has been paid as a
bonus by or with the approval of the boar of directors. In the case before us the promise to pay a bonus is
absolute and unconditional. The payment is not conditioned upon satisfactory service, nor upon the duration of
the service, nor upon the profits which may accrue to the employer from the efficiency of the employee. All
these elements might and naturally would operate upon the minds and discretion of the directors in fixing the
amount of the bonus, but they are wholly unconnected with the legal right of the plaintiff to receive something
as a bonus.itc@a1f
The amount of the bonus, it will be observed, is left by the contract to the discretion of the board of directors.
Now, when that discretion has once been exercised and a bonus has been pa by the directors or by the
officers of the company, with the approval, express or implied, of the directors, can that discretion be judicially
reviewed? We are of the opinion that it cannot. The parties stipulate that the discretion to be exercised was the
discretion of the directors; and there would be a very manifest infringement of the contract, if we were to
substitute in place of the discretion of the directors the discretion of any other person or body whomsoever.
Practical considerations point to the same conclusion. An employer, in determining what amount to award as a
bonus, naturally and properly considers many things a court could not well take into account, as for instance,
the personal peculiarities which make one man more acceptable or more serviceable in the employment than
another. In the complex enterprises of modern industry, especially, would it be difficult for a court to undertake
to say just what any particular employee might be entitled to. The best course, we think, in such a case as this,
is to recognize that the contracting parties have placed the discretion to determine the amount of the bonus in
the hands of the employer, and to hold them bound by than.
But it is suggested that where a contract of service provides for a salary in a fixed sum and an additional sum
to be paid by way of bonus, the whole contract is to be taken together, and it is to be considered as having
about the same effect as if the parties, recognizing the inadequacy of the amount fixed as salary, had agreed
that a further bonus should be paid sufficient to raise the amount to what should be considered adequate upon
the basis of a quantum meruit. A more reasonable construction and in our opinion one which approximates
more closely to the evident intention of the parties is to hold that the fixed salary was adjusted with a view to
compensate the employee so far as those elements are concerned which could properly be taken into
consideration in fixing a quantum meruit and that the bonus was intended to be a mere gratuity the amount of
which should be determined exclusively in the discretion of the employer.
If, as supposed, the contracting parties are really bound by the stipulation which leaves the determination of
the amount of the bonus to the employer, two consequences necessarily follow. The first is that where
something or other is paid by way of a bonus upon such a contract, even though only a nominal amount, the
obligation is satisfied. The other is that, if nothing at all is paid, the employee can recover in a legal action only
nominal damages. Such a contract contains nothing which could serve as the basis of a title to special
damages and affords no measure by which the amount of such damages could be ascertained.
It therefore becomes a matter of little or no practical importance whether the sum of P4,500, which was paid to
the plaintiff after he quit work for the defendant, was paid as a bonus or not; for even if it were not so paid, the
plaintiff could in this action recover no more than mere nominal damages.
A question which we consider of much importance is presented in an assignment of error directed to the action
of the trial court with reference to a subpoena duces tecum which the plaintiff caused to be issued a few days
prior to the hearing in the Court of First Instance. Said subpoena was directed to the managing director of the
Philippine Vegetable Oil Company and commanded him to produce in court upon the day set for the hearing of
the cause the following documents. records, and papers relative to the company's business, to wit:
(1) All Daily Mill reports showing daily output of oil and cake and consumption of copra of the P. V. O.
Co., from April 1, 1913, to March 31, 1915, both inclusive.
(2) All shipping reports of oil said company for the same period.
(3) All records showing cost of all shipments of oil made by said company, both in bulk and barrels for
the same period.
(4) All records of all demurrage charges on said shipments for the same period.
(5) All records of receipts, expenses and profits from operation of the company's mill and all operating
charges and costs of said mill for the same period.
(6) All records and vouchers showing the salary and all other sums paid to Mr. Thompson, the
company's mill superintendent, or mill manager, during the entire period of his employment as well as
all sums paid to him thereafter.lawphil.net
When the case was called for hearing the attorney for the defendant moved the court to vacate this subpoena
on the ground that the plaintiff was not entitled to require the production of the documents called for. The court
reserved the matter for later determination and in the end ruled that the evidence which the plaintiff sought to
elicit was irrelevant. The witness was therefore excused from producing the papers mentioned in the
subpoena duces tecum and the plaintiff duly excepted.
According to the plaintiff's theory of the case, he was entitled to a bonus the amount of which should be
determined by the court with a view to the usefulness and efficiency which he had exhibited in the course of his
employment; and he insists that the profits earned by the defendant during the time he was employed as
superintendent of the Nagtahan factory are relevant in determining the amount to be thus awarded. For
reasons already stated, this contention is untenable; and we are of the opinion that the court committed no
error in refusing to compel the production of the documents and records in question. The right to the bonus
was wholly independent of the profits, and the amount of the profits could not properly be taken into
consideration by the court at all.
The subpoena duces tecum is, in all respects, like the ordinary subpoena ad testificandum, with the exception
that it concludes with an injunction that the witness shall bring with him and produce at the examination the
books, documents, or things described in the subpoena. It is issued in the same manner as the ordinary
subpoena, and is procurable from the clerk as of course without application to the court. Section 402 of the
Code of Civil Procedure says that the subpoena duces tecum may be used to compel the witness to bring any
book, document, or other thing under his control, which he is bound by law to produce in evidence. The words
"which he is bound by law to produce in evidence" indicate a limitation upon the exigency of the writ; and it is
evident that there is this difference between the ordinary subpoena to testify an the subpoena duces tecum,
namely, that while the person to whom the subpoena to testify is directed is bound absolutely and without
qualification to appear in response to the subpoena, the person to whom the subpoena duces tecum is
directed is bound only in so far as he is required by law to produce the documents in evidence.
It results therefore that, if the case is such as to make it doubtful whether the documents to be produced are
such that the witness is bound by law to produce them, the witness is entitled to have the court pass upon this
question; and where a subpoena duces tecum is improperly issued to enforce the production of documents
which the witness is not bound to produce, a proper remedy is by motion to vacate or set aside the subpoena.
Such was the procedure adopted in this case.
The power to require the production of books, documents, and papers by means of the subpoena duces
tecum is one which is undoubtedly capable of abuse and one which, if improperly used, causes great
annoyance, not to say, expense to the person against whom it is directed. If the use of the subpoena duces
tecum were in practice confined to the office of compelling the production of documents and papers which are
directly related to the issues in a case, occasions for complaint would be infrequent. However, in modern
business it is sometimes necessary for litigants to have access to voluminous materials. Journals, ledgers,
cashbooks, invoice books, and account books pertaining to the business of large enterprises may have to be
examined. To enforce the production of these great piles of material unconditionally in court would in many
cases operate with unreasonable hardship on the party against whom the subpoena is issued and not
infrequently the step would be barren of results to the person seeking to examine them. Such procedure is not
to be encouraged; and it is the duty of the court, in such a situation, to control the process so as to make it
conformable to law and justice. (Subsection 7, section 11, Code of Civil Procedure.) The motion to vacate or
set aside the subpoena gives the court the requisite opportunity to examine the issues raised by the pleadings
in the cause and to consider not only the relevancy of the evidence which is to be elicited but also to consider
whether an order for the production of the document would constitute an unlawful invasion of privacy.
In determining whether the production of the documents described in a subpoena duces tecum should be
enforced by the court, it is proper to consider, first, whether the subpoena calls for the production of specific
documents, or rather for specific proof, and secondly, whether that proof is prima facie sufficiently relevant to
justify enforcing its production. A general inquisitorial examination of all the books, papers, and documents of
an adversary, conducted with a view to ascertain whether something of value may not show up, will not be
enforced. (Street, Federal Equity Practice, vol. 2, sec. 1844.) No court, it is needless to say, would punish a
witness for contempt in refusing to obey a subpoena duces tecum the issuance of which has been procured
with such end in view.
We observe in conclusion that where a party has any legitimate reason for inspecting the voluminous
documents of an adversary, it is usually more to the purpose to ask the court, before the hearing, for an order
requiring such adversary to submit his books and records for examination under such reasonable condition as
the court may specify. If necessary, an expert can then be set to work; and the result of his examination can be
submitted to the court in a form at once intelligible and helpful. In the case before us if the documents called for
had been produced in the court room, both the court and the attorneys alike would have been helpless to
discover from the unsystematized mass the particular facts intended to be proved by them; and in the end it
would have been necessary to adjourn the hearing and call in an accountant to make the needed examination.
While we do not wish to be understood as attempting to lay down any hard and fast rule upon such a matter,
we merely suggest that it is an abuse of legal process to use the subpoena duces tecum to produce in court
material which cannot be properly utilized by the court in determining the issues of the case; and in cases of
this kind the litigant should be required to resort to some other procedure in order properly to place before the
court the evidence upon which the case should be decided.
The judgment is affirmed, with costs. So ordered.

G.R. No. 107569 November 8, 1994
PHILIPPINE NATIONAL BANK, petitioner,

vs.
COURT OF APPEALS, REMEDIOS JAYME-FERNANDEZ and AMADO FERNANDEZ, respondents.
Vidad, Corpus & Associates for petitioner.
Remedios Jayme-Fernandez for privaate respondents.
PUNO, J.:
Petitioner bank seeks the review of the decision, dated October 15, 1992, of the Court of Appeals 1 in CA G.R.
CV No. 27195, the dispositive portion of which reads as follows:
WHEREFORE, the judgment appealed from is hereby SET ASIDE and a new one is entered
ordering defendant-appellee PNB to re-apply the interest rate of 12% per annum to plaintiffs-
appellants' (referring to herein private respondents) indebtedness and to accordingly take the
appropriate charges from plaintiffs-appellants' (private respondents') payment of P81,000.00
made on December 26, 1985. Any balance on the indebtedness should, likewise, be charged
interest at the rate of 12% per annum.
SO ORDERED.
The parties do not dispute the facts as laid down by respondent court in its impugned decision, viz.:
On April 7, 1982, (private respondents) as owners of a NACIDA-registered enterprise, obtained

a loan under the Cottage Industry Guaranty Loan Fund (CIGLF) from the Philippine National
Bank (PNB) in the amount of Fifty Thousand (P50,000.00) Pesos, as evidenced by a Credit
Agreement. Under the Promissory Note covering the loan, the loan was to be amortized over a
period of three (3) years to end on March 29, 1985, at twelve (12%) percent interest annually.
To secure the loan, (private respondents) executed a Real Estate Mortgage over a 1.5542-
hectare parcel of unregistered agricultural land located at Cambang-ug, Toledo City, which was
appraised by the PNB at P1,062.52 and given a loan value of P531.26 by the Bank. In addition,
(private respondents) executed a Chattel Mortgage over a thermo plastic-forming machine,
which had an appraisal value of P8,800 and a loan value of P4,400.00.
The Credit Agreement provided inter alia, that
(a) The BANK reserves the right to increase the interest rate within the limits
allowed by law at any time depending on whatever policy it may adopt in the
future; Provided, that the interest rate on this accommodation shall be
correspondingly decreased in the event that the applicable maximum interest is
reduced by law or by the Monetary Board. In either case, the adjustment in the
interest rate agreed upon shall take effect on the effectivity date of the increase
or decrease in the maximum interest rate.
The Promissory Note, in turn, authorized the PNB to raise the rate of interest, at any time
without notice, beyond the stipulated rate of 12% but only "within the limits allowed by law."
The Real Estate Mortgage contract likewise provided that
(k) INCREASE OF INTEREST RATE: The rate of interest charged on the

obligation secured by this mortgage as well as the interest on the amount which
may have been advanced by the MORTGAGE, in accordance with the provision
hereof, shall be subject during the life of this contract to such an increase within
the rate allowed by law, as the Board of Directors of the MORTGAGEE may
prescribe for its debtors.
On February 17, 1983, (private respondents) were granted an additional NACIDA loan of Fifty
Thousand (P50,000.00) Pesos by the PNB, for which (private respondents) executed another
Promissory Note, which was to mature on April 1, 1985. Other than the date of maturity, the
second promissory note contained the same terms and stipulations as the previous note. The
parties likewise executed a new Credit Agreement, changing the amount of the loan from
P50,000.00 to P100,000.00, but otherwise preserving the stipulations contained in the original
agreement.
As additional security for the loan, (private respondents) constituted another real estate
mortgage over 2 parcels of registered land, with a combined area of 311 square meters, located
at Guadalupe, Cebu City. The land, upon which several buildings are standing, was appraised
by the PNB to have a value of P40,000.00 and a loan value of P28,000.00.
In a letter dated August 1, 1984, the PNB informed (private respondents) "that the interest rate
of your CIGLF loan account with us is now 25% per annum plus a penalty of 6% per annum on
past dues." The PNB further increased this interest rate to 30% on October 15, 1984; and to
42% on October 25, 1984.
The records show that as of December 1985, (private respondents) had an outstanding principal
account of P81,000.00 of which P18,523.14 was credited to the principal, P57,488.89 to the
interest, and the rest to penalty and other charges. Thus, as of said date, the unpaid principal
obligation of (private respondent) amounted to P62,830.32.
Thereafter, (private respondents) exerted efforts to get the PNB to re-adopt the 12% interest
and to condone the present interest and penalties due; but to no avail. 2 (Citations omitted.)
On December 15, 1987, private respondents filed a suit for specific performance against petitioner PNB and
the NACIDA. It was docketed as Civil Case No. CEB-5610, and raffled to the Regional Trial Court, 7th Judicial
Region, Cebu City, Br. 7. 3 Private respondents prayed the trial court to order:
1. The PNB and NACIDA to issue in (private respondents') favor, a release of mortgage;
2. The PNB to pay pecuniary consequential damages for the destruction of (private
respondents') enterprise;
3. The PNB to pay moral and exemplary damages as well as the costs of suit; and
4. Granting (private respondents') such other relief as may be found just and equitable in the
premises.4
On February 26, 1990, the trial court dismissed private respondents' complaint in Civil Case No. CEB-5610.
On October 15, 1992, the Court of Appeals reversed the dismissal with respect to petitioner bank, and
disallowed the increases in interest rates.
Petitioner bank now contends that "respondent Court of Appeals committed grave error when it ruled (1) that
the increase in interest rates are unauthorized; (2) that the Credit Agreement and the Promissory Notes are not
the law between the parties; (3) that CB Circular No. 773 and CB Circular
No. 905 are not applicable; and (4) that private respondents are not estopped from questioning the increase of
rate interest made by petitioner." 5
The petition is bereft of merit.
In making the unilateral increases in interest rates, petitioner bank relied on the escalation clause contained in
their credit agreement which provides, as follows:
The Bank reserves the right to increase the interest rate within the limits allowed by law at any
time depending on whatever policy it may adopt in the future and provided, that, the interest rate
on this accommodation shall be correspondingly decreased in the event that the applicable
maximum interest rate is reduced by law or by the Monetary Board. In either case, the
adjustment in the interest rate agreed upon shall take effect on the effectivity date of the
increase or decrease in maximum interest rate.
This clause is authorized by Section 2 of Presidential Decree (P.D.)

No. 1684 which further amended Act No. 2655 ("The Usury Law"), as amended, thus:
Section 2. The same Act is hereby amended by adding a new section after Section 7, to read as
follows:
Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance of money, goods or credits
may stipulate that the rate of interest agreed upon may be increased in the event that the
applicable maximum rate of interest is increased by law or by the Monetary Board; Provided,
That such stipulation shall be valid only if there is also a stipulation in the agreement that the
rate of interest agreed upon shall be reduced in the event that the applicable maximum rate of
interest is reduced by law or by the Monetary Board; Provided further, That the adjustment in
the rate of interest agreed upon shall take effect on or after the effectivity of the increase or
decrease in the maximum rate of interest.
Section 1 of P.D. No. 1684 also empowered the Central Bank's Monetary Board to prescribe the maximum
rates of interest for loans and certain forbearances. Pursuant to such authority, the Monetary Board issued
Central Bank (C.B.) Circular No. 905, series of 1982, Section 5 of which provides:
Sec. 5. Section 1303 of the Manual of Regulations (for Banks and Other Financial
Intermediaries) is hereby amended to read as follows:
Sec. 1303. Interest and Other Charges. The rate of interest, including
commissions, premiums, fees and other charges, on any loan, or forbearance of
any money, goods or credits, regardless of maturity and whether secured or
unsecured, shall not be subject to any ceiling prescribed under or pursuant to the
Usury Law, as amended.
P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to stipulate freely regarding
any subsequent adjustment in the interest rate that shall accrue on a loan or forbearance of money, goods or
credits. In fine, they can agree to adjust, upward or downward, the interest previously stipulated. However,
contrary to the stubborn insistence of petitioner bank, the said law and circular did not authorize either party
to unilaterally raise the interest rate without the other's consent.
It is basic that there can be no contract in the true sense in the absence of the element of agreement, or of
mutual assent of the parties. If this assent is wanting on the part of the one who contracts, his act has no more
efficacy than if it had been done under duress or by a person of unsound mind. 6
Similarly, contract changes must be made with the consent of the contracting parties. The minds of all the
parties must meet as to the proposed modification, especially when it affects an important aspect of the
agreement. In the case of loan contracts, it cannot be gainsaid that the rate of interest is always a vital
component, for it can make or break a capital venture. Thus, any change must be mutually agreed upon,
otherwise, it is bereft of any binding effect.
We cannot countenance petitioner bank's posturing that the escalation clause at bench gives it unbridled right
to unilaterally upwardly adjust the interest on private respondents' loan. That would completely take away from
private respondents the right to assent to an important modification in their agreement, and would negate the
element of mutuality in contracts. In Philippine National Bank v. Court of Appeals, et al., 196 SCRA 536, 544-
545 (1991) we held
. . . The unilateral action of the PNB in increasing the interest rate on the private respondent's
loan violated the mutuality of contracts ordained in Article 1308 of the Civil Code:
Art. 1308. The contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them.
In order that obligations arising from contracts may have the force or law between the parties,
there must be mutuality between the parties based on their essential equality. A contract
containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled
will of one of the contracting parties, is void . . . . Hence, even assuming that
the . . . loan agreement between the PNB and the private respondent gave the PNB a license
(although in fact there was none) to increase the interest rate at will during the term of the loan,
that license would have been null and void for being violative of the principle of mutuality
essential in contracts. It would have invested the loan agreement with the character of a
contract of adhesion, where the parties do not bargain on equal footing, the weaker party's (the
debtor) participation being reduced to the alternative "to take it or leave it" . . . . Such a contract
is a veritable trap for the weaker party whom the courts of justice must protect against abuse
and imposition. (Citation omitted.)
Private respondents are not also estopped from assailing the unilateral increases in interest rate made by
petitioner bank. No one receiving a proposal to change a contract to which he is a party, is obliged to answer
the proposal, and his silence per se cannot be construed as an acceptance. 7 In the case at bench, the
circumstances do not show that private respondents implicitly agreed to the proposed increases in interest rate
which by any standard were too sudden and too stiff.
IN VIEW THEREOF, the instant petition is DENIED for lack of merit, and the decision of the Court of Appeals in
CA-G.R. CV No. 27195, dated October 15, 1992, is AFFIRMED. Costs against petitioner.
SO ORDERED.
G.R. No. 187678 April 10, 2013
SPOUSES IGNACIO F. JUICO and ALICE P. JUICO, Petitioners,

vs.
CHINA BANKING CORPORATION, Respondent.
DECISION
VILLARAMA, JR., J.:
Before us is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as
amended, assailing the February 20, 2009 Decision 1 and April 27, 2009 Resolution 2 of the Court of
Appeals (CA) in CA G.R. CV No. 80338. The CA affirmed the April 14, 2003 Decision 3 of the Regional Trial
Court (RTC) of Makati City, Branch 147.
The factual antecedents:
Spouses Ignacio F. Juico and Alice P. Juico (petitioners) obtained a loan from China Banking Corporation
(respondent) as evidenced by two Promissory Notes both dated October 6, 1998 and numbered 507-
001051-34 and 507-001052-0,5 for the sums of !!6,216,000 and P4, 139,000, respectively. The loan was
secured by a Real Estate Mortgage (REM) over petitioners property located at 49 Greensville St., White
Plains, Quezon City covered by Transfer Certificate of Title (TCT) No. RT-103568 (167394) PR-41208 6 of
the Register of Deeds of Quezon City.
When petitioners failed to pay the monthly amortizations due, respondent demanded the full payment of
the outstanding balance with accrued monthly interests. On September 5, 2000, petitioners received
respondents last demand letter7 dated August 29, 2000.
As of February 23, 2001, the amount due on the two promissory notes totaled P19,201,776.63
representing the principal, interests, penalties and attorneys fees. On the same day, the mortgaged
property was sold at public auction, with respondent as highest bidder for the amount of P10,300,000.
On May 8, 2001, petitioners received8 a demand letter9 dated May 2, 2001 from respondent for the
payment of P8,901,776.63, the amount of deficiency after applying the proceeds of the foreclosure sale to
the mortgage debt. As its demand remained unheeded, respondent filed a collection suit in the trial court.
In its Complaint,10 respondent prayed that judgment be rendered ordering the petitioners to pay jointly and
severally: (1) P8,901,776.63 representing the amount of deficiency, plus interests at the legal rate, from
February 23, 2001 until fully paid; (2) an additional amount equivalent to 1/10 of 1% per day of the total
amount, until fully paid, as penalty; (3) an amount equivalent to 10% of the foregoing amounts as
attorneys fees; and (4) expenses of litigation and costs of suit.
In their Answer,11 petitioners admitted the existence of the debt but interposed, by way of special and
affirmative defense, that the complaint states no cause of action considering that the principal of the loan
was already paid when the mortgaged property was extrajudicially foreclosed and sold for P10,300,000.
Petitioners contended that should they be held liable for any deficiency, it should be only for P55,000
representing the difference between the total outstanding obligation of P10,355,000 and the bid price
of P10,300,000. Petitioners also argued that even assuming there is a cause of action, such deficiency
cannot be enforced by respondent because it consists only of the penalty and/or compounded interest on
the accrued interest which is generally not favored under the Civil Code. By way of counterclaim,
petitioners prayed that respondent be ordered to pay P100,000 in attorneys fees and costs of suit.
At the trial, respondent presented Ms. Annabelle Cokai Yu, its Senior Loans Assistant, as witness. She
testified that she handled the account of petitioners and assisted them in processing their loan application.
She called them monthly to inform them of the prevailing rates to be used in computing interest due on
their loan. As of the date of the public auction, petitioners outstanding balance
was P19,201,776.6312 based on the following statement of account which she prepared:
STATEMENT OF ACCOUNT
As of FEBRUARY 23, 2001
IGNACIO F. JUICO
PN# 507-0010520 due on 04-07-2004

1wphi1
Principal balance of PN# 5070010520. . . . . . . . . . . . . . 4,139,000.00
Interest on P4,139,000.00 fr. 04-Nov-99
04-Nov-2000 366 days @ 15.00%. . . . . . . . . . . . . . . . . 622,550.96
04-Dec-2000 30 days @ 24.50%. . . . . . . . . . . . . . . . . . 83,346.99
Interest on P4,139,000.00 fr. 04-Dec-2000
04-Jan-2001 31 days @ 21.50%. . . . . . . . . . . . . . . . . . . 75,579.27
Interest on P4,139,000.00 fr. 04-Jan-2001
04-Feb-2001 31 days @ 19.50%. . . . . . . . . . . . . . . . . . 68,548.64
Interest on P4,139,000.00 fr. 04-Feb-2001
23-Feb-2001 19 days @ 18.00%. . . . . . . . . . . . . . . . . . 38,781.86
Penalty charge @ 1/10 of 1% of the total amount due

(P4,139,000.00 from 11-04-99 to 02-23-2001 @
1/10 of 1% per day). . . . . . . . . . . . . . . . . 1,974,303.00
Sub-total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,002,110.73
PN# 507-0010513 due on 04-07-2004

Principal balance of PN# 5070010513. . . . . . . . . . . . . . 6,216,000.00
Interest on P6,216,000.00 fr. 06-Oct-99

04-Nov-2000 395 days @ 15.00%. . . . . . . . . . . . . . . . . 1,009,035.62

04-Dec-2000 30 days @ 24.50%. . . . . . . . . . . . . . . . . . 125,171.51
Interest on P6,216,000.00 fr. 04-Dec-2000

04-Jan-2001 31 days @ 21.50%. . . . . . . . . . . . . . . . . . . 113,505.86
Interest on P6,216,000.00 fr. 04-Jan-2001

04-Feb-2001 31 days @ 19.50%. . . . . . . . . . . . . . . . . . 102,947.18
Interest on P6,216,000.00 fr. 04-Feb-2001

23-Feb-2001 19 days @ 18.00%. . . . . . . . . . . . . . . . . . 58,243.07
Penalty charge @ 1/10 of 1% of the total amount due

(P6,216,000.00 from 10-06-99 to 02-23-2001 @
1/10 of 1% per day). . . . . . . . . . . . . . . . . 3,145,296.00
Subtotal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,770,199.23
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,772,309.96
Less: A/P applied to balance of principal (55,000.00)
Less: Accounts payable L & D (261,149.39) 17,456,160.57
Add: 10% Attorneys Fee 1,745,616.06
Total amount due 19,201,776.63
Less: Bid Price 10,300,000.00
TOTAL DEFICIENCY AMOUNT AS OF

FEB. 23, 2001 8,901,776.63 13
Petitioners thereafter received a demand letter 14 dated May 2, 2001 from respondents counsel for the
deficiency amount of P8,901,776.63. Ms. Yu further testified that based on the Statement of
Account15 dated March 15, 2002 which she prepared, the outstanding balance of petitioners
was P15,190,961.48.16
On cross-examination, Ms. Yu reiterated that the interest rate changes every month based on the
prevailing market rate and she notified petitioners of the prevailing rate by calling them monthly before
their account becomes past due. When asked if there was any written authority from petitioners for
respondent to increase the interest rate unilaterally, she answered that petitioners signed a promissory
note indicating that they agreed to pay interest at the prevailing rate. 17
Petitioner Ignacio F. Juico testified that prior to the release of the loan, he was required to sign a blank
promissory note and was informed that the interest rate on the loan will be based on prevailing market
rates. Every month, respondent informs him by telephone of the prevailing interest rate. At first, he was
able to pay his monthly amortizations but when he started to incur delay in his payments due to the
financial crisis, respondent pressured him to pay in full, including charges and interests for the delay. His
property was eventually foreclosed and was sold at public auction. 18
On cross-examination, petitioner testified that he is a Doctor of Medicine and also engaged in the
business of distributing medical supplies. He admitted having read the promissory notes and that he is
aware of his obligation under them before he signed the same. 19
In its decision, the RTC ruled in favor of respondent. The fallo of the RTC decision reads:
WHEREFORE, premises considered, the Complaint is hereby sustained, and Judgment is rendered
ordering herein defendants to pay jointly and severally to plaintiff, the following:
1. P8,901,776.63 representing the amount of the deficiency owing to the plaintiff, plus interest
thereon at the legal rate after February 23, 2001;
2. An amount equivalent to 10% of the total amount due as and for attorneys fees, there being
stipulation therefor in the promissory notes;
3. Costs of suit.
SO ORDERED.20
The trial court agreed with respondent that when the mortgaged property was sold at public auction on
February 23, 2001 for P10,300,000 there remained a balance of P8,901,776.63 since before foreclosure,
the total amount due on the two promissory notes aggregated to P19,201,776.63 inclusive of principal,
interests, penalties and attorneys fees. It ruled that the amount realized at the auction sale was applied to
the interest, conformably with Article 1253 of the Civil Code which provides that if the debt produces
interest, payment of the principal shall not be deemed to have been made until the interests have been
covered. This being the case, petitioners principal obligation subsists but at a reduced amount
of P8,901,776.63.
The trial court further held that Ignacios 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. It also ruled
that considering the substantial amount involved, it is unbelievable that petitioners threw all caution to the
wind and simply signed the documents without reading and understanding the contents thereof. It noted
that the promissory notes, including the terms and conditions, are pro forma and what appears to have
been left in blank were the promissory note number, date of the instrument, due date, amount of loan, and
condition that interest will be at the prevailing rates. All of these details, the trial court added, were within
the knowledge of the petitioners.
When the case was elevated to the CA, the latter affirmed the trial courts decision. The CA recognized
respondents right to claim the deficiency from the debtor where the proceeds of the sale in an
extrajudicial foreclosure of mortgage are insufficient to cover the amount of the debt. Also, it found as valid
the stipulation in the promissory notes that interest will be based on the prevailing rate. It noted that the
parties agreed on the interest rate which was not unilaterally imposed by the bank but was the rate offered
daily by all commercial banks as approved by the Monetary Board. Having signed the promissory notes,
the CA ruled that petitioners are bound by the stipulations contained therein.
Petitioners are now before this Court raising the sole issue of whether the interest rates imposed upon
them by respondent are valid. Petitioners contend that the interest rates imposed by respondent are not
valid as they were not by virtue of any law or Bangko Sentral ng Pilipinas (BSP) regulation or any
regulation that was passed by an appropriate government entity. They insist that the interest rates were
unilaterally imposed by the bank and thus violate the principle of mutuality of contracts. They argue that
the escalation clause in the promissory notes does not give respondent the unbridled authority to increase
the interest rate unilaterally. Any change must be mutually agreed upon.
Respondent, for its part, points out that petitioners failed to show that their case falls under any of the
exceptions wherein findings of fact of the CA may be reviewed by this Court. It contends that an inquiry as
to whether the interest rates imposed on the loans of petitioners were supported by appropriate
regulations from a government agency or the Central Bank requires a reevaluation of the evidence on
records. Thus, the Court would in effect, be confronted with a factual and not a legal issue.
The appeal is partly meritorious.
The principle of mutuality of contracts is expressed in Article 1308 of the Civil Code, which provides:
Article 1308. 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 contract which appears to be
heavily weighed in favor of one of the parties so as to lead to an unconscionable result is void. Any
stipulation regarding the validity or compliance of the contract which is left solely to the will of one of the
parties, is likewise, invalid.21
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 which are valid stipulations in commercial contracts to maintain fiscal stability and to retain the
value of money in long term contracts.22 Hence, such stipulations are not void per se. 23
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.24 Thus, this Court has previously nullified the unilateral determination and imposition by creditor
banks of increases in the rate of interest provided in loan contracts. 25
In Banco Filipino Savings & Mortgage Bank v. Navarro, 26 the escalation clause stated: "I/We hereby
authorize Banco Filipino to correspondingly increase the interest rate stipulated in this contract without
advance notice to me/us in the event a law should be enacted increasing the lawful rates of interest that
may be charged on this particular kind of loan." While escalation clauses in general are considered valid,
we ruled that Banco Filipino may not increase the interest on respondent borrowers loan, pursuant to
Circular No. 494 issued by the Monetary Board on January 2, 1976, because said circular is not a law
although it has the force and effect of law and the escalation clause has no provision for reduction of the
stipulated interest "in the event that the applicable maximum rate of interest is reduced by law or by the
Monetary Board" (de-escalation clause).
Subsequently, in Insular Bank of Asia and America v. Spouses Salazar 27 we reiterated that escalation
clauses are valid stipulations but their enforceability are subject to certain conditions. The increase of
interest rate from 19% to 21% per annum made by petitioner bank was disallowed because it did not
comply with the guidelines adopted by the Monetary Board to govern interest rate adjustments by banks
and non-banks performing quasi-banking functions.
In the 1991 case of Philippine National Bank v. Court of Appeals, 28 the promissory notes authorized PNB
to increase the stipulated interest per annum "within the limits allowed by law at any time depending on
whatever policy PNB may adopt in the future; Provided, that, the interest rate on this note shall be
correspondingly decreased in the event that the applicable maximum interest rate is reduced by law or by
the Monetary Board." This Court declared the increases (from 18% to 32%, then to 41% and then to 48%)
unilaterally imposed by PNB to be in violation of the principle of mutuality essential in contracts. 29
A similar ruling was made in a 1994 case 30 also involving PNB where the credit agreement provided that
"PNB reserves the right to increase the interest rate within the limits allowed by law at any time depending
on whatever policy it may adopt in the future: Provided, that the interest rate on this accommodation shall
be correspondingly decreased in the event that the applicable maximum interest is reduced by law or by
the Monetary Board x x x".
Again, in 1996, the Court invalidated escalation clauses authorizing PNB to raise the stipulated interest
rate at any time without notice, within the limits allowed by law. The Court observed that there was no
attempt made by PNB to secure the conformity of respondent borrower to the successive increases in the
interest rate. The borrowers assent to the increases cannot be implied from their lack of response to the
letters sent by PNB, informing them of the increases. 31
In the more recent case of Philippine Savings Bank v. Castillo, 32 we sustained the CA in declaring as
unreasonable the following escalation clause: "The rate of interest and/or bank charges herein stipulated,
during the terms of this promissory note, its extensions, renewals or other modifications, may be
increased, decreased or otherwise changed from time to time within the rate of interest and charges
allowed under present or future law(s) and/or government regulation(s) as the PSBank may prescribe for
its debtors." Clearly, the increase or decrease of interest rates under such clause hinges solely on the
discretion of petitioner as it does not require the conformity of the maker before a new interest rate could
be enforced. We also said that respondents assent to the modifications in the interest rates cannot be
implied from their lack of response to the memos sent by petitioner, informing them of the amendments,
nor from the letters requesting for reduction of the rates. Thus:
the validity of the escalation clause did not give petitioner the unbridled right to unilaterally adjust
interest rates. The adjustment should have still been subjected to the mutual agreement of the contracting
parties. In light of the absence of consent on the part of respondents to the modifications in the interest
rates, the adjusted rates cannot bind them notwithstanding the inclusion of a de-escalation clause in the
loan agreement.33
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.34While a ceiling on interest rates under the Usury Law was already
lifted under Central Bank Circular No. 905, nothing therein "grants lenders carte blanche authority to raise
interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their
assets."35
The two promissory notes signed by petitioners provide:
I/We hereby authorize the CHINA BANKING CORPORATION to increase or decrease as the case may
be, the interest rate/service charge presently stipulated in this note without any advance notice to me/us in
the event a law or Central Bank regulation is passed or promulgated by the Central Bank of the
Philippines or appropriate government entities, increasing or decreasing such interest rate or service
charge.36
Such escalation clause is similar to that involved in the case of Floirendo, Jr. v. Metropolitan Bank and
Trust Company37 where this Court ruled:
The provision in the promissory note authorizing respondent bank to increase, decrease or otherwise
change from time to time the rate of interest and/or bank charges "without advance notice" to petitioner,
"in the event of change in the interest rate prescribed by law or the Monetary Board of the Central Bank of
the Philippines," does not give respondent bank unrestrained freedom to charge any rate other than that
which was agreed upon. Here, the monthly upward/downward adjustment of interest rate is left to the will
of respondent bank alone. It violates the essence of mutuality of the contract. 38
More recently in Solidbank Corporation v. Permanent Homes, Incorporated, 39 we upheld as valid an

escalation clause which required a written notice to and conformity by the borrower to the increased
interest rate. Thus:
The Usury Law had been rendered legally ineffective by Resolution No. 224 dated 3 December 1982 of
the Monetary Board of the Central Bank, and later by Central Bank Circular No. 905 which took effect on 1
January 1983. These circulars removed the ceiling on interest rates for secured and unsecured loans
regardless of maturity. The effect of these circulars is to allow the parties to agree on any interest that may
be charged on a loan. The virtual repeal of the Usury Law is within the range of judicial notice which
courts are bound to take into account. Although interest rates are no longer subject to a ceiling, the lender
still does not have an unbridled license to impose increased interest rates. The lender and the borrower
should agree on the imposed rate, and such imposed rate should be in writing.
The three promissory notes between Solidbank and Permanent all contain the following provisions:
"5. We/I irrevocably authorize Solidbank to increase or decrease at any time the interest rate agreed in
this Note or Loan on the basis of, among others, prevailing rates in the local or international capital
markets. For this purpose, We/I authorize Solidbank to debit any deposit or placement account with
Solidbank belonging to any one of us. The adjustment of the interest rate shall be effective from the date
indicated in the written notice sent to us by the bank, or if no date is indicated, from the time the notice
was sent.
6. Should We/I disagree to the interest rate adjustment, We/I shall prepay all amounts due under this Note
or Loan within thirty (30) days from the receipt by anyone of us of the written notice. Otherwise, We/I shall
be deemed to have given our consent to the interest rate adjustment."
The stipulations on interest rate repricing are valid because (1) the parties mutually agreed on said
stipulations; (2) repricing takes effect only upon Solidbanks written notice to Permanent of the new
interest rate; and (3) Permanent has the option to prepay its loan if Permanent and Solidbank do not
agree on the new interest rate. The phrases "irrevocably authorize," "at any time" and "adjustment of the
interest rate shall be effective from the date indicated in the written notice sent to us by the bank, or if no
date is indicated, from the time the notice was sent," emphasize that Permanent should receive a written
notice from Solidbank as a condition for the adjustment of the interest rates. (Emphasis supplied.)
In this case, the trial and appellate courts, in upholding the validity of the escalation clause, underscored
the fact that there was actually no fixed rate of interest stipulated in the promissory notes as this was
made dependent on prevailing rates in the market. The subject promissory notes contained the following
condition written after the first paragraph:
With one year grace period on principal and thereafter payable in 54 equal monthly instalments to start on
the second year. Interest at the prevailing rates payable quarterly in arrears. 40
In Polotan, Sr. v. CA (Eleventh Div.),41 petitioner cardholder assailed the trial and appellate courts in ruling
for the validity of the escalation clause in the Cardholders Agreement. On petitioners contention that the
interest rate was unilaterally imposed and based on the standards and rate formulated solely by
respondent credit card company, we held:
The contractual provision in question states that "if there occurs any change in the prevailing market rates,
the new interest rate shall be the guiding rate in computing the interest due on the outstanding obligation
without need of serving notice to the Cardholder other than the required posting on the monthly statement
served to the Cardholder." This could not be considered an escalation clause for the reason that it neither
states an increase nor a decrease in interest rate. Said clause simply states that the interest rate should
be based on the prevailing market rate.
Interpreting it differently, while said clause does not expressly stipulate a reduction in interest rate, it
nevertheless provides a leeway for the interest rate to be reduced in case the prevailing market rates
dictate its reduction.
Admittedly, the second paragraph of the questioned proviso which provides that "the Cardholder hereby
authorizes Security Diners to correspondingly increase the rate of such interest in the event of changes in
prevailing market rates x x x" is an escalation clause. However, it cannot be said to be dependent solely
on the will of private respondent as it is also dependent on the prevailing market rates.
Escalation clauses are not basically wrong or legally objectionable as long as they are not solely
potestative but based on reasonable and valid grounds. Obviously, the fluctuation in the market rates is
beyond the control of private respondent.42 (Emphasis supplied.)
In interpreting a contract, its provisions should not be read in isolation but in relation to each other and in
their entirety so as to render them effective, having in mind the intention of the parties and the purpose to
be achieved. The various stipulations of a contract shall be interpreted together, attributing to the doubtful
ones that sense which may result from all of them taken jointly.43
Here, the escalation clause in the promissory notes authorizing the respondent to adjust the rate of
interest on the basis of a law or regulation issued by the Central Bank of the Philippines, should be read
together with the statement after the first paragraph where no rate of interest was fixed as it would be
based on prevailing market rates. While the latter is not strictly an escalation clause, its clear import was
that interest rates would vary as determined by prevailing market rates. Evidently, the parties intended the
interest on petitioners loan, including any upward or downward adjustment, to be determined by the
prevailing market rates and not dictated by respondents policy. It may also be mentioned that since the
deregulation of bank rates in 1983, the Central Bank has shifted to a market-oriented interest rate policy. 44
There is no indication that petitioners were coerced into agreeing with the foregoing provisions of the
promissory notes. In fact, petitioner Ignacio, a physician engaged in the medical supply business,
admitted having understood his obligations before signing them. At no time did petitioners protest the new
rates imposed on their loan even when their property was foreclosed by respondent.
This notwithstanding, we hold that the escalation clause 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. Respondents 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.45
Modifications in the rate of interest for loans pursuant to an escalation clause must be the result of an
agreement between the parties. Unless such important change in the contract terms is mutually agreed
upon, it has no binding effect.46 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 Banks unilateral
increases in the interest rates from 15% 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, 1999 to 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. 1wphi1
Petitioners Statement of Account, as of February 23, 2001, the date of the foreclosure proceedings,
should thus be modified as follows:
Principal P10,355,000.00
Interest at 15% per annum

P10,355,000 x .15 x 477 days/365 days 2,029,863.70
Penalty at 12% per annum 1,623 ,890. 96
P10,355,000 x .12 x 477days/365 days
Sub-Total 14,008,754.66
Less: A/P applied to balance of principal (55,000.00)
Less: Accounts payable L & D (261,149.39)
13,692,605.27
Add: Attorney's Fees 1,369,260.53
Total Amount Due 15,061,865.79
Less: Bid Price 10,300,000.00
TOTAL DEFICIENCY AMOUNT 4,761,865.79
WHEREFORE, the petition for review on certiorari is PARTLY GRANTED. The February 20, 2009
Decision and April 27, 2009 Resolution of the Court of Appeals in CA G.R. CV No. 80338 are hereby
MODIFIED. Petitioners Spouses Ignacio F. Juico and Alice P. Juico are hereby ORDERED to pay jointly
and severally respondent China Banking Corporation P4, 7 61 ,865. 79 representing the amount of
deficiency inclusive of interest, penalty charge and attorney's fees. Said amount shall bear interest at 12%
per annum, reckoned from the time of the filing of the complaint until its full satisfaction.
No pronouncement as to costs.
ART. 1308 THE CONRACTS MUST BINDS BOTH CONTRACTING PARTIES; VALIDITY OR
COMPLIANCE CANNOT BE LEFT TOT THE WILL OF ONE OF THEM.
PRINCIPLE: MUTUALITY OF CONTRACT - Purpose is to nullify a contract containing a condition that

makes its fulfillment or pre-termination dependent exclusively upon the uncontrolled will of one
of the contracting parties.
VIOD: Contract contains condition that makes its fulfillment or extinguishment depend
exclusively upon the uncontrolled will of one of them.
RULE: No party can renounce or violate the law of the contract unilaterally or without the consent
of the other.

Arellano University Case Rules on Validity of Scholarship Contracts

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Arellano University Case Rules on Validity of Scholarship Contracts

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FEBRUARY 6, 2017 CASES 188-197 PG.

G.R. No. L-15127 May 30, 1961

EMETERIO CUI, plaintiff-appellant,

G.A.S. Sipin, Jr., for plaintiff-appellant.

In the language of the decision appealed from:

(Sgd.) Emeterio Cui".

G.R. No. L-82499 October 13, 1989

Samson S. Alcantara for petitioners.

Law Firm of Raymundo A. Armovit for private respondents.

ALL STUDENTS, PLEASE BE INFORMED OF THE TOTAL CLOSURE OF CAPITOL MEDICAL

HERE IS A PARTIAL LIST OF SCHOOLS WILLING TO ACCEPT STUDENTS TRANSFEREES:

2. DE OCAMPO COLLEGE OF NURSING

3. FATIMA COLLEGE OF NURSING

4. ST. JUDE COLLEGE OF NURSING

5. DE LOS SANTOS COLLEGE OF NURSING

1. FAMILY CLINIC COLLEGE OF NURSING

2. CMC COLLEGE ADMINISTRATION

(p. 131, Rollo.)

CAPITOL MEDICAL CENTER, INC.

October 20, 1987

The Honorable Lourdes R. Quisumbing

Secretary of Education Culture and Sports

Through the Regional Director

Mrs. Modesta Boquiren

National Capital Region

Dear Madam Secretary:

Very truly yours,

(SGD) THELMA NAVARRETE-CLEMENTE

M.D., M.H.A., Chairman of the Board and President

(p. 269, Rollo; italics ours.)

October 29, 1987

The Honorable Lourdes R. Quisumbing

Secretary of Education, Culture and Sports

Dear Madam Secretary:

The decision as embodied in the corporate resolution contemplates in no uncertain terms

1. Mismanagement of the school administration and mishandling of corporate

2. Failure of the school to produce the quality of education that may be

3. The increasing costs of operation and maintenance of school facilities.

Very truly yours,

(SGD) THELMA NAVARRETE-CLEMENTE, M.D., M.H.A.

Chairman, Board of Directors

(p. 270-271, Rollo; emphasis supplied.)

The Chairman of the Board and President

CAPITOL MEDICAL CENTER COLLEGE

Sct. Magbanua Cor. Panay Avenue, Quezon City

June 1988 - No 1st year

June 1989 - No 2nd year

June 1990 - No 3rd year

June 1991 - No 4th year

Very truly yours,

(p. 256, Rollo; emphasis supplied.)

The petition for review has merit.

The questions that we might ask are:

G.R. No. L-9506 June 30, 1956

SY SUAN and PRICE INCORPORATED, petitioners,

Jose C. Reyes for petitioners.

G.R. No. L-11980 February 14, 1959

MATHEW S. TEE, plaintiff-appellant,

Diokno and Sison for appellant.

G.R. No. L-20175 October 30, 1967

MARIA A. GARCIA, ET AL., petitioners,

Picazo and Agcaoili for petitioners.