A contractual stipulation requiring a student to waive their right to transfer to another school unless they refund the scholarship benefits previously granted is void for being contrary to public policy, as scholarships are awarded in recognition of merit and not as a business scheme to retain students.

The case arose from a dispute between Emeterio Cui, a law student, and Arellano University. Cui had been awarded scholarship grants by the university for scholastic merit. Before receiving these grants, he was made to sign a contract waiving his right to transfer to another school without refunding the scholarship amount. Cui later transferred to another university, and Arellano University refused to release his academic transcripts necessary for the bar examination unless he repaid the scholarship funds.

• Emeterio Cui studied preparatory law and then enrolled in the College of Law at Arellano University (AU) from 1948-1949 up to the first semester of his fourth year.
• During his law studies at AU, Francisco R. Capistrano, Cui's maternal uncle, was the Dean of the College of Law and legal counsel of AU.
• Cui was consistently awarded scholarship grants for scholastic merit by AU, resulting in the refund of his tuition fees, totaling P1,033.87.
• Before being awarded these scholarships, Cui signed a contract stating: "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."
• After Dean Capistrano severed ties with AU and became Dean at Abad Santos University, Cui left AU and enrolled for his last semester of law at Abad Santos University, from which he graduated.
• To take the bar examinations, Cui needed his transcripts from AU, but AU refused to issue them unless he repaid the P1,033.87 scholarship amount.
• Cui paid the sum under protest to obtain his transcripts and take the bar examinations in 1953.
• On August 16, 1949, the Director of Private Schools issued Memorandum No. 38, series of 1949, stating that scholarships are merited and earned, and their corresponding tuition fees should not be charged to students who decide to transfer.
• The Bureau of Private Schools upheld Cui's position that he should not be required to refund the scholarship amount, but AU maintained its stance.
• Cui filed an action to recover the P1,033.87 he paid under protest, plus damages.

• The contractual provision requiring the refund of scholarship money upon transfer to another school is null and void because it is contrary to public policy, as enunciated in Memorandum No. 38, s. 1949, of the Director of Private Schools.
• Petitioner was compelled to pay the amount under protest to secure his transcripts for the bar examination.

• The contract signed by the plaintiff, containing the waiver and refund clause, is valid and binding.
• Memorandum No. 38, s. 1949, issued by the Director of Private Schools, is null and void because the Director lacked authority to issue it, it was not approved by the department head, and it was not published in the Official Gazette.
• The provisions of Memorandum No. 38 are merely advisory and not mandatory.
• It was unethical for the plaintiff to transfer schools without good reason, merely following his uncle.

• Whether the contractual provision signed by Emeterio Cui, wherein he waived his right to transfer to another school without refunding to Arellano University the equivalent of his scholarship cash, is valid or void.

• The Supreme Court reversed the decision of the Court of First Instance and ordered Arellano University to pay Emeterio Cui the sum of P1,033.87 with legal interest.
• The Court held that the stipulation in the contract whereby Cui waived his right to transfer to another school without refunding the scholarship amount is contrary to public policy and, therefore, null and void.
• The Court reasoned that scholarships are awarded in recognition of merit or to help gifted students, not to attract and keep students in a school for its prestige or as a business scheme.
• The Court found that Memorandum No. 38, s. 1949, of the Director of Private Schools, although its ultimate validity as a law was not passed upon, incorporates a sound principle of public policy.
• The policy is that students should not be penalized for transferring schools by being required to repay scholarships, as this would nullify the principle of merit underlying such awards.
• Such a contractual provision is deemed prejudicial to public welfare, sound morality, and civic honesty.

• Contracts Contrary to Public Policy — A contract is void if its object, operation, or tendency is calculated to be prejudicial to the public welfare, to sound morality, or to civic honesty. In this case, the Court found that the waiver signed by Cui, requiring him to refund scholarship money if he transferred schools, was contrary to public policy because it transformed scholarships from a recognition of merit into a business scheme designed to retain students, which is inconsistent with the societal interest in promoting education and supporting deserving students.
• Nature and Purpose of Scholarships — Scholarships are awarded in recognition of merit or to assist gifted students in whom society has an interest, not merely to attract students or bolster a school's prestige. The Court applied this principle by stating that if scholarships were conditioned on continued enrollment without the possibility of transfer unless repaid, it would undermine the very essence of scholarships as rewards for academic excellence or aid to deserving students, rather than as tools for student retention for propaganda or business purposes.

• "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."
• "Scholarships are awarded in recognition of merit not to keep outstanding students in school to bolster its prestige."
• "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 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."
• "...scholarships are granted not to attract and to keep brilliant students in school for their propaganda value but to reward merit or help gifted students in whom society has an established interest or a first lien."

• Zeigler vs. Illinois Trust and Savings Bank, 245 Ill. 180, 19 Ann. Case 127 — Referenced to support the idea that courts, in determining public policy, consider various factors including the practice of government officers (like the Director of Private Schools issuing Memorandum No. 38).
• Ritter vs. Mutual Life Ins. Co., 169 U. S. 139 — Cited as an example of American jurisprudence establishing that courts will not uphold transactions whose object, operation, or tendency is prejudicial to public welfare, sound morality, or civic honesty.
• Heding vs. Gallaghere, 64 L.R.A. 811 — Cited alongside Ritter for the same principle regarding contracts against public policy.
• Veazy vs. Allen, 173 N.Y. 359 — Cited alongside Ritter for the same principle regarding contracts against public policy.
• Gabriel vs. Monte de Piedad, Off. Gazette Supp. Dec. 6, 1941, p. 67 — Cited for the criteria to declare a contract void as against public policy: if it contravenes an established interest of society, is inconsistent with sound policy and good morals, or tends to undermine individual rights. This was directly applied to invalidate the waiver in Cui's contract.

• Memorandum No. 38, series of 1949, Director of Private Schools — This memorandum was central to the case as it stated that scholarships are merited and earned, and students transferring should not be charged for them. The Court found that this memorandum, regardless of its legal force, incorporated a sound principle of public policy which the contractual waiver violated.
• Constitution, Article XIV, Section 5 (then applicable provision on education) — Referenced by the Court when it noted that the University of the Philippines, in implementing the constitutional mandate for free scholarships to gifted children, does not require reimbursement if scholars transfer. This highlighted a broader state policy consistent with the Court's ruling.