VIII. Obligations and Contracts

PRACTICE QUESTIONS (part 1 of 5)

Qtn: FBDC entered into a Trade Contract with MS Maxco Company, Inc. (MS Maxco) for the execution of the structural and partial architectural works of one of its condominium projects. The Trade Contract provided that MS Maxco is prohibited from assigning or transferring any of its rights, obligations, or liabilities under the said Contract without the written consent of FBDC received a letter from Fong’s counsel, informing it that MS Maxco had already assigned its receivables from FBDC to him. Despite Fong’s repeated requests, FBDC refused to deliver to Fong the amount assigned by MS Maxco. Is FBDC bound by the assignment between MS Maxco and Fong?

Ans. NO. Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. The Court finds that MS Maxco, as the Trade Contractor, cannot assign or transfer any of its rights, obligations, or liabilities under the Trade Contract without the written consent of FBDC. FBDC cannot, therefore, be bound by the unilateral assignments of MS Maxco of its receivables from FBDC to Fong. (Fort Bonifacio Dev. Corp. v. Fong, G.R. No. 209370, 25 Mar. 2015)

Qtn: Great Harvest hired Tan to transport 430 bags of soya beans from Tacoma to Selecta Feeds. At Selecta Feeds, however, the shipment was rejected. The truck and its shipment never reached Great Harvest's warehouse. Great Harvest asked Tan about the missing delivery but to no avail. Is Annie Tan liable for the lost bags of soya beans?

Ans: YES, Annie Tan should be liable. Common carriers are mandated to internalize or shoulder the costs under the contracts of carriage. This is so because a contract of carriage is structured so that passengers or shippers surrender total control over their persons or goods to common carriers, fully trusting that the latter will safely and timely deliver them to their destination. Here, the petitioner is a common carrier obligated to exercise extraordinary diligence over the goods entrusted to her. Her responsibility began from the time she received the soya beans from the respondent's broker and would only cease after she has delivered them to the consignee or any person with the right to receive them. (Tan v. Great Harvest Enterprises, Inc., G.R. No. 220400, 20 Mar. 2019)

Qtn: Eliza, a condo unit owner, delivered thru FedEx a check to Sison, who will be paying in behalf of Eliza, however, Sison did not receive the package. Later, it was found out that the check was delivered to Sison’s neighbor, but there was no signed receipt. Hence, Eliza sent a demand letter to FedEx, the delivery courier, for payment of damages since the check was supposed to be used to pay the balance for the condo unit, which was foreclosed since it was unpaid. FedEx refused, and thus Eliza filed a complaint for damages with the Regional Trial Court. Is FedEx liable?

Ans: YES. The Civil Code mandates common carriers to observe extraordinary diligence in caring for the goods they are transporting. Common carriers must ascertain the identity of the recipient. Failing to deliver shipment to the designated recipient amounts to a failure to deliver. The shipment shall then be considered lost, and liability for this loss ensues. FedEx is unable to prove that it exercised extraordinary diligence in ensuring delivery of the package to its designated consignee. It claimed to have made a delivery but it even admits that it was not to the designated consignee. (Federal Express Corp. v. Antonino, G.R. No. 199455, 27 June 2018)

NOTE: Banks are expected to exercise higher degree of diligence in their dealings, including those involving lands. Banks may not rely simply on the face of the certificate of title. (LBP v. Musni, G.R. No. 206343, 22 Feb. 2017)

Qtn: American Express Card (AMEX) failed to approve Pantaleon’s credit card purchases, which urged the latter to commence a complaint for moral and exemplary damages against AMEX. He said that he and his family experienced inconvenience and humiliation due to the delays in credit authorization during his vacation trip in Amsterdam and in the United States. Did AMEX commit a breach of its obligations to Pantaleon?

Ans: NO. On reconsideration, the Supreme Court rejected liability based on the authorization delays described. AMEX did not undertake to approve credit card purchases within a specific period, and the delays did not establish a breach of its obligation or bad faith warranting damages. The contrary ruling of 08 May 2009 was superseded. (Pantaleon v. American Express International, Inc., G.R. No. 174269, resolution on reconsideration, 03 Dec. 2010)

Qtn: Gotesco obtained from Solidbank a term loan of ₱300 million. To secure the loan, Gotesco was required to execute a Mortgage Trust Indenture naming Solidbank-Trust Division as Trustee. The Indenture obliged Gotesco to mortgage several parcels of land in favor of Solidbank. When the loan was about to mature, Gotesco found it difficult to meet its obligation because of the 1997 Asian Financial Crisis. Solidbank sent a demand letter to Gotesco as the loan became due. Despite having received this demand letter, Gotesco failed to pay the outstanding obligation. Solidbank then filed a Petition for the Extrajudicial Foreclosure of the lot. Gotesco filed a complaint before the RTC for Annulment of Foreclosure Proceedings, Specific Performance, and Damages against Solidbank. Gotesco assailed the validity of the foreclosure proceeding, claiming that it was premature and without legal basis. Was the foreclosure premature?

Ans: NO. Petitioner defaulted in its obligation. Thus, respondent was within its rights to foreclose the property. Under Art. 1169 of the NCC, a party obliged to deliver or to do something generally incurs delay upon judicial or extrajudicial demand, unless an exception dispenses with demand. In Social Security System v. Moonwalk Development & Housing Corp. (G.R. No. 73345, 07 Apr. 1993), this Court enumerated the elements of default:

In order that the debtor may be in default, it is necessary that the following requisites be present: (1) that the obligation be demandable and already liquidated; (2) that the debtor delays performance; and (3) that the creditor requires performance judicially or extrajudicially, unless demand is unnecessary under an exception in Art. 1169 of the NCC. Default generally begins from the moment the creditor demands the performance of the obligation. (Gotesco Properties, Inc. v. Solid Bank Corporation, G.R. No. 209452, 26 July 2017)

Qtn: “A” borrowed P2,000 from “B” on 01 Dec. 1956. He executed a promissory note promising to pay the indebtedness on 01 Dec. 1956. Upon the arrival of the designated date for payment, is demand necessary in order that “A” shall incur delay?

Ans: YES. In the first two paragraphs of Art. 1169 of the NCC, it is not sufficient that the law or obligation fixes a date for performance. It must further state expressly that after the period lapses, default will commence. (Rivera v. Sps. Chua, G.R. No. 184472, 14 Jan. 2015)

Qtn: Camp John Hay Development entered into a Contractor's Agreement with Charter Chemical. Although the Contractor's Agreement contained no date of the units' turnover, it allowed Charter Chemical to choose the units for offsetting under an offsetting scheme against the 2 Units chosen by Charter Chemical.

The contract price was P13,239,734.16, for which Camp John Hay Development paid P7,339,734.16. The balance of P5,900,000.00 was ought to be settled by offsetting the price of the two studio units. Camp John Hay Development had initially estimated that the construction would be completed by 2006. Because of its failure to follow this timetable, the Camp John Hay Suites was estimated to be completed by 2012.

Due to the subsisting construction delay, Charter Chemical, through counsel, wrote Camp John Hay Development, demanding that it transfer the units or pay the values of these units in the sum of P6,996,517.48. Charter Chemical filed before the Construction Industry Arbitration Commission a Request for Arbitration. The arbitral tribunal ruled that Charter Chemical was entitled to its claim for the value of the two (2) units because Camp John Hay Development failed to deliver the units within the targeted completion date. Is the remedy of rescission proper?

Ans: YES. Rescission on account of breach of reciprocal obligations is provided under Art. 1191 of the NCC. The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible. (Camp John Hay Development Corporation v. Charter Chemical and Coating Corporation, G.R. No. 19884, 07 Aug. 2019)

Q: On 16 May 1998, Wellex and U-Land entered into a Memorandum of Agreement (First Memorandum of Agreement) to expand their respective airline operations in Asia. The First Memorandum of Agreement stated that within 40 days from its execution date, Wellex and U- Land would execute a share purchase agreement covering U-Land’s acquisition of the shares of stock of both APIC (APIC shares) and PEC (PEC shares).

In this share purchase agreement, U-Land would purchase from Wellex its APIC shares and PEC shares. Both parties agreed that the purchase price of APIC shares and PEC shares would be paid upon the execution of the share purchase agreement and Wellex’s delivery of the stock certificates covering the shares of stock. The transfer of APIC shares and PEC shares to U- Land was conditioned on the full remittance of the final purchase price as reflected in the share purchase agreement.

Further, the transfer was conditioned on the approval of the Securities and Exchange Commission of the issuance of the shares of stock, and the approval by the Taiwanese government of U-Land’s acquisition of these shares of stock. Wellex and U-Land agreed that if they were unable to agree on the terms of the share purchase agreement and the joint development agreement within 40 days from signing, then the First Memorandum of Agreement would cease to be effective.

The 40-day period lapsed 25 June 1998. Wellex and U-Land were unable to enter into any share purchase agreement although drafts were exchanged between the two. Whether or not the rescission of the First Memorandum of Agreement can be subject of rescission?

A: YES, Respondent U-Land is praying for the rescission or resolution under Art. 1191 and not rescission under Art. 1381. The failure of one of the parties to comply with the reciprocal obligation allows the wronged party to seek the remedy of Art. 1191. The wronged party is entitled to rescission under Art. 1191 and even the payment of damages. It is a principal action precisely because it is a violation of the original prestation.

Art. 1381 and Art. 1383 pertains to rescission where creditors or even third persons not privy to the contract can file an action due to lesion or damage as a result of the contract.

Rescission or resolution under Art. 1191, therefore, is a principal remedy for substantial breach of a reciprocal obligation; unlike rescission under Art. 1381, it is not premised on lesion. Art. 1383 mandating that rescission be deemed a subsidiary action cannot be applicable to rescission or resolution under Art. 1191.

Thus, respondent U-Land correctly sought the principal relief of rescission or resolution under Art. 1191. The obligations of the parties gave rise to reciprocal prestations, which arose from the same cause: the desire of both parties to enter into a share purchase agreement that would allow both parties to expand their respective airline operations in the Philippines and other neighboring countries. (The Wellex Group, Inc. v. U-Land Airlines, Co., Ltd., G.R. No. 167519, 14 Jan. 2015)

Q: MIAA entered into a compromise agreement with ALA. MIAA failed to pay within the period stipulated. Thus, ALA filed a motion for execution to enforce its claim. MIAA filed a comment and attributed the delays to it being a government agency and to the Christmas rush. Is the delay of payment a fortuitous event?

A: NO. The act-of-God doctrine requires all human agencies to be excluded from creating the cause of the mischief. Such doctrine cannot be invoked to protect a person who has failed to take steps to forestall the possible adverse consequences of loss or injury. Since the delay in payment in the present case was partly a result of human participation – whether from active intervention or neglect – the whole occurrence was humanized and was therefore outside the ambit of a caso fortuito.

First, processing claims against the government are certainly not only foreseeable and expectable, but also dependent upon the human will. Second, the Christmas season is not a caso fortuito, but a regularly occurring event. Third, the occurrence of the Christmas season did not at all render impossible the normal fulfillment of the obligation. Fourth, MIAA cannot argue that it is free from any participation in the delay. It should have laid out on the compromise table the problems that would be caused by a deadline falling during the Christmas season. Furthermore, it should have explained to ALA the process involved in the payment of ALA’s claim. (MIAA v. Ala Industries Corp., G.R. No. 147349, 13 Feb. 2004)

Q: Kristina brought her diamond ring for cleaning to a jewelry shop that failed to fulfill its promise to return such ring in 01 Feb. 1999. Kristina went back to the shop on 06 Feb. 1999, but she was informed that the ring was stolen by a thief the night before. Kristina filed an action for damages against the jewelry shop, which put up the defense of force majeure. Will the action prosper or not? (2000 BAR)

A: On the stated facts, default cannot be based on a demand at the due date: none is stated. Under Art. 1169 of the NCC, Kristina must establish a demand before the loss or an exception dispensing with demand. Without an established prior default, the shop’s liability for the loss cannot rest on delay alone; its defense of force majeure must be assessed under Art. 1174 of the NCC.

Q: AB Corp entered into a contract with XY Corp for the construction of the research and laboratory facilities of the XY Corp. XY Corp paid 50% of the 10M contract price on the other hand AB agreed to complete the work for 18 months. After 17 months, work was only 45% completed as AB Corp experienced work slippage due to labor unrest. (2008 BAR)

(a) Can the labor unrest be considered a fortuitous event?

A: NO. Labor unrest is not a fortuitous event that will excuse AB Corp. from complying with its obligation of constructing the research and laboratory facilities of XY Corp. The labor unrest, which may even be attributed largely to AB Corp. itself, is not the direct cause of non-compliance by AB Corp. It is independent of its obligation. It does not excuse compliance with the obligation. (DBP v. Vda. De Moll, G.R. No. L-25802, 31 Jan. 1972) AB Corp. could have anticipated the labor unrest caused by delays in paying the laborer’s wages. The company could have hired additional laborers to make up for the work slowdown.

(b) Can XY Corp. unilaterally and immediately cancel the contract?

A: YES. XY Corp. may unilaterally cancel the obligation, but this is subject to the risk that the cancellation of the reciprocal obligation being challenged in court and if AB Corp. succeeds, then XY Corp. will be declared in default and be liable for damages.

(c) Must AB Corp. return the 50% down payment?

A: NO. Under the principle of quantum meruit, AB Corp. had the right to retain payment corresponding to his percentage of accomplishment less the amount of damages suffered by XY Corp. because of the delay or default.

Q: X, a dressmaker, accepted clothing materials from Karla to make two dresses for her. On the day X was supposed to deliver Karla’s dresses, X had an urgent matter to attend to and told Karla to deliver those the next day. That night, however, a robber broke into her shop and took everything, including Karla’s dresses. X claims she is not liable to deliver Karla’s dresses nor pay for the clothing materials considering she, herself, was a victim of the robbery, which was a fortuitous event, and over which she had no control. Do you agree? Why? (2015 BAR)

Ans: NO. The law provides that except when it is otherwise declared by stipulation, or when the law expressly provides, or when the nature of the obligation requires the assumption of risk, no person shall be liable for those events which could not be foreseen or which though foreseen were inevitable. (Art. 1174, NCC).

In this case, X’s liability cannot be based on delay merely because she missed the delivery date and postponed delivery: Art. 1169 of the NCC requires a demand by Karla or an exception dispensing with demand, neither of which is stated. Whether the robbery excuses liability depends on Art. 1174 of the NCC, including whether X exercised the diligence required of her. (Art. 1165, NCC)

Q: Sacramento Steel Corporation (SSC) executed five separate deeds of chattel mortgage constituted over various equipment for International Exchange Bank (IEB) which subsequently, SSC defaulted in the payment of its obligations. IEB’s demand for payment went unheeded. Meanwhile, Metropolitan Bank and Trust Company (Metro Bank) filed a motion for intervention as a creditor of SSC. Which it contends that the mortgage contracts between IEB and SSC were entered into to defraud the latter’s creditors. Thus, it prayed for the rescission of the chattel mortgaged executed by SSC in favor of IEB. Will the action to rescind the mortgage prosper?