Pacific Banking Corporation vs.

CA &
Oriental Assurance
Posted on September 9, 2015
Pacific Banking Corporation vs. CA & Oriental Assurance
[GR. No. L-41014 28 November 1988]

Facts: An open Fire Policy issued to Paramount Shirt Manufacturing for

Php61,000 on the following: stocks, materils, supplies, furniture, fixture,
machinery, equipment contained on the 1st to 3rd floors. Insurance is for a
year starting 21 OCTOBER 1964.

Paramount Shirt is debtor of Pacific Banking amounting to Php800,000.

Goods in policy were held in trust by Paramount for Pacific under thrust
receipts. Fire broke out on 4 January 1964.

Pacific sent letter of demand to Oriental. Insurance Adjuster of Oriental

notified Pacific to submit proof of loss pursuant to Policy Condition 11. Pacific
did not accede but asked Insurance Adjuster to verify records form Bureau of
Customs.

Pacific filed for sum of money against Oriental. Oriental alleged that Pacific
prematurely filed a suit, for neither filing a formal claim over loss pursuant to
policy nor submitting any proof of loss.

Trial court decided in favor of Pacific. Decision based on technicality. The

defense of lack of proof of loss and defects were raised for the 1st time. (On
presentation of evidences by Pacific, it was revealed there was violation of
Condition No.3, there were undeclared co-insurances under same property –
Wellington, Empire, Asian. The only declared co-insurances were Malayan,
South Sea, and Victory)

CA reversed decision. Concealment of other co-insurances is a

misrepresentation and can easily be fraud.

Issues: (1) Whether or not unrevealed con-insurances is a violation of Policy

Condition No.3

(2) Whether or not there was premature filing of action

Held: (1) Yes. Policy Condition 3 provides that the insured must give notice of
any insurance already in effect or subsequently be in effect covering same
property being insured. Failure to do so, the policy shall be forfeited.

Failure to reveal before the loss of the 3 other insurances is a clear

misrepresentation or a false declaration. The material fact was asked for but
was not revealed. Representations of facts are the foundations of the contract.
Pacific itself provided for the evidences in trial court that proved existence of
misrepresentation.

(2) Yes. Policy Condition 11 is a sine qua non requirement for maintaining
action. It requires that documents necessary to prove and estimate the loss
should be included with notice of loss. Pacific failed to submit formal claim of
loss with supporting documents but shifted the burden to the insurance
company. Failing to submit claim is failure for insurance company to reject
claim. Thus, a lack of cause of action to file suit.

Furthermore, the mortgage clause in the policy specifically provides that the
policy is invalidated by reasons of FRAUD, MISREPRESENTATION and
FRAUD. Concealment can easily be fraud or misrepresentation.

The insured – PARAMOUNT is not entitled to proceeds. Moreso, Pacific as

indorsee of policy is not entitled.

From LAW I.Q. for Law Students

NEWTON JISON v. CA, GR No. L-45349, 1988-08-15

Facts:
The instant petition for review of the decision of the Court of Appeals... issue of the validity
of the rescission of a contract to sell a subdivision lot due to the failure of the lot buyer to
pay monthly installments on their due dates and the forfeiture of the... amounts already
paid.
Petitioners... entered into a Contract to Sell with private respondent, Robert O. Phillips &
Sons. Inc.,... whereby the latter agreed to sell to the former a lot... for the agreed price... of
P55,000.00, with interest at 8% per annum, payable on an installment basis.
Pursuant to the contract, petitioners paid private respondents a down payment of
P11,000.00... a monthly installment of P533.85.
due to the failure of petitioners to build a house as provided in the contract, the stipulated
penalty of P5.00 per square meter was imposed to the effect that the monthly amortization
was increased to P707.24.
January 1, 1966, February 1, 1966 and March 1, 1966, petitioners failed to pay the monthly
installments due on said dates although petitioners subsequently paid the amounts due and
these were accepted by private respondent.
petitioners failed to pay... private respondent sent a letter (Ex... to petitioners calling their
attention to the fact that their account was four months overdue.
This... letter was followed up by another letter... where private respondent reminded
petitioner of the automatic rescission clause of the contract.
Petitioners eventually paid on March 1, 1967.
Petitioners again failed to pay the monthly installments
Thus, in a letter... private respondent returned petitioners' check and informed them that the
contract was cancelled... petitioners failed to pay the monthly installment due, thereby
making their account delinquent for three months.
petitioners tendered payment for all the installments already due but the tender was
refused.
Thus, petitioners... countered by filing a complaint for specific performance
Court of First Instance... and consigning the monthly... installments due with the court.
endered judgment in favor of private respondent, dismissing the complaint and declaring the
contract cancelled and all payments already made by... petitioner forfeited;
Not satisfied with the decision of the trial court, petitioners appealed to the Court of Appeals.
Court of Appeals... ffirmed the former's decision.
Thus, the instant petition for review.
Issues:
principal issue in this case is the legality of the rescission of the contract and the forfeiture
of the payments already made by petitioners.
Ruling:
In this case, private respondent has denied that rescission is justified and has resorted to
judicial action. It is now for the Court to determine whether resolution of the contract by
petitioner was warranted.
We hold that resolution by petitioners of the contract was ineffective and inoperative against
private respondent for lack of notice of resolution,... There is no denying that in the instant
case the resolution or rescission of the Contract to Sell was valid.
Neither can it be said that the cancellation of the contract was ineffective for failure of
private respondents to give petitioners notice thereof as petitioners were... informed by
private respondent that the contract was cancelled
While the resolution of the contract and the forfeiture of the amounts already paid are valid
and binding upon petitioners, the Court is convinced that the forfeiture of the amount of
P47,312.64, although it includes the accumulated fines for petitioners' failure to construct...
a house as required by the contract, is clearly iniquitous considering that the contract price
is only P55,000.00. The forfeiture of fifty percent (50%) of the amount already paid,
orP23,656.32, appears to be a fair settlement.
In arriving at this amount the Court gives weight... to the fact that although petitioners have
been delinquent in paying their amortizations several times to the prejudice of private
respondent, with the cancellation of the contract the possession of the lot reverts to private
respondent who is free to resell it to another party.
The Court's decision to reduce the amount forfeited finds support in the Civil Code. As
stated in paragraph 3 of the contract, in case the contract is cancelled, the amount already
paid shall be forfeited in favor of the vendor as liquidated damages. The Code provides
that... liquidated damages, whether intended as an indemnity or a penalty, shall be
equitably reduced if they are iniquitous or unconscionable [Art. 2227.]
Further, in obligation with a penal clause, the judge shall equitably reduce the penalty when
the principal obligation has been partly or irregularly complied with by the debtor
Private respondent is ordered to refund to petitioners the excess of P23,656.32 within thirty
(30) days from the date of finality of this judgment.
 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 83271 May 8, 1991

VICTOR D. YOUNG and JOHNNY YOUNG, petitioners,

vs.
COURT OF APPEALS, as nominal party respondent, and FAUSTA B. JAGDON, AMPARO R.
CASAFRANCA and MIGUELA R. JARIOL, respondents.

Ramires, Corro & Associates for petitioners.

Navarro Law Office collaborating counsel for petitioners.
Manuel V Trinidad and Efren V. Ramirez for private respondents.

CRUZ, J.:

On November 7, 1961, the estates of Humiliano Rodriguez and Timoteo Rodriguez leased to Victor
D. Young a parcel of land consisting of 840 square meters and located at Colon Street, Cebu City,
on which the latter's building, then known as Liza Theater (later renamed Nation Theater), was
standing. The contract of lease contained the following stipulation:

(8) That at the end of this lease contract or after the twenty-first (21st) year, the LESSORS
may purchase the LIZA THEATRE building (excluding movie projectors, equipment, and
other movables of the business of the LESSEE) at their option from the LESSEE by paying
the market value thereof if acceptable to the LESSEE; provided, however, that if the
LESSORS do not exercise this option to buy, the LESSEE shall continue for another period
of TWENTY-ONE (21) YEARS and the rental will be agreed upon by the parties with the
prevailing rental of properties near the premises as the basis.

On December 18, 1961, exactly the same contract was again executed by the same parties, except
that the estate of Humiliano Rodriguez was this time represented by Antolin A. Jariol, instead of
Miguela Rodriguez, as one of the signatories.

During the period of the lease, the two estates were finally settled, and the land leased to Victor
Young was distributed among Fausta R. Jagdon, Amparo R. Casafranca, Miguela R. Jariol, the
herein private respondents, and Teresita R. Natividad. Natividad later sold her share, consisting of
223 square meters, to Johnny Young, son of Victor D. Young.

On November 5, 1982, or two days before the expiration of the first contract, the heirs (except
Natividad) filed a suit for specific performance against Victor D. Young to compel him to sell to them
his theater-building for P 135,000.00. They tendered this amount with the clerk of court by way of
consignation. They also sued Victor Young's son, Johnny, as an unwilling co-plaintiff.

The defendants contended that the plaintiffs had no cause of action because the complaint was
premature. The lease contract of November 7, 1961, had been novated by the second lease contract
dated December 18, 1961; hence, the lease was terminated on December 18, 1982, and not
November 7, 1982. Moreover, even if the lease ended on November 7, 1982, the action brought by
the respondent on November 5, 1982, was still premature because the plaintiffs had not yet then
notified Victor Young of the exercise of their option. The lease expired without a valid exercise of the
option and the lease contract was thus renewed for another 21 years.

In his decision dated May 28, 1986, Judge Ramon Am. Torres of the Regional Trial Court of Cebu
found in favor of the plaintiffs and held that there was no novation. The second contract was
executed merely to substitute the correct signatory. As there was no express stipulation therein that
it superseded and replaced the first contract, the complaint was not prematurely filed.

The dispositive portion of the decision read:

WHEREFORE, judgment is hereby rendered:

(a) declaring the sum of P250,000.00 as the fair market value of the building known as the
Liza Theatre (Nation Theatre);

(b) declaring the plaintiffs as the legal owners of the said building when they shall have paid
the defendant Victor Young the sum of P250,000.00;

(c) ordering the defendant Victor Young to pay the plaintiffs the sum of P50,000.00 as moral
damages, Pl0,000.00 as attorney's fees for Fausta R. Jagdon and another P 10,000.00 as
attorney's fees for the other plaintiffs and costs of the suit;

(d) ordering the defendant Johnny Young to pay his proportionate share of the sum of
P250,000.00 as well as in the sum of P20,000.00 incurred by the plaintiffs as attorney's fees.

SO ORDERED.

On appeal, the decision was modified by the respondent court1 which, while agreeing that there was
no novation of the first contract, declared that the original period of the lease was extended by the
second contract. It did not find that the complaint was premature because although the action below
had been filed a month early, the question became moot and academic when Victor D. Young
declared in his letter dated November 9, 1982, his refusal to sell the building in question. This stand
was confirmed in the answer he filed on December 7, 1982, in which he rejected the plaintiffs' offer
of P135,000.00.

The respondent court also held that the plaintiffs' complaint could be considered originally as an
action for declaratory relief, which was later converted into an ordinary action for specific
performance.

It is this decision that is now questioned in this petition for review.

Law and jurisprudence on the concept and effects of novation are well settled in this jurisdiction.
In Caneda, Jr. v. Court of Appeals,2 we held:

Novation has been defined as the extinguishment of an obligation by a subsequent one

which terminates it, either by changing its object or principal conditions, referred to as
objective or real novation or by substituting a new debtor in place of the old one, or by
subrogating a third person to the rights of the creditor, also called as subjective or personal
 novation. But as explained by this Court, novation is never presumed; it must be explicitly
stated or there must be a manifest incompatibility between the old and the new obligations in
every aspect. The test of incompatibility between two obligations or contracts, is whether or
not they can stand together, each one having an independent existence. If they cannot, they
are incompatible, and the later obligation novates the first. (Emphasis supplied.)

A careful examination of the text of the two contracts will show that the only change introduced in the
second contract was the substitution by Antolin A. Jariol of his wife Miguela as signatory for the
estate of Humiliano Rodriguez. There was no express declaration in the second contract that it was
novating the first.

To determine if there was at least an implied novation because of a clear incompatibility between the
old and new contracts, we apply the rule that—

In order that there may be implied novation arising from incompatibility of the old and new
obligations, the change must refer to the object, the cause, or the principal conditions of the
obligation. In other words, there must be an essential change.

There was clearly no implied novation for lack of an essential change in the object, cause, or
principal conditions of the obligation. At most, the substitution of a signatory in the second contract
can be considered only an accidental modification which, according to Tolentino, "does not
extinguish an existing obligation. When the changes refer to secondary agreements, and not to the
object or principal conditions of the contract, there is no novation; such changes will produce
modifications of incidental facts, but will not extinguish the original obligation."3

Hence, he concludes, "it is not proper to consider an obligation novated by unimportant modifications
which do not alter its essence."4

There being no novation, the lease is properly deemed to have commenced on November 7, 1961,
and so ended 21 years later on November 7, 1982. It is significant that it was in fact from this first
date that Victor Young effectively started as lessee.

We do not agree with the respondent court that there was an extension of the period of lease in the
second contract. As earlier explained, the only reason for the execution of the second contract was
to change the signatory. There is no clear showing from the language of that contract that the parties
intended to extend the lease for one month.

According to Article 1370 of the new Civil Code:

If the terms of a contract are clear and leave no doubt upon the intention of the contracting
parties, the literal meaning of its stipulation shall control.

But although the lease contract was not novated or extended, the action for specific performance
was still premature because it was filed before the petitioner was given a chance to refuse the
option. The complaint was filed on November 5, 1982, and it was only on the following day, or on
November 6, 1982, that the plaintiffs informed Victor Young of their decision to buy the theater-
building. The tender of the purchase price is further proof of the fact that Victor Young was informed
of that decision only on November 6, 1982.
The action was premature not because the option was exercised prior to the expiration of the lease
but because the complaint was filed before the defendant could reject the lessors' offer. No right of
the plaintiffs had as yet been violated when they filed their complaint on November 5, 1982.

Since a "cause of action" requires, as essential elements, not only a legal right of the plaintiff
and a correlative obligation of the defendant but also "an act or omission of the defendant in
violation of said legal right," the cause of action does not accrue until the party obligated
refuses, expressly or impliedly, to comply with its duty.5

Therefore unless the plaintiff has a valid and subsisting cause of action at the time his action
is commenced, the defect cannot be cured or remedied by the acquisition or accrual of one
while the action is pending, and a supplemental complaint or an amendment setting up such
after-accrued cause of action is not permissible.6(Emphasis supplied.)

The Court adds that even if the case was prematurely filed, it did not follow that the option was not
properly exercised. An option may be exercised at any time before the expiration of the period
1âwphi1

agreed upon. An "option" is defined as a contract granting a person the privilege to buy or not to buy
certain objects at any time within the agreed period at a fixed price.7 It is settled that when the offer
has stated a fixed period for acceptance, the offeree may accept at any time until such period
expires.8

The ruling of the respondent court that the complaint for specific performance could be originally
regarded as a petition for declaratory relief is not acceptable. The Rules of Court provide that an
action for declaratory relief may be filed by "any person"9 and does not say it may be initiated by the
court itself motu proprio. More importantly, there was as yet no refusal or denial by the defendants of
the plaintiffs' claimed right to buy the theater-building when the complaint was filed on November 5,
1986. In fact, as previously noted, it was only the following day that the defendants were informed of
the plaintiffs' decision to exercise their option under the contract. Before that date, there was no
uncertainty about the said option to justify the filing of a petition for declaratory relief. Hence, there
was no cause of action to support a declaratory relief proceeding.

We dismiss out of hand the argument that the merger of the character of the lessor and the lessee in
Johnny Young resulted in the extinguishment of the right to the option to buy. It is utterly fallacious.
Victor Young did not purchase any portion of the land covered by the lease; it was his son, Johnny
Young, who did. The sale to the son of part of the land under lease to the father did not extinguish
the plaintiffs' option to buy, which was enforceable against Victor D. Young and no other.

The respondent court rejected the petitioner's contention that the case has become moot and
academic because the theater subject of the option was no longer existing, having been gutted by
fire. Its reason was that there was no adequate evidence of such destruction. On the contrary, the
record contains a certificate from the Deputy Chief of Constabulary that the building was indeed
burned to the ground on January 31, 1987.10 This fact indeed rendered the action for specific
performance no longer viable.

Since the action filed by the private respondents was premature, they are not entitled to any award
of damages. Neither may the petitioners recover on their counterclaim because the private
respondents filed their complaint in the honest belief that they had a right to the relief they were
seeking. Attorney's fees are also not due to either of the parties because it has not been shown that
any of them acted "in a wanton, fraudulent, reckless, oppressive, or malevolent manner." The parties
must therefore bear their own costs.
WHEREFORE, the challenged decision is SET ASIDE and a new judgment is rendered: (a)
DISMISSING the complaint for specific performance; (b) DECLARING the lease terminated as of
November 7, 1982; and (c) ORDERING petitioner Victor D. Young to vacate the leased premises. It
is so ordered.