OBLIGATIONS AND CONTRACTS
Chapter 1
GENERAL PROVISIONS
Art. 1156
 Definition of Obligation
-a juridical necessity to give, to do or not to do.
-a juridical relation whereby a person (called the creditor) may demand from another
(called the debtor) the observance of a determinate conduct (the giving, doing, or not
doing), and in case of breach, may demand satisfaction from the assets of the latter.”
( Arias Ramos, p. 74)


“Judicial necessity” because non-compliance can result in judicial or legal sanction.
Elements of Obligation:
1) an active subject (obligee or creditor): the possessor of a right; he in whose favor
the obligation is constituted;
2) a passive subject (obligor or debtor): he who has the duty of giving, doing or not
doing;
3) the object or prestation: the subject matter of the obligation; it may consist of
giving a thing, or doing or not doing a certain act;
4) the efficient cause (vinculum or juridical tie): the reason why the obligation exists
and
5) Causa (causa debendi/causa obligationes) - why obligation exists
Requisites of Object:
a. licit - if illicit, it is void
b. possible - if impossible, it is void
c. determinate or determinable - or else, void
d. pecuniary value

Kinds of Obligations
1) From the viewpoint of sanction
a) civil obligation (perfect obligation) : defined in Art. 1156, Civil Code, and
sanctioned by judicial process
b) natural obligation: the duty not to recover what has voluntarily been paid
although payment was no longer required
: it is sanctioned by law, but only because conscience had originally motivated
the payment
Example: Knowing that it already prescribed, a debtor still paid his debt to the
creditor.
c) moral obligation: sanctioned by conscience or morality, or the laws of the
church.
Example: the duty of a catholic to hear mass on Sundays
2) From the viewpoint of subject matter
a) real obligation: the obligation to give
b) personal obligation: to obligation to do or not to do
3) From the affirmativeness and negativeness of the obligation
a) positive or affirmative obligation: the obligation to give or to do
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b) negative obligation: the obligation not to give or not to do
4) From the persons obliged
a) unilateral: when only one of the parties is bound
b) bilateral: where both parties are or may be bound
i)
reciprocal: the performance of one is dependent upon the
performance of the other
ii)
non-reciprocal: the performance of one is not dependent on the
performance by the other
Article 1157, Articles 1158-62
Art. 1157
 Sources of Obligation (LCQAQ)
1) Law, (OBLIGATION EX LEGE ) - Must be expressly or impliedly set forth and
cannot be presumed
2) Contracts, (OBLIGATION EX CONTRACTU ) - Must be complied with in good
faith because it is the “law” between parties; neither party may unilaterally evade
his obligation in the contract, unless:
a) contract authorizes it
b) other party assents
Parties may freely enter into any stipulations, provided they are not contrary to law,
morals, good customs, public order or public policy
3) Quasi-contracts (OBLIGATION EX QUASI-CONTRACTU ) - That juridical
relation resulting from a lawful, voluntary and unilateral act, and which has for its
purpose, the payment of indemnity to the end that no one shall be unjustly
enriched or benefited at the expense of another
4) Acts or omissions punishable by law/Delicts (OBLIGATION EX MALEFICIO OR
EX DELICTO ) and
5) Quasi delicts/Torts ( OBLIGATION EX QUASI-DELICTO or EX QUASI
MALEFICIO ) - It is a fault or act of negligence ( or omission of care ) which
causes damage to another, there being no pre-existing contractual relations
between the parties
Art. 1158: law
 Obligations derived from law are
1) not presumed but must be expressly determined in this Code or other special
laws;
2) regulated by the precepts of law which establishes them; and as to what not
has been foreseen, by the provisions of this book.
Art. 1159: contracts
 Obligations arising from contracts:
1) have the force of law between the parties; and
 meaning that neither party may unilaterally and upon his own exclusive volition,
escape his obligations under the contract, unless the other party assented thereto, or
unless for causes sufficient in law and pronounced adequate by a competent
tribunal. (p. 81)
2) should be complied with in good faith.
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
“Compliance in good faith” means that we must interpret “not by the letter that killeth
but by the spirit that giveth life.” (p. 81)
Principle of Privity of Contracts: The terms of the contract cannot be extended to
third parties or those
not included in the contract.
Article 1160: quasi-contracts
 Obligations derived from quasi-contract shall be subject to the provisions of Chapter
1, Title XVII, of this Book.
 Definition of Quasi-contract: that juridical relation resulting from a lawful, voluntary,
and unilateral act, and which has for its purpose the payment of indemnity to the end
that no one shall be unjustly enriched or benefited at the expense of another. (Art.
2142, Civil Code)
 Kinds of Quasi-contract
1) Negotiorium gestio (unauthorized management): takes place when a person
voluntarily takes charge of another’s abandoned business or property without
the owner’s authority;
 Reimbursement should be made to the gestor for necessary and useful expenses.
2) Solutio Indebiti (undue payment) : takes place when something is received
when there is no right to demand it, and it was unduly delivered by mistake.
 The recipient has the duty to return what was received.
Art. 1161: Ex Delicto or Ex Maleficio
 Rules that govern:
1) pertinent provisions of the Revised Penal Code and other penal laws, subject to
the provisions of Art. 2177, Civil Code;
2) Chapter 2, Preliminary Title, on Human Relations of the Civil Code;
3) Title 18 of Book IV of the Civil Code (on damages).
What civil liability arising from a crime includes:
a. restitution
b. reparation of damage caused
c. indemnity for consequential damages
Effect of acquittal in criminal case:
 when acquittal is due to reasonable doubt – no civil liability
 when acquittal is due to exempting circumstances – there is civil liability
 when there is preponderance of evidence – there is civil liability
Art. 1162: Ex Quasi-Delicts or Ex Quasi-Maleficio
 Rules that govern:
1) Chapter 2, Title 17, Book IV, Civil Code
2) Special laws.


Definition of Quasi-delict: a fault or act of negligence (or omission of care), which
causes damages to another, there being no pre-existing contractual relations
between the parties.
Definition of Negligence: the omission of that diligence which is required by the
circumstances of person, place and time (Art. 1173)
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Requirements before a Person can be held Liable for a Quasi Delict
1) There must be fault or negligence attributable to the person charged;
2) There must be damage or injury;
3) There must be a direct relation of cause and effect between the fault or
negligence on the one hand and the damage or injury on the other hand
(proximate cause).
“Proximate cause” is that adequate and efficient cause, which in the natural order of
events, necessarily produces the damages or injury complained of. (p. 102)
In Sagrada v. Naccoco, the Supreme Court held that the sources of obligation
in Art 1157 is exclusive. Many commentators believe, however that it should not
be. At present, there is one more possible source of obligations - PUBLIC OFFER
(Public Offer is in fact a source of obligation in the German Civil Code)
Chapter 2
NATURE AND EFFECT OF OBLIGATIONS
EFFECTS OF OBLIGATION
1. Obligation to give - obligation to deliver the thing agreed upon
2. Obligation to do/not to do - obligation to do/not to do the service agreed upon
ACCESSORY OBLIGATIONS:
1. Exercise diligence / Preserve the thing (Art. 1163) EDD
Art. 1163: The obligation of every person to take care of a DETERMINATE/SPECIFIC
THING with proper diligence of a GOOD FATHER OF A FAMILY.
 standard of care: that of a good father of a family – unless the law or stipulation
requires another standard of care
2. Delivery of fruits (Art. 1164)
Art. 1164: Nature of the rights of the creditor
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The creditor has the rights to the fruits of the thing from the time the obligation to
deliver it arises. However, he shall acquire no real right over it until the same has been
delivered to him.
 When does the right begin to exist : from the time to deliver arises
a) when there is no term/condition – from the perfection of the contract
b) when there is a term/condition – from the moment the term or condition arises
3. Delivery of accessories & accessions ( obligation to deliver determinate thing, even if
the stipulation does not mention delivery of accessories & accessions)
 Accessories - those joined to or included with the principal for the latter’s better
use, perfection or enjoyment
 Accessions – additions to or improvements upon a thing
When does right to fruits arise? – from the time the obligation to deliver arises
a) Conditional – from the moment the condition happens
b) With a term/period – upon the expiration of the term/period
c) Simple – from the perfection of the contract
IT DEPENDS!
A. If there is no term or condition, then from the perfection of the contract
B. If there is a term or a condition, then from the moment the term arrives or the
condition happens.
PERSONAL RIGHT – jus in personam or jus ad rem
Power demandable by one person of another (obligation to give, to do or not to
do)
REAL RIGHT – jus in rem
A power over a specific thing and it is binding on the whole world.
KINDS OF DELIVERY
A. ACTUAL OR TRADITION – physically, the property changes hands
B. CONSTRUCTIVE DELIVERY – where the physical transfer is implied
1.
Traditio Simbolica (symbolical tradition) – as when the keys to the
bodega are given
2.
Tradition Longa Manu (delivery by mere consent or the pointing out of the
object) – like pointing out to the car, which is the object of a sale.
3.
Tradition Brevi Manu (delivery by short hand) – a possessor of a thing not
as an owner, becomes the possessor as owner – like when a tenant already in
possession buys the house he is renting.
4.
Tradition Constitutum Possessorium – opposite of Brevi Manu – the
delivery whereby a possessor of a thing as an owner retains possession no longer of a
thing as an owner but in some other capacity.
5.
Tradition by the Execution of Legal Forms and Solemnities – like the
execution of a public instrument selling land.
Art. 1165
“DELAY” in this article means LEGAL DELAY or DEFAULT
a. ORDINARY DELAY merely the non-performance at the stipulated time
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b. LEGAL DELAY or DEFAULT – that delay which amounts to a virtual nonfulfillment of the obligation. AS A RULE, to put a debtor in default, there must be a
JUDICIAL or EXTRAJUDICIAL DEMAND or fulfillment
WHEN THE DEBTOR FAILS TO COMPLY WITH HIS OBLIGATION, THE CREDITOR
CAN:
1. Demand specific performance or compliance
- Specific Performance- performance of the prestation itself
- Substitute Performance - someone else performs or something else is
performed at the expense of debtor
- Equivalent Performance – demand for damages
a. If the thing is determinate – compel obligor to deliver the thing
b. If the thing is generic – demand obligor to comply with his obligation – you
cannot compel him to deliver a specific thing.
2. Demand rescission or cancellation
3. Demand Damages
Art. 1166
 ACCESSORIES – those joined to or included in the principal for the latter’s better
use, perfection or enjoyment. (Example: keys to a house, jack of a car)
 ACCESSIONS – additions to improvements upon a thing (Examples: whatever is
built, planted or sown on a parcel of land).
 If there is a stipulation to said effect, accessions and accessories do not have to be
included.
Art. 1167: The Obligation TO DO
 If DEBTOR fails to Do something, CREDITOR can:
 Have the obligation performed by himself or another at the debtor’s expense
(only if another can do the performance)
 Obtain Damages – only if personal or special, or if others or the creditor can’t do
it
 Specific performance is not a remedy in personal obligations, otherwise, this may
amount to involuntary servitude, which is prohibited under our Constitution
 When a Thing May be Ordered Undone:
 If poorly made – performance by another and damages may be demanded
 If the obligation is a negative one – provided the undoing is possible
Art. 1168
When the obligation consists in not doing, and the obligor does what has been
forbidden him, it shall also be undone at his expense.
Table of Remedies in case of
FAILURE TO COMPLY WITH PERFORMANCE/REMEDIES:
Remedies
SPECIFIC
PERFORMANCE
Obligation to give
(Real Obligation)
Specific Generic
X
X
Obligations to do
(Personal Obligation)
To do
Not to do
undo
the
things
X
already done
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EQUIVALENT
PERFORMANCE
SUBSTITUTE
PERFORMANCE
X
X
Can only be demanded
if obligation is not very
personal
X
X
X
Undo
the
things
already
done
at
debtor's expense
RESCISSION/
CANCELLATION
X
X
A. CAUSES ATTRIBUTABLE TO DEBTOR
X
1. Contravention of tenor
2. Delay/ Mora - Non performance with respect to time
a. Mora solvendi – default on the part of the debtor;
2 kinds:
(1) Mora Solvendi Ex re – default in real obligations
(2) Mora Solvendi Ex persona – default in personal obligations
Elements:
(1) The obligation must be due, enforceable and already liquidated or
determinate in amount
(2) There must be non-performance
(1) There must be a demand, unless demand is not required
Effects:
a. if determinate thing - debtor bears risk of loss (even when there is
fortuitous event)
b. debtor liable for damages/interest
c. resolution (art 1170, in proper cases)
b. Mora accepiendi – default on part of creditor; Creditor is guilty of default
when he unjustifiably refuses to accept payment or performance at the time
payment/performance can be done
Effects:
(1) responsibility of debtor is reduced to fraud and gross negligence
(2) debtor is exempted from risk of loss of thing / creditor bears risk of loss
(3) expenses by debtor for preservation of thing after delay is chargeable to
creditor
(4) if obligation bears interest, debtor does not have to pay from time of delay
(5) creditor liable for damages
(6) debtor may relieve himself of obligation by consigning the thing
c. Compensatio morae – both parties are in default (in reciprocal obligations);
the effect: is as if there is no default
Art 1169
Those obliged to deliver or to do something incur in delay from the time the
obligee judicially or extra-judicially demands from them the fulfillment of their obligation.
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However, the demand from the creditor shall not be necessary in order that delay
may exist:
a. When the obligation or the law expressly so declares. ONU
b. When from the nature and the circumstances of the obligation it appears that the
designation of the time when the thing is to be delivered to the service is to be
rendered was a controlling motive for the establishment of the contract
c. When demand would be useless, as when the obligor has rendered it beyond his
power to perform
In reciprocal obligations, neither party incurs in delay if the other does not comply or
is not ready to comply in a proper manner with what is incumbent upon him. From
the moment one of the parties fulfills his obligation, delay by the other begins.
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Extra-judicial demands may be written or oral-but best if written because it can be
presented as evidence.
AS A RULE-to put a debtor in default, DEMAND is needed.
Demand is not Needed to Put Debtor in Default When:
a. When the law so provides
b. When the obligation expressly so provides
c. When the fixing of the time was the controlling motive for the establishment of the
contract
d. When demand would be useless
e. When the obligor has expressly acknowledged that he really is in default
BUT IN THE PHILIPPINE LAW, THIS IS NO LONGER SO because it is expressly
provided that in reciprocal obligations, neither party incurs default if the other does
not comply with what is incumbent upon him. Even if there were (written) demands
from both sides, there is no default when neither has done his obligation.
It is only when one party fulfills his obligation, delay by the other begins (assuming
that there is no date set in the contract for his performance).
3. Fraud / Dolo – Voluntary execution of a wrongful act or willful omission, knowing
and intending the effects which naturally and necessarily arise from such act or
omission
a. Causante ( causal ) - makes contract voidable
b. incidente – ( incidental ) - fraud in performance of obligation; does not
affect validity of obligations
Remedies of Person in fraud under obligations are:
a. insist on specific performance (art 1233)
b. resolve contract (art 1191)
c. claim damages, in either case
4. Negligence /Culpa - absence of due diligence
Elements:
a) Omission of diligence required
b) Diligence required – per nature of obligation, circumstances of persons, time
and place
Art 1170
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Those who in the performance of their obligation are guilty of fraud, negligence
or delay and those who in any manner contravene the tenor thereof are liable for
damages.

Grounds for Liability in the Performance of Obligations
a. Fraud-use of deceit or other machinations to intentionally evade the fulfillment of
the obligation
-This type of fraud is applicable in obligations only-it is different from CAUSAL
OR INCIDENTAL fraud (fraud that exists between parties when there is no preexisting contractual relations or obligations between them).
b. Negligence-fault-0no intent
c. Default
d. Violation of the terms of Obligation (unless excused in proper cases by fortuitous
events)

The Following do not Exempt from the Fulfillment of the Obligation
a. Increase in the cost of the performance
b. Poverty
c. War between the subject of the neutral country and the subject of a country at
war, as long as the substantial compliance can still be done.

Those liable under this Article should pay damages, only if prejudice or damage was
caused.
Kinds of Damages
a. Moral-for moral and physical anguish
b. Exemplary-corrective or to set an example
c. Nominal-to vindicate a right-when no other kind of damages may be recovered
d. Temperate-when the exact amount of damages cannot be determined
e. Actual-actual losses as well as unrealized profits
f. Liquidated predetermined beforehand by agreement.

Art 1171
Responsibility arising from fraud is demandable in all obligations. Any waiver of
an action for future fraud is void.
Art 1172
Responsibility arising from negligence in the performance of every kind of
obligation is also demandable, but such liability may be regulated by the courts,
according to the circumstances.
Art 1173
The fault or negligence of the obligor consists in that omission of the diligence
which is required by the nature of the obligation and corresponds with the circumstances
of the person, of the time and of the place. When negligence shows bad faith, the
provisions of Articles 1171 and 2201 paragraph 2, shall apply.
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Kinds of Diligence Under the Civil Code
a. That agreed upon by the parties
b. In the absence of that agreed upon by the parties, that required by law
c. In the absence of that required by law, that expected of a good father of a family.
FRAUD DISTINGUISHED FROM NEGLIGENCE
FRAUD
NEGLIGENCE
There is deliberate intention to cause There is no deliberate intention to cause damage.
damage.
Liability cannot be mitigated.
Liability may be mitigated.
Waiver for future fraud is void.
Waiver for future negligence may be allowed in
certain cases:
a) gross – can never be excused in advance;
against public policy
b) simple – may be excused in certain cases
Art 1174
Concept: Fortuitous Event - event which could not be foreseen, or which though
foreseen, were inevitable
Refers to as caso fortuito, act of God, force majeure, unavoidable accident
Eg. Natural calamities
Essential Characteristics of a fortuitous Event (Nakpil & Sons vs. CA)
1. The cause of the breach of the obligation must be independent of the will of
the debtor
2. The event must be either unforeseeable or unavoidable
3. The event must be such as to render it impossible for the debtor to fulfill his
obligation in a normal manner
4. The debtor must be free from any participation in, or aggravation of injury to
the creditor
Liability for fortuitous events

General Rule for Fortuitous Events- No person shall be liable for fortuitous events;
i.e., his obligation will be extinguished:
Exceptions to the General Rule- when the debtor shall be held liable for a
fortuitous event (Art. 1174)
a) when expressly declared by law ( bad faith, subject matter is generic,
debtor is in delay )
b) when expressly declared by stipulation or contract
c) when the nature of the obligation requires assumption of risk (eg.
obligation of an insurer)
FORTUITOUS EVENTS CANNOT EXEMPT ONE FROM COMPLIANCE IF:
1. The obligor defaults
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2. The obligor is guilty of Bad Faith (for having promised to deliver to two or
more persons who do not have the same interest).
EXAMPLE:
Jaypee is obliged to give Jaboom his car on Dec. 7, 1991. If on that said day,
Jaypee does not deliver, he is in ordinary delay. If on Dec. 8, 1991, an earthquake
destroys the car, he is not liable because the obligation is extinguished.
Art 1175
Usurious transactions shall be governed by special laws.

Usury-contracting for or receiving something in excess of the amount allowed by the
law for the loan or use of money, goods, chattels (estate inheritance, personal
property) or credit
Art 1176 – Presumptions on receipt of principal or of later installment (these are
disputable presumptions and evidence may be introduced to the contrary by the
creditor.)
1. The receipt of the principal by the creditor without reservation as to interest,
shall give rise to the presumption that said interest has been paid.
2. The receipt of a later installment without reservation as to prior installments,
shall give rise to the presumption that such prior installments have been paid.

The condition not to do an impossible thing shall be considered as not having been
agreed upon:
a. If condition is to do an impossible of illegal thing=condition and obligation are
void
b. If the condition is negative/not to do the impossible=just disregard the condition
but the obligation remain
c. If the obligation is negative/not to do= both condition and obligation are valid
Art. 1177 Remedies of creditor to enforce payment of his claims against debtor
1. Exact performance - specific, substitute, equivalent
2. Attach and execute debtor's property which is not exempt (art 2236)
- pursue the property in the possession of the debtor, except those exempt by
law.
3. Accion subrogatoria (Art 1171)- exercise all the rights and bring all the actions of
the debtor except those personal to him.
Requisites:
a. Creditor must have right of return against debtor
b. The debt is due and demandable
c. There is a failure of the debtor to collect his own debt from 3rd persons
either through malice or negligence
d. Debtor's assets are insufficient
e. The right of account is not purely personal
4. Accion directa (arts 1729 & 1652)
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5. Accion pauliana – the right to impugn the acts which the debtor may have done
to defraud his creditors. (remedy is rescission)
Requisites:
a. There is a credit in favor of plaintiff
b. The debtor has performed an act subsequent to the contract, giving
advantage to other persons
c. The creditor is prejudiced by the debtor's act which are in favor of 3rd
parties and rescission will benefit the creditor
d. The creditor has no other legal remedy
e. The debtor's acts are fraudulent
Art. 1178
Rule on transmissibility of rights and exceptions thereto.
All rights acquired by virtue of an obligation are generally transmissible
Exceptions:
1. If the law prohibits the transmission of rights;
2. It the parties stipulated;
3. If the right is not transmissible. Eg. personal obligation
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CHAPTER III
DIFFERENT KINDS OF OBLIGATIONS
CATEGORIES:
a.
b.
c.
d.
e.
Demandability - pure, conditional or with a term
Plurality of object - simple, alternative or facultative
Plurality of subject - simple, joint or solidary
Performance - divisible or indivisible
Sanctions for breach - with or without a penal clause
Primary Classification
1. Pure obligation
2. Conditional Obligation
3. Obligation with a period
4. Alternative Obligation
5. Facultative Obligation
6. Joint Obligation
7. Solidary Obligation
8. Divisible obligation
9. Indivisible Obligation
10. Obligation with a Penal Clause
PURE AND CONDITIONAL OBLIGATIONS:
1. Pure obligation– demandable at once, with no term and no condition Eg. I will give
you ten pesos.
2. Conditional Obligation- one whose demandability or extinguishment depends
upon the happening of a condition.
A condition is a future and an uncertain event or a past event unknown to the parties
eg. I will give you one million pesos if you pass the Bar.
Definition of Condition: It is an uncertain event which wields influence on a legal
relationship (Manresa)
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Kinds of Condition
1. Suspensive and Resolutory
2. Potestative, Casual and Mixed
3. Possible and Impossible
4. Positive and Negative
5. Divisible and Indivisible
i. Suspensive – happening of condition gives rise to obligation; also called as
condition antecedent or condition precedent.
Effects:
1. effectivity is retroactive
2. no retroactivity with reference to fruits or interest & prescription
3. creditor may preserve rights
4. debtor – recovery of payment by mistake or even w/o mistake
ii. Resolutory – happening of condition extinguishes the obligation, referred to
as condition subsequent
Effects:
1. no retroactive effect
2. obligation extinguished
3. restore to each other what was received plus interest/fruits
iii. Potestative – dependent on sole will of a party; if on part of debtor &
suspensive – the obligation is void.
Art. 1182 Even if the condition is fulfilled, obligation is not demandable.; eg.
Debtor will give creditor P10000 if debtor goes to US
If potestative on the part of the creditor, obligations is valid whether condition is
suspensive or resolutory- eg. Debtor is to give Creditor P10000 if creditor goes to US
iv. Casual – dependent upon chance or hazard, or upon the will of a third person
eg. Ill give you P1000 if I will win first prize in the lotto which I bet today
v. Mixed – dependent partly upon chance and upon the will of one of the parties,
or upon the will of a third person. Eg. I will give you P1million if you marry A.
vi. With term Positive – extinguished if time expires or indubitable of condition to
happen
Negative – effective from moment of time elapsed or evident it can't
happen
vii. Possible and Impossible
Possible- capable of being fulfilled in its nature and by law.
Impossible- incapable of being fulfilled by its nature and due to operation of law.
(1)
To do - both the condition and the obligation are void
(2)
Not to do –disregard the condition, the obligation is still valid; Condition
not to do an impossible thing, deemed to have been not agreed upon. Art. 1183
Impossible condition – physically not feasible
Illegal condition – prohibited by law, good custom, public policy and morals
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viii. Positive and Negative
Positive – the condition that some event happen at a determinate time.
Obligation is extinguished as soon as the time expires or it has become indubitable that
the event will not take place or it has become indubitable that the event will not take
place. Eg. Debtor to give creditor P1000 if Creditor will marry A on or before December
30, 2011. obligation is extinguished if creditor will not marry A on Dec 30, 2011.
Negative – Condition that some event will not happen at a determinate time.
Oblgiation be comes effective as soos as the time indicated has elapsed or it become
evident tha event will not occur. Eg. Ill give you 10000 if you have not yet married A as of
Dec 30 2011.
ix Divisible and Indivisible
Divisible –capable of partial performance, eg. A will give B 1000 if B will finish his
law course and P10,000 if B pass the bar.
Indivisible – incapable of partial performance, eg. A will give P1million to B if B
finish his law course and also top the bar.
Rules on loss, impairment, improvement of the subject matter pending the
happening of suspensive condition/ term (Art. 1189)
Liability in
Liability in case of Improvement
case of Loss/
Impairment
w/ debtor’s fault or Indemnity
& specific performance, rescission & damages
at
expense
of damages
If it improved at the expense of the debtor, he
obligor/ usufructuary
shall have no other right than that granted to
the usufructuary. (art 1189)
w/o debtor’s fault
Creditor to bear damages
or not at expense of Extinguished
Creditor gets it
obligor
REQUISITES FOR THE AFOREMENTIONED RULE:
1. There is a suspensive condition
2. There is an obligation to deliver a determinate thing
3. There is loss, deterioration or improvement before the happening of the
condition
OBLIGATION WITH A PERIOD – future & certain, past & uncertain, payable when able
When stipulation says “payable when able “ – it is with a period,
remedy:
a) agreement among parties
b) court shall fix period of payment when parties unable to agree
Kinds:
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a. Resolutory ( in diem ) – takes effect at once but terminate upon arrival of
the day certain;
Day certain – that which must necessarily come, although it may not be known
when
b. Suspensive ( ex die ) – takes effect on the day stipulated
WHEN COURTS MAY FIX PERIOD:
a) art 1197
b) art 1197, 2nd paragraph
c) art 1191, 3rd paragraph
d) art 1687, 2nd, 3rd, 4th sentence
e) art 1180
WHEN DEBTOR LOSES RIGHT TO PERIOD:
a. insolvency of debtor, unless security provided
b. did not deliver security
c. impaired security- thru fault or fortuitous event
d. violate undertaking in consideration of extension of period
e. attempts to abscond
(4). Facultative – only one prestation has been agreed upon but another may be given
in substitution
Effect of loss or deterioration thru negligence, delay or fraud of obligor:
a) of thing intended as substitute - no liability
b) of the substitute after substitution is made – with liability
(5). Alternative – bound by different prestations but only one is due
Right of choice: General rule: right of choice belongs to debtor
a. the choice is with debtor
(1) If only 1 is left either because of fortuitous events or due to debtor's acts,
perform what is left. The effect is that the debtor loses the right of choice
16
(2) if the choice is limited because of the creditor's acts, the debtor has the right
of resolution and damages
(3) if all are lost due to debtor, the creditor is entitled to damages
(4) if some are lost, the debtor can choose from the remaining
b. the choice is with creditor
(1) if one or some are lost due to fortuitous event, the creditor chooses the
remainder
(2) if one or some is lost because of the fault of debtor, the creditor may choose
either the remainder or the value of any which disappeared, and damages in
either case
(3) if all is lost due to the debtor's fault, the creditor may choose the value of any
if some is lost due to debtor's fault, the creditor chooses the remainder
(4) if all is lost due to fortuitous event, obligation is extinguished
(5) if all is lost due to creditor's fault, the obligation is extinguished
Requisites for making the choice:
a) Made properly so that creditor or his agent will actually know
b) Made with full knowledge that a selection is indeed being made
c) Made voluntarily and freely
d) Made in due time – before or upon maturity
e) Made to all proper persons
f)
Made w/o conditions unless agreed by the creditor
g) May be waived, expressly or impliedly
DISTINCTIONS BETWEEN ALTERNATIVE AND FACULTATIVE OBLIGATIONS
ALTERNATIVE
a) Various things are due but the giving
principally of one is sufficient
b) If one of prestations is illegal, others
may be valid but obligation remains
FACULTATIVE
a) Only one thing is due but a substitute may be
given to render payment/fulfillment easy
b) If principal obligations is void and there is no
necessity of giving the substitute; nullity of P
carries with it nullity of S
c) If it is impossible to give all except c) If it is impossible to give the principal, the
one, the last one must still be given
substitute does not have to be given; if it is
17
impossible to give the substitute, the principal
must still be given
d) Right to choose may be given either d) The right of choice is given only to the debtor
to debtor or creditor
(6). Joint – presumption when 2 or more creditors or 2 or more debtors concur in one
and the same obligation
Effects:
a. Demand on one produces delay only with respect to the debt
b. Interruption in payment by one does not benefit or prejudice the other
c. Vices of one debtor to creditor has no effect on the others
d. Insolvency of one debtor does not affect other debtors
(7). Solidary – must be expressed in stipulation or provided by law or by nature of
obligation
a. Active – on the part of creditor or obligee
Effects:
1. Death of 1 solidary creditor transmits share to heirs (but collectively)
2. Each creditor represents the other in the act of recovery of payment
3. Credit is divided equally between creditors as among themselves
4. Debtor may pay any of the solidary creditors
b. Passive – on the part of debtors or obligors
Effects:
1. Each debtor may be requested to pay whole obligation with right to recover
from co-debtors
2. Interruption of prescription to one creditor affects all
3. Interest from delay on 1 debtor is borne by all
c. Mixed – on the part of the obligors and obligees, or the part of the debtors and
the creditors
d. Conventional – agreed upon by the parties
e. Legal – imposed by law
Instances where law imposes solidary obligation:
18
1. obligations arising from tort
2. obligations arising from quasi-contracts
3. legal provisions regarding obligation of devisees and legatees
4. liability of principals, accomplices, and accessories of a felony
5. bailees in commodatum
Effects:
a. payment made before debt is due, no interest can be charged, otherwise –
interest can be charged
b. insolvency of one – others are liable for share pro-rata
c. if different terms & conditions – collect only what is due, later on collect from any
d. no reimbursement if payment is made after prescription or became illegal
d. remission made after payment is made – co-debtor still entitled to reimbursement
e. effect of insolvency or death of co-debtor – still liable for whole amount
f.
fault of any debtor – every one is responsible – price, damage & interest
g. complete/ personal defense – total or partial ( up to amount of share only ) if not
personal to him
Effect of loss or impossibility of the prestation:
a. if without fault – no liability
b. if with fault – there is liability (also for damage and interest)
c. loss due to fortuitous event after default – there is liability (because of default)
(8). Divisible – obligation that is capable of partial performance
a. execution of certain no of days work
b. expressed by metrical units
c. nature of obligation – susceptible of partial fulfillment
(9). Indivisible – one not capable of partial performance
a. to give definite things
b. not susceptible of partial performance
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c. provided by law
d. intention of parties
(10). With penal clause - an accessory undertaking to assume greater liability in case of
breach;
CHARACTERISTICS OF PENAL CLAUSES
1. Subsidiary - As a general rule, only penalty can be demanded, principal
cannot be demanded, except: Penalty is joint or cumulative
2. Exclusive - takes place of damage,
damage can only be demanded in the ff. cases:
a. Stipulation – granting right
b. refusal to pay penalty
c. with dolo ( not of creditor )
Causes for reduction of penalty:
a. partial/irregular performance
b. penalty provided is iniquitous/unconscionable
Art 1184
The condition that some event will happen at a determinate time shall extinguish
the obligation as soon as the time expires or if it has become indubitable that the event
will not take place.

If the period is not fixed in the contract, the court, considering the parties’ intentions,
should determine what period was really intended.
Art 1185
The condition that some event will not happen at a determinate time shall ender
the obligation effective from the moment the time indicated has elapsed, or if it has
become evident that the event cannot occur.
If no time has been fixed, the condition shall be deemed fulfilled at such time as
may have been contemplated, bearing in mind the nature of the obligation.

This article refers to negative conditions.
Art 1186
20
The condition shall be deemed fulfilled when the obligor voluntarily prevents its
fulfillment (Doctrine of Constructive Fulfillment)
 This Article deals with Constructive or Presumes Fulfillment.
 Reason for the article: One must not profit by his own fault.
 Requisites:
a. Voluntarily made-intent to prevent must be present
b. Actually prevents-intention without prevention or prevention without intention is
not sufficient
Art 1187
The effects of a conditional obligation to give, once the condition has been
fulfilled, shall retroact to the day of the constitution of the obligation. Nevertheless, when
the obligation imposes reciprocal prestations upon the parties, the fruits and interests
during the pendency of the condition shall be deemed to have been mutually
compensated. If the obligation is unilateral, the debtor shall appropriate the fruits and
interests received, unless from the nature and circumstances of the obligation it should
be inferred that the intention of the person constituting the same was different.
Art 1188
The creditor may, before the fulfillment of the condition, bring the appropriate
actions fro the preservation of his rights.
The debtor may recover what during the same time he has paid by mistake in
case of suspensive condition.
Art 1189
When the conditions have been imposed with the intention of suspending the
efficacy of an obligation to give, the following rules shall be observed in case of the
improvement, loss or deterioration of the thing during the pendency of the condition:
a. If the thing is lost without the fault of the debtor, the obligation shall be
extinguished
b. If the thing is lost through the fault of the debtor, he shall be obliged to pay
damages, it is understood that the thing is lost when it perishes, or goes out of
commerce, or disappears in such a way that its existence is unknown or cannot
be recovered.
c. When the thing deteriorates without the fault of the debtor, the impairment is to
be borne by the creditor
d. If it deteriorates through the fault of the debtor, the creditor may choose from the
rescission of the obligation and its fulfillment, with indemnity for damages in
either case
e. If the thing is improved by its nature or by time, the improvement shall inure to
the benefit of the creditor
f. If it is improved at the expense of the debtor, he shall have no other right than
that granted to the usufractuary.
Effects of Partial Loss-It may be partial loss:
a. That would amount to a loss important enough to be considered a complete loss
(this will be determined by the courts)
21
b. That would merely be considered a deterioration of the thing, in which case the
rules on deterioration should apply
Art 1190
When the condition have for their purpose the extinguishments of an obligation to
give, the parties, upon fulfillment of said conditions, shall return to each other what they
have received.
Effects When Resolutory Condition is Fulfilled:
a. The obligation is extinguished
b. Because the obligation has been extinguished and considered to have had no
effect, the parties should restore to each other want they have received
c. Aside from the actual things received, the fruits of the interests thereon should
also be returned after deducting of course the expenses made for their
production, gathering and preservation
d. The rule on Art 1189 will apply to whoever has the duty to return in case of the
loss, deterioration or improvement of the thing
e. The courts are given power to determine the retroactivity of the fulfillment of
resolutory conditions.
Art 1191
The power to rescind obligations is implied in reciprocal ones in case one of the
obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment if the latter should become
impossible.
The court shall decree the rescission claimed, unless there be just cause
authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons who have
acquired the thing, in accordance with Articles 1385 and 1388 and the Mortgage Law.
 To rescind=to cancel/revoke
 Rescission may be judicial or extra-judicial (but best to be judicial)
 Effect of Rescission-mutual restitution
 This article speaks of reciprocal obligations
Characteristics of the Right to Rescind of Resolve
a. It only exists in reciprocal obligations
b. It can be demandable only if the plaintiff is ready, will and able to comply with his
own obligation, and the other is not
The Right to Rescind is not Absolute
a. trivial causes for slight breaches will not case rescission
b. If there be a just cause for fixing the period within which the debtor can comply,
the court will not decree rescission
22
c. If e property is now in the hands of an innocent 3rd party who has lawful
possession of the same



Judicial approval for rescission is needed when there has already been delivery of
the object (unless there is a voluntary returning)
Judicial approval is not needed when there has been no delivery yet
Choice by the Injured Party
a. Fulfillment or specific performance with damages or
b. Rescission plus damages
Art 1192
In case both parties have committed a breach of the obligation. The liability of
the first infractor shall be equitably tempered by the courts. If it cannot be determined
which of the parties first violated the contract, the same shall be deemed extinguished,
and each shall bear his own damages.

Breach of the second infractor provides mitigating effect to the liability of the first
infractor because of this, the courts shall temper/regulate/lessen the liability of the
first infractor.
Section 2 – Obligations with a Period
Art 1193
Obligations for whose fulfillment a day certain has been fixed, shall be
demandable only when that day comes.
Obligations with resolutory period take the effect at once, but terminate upon
arrival of the day certain.
A day certain is understood to be that which must necessarily some, although it
may not be known when.
If the uncertainty consists in whether the day will come or not, the obligation is
conditional and it shall be regulated by the rules of the preceding Section.

Period ids a certain length of time which determines the effectively or the
extinguishment of the obligation (it must surely come)
Different Kinds of Periods or Terms
a. Definite-exact date or time is known or given
b. Indefinite-something will surely happen but the date is unknown
c. Legal-period granted under the provision of the law
d. Conventional or Voluntary-period agreed upon or stipulated by the parties
e. Judicial-period is fixed by the courts for the performance of an obligation or for its
termination
f. Ex Die- a period with suspensive effect- the obligation begins upon the arrival of
the period
23
g. In Diem-a period with a resolutory effect- the obligation terminates upon the
arrival of the period
Requisites for a Valid Period or Term
a. It must refer to the future
b. It must be certain, but can be extended
c. It must be physically or legally impossible, otherwise the obligation is void.
Art 1194
In case of loss, deterioration or improvement of the thing before the arrival of the
day certain, the rules in Art 1189 shall be observed.
Art 1195
Anything paid or delivered before the arrival of the period, the obligor being
unaware of the period or believing that the obligation has become due and demandable,
may be recovered, with fruits and interests.
Art 1196
Whenever in an obligation a period is designated, it is presumed to have been
established for the benefit of both the creditor and the debtor, unless from the tenor of
the same or other circumstances it should appear that the period has been established
in favor of one or of the other.


General Rule: Term is for the benefit of the debtor or creditor. Meaning, the debtor
cannot prematurely pay and the creditor cannot demand prematurely.
This Article applies only to a contract with a period they fixed themselves.
Art 1197
If the obligation does not fix a period, but from its nature and the circumstances it
can be inferred that a period was intended, the courts may fix the duration thereof.
The courts shall also fix the duration of the period when it depends upon the will
of the debtor.
In every case, the courts shall determine such period as may under the
circumstances have been probably contemplated by the parties. Once fixed by the
courts, the period cannot be changed by them.
Art 1198
The debtor shall lose every right to make use of the period:
When after the obligation has been contracted, he becomes insolvent, unless he
gives a guaranty or security for the debt
b. When he does not furnish to the creditor the guarantees or securities which he
has promised
a.
24
c.
d.
e.

When by his own acts he has impaired said guaranties and securities after their
establishment, and when through a fortuitous event they disappear, unless he
immediately gives new ones equally satisfactory
When the debtor violates any undertaking, in consideration of which the creditor
agreed to the period
When the debtor attempts to abscond.
The debtor shall lose every right to make use of the period-it means that the term is
extinguished and the creditor can demand fulfillment at once.
Art 1199
A person alternatively bound by different prestations shall completely perform
one of them.
The creditor cannot be compelled to receive part of one and part of the other
undertaking.
Art 1200
The right of choice belongs to the debtor, unless if as been expressly granted to
the creditor.
The debtor shall have no right to choose from those prestations which are
impossible, unlawful, or which could not have been the object of the obligation.

General Rule-In the absence of any stipulations, the right if choice belongs to the
debtor.

Limitation on the Debtor’s Choice- the debtor shall have no right to choose
prestations which are:
a. Impossible
b. Unlawful
c. Which could not have been the object of the obligation
Art 1201
The choice shall produce no effect except from the time it has been
communicated.



The choice may be communicated orally or in writing, expressly or impliedly.
Once notice has been made that a choice has been done, the obligation becomes a
simple obligation to do or to deliver the object selected.
An election once made is binding on the person who makes it, and he will not
therefore be permitted to renounce his choice and take an alternative which was first
open to him.
Requisites for Making the Choice:
a. Made properly so that the creditor or his agent will actually know
25
b.
c.
d.
e.
f.
g.
Made with full knowledge that a selection is indeed being made
Made voluntarily and freely
Made in due time-that is before or upon maturity
Made to all the proper persons
Made without conditions unless agreed to by the creditor
May be waived expressly or impliedly
Art 1202
The debtor shall lose the right of choice when among the prestations whereby he
is alternatively bound, only one is practicable.
Art 1203
If through the creditor’s acts the debtor cannot make a choice according to the
terms of the obligation, the latter may rescind the contract with damages.
The debtor may:
a. Rescind the obligation plus collect damages
b. Perform other prestation(s)

Observe that the contract is not automatically rescinded.
Art 1204
The creditor shall have a right to indemnity for damages when, through the fault
of the debtor, all the things which are alternatively the object of the obligation have been
lost, or the compliance of the obligation has become impossible.
The indemnity shall be fixed taking as a basis the vale of the last thing which
disappeared, or that of the services which last become impossible.
Art 1205
When the choice has been expressly given to the creditor, the obligation shall
cease to be alternative from the day the selection has been communicated to the
debtor.

Until then the responsibility of the debtor shall be governed by the following rules:
a. If one of the things is lost through a fortuitous event, he shall perform the
obligation by delivering that which the creditor should choose from among the
remainder, or that which remains if only one subsists
b. If the lose of one of the things occurs through the fault of the debtor, the creditor
may claim any of those subsisting, or the price of that which, through the fault of
the former has disappeared, with a right to damages
c. If all the things are lost through the fault of the debtor, the choice by the creditor
shall fall upon the price of any of them, also with indemnity for damages.
Art 1206
26
When only one prestation has been agreed upon the obligor may render another
in substitution, the obligation is called facultative.
Facultative Obligation- one where only one prestation has been agreed upon but
the obligor may render another in substitution.
Section 4 – Joint and Solidary Obligation
Art 1207
Joint Obligations- each obligor answers only for a part of the whole liability and to each
obligee belongs only a part of the correlative (equivalent) rights
Solidary / Joint and Several Obligations- the relationship between the active and the
passive subjects is so close that each of the former or of the latter may demand the
fulfillment of or must comply to the whole obligation.
General Rule: When there are two or more debtors or two or more creditors the
obligation is joint.
Exceptions:
a. When there is a stipulation to the contract that the obligation is solidary
b. When the object of the obligation requires liability to be solidary
c. When the law declares the obligation to be solidary
Art 1208
Liability of Partners:
a. If it arises out of contracts the liability is joint or pro-rata
b. If it arises out of a crime or quasi-delict, the liability is solidary together with the
partnership
Art 1209
If the division is impossible, the rights of the creditors may be prejudiced only by
their collective acts, and the debt can be enforced only by proceeding against all the
debtors.
Characteristics
a. The obligation is joint but since the object is indivisible, the creditor may proceed
against all the joint debtors for compliance is possible only if all the joint debtors
would act together
b. Demand must therefore be made on all the joint debtors if anyone of the debtors
does not comply with his monetary obligation for damages
27
c. If any of the debtors shall be insolvent, the others shall not be liable for his share
d. If there be joint creditors, delivery must be made to all, and not merely to one,
unless that one be specifically authorized by others
e. Each joint creditor is allowed to renounce his proportionate credit
Art 1210
The indivisibility of an obligation does not necessarily give rise to solidarity. Nor
does solidarity of itself imply indivisibility.
Indivisibility- refers to the subject matter
Solidarity- refers to the tie between the parties
Art 1211
Different Ways by Which Two Debtors may be Bound:
a. Uniform-when the debtors are bound by the same stipulations and clauses
b. Otherwise-where the obligor, though liable for the same prestation are
nevertheless not subject to the same secondary stipulations and clauses
Art 1213 – A solidary creditor cannot assign his rights without the consent of the others.
Art 1214 – The debtor may pay any one of the creditors: but if any demand has been
made by any one of them, payment must be made to him.
Art 1215
The creditor who may have expected any of these acts, as well as he who has
collects the debt, shall be liable to the others for the share in the obligation
corresponding to them.
Novation- the modification of an Obligation by changing its object or principal conditions,
or by substituting the person of the debtor or by subrogating a third person in the rights
of the creditor
Compensation- that which takes place when 2 persons in their own right are creditors
and debtors of each other. Compensation may be Total or Partial depending upon the
amount involved
Confusion or Merger- That which takes place when the characters of the creditor and
debtor are merged in the same person
Remission or Waiver- that act of liberality whereby the creditor condones the obligation
of the debtor, that where the creditor tells the debtor to forget the whole thing
Payment- one of the ways by which the obligation is extinguished and consists in the
delivery of the thing or the rendition of the service which is the object of the obligation.
Art 1218 – Payment by a solidary debtor shall not entitle him to reimbursement from his
co-debtors if such payment is made after the obligation has prescribed or become illegal.
28
Art 1220 – The remission of the whole obligation, obtained by one of the solidary
debtors, does not entitle him from reimbursement from his co-debtors.
Art 1221
If the thing has been lost or the prestation has become impossible without the
fault of the solidary debtors, the obligation shall be extinguished.
If there was fault on the part of any one of them, all shall be responsible to the
creditor, for the price and the payment of damages and interest, without prejudice to
their action against the guilty or negligent debtor.
A solidary obligation implies mutual agency and mutual confidence.
Art 1222
A solidary debtor may, in actions filed by the creditor, avail himself of all defenses
which are derived from the nature of the obligation and of those which are personal to
him, or pertain to his own share. With respect to those which personally belong to the
others, he may avail himself thereof only as regards that part of the debt for which the
latter are responsible.
Kinds of Defense
a. Those derived from the nature of the obligation
- Lack of consideration or cause
- Absolute simulation-as when the contract is totally fictitious
- Illegal consideration
- Extinguishment of the obligation-as when the whole debt has been paid, remitted,
etc.
- Non-fulfillment of the suspensive condition
- Statute of frauds
- When all the debtors were incapacitated to give consent-such as unemancipated
minors, insane, etc.
- When there are Vices of Consent/Vitiated Consent on the part of all the debtors
b. Those personal to the debtor sued
c. Those personal to the other
Section 5 – Divisible and Indivisible Obligations
Art 1223
29
The divisibility of the indivisibility of the things that are the object of obligations in
which there is only one debtor and only one creditor does not alter or modify the
provisions of Chapter 2 of this Title.
Divisible Obligations-one capable of partial performance
Indivisible Obligations- one not capable of partial performance
Classes of Kinds of Indivisibility
a. Conventional- by common agreement
b. Natural or Absolute- because of the nature of the undertaking
c. Legal- if so provided by law
Kinds of Division
a. Quantitative- depends on quantity
b. Qualitative- depends on quality, irrespective of quantity
c. Intellectual or Moral- one that exists only in the mind, and nor in physical reality
Art 1224
A joint indivisible obligation give rise to indemnity for damages from the time
anyone of the debtors does not comply with his undertaking. The debtors who may have
been ready to fulfill their promises shall nor contribute to the indemnity beyond the
corresponding portion of the price of the thing or of the value of the service in which the
obligation consists.
Effect of Non Compliance- the obligation is converted to a monetary one for indemnity.
Art 1225
For the purpose of the preceding articles, obligations to give definite and those
which are not susceptible of partial performance shall be deemed to be indivisible.
In obligations not to do, divisibility or indivisibility shall be determined by the
character of the prestation in each particular case.
Obligations that are Deemed Indivisible:
a. Obligations to give definite things
b. Those which are not susceptible of partial performance
c. Even if the thing is physically divisible, it may be indivisible if so provided by law
d. Even if the thing is physically divisible, it may be indivisible if such was the
intention of the parties concerned
Obligations that are Deemed Divisible
a. When the object of the obligation is the execution of a certain number of days of
work
b. When the object of the obligation is the accomplishment of work by metric units
c. When the purpose of the obligation is to pay a certain amount in installment
d. When the object of the obligation is the accomplishment of work susceptible of
partial performance
30

The character of the prestation or obligation will determine the divisibility or
indivisibility of obligation not to do.
Section 6 – Obligations with a Penal Clause
Art 1226
In obligation with a penal clause, the penalty shall substitute the indemnity fro
damages and the payment of interest in case of non-compliance, if there is no stipulation
to the contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the
penalty or is guilty of fraud in the fulfillment of the obligation.
Principal Purpose of the Penal Clause- to insure the performance of the obligation and
also to substitute for damages and the payment of interest in case of non-compliance.
Exceptions to the General Rule:
a. When there is express stipulation to the effect that damages or interest may still
be recovered, despite the presence of the penalty clause
b. When the debtor refuses to pay the penalty imposed in the obligation
c. When the debtor is guilty of fraud in the fulfillment of the obligation
Art 1227
The debtor cannot exempt himself from the performance of the obligation by
paying the penalty, save in the case where this right has been expressly reserved for
him. Neither can the creditor demand the fulfillment of the obligation and the satisfaction
of the penalty at the same time, unless this right has been clearly granted to him.
However, if after the creditor has decided to require the fulfillment of the obligation, the
performance thereof should become impossible without his fault, the penalty may be
enforced.

IF the debtor can just pay the penalty, the fulfillment of the obligation will be
considered an alternative one.
Art 1228 – Proof of actual damages suffered by the creditor is not necessary in order
that the penalty may be demanded.
Art 1229
The judge shall equitably reduce the penalty when the principal obligation has
been partly or irregularly complied with by the debtor. Even if there has been no
performance, the penalty may also be reduced by the courts if it is iniquitous or
unconscionable.
When Penalty may be Reduced by Court;
a. When the obligation has been partly complied with by the debtor
b. When the obligation has been irregularly complied with by the debtor
c. When the penalty is iniquitous or unconscionable, even if there has been no
performance at all
It is thus clear that the penal clause cannot be enforced if
a. The breach is the fault of the creditor
31
b. A fortuitous event intervened, unless the debtor expressly agreed on his liability
in case of fortuitous events
c. The debtor is not yet in default
Art 1230 – The nullity of the penal clause does not carry with it that of the principal
obligation.
The nullity of the principal obligation carries with it that of the penal clause.
CHAPTER IV
EXTINGUISHMENT OF OBLIGATIONS
32
1.
2.
3.
4.
5.
6.
7.
8.
9.
Modes of Extinguishment of Obligation:
Payment or performance
Loss of the thing due
Condonation or remission of debt
Confusion or merger of rights
Compensation
Novation
Annulment
Rescission
Fulfillment of resolutory condition
1. PAYMENT OR PERFORMANCE – delivery of money and performance, in any other
manner of the obligation
REQUISITES FOR VALID PAYMENT/PERFORMANCE
A. With respect to prestation itself:
(1) identity
(2) integrity or completeness
(3) indivisibility
B. With respect to parties - must be made by proper party to proper party
(1) Payor
(a) Payor - the one performing, he can be the debtor himself or his heirs or
assigns or his agent, or anyone interested in the fulfillment of the
obligation; can be anyone as long as it is with the creditor's consent
(b) 3RD person pays/performs - only the creditor's consent;
If performance is done also with debtor's consent - he takes the place of the
debtor. There is subrogation except if the 3rd person intended it to be a
donation
(c) 3rd person pays/performs with consent of creditor but not with debtor's
consent, the repayment is only to the extent that the payment has been
beneficial to debtor
(2) Payee
(a) payee - creditor or obligee or successor in interest of transferee, or agent
(b) 3rd person - if any of the ff. concur:
i.
it must have redounded to the obligee's benefit and only to the extent
of such benefit
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ii. it falls under art 1241, par 1,2,3 - the benefit is total so, performance
is total
(c) anyone in possession of the credit - but will apply only if debt has not
been previously garnished
PAYMENT MADE TO AN INCAPACITATED PERSON , VALID IF:
1. Incapacitated person kept the thing delivered, or
2. Insofar as the payment has been beneficial to him
PAYMENT TO A 3RD PARTY NOT AUTHORIZED, VALID IF PROVED & ONLY
TO THE EXTENT OF BENEFIT;
PRESUMED IF:
1. After payment, 3rd person acquires the creditor’s rights
2. Creditor ratifies payment to 3rd person
3. By creditor’s conduct, debtor has been led to make the payment (estoppel)
PAYMENT MADE IN GOOD FAITH TO A PERSON IN POSSESSION OF CREDIT
SHALL RELEASE DEBTOR,
Requisites:
1. Payment by debtor must be made in good faith
2. Creditor must be in possession of the credit & not merely the evidence of
indebtedness
C. With respect to time and place of payment - must be according to the
obligation
Where payment should be made:
1. In the place designated in the obligation
2. If there is no express stipulation and the undertaking is to deliver a specific
thing – at the place where the thing might be at the moment the obligation
was constituted
3. In other case – in the place of the domicile of the debtor
Time of payment - time stipulated
Effect of payment – extinguish obligation
Except: order to retain debt
34
SUBSTANTIAL PERFORMANCE
1. Attempt in Good Faith to perform without willful or intentional departure
2. Deviation is slight
3. Omission/Defect is technical or unimportant
4. Must not be so material that intention of parties is not attained
Effect of Substantial performance in good faith
1. Obligor may recover as though there has been strict and complete fulfillment,
less damages suffered by the obligee
2. Right to rescind cannot be used for slight breach
SPECIAL RULES/FORMS OF PAYMENT - Special Forms:
a. Application of Payments – the designation of the debt which payment shall
be made, out of 2 or more debts owing the same creditor:
stipulation or application of party given benefit of period – OK;
to be valid: must be debtor’s choice or w/ consent of debtor
Requisites for the Application of payment:
1. Various debts of the same kind
2. Same debtor
3. Same creditor
4. All debts must be due
Exception: there may be application of payment even if all debts are
not yet due if:
a) parties so stipulate
b) when application of payment is made by the party for whose
benefit the term has been constituted
5. Payment is not enough to extinguish all debts
HOW APPLICATION IS MADE:
1. Debtor makes the designation
2. If not, creditor makes it by so stating in the receipt that he issues – unless
there is cause for invalidating the contract
3. If neither the debtor nor creditor has made the application or if the
application is not valid, then application, is made by operation of law
35
WHO MAKES APPLICATION:
General Rule: Debtor
Exception: Creditor –
a) Debtor without protest accepts receipt in which creditor specified
expressly and unmistakably the obligation to which such payment was to
be applied – debtor in this case renounced the right of choice
b) When monthly statements were made by the bank specifying the
application and the debtor signed said statements approving the status of
her account as thus sent to her monthly by the bank
IN CASE NO APPLICATION HAS BEEN MADE
1. Apply payment to the most onerous
2. If debts are of the same nature and burden, application shall be made to
all proportionately
b. Dacion en Pago – mode of extinguishing an obligation whereby the debtor
alienates in favor of the creditor property for the satisfaction of monetary debt;
extinguish up to amount of property unless w/ contrary stipulation;
A special form of payment because 1 element of payment is missing: IDENTITY

Governed by law on sales

Conditions for a valid dacion:
1) If creditor consents, for a sale presupposes the consent of both
parties
2) If dacion will not prejudice the other creditors
3) If debtor is not judicially declared insolvent
c. Cession/Assignment in Favor of creditors – the process by which debtor
transfer all the properties not subject to execution in favor of creditors is that
the latter may sell them and thus, apply the proceeds to their credits;
extinguish up to amount of net proceeds ( unless w/ contrary stipulation )
Kinds:
1. Legal – governed by the insolvency law
2. Voluntary – agreement of creditors
REQUISITES FOR VOLUNTARY ASSIGNMENT
a) More than 1 debt
36
b) More than 1 creditor
c) Complete or partial insolvency of debtor
d) Abandonment of all debtor’s property not exempt from execution
e) Acceptance or consent on the part of the creditors
EFFECTS:
a) Creditors do not become the owner; they are merely assignees with
authority to sell
b) Debtor is released up to the amount of the net proceeds of the sale,
unless there is a stipulation to the contrary
c) Creditors will collect credits in the order of preference agreed upon, or
in default of agreement, in the order ordinarily established by law
d. Consignation
Tender -the act of offering the creditor what is due him together with a
demand that the creditor accept the same (When creditor refuses w/o just
cause to accept payment, he becomes in mora accepiendi & debtor is
released from responsibility if he consigns the thing or sum due)
Consignation – the act of depositing the thing due with the court or judicial
authorities whenever the creditor cannot accept or refuses to accept
payment; generally requires prior tender of payment
REQUISITES OF VALID CONSIGNATION:
(1) Existence of valid debt
(2) Consignation was made because of some legal cause - previous valid
tender was unjustly refused or circumstances making previous tender
exempt
(3) Prior Notice of Consignation had been given to the person interested in
performance of obligation (1st notice)
(4) actual deposit/Consignation with proper judicial authorities
(5) subsequent notice of Consignation (2nd notice)
Effects: Extinguishment of obligation
(1) Debtor may ask judge to order cancellation of obligation
(2) Running of interest is suspended
37
(3) Before creditor accepts or before judge declares consignation has been
properly made, obligation remains ( debtor bears risk of loss at the
meantime, after acceptance by creditor or after judge declares that
consignation has been properly made – risk of loss is shifted to creditor)
Consignation w/o prior tender – allowed in:
1. creditor absent or unknown/ does not appear at the place of payment
2. incapacitated to receive payment at the time it is due
3. refuses to issue receipt w/o just cause
4. 2 or more creditor claiming the same right to collect
5. title of obligation has been lost
2. LOSS OF THE THING DUE – partial or total/ includes impossibility of performance
WHEN IS THERE A LOSS:
1) When the object perishes (physically)
2) When it goes out of commerce
3) When it disappears in such a way that: its existence is unknown or it cannot be
recovered
WHEN IS THERE IMPOSSIBILITY OF PERFORMANCE
1) Physical impossibility
2) Legal impossibility :
(a) Directly – caused as when prohibited by law
(b) Indirectly – caused as when debtor is required to enter a military draft
OBLIGATION TO DELIVER A SPECIFIC THING
General Rule: Extinguished
Exceptions:
a) Debtor is at fault
b) Debtor is made liable for fortuitous event because of a provision of law,
contractual stipulation or the nature of the obligation requires assumption of risk
on part of debtor
OBLIGATION TO DELIVER A GENERIC THING
38
General Rule: Not extinguished
Exceptions:
a) if the generic thing is delimited
b) if the generic thing has already been segregated
c) monetary obligation
OBLIGATION TO DO
General Rule: Debtor is released when prestation becomes legally or physically
impossible without fault on part of debtor
EFFECT OF PARTIAL LOSS – ( judicial determination of extent is necessary)
a) when loss is significant – may be enough to extinguish obligation
b) when loss insignificant – not enough to extinguish obligation
WHEN THING IS LOST IN THE POSSESSION OF THE DEBTOR
Presumption: Loss due to debtor’s fault ( disputable )
Exception: natural calamity, earthquake, flood, storm
3. REBUS SIC STANTIBUS - agreement is valid only if the same conditions prevailing
at time of contracting continue to exist at the time of performance
EFFECT OF DIFFICULTY BEYOND PARTIES’ CONTEMPLATION
Rule: Obligor may be released in whole or in part
REQUISITES:
(a) The event or change could not have been forseen at the time of the
execution of the contract
(b) The performance is extremely difficult, but not impossible (because if it is
impossible, it is extinguished by impossibility)
(c) The event was not due to the act of any of the parties
(d) The contract is for a future prestation
4. CONDONATION/REMISSION OF THE DEBT – gratuitous abandonment of debt; right
to claim; donation; rules of donation applies; express or implied
REQUISITES:
a. There must be an agreement
39
b. There must be a subject matter (object of the remission, otherwise there would
be nothing to condone)
c. Cause of consideration must be liberality (Essentially gratuitous, an act of
liberality )
d. Parties must be capacitated and must consent; requires acceptance by obligor;
implied in mortis causa & expressed inter vivos
e. Formalities of a donation are required in the case of an express remission
f.
Revocable – subject to rule on inofficious donation ( excessive, legitime is
impaired ) & ingratitude & condition not followed
g. Obligation remitted must have been demandable at the time of remission
h. Waivers or remission are not to be presumed generally
Forms:
Extent:
a. Express – formalities a. total
of donation
b. Implied – conduct is b. partial
sufficient
Kinds:
a. Principal – accessory also condoned
b. accessory – principal still outstanding
c. accessory oblig. Of pledge – condoned;
presumption only, rebuttable
Requisites of Implied:
1. voluntary delivery – presumption; when evidence of indebtedness is w/ debtor –
presumed voluntarily delivery by creditor; rebuttable
2. effect of delivery of evidence of indebtedness is conclusion that debt is condoned
– already conclusion;
voluntary delivery of private document
a. if in hands of joint debtor – only his share is condoned
b. if in hands of solidary debtor - whole debt is condoned
c. Tacit – voluntary destruction of instrument by creditor; made to prescribe
w/o demanding
5. CONFUSION OR MERGER OF RIGHTS– character of debtor & creditor is merged in
same person with respect to same obligation
REQUISITES:
a. It must take place between principal debtor & principal creditor only
b. Merger must be clear & definite
c. The obligation involved must be same & identical – one obligation only
40
d. Revocable, if reason for confusion ceases, the obligation is revived
6. COMPENSATION – Set off; it is a mode of extinguishment to the concurrent amount
the obligation of persons who are in their own right reciprocally debtors or creditors
REQUISITES:
a. Both parties must be mutually creditors and debtors - in their own right and as
principals
b. Both debts must consist in sum of money or if consumable , of the same kind
or quality
c. Both debts are due
d. Both debts are liquidated & demandable (determined)
e. Neither debt must be retained in a controversy commenced by 3rd person &
communicated w/ debtor (neither debt is garnished)
Kinds:
a. legal – by operation of law; as long as 5 requisites concur- even if unknown
to parties & if payable in diff places; indemnity for expense of exchanges;
even if not equal debts – only up to concurring amount
b. conventional – agreement of parties is enough, forget other requirement as
long as both consented
c. facultative – one party has choice of claiming/opposing – one who has
benefit of period may choose to compensate
- not all requisites are present
- depositum; commodatum; criminal offense; claim for future support; taxes
d. judicial – set off; upon order of the court; needs pleading & proof; all
requirements must concur except liquidation
e. total – when 2 debts are of the same amount
f. partial – when 2 debts are not of the same amount
Effect of assignment of credit to 3rd person; can there still be compensation
a. if made after compensation took place – no effect; compensation already
perfected
b. if made before compensation took place – depends
1. with consent of debtor – debtor is estopped unless he reserves his right &
gave notice to assignee
2. with knowledge but w/o consent of debtor – compensation may be set up
as to debts maturing prior to assignment
3. w/o knowledge – compensation may be set-up on all debts prior to his
knowledge
7. NOVATION – extinguishment of obligation by creating/ substituting a new one in its
place
a. changing object or principal conditions
b. substituting person of debtor
c. subrogating 3rd person in right of creditor
41
REQUISITES:
a. valid obligation
b. intent to extinguish old obligation – expressed or implied: completely/substantially
incompatible old and new obligation on every point
c. capacity & consent of parties to the new obligation
d. valid new obligation
EFFECT OF NOVATION:
a. extinguishment of principal carries accessory, except:
- stipulation to contrary
- stipulation pour autri unless beneficiary consents
- modificatory novation only; obliged to w/c is less onerous
- old obligation is void
b. old obligation subsists if:
- new obligation is void or voidable but annulled already ( except: intention of
parties )
c. if old obligation has condition
-
if Resolutory & it occurred –old obligation already extinguished; no new
obligation since nothing to novate
if suspensive & it never occurred –as if no obligation; also nothing to novate
d. if old obligation has condition, must be compatible with the new obligation; if new
is w/o condition – deemed attached to new
e. if new obligation has condition
- if resolutory: valid
-
if suspensive & did not materialize: old obligation is enforced
KINDS:
a. REAL/OBJECTIVE – change object, cause/consideration or principal condition
b. PERSONAL/SUBJECTIVE
1. substituting person of debtor ( passive )
EXPROMISION; initiative is from 3rd person or new debtor; new debtor &
creditor to consent; old debtor released from obligation;
subject to full reimbursement & subrogation if made w/ consent of old debtor;
if w/o consent or against will , only beneficial reimbursement;
if new debtor is insolvent, not responsible since w/o his consent
DELEGACION; initiative of old debtor; all parties to consent; full
reimbursement;
42
if insolvent new debtor – not responsible old debtor because obligation
extinguished by valid novation unless:
insolvency already existing & of public knowledge or know to him at time of
delegacion
a. Delegante – old debtor
b. Delegatario - creditor
c. Delegado – new debtor
2. subrogating 3rd person to rights of creditor ( active )
a. conventional- agreement & consent of all parties; clearly established
b. legal- takes place by operation of law; no need for consent; not presumed
except as provided for in law:
presumed when1. creditor pays another preferred creditor even w/o debtor’s knowledge
2. 3rd person not interested in obligation pays w/ approval of debtor
3. person interested in fulfillment of obligation pays debt even w/o
knowledge of debtor
Difference from payment by 3rd person
1. debtor is not nec. Released from debt
Change of debtor
1. debtor is released
2. can be done w/o consent of creditor
2. needs consent of creditor
– express or implied
3. 2 obligations; 1 is extinguished & new one
created
4. new debtor is obliged to pay
3. 1 obligation
4. 3rd person has no oblig. to pay if insolvent
Art 1231 – Obligations are extinguished:
a. By payment or performance
b. By the loss of the thing due
c. By the condonation or remission of the debt
d. By the confusion or merger of the rights of creditor and debtor
e. By compensation
f. By novation
Other causes of extinguishment of obligation, such as annulment, rescission, fulfillment
of a resolutory condition, and prescription, are governed elsewhere in this code.
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Still other causes:
a. Death of a party in case the obligation is a personal one
b. Resolutory term
c. Change of civil status
d. Compromises
e. Mutual dissent
f. Impossibility of fulfillment
g. Fortuitous event
Section 1 – Payment or Performance
Art 1232 – Payment means not only the delivery of money but also the performance in
any other manner, of an obligation.
Art 1233 – a debt shall not be understood to have been paid unless the thing or service
in which the obligation consists has been completely delivered or rendered, as the case
may be.
Requisites for a valid payment under this Article:
a.
The very thing or service contemplated must be paid
b.
Fulfillment must be complete
Art 1235 – When the obligee accepts the performance, knowing its incompleteness of
irregularity, and without expressing any protest or objection, the obligation is deemed
fully complied with.
Art 1236
Creditor may accept payment from a stranger:
a. if there is a stipulation allowing this
b. or if said third person has an interest in the fulfillment of the obligation
The third person may pay:
a. With the knowledge and consent of the debtor- here, the payor/said 3rd person is
entitled to Reimbursement and Subrogation to such rights as guaranty, penalty
clause, or mortgage
b. Without the debtor’s knowledge or against his will – here, the payor is not entitled
to subrogation: he is allowed only Beneficial reimbursement
Instances when recovery can be had from the creditor and not from the innocent debtor:
a. When the debt has prescribed
b. When the debt had been completely remitted
c. When debt has already been paid
d. When legal compensation had already taken place
Art 1237 – Whoever pays on behalf of the debtor without the knowledge or against the
will of the later, cannot compel the creditor to subrogate him in his rights, such as those
arising from a mortgage, guaranty, or penalty.
Art 1238 – Payment made by a third person who does not intend to be reimbursed by
the debtor is deemed to be a donation, which requires the debtor’s consent. But the
payment is in any case valid as to the creditor who has accepted it.
44
Art 1239 – In obligations to give, payment made by one who does not have the free
disposal of the thing due and capacity to alienate it shall not be valid without prejudice to
the provisions of Art 1427 under the Title on “Natural Obligations”
General Rule- if the person paying has no capacity to give:
a. Payment is not valid-if accepted
b. Creditor cannot even be compelled to accept it
c. The remedy of consignation
Exception- When a minor between 18 and 21 years of age, who has entered into a
contract without the consent of the parents or guardian voluntarily pays a sum of money
or delivers a fungible thing in the fulfillment of an obligation, there shall be no right to
recover from the same from the obligee who has spent or consumed it in good faith.
Art 1240 - Payment shall be made to the person in whose favor the obligation has
been constituted, or his successor in interest, or any person authorized to receive it.

If the recipient was not authorized, the payment is generally not valid.
Art 1241 – Payment to a third parson who is incapacitated to administer his property
shall be valid if he has kept the thing delivered, or insofar as the payment has been
beneficial to him.
Payment made to a third person shall also be valid insofar as it has redounded to
the benefit of the creditor. Such benefit to the creditor need not be proven in the
following case:
a.
If after the payment, the third person acquires the rights of the
creditor
b.
If the creditor ratifies the payment to the third person
c.
If by the creditor’s conduct, the debtor has been led to believe that
the third person had authority to receive the payment
Examples When Benefit to the Creditor is Presumed:
a.
If after payment, the third person acquires the creditor’s rights-as when
the creditor is indebted to the third person
b.
If the creditor ratifies the payment to the third person-like if Meralco, a
few days after its unauthorized collector had collected form you, tells
you that the payment to him is all right. Here, the defect is cured.
c.
If by the creditor’s conduct, the debtor has been led to make the
payment-like when the impostor agent had been given by the Meralco
the usual uniform for collectors.
Art 1242 – Payment made in good faith to any person in possession of the credit shall
release the debtor.
Requisites:
a. Payment by the payor must be made in good faith (this is presumed, but payee
may be in good or bad faith)
b. The payee must be in possession of the credit itself (not merely the document
evidencing credit)
45
Art 1243- Payment made to the creditor by the debtor after the latter has been judicially
ordered to retain the debt shall not be valid.
Garnishment:
a. Takes place when the debtor of a debtor is ordered not to pay the latter so that
preference would be given to the latter’s consent
b. The preceding by which a debtor’s credit is subjected to the payment of his own
debt to another
Interpleader- the technical name of an action in which a certain person is in possession
of certain property wants claimants to litigate among themselves for the same.
Injunction- a judicial process by virtue of which a person is generally entered to refrain
from doing something. It is called Preliminary Injunction is the prohibition is during the
pendency of certain proceedings
Art 1244 – The debtor of a thing cannot compel the creditor to receive different one,
although the latter may be of the same value as, or more valuable that which is due.
In obligation to do or not to do, an act of forbearance cannot be substituted by another
act or forbearance against the obligee’s will.



Instances when Art 1244 does not apply:
A. In case of facultative obligations
In case there is another agreement resulting in either
a. dation in payment or
b. novation
Art 1245 – Dation in payment, whereby property is alienated to the creditor in
satisfaction of a debt in money, shall be governed by the law on sales.
Dation in Payment- that mode of extinguishing an obligation whereby the debtor
alienates in favor of the creditor property for the satisfaction of monetary debt.
Sale vs. Dation in Payment
a. Sale -there is no pre-existing credit
-This gives rise to obligations
-The cause or consideration here is the Price (from the point of view of
the seller) or the object (from the point of view of the buyer)
-There is greater freedom in the determination of the price
The giving of the price may generally and the obligation of the buyer
b. Dation in Payment
-There is a pre-existing credit
-This extinguishes obligations
The cause or consideration here, from the viewpoint of the debtor is the
extinguishment of his debt, and from the point of view of the creditor, it is
the acquisition of the object offered in credit
-There is less freedom in determining the price
46
The giving of the object in lieu if the credit may extinguish completely or
only partially the credit (depending on the agreement)

Conditions in which dation in payment would be valid:
a. If the creditor consents, for a sale presupposes the consent of both parties.
b. If the dation in payment will not prejudice the other creditors for this might lead to
debtor to connive with one creditor in defrauding the other creditors.
c. If the debtor is not judicially declared insolvent, for here, his property is supposed
to be administered by the assignee.

In dation, it is not always necessary that all the property of the debtor will be given to
satisfy the credit.
Art 1246 – When the obligation consists in the delivery of an indeterminate or generic
thing, whose quality and circumstances have not been stated, the creditor cannot
demand a thing of superior quality. Neither can the debtor deliver a thing of inferior
quality. The purpose of the obligation and other circumstances shall be taken into
consideration.

If the contract does not specify the quality:
a. The creditor cannot demand a thing of superior quality- but if he desires, he may
demand and accept one of inferior quality.
b. The debtor cannot deliver a thing of inferior quality- but if he so desires, he may
deliver one of superior quality- provided it is not of a different kind.
Art 1248 –Unless there is an express stipulation to that effect, the creditor cannot be
compelled partially to receive the prestations in which the obligation consists. Neither
may the debtor be required to make partial payments.
However, when the debt is in part liquidated and on part unliquidated, the creditor
may demand and the debtor may effect the payment of the former without waiting for the
liquidation lf the latter.
Exceptions when Partial Performance is Allowed:
a. When there is stipulation to this effect
b. When the different prestations are subject to different conditions or different
terms (e.g. like a debt payable in installment)
c. When a debt is in part liquidated and in part unliquidated, in which case
performance of the liquidated part may be insisted upon by either by the debtor
or creditor.
d. When a joint debtor pays his share or the creditor demands the same
e. When a solidary debtor pays only the part demandable because the rest are not
yet demandable on account on their being subject to different terms and
conditions
f. In case of compensation, which one debt is larger than the other, it follows that a
balance is left.
Art 1249
47
That payments of debts in money shall be made in the currency stipulated, and if
it is not possible to deliver such currency, then in the currency which is legal tender in
the Philippines.
In the meantime, the action derived from the original obligation shall be held in
abeyance.
Legal tender- it is that which a debtor may compel the creditor to accept in payment of a
debt.
Stipulation of another currency:
a. Under the first paragraph of this Article, payment may be either:
 In the currency stipulated
 Or if it is not possible to deliver such currency, then in Philippine legal tender
Art 1250
In case an extraordinary inflation or deflation of the currency stipulated should
supervene, the value of the currency at the time of the establishment of the obligation
shall b the basis of payment, unless there is an agreement to the contrary.
Inflation – it is a sharp sudden increase of money or credit or both without a
corresponding increase in business transaction
*
Under this article, the basis of payment is the value at the time the obligation was
constituted or incurred, unless there is an agreement to the contrary.
Art 1251 - Payment shall be made in the place designated in the obligation.
There being no express stipulation and if the undertaking is to deliver a thing, the
payment shall be made wherever the thing might be at the moment the obligation was
constituted.
In any other case, the place of payment shall be the domicile of the debtor. If the
debtor changes his domicile in bad faith, or after he has incurred in delay, the additional
expenses shall be borne by him.
Where payment must be made:
a. If there is stipulation – in the place designated
b. If there is no stipulation:
- If it is an obligation to deliver a determinate thing, then on the place
where the thing might be at the time the obligation was constituted;
- If the obligation is for any other thing, delivery must be made to the
domicile of the debtor.
Subsection 1 – Application of Payments
Art. 1252
4 special forms of payment:
a. Application or imputation of payments
b. Dation in payment
c. Assignment in favor of creditors/cessation
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d. Tender of payment and consignation
Application of payment – the designation of the debt to which should be applied a
payment made by a debtor who owes several debts in favor of the same creditor
Requisites for application:
a. There must be 2 or more debts
b. The debts must be of the same kind
c. The debts are owed by the same debtor in favor of the same creditor
d. All the debts must be due
General rule: it is the debtor who is given the right to select which of his debt he is
paying.
Exception:
d.
If there was a valid prior but contrary agreement, the debtor cannot
choose
The debtor cannot choose to pay part of the principal ahead of the
interest unless the creditor consents.
e.
How application for payment is made:
a. The debtor makes a designation
b. If not, the creditor makes it, by so stating in the receipt that he issues, unless
there is cause for invalidating the contract
c. If neither the debtor nor the creditor has made the application, or if the
application is not valid, then application is made by operation of law.



If the creditor makes the application without the knowledge and
consent of the debtor, the application is not valid.
Once the application has been made, it may not be revoked, unless
both parties agree. Even if both parties agree, however, still the
revocation or change in the application will not be allowed if third
persons would be prejudiced.
Application must be made at the time when payment by the debtor is
made, not afterwards.
Art. 1253
If the debt produces interest, payment of the principal shall not be deemed to
have been made until the interest has been covered.



Interest must be paid first – the debtor cannot insist that his payment be credited
to the principal instead of the interest. However, if the creditor agrees, that is ala
right.
Effect if payment is credited to the principal – reduction of the principal would of
course result in the decrease of the total interest collectible.
What interest I supposed to be paid:
d.
Interest by way of compensation
e.
Interest by way of damages due to default
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Art. 1254
Rules in case no application for payment has been voluntarily made
a.
Apply it to the most onerous/heavy/burdensome- (in case the due and
demandable debts are of different natures)
b.
If the debts are of the same nature and burden, application shall be made to all
proportionately.
1.If the debtor makes the application, the payment should be credited to the first
debt. The debtor cannot insist that the creditor accept it for the second debt for
insofar as the second debt is concerned, it is only a partial payment. And under
the law, a creditor cannot generally be compelled to receive partial payment
3. If no application has been made, the law steps in, and application will be
made, not equally but proportionately.
Section 2
Payment by Cession
Art 1255
Cession or assignment in favor of creditors- it is a process by which a debtor transfers all
the properties not subject to execution in favor of his creditors so that the properties not
subject to execution in favor of his creditors so that the latter may sell them, and thus
apply the proceeds to their credits.
Kinds or Classes of Assignment
a. Legal- the majority of creditors must agree; governed by the insolvency law
b. Voluntary-all creditors must agree; this is referred to in Art 1255
Requisites for Voluntary Assignment:
a. More than 1 debt
b. More then 1 creditor
c. Complete or partial insolvency of debtor
d. Abandonment of all debtor’s property not exempt from execution in favor of
creditors (unless exemption is validly waived by the debtor)
e. Acceptance on consent on the part of the creditors (for it cannot be imposed
upon an unwilling creditor)
Effect of Voluntary Assignment
a. The creditor do not become the owners; they are merely assignees with authority
b. The debtor is released up to the amount of the net proceeds of the sale, unless
there is stipulation to the contrary. The balance remains collectible.
c. Creditor will collect credits in the order of preference agreed upon, or in default of
agreement, in the order ordinarily established by law.
Cession Distinguished from Dation in Payment
a. Dation in Payment
-Does not affect all the properties
-Does not require plurality of creditors
-Only the specific or concerned creditor’s consent is required
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-May take place during the solvency of the debtor
Transfers ownership upon delivery
-This is really an act of novation
b. Cession
-In general, affects all the properties of the debtor
-Requires more than 1 creditor
Requires the consent of all the creditors
-Requires full or partial insolvency
Does not transfer ownership
Not an act of novation
Art 1256
Tender of Payment- the act of offering the creditor what is due him together with a
demand that the creditor accept the same.
Consignation-the act of depositing the thing due with the court or judicial authorities
whenever the creditor cannot accept or refuses to accept payment. It generally requires
a prior tender of payment. It releases the debtor of his debt.

In tender of payment and consignation, to extinguish the debtor’s obligation, one
must comply with the requisites provided in Arts 1256-1258.
Art 1257 – In order that the consignation of the thing due may release the obligor, it
must first be announced to the persons interested in the fulfillment of the obligation.
The consignation shall be ineffectual if it is not made strictly in consonance with
the provisions which regulate payment.
Essential Requisites for Consignation:
a. Existence of a valid debt
b. Valid prior tender, unless tender is excused
c. Prior notice of consignation (before deposit0
d. Actual consignation (deposit)
e. Subsequent notice of consignation
Art 1258 – Consignation shall be made by depositing the thing due at the disposal of
judicial authority, before whom the tender of payment shall be proved, in a proper case,
and the announcement of the consignation in other cases.
Art 1259 – The expenses of consignation, when properly made shall be charged against
the creditor.
Art 1260 – Once the consignation has been duly made, the debtor may ask the judge to
order the cancellation of the obligation.
Before the creditor has accepted the consignation, or before a judicial declaration
that the consignation has been properly made, the debtor may withdraw the thing or the
sum deposited, allowing the obligation to remain in force.
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If the consignation is duly (properly) made:
a. The debtor may ask the judge to order the cancellation of the obligation
b. The running of interest is suspended
c. Before the creditor accepts, or before the judge declares that consignation has
been made, the obligation remains
When debtor may withdraw the thing or sum consignated:
a. As a matter of right
1. Before the creditor has accepted the consignation
2. Or before there is a judicial declaration that the consignation had been
properly made-obligation and accessory stipulation remain
b. As a matter of privilege
When after consignation had been properly made, the creditor authorizes the
debtor to withdraw the thing.
Art 1261 – If the consideration having made, the creditor should authorize the debtor to
withdraw the same, he shall lose every preference which he may have over the thing.
The co-debtors, guarantors and sureties shall be released.
Section 2 – Loss of the Thing due
Loss- under this section, loss includes impossibility of performance
When is there a loss?
a. When the object perishes (physically it is destroyed)
b. When it goes out of commerce
c. When it disappears in such a way that:
 Its existence is unknown
 Or it cannot be recovered
Impossibility of Performance includes:
a. Physical impossibility
b. Legal impossibility- which is either
 Directly caused-when prohibited by law
 Indirectly caused- when the debtor is required to enter a military draft
c. Moral impossibility- impracticability
Art 1262
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An obligation which consists in the delivery of a determinate thing shall be
extinguished it should be lost or destroyed without the fault of the debtor, and before he
has incurred in delay.
2 Kinds of Obligations “To Give”
a. Obligation to give a Generic Thing- obligation is not extinguished by loss or by
fortuitous event because genus never perishes
b. Obligation to give a Specific Thing
Effect of Loss on an Obligation to Deliver a Specific Thing
General Rule: the obligation is extinguished
Exceptions:
a. If the debtor is at fault
b. When the debtor is made liable for a fortuitous event because:
 Of a previous law
 Of a contract stipulation
 The nature of the obligation requires the assumption of risk on the part of the
debtor
Examples of instances when the law requires liability even in the case of a fortuitous
event:
a. When the debtor is in default
b. When the debtor has promised to deliver the same thing to 2 or more parties who
do not have the same interest
c. When the obligation arises from a crime
d. When the borrower of an object has lent the thing to another who is not a
member of his own household
e. When the thing loaned has been delivered with appraisal of the value, unless
there is a stipulation exempting the borrower from responsibility in case of a
fortuitous event
f. When the payee in solutio indebiti is in bad faith
Art 1263 –In an obligation to deliver a generic thing, the loss or destruction of anything
of the same kind does not extinguish the obligation.
Exceptions:
a. If the generic thing is delimited
b. If the generic thing has already been segregated or set aside in which case, it
has become specific.
Art 1264 – The courts shall determine whether, under the circumstances, the partial loss
of the obligation is so important as to extinguish the obligation.
Art 1265 – Whenever the thing is lost in the possession of the debtor, it shall be
presumed that the loss was due to his fault, unless there is proof to the contrary, and
without prejudice to the provisions of Article 1165. This presumption does not apple in
case of earthquake, flood, storm or other natural calamity.
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
In a case filed by the creditor, he doesn’t have to prove that the debtor was at
fault, because it is already presumed.

When presumption does not apply:
In case of earthquake, flood, storm or other natural calamity.
Art 1266 – The debtor in obligations to do shall also be released when the prestation
becomes legally or physically impossible without the fault of the obligor.

This Article refers to a case when compliance of a personal obligation becomes,
without the debtor’s fault:
a. A legal impossibility
b. Or a physical impossibility


The impossibility must be after the constitution of the obligation.
If the act is subjectively impossible (for the debtor himself), but otherwise
objectively possible (for all others), usually the obligation subsists, unless
personal considerations are involved such as when only a particular company is
prohibited by law to furnish work on a certain day.
Art 1267



This Article refers to Moral Impossibility or Impracticability due to change of
certain conditions (rebus sic stantibus) – also referred to as the Doctrine of the
Frustration of the Commercial Object/”frustration of Enterprise”
Real Obligations (to give) are not included in this Article
General Rule- Impossibility of performance releases the obligor
Requisites for Art. 1267:
a. The service must become so difficult that it was manifestly beyond the
contemplation of BOTH parties. The difficulty could not possibly have been
anticipated or foreseen.
b. One of the parties must ask for relief
c. The object must be a future service with future unusual change in conditions.
Art 1268


This Article gives one instance where a fortuitous event does not extinguish the
obligation.
Exception: When the creditor is in Mora Accipiende (default on the part of the
creditor)
Art 1269 – The obligation having been extinguished by the loss of the thing, the creditor
shall have all the rights of action which the debtor may have against third persons by
reason of the loss.
Section 3 – Condonation of Remission of the Debt
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Art 1270 – Condonation or remission is essentially gratuitous and requires the
acceptance of the obligor. It may be made expressly or impliedly.
Remission or Condonation- it is the gratuitous abandonment by the creditor of his rights.
Essential Requisites for Remission:
a. There must be an agreement since acceptance of the offer is required.
b. The parties must be capacitated and must consent.
c. There must be subject matter.
d. The cause of consideration must be “liberality”
e. The obligation remitted must have been demandable at the time of remission.
f. The remission must not be in officious.
g. Formalities of a donation are required in the case of an express remission.
h. Waivers or remissions are not to be presumed generally.
Classes of Remission:
a. As regards its effect or extent:
 Total
 Partial-only a portion is remitted or the remission may refer only to the accessory
obligations
b. As regards its date of effectivity:
 inter vivos- during life
 mortis causa- after death
c. As regards its form:
*Implied or Tacit- required no formality
Express of Formal- requires formalities of a donation if inter vivos; of a will or cordial
if mortis causa

Effect if Remission is not Accepted by the Debtor- This would not be remission.
If the creditor does not really collect within the statute of limitations, the debt may
be said to have been extinguished by prescription.
Art 1271 – The delivery of a private document evidencing a credit, made voluntarily by
the creditor to the debtor, implies the renunciation of the action the former had against
the latter.
Art 1271 – tantamount to an implied Remission
Art 1272 – Whenever the private document in which the debt appears is found in the
possession of the debtor, it shall be presumed that the creditor delivered it voluntarily,
unless the contrary is proved.
Art 1273 – The renunciation of the principal debt shall extinguish the accessory
obligation; but the waiver of the latter shall leave the former in force.
Art 1274 – It is presumed that the accessory obligation of pledge has been remitted
when the thing pledged, after its delivery to the creditor, is found in the possession of the
debtor, or of a third person who owns the thing.

In a contract of pledge, delivery is mandatory so that the contract is perfected.
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Section 4 – Confusion or Merger of Rights
Art 1275 – The obligation is extinguished from the time the characters of creditors and
debtors are merged in the same person.
Merger or Confusion – It is the meeting in one person the qualities of a creditor and
debtor with respect to the same obligation.
Requisites of a Valid Merger:
a. It should take place between the principal debtor and creditor.
b. The merger must be clear and definite.
c. The very obligation involved must be the same or identical.
Art 1276 – Merger which takes place in the person of the principal debtor or creditor
benefits the guarantors. Confusion which takes place in the person of any of the latter
does not extinguish the obligation.
Art 1277 – Confusion does not extinguish a joint obligation except as regards the share
corresponding to the creditor or debtor in whom the two characters concur.

In joint obligations, the debts are distinct and separate from each other.
Section 5 – Compensation
Art 1278 – Compensation shall take place when two persons, in their own right, are
creditors and debtors of each other.
Compensation vs. Payment
a. While payment must be complete and indivisible as a rule, in compensation,
partial extinguishment is always permitted.
b. While payment involves action or delivery, true/legal compensation takes place
by operation of law.
Compensation vs. Merger/Confusion
a. As to the number of persons
 Confusion- there is only 1 person in whom is merged the qualities of creditor and
debtor
 Compensation – there must be 2 persons who are mutually creditor and debtor of
each other.
b. As to the number of obligations:
 Confusion- there can only be 1
 Compensation-there must be 2
Classes of Compensation
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a. According to its effect or extent
 Total-both obligations are completely extinguished because they are of the same
amount
 Partial- when a balance remains
b.




According to its origin or cause
Legal- takes place by operation of law
Voluntary or Conventional- due to the agreement of both parties
Judicial- also called “set off”
Facultative- one of the parties has the choice of claiming the compensation or of
opposing it.
Art 1279

The requisites enumerated under Art 1279 are those for LEGAL compensation.
VOLUNTARY compensation in general requires no requisite except that the
agreement be voluntarily and validly entered into.
Negative Requisites for Legal Compensation
a. Over either of the debts must there be any retention or controversy commenced
by third persons and communicated in due time to the debtor. (There can be no
legal compensation when one’s claim against another is still the subject of court
litigation)
b. There must have been no waiver of the compensation
c. The compensation of the debts must not have been prohibited by law
Art 1280 – Notwithstanding the provisions of the preceding article, the guarantor may
set up compensation as regards what the creditor may owe the principal debtor.
Art 1281 – Compensation may be total or partial. When the two debts are of the same
amount, there is total compensation.
Art 1282 – The parties may agree upon the compensation of debts whish are not yet
due.


This applies to conventional or voluntary compensation.
Requisites in Art 1279 do NOT apply.
Art 1283 – If one of the parties to a suit over an obligation has a claim for damages
against the other, the former may set it off by proving his right to said damages and the
amount thereof.

All the requisites mentioned in Art 1279 must be present, except at the time of
the pleading, the claim need not yet be liquidated.
Art 1284 – When one or both debts are rescissible or voidable, they may be
compensated against each other before they are judicially rescinded or avoided.

Rescissible or voidable debts are valid until rescinded or voided, hence,
compensation is allowed.
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Art 1285
The 3 Cases covered by Art 1285
a. The assignment may be made with the consent of the debtor
EFFECT: Compensation cannot be set up- because there has been consent and
therefore a waiver
EXCEPTION: If the right to the compensation (that has already taken place) is
reserved.
b. The assignment may be made with the knowledge but without the consent (or
against the will) of the debtor
EFFECT: Compensation can be set up regarding debts previous to the cession or
assignment. This refers to debts maturing before the assignment (that is, before the
notice) hence here, legal compensation has already taken place.
c. The assignment may be made without the knowledge of the debtor.
EFFECT: Debtor can set up compensation as a defense for all debts maturing
PRIOR to his knowledge of the assignment (whether the debts matured before or
after the assignment)
Art 1286 – Compensation takes place by operation of law, even though the debts may
be payable at different places, but there shall be an indemnity for expenses of exchange
or transportation to the place of payment.
Art 1287 – Compensation shall not be proper when one of the debts arises from a
depositum or from the obligation of a depository or of a bailee in commodatum.

This Article speaks of instances when legal compensation cannot take place,
such as:
a. When one debt arises from a depositum (not bank deposit for this is really a
loan)- It is the depository who cannot claim compensation. The depositor is
allowed to so claim.
b. When one debt arises from the obligations of a depository
c. When one debt arises from the obligations of a bailee in commodatum (the
borrower of property who pays nothing for the loan)- the lender may claim
compensation, the borrower is not allowed to do so.
Obligations of the Depository
a. He is obliged to keep the thing safely and to return it when required, to the
depositor, or to his heirs and successors, or to the person who may have been
designated in the contract.
b. Unless there is a stipulation to the contrary, the depositary cannot deposit the
thing to a third person
c. If a deposit with a third person is allowed, the depositary is liable for the loss of
he deposited the thing with a person who is manifestly careless or unfit.
d. The depositary is responsible for the negligence of his employees
e. The depositary cannot make use of the thing deposited without the express
permission of the depositor. Otherwise, he shall be liable for damages.
However, when the preservation of the thing requires its use, it must be used
only for that purpose.
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Art 1288- Neither shall there be compensation if one of the debts consists of civil liability
arising from a penal offense.
Art 1289 – If the person shall have against him, several debts which are susceptible of
compensation, the rules on the application of payment shall apply to the order of the
compensation.
Art 1290 – When all the requisites mentioned in Article 1279 are present, compensation
takes effect by operation of law, and extinguishes both debts to the concurrent amount,
even though the creditors and debtors are not aware of the compensation.
Art 1291
Novation- the substitution or change of an obligation by another, which extinguishes or
modifies the first, either changing its object or principal condition, or substituting another
in place of the debtor, or subrogating third person in the right of the creditor.
Kinds of Novation:
A. According to its Object or Purpose:
1. Real or Objective- changing the object or principal conditions of the obligation
2. Personal or Subjective -change of persons
a. Expromission or Delegacion- substituting the person of the debtor
b. Subrogating a third person in the rights of the creditor- may be
b1.Conventional Subrogation- by agreement
b2.Legal Subrogation- by operation of law
b3. Mixed- change of object or parties
B. According to the form of the constitution
1. Express- it is declared in unequivocal terms
2. Implied- when the 2 obligations are essentially incompatible with each other.
C. According to its extent of effect
1. Total or extensive novation – when the old obligation is completely extinguished
2. Partial or Modificatory – also called imperfect or improper – the old obligation is
merely modified, thus, it still remains in force insofar as it has been modified.
Requisites for Novation:
a. The existence of a valid OLD obligation
b. The intent to extinguish or modify the old obligation by a substantial difference
(the extinguishment/modification itself is a result of novation)
c. The capacity and consent of all the parties (except in the case of expromision,
where the old debtor does not participate)
d. The validity of the new obligation
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Art 1292 – In order that an obligation may be extinguished by another which substitute
the same, it is imperative that it be so declared in unequivocal terms, or that the old and
the new obligation be on every point incompatible with each other.
How implied Novation may be Made- it is done by making Substantial Changes in:
a. The object or subject matter of the contract (e.g. delivery of a car instead of a
diamond ring)
b. The cause or consideration of the contract (e.g. upward changes in price)
a. The principal terms of the contract (e.g. reduction of the term or period
originally stipulated)
Art 1293
2 Kinds if Personal or Subjective Novation:
a. Passive- change in the debtor
b. Active- change in the creditor

Art 1293 speaks of Passive subjective Novation- which may be in the form of:
a. Expromission- initiative comes from a third person
c. Delegacion- initiative comes from the debtor, for it is he who delegates another to
pay the debt, and thus, he excuses himself. The 3 parties, the old debtor, the
new debtor and the creditor, must agree.
Art 1294 – If the substitution is without the knowledge or against the will of the debtor,
the new debtor’s insolvency or non-fulfillment of the obligation shall not give rise to any
liability on the part of the original debtor.
Requisites for Expromision:
a. The initiative must come from a third person-who will be new debtor
b. the new debtor and the creditor must consent
c. the old debtor must be excused or released from his obligation (The old debtor’s
knowledge/consent is not required
Art 1295 – The insolvency of the debtor, who has been proposed by the original debtor
and accepted by the creditor, shall not revive the action of the latter against the original
obligor, except when said insolvency was already existing and of public knowledge or
known to the debtor, when he delegated his debts.
Requisites for Delegacion:
a. The initiative comes from the old debtor
b. All the parties concerned must consent or agree
Art 1296
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
Accessory obligations or stipulations made in favor of third persons remain
unless said third persons have their consent to the novation.
Art 1297 – If the new obligation is void, the original one shall subsist unless the parties
intend that the former relation should be extinguished in any event.
Other factors:
a. If the new obligation is subject to a condition and said condition does not materialize,
the old obligation subsists.
If the new obligation was intended, but the new contract was never perfected fro lack of
the necessary consent, the old obligation continues.
Rule if New Obligation is Merely Voidable;
a. The old obligation is novated because a voidable obligation is valid until it is annulled
b. If the new obligation is annulled, the old obligation subsists, and whatever novation
has taken place will naturally have to be set aside
Art 1298 - Effect if the Old Obligation was Void
a. if the old obligation is VOID, there is no valid novation
b. if the obligation was VOIDABLE and has already been annulled, there is no more
obligation. Thus, the novation is also void.

If the old obligation was VODABLE, and has NOT YET been annulled, there
MAY BE a valid novation, provided that:
a. Annulment may be claimed only by the debtor or
b. When ratification validates acts which are voidable
Rule if the Old Obligation was Extinguished by Loss
a. If the loss was purely because of a fortuitous event, without liability on the
part of the debtor, the novation is VOID for there would be NO obligation to
novate.
b. If the loss made the debtor liable, there is still an existing monetary obligation the
may be the subject of novation.

A prescribed obligation may be the subject of novation because unless the
defense of prescription is set up by the debtor, the obligation continues, since
this failure amount to a WAIVER.
Effect on a Voidable Obligation of Novation by Expromision
a. The debtor is no doubt released from his obligation to the creditor for the
substitution was not done through his initiative.
b. But when the new debtor, after payment, sues the old debtor for Beneficial
reimbursement, the old debtor can set up whatever defenses he could have set
against the creditor.
Art 1299 – If the original obligation was subject to a suspensive or resolutory condition,
the new obligation shall be under the same condition, unless it is otherwise stipulated.
Art 1300
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Subrogation- the transfer to a third person of all the rights appertaining to the creditor,
including the right to proceed against guarantors, or possessors of mortgages, subject
to any legal provision or any modification that may be agreed.
Kinds of Subrogation:
From the viewpoint of Cause of Origin
a. Conventional or Voluntary Subrogation- requires an agreement and the consent
of the original parties and of the creditor.
b. Legal Subrogation- takes place by operation of law
From the viewpoint of extent
a. Total Subrogation
b. Partial Subrogation- there would now be 2 or more creditors


Legal subrogation is not presumed, except in cases expressly mentioned in the
law.
Conventional subrogation must be clearly established, otherwise, it is as id no
subrogation has taken place.
Art 1301 – Conventional subrogation of a third person requires the consent of the
original parties and of the third person.
Note: Generally, the debtor losses the right to present against the new creditor any
defense which he, the debtor, could have set up against the old creditor.
 Distinctions between Conventional Subrogation and Assignment of Credit
a. Conventional Subrogation
- Extinguishes the obligation and creates a new one
- This requires debtor’s consent
- The defect of the old obligation may be cured in such a way that the
new obligation becomes entirely valid
b. Assignment of Credit
- Mere transfer of the same right or credit (the transfer die not
extinguish the credit)
- This does not require the debtor’s consent
- The defect in the credit or right is not cured simply by assigning the
same

An assignment of a savings deposit in a bank is not a withdrawal but a sort of
subrogation, with the account being continued in the name of the assignee.
Art 1302 – This Article speaks of Legal Subrogation.
Art 1303
Effects of Total Subrogation
The credit and all appurtenant rights, either against the debtor, or against third
persons, are transferred (thus, in a sense the obligation subsists, that is, it has not yet
been extinguished or paid).
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Art 1304
Partial Subrogation
Here, there are the creditors
a. The old creditor, who still remains a creditor as to the balance (because partial
payment has been made to him)
b. The new creditor who is a creditor to the extent of what he had paid the creditor.
PART II – CONTRACTS
Meeting of minds bet 2 parties whereby one binds himself with respect to other to give
something or render some service
PRINCIPAL CHARACTERISTICS:
1. Autonomy of wills – parties may stipulate anything as long as not illegal, immoral,
etc.
2. Mutuality – performance or validity binds both parties; not left to will of one of parties
3. Obligatory Force – parties are bound from perfection of contract:
a. fulfill what has been expressly stipulated
b. all consequences w/c may be in keeping with good faith, usage & law
4. Relativity – binding only between the parties, their assigns, heirs; strangers cannot
demand enforcement
EXCEPTION TO RELATIVITY:
a. Accion pauliana
b. Accion directa
c. Stipulation pour autrui
REQUISITES OF STIPULATION POUR AUTRUI
(1) Parties must have clearly and deliberately conferred a favor upon a 3rd
person
(2) The stipulation in favor of a 3rd person should be a part of, not the whole
contract
(3) That the favorable stipulation should not be conditioned or compensated by
any kind of obligation whatsoever
(4) Neither of the contracting parties bears the legal representation or
authorization of 3rd party
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(5) The third person communicates his acceptance before revocation by the
original parties
d. Art 1312
e. Art 1314
REQUISITES OF ART 1312:
(1) Existence of a valid contract
(2) Knowledge of the contract by a 3rd person
(3) Interference by the 3rd person
KINDS OF CONTRACTS
As to perfection or formation:
1. consensual – perfected by agreement of parties
2. real – perfected by delivery ( commodatum, pledge, deposit )
3. formal/solemn – perfected by conformity to essential formalities ( donation )
As to cause
1. Onerous – with valuable consideration
2. Gratuitous – founded on liberality
3. Remunerative – prestation is given for service previously rendered not as obligation
As to importance or dependence of one upon another
1. principal – contract may stand alone
2. accessory – depends on another contract for its existence; may not exist on its own
3. Preparatory – not an end by itself; a means through which future contracts may be
made
As to parties obliged:
1. Unilateral – only one of the parties has an obligation
2. Bilateral – both parties are required to render reciprocal prestations
As to name or designation:
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1. Nominate
2. Innominate
a) Do ut des – I give that you may give
b) Do ut facias – I give that you may do
c) Facio ut des – I do that you may give
d) Facio ut facias – I do that you may do
STAGES IN A CONTRACT:
1. Preparation - negotiation
2. perfection/birth
3. consummation – performance
ESSENTIAL ELEMENTS:
1. Consent – meeting of minds between parties on subject matter & cause of contract;
concurrence of offer & acceptance
Requirements:
a. Plurality of subject
b. Capacity
c. Intelligence and free will
d. Manifestation of intent of parties
e. Cognition by the other party
f. Conformity of manifestation and cognition
Note: We follow the theory of cognition and not the theory of manifestation.
Under our civil law, the offer and acceptance concur only when the offeror
comes to know, and not when the offeree merely manifests his acceptance
ELEMENTS OF VALID OFFER
a. definite
b. complete
c. intentional
ELEMENTS OF VALID ACCEPTANCE
a. unequivocal
b. unconditional
WHEN OFFER BECOMES INEFFECTIVE:
1. death, civil interdiction, insanity or insolvency of either party before acceptance is
conveyed
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2. express or implied revocation of the offer by the offeree
3. qualified or conditional acceptance of the offer
4. subject matter becomes illegal or impossible before acceptance is communicated
PERIOD FOR ACCEPTANCE
1. stated fixed period in the offer
2. no stated fixed period
a) offer is made to a person present – acceptance must be made
immediately
b) offer is made to a person absent – acceptance may be made within such
time that, under normal circumstances, an answer can be received from
him
OPTION - option may be withdrawn anytime before acceptance is communicated but
not when supported by a consideration other than purchase price: option money
Note: Ang Yu v. CA (1994) states that a unilateral promise to buy or sell, if not
supported by a distinct consideration, may be withdrawn but may not be done
whimsically or arbitrarily; the right of the grantee here is damages and not
specific performance; Equatorial v. Mayfair(264 SCRA 483) held that an option
clause in order to be valid and enforceable must indicate the definite price at
which the person granting the option is willing to sell, contract can be
enforced and not only damages; Paranaque Kings V CA (1997) states that right
of first refusal may be enforced by specific performance.
PERSONS WHO CANNOT GIVE CONSENT TO A CONTRACT:
1. Minors
2. Insane or demented persons
3. Illiterates/ deaf-mutes who do not know how to write
4. Intoxicated and under hypnotic spell
5. Art 1331 - person under mistake; mistake may deprive intelligence
6. Art 1338 - person induced by fraud (dolo causante)
Note: Dolus bonus (usual exaggerations in trade) are not in themselves
fraudulent
RULE ON CONTRACTS ENTERED INTO BY MINORS
General Rule: VOIDABLE
66
EXCEPTIONS:
1. Upon reaching age of majority – they ratify the same
2. They were entered unto by a guardian and the court having jurisdiction had
approved the same
3. They were contracts for necessities such as food, but here the persons who
are bound to give them support should pay therefor
4. Minor is estopped for having misrepresented his age and misled the other
party (when age is close to age of majority as in the Mercado v Espiritu & Sia
Suan v Alcantara cases)
Note: In the Sia Suan v Alcantara case, there is a strong dissent by
J.Padilla to the effect that the minor cannot be estopped if he is too young
to give consent; one that is too young to give consent is too young to be
estopped. Subsequently, in Braganza v Villa-Abrille, the dissent became
the ruling. Minors could not be estopped
DISQUALIFIED TO ENTER INTO CONTRACTS: ( contracts entered into are
void )
1. those under civil interdiction
2. hospitalized lepers
3. prodigals
4. deaf and dumb who are unable to read and write
5. those who by reason of age, disease, weak mind and other similar causes,
cannot without outside aid, take care of themselves and manage their
property, becoming an easy prey for deceit and exploitation
CAUSES WHICH VITIATE FREEDOM
1. violence
REQUISITE:
a. Irresistable physical force
b. Such force is the determining cause for giving consent
2. Intimidation
REQUISITE:
a. Determining cause for the contract
b. Threatened act is unjust and unlawful
c. Real and serious
67
d. Produces a well grounded fear that the person making it will carry it over
3. undue influence
SIMULATED CONTRACTS
a. absolute – no intention to be bound at all, fictitious only – void from beginning
b. relative – there is intention to be bound but concealed; concealed contract
binds:
1. no prejudice to 3rd persons
2. not contrary to law, morals, etc.
2. OBJECT – The prestation
REQUISITES:
a) Within the commerce of man - either existing or in potency
b) Licit or not contrary to law, good customs
c) Possible
d) Determinate as to its kind or determinable w/o need to enter into a new contract
e) Transmissible
3. CAUSA – reason why parties enter into contract
REQUISITES:
a) It must exist
b) It must be true
c) It must be licit
MOTIVE - purely private reason; illegality does not invalidate contract except when it
predetermines purpose of contract; when merged into one
ABSENCE OF CAUSA
VOID - produce no legal effect
VOID - produce no legal effect
ILLEGALITY OF CAUSA
FALSITY OF CAUSA
VOIDABLE – party must prove that cause is untruthful;
presumption of validity but rebuttable
CAUSA NOT STATED IN PRESUMED TO EXIST - burden of proof is on the person
CONTRACT
assailing its existence
INADEQUACY OF CAUSA DOES NOT INVALIDATE CONTRACT PER SE
Exceptions:
1. fraud
68
2. mistake
3. undue influence
4. cases specified by law
- contracts entered when ward suffers
lesion of more than 25%
4. FORM – in some kind of contracts only as contracts are generally consensual; form
is a manner in which a contract is executed or manifested
a. Informal – may be entered into whatever form as long as there is consent,
object & cause
b. Formal – required by law to be in certain specified form such as: donation of
real property, stipulation to pay interest, transfer of large cattle, sale of land
thru agent, contract of antichresis, contract of partnership, registration of
chattel mortgage, donation of personal prop in excess of 5,000
c. Real – creation of real rights over immovable prop – must be written
WHEN FORM IS IMPORTANT:
1) for validity (formal/solemn contracts)
2) for enforceability (statute of frauds)
3) for convenience
General Rule: contract is valid & binding in whatever form provided that 3 essential
requisites concur
Exception:
a. Law requires contract to be in some form for validity - donation & acceptance of
real property
b. Law requires contract to be in some form to be enforceable - Statute of Frauds;
contract is valid but right to enforce cannot be exercised; need ratification to be
enforceable
c. Law requires contract to be in some form for convenience - contract is valid &
enforceable, needed only to bind 3rd parties
-
ex: public documents needed for the ff:
1. contracts w/c object is creation, transmission or reformation of real rights
over immovables
2. cession, repudiation, renunciation of hereditary rights/CPG
3. power to administer property for another
4. cession of action of rights proceeding from an act appearing in a public
inst.
69
5. all other docs where amount involved is in excess of 500 ( must be written
even private docs )
REFORMATION OF CONTRACTS – remedy to conform to real intention of parties due
to mistake, fraud, inequitable conduct, accident
CAUSES/GROUNDS:
a. mutual: instrument includes something w/c should not be there or omit what
should be there

mutual

mistake of fact

clear & convincing proof

causes failure of instrument to express true intention
b. unilateral
 one party was mistaken
\
 other either acted fraudulently or inequitably or knew but concealed

party in good faith may ask for reformation
c. mistake by 3rd persons – due to ignorance, lack of skill, negligence , bad faith of
drafter, clerk, typist
d. others specified by law – to avoid frustration of true intent
REQUISITES:
1. there is a written instrument
2. there is meeting of minds
3. true intention not expressed in instrument
4. clear & convincing proof
5. facts put in issue in pleadings
Note: prescribes in 10 years from date of execution of instrument
WHEN NOT AVAILABLE:
a. simple donation inter vivos
b. wills
c. when real agreement is void
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d. estoppel; when party has brought suit to enforce it
KINDS OF DEFECTIVE CONTRACTS:
1. RESCISSIBLE CONTRACTS – Those which have caused a particular economic
damage either to one of the parties or to a 3rd person and which may be set aside
even if valid. It may be set aside in whole or in part, to the extent of the damage
caused'
REQUISITES:
a. Contract must be rescissible
(1) Under art 1381:
i. Contracts entered into by persons exercising fiduciary capacity
(a) Entered into by guardian whenever ward suffers damage by more
than 1/4 of value of object
(b) Agreed upon in representation of absentees, if absentee suffers lesion
by more than ¼ of value of property
(c) Contracts where rescission is based on fraud committed on creditor
(accion pauliana)
(d) Objects of litigation; contract entered into by defendant w/o knowledge
or approval of litigants or judicial authority
(e) Payment by an insolvent – on debts w/c are not yet due; prejudices
claim of others
(f) Provided for by law - art 1526, 1534, 1538, 1539, 1542, 1556, 1560,
1567 and 1659
ii.Under art 1382 - Payments made in a state of insolvency
b. Plaintiff has no other means to obtain reparation
b. Plaintiff must be able to return whatever he may be obliged to return due to
rescission
c. The things must not have been passed to 3rd parties who did not act in bad faith
d. It must be made within the prescribed period
OBLIGATION CREATED BY THE RESCISSION OF THE CONTRACT:
Mutual Restitution
1. Things w/c are the objects of the contract & their fruits
2. Price with interest
Note: Mutual restitution N.A. when:
1. creditor did not receive anything from contract
2. thing already in possession of party in good faith; subject to indemnity
only; if there are 2 or more alienations – liability of 1st infractor
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2. VOIDABLE CONTRACTS – intrinsic defect; valid until annulled; defect is due to vice
of consent or legal incapacity
CHARACTERISTICS:
a. Effective until set aside
b. May be assailed or attacked only in an action for that purpose
c. Can be confirmed ( Note: CONFIRMATION IS THE PROPER TERM FOR
CURING THE DEFECT OF A VOIDABLE CONTRACT)
d. Can be assailed only by the party whose consent was defective or his heirs or
assigns
WHAT CONTRACTS ARE VOIDABLE:
a. THOSE WHERE ONE OF THE PARTIES IS INCAPABLE OF GIVING
CONSENT TO A CONTRACT (legal incapacity)
(1) minors ( below 18 )
(2) insane unless acted in lucid interval
(3) deaf mute who can’t read or write
(4) persons specially disqualified: civil interdiction
(5) in state of drunkenness
(6) in state of hypnotic spell
b. THOSE WHERE THE CONSENT IS VITIATED BY MISTAKE, VIOLENCE,
INTIMIDATION, UNDUE INFLUENCE OR FRAUD (vice of consent)
(1) mistake – false belief into something
REQUISITES:
1. Refers to the subject of the thing which is the object of the contract
2. Refers to the nature of the contract
3. Refers to the principal conditions in an agreement
4. Error as to person - when it is the principal consideration of the contract
5. Error as to legal effect - when mistake is mutual and frustrates the real
purpose of parties
(2) violence – serious or irresistible force is employed to wrest consent
72
(3) intimidation – one party is compelled by a reasonable & well-grounded fear
of an imminent & grave danger upon person & property of himself, spouse,
ascendants or descendants (moral coercion)
(4) undue influence – person takes improper advantage of his power over will of
another depriving latter of reasonable freedom of choice
(5) fraud – thru insidious words or machinations of contracting parties, other is
induced to enter into contract w/o w/c he will not enter (dolo causante)
PERIOD TO BRING ACTION FOR ANNULMENT
4 years from time defect of consent ceases
Intimidation, violence, undue influence
Mistake, fraud
Incapacity
4 years from time of discovery
from time guardianship ceases
EFFECTS OF ANNULMENT:
1. Obligation to give – mutual restitution
2. Obligation to do – value of service
PRESCRIPTION IN ACTION FOR ANNULMENT OF VOIDABLE CONTRACTS:
4 years from time defect of consent ceases
Intimidation/Violence/undue Influence
Mistake/Fraud
4 years from time of discovery
Contracts
entered
into
by 4 years from time guardianship ceases
minors/incapacitated persons
3. UNENFORCEABLE CONTRACT – valid but cannot compel its execution unless
ratified; extrinsic defect; produce legal efefcts only after ratified
KINDS/VARIETIES:
1. Unauthorized/No sufficient authority – entered into in the name of another when:
a. no authority conferred
b. in excess of authority conferred ( ultra vires )
Note: Curable by RATIFICATION
2. Both parties incapable of giving consent -2 minor or 2 insane persons
Note: Curable by ACKNOWLEDGEMENT
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3. Failure to comply with Statute of Frauds
a. Agreement to be performed within a year after making contract
b. Special promise to answer for debt, default or miscarriage of another
c. Agreement made in consideration of promise to marry
d. Agreement for sale of goods, chattels or things in action at price not less than
500; exception: auction when recorded sale in sales book
e. Agreement for lease of property for more than 1 year & sale of real property
regardless of price
f.
Representation as to credit of another
2 WAYS OF CURING UNENFORCEABLE CONTRACTS:
1. Failure of defendant to object in time, to the presentation of parole evidence in
court, the defect of unenforceability is cured
2. Acceptance of benefits under the contract. If there is performance in either part
and there is acceptance of performance, it takes it out of unenforceable
contracts; also estoppel sets in by accepting performance, the defect is waived
4. VOID OR INEXISTENT – of no legal effect
CHARACTERISTICS:
a. It produces no effect whatsoever either against or in favor of anyone
b. There is no action for annulment necessary as such is ipso jure. A judicial
declaration to that effect is merely a declaration
c. It cannot be confirmed, ratified or cured
d. If performed, restoration is in order, except if pari delicto will apply
e. The right to set up the defense of nullity cannot be waived
f.
Imprescriptible
g. Anyone may invoke the nullity of the contract whenever its juridical effects are
asserted against him
KINDS OF VOID CONTRACT:
1) Those lacking in essential elements: no consent, no object, no cause
(inexistent ones) – essential formalities are not complied with ( ex: donation
propter nuptias – should conform to formalities of a donation to be valid )
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(a) Those w/c are absolutely simulated or fictitious – no cause
(b) Those which cause or object did not exist at the time of the transaction – no
cause/object
(c) Those whose object is outside the commerce of man – no object
(d) Those w/c contemplate an impossible service – no object
(e) Those w/c intention of parties relative to principal object of the contract
cannot be ascertained
2) Prohibited by law
(f) Those expressly prohibited or declared void by law - Contracts w/c violate any
legal provision, whether it amounts to a crime or not
3) Illegal/Illicit ones – Those whose cause, object or purpose is contrary to law,
morals, good customs, public order or public policy ; Ex: Contract to sell
marijuana
KINDS OF ILLEGAL CONTRACTS
CONTRACT
CONSTITUTE CONTRACT
DOES
NOT
CRIMINAL OFFENSE
CONSTITUTE
CRIMINAL
OFFENSE BUT IS ILLEGAL OR
UNLAWFUL PER SE
Parties are in  No
action
for
specific  No
action
for
specific
pari delicto
performance
performance
 No action for restitution on  No action for restitution on
either side. The law will leave
either side. The law will leave
you where you are
you where you are
 Both shall be prosecuted
 No confiscation
 Thing/price to be confiscated
in favor of government
Only one party  No
action
for
specific  No
action
for
specific
is guilty
performance
performance
 Innocent party is entitled to  Innocent party is entitled to
restitution
restitution
 Guilty party is not entitled to  Guilty party is not entitled to
restitution
restitution
 Guilty party will be prosecuted
 Instrument of crime will be
confiscated in favor of govt
PARI DELICTO DOCTRINE -both parties are guilty, no action against each other;
those who come in equity must come with clean hands; applies only to illegal
contracts & not to inexistent contracts; does not apply when a superior public policy
intervenes
EXCEPTION TO PARI DELICTO RULE
1. If purpose has not yet been accomplished & If damage has not been caused to
any 3rd person
Requisites:
75
a) contract is for an illegal purpose
b) contract must be repudiated by any of the parties
accomplished or damage is caused to 3rd parties
before purpose is
c) court believes that public interest will be served by allowing recovery
(discretionary upon the court ) – based on remorse; illegality is accomplished
when parties entered into contract; before it takes effect – party w/c is
remorseful prevents it
2. Where laws are issued to protect certain sectors: consumer protection, labor,
usury law
a) Consumer protection – if price of commodity is determined by statute, any
person paying an amount in excess of the maximum price allowed may
recover such excess
b) Labor – if law sets the minimum wage for laborers, any laborer who agreed
to receive less may still be entitled to recover the deficiency; if law set max
working hours & laborer who undertakes to work longer may demand
additional compensation
c) Interest paid in excess of the interest allowed by the usury law may be
recovered by debtor with interest from date of payment
3. If one party is incapacitated, courts may allow recovery of money, property
delivered by incapacitated person in the interest of justice; pari delicto cannot
apply because an incapacitated person does not know what he is entering into;
unable to understand the consequences of his own action
4. If agreement is not illegal per se but merely prohibited & prohibition is designated
for the protection of the plaintiff – may recover what he has paid or delivered by
virtue of public policy
MUTUAL RESTITUTION IN VOID CONTRACTS
General Rule: parties should return to each other what they have given by virtue of
the void contract in case where nullity arose from defect in essential elements
1. return object of contract & fruits
2. return price plus interest
Exception: No recovery can be had in cases where nullity of contract arose from
illegality of contract where parties are in pari delicto;
except:
a. incapacitated – not obliged to return what he gave but may recover what
he has given
b. other party is less guilty or not guilty
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CONTRACTS
Art 1305
ELEMENTS OF A CONTRACT
a. Essential Elements
1.Consent
2.Subject Matter
3.Cause or Consideration
b. Natural Elements- presumed to exist, unless the contrary is stipulated
Ex. Warrants against eviction and against hidden defects
c. Accidental Elements – existence of such is dependent on the agreement of the
parties.
Classification of Contracts
a. According to perfection or formation
1. Consensual
2. Real-perfected by delivery
3. Formal or Solemn
b. According to cause of equivalence of the value of prestations:
1. Onerous
2. Gratuitous or Lucrative
3. Remunerative
c. According to Importance or dependence of one upon another
1. Principal – can stand alone
2. Accessory – depends upon the existence of another contract
3. Preparatory – here, the parties do not consider the contract as an end by
itself, but as a means thru which future transaction or contracts may be
made
Ex. Agency, partnership
d. According to the parties obligated
1. Unilateral
2. Bilateral
e. According to their Name or Designation
1. Nominate
2. Innominate
f.
According to the risk of fulfillment
1. Commutative
2. Alienatory
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g. According to the time of performance or fulfillment
1. Executed- one completed at the time the contract is entered into
2. Executory – one where the prestations are to be complied with at some
future time
h. According to subject matter
1. Contracts involving things
2. Contracts involving rights or credit
3. Contracts involving services
i.
According to obligations imposed and required by law
1. Ordinary
2. Institutional-like contract of marriage
j.
According to the evidence required for its proof
1. Those requiring merely oral or parol evidence
2. Those requiring written proof
k. According to the number of persons actually and physically entering into the
contracts
1. Ordinary – two parties are represented by different persons
2. Auto Contracts –where only one person represents two opposite parties,
but in different capacities
l.
According to the number of persons who participated in the drafting of the
contract
1. Ordinary
2. Contract of Adherence
m. According to the nature of the contract
1. Personal
2. Impersonal
STAGES OF A CONTRACT
a. Preparation
b. Perfection
c. Consummation (or death or termination)
Basic Principles or Characteristics of a Contract
a. Freedom to stipulate
b. Obligatory force and compliance in good faith
c. Perfection by mere consent
d. Both parties are mutually bound
e. Relativity
Art 1306 – Freedom or autonomy of contract
Art 1307
78
Four Kinds of Innominate Contracts
a. Du ut des (I give that you may give)
b. Do ut facias (I give that you may do)
c. Facio ut des (I do that you may give)
d. Facio ut facias (I do that you may do)
Art 1308-1310
MUTUALITY OF CONTRACTS
 The validity or fulfillment of a contract cannot be left to the will of one of the
contracting parties.
 The validity or fulfillment may be left to the will of a third person.
 The validity or fulfillment may be left to chance.
Art 1311
This principle stresses the Principle of Relativity.
Contracts are generally effective only between the parties, their assigns and their
heirs.
Exceptions:
a. Where the obligation arising from the contract are not transmissible by their
nature, by stipulation, or by provision of law.
b. Where there is stipulation pour atrui (a stipulation in favor of a third party)
c. Where a third person induces another to violate his contract
d. Where, in some cases, third persons may be adversely affected by a contract
where they did not participate.
e. Where the law authorizes the creditor to sue on a contract entered into by his
debtor.
Art 1312
A real right binds the property over which it is exercised.
Exception to the general rule that a contract binds only the parties.
Art 1313
Right of defrauded creditor.
Art 1314
Requisites before a third person in this article can be held for damages
a. Existence of a valid contract
b. Knowledge on the part of the third person of the existence of the contract
c. Interference by the third person without legal justification or excuse
79
Art 1315-1316
Perfection of contracts
Art 1317
Requisites for a Person to Contract in the Name of Another
a. He must be duly authorized (expressly or impliedly)
b. Or he must have by law a right to represent him
c. Or the contract must be subsequently ratified
Art 1318
Requisites of Contracts
a. Consent (Art 1319-46)
b. Object (Art 1347-1349)
c. Cause (Art 1350-55)
Art 1319
Definition of Consent
-Art 1319,first paragraph
Requisite of Consent
a. There must be two or more parties
b. The parties must be capable or incapacitated
c. There must be no vitiation of consent
d. There must be no conflict between what was expressly declared and what was
really intended
e. The intent must be declared properly
Requisites for the meeting of minds
a. An offer that must be certain
b. And an acceptance must be unqualified and absolute



Concurrence of offer and acceptance (Art 1319-26)
Legal capacity of contracting parties (Art 1327-29)
Characteristics of Consent (Art 1330-46)
Art 1320
Forms of Acceptance
Art 1322
Acceptance of an Offer made thru an agent
Art 1323
Other instances when the offer becomes ineffective
80
a.
b.
c.
d.
e.
When the offeree expressly or impliedly rejects the offer
When the offer is accepted with qualification or condition
When before acceptance is communicated, the subject matter becomes illegal
or impossible
When the period of time given to the offeree within which he must signify his
acceptance has already lapsed
When the offer is rejected in due tome
Art 1324
Option Contract
Option- it is a contract granting a person the privilege to buy or not to buy certain objects
at anytime within the agreed period at a fixed price
Perfection of Option
When there is a meeting of minds on the option
Art 1325-1326
If the advertisement contains all the specific particular needed in a contract, it is a
definite offer.
If important details are left out, the advertisement is not a definite offer, but a
mere invitation to make an offer.
Art 1327 in relation to Art 1329
Who cannot give consent.
Art 1328
Voidable contracts by reason of incapacity
Art 1330
This article enumerates causes or vices of consent.
Art 1331 in relation to Art 1333
Mistake
It is a false belief about something.
Requisites for mistake to vitiate consent
a. Object of the contract
b. The condition which principally proved or induced one of the parties
c. Identify or qualifications, but only if such was the principal cause of the contract.
d. The error must be excusable
e. The error must be a mistake of fact
Kinds of Mistake
a. Mistake as to the object
1. Mistake as the identity of the thing
2. Mistake as to the substance of the thing
3. Mistake as to the conditions of the thing
4. Mistake as to the quantity of the thing
b. Mistake as to person
81
1. Mistake must be either with regards to the identify or with regard to the
qualification of one of the contracting parties
2. Such identity or qualification must have been the principal consideration
for the celebration of the contract
Art 1332
Burden of proof in case of mistake
Art 1333
Effect of knowledge of risk
Art 1334
Mistake of Law
Is that which arises from an ignorance of some provision of law, or from an
erroneous interpretation of its meaning, or from an erroneous conclusion as to the legal
effect of the agreement, on the part of one of the parties.
Requisites:
a. There must be mutual error
b. The error must refer to the legal effect of the agreement
c. The real purpose of the parties is frustrated
Art 1335-1336
Violation refer to physical coercion
Intimidation refers to moral coercion
Requisites for violence to vitiate consent
a. Employment of serious or irresistible force
b. It must have been the reason why the contract was entered into
Requisites for intimidation to vitiate consent
a. Reasonable and well-grounded fear
b. Of an imminent and grave evil
c. Upon his person, property, or upon the person of property of his spouse,
descendents or ascendants
d. It must have been the reason why the contract was entered into
e. The threat must be an unjust act, an actionable wrong
Art 1337
Requisites for undue influence to vitiate consent
a. Improper advantage
b. Power over the will of another
c. Deprivation of the latter’s will of a reasonable freedom of choice
Art 1338-1341
Kinds of Fraud
a. Fraud in the celebration of the contract
1.
Dolo Causante or causal fraud (Art 1338)
2.
Dolo Incidente of incidental fraud
82
b. Fraud in the performance of the obligations stipulated in the contract
Requisites of Dolo Causante
a. The fraud must be material and serious
b. The fraud must have been employed by one of the contracting parties,
because if both committed fraud, the contract would remain valid
c. There must be a deliberate intent to deceive to induce
d. The other party must have relied on the untrue statement, and must
himself not be guilty of negligence in ascertaining the truth
Art 1342-1344
Speaks about misrepresentation
Art 1345-1346
Simulation
Simulation of a Contract defined
It is the process of intentionally deceiving others by producing the appearance of
a contract that really does not exist (absolute simulation)
Or which is different from the true agreement relative simulation.
Kinds
a. Absolute; Effect; the contract is void
b. Relative; Effect; the parties are bound to the real or true agreement excepta. If the contract should prejudice third persons
b. Or if the purpose is contrary to law, morals, public order, policy or
good customs
Requisites
a. An outward declaration of will difference from the will of the parties
b. The false appearance must have been intended by mutual agreement
c. The purpose is to deceive third persons
Art 1347-1349
Objects (Subject Matter) of a contract
- A thing or a service
Requisites
a. The thing or service must be within the commerce of man
b. Must be transmissible
c. Must not be contrary to law, morals, good customs, public order, or public policy
d. Must not be impossible
e. Must be determinate as to its kind or determinate without the need of a new
contract or agreement
CAUSE OF CONTRACTS
Art 1350
“Cause” defined
-It is the essential and impelling reason why a party assumes an obligation
83
Art 1351
Motive – is the purely personal or private reason which a party has in entering into a
contract
Motive vs. Cause
Motive
a. May vary although he enters into the same kind of contract
b. May be unknown to the other
c. The presence of motive
Cause
a. Always the same
b. Always known
c. Cannot cure the absence of cause
Art 1352-1355
Requisites for cause
a. It must be present
b. It must be true
c. It must be lawful
CHAPTER 3
FORM OF CONTRACTS
Art 1356
Meaning of form of contracts
-Refers to the manner in which a contract is executed or manifested
Rules regarding from of contracts (Art 1356)
Art 1357-1358
Principles regarding formalities for the efficacy of a contract
a. Art 1357 and Art 1358 do not require the execution of a contract either in a public
or private instrument in order to validate enforce it but only to ensure its efficacy,
so after its existence has been admitted, the party bound may be compelled to
execute the necessary document
b. Even where the contract has not been reduced to the required form, it is still valid
and binding as far as the parties are concerned
c. From the moment one of the contracting parties invokes the provisions of Art
1357 and 1358by means of a proper action, the effect is to place the existence of
the contract in issue, which must be resolved by the ordinary rules of evidence
d. Art 1357 does not require that the action to compel the execution of the
necessary document must precede the action upon the contract
e. However, although the provisions of Art 1357 in connection with those of Art
1358, do not operate against the validity of the contract nor the validity of the acts
voluntarily performed by the parties for the fulfillment thereof, yet from the
moments when any of the contracting parties invokes said provisions, it is
evident that under them the execution of the required document must precede
the determination of the other obligations derived from the contract
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CHAPTER 4
REFORMATION OF INSTRUMENT
Reformation – is that remedy by means of which a written instrument is amended or
rectified so as to express or conform to the real agreement or intention of the parties
when by reason of mistake, fraud, or inequitable contract, or accident the instrument
fails to express such agreement or intention.
Requisites for reformation
a. There is a meeting of minds of the parties to the contract
b. The written instrument does not express the true agreement or intention of the
parties
c. The failure to express the true intentions is due to mistake, fraud, inequitable
conduct or accident
d. The facts upon which relief by way of reformation of the instrument is sought are
put in issue by the pleadings
e. There is clear and convincing evidence of the mistake, fraud, inequitable
conduct, or accident
Reformation vs. Annulment
In reformation, there has been a meeting of the minds of the parties, hence, a
contract exists while in annulment, there has been none, the consent of one of the
parties being vitiated by mistake, etc.
Art 1360-69
Art 1360
Rule in case of conflict
Art 1366
Instances when reformation is not allowed
CHAPTER 5
INTERPRETATION OF A CONTRACT
Art 1370
Definition of interpretation of contract
-Is the determination of the meaning of the terms or words used by the parties in
their contract
Art 1371-79 (provisions)
Kinds of defective contracts
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a.
b.
c.
d.
Rescissible (Art 1380-89)
Voidable (Art 1390-1402)
Unenforceable (Art 1403-1408)
Void or Inexistent (Art 1409-1422)
Art 1381 in relation to Art 1382
Meaning of rescissible contracts
-Those validly agreed upon because all the essential elements exists but in some
cases established by law, the remedy of rescission is granted in the interest of equity
Requisites of rescission
a. The contracts must be validly agreed upon
b. There must be lesion or pecuniary prejudice to one of the parties or to a third
person
c. The rescission must be based upon a case especially provided by law
d. There must be no other legal remedy to obtain reparation of the damages
e. The party asking for rescission must be able to return what he is obliged to
restore by reason of the contract
f. The object of the contract must not legally
g. The object of the contract must not legally be in the possession of third persons
who did not act in bad faith
h. The period for filing the action of rescission must have not prescribed
Meaning of Rescission
-Remedy granted by law to the contracting parties and sometimes even to third
persons in order to secure reparation of damages caused by them by a valid contract, by
means of the restoration of things to their condition in which they were prior to the
celebration of the said contract.
Art 1385
Effects of rescission
Art 1324
Prescription
VOIDABLE CONTRACTS
Definition
-Are those which possess all the essential requisites of a valid contract but one of
the parties is incapable of giving consent, or consent is vitiated by mistake, violence,
intimidation, undue influence, or fraud
Characteristics
a. Their defect consist in the vitiation of consent of one of the contracting parties
b. They are binding until they are annulled by competent court
c. They are susceptible of convalidation by ratification or by prescription
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Voidable vs. Rescissible Contracts
Voidable
a. Defect is intrinsic
b. Contract is voidable even if there is no damage or prejudice
c. Annulability of the contract is based on law
d. Susceptible of ratification
e. The causes of annulment
The causes of rescission
Rescissible
a. Defect is extrinsic
b. Contract is not rescissible id there is no damage or prejudice
c. Rescissibility of the contract is based on equity
d. Not susceptible of ratification
e. Are different form
Art 1390
Voidable contracts
Art 1391
Prescription
Art 1392-96
Concept of Ratification
-By virtue of which efficacy is given to a contract which suffers from a vice of
curable nullity
Requisites for ratification
a. The contract should be tainted with a vice which is susceptible of being cured
b. The confirmation should be effected by the person who is entitled to do so under
the law
c. It should be effected with knowledge of the vice or defect of the contract
d. The cause of the nullity or defect should have already disappeared
Art 1397 in relation to Art 1391
-Who and when may an action for annulment of contract be instituted
Art 1398-99
Effects of annulment
Art 1400-02
- Effect pf failure to make restitution
-Where loss is due to fault of plaintiff
-Where loss is due to fault of defendant
-Where loss is due to fortuitous event
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CHAPTER 8
UNENFORCEABLE CONTRACTS
Meaning of unenforceable contracts
-Those that san not be enforced in court or sued upon by reason of defects
provided by law until and unless they are ratified according to law.
Kinds:
a. Those entered into in the name of another by one without or acting in excess of
authority
b. Those that do not comply with the statute of fraud
c. Those where both parties are incapacitated of giving consent
Unauthorized contracts
-Those entered into in the name of another person by one who has been given
no authority or legal representation on who has acted beyond his powers.
Characteristics of Unenforceable Contracts
a. They can not be enforced by a proper action in court
b. They are susceptible of ratification
c. They can not be assailed by third persons
Unenforceable vs. Rescissible
a. An unenforceable contract cannot be enforced by a proper action in court, while
a rescissible contract can be enforced, unless it is rescinded
b. The causes for the unenforceable character of the former are different from the
causes fro the rescissible character of the latter
c. The former is susceptible of ratification, while the latter is not
d. The former cannot be assailed by third persons, while the latter may be assailed
by third persons who are prejudiced
Unenforceable vs. Voidable
a. An unenforceable contract cannot be enforced by a proper action in court, while
a voidable contract can be enforced, unless it is annulled
b. The causes for the unenforceable character of the former are different from the
causes for the voidable character of the latter
STATUTE OF FRAUDS
Purpose
-Not only to prevent fraud but also to guard against the mistakes of honest men
by requiring that certain agreement specified must be in writing.
Application
a. Not applicable in actions which are neither for damages because of a violation of
a contract, nor for the specific performance thereof
b. Applicable only to executory contracts and not to contracts which are totally or
partially performed
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c. Not applicable where the contract is admittedly expressly, or impliedly by the
failure to deny specifically its existence, no further evidence thereof being
required in such case.
d. Applicable only to the agreements enumerated therein
e. Not applicable where a writing does not express the true agreement of the
parties
f. It does not declare the contracts infringing it are void but merely unenforceable
g. The defense of the statute of frauds may be waived
h. The defense of the statute of frauds is personal to the parties and cannot be
enforced by strangers to the contract
Effect of Non-Compliance
-The contract or agreement is unenforceable by action
Ratification of Unenforceable Contracts
Either by: a. the failure of object to the presentation of oral existence to prove the same
c. The acceptance of benefits under them
Art 1404-1408 (provisions)
CHAPTER 9
VOID OR INEXISTENT CONTRACTS
Void Contracts
-Those, which of certain defects generally produce no effect at all
Inexistent Contracts
-Refer to agreements which lack one or some or all the elements or do not
comply with the formalities which are essential for the existence of a contract
Characteristics of a Void or Inexistent Contracts
a. Generally, it produces no effect
b. It cannot be ratified
c. The right to set up the defense of legality cannot be waived
d. The action or defense for the declaration of its inexistence does not prescribe
e. The defense of illegality is not available to third persons whose interests are not
directly affected
f. It cannot give rise to a valid contract
Art 1410
-Imprescriptibility of void or inexistent contract
Art 1411-1412
Where both parties are in pari delicto
a. The parties shall have no action against each other
b. Both shall be prosecuted
c. The things or the price of the contract, as the effects of the crime shall be
confiscated in favor of the government
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Where only one party is guilty
-The rule in paragraph 1 of Art 1411 applies only to the guilty party or the more
guilty party
Exceptions to the principle of pari delicto
Art 1413-1419
Art 1420-22 (provisions)
NATURAL OBLIGATIONS
Art 1423
-Defines Natural Obligations
Civil vs. Natural Obligations
Civil
a. Arise from la, contracts, quasi-contracts, and quasi-delicts
b. Give a right of action to compel their performance
Natural
a. Based not on positive law but on equity and natural law
b. Do not grant such right of action to enforce their performance
TITLE IV
ESTOPPEL
Art 1431
Definition of Estoppel
-Condition or state by virtue of which admission or representation is rendered
conclusive upon the person making it and cannot be denied or disproved as against the
person relying thereon
Art 1432
Adoption of the principle
Art 1433
Kinds of Estoppel
A. Estoppel in Pais (equitable estoppel)
-That which arises one y his acts, representations, or admission, or by his silence
when he ought to speak out, intentionally or through culpable negligence, induces
another to believe certain facts to exist and such, other rightfully relies and acts on such
belief, as a consequence of which he would be prejudice if the former is permitted to
deny the existence of such facts
Kinds
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a.
b.
c.
d.
e.
Estoppel by conduct or by acceptance of benefits
Estoppel by representation or concealment
Estoppel by silence
Estoppel by omission
Estoppel by laches
Requisites
a. As related to the party being estopped
a. Conduct which amounts to a false representations or concealment of
material facts, or at least which is calculated to convey the impression
that the facts are otherwise than, and inconsistent with those which the
party subsequently attempts to assert;
b. The intention or at least the expectation, that such conduct shall be acted
upon, or influence, the other party or other person; and
c. Knowledge, actual or constructive, of the real facts
b. As related to the party claiming the estoppel
a. Ignorance or lack of knowledge and of the means of knowledge of the
truth as to the facts in question
b. Reliance in good faith, upon the conduct or statement of the party to be
estopped; and
c. Action or inaction based thereon of such a character as to chance the
position or status of the party claiming the estopped, to his injury,
detriment, or prejudiced
B. Estopped by deed or by record
-Types of technical estoppel
Kinds
a. Estoppel by deed proper
b. Estoppel by judgment as a court record
Estoppel by Laches
Definition of Laches
-Failure or neglect, for an unreasonable and unexplained length of time, to do
that which by exercising due diligence, one could or should have done earlier; it is
negligence or omission to assert a right within a reasonable time, warranting a
presumption that the party entitled to assert it either has abandoned it or declined to
assert on
Requisites
a. Conduct on the part of the defendant, or of one under whom he claims, giving
rise to the situation of which complaint is made
b. Delay in asserting the complainant’s right, the complainant having had
knowledge or notice of the defendant’s conduct and having been afforded an
opportunity to sue; actual knowledge of the omission of the adverse act is not
necessary, it being enough that such knowledge may be imputed to the
complainant because of circumstances of which he was cognizant;
c. Lack lf knowledge or notice on the part of the defendant that the complainant
would assert the right on which he bases his suit;
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d. Injury or prejudice to the defendant in the event of relief is accorded to the
complainant, or the suit is not held to be barred
Laches vs. Prescription
Laches
a. Concerned with the effect of delay
b. Principally a question of inequity of permitting a claim to the enforced
c. Not statutory
d. Applies in equity
e. Not based on fixed time
Prescription
a. Concerned with the fact of delay
b. Question of matte of time
c. Statutory
d. Applies at law
e. Based on fixed time
GOLDEN ROD INC. vs CA (May 2000)
Contracts; Sales; RescissionLand dispute between Barreto Realty
executed an agreement w/ Golden Rod wherein Barreto accepted Golden Rod’s offer to
buy the properties of Golden Rod which was subject to imminent foreclosure. Later on,
Golden Rod informed Barreto, then its president, that it would not go through w/ the sale
because of the denial of UCPB of its request for an extension of time to pay the
obligation. He also demanded the refund of the earnest money of P1M which it gave to
Barreto.
Art. 1385 of the CC provides that rescission creates the obligation to return the
things which were the object of the contract together with their fruits and interest. The
vendor is therefore obliged to return the purchase price paid to him by the buyer if the
latter rescinds the sale, or when the transaction as called off and the subject property
had already been sold to a 3rd person, as what was obtained in this case. Therefore, by
virtue of the extrajudicial rescission of the contract to sell by the petitioner without
opposition from private respondents who, in turn, sold the property to other persons,
private respondent Barreto Realty, as the vendor, had the obligation to return the
earnest
money of P1M plus legal interest.
METROBANK v. CA (G.R. No. 122899, June 8, 2000)
Civil Law/Oblicon/ Estoppel: In Maneclang vs. Baun, this Court enumerated the
requisites for estoppel by conduct to operate, to wit:
1. there must have been a representation or concealment of material facts;
2. the representation must have been with knowledge of the facts;
3. the party to whom it was made must have been ignorant of the truth of the matter;
and
4. it must have been with the intention that the other party would act upon it.
ROMAGO ELECTRIC CO. v. CA (G.R. No. 125947, June 8, 2000)
92
Civil Law/ Oblicon/ Contracts: There is no contract here. We are not convinced that there
was a meeting of the minds between Romago and TSI regarding the question of sharing
of payment of rentals and utilities charges, pending the consummation of the Stock
Purchase Agreement. There is no adequate showing that TSI consented to any such
verbal agreement. On the contrary, TSI through its General Manager Severino Lim and
Director Jorge Salazar denied the existence of such verbal agreement or understanding.
YUCHENGCO v. REPUBLIC (G.R. No. 131127, June 8, 2000)
Civil Law/ Oblicon/ Constructive Trust: Constructive trust is that created by reason of
equity to answer the demands of justice and prevent unjust enrichment. It arises against
one, who, by fraud, duress or abuse of confidence, obtains or holds the legal right to
property which he ought not, in equity and good conscience, hold. Correspondingly,
actions thereon prescribe after ten (10) years as provided by Article 1144 of the Civil
Code:
The following actions must be brought within ten (10) years from the time the
right of action accrues: (1) upon a written contract; (2) upon an obligation created by law;
and (3) upon a judgment.
Article 1154 of the Civil Code is applicable by parallelism: the period during which the
obligee was prevented by fortuitous event from enforcing his right is not reckoned
against him.
JARDINE DAVIES INC. v. CA (G.R. No. 128066, June 19, 2000)
Civil Law/ Oblicon/ Condition: We distinguish between a condition imposed on the
perfection of a contract and a condition imposed merely on the performance of an
obligation. While failure to comply with the first condition results in the failure of a
contract, failure to comply with the second merely gives the other party options and/or
remedies to protect his interests.
…by the unilateral cancellation of the contract, the defendant has acted with bad
faith and this was further aggravated by the subsequent inking of a contract between
defendant and co-defendant. It is very evident that (the defendant) thought that by the
expedient means of merely writing a letter would automatically cancel or nullify the
existing contract entered into by both parties after a process of bidding. This, to the
Court's mind, is a flagrant violation of the express provisions of the law and is contrary to
fair and just dealings to which every man is due.
ESPINA v. CA (G.R. No. 116805, June 22, 2000)
Civil Law/ Oblicon/ Novation/ Application of Payment: Novation is never presumed; it
must be proven as a fact either by express stipulation of the parties or by implication
derived from an irreconcilable incompatibility between old and new obligations or
contracts. Novation takes place only if the parties expressly so provide, otherwise, the
original contract remains in force. In other words, the parties to a contract must
expressly agree that they are abrogating their old contract in favor of a new one.
Where there is no clear agreement to create a new contract in place of the
existing one, novation cannot be presumed to take place, unless the terms of the new
contract are fully incompatible with the former agreement on every point. Thus, a deed of
cession of the right to repurchase a piece of land does not supersede a contract of lease
over the same property.
Petitioner gave respondent a notice to vacate the premises and to pay his back
rentals. Failing to do so, respondent's possession became unlawful and his eviction was
93
proper. Now respondent contends that the petitioner's subsequent acceptance of such
payment effectively withdrew the cancellation of the provisional sale. We do not agree.
Unless the application of payment is expressly indicated, the payment shall be applied to
the obligation most onerous to the debtor. In this case, the unpaid rentals constituted the
more onerous obligation of the respondent to petitioner. As the payment did not fully
settle the unpaid rentals, petitioner's cause of action for ejectment survives.
VIEWMASTER CONSTRUCTION CORP vs. ROXAS (G.R. No. 133576, July 13, 2000)
Civil Law/ Contracts/ Statute of Frauds/ Implied Trusts/ Sales: The verbal agreement
entered into between petitioner Viewmaster and respondent Allen Roxas was an
agreement that by its terms is not to be performed within a year from the making
thereof. To be taken out of the operation of the Statute of Frauds, the agreement
must be fully performed on one side within one year from the making thereof. In the
case at bar, since neither of the parties has fully performed their obligations within
the one-year period, then it behooves this Court to declare that the case falls within
the coverage of the Statute of Frauds. Also, as the sale of fifty percent (50%) of Allen
Roxas’s shareholdings in State Investment would amount to more than five hundred
pesos (P500.00), the contract must be in writing to be enforceable.
There is no implied trust here for in order for the provisions of Article 1448 to
apply in the case at bar "the price is paid by another for the purpose of having the
beneficial interest of the property." It bears stressing that respondent Allen Roxas
obtained a loan from First Metro Investments, Inc. not from petitioner Viewmaster. It
was FMIC that provided the funds with which Allen Roxas acquired the controlling
interest in State Investment Trust, Inc. FMIC lent the money to Roxas because the
latter needed the money and not to obtain any beneficial interest in the shares of
stock in State Investment. Viewmaster merely facilitated the loan by acting as
guarantor of the loan and nothing more.
ARRIOLA vs. DEMETRIO
Civil Law/ Contracts/ Fraud : The law, however, requires that in case one of the parties
to a contract is unable to read and fraud is alleged, the person enforcing the contract
must show that the terms thereof have been fully explained to the former. Consent,
having been obtained by fraud, the deed entered into could be annulled.
PILIPINAS HINO vs. CA
Civil Law/ Oblicon/Application of Equity/ Sales: Obligations arising from contracts and
agreements between parties not contrary to law, morals, good customs, public policy or
public order have the force of law between the contracting parties and should be
complied with in good faith.
Equity is applied only in the absence of, and never against, statutory law or judicial
rules of procedure.
Also, while this Court recognizes that in contracts to sell even if the contract is
terminated the seller can retain the sums already received or paid, such can be done
only if it is expressly provided for in the contract.
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ACE HAULERS CORP. vs. CA
Civil Law/ Civil Liability/ Damages: Civil liability coexists with criminal responsibility. In
negligence cases, the offended party (or his heirs) has the option between an action for
enforcement of civil liability based on culpa criminal under Article 100 of the Revised
Penal Code and an action for recovery of damages based on culpa aquiliana under
Article 2176 of the Civil Code. Article 2177 of the Civil Code, however, precludes
recovery of damages twice for the same negligent act or omission.
Consequently, a separate civil action for damages lies against the offender in a
criminal act, whether or not he is criminally prosecuted and found guilty or acquitted,
provided that the offended party is not allowed, if he is actually charged also criminally,
to recover damages on both scores, and would be entitled in such eventuality only to the
bigger award of the two, assuming the awards made in the two cases vary.
PRODUCERS BANK OF THE PHILIPPINES v. BPI (G.R. No. 125167, September 8,
2000)
Civil Law/ Oblicon/ Action for Written Contract: The nature of an action is determined by
the allegations of the complaint. In this case, petitioners' complaint alleges facts
constituting its cause of action based on a written contract, the deed of pledge. Hence,
the prescriptive period is ten (10) years.
SBMA v. UNIVERSAL INTERNATIONAL GROUP OF TAIWAN (G.R. No. 131680,
September 14, 2000)
Civil Law/ Oblicon/ Extrajudicial Rescission: A stipulation authorizing a
party to extrajudicially rescind a contract and to recover possession of the
property in case of contractual breach is lawful. But when a valid objection is
raised, a judicial determination of the issue is still necessary before a takeover
may be allowed. In the present case, however, respondents do not deny that there
was such a breach of the Agreement; they merely argue that the stipulation
allowing a rescission and a recovery of possession is void. Hence, the other party
may validly enforce such stipulation.
PILIPINAS BANK v. CA (G.R. No. 141060, September 29, 2000)
Civil Law/ Oblicon/ Interpretation of Contracts: Section 9, Rule 130 of the
Revised Rules of Court expressly requires that for parol evidence to be admissible to
vary the terms of the written agreement, the mistake or imperfection thereof or its failure
to express the true agreement of the parties should be put in issue by the pleadings.
Disallowance of parol evidence in the absence of an intrinsic ambiguity, mistake or
failure to express the true intent and agreement of the parties is in accord with the rule
that when the terms of an agreement have been reduced to writing, it is considered as
containing all the terms agreed upon and there can be, between the parties and their
successors-in-interest, no evidence of such other terms other than the contents of the
written agreement.
TUAZON v. CA (G.R. No. 119794. October 3, 2000)
Civil Law/ Contracts/ Equitable Mortgage/ Reformation of Contract: Article 1602 of
the Civil Code provides that a contact shall be presumed to be an equitable
mortgage by the presence of any of the following:
'(1)
When the price of a sale with right to repurchase is unusually inadequate;
95
(2)
When the vendor remains in possession as lessee or otherwise;
(3)
When upon or after the expiration of the right to repurchase another instrument
extending the period of redemption or granting a new period is executed;
(4)
When the purchaser retains for himself a part of the purchase price;
(5)
When the vendor binds himself to pay the taxes on the thing sold;
(6)
In any other case where it may be fairly inferred that the real intention of the
parties is that the transaction shall secure the payment of a debt or the performance of
any other obligation.'"
Under Article 1604 of the New Civil Code, the provisions of Article 1602 shall
also apply to a contract purporting to be an absolute sale. And for these provisions of
law to apply, two requisites must concur: that the parties entered into a contract
denominated as a contract of sale and that their intention was to secure an existing debt
by way of mortgage.
As to the reformation of contracts, Article 1365 applies only if there is evidence,
clear and convincing, that the parties did agree upon a mortgage of subject property.
Here, everything appears to be clear and unambiguous and nothing is doubtful, within
the contemplation of Article 1602. When the words of the contract are clear and readily
understandable, there is no room for construction, the contract being the law between
the parties.
SINGSON v. CALTEX (PHILIPPINES) (G.R. No. 137798. October 4, 2000)
Civil Law/ Contracts/ Extraordinary Inflation: Article 1250 of the Civil Code states
that in case an extraordinary inflation or deflation of the currency stipulated should
supervene, the value of the currency at the time of the establishment of the obligation
shall be the basis of payment, unless there is an agreement to the contrary.
Extraordinary inflation exists when there is a decrease or increase in the purchasing
power of the Philippine currency which is unusual or beyond the common fluctuation in
the value of said currency, and such increase or decrease could not have been
reasonably foreseen or was manifestly beyond the contemplation of the parties at the
time of the establishment of the obligation.
“Erosion” is indeed an accurate description of the trend of decline in the value of
the peso in the past three to four decades. Unfortunate as this trend may be, it is
certainly distinct from the phenomenon contemplated by Article 1250.
Moreover, the effects of extraordinary inflation are not to be applied without an
official declaration thereof by competent authorities.
SANTOS v. HEIRS OF MARIANO (G.R. No. 143325. October 24, 2000)
Civil Law/ Contracts/ Sales: What determines the validity of a contract, in
general, is the meeting of the minds of the parties as to (1) consent of the contracting
parties; (2) object certain which is the subject matter of the contract; and (3) cause of the
obligation which is established. Due execution of documents representing a contract is
one thing, but perfection of the contract is definitely another.
DBP v. CA (G.R. No. 137557. October 30, 2000)
Civil Law/ Contracts/ Breach/ Rescission: Under the Civil Code, parties to a contract
can make stipulations therein provided they are not contrary to law, morals, good
customs, public order or public policy. The interest and penalty charges to be paid in
case of delay in payments were expressly stipulated in the Conditional Contract of
Sale. There being no question as to the validity of the Conditional Contract of Sale,
96
the DBP correctly applied the provision on interests and penalty charges when
private respondents failed to pay on the dates agreed upon. No further notice to
private respondents had to be given to them.
Rescission of a contract will not be permitted for a slight or casual breach, but only
such substantial and fundamental breach as would defeat the very object of the
parties in making the agreement. Notwithstanding private respondents' delay in
paying the amortizations, petitioner DBP unqualifiedly accepted the payments made
by them. Hence, petitioner lost its right to rescind the sale on the basis of such late
payments.
PACULDO v. REGALADO (G.R. No. 123855. November 20, 2000)
Civil Law/ Contracts/ Application of Payments: The right to specify which among his
various obligations to the same creditor is to be satisfied first rests with the debtor.If the
debtor accepts from the creditor a receipt in which an application of the payment is
made, the former cannot complain of the same, unless there is a cause for invalidating
the contract.
Also, under the law, if the debtor did not declare at the time he made the payment to
which of his debts with the creditor the payment is to be applied, the law provided the
guideline--no payment is to be made to a debt that is not yet due and the payment
has to be applied first to the debt most onerous to the debtor.
Assnt to the change in the manner of application of payment must be clear and
unequivocal. Mere silence is not tantamount to consent.
PUA v. CA (G.R. No. 134992. November 20, 2000)
Civil Law/ Contracts/ Minors Entering Into Contracts/ Sales/ Simulated Contract:
Unemancipated minors, insane or demented persons, and deaf-mutes who do not know
how to write can not validly give consent to contracts. In the instant case, Johnny P. Uy
could not have validly given his consent to the contract of sale, as he was not even
conceived yet at the time of its alleged perfection. For lack of consent of one of the
contracting parties, the deed of sale is null and void
Without authority from the Court, no person can make a valid contract for or on
behalf of a minor. Coloma therefore could not have acted as representative of Johnny P.
Uy. Besides, petitioners themselves insist that Coloma was not acting in a representative
capacity when she purchased the subject, but rather, that she was acting in her own
behalf as the actual buyer of said land.
An absolutely simulated contract is not susceptible of ratification.
SPOUSES BUENAFLOR v. CA (G.R. No. 142021. November 29, 2000)
Civil Law/ Obligations/ Payment/ Substantial Performance: In the Civil Law sense,
payment means not only the delivery of money but also the performance, in any other
manner, of the obligation.
Article 1234 of the Civil Code allows substantial performance in the payment of
obligations. In order that there may be substantial performance of an obligation, there
must have been an attempt in good faith to perform, without any willful or intentional
departure therefrom. This concept of substantial performance may be applied by
analogy in the determination of question on the proper payment of the appellate docket
fees.
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AYALA CORPORATION v. ROSA-DIANA REALTY AND DEVELOPMENT
CORPORATION (G.R. No. 134284. December 1, 2000)
Civil Law/ Contracts/ Obligatory Force: Contractual obligations between parties have the
force of law between them and absent any allegation that the same are contrary to law,
morals, good customs, public order or public policy, they must be complied with in good
faith. The party guilty of violating the deed restrictions may only be held alternatively
liable for substitute performance of its obligation, that is, for the payment of damages.
ORTIGAS & CO. LTD. v. CA (G.R. No. 126102. December 4, 2000)
Civil Law/ Contracts/ Stipulations Contravening Law, Good Customs, etc: The
contractual stipulations annotated on the Torrens Title, on which Ortigas relies, must
yield to the ordinance. When that stretch of Ortigas Avenue from Roosevelt Street to
Madison Street was reclassified as a commercial zone by the Metropolitan Manila
Commission in March 1981, the restrictions in the contract of sale between Ortigas and
Hermoso, limiting all construction on the disputed lot to single-family residential
buildings, were deemed extinguished by the retroactive operation of the zoning
ordinance and could no longer be enforced. While our legal system upholds the sanctity
of contract so that a contract is deemed law between the contracting parties,
nonetheless, stipulations in a contract cannot contravene "law, morals, good customs,
public order, or public policy." Otherwise such stipulations would be deemed null and
void.
LHUILLIER v. CA (G.R. No. 128058. December 19, 2000)
Civil Law/ Contracts/ Lease: A covenant to renew a lease, which makes no
provision on its terms, implies an extension or renewal subject to the same terms
in the original lease contract. Since the parties did not make a new one, the terms
and conditions of the original except the provision on the rate and period of lease
are deemed extended.
The parties agreed that all improvements introduced by the lessee would
accrue to the benefit of the owner at the end of the lease, without reimbursement.
This stipulation, not being contrary to law, morals, public order or public policy,
binds the parties and is the law between them.
1999
CHUA v. CA (Jan. 21, 1999)
Civil Law/ Contracts/ Lease/ Power of Courts to Extend Lease/Improvements: (1)The
potestative authority of the courts to fix a longer term for a lease under Art. 1687 of the
CC applies only to cases where there is NO period fixed by the parties. Where the lease
agreement between the parties has already expired, courts are without jurisdiction to
extend said lease, for to do so would in effect allow the courts to make a contract for the
parties.
(2) Improvements made by lessees on the leased premises are not valid reasons for
their retention thereof; otherwise, a lessee would “improve” his landlord out of his
property. Art. 448 of the CC, in relation to Art. 546, which provides for full
reimbursement of useful improvements and retention of the premises until
reimbursements us made, applies only to a possessor in good faith, i.e., one who
builds on a land in the belief that he is the owner thereof. Also, Art. 1678 merely
grants to such a lessee making in good faith useful improvements the right to be
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reimbursed ½ of the value of the improvements upon the termination of the lease,
or, in the alternative, to remove the improvements if the lessor refuses to make
reimbursement.
ABS-CBN v. CA (Jan. 21, 1999)
Civil Law/ Contracts/ Basis for the Award of Damages: (1) A contract is a meeting of the
minds between two persons whereby one binds himself to give something or render
some service to another for a consideration. In the instant case, there was no
acceptance of VIVA’s offer for it was met by a counter-offer which substantially varied
the terms of the offer. ABS-CBN made no unqualified acceptance of VIVA’s offer hence,
they underwent a period of bargaining.
(2) The award of moral damages cannot be granted in favor of a corporation
because being an artificial person and having existence only in legal contemplation, it
has no feelings, no emotions, no senses.
(3) The claims of RBS against ABS-CBN are not based on contract, quasicontract, delict, or quasi-delict. Hence, the claims of moral and exemplary damages can
only be based on Articles 19, 20, and 21 of the CC. Verily then, malice or bad faith is at
the core of Articles 19, 20, 21. Malice or bad faith implies a conscious and intentional
design to do a wrongful act for a dishonest purpose or moral obliquity. Such must be
substantiated by evidence. There is no adequate proof that ABS-CBN was inspired by
malice or bad faith. It was honestly convinced of the merits of its cause after it had
undergone serious negotiations culminating in its formal submission of a draft contract.
Settled is the rule that the adverse result of an action does not mean to impose a penalty
on the right to litigate. If damages result from a person’s exercise of a right, it is
damnum absque injuria.
DIZON v. CA (Jan. 28, 1999)
Civil Law/ Contracts/ Lease with Option to Purchase/ Exception of Period to Exercise
Option:The other terms of the original contract of lease which are revived in the implied
new lease under Art.1670 of the CC are only those terms which are germane to the
lessee’s right of continued enjoyment of the property leased. Therefore, an implied new
lease does not ipso facto carry with it any implied revival of private respondent’s option
to purchase (as lessee thereof) the leased premises. The provision entitling the lessee
the option to purchase the leased premises is not deemed incorporated in the impliedly
renewed contract because it is alien to the possession of the lessee. Private
respondent’s right to exercise the option to purchase expired with the termination of the
original contract of lease for one year.
RAMOS v. CA (Feb. 3, 1999)
Civil Law/ Oblicon/ Principle of Relativity of Contracts/ Land Titles/ Prescription or
Adverse Possession: (1) In the absence of registration as to operate against the whole
world, contracts bind only the parties who had entered it by virtue of the basic principle
of relativity of contracts. This basic principle applies even if the sales were supposedly
concluded at a time prior to the operation of the Torrens system of land registration over
the properties involved.
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(2) Under the Cadastral Act, the OCTs issued to the original registrant, shall have
the same effect as CTs granted to an application for registration of land under the Land
Registration Act, because “no title to registered land in derogation to that of the
registered owner shall be acquired by prescription or adverse possession.”
CARCELLER v. CA (Feb. 10, 1999)
Civil Law/ Oblicon/ Contracts/ Option: (1) An option is a preparatory contract in which
one party grants to the other, for a fixed period and under specified conditions, the
power to decide, WON to enter into a principal contract. It binds the party who has given
the option, not to enter into the principal contract with the one to who, the option was
granted, if the latter should decide to use the option. It is a separate agreement distinct
from the contract which the parties may enter upon the consummation of the option.
(2) In the contractual relations, the law allows the parties leeway in the terms of
their agreement, which is the law between them.
MISENA v. RONGAVILLA (Feb. 25, 1999)
Civil Law/ Contracts/ Sale of Real Property, When Presumed an Equitable Mortgage
Instead: Art. 1602 of the CC enumerates instances when a contract regardless of its
nomenclature may be presumed an equitable mortgage. It also applies to a contract
purporting to be an absolute sale, and the presence of any of the circumstances in 1602
give rise to the presumption in favor of an equitable mortgage. Here, the CA confirmed
that 3 circumstances were present and proven, to wit: (1) the inadequacy of the
consideration; (2) the respondent remained in possession of the land and (3) the subject
property was charged as security for the loan.
LOGRONIO v. TALESEO (August 1999)
Civil Law/ Laches: Currit Tempus contra decides et sui juris contemptores (Time runs
against the slothful and those who neglect their rights). Through their inaction for 39
years, the petitioners were barred by laches from asserting ownership and possession of
the property in dispute.
SPS. CO v. CA (August 1999)
Civil Law/ Contracts/Sale/Option Contract: An option contract is distinct from a contract
of sale, it is a contract granting a privilege to buy or sell within an agreed time and at a
determined price. It is separate and distinct contract from that which the parties may
enter into upon the consummation of the option. It must be supported by consideration.
A contract of sale on the other hand is a consensual contract and is perfected at the
moment there is a meeting of the minds upon the thing which is the object of the contract
and upon the price.
In the case at bar, the contract entered into was a Contract of sale and not an
Option Contract so that the proper remedy would be rescission.
LAPAT v. ROSARIO (August 1999)
Civil Law/ Contracts/Equitable Mortgage: Where the presumptions under the law that a
contract is an equitable mortgage are present, it shall be considered as such regardless
of its nomenclature: (1) when the price of a sale with the right to repurchase is unusually
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inadequate; (2) when the vendor remains in possession as lessee or otherwise; (3) when
upon or after the expiration of the right to repurchase another instrument extending the
period of redemption or granting a new period is executed; (4) when the purchaser
retains a part of the purchase price; (5) when the vendor binds himself to pay the taxes
on the thing sold, and; (6) in any other case where it may fairly be inferred that the real
intention of the parties is that the transaction shall secure the payment of a debt or
performance of any other obligation.
In determining the nature of a contract, courts are not bound by its form or title
but by the intention of the parties.
LAO v. MACAPUGAY (August 1999)
Civil Law/ Contracts/ Compromise: A compromise is a bilateral act or transaction that is
expressly acknowledged as a juridical agreement by the CC. Art 202 provides that “a
compromise is a contract whereby the parties by making reciprocal concessions, avoid a
litigation or put an end to one already commenced. The CC does not only defines and
authorizes compromises, it in fact encourages them in civil actions. They are generally to
be favored and cannot be set aside if the parties acted in good faith and made reciprocal
concessions to each other in order to terminate a case. However, the law abhors
settlement of criminal liability so that the compromise agreement cannot affect charges
of violation of RA 3019, sec 3(e) and (j) and Sec 4 and RPC Art 171, 172 par 2, Arts.
206 and 207.
HEIRS OF YAP v. CA (August 1999)
Civil Law/ Contracts/ Trusts: One basic distinction between an implied trust and an
express trust is that while the former may be established by parol evidence, the latter
cannot. Even then, in order to establish an implied trust in real property by parol
evidence, the proof should be convincing as if the acts giving rise to the trust obligation
are proven by an authentic document. An implied trust, in fine, cannot be established
upon vague and inconclusive proof.
Not to be dismissed, however, is the long standing and broad doctrine of clean
hands that will not allow the creation or the use of a juridical relation, a trust whether
express or implied included, to perpetuate fraud or tolerate bad faith nor to subvert,
directly or indirectly, the law.
SPS. BAUTISTA v. PILAR DEV’T CORPORATION (August 1999)
Civil Law/ Contracts/ Novation: The extinguishment of an obligation by the substitution or
change of the obligation by a subsequent one which extinguishes or modifies the first is
a novation. It is made either by changing the object or principal conditions referred to as
an objective or real novation; or by substituting the person of the debtor or subrogating a
3rd person to the rights of the creditor, which is known as subjective or personal
novation.
Novation may either be express or implied: Express, when the new obligation
declares in unequivocal terms that the old obligation is extinguished. Implied, when the
new obligation is on every point incompatible with the old one. In the case at bar, there
was clearly an animus novandi, an express intention to novate. The 1st promissory note
which provides for an interest rate of 12% was cancelled and replaced by a 2nd note
which stipulated a higher interest of 21%. This 2nd note became the new contract
governing the parties’ obligations.
1998
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JAPAN AIRLINES v. CA (August 1998)
Civil Law/ Contracts/ Fortuitous Event/ Nominal Damages: Respondents are
passengers of Japan Airlines who were stranded for almost a week in Japan due to
the Pinatubo eruption which made NAIA inaccessible to airline traffic. As a result of
the refusal of JAL to pay for the accommodations of respondents during their whole
stay in Japan, they commenced an action for damages against JAL.
As a general rule, common carriers are expected to follow a standard of care and
diligence which is higher and different in kind to that of ordinary carriers. However, in
the case at bar, JAL is not absolutely responsible for all injuries or damages suffered
by respondents because such was caused by a fortuitous event. They are liable for
nominal damages to respondents though, for their failure to make the necessary
arrangements to transport respondents on the first available connecting flight to
Manila. Nominal damages are adjudicated in order that a right of a plaintiff, which
has been violated of invaded by the defendant, may be vindicated or recognized,
and not for the purpose of indemnifying any loss suffered by him.
VALGOSONS REALTY INC. v. CA (September 1998)
Civil Law/ Lease/ Non-delivery of the Leased Premises: Under Art. 1654 of the NCC, it is
the duty of the lessor, in this case, petitioner VRI (Valgosons Realty Inc), “to deliver the
thing which is the object of the contract ….”, failure to do so constitutes a wrong to which
petitioner exposes itself to legal action including being held liable for damages. The fact
that respondent Prudential Bank (PB), the former lessee of the same space, did not
vacate the premises at the time the new lessee (respondent UDB) was supposed to
enter therein cannot exculpate petitioner VRI from its liability for the non-performance of
its obligation to URB. Moreover, UDB has no cause of action against the first lessee
(PB) because there is no privity of contract between the two respondents-lessees.
POLOTAN, SR. v. CA (September 1998)
Civil Law/ Contracts/ Binding Effect/ Escalation Clause/ Contract of Adhesion: Petitioner
is a holder of a credit card of Security Diners International Corporation (Diners Club). He
was adjudged by the RTC and CA to be indebted to the company for the use of the card.
The contract entered into between petitioner and the company is a contract of
adhesion. A contract of adhesion is one in which one of the contracting parties imposes
a ready-made form of contract which the other party may accept or reject but cannot
modify. Nevertheless, these types of contracts have been declared as binding as
ordinary contracts, the reason being that the party who adheres to the contract is free to
reject it entirely. The binding effect of any agreement between parties to a contract is
premised on two settled principles: (1) that any obligation arising from a contract has the
force of law between the parties; and (2) that there must be mutuality between the
parties based on their essential equality. The court is therefore not precluded from ruling
out blind adherence to their terms if the attendant facts and circumstances show that
they should be ignored for being obviously too one-sided.
In the instant case, the claim of petitioner that the contract is one-sided has no
basis. The fact that the contract allows for the escalation of interests but does not
provide for a downward adjustment of the same does not boost his claim. There is
nothing inherently wrong with escalation clauses, as long as they are not merely
potestative but based on reasonable and valid grounds. They are valid stipulations in
commercial contracts to maintain fiscal stability and to retain the value of money in long
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term contracts. In this case, the interest rate is based on the fluctuation in the market
rates, which is beyond the control of the credit card company.
1997
ROBLETT INDUSTRIAL CONSTRUCTION CORP. v. CA (G.R. No. 116682, Jan. 2,
1997)
Civil Law/ Estoppel: Estoppel in pais arises when one, by his acts, representations or
admissions, or by his own silence when he ought to speak out, intentionally or through
culpable negligence, induces another to believe certain facts to exist and such other
rightfully relies and acts on such belief, so that he will be prejudiced if the former is
permitted to deny the existence of such facts. (Panay Electric v. CA, 174 SCRA 500
[1989]) This doctrine obtains here. A statement of account for P376,350.18 covering
the period above mentioned was received from respondent by petitioner with nary a
protest from the latter. Neither did petitioner controvert the demand letter concerning the
overdue account; on the contrary, it asked for ample time to source funds to substantially
settle the account.
TANGUILIG v. CA (G.R. No. 117190, Jan. 2, 1997)
Civil Law/Contracts/ Interpretation/ Payment/ Fortuitous Event/ Delay: (1) The
installation of a deep well was not included in petitioner's proposals to construct a
windmill system for respondent. While the words "deep well" and "deep well pump" are
mentioned in the proposals, these do not indicate that a deep well is part of the windmill
system. They merely describe the type of deep well pump for which the proposed
windmill would be suitable. Since the terms of the instruments are clear they should not
be disturbed.
(2) In the absence of a creditor-debtor relationship, respondent cannot claim the
benefit of the law concerning payments made by a third person (Arts. 1236 & 1237)..
(3) In order for a party to claim exemption from liability by reason of fortuitous
event under Art. 1174, the event should be the sole and proximate cause of the loss or
destruction of the object of the contract. In Nakpil v. CA (144 SCRA 596 [1986]), 4
requisites must concur: (a) the cause of the breach of the obligation must be
independent of the will of the debtor; (b) the event must be either unforseeable or
unavoidable; (c) the event must be such as to render it impossible for the debtor to fulfill
his obligation in a normal manner; and (d) the debtor must be free from any participation
in or aggravation of the creditor's injury. A strong wind causing the collapse of the
windmill cannot be considered fortuitous, for it must be present where windmills are
constructed. There must have been an inherent defect in the windmill itself.
(4) In reciprocal obligations, neither party incurs in delay if the other does not
comply or is not ready to comply in a proper manner with what is incumbent upon him.
(Art. 1169) When the windmill failed to function properly it became incumbent upon
petitioner to repair it in accordance with the stipulated guaranty. Thus, respondent
cannot be said to have been in delay; instead, it is petitioner who should bear the
expenses for the reconstruction of the windmill. Art. 1167 provides that if a person
obliged to do something fails to do it, the same shall be executed at his cost.
ACE-AGRO DEVELOPMENT CORP. v. CA (G.R. No. 119279, Jan. 21, 1997)
Civil Law/Contracts/Force Majeure: The temporary suspension of work did not merit an
automatic extension of the period of the contract. (Victorias Milling v. Victorias Milling
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Planters Cooperative, 97 Phil. 318 [1955]) The fact is that the contract was subject to a
resolutory period which relieved the parties of their respective obligations but did not
stop the running of the period of the contract. Petitioner may not be to blame for the
failure to resume work after the fire (there were alleged intervening causes, e.g., labor
problems due to the work stoppage), but neither is private respondent.
HEIRS OF SUICO v. CA (G.R. No. 120615, Jan. 21, 1997)
Civil Law/ Contracts/Property/Lease: (1)The parties to the oral lease in question did not
fix a specified period therefor. However, since the rentals were paid monthly, the lease
may be deemed to be on a monthly basis, expiring at the end of every month, pursuant
to Arts. 1687 and 1673. In such case, a demand to vacate was not even necessary for
judicial action after the expiration of every one month.
(2) The power of a court to extend the term of the lease under the second
sentence of Art. 1687 is potestative, or more precisely, discretionary. The court is not
bound to extend it, and its exercise depends upon the circumstances surrounding the
case. Basic common law principles of fairness and equity shun property entailment that
borders on perpetuity to the exclusion of the owner.
(3) The value of the house is inconsequential since it was build in 1950, and
private respondents can remove it if petitioners opt not to retain it by paying 1/2 of its
value, pursuant to Art. 1678, which provides that the lessors would become the owner of
the house constructed by reimbursing the lessees in said amount. Petitioners-lessors
are thus given the option to pay indemnity, while private respondents-lessees do not
have a right to demand that they be paid. If the former refuses to reimburse, the latter's
remedy is to remove the house, even though petitioners' lot may suffer damage thereby,
as long as the damage caused is not more than reasonably necessary.
RAMOS v. CA (July 1997)
Civil Law/ Oblicon/ Supervening Inflation: (1) Failure to comply with a provision deemed
by the parties themselves as so important is a ground for the termination of the contract.
(2) Art. 1250 requires for its application a declaration of inflation by the Central
Bank, without such declaration creditors cannot demand an increase of what is due
them.
MATANGUIHAN v. CA (July 1997)
Civil Law/Equitable Mortgages: In order to judge the intention of the contracting parties,
their contemporaneous and subsequent acts shall be principally considered.
Accordingly, there are instances where the form and stipulations of a contract must give
way to reflect the true intention of the parties. This is best illustrated in the instances
where contracts of sale, whether absolute, or one where the vendor reserves the right to
repurchase the thing sold or a sale pacto de retro, are presumed to be an equitable
mortgage. An equitable mortgage is defined as one which although lacking in some
formality, or form or words, or other requisites demanded by a statute, nevertheless
reveals the intention of the parties to charge real property as security for a debt, and
contains nothing impossible or contrary to law. Its essential requisites are: (1) That the
parties entered into a contract denominated as a contract of sale; and (2) That their
intention was to secure an existing debt by way of a mortgage.
Under the wise, just and equitable presumption in Article 1602, a document
which appears on its face to be a sale - absolute or with pacto de retro - may be proven
by the vendor or vendor-a-retro to be one of a loan with mortgage. In this case, parol
evidence becomes competent and admissible to prove that the instrument was in truth
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and in fact given merely as a security for the payment of a loan. And upon proof of the
truth of such allegations, the court will enforce the agreement or understanding in
consonance with the true intent of the parties at the time of the execution of the contract.
Sales with a right to repurchase are not favored. As before, instruments shall not
be construed to be sales with a right to repurchase, with the stringent and onerous
effects which follow, unless the terms of the document and the surrounding
circumstances so require. Whenever, under the terms of the writing, any other
construction can be fairly and reasonably inferred, such construction will be adopted and
the contract construed as a mere loan unless the court sees that, if enforced according
to its terms, it is not an unconscionable pact.
NOOL v. CA (July 1997)
Civil Law/Void Contracts/Sales: (1) A contract of repurchase arising out of a contract of
sale where the seller did not have any title to the property "sold" is not valid. Since
nothing was sold, then there is also nothing to repurchase. A void contract cannot give
rise to a valid one.
(2) The right to repurchase presupposes a valid contract of sale between the
same parties.
(3) In light of the prohibition against unjust enrichment, if a void contract has
already been performed, the restoration of what has been given is in order. Corollarily,
interest thereon will run only from the time of private respondents' demand for the return
of this amount in their counterclaim.
ONG v. CA (July 1997)
Civil Law/Contracts/Rescission: Arts 1191 and 1383 are inapplicable in this case: Art
1191 refers to rescission applicable to reciprocal obligations which should be
distinguished from rescission of contracts under Art 1383. Although both presupposed
contracts validly entered into and subsisting and both require mutual restitution when
proper, they are not entirely identical.
SPOUSES SANTIAGO v. CA (August 1997)
Civil Law/ Oblicon/ Simulated or Fictitious Contracts: Here, while petitioners (buyers
in a conditional deed of sale) were able to occupy the property allegedly sold, they
were relegated to a small bedroom without bath and toilet, while Arcega (seller)
remained virtually in full possession of the house and lot, using the master's
bedroom. If the transaction was indeed an absolute sale, then Arcega had no
business remaining on the property. Also if petitioners were the legitimate owners,
they would have collected rent from Arcega.
Since the transaction was used merely to facilitate a loan with the SSS with
petitioners using the property as collateral, the contract was absolutely simulated or
fictitious, declared void as per Art. 1409, NCC. The fact that petitioners were able to
secure a title in their names did not operate to vest ownership upon them. The Torrens
system does not create nor vest title, but merely confirms and records title already
existing and vested.
BANGAYAN v. CA (August 1997)
Civil Law/Contracts/ Lease/ Novation: Art. 1311, NCC, provides that contracts take effect
only between the parties, their assigns and heirs, except where the rights and
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obligations arising from contract are not transmissible by their nature, or by stipulation or
by provision of law. Here, paragraphs 4 and 5 of the lease contract provided that the
right of first option was not transmissible, which are consistent with Art. 1649, NCC that
the lessee cannot assign the lease without the consent of the lessor, unless there is a
stipulation to the contrary. The lessor's consent is necessary as the assignment of the
lease would involve the transfer not only of rights, but also of obligations. It constitutes
novation by a substitution of the person of one of the parties.
It cannot be denied that Teofista's right of first option to buy the leased property
in case of its sale is but part of the bigger right to lease said property. The option was
given to Teofista as she was the lessee. It was a component of the consideration of the
lease. The option was by no means an independent right which Teofista could exercise.
It ought to follow that if Teofista was barred by contract from assigning her right to lease
the lot, she was similarly barred from assigning her right of first option to Angelita.
RAMOS v. CA (September 1997)
Civil Law/Contracts/ Sale with Assumption of Mortgage: In sales with assumption of
mortgage, the assumption of mortgage is a condition to the seller's consent so that
without approval by the mortgagee, no sale is perfected.
SPOUSES PANGALINAN v. CA (September 1997)
Civil Law/Sales/Contract to Sell/Extrajudicial Rescission: Art. 1592, NCC, requiring
demand by suit or by notarial act in case the vendor of realty wants to rescind does not
apply to a contract to sell but only to a contract of sale. To argue that there was only a
casual breach is to proceed from the assumption that the contract is one of absolute
sale, where non-payment is a resolutory condition, which is not the case.
The applicable provision of law is Art. 1191, NCC. Pursuant to this, the law
makes it available to the injured party alternative remedies such as the power to rescind
or enforce fulfillment of the contract, with damages in either case if the obligor does not
comply with what is incumbent upon him.
The validity of the stipulation in the contract providing for automatic rescission
upon non-payment cannot be doubted. It is in the nature of an agreement granting a
party the right to rescind a contract unilaterally in case of breach without need of going to
court. Thus, rescission under Art. 1191 was inevitable due to petitioners' failure to pay
the stipulated price within the original period fixed in the agreement.
TIGNO v. CA (October 1997)
Civil Law/ Contracts/ Implied Trusts: An implied trust is deducible by operation of law
from the nature of the transaction as matters of equity, independently of the particular
intention of the parties. It arises where a person purchases land with his own money and
takes conveyance thereof in the name of another. In such a case, the property is held
on resulting trust in favor of the one furnishing the consideration for the transfer, unless a
different intent appears. The trust which results under such circumstances does not
arise from a contract or an agreement of the parties, but from the facts and
circumstances; i.e., the trust results because of equity and it arises by implication or
operation of law.
VILLAFLOR v. CA (October 1997)
Civil Law/Contracts/Simulated Contracts/Land Titles: (1) Petitioner's delivery of the
certificate of ownership and execution of the deed of absolute sale were suspensive
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conditions, which gave rise to a corresponding obligation on the part of private
respondent, i.e., the payment of the last installment of the consideration mentioned in
the first agreement. Such conditions did not affect the perfection of the contract or prove
simulation. Neither did the mortgage.
Simulation occurs when an apparent contract is a declaration of a fictitious will,
deliberately made by agreement of the parties, in order to produce, for the purpose of
deception, the appearance of a juridical act which does not exist or is different from that
which was really executed. (Tongoy v. CA, 123 SCRA 99, 118 [1983]) Such an intention
is not apparent in the agreements. The intent to sell, on the other hand, is clear.
(2) At most, nonpayment only gives petitioner the right to sue for collection.
Generally, in a contract of sale, payment of the price is a resolutory condition and the
remedy of the seller is to exact fulfillment or, in case of substantial breach, to rescind the
contract under Art. 1191, NCC. However, failure to pay is not even a breach, but merely
an event which prevents the vendor's obligation to convey title from acquiring binding
force. (Jacinto v. Kaparaz, 209 SCRA 246, 254-55 [1992])
(3) The transfer of ownership via the 2 agreements and the relinquishment of
rights, being private contracts, were binding only between petitioner and private
respondent. The Public Land Act finds no relevance as the disputed land was covered
by said Act only after issuance of the order of award in favor of private respondent.
Thus, possession of any disqualification by private respondent under said Act is
immaterial to the private contracts between the parties thereto. (We are not, however,
suggesting a departure from the rule that laws are deemed written in contracts.)
BINGCOY v. CA (October 1997)
Civil Law/Prescription: Acquisitive prescription is in itself a mode of acquiring ownership
over a parcel of land and does not require successional rights in order to ripen into
ownership. There is nothing on the record that discloses even an attempt by petitioners
to rebut the evidence of private respondents as to their peaceful, continuous, adverse
and open possession in the concept of an owner over the lots for 22 years. Under the
law then, Act No. 190, §41 (Code of Civil Procedure), 10 years of continuous, actual
adverse possession was sufficient.
YOBIDO v. CA (October 1997)
Civil Law/Oblicon/Fortuitous Event: The explosion of a newly installed tire of a
passenger vehicle causing the vehicle to fall in the ravine is not a fortuitous event that
exempts the carrier from liability for the death of a passenger. To be considered a
fortuitous event: (a) the cause of the unforeseen and unexpected occurrence must be
independent of human will; (b) it must be impossible to foresee the event which
constitutes the caso fortuito, or if it could be foreseen, must have been impossible to
avoid; (c) the occurrence must be such as to render it impossible for the debtor to fulfill
his obligation in a normal manner; (d) obligor must be free from any participation in the
aggravation of the creditor's injury; (e) entire exclusion of human agency from the cause
of injury or loss.
Under the circumstances here, there are human factors involved. The fact that
the tire was new (in fact, grooves/tread were still visible) did not imply that it was entirely
free from manufacturing defects or that it was properly mounted on the vehicle. Neither
may the fact that the tire bought and used vehicle is of a brand name noted for qualify,
resulting in the conclusion that it could not explode within 5 days' use. Be that as it may,
it is settled that an accident caused either by defects in the automobile or through the
negligence of its driver is not a caso fortuito that would exempt the carrier from liability
for damages.
107
MURLI SADHWANI v. CA (October 1997)
Civil Law/Contracts/Lease/Sublease: Under Art. 1650, NCC, when the lease contract
does not expressly forbid a sublease, the lessee may sublet the thing leased. The rule is
different, however, re: assignments of lease. Art. 1649 provides that the lessee cannot
assign the lease without the consent of the lessor, unless there is a stipulation to the
contrary..
Indeed, the consent of the lessor is necessary because the assignment of lease
would involve the transfer not only of rights, but also of obligations. Such assignment
would constitute novation by substitution of one of the parties, i.e., the lessee. There is
no evidence here showing that Sawit subsequently agreed to a substitution of petitioners
in place of Orient as lessee.
1996
DOMINGO v. CA (March 1996)
Civil Law/ Contracts/ Compromise: A compromise is a contract whereby the parties, by
making reciprocal concessions, avoid a litigation or put an end to one already
commenced. Essentially, it is a contract perfected by mere consent. Once an
agreement is stamped with judicial approval, it becomes more than a contract binding
upon the parties; having the sanction of the court and entered as its determination of the
controversy, it has the force and effect of any other judgment.
PCIB v. CA (March 1996)
Civil Law/ Contracts/ Absolution from Liability: A stipulation embodied in the standard
application for/receipt furnished by petitioner for the purchase of a telegraphic transfer
which relieves it of any liability resulting from loss caused by errors or delays in the
course of the discharge of its services cannot absolve the petitioner from liability, where
it has acted fraudulently and in bad faith. In Geraldez v. CA (230 SCRA 320 [1994]), it
was unequivocally declared that notwithstanding the enforceability of a contractual
limitation, responsibility from a fraudulent act cannot be exculpated because the same is
contrary to public policy. (See Art. 21, Civil Code.) Freedom of contract is subject to the
limitation that the agreement must not be against public policy and any agreement
made in violation of this rule is not binding and will not be enforced. (17 Am Jur. 2d,
Contracts 257)
PNB v. CA (April 1996)
Civil Law/ Oblicon/ Payment/ Exemplary Damages: (1)When the court ordered petitioner
to pay private respondent the amount of P32,480.00, it had the obligation to deliver the
same to him. Under Art. 1233 of the Civil Code, a debt shall not be understood to have
been paid unless the thing or service in which the obligation consists has been
completely delivered or rendered. The burden of proof of such payment lies with the
debtor. (Pinon v. Osorio, 30 Phil. 365)
(2) Jurisprudence has set down the requirements for exemplary damages to be
awarded:
1.
they may be imposed by way of example in addition to compensatory
damages, and only after the claimant's right to them has been established;
108
2.
they cannot be recovered as a matter of right, their determination
depending upon the amount of compensatory damages that may be awarded to the
claimant;
3.
the act must be accompanied by bad faith or done in a wanton manner.
(Octol v. Ybañez, 111 SCRA 79 [1982]; De Leon v. CA, 165 SCRA 166 [1988])
In the case at bench, while there is a clear breach of petitioner's obligation to pay
there is no evidence that it acted in a fraudulent manner. Furthermore, there is no award
of compensatory damages which is a prerequisite before exemplary damages may be
awarded.
SPOUSES ALMEDA v. CA (April 1996)
Civil Law/Contracts/Obligatory Force/Interest/Escalation Clause: (1)The binding
effect of any agreement between parties to a contract is premised on two settled
principles: (a) that any obligation arising from contract has the force of law
between the parties; and (b) 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.
PNB unilaterally altered the terms of its contract with petitioners by increasing the
interest rates on the loan without prior assent of the latter. Article 1956 stipulates that
"No interest shall be due unless it has been expressly stipulated in writing."
(2)Escalation clauses are not basically wrong or legally objectionable as long as they
are not solely potestative but based on reasonable and valid grounds.
WILLEX PLASTIC v. CA(April 1996)
Civil Law/ Oblicon/Accessory Obligations/Sureties/Retroactivity of Sureties: The
consideration necessary to support a surety obligation need not pass directly to the
surety, a consideration moving to the principal alone being sufficient.
Moreover, as we held in BPI v. Foerster, although a contract of suretyship is
ordinarily not to be construed as retrospective, in the end the intention of the parties as
revealed by the evidence is controlling. In this case, the parties clearly provided that the
guaranty would cover "sums obtained and/or to be obtained.”
YNSON v. CA; YULIENCO v. CA (June 1996)
Civil Law/ Remedial Law/Compromise: Since the parties entered into this compromise
agreement freely without any vice of consent, the same must govern the relations of the
parties.
A judicial compromise has the force of law and is conclusive between the
parties. A compromise upon its perfection becomes binding upon the parties and has the
effect and authority of res judicata even if not judicially approved.
VILLA v. CA (G.R. No. 119850, June 20, 1996)
Civil Law/ Oblicon/ Stipulation Pour Autrui/ Torts:(1)The "Agreement" entered into by
petitioner and Bankard, provides inter alia that the merchant shall honor validly issued
PCCCI credit cards provided that the card expiration date has not elapsed and the card
number does not appear on the latest cancellation bulletin of lost, suspended and
canceled PCCCI credit cards and, no signs of tampering appear on the face of the credit
card.
109
While de Jesus may not be a party to the said agreement, the above-quoted
stipulation conferred a favor upon de Jesus, a holder of a credit card validly issued by
Bankard. This is a stipulation pour autri and under Article 1311 of the Civil Code de
Jesus may demand its fulfillment provided he communicated his acceptance to the
petitioner before its revocation. In this case, de Jesus' offer to pay by means of his
Bankard constitutes not only an acceptance of the said stipulation but also an explicit
communication of his acceptance to the obligor.
(2)The test for determining the existence of negligence in a particular case may
be stated as follows: Did the defendant in doing the alleged negligent act use the
reasonable care and caution which an ordinary prudent person would have used in the
same situation? If not, then he is guilty of negligence. While it is true that de Jesus did
not have sufficient cash on hand this fact alone does not constitute negligence on his
part. Neither can it be claimed that the same was the proximate cause of his damage.
We take judicial notice of the current practice among major establishments to accept
payment by means of credit cards in lieu of cash.
ABELLA v. CA (June 1996)
Civil Law/Interpretation of Contracts: It is a cardinal rule in the
interpretation of contracts that "if the terms are clear, the literal meaning of its
stipulations shall control." No amount of extrinsic aids are required.
INCIONG v. CA (June 1996)
Civil Law/Contracts/Fraud/ Credit Transactions/ Solidary Obligations v.
Suretyship/ Joint Obligations: (1) Fraud must be established by clear and
convincing evidence, mere preponderance of evidence, not even being adequate.
Petitioner's attempt to prove fraud must, therefore, fail as it was evidenced only by
his own uncorroborated and, expectedly, self-serving testimony.
(2) Petitioner signed the promissory note as a solidary co-maker and not as a
guarantor. A solidary or joint and several obligation is one in which each debtor is liable
for the entire obligation, and each creditor is entitled to demand the whole obligation.
While a guarantor may bind himself solidarily with the principal debtor, the liability of a
guarantor is different from that of a solidary debtor. "A guarantor who binds himself in
solidum does not become a solidary co-debtor to all intents and purposes. There is a
difference between a solidary co-debtor and a fiador in solidum (surety). The latter,
outside of the liability he assume to pay the debt before the property of the principal
debtor has been exhausted, retains all other rights, actions and benefits which pertain to
him by reason of the fiansa; while a solidary co-debtor has no other rights than those
bestowed upon him in Section 4, Chapter 3, Title I Book IV of the Civil Code
(3) Under Art. 1207 thereof, when there are two or more debtors in one and the
same obligation, the presumption is that the obligation is joint so that each of the debtors
is liable only for a proportionate part of the debt. There is solidary liability only when the
obligation expressly so states, when the law so provides or when the nature of the
obligation so requires.
Because the promissory note involved in this case expressly states that the three
signatories therein are jointly and severally liable, any one, some or all of them may be
proceeded against for the entire obligation. The choice is left to the solidary creditor to
determine whom he will enforce collection.
NATIONAL WATERWORKS (now MWSS) v. NLRC (July 1996)
Civil Law/Contracts/Prescription: Article 1155 of the Civil Code provides the specific
instances when the period of prescription may be interrupted. Any such interruption is a
110
factual matter to be properly supported by evidence. Private respondents' claims herein
are not barred by prescription, the period having been interrupted by the written
extrajudicial demands made by private respondents, coupled with petitioner's own pleas
for time within which to pay the claims.
AMERICAN HOME ASSURANCE v. NLRC (July 1996)
Civil Law/ Oblicon/ Condition: Petitioners denied the grant of the bonus to private
respondent because the condition for its grant is that the employee must retire under the
SERP. Yet, it was the unjust denial of his applications that prevented private respondent
from complying with such condition for early retirement. As petitioners, being
employers-obligors, voluntarily prevented fulfillment of the condition by their own acts,
private respondent is deemed to have fulfilled the condition for early retirement.
PNB v. CA (July 1996)
Civil Law/Oblicon/Compensation: What petitioner bank is effectively saying is that since
the respondent appellate court ruled that petitioner bank could not do a shortcut and
simply intercept funds being coursed through it, for transmittal to another bank, and
eventually to be deposited to the account of an individual who happens to owe some
money to petitioner, and because respondent court ordered petitioner bank to return the
intercepted amount to said individual, who in turn was found by the appellate court to be
indebted to petitioner bank, therefore, there must now be legal compensation of the
amounts each owes the other, hence, there is no need for petitioner bank to actually
return the amount, and finally, that petitioner bank ends up in exactly the same position
as when it first took the improper and unwarranted shortcut by intercepting the said
money transfer, notwithstanding the assailed decision saying that this could not be done!
There is here a clever ploy to use this Court to validate an improper act of petitioner
bank, with the not impossible intention of using this case as precedent for similar acts of
interception in the future.
BRILLO HANDICRAFTS v. CA (G.R. No. 109090, Aug. 7, 1996)
Civil Law/Contracts/Estoppel: Estoppel has set in where petitioner had partially paid the
amount and acquiesced to the respondent’s rate.
CUIZON v. CA (G.R. No. 102096, Aug. 22, 1996)
Civil Law/Oblicon/Interpretation/Fraud: (1) In contractual relations, the law allows the
parties much leeway and considers their agreement to be the law between them. This is
because "courts cannot follow one every step of his life and extricate him from bad
bargains xxx relieve him from one-sided contracts, or annul the effects of foolish acts."
(Vales v. Villa, 35 Phil. 769)
(2) Where the parties have given a practical construction by their conduct, as by
acts in partial performance, such construction may be considered by the court in
determining its meaning and ascertaining the mutual intention of the parties at the time
of the contracting. (Javier v. CA, 183 SCRA 171) If it were true as private respondents
claim that their agreement was for the transfer of the subject lots only upon payment of
the full consideration, why then did private respondents execute a deed of sale over one
[of six] lot[s] although they knew too well that a partial amount only of the purchase price
was paid? No credible explanation was given by private respondents.
(3) In construing a written agreement, the reason behind and the circumstances
surrounding its execution are of paramount importance to place the interpreter in the
situation occupied by the parties concerned at the time the writing was executed.
111
(Vicente v. Shotwell, 38 SCRA 107) Admittedly, the intention of the contracting parties
should always prevail because their will has the force of law between them. (Kasilag v.
Rodriguez, 69 Phil. 217)
(4) We do not find it proper to use the fair market value as the price of one lot.
This is not in accord with the contract between the parties. It is not the province of the
court to alter a contract by construction or to make a new contract for the parties; its
duty is confined to the interpretation of the one which they have made for themselves
without regard to its wisdom or folly as the court cannot supply material stipulations or
read into the contract words which it does not contain. (Bacolod Murcia v. Banco
Nacional, 74 Phil. 675)
(5) Fraud is the deliberate or intentional evasion of the normal fulfillment of an
obligation. (8 Manresa 72) The mere failure of private respondents to execute a deed of
sale because they demanded first an accounting of the lots used as collateral by
petitioner and amount of loans secured could not be considered as fraud. Fraud is
never presumed; it must be alleged and proven. (Atilano v. Inclan, 45 Phil. 246) Fraud is
negated when private respondents partially performed their obligation when they
executed a deed of sale over 1 lot.
RIZAL SURETY v. CA & TRANSOCEAN TRANSPORT (G.R. No. 96727, Aug. 28,
1996)
Civil Law/ Contracts/Trusts: In Mindanao Devt. Authority v. CA (113 SCRA 429, 436-437
[1982]), this Court held the elements of an express trust:
1)
Competent trustor and trustee;
2)
An ascertainable trust res; and
3)
Sufficiently certain beneficiaries.
There is no need for stilted formalities. There must be a present and complete
disposition of the trust propoerty, notwithstanding that the enjoyment in the beneficiary
will take place in the future. Also, the purpose must be an active one to prevent trust
from being executed into a legal estate or interest, and one not in contravention of some
prohibition of statute or rule of public policy.
Power of administration must be other than a mere duty to perform a contract
although the contract is for a 3rd party beneficiary. A declaration of terms is essential,
and these must be stated with reasonable certainty in order that the trustee may
administer, and the court, if called upon to do so, may enforce the trust.
INTER-ASIA SERVICES CORP. v. CA (G.R. No. 106427, October 1996)
Civil Law/ Contracts/ Lease/ Renewal v. Extension: To renew means the old contract is
extinguished, thus a new one must be executed, and vice-versa. In this case, there was
only an extension where after the contract expired on 14 July 1990, “agreements” were
entered into for petitioner to stay on the leased premises up to 1 January 1991 and
subsequently up to 1 March 1991. In Fernandez v. CA (166 SCRA 577 [1988]), this
Court held that an alleged verbal assurance of renewal of a lease is inadmissible to
qualify the terms of the written lease agreement under the parole evidence rule and
unenforceable under the Statute of Frauds.
PHIL. INTL. TRADING CORP. v. ANGELES (G.R. No. 108461, October 1996)
Civil Law/Publication of Laws: In Tañada v. Tuvera (146 SCRA 446 [1986]), we ruled
that executive issuances meant to enforce and implement an existing law pursuant to a
valid delegation, must be published.
112
SECURITY BANK & TRUST CO. v. RTC (G.R. No. 113926, October 1996)
Civil Law/Interest/Usury: Should the rate of interest on a loan as stipulated in a
contract (23% here), far in excess of the ceiling prescribed under or pursuant to the
Usury Law prevail over §2 of CB Circular No. 905 which prescribes that the rate of
interest thereof shall continue to be 12% per annum?
Circular No. 905 merely suspended the effectivity of the Usury Law. Where the
rate of interest was agreed upon by the parties freely, it is not for respondent court to
change the stipulations in the contract where it is not illegal. Further, Art. 1306, NCC
provides that contracting parties may establish stipulations as they deem convenient,
provided they are not contrary to law, etc. We find no valid reason for the respondent
court to impose a 12% interest rate on the principal balanc. In a loan, the interest due
should be that stipulated in writing, and in the absence thereof, the rate shall be 12%
p.a. (Eastern Shipping v. CA, 234 SCRA 78) Hence, only in the absence of a stipulation
can the court impose the 12% interest rate.
MACTAN CEBU INTL. AIRPORT AUTHORITY v. CA (G.R. No. 121506, October 1996)
Civil Law/Contracts/Statute of Frauds: Under Art. 1403, NCC, a contract for the sale of
real property shall be unenforceable unless the same or some note or memorandum
thereof be in writing and subscribed the party charged or his agent. Evidence of the
agreement cannot be received without the writing, or a secondary evidence of its
contents. In case at bench, the deed of sale and verbal agreement allowing the right of
repurchase should be considered an integral whole. The deed of sale relied upon by
petitioner is in itself the note or memorandum evidencing the contract. Thus, the
requirement of the Statute of Frauds has been sufficiently complied with. Moreover, the
principle of the Statute of Frauds only applies to executory contracts and not to contract
either partially or totally performed (Victoriano v. CA, 194 SCRA 19), as in this case,
where the sale has been consummated; hence, the same is taken out of the scope of
the Statute of Frauds.
As the deed of sale has been consummated, by virtue of which, petitioner
accepted some benefits thereunder, it cannot now deny the existence of the agreement.
(Art. 1405, NCC) The Statute of Frauds was enacted for the purpose of preventing fraud
and should not be made the instrument to further them. (National Bank v. Phil.
Vegetable Oil, 49 Phil. 857)
PHIL. NATIONAL BANK v. CA (G.R. No. 123643, October 1996)
Civil Law/Damages/Interest: The 12% interest rate referred to in Circ. 416 applies only to
loans or forbearance of money, or where money is transferred from one person to
another and the obligation to return the same or a portion thereof is adjudged. xxx (FTI
v. CA & TAO Devt., G.R. No. 120097, 23 Sept. 1996)
Therefore, the proper rate of interest referred to in the judgment under execution
is only 6%, to be computed from the time of the filing of the complaint considering that
the amount adjudged can be established with reasonable certainty (P98,691.90).
CONSTANTINO v. CA (G.R. No. 116018, November 1996)
Civil Law/Contracts/Land Titles/Fraud: We find respondents’ allegation that they signed
the deed prior to the survey worthy of credit. As found by the trial court, petitioner’s
contrary contention was contradicted by petitioner’s own witness who positively asserted
in court that the survey was conducted 6 days after the signing. Obviously, when
113
respondents signed the deed, it was still incomplete sice petitioner who caused it to be
prepared left several spaces blank, regarding the dimensions of the property to be sold.
The heirs were persuaded to sign the document only upon assurance of petitioner that
Roque would be present when the property would be surveyed. But this turned out to be
a ruse of petitioner to induce respondents to sign the deed. (See Periquet v. IAC, 238
SCRA 697 [1994]) Thus all elements of fraud vitiating consent for purposes of annulling
a contract concur: (a) employed by a contracting party upon the other; (b) induced the
other party to enter into the contract; (c) serious; and (d) resulted in damage and injury
to the party seeking annulment. (Alcasid v. CA, 237 SCRA 419 [1994])
Perhaps, another reason to annul the document is that the second page
manifests that the number of the subdivision plan and the respective area of the lot were
merely handwritten while the rest of the statements were typed, which leads us to
conclude that the handwritten figures were not available at the time the document was
formalized.
CATHOLIC BISHOP OF BALANGA v. CA (G.R. No. 112519, November 1996)
Civil Law/Contracts/Land Titles/Laches: The elements of laches are:
1)
Defendant’s conduct giving rise to the situation complained of;
2)
Delay in asserting complainant’s right after he had knowledge of defendant’s
conduct and after he had opportunity to sue;
(a) knowledge of defendant’s action;
(b) opportunity to sue defendant after obtaining such knowledge; and
(c) delay in suing
3)
Lack of knowledge or notice on defendant’s part that complainant would assert
the right on which he based his suit; and
4)
Injury or prejudice to defendant if relief is accorded to complainant. (citations
omitted)
In this case, petitioner sued only after 49 years since the donation, without
explanation for this long delay making petitioner guilty of laches.
Further, while petitioner is still the registered owner, and jurisprudence is settled
as to the imprescriptibility of a Torrens Title, there is equally an abundance of cases
where we categorically ruled that a registered landower may lose his right to recover the
possession of his registered property by reason of laches. (citations omitted)
SPOUSES FLORENDO v. CA (G.R. No. 101771, Dec. 17, 1996)
Civil Law/Contracts/Escalation Clauses: In Banco Filipino v. Navarro (152 SCRA
346,353 [1987]), we ruled that in general, there is nothing inherently wrong with
escalation clauses. In IBAA v. Spouses Salazar (159 SCRA 133, 137 [1988]), the Court
reiterated the rule that escalation clauses are valid in commercial contracts.
ManCom Resolution 85-08, which is neither a rule nor a CB resolution, cannot be
used as basis for escalation in lieu of CB issuances, since par. (f) of the mortgage
contract categorically specifies that any interest rate increase be in accordance with
prevailing rules, regulations and circulars of the CB. The Banco Filipino and PNB
doctrines thus apply four-square, that without such CB issuances, any proposed
increased rate will never become effective.
It will not be amiss also to point out that the unilateral determination and
imposition of increased interest rates by LBP violates the principle of mutuality of
contracts (Art. 1308, NCC).
114
1995
DEL MUNDO v. CA (240 SCRA 348 [1995])
Civil Law/Damages: Actual and moral damages cannot be dealt with in the
aggregate, each must be separately identified and independently justified.
CASTELO v. CA (244 SCRA 180 [May 1995])
Civil Law/Oblicon/ Damages/ Interest: In case of ambiguity in language of
contract, that interpretation which establishes a less onerous transmission of
rights or permits greater reciprocity is to be adopted. In delay in discharging an
obligation consisting of a payment of a sum of money, the appropriate measure of
damages is payment of penalty interest. Under Art. 2209, use the rate agreed
upon, if none, pay additional interest at a rate equal to the regular or monetary
interest, if none, legal interest of 6% or 12% (latter if loan or forbearance of
money).
RAPANUT v. CA (246 SCRA 323 [July 1995])
Civil Law/Oblicon/Contracts Involving Installment Payments/Estoppel: (1) Failure to
exercise the right to rescission after petitioner's alleged default constitutes a waiver,
further, continued acceptance of the installment payments constitutes estoppel.
(2) In a contract involving installment payment with interest chargeable against
the remaining balance of the obligation, it is the duty of the creditor to inform the debtor
of the amount of interest that falls due and that he is applying the installment payments
to cover said interest. Otherwise, the creditor cannot apply the payments to the interest
and then hold the debtor in default for non-payment of installments on the principal (Art.
1253, Civil Code).
DBP v. CA (G.R. No. 110053, Oct. 16, 1995)
Civil Law/Oblicon/Void Contracts/Restoration: If both parties have no fault
or are not guilty, the restoration of what was given by each of them to the other is
in order. The declaration of nullity of a contract which is void ab initio operates to
restore things to the state and condition in which they were found before the
execution thereof.
AG & P v. CA (G.R. Nos. 114841-42, Oct. 20, 1995)
Civil Law/Contracts/Damages/Interest: When an obligation not constituting a loan or
forbearance of money is breached, interest on the amount of the damages awarded may
be imposed at the rate of six percent (6%) per annum. No interest shall be adjudged on
unliquidated claims unless the same can be established with reasonable certainty.
The actual base for the computation of such legal interest, however, shall be the
amount as finally adjudged by this Court. Furthermore, when our judgment herein
becomes final and executory, the rate of legal interest shall be twelve percent (12%)
from such finality until the satisfaction of the total judgment account, the interim period
being effectively equivalent to a forbearance of credit.
CASE NO.9
SM: Contracts; suretyship; Art. 2047, NCC
PALMARES vs. CA
GR # 126490, March 31, 1998
115
FACTS: Pursuant to a promissory note (PN), private respondent MB Lending Corp. (MB)
extended a loan to the spouses Azarraga together with petitioner amounting to P30k but
debtors were able to pay only P16, 300. Consequently, on the basis of petitioner’s
solidary liability under the PN, MB filed a complaint against petitioner as the lone party
defendant to the exclusion of the principal debtors, allegedly due to the latter’s
insolvency. Petitioner claimed that while she agreed to be liable on the note upon default
of the principal debtor, MB acted in bad faith in suing her alone without including the
Azarragas when they were the only ones who benefited from the loan’s proceeds.
HELD: Petitioner expressly bound herself to be jointly and severally liable with the
principal maker of the note. The terms of the contract are clear, explicit and unequivocal
that petitioner’s liability is that of a surety. A surety is an insurer of the debt, a
suretyship is an undertaking that the debtor shall pay. A surety promises to pay
the principal’s debt. If the principal will not pay, he binds himself to perform if the
principal does not, w/o regard to his ability to do so. In fine, a surety undertakes
directly for the payment and is so responsible at once if the principal debtor
makes default. It has not been shown, either in the contract or the pleadings that MB
agreed to proceed against petitioner only if and when the defaulting principal has
become insolvent
CASE NO. 10
SM: Contracts; A. 1342, NCC
PBC vs. CA
GR # 109803, April 20, 1998
FACTS: Chee Puen, then the general manager of Global Inc., informed private
respondent, his estranged wife that their company a P300k loan for its operational
expenses. He proposed that her paraphernal lot in Makati be used as collateral. He
assured her that the loan would not exceed P300k and she was asked to sign 3 sets of
blank forms of real estate mortgage (REM) of PBC. He wrote down in pencil the figure
300 under the space provided for the amount to be loaned and respondent signed the
blank mortgage forms due to Chee Puen’s representations. Chee Puen had the REM
document later notarized by Atty. Arzadon using a residence certificate bearing
respondent’s forged signature. Apparently, Chee Puen applied for a P3M loan from
PBC. To secure the loan, he mortgaged respondent’s paraphernal lot in Makati, using
the blank REM forms signed by her. He also misrepresented himself as president and
acting corporate secretary of Global, Inc. PBC did not investigate Chee Puen’s authority
to mortgage respondent’s property. Private respondent discovered that Chee Puen
obtained a loan of P3M from PBC. HELD: Respondent has not consented to
collateralize Global, Inc’s P3M loan with her paraphernal lot. All facts show that she was
misled by Chee Puen and thus, the REM should be nullified. The established facts
preclude the application of estoppel against the respondent. Respondent did not
deliberately or intentionally lead the PBCtobelieve that she was putting up her
paraphernal realty to secure the P3M loan of Global.It was Chee Puen who made the
misrepresentation thus defrauding respondent herself.
Further, PBC’s reliance in the REMs signed in blank by the respondent was
unreasonable. As a banking institution, PBC was grossly negligent when (a) it took no
step to verify whether the respondent was really offering her paraphernal property as
collateral; (b) made no credit check on respondent and Global, Inc.; and (c) conducted
no investigation on the authenticity of the “Secretary’s Certificate of Board
Resolution.”The business of a bank is affected with public interest and it should observe
a higher standard of diligence when dealing with the public. Neither will it matter that
116
PBC itself was misled by Chee Puen, a 3rd person to the contract. Under A.1342, NCC,
the misrepresentation of a 3rd person will vitiate consent if it has resulted in
substantial mistake and the same is mutual.
CASE NO.22
SM: Contracts; Arts. 1385 &1482
GOLDENROD, INC. vs. CA
GR# 126812, November 124, 1998
FACTS: Petitioner and private respondent Baretto Realty (BR) entered into a contract to
sell for one of the lots sold by BR. Petitioner gave BR earnest money for the said
property. It appeared that the same was intended to form part of the purchase price and
absent any express provision it shall not be forfeited in favor of BR in case petitioner fails
to comply with his obligation. Petitioner informed BR that it would no longer push thru
with the sale. It then resorted to extrajudicial rescission of its agreement to which BR did
not object. In fact, BR sold the subject realty a day after said letter of rescission was
received by BR’s president. Petitioner demanded the return of its earnest money but BR
refused. HELD: Under A.1482, NCC, whenever earnest money is given in a
contract of sale, it shall be considered as part of the purchase price and as proof
of he perfection of the contract. Petitioner clearly stated without any objection from
BR that the earnest money was intended to form part of the purchase price. It was an
advance payment which must be deducted from the total price. Thus, the parties could
not have intended that the earnest money or advance payment would be forfeited when
the buyer should fail to pay the balance of the price, especially in the absence of a clear
and express agreement thereon. Petitioner resorted to extrajudicial rescission of its
contract with BR which in turn did not object. If the party does not oppose the declaration
of rescission of the other party, specifying the grounds therefore, and if it fails to reply or
protest against it, its silence thereon suggests an admission of the veracity and validity
of the rescinding party’s claim. By virtue of the extrajudicial rescission of the contract to
sell by petitioner without opposition from BR, which, in fact, sold the property to other
persons, BR, as the vendor, had the obligation to return the earnest money of P1M. It
would be most inequitable if respondent BR would be allowed to retain it and at the
same time appropriate the proceeds of the 2nd sale.
CASE NO. 23
SM: Quasi delicts; Liability of employers under Arts.2180 & 2194, NCC
METRO MANILA TRANSIT CORP. vs. CA
GR# s 116617 & 126395, November 16, 1998
FACTS: Liza Rosalie Rosales died due to a vehicular accident involving petitioner
MMTC’s vehicle driven by Pedro Musa. Her parents sued MMTC and Musa for
damages. According to MMTC, it has exercised the diligence of a good father of a
family with respect to the selection of employees by presenting mainly testimonial
evidence on its hiring procedure. Thus, it should not be liable for damages. HELD: The
evidence presented by MMTC to show that it exercised the diligence of a good father of
a family in the selection and supervision of employees and thus avoid the vicarious
liability for the negligent acts of its employees is insufficient to overcome the
presumption of negligence against it. MMTC is thus primarily liable for damages arising
from the negligence of its employee in view of A.2180, NCC. It can recover from its
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employee but does not make the latter’s liability subsidiary. They are solidarily liable.
The liability of the registered owner of a public service vehicle for damages
arising from the tortious acts of its driver is primary, joint and direct with the
driver.
NO. 25
SM: Obligations and contracts; double sale
CHENG vs. GENATO
GR# 129760, December 29, 1998
FACTS: Respondent Ramon Genato entered into a contract to sell with the other
respondents, spouses Da Jose. The contract was in a public instrument and was duly
annotated at the back of the 2 Transfer of Certificate of Titles covering the said lots. The
contract provided, among others, the partial down payment of P50k and the payment of
the remaining P950k after 30 days and only after verifying and confirming the truth and
authenticity of the documents. Said 30 days was executed for another 30 days.
Pending the effectivity of said extension, and without notifying the Da Joses,
Genato executed an Affidavit to Annul the Contract to Sell but no annotation of the same
was made at the back of his titles.
Cheng and Genato thereafter entered into a contract of sale over the lands. Genato
decided to continue the contract he had with the Da Joses and sent back Cheng’s check
but Cheng demanded compliance with their agreement as it was already perfected.
Cheng further executed as Affidavit of Adverse Claim which was annotated on the
subject TCTs. Meanwhile, the Da Joses paid Genato the P950k balance. HELD: The
Da Joses were not in default since the 30 day extension period has not yet expired. In
addition, no further condition was agreed upon when the Da Joses were granted the 30
days extension. Even if they did default in their Contract to sell, the affidavit to annul is
not even called for. With or with out it, their non-payment to complete the full down
payment of the purchase price ipso facto avoids their contract to sell, it being subjected
to a suspensive condition. When a contract is subject to a suspensive condition, its
birth/effectivity can take place only if and when the event which constitutes the
condition happens or is fulfilled. If it does not take place, the parties would stand
as if the conditional obligation had never existed. Further, the act of a party of
canceling a contract should be made known to the other. Since that was not made, the
Da Joses contract was not rescinded properly. Lastly, the knowledge gained by Cheng
of t heist transaction between the Da Joses and Genato defeats his rights even if he is
first to register the 2nd transaction, since such knowledge taints his prior registration with
bad faith.
CASE NO. 29
SM: Obligation and contracts; Rescission, A.1191, NCC
ONG vs. CA
GR# 97347, July 06, 1999
FACTS: Petitioner Jaime Ong and respondent spouses Miguel and Alejandra Robles
executed an “Agreement of Purchase and Sale” on 2 lots for P2M. Ong paid the Robles
couple the initial payment of P103, 499.91 as agreed upon, by depositing it with the
UPCB. Ong took possession of the property will all the improvements thereon. He
further deposited the remaining payment with the BPI in accordance with their stipulation
that Ong pay the respondents’ loan with BPI. Ong issued 4 post dated Metro Bank
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checks to answer fro his P1.4M balance but they were dishonored for insufficient funds.
Ong failed to replace the checks and out of the P496, 500 BPI loan, he only paid P393,
679.60. Respondents then sold 3 of their rice mill’s transformers found in the subject
lots and Ong gave them the authority to operate the mill while retaining possession of
the lots. Respondents demanded Ong the return of their properties. Ong ignored the
same. HELD: A careful reading of the parties’ contract shows that it is a contract to
sell whereby ownership is by agreement, reserved in the vendor and is not to pass
to the vendee till full payment of the purchase price. In a contract to sell, payment
of the purchase price is a positive suspensive condition, the failure of which is not
a breach, causal or serious, but a situation that prevents the obligation of the
vendor to convey title from acquiring an obligatory force.
In the instant case,
the respondents bound themselves to deliver a deed of absolute sale and a clean title
upon full payment by Ong of the P2M. Ong’s failure to complete payment rendered the
contract to sell ineffective and without force and effect. The breach contemplated in
A.1191, NCC is the obligor’s failure to comply with an obligation already extant, not a
failure of a condition to render binding that obligation. Hence, the agreement of the
parties herein maybe set aside, but not because of a breach on Ong’s part to pay in full.
Rather, his failure brought a situation which prevented the obligation of respondents to
convey title from acquiring an obligatory force.
CASE NO. 30
SM: Wills and Succession; Holographic will; A.811, NCC
CODOY vs. CALUGAY
GR# 123486, August 12, 1999
FACTS: Matilde Seño Vda. De Ramonal executed a holographic will. Herein
respondents, devisees and legatees of said will filed with the RTC of Misamis Oriental a
petition for probate of said will.Petitioners opposed the petition alleging that the
holographic will was a forgery and that the same was even illegible. They argued that
the repeated dates incorporated or appearing on the will after every disposition is out of
the ordinary. The CA held that the testimonies presented by respondents prove the
authenticity of the will and the handwriting and signature therein and allowed the will’s
probate. HELD: The word “shall” in a statute commonly denotes an imperative
obligation and is inconsistent with the idea of discretion and that the presumption
is that the word “shall” when used in a statute is mandatory. However, in the case
at bar, the goal to achieve is to give effect to the wishes of the deceased and the evil to
be prevented is the possibility that unscrupulous individuals who for their benefit will
employ means to defeat the wishes of the testator. Not all the witnesses presented by
the respondents testified explicitly that they were familiar with the testator’s handwriting.
Further, the will was found not in the decedent’s personal belongings but with one of the
respondents who kept it even before the decedent’s death. There was even no
opportunity for an expert to compare the signature and the handwriting of the deceased
with other documents signed and executed by her during her lifetime. A comparison of
the strokes and signature of the decedent in the will with the other documents written by
her prior to said will showed that there is uncertainty that the holographic will is in the
deceased’s handwriting.
CASE NO. 31
SM: Contracts; A.1603, NCC; equitable mortgage
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CHING SEN BEN vs. CA
GR # 124355, September 21, 1999
FACTS: Petitioner constructed a house on his Marikina lot (TCT 128394) and agreed to
transfer the same to Vicente for P150, 000 to be paid by Vicente from the proceeds of
his housing loan from the SSS which granted him a P119, 400 loans. Ching then
executed a Deed of Absolute Sale over said realty in Vicente’s favor. Ching informed
Vicente that he has a P43k balance on the house and lot. Vicente failed to pay the said
amount. Thereafter, they executed a Deed of Sale with Assumption of Mortgage and
With Right to Repurchase whereby Vicente conveyed the property to Ching. It provided
that Ching will assume all the duties and obligations of Vicente imposed upon by the
latter in the deed of mortgage he executed in SSS’s favor, as if Ching was the original
mortgagor in the mortgaged deed. However, Vicente retained possession of the
property. Ching paid in full to the SSS Vicente’s account. SSS then issued a release of
REM annotated on TCT 146078 under Vicente’s name. Ching demanded that Vicente
execute a Deed of Absolute Sale over the property. Vicente ignored it. HELD: The deed
of sale with assumption of mortgage and right to repurchase is actually an equitable
mortgage. The purported consideration for the sale with right to repurchasing the amount
of P60, 242.86 is unusually inadequate compared to the purchase price of P150k when
Vicente bought it from Ching 6 months before the execution of the deed. Not only did
Vicente retained possession of the property but he also retained ownership thereof
which led Ching to file the consolidation case.The real intention of the parties was to
secure the payment by Vicente of the balance of the purchase price and the transfer
fees of P43k. The stipulation in the Deed of sale with right to repurchase that absolute
title shall be vested in the vendee in case the vendor failed to redeem the property on
the specified date is void for being a pactum commissorium. Further, that Ching
assumed the mortgage obligation of Vicente to the SSS does not detract from the real
nature of the agreement as a contract of mortgage to secure the debt’s payment.
CASE NO. 38
SM: Contracts; void contract; A.1412 (2)
CAVITE DEVELOPMENT BANK vs. SPOUSES LIM
GR# 131679, February 01, 2000
FACTS: Rodolfo Guansing obtained a P90k loan from CDB and mortgaged a lot
covered by TCT#300809 registered in his name. Guansing defaulted in his payment and
thus, CDB foreclosed the mortgage which was sold to CDB in the foreclosure sale that
ensued. Guansing failed to redeem his lot and CDB eventually consolidated title to the
property in its name evidenced by TCT# 355588.Private respondent Lolita Lim offered to
buy the lot from CDB. The offer provided 10% option money and the balance payable in
cash. Lim discovered that the subject property was originally registered in the name of
Perfecto Guansing, Rodolfo’s father. Apparently, Rodolfo succeeded in having the lot
registered in his name under the title he mortgaged to CDB and from which CDB’s title
was derived. However, Perfecto instituted a case for the cancellation of Rodolfo’s title
which was granted and the decision became final and executory. HELD: In the instant
case, the P30k, although denominated in the offer to purchase as “option money”, is
actually in the nature of earnest money or down payment when considered with the
other terms of the offer. An option contract is a contract separate from and
preparatory to a contract of sale which, if perfected, does not result in the
perfection or consummation of the sale. Only when the option is exercised may a
sale be perfected. Here however, after the payment of the 10% option money, the offer
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to purchase provides for the payment only of the balance of the purchase price. This is
the result of paying earnest money under A.1482, NCC. Clearly, the parties entered into
a contract of sale, perfected and partially executed by the partial payment of the
purchase sale. But due to the legal obstacle of the annulment of Rodolfo’s title from
which CDB derived its own title, the contract between it and Lim can not be enforced and
is void by reasons of public policy. Since CDB can not be considered a mortgagee in
good faith due to its negligence for failing to conduct an exhaustive investigation, it is
liable to return the P30k, plus damages as provided by A.1412 (2), NCC.
CASE NO. 40
SM: Obligation and contracts; rescissible contracts; A.1381(3), NCC
CHINA BANKING CORPORATION (CBC) vs. CA
GR# 129644, March 3, 2000
FACTS: Alfonso Roxas Chua obtained a loan from MetroBank which he secured by
mortgaging his conjugal share in a property covered by TCT #410603. Alfonso failed to
pay and consequently MetroBank foreclosed the realty. In 1988, during the period of
exercising his right to redeem said realty, Alfonso sold his right of redemption to his son,
Paulino who redeemed the property and caused the annotation thereof at the back of the
title. This preceded the annotation of the levy of execution in CBC’s favor by 2 years
and the certificate of sale also in CBC’s favor by more than 3 years. CBC is Alfonso’s
creditor which obtained judgment against him and Pacific Multi Agro Industrial Co. on
November 07, 1985, 2 years before Alfonso sold his right to redeem to Paulino.
Consequently, CBC sued Paulino alleging that the transaction between him and his
father was fraudulent and was meant to defraud the latter’s creditors such as CBC.
HELD: Since the judgment of the trial court in CBC’s favor against Alfonso was rendered
as early as 1985, there is a presumption that the ’88 sale of his property, in this case, the
right of redemption, is fraudulent under A.1387, NCC. The fact that Paulino redeemed
the property and caused its annotation on the TCT ahead of CBC is of no moment since
a fraudulent transaction , such as Alfonso’s and Paulino’s , is not overcome by the mere
fact that the deeds of sale were in the nature of public instruments.
This
presumption is strengthened by the fact that the conveyance has virtually left Alfonso’s
other creditors with no other property to attach. The mere fact that the conveyance
was founded on valuable consideration as in the case at bar, does not necessarily
negates the presumption of fraud under A.1387, NCC. There has to be a valuable
consideration and the transaction must have been made bona fide. In the instant
case, the presumption of fraudulent conveyance has not been overcome.
CASE NO. 50
SM: Obligations; when is a contract perfected
JARDINE DAVIES INC. vs. CA
GR#s 128066 & 128069, June 19, 2000
FACTS:
Purefoods Corporation (PC) decided to install 2 1500kw generators in its
food processing plant in Marikina City due to the 1992 power crisis.3 bidders submitted
bid proposals and gave bid bonds equivalent to 5% of their respective bids as required.
Far East Mill Supply Corporation (FEMSCO) won the contract and immediately
submitted the required performance bond amounting to P1, 841,187.90 and contractor’s
all-risk insurance policy totaling P6, 137,293 with PC acknowledged in a letter. It also
made arrangements with its principal and started purchasing the necessary materials.
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PC meanwhile returned FEMSCO’s Bidder’s Bond of P1M as requested. However, PC
unilaterally cancelled the award allegedly due to significant factors. FEMSCO protested
the act and before the matter could be resolved, PC already awarded the project and
entered into a contract with Jardine Nell, a division of Jardine Davies, Inc (JDI), which
was not one of the original bidders. HELD: Contracts are perfected by mere consent,
upon the acceptance by the offeree of the offer made by the offeror. From that moment,
the parties are bound not only to the fulfillment of what has been expressly stipulated but
also to all the consequences which, according to their nature, maybe in keeping with
good faith, usage and law. For a contract to arise, the acceptance must be made known
to the offeror. Accordingly, the acceptance can be withdrawn/ revoked before it is made
known to the offeror. PC started the process on entering into the contract by conducting
bidding. The bid proposals/quotations submitted by the bidders which included FEMSCO
are the offers and PC’s reply the acceptance / rejection of the same. The December 12,
1992 letter of PC to FEMSCO constituted acceptance of FEMSCO’s offer
notwithstanding the conditions contained in the contract. The conditions were imposed
on the performance of the obligation rather than on the perfection of the contract. They
were prescriptions on how the obligation was to be performed and implemented, not
conditions imposed on the perfection of the contract. PC’s cancellation of its contract
with FEMSCO presupposes that the contract has been perfected. Here, the SC
awarded moral damages to FEMSCO after it sufficiently showed that its reputation
has been tarnished (cf HANIL and ABS-CBN cases).
CASE NO. 51
SM: Contracts; Novation
ESPINA vs. CA
GR# 116805, June 22, 2000
FACTS: Respondent Diaz originally occupied the subject condo unit in 1987 as a
lessee. While he was its lessee, petitioner agreed to sell the unit to him by installments.
The agreement to sell was provisional as the consideration was payable in installments.
Petitioner terminated the provisional deed of sale by a notarial notice of cancellation;
Diaz remained the lessee but he failed to pay the rentals due. Diaz subsequently made
payment of P100k applicable either to the back rentals or for the purchase of the unit.
Nevertheless, petitioner gave Diaz a notice to vacate the premises and to pay his back
rentals. Diaz failed to do both and so petitioner filed an action for unlawful detainer
against him. Diaz alleged that the provisional deed of sale executed by them novated the
original existing contract of lease and thus, petitioner has no cause of action for
ejectment against him. HELD: Novation must be clearly proved; its existence is not
presumed. It only takes place if the parties expressly so provide, otherwise, the original
contract remain in force. Where there is no clear agreement to create a new contract in
place of the existing one, novation cannot be presumed to take place, unless the terms
of the new contract are fully incompatible with the former agreement on every point. In
the case at bar, after the initial down payment , respondent’s checks in payment of 6
installments all bounced and were dishonored. This led to petitioner’s termination of the
provisional deed of sale. Petitioner’s subsequent acceptance of payment did not
withdraw the cancellation of the provisional sale. Unless the application of payment is
expressly indicated, the payment shall be applied to the most onerous obligation of the
debtor, in this case, the unpaid rentals.
Since the payment did not fully settle the
unpaid rentals, the cause of action for ejectment survives.
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CASE NO. 53
SM: Contracts; A. 1479, NCC
SAN MIGUEL PROPERTIES PHIL INC. vs. SPOUSES HUANGS
GR# 137290, July 31, 2000
FACTS: The parties in the case at bar executed an instrument involving the sale of the
petitioner’s subject real properties to the Huangs. The Huangs wrote petitioner the terms
of their offer. Among the conditions given by the Huangs are: (1) that they be given the
exclusive option to purchase the property within 30 days from acceptance of the offer;
(2) that during the option period, the parties would negotiate the terms and conditions of
the purchase; and (3) petitioner would secure the necessary approval while respondents
would handle the documents. The Huangs gave petitioner P1M as “earnest deposit”.
However, the couple and petitioner failed to agree on the terms of the payment.
Petitioner gave the Huangs a 45-day extension so that a final agreement may be had.
What transpired however was nothing more than offers and counter offers. Petitioner
then offered the properties to another. HELD: Under A.1479, NCC, consideration in an
option contract maybe anything of value, unlike in sale where it must be the price certain
in money or its equivalent. In the case at bar, there is no showing of any consideration
for the option. Lacking any proof of such consideration, the option is unenforceable. The
manner of payment of the purchase price is an essential element before a valid and
binding contract of sale can exist. Although the NCC does not expressly state that the
minds of the parties must also meet on the terms/manner of payment of the price, the
same is needed; otherwise, there is no sale. Agreement on the manner of payment goes
into the price such that a disagreement is tantamount to a failure to agree on the price.
Thus, it is not the giving of earnest money, but the proof of the concurrence of all the
essential elements of the contract of sale which establishes the existence of a perfected
sale. In addition, the Huangs did not give the P1M as earnest money as defined by
A.1482, NCC. It was only given not as a part of the purchase price and as proof of the
perfection of the contract of sale but only as a guarantee that respondents would not
back out of the sale.
CASE NO. 54
SM: Obligations and Contracts; Contract to Sell vs. Contract of Sale
SPOUSES FORTUNATO AND ROSALINDA SANTOS vs. CA
GR# 120820, August 01, 2000
FACTS: Private respondents, the Caseda couple, possessed the subject house and lot
in Parañaque City. However, the TCT over the same issued by the Register of Deeds of
Parañaque has always remained in Rosalinda’s name. Although the parties agreed that
the Casedas would assume the mortgage, all amortization, payments made by Carmen
Caseda to the bank were in Rosalinda’s name. The bank cancelled and discharged the
mortgage in Rosalinda’s favor. Apparently, petitioners thus informally sold with
conditions the said realties to the Casedas. The Casedas failed to pay in full. The
Santoses thus reposed their property. HELD: A.1458, NCC expressly obliges the vendor
in a contract of sale to transfer the ownership of the thing sold as an essential element of
such a contract. After a careful examination of the contents of the parties’ unofficial
receipt and other proofs, the SC held that there was no valid transfer of ownership was
made by the Santoses to the Casedas. Absent this essential element, their agreement
can not be deemed a contract of sale. What they had was a mere contract to sell. In
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contracts to sell, ownership is reserved in the vendor and is not to pass until full payment
of the purchase price. In a contract of sale, the vendor has lost ownership of the thing
sold and can not recover it, unless the contract of sale is rescinded and set aside. In a
contract to sell, however, the vendor remains the owner for as long as the vendee has
not complied fully with the condition of paying the purchase. If the vendor should eject
the vendee for failure to meet the condition precedent, he is enforcing the contract and
not rescinding it. Such is what the Santoses did in this case.
CASE NO. 65
SM: Obligation and Contracts; Novation
AGRO CONGLOMERATES, INC. vs. CA
GR# 117660, December 18, 2000
FACTS: The conflict among the parties started from a contract of sale of a farmland
between Agro and Wonderland Food Industries.The original plan was that the initial
payments would be paid in cash. Subsequently, the parties, with respondent bank’s
participation, executed an addendum providing instead, that Agro would secure a loan in
its name for the total amount of the initial payments, while the settlement of said loan
would be assume by Wonderland. Thereafter, petitioner Soriano signed several
promissory notes (PNs) and received the proceeds in Agro’s behalf.
In effect, the
parties entered into a subsidiary contract of suretyship since petitioners signed the PNs
as makers and accommodation party for Wonderland’s benefit. Petitioners asserted that
the addendum provided that their obligation to pay the PNs was novated by “substitution’
of a new debtor, Wonderland, and as such, they were not liable anymore on the PNs.
HELD: In order that a novation can take place, the concurrence of the following
requisites is indispensable: (1) there must be a previous valid obligation; (2) there
must be an agreement of the parties concerned to a new contract; (3) there must be the
extinguishment of the old contract; and (4) there must be the validity of the new contract.
In the case at bar, the 1st requisite for a valid novation is lacking. There was no
novation by “substitution” of debtor because there was no prior obligation which was
substituted by a new contract. The PNs, which bound petitioners to pay, were executed
after the addendum. The addendum modified the contract of sale, not the stipulation in
the PNs which pertain to the surety contract. Wonderland apparently assured the
payment of future debts to be incurred by petitioners. Consequently, only a contract of
surety arose. It was wrong for petitioners to presume that a novation had taken place.
Settled is the rule that a novation is never presumed, it must be clearly and
unequivocally shown.
CASE NO. 67
SM: Obligations and Contracts; Novation as a means to extinguish a contract of surety
BABST vs. CA
GR#s 99398/104625, January 26, 2001
FACTS: Babst alleged that DBP sold ELISCON’s entire asset to the NADECO, for the
latter to take over and continue the operation of its business. Thereafter, the DBP’s
Board of Governors adopted Resolution# 2817 providing that DBP shall enter into a
contractual arrangement with NDC for the latter to pay ELISCON;s creditors, including
BPI, amounting to P 4,015,534.54. A Memorandum of Agreement (MOA) between DBP
and NDC followed which provided that NDC shall pay to ELISCON’s creditors, through
DBP, the amount of P299, 524,700. BPI again was listed as a creditor. Babst further
alleged that the ELISCON assets which DBP acquired and later transferred to NADECO
(NDC) were placed under the Asset Privatization Trust. Thus, he was not liable. Due to
its failure to make payment, BPI commenced an action to enforce payment of the credits
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of ELISCON with CBTC which was acquired in a merger by BPI. The action was against
Pacific Multi Commercial Corporation and Babst as ELISCON’s sureties. HELD: While a
surety is solidarily liable with the principal debtor, his obligation to pay only arises upon
the principal debtor’s failure/ refusal to pay. In the case at bar, there was no indication
that the principal debtor will default in payment.
BPI’s conduct further showed a clear
and unmistakable consent to DBP’s substitution for ELISCON as debtor. The authority
granted by BPI to its account officer to attend the creditors’ meeting was an authority to
represent the bank such that when he failed to object to the substitution of debtors, he
did so in behalf of and for the bank. Hence, there was a valid novation which resulted in
the release of ELISCON from its obligation to BPI, whose course of action should be
directed against DBP as the new debtor. The original obligation having been
extinguished, the contracts of suretyship executed separately by Babst and Multi being
accessory obligations are likewise extinguished.
CASE NO. 73
SM: Quasi- Contracts; Art. 2141, NCC
RODZSSEN SUPPLY CO. VS. FAR EAST
GR# 109087, May 09, 2001
FACTS: RODZSSEN applied for and obtained an irrevocable 30- day domestic Letter of
Credit from respondent Bank on January 15, 1979, in favor of Ekman & Co. Inc. in order
to finance the purchase of 5 units of hydraulic loaders amounting to P190k. After several
extensions, the validity was finally granted until October 16, 1979. Far East paid Ekman
for the first 3 hydraulic loaders that w ere delivered. The bank however paid Ekman
P76k on March 14, 1980 for the last 2 units which petitioner accepted under its trust
receipt arrangement with Far East. The latter demanded payment from petitioner which
refused the same since the bank paid Ekman when it was no longer bound to do so
under the Letter of Credit which expired 5 months prior to the payment of the 2 units.
HELD: The subject Letter of Credit had become invalid upon the lapse of period fixed
therein. Thus, respondent should not have paid Ekman since it was not obliged to do so.
However, Far East’s right to seek recovery from the petitioner is anchored not upon the
inefficacious letter of Credit, but on Art. 2142, NCC. Indeed, equitable considerations
should be used to allow recovery by respondent. Thus, it erred in paying Ekman but
petitioner itself was not without fault in the transaction. It must be noted that the latter
had voluntarily received and kept the loaders since October 1979.
CASE NO. 77
SM: Contracts; Novation as a mode of extinguishing obligations.
MOLINO vs. SECURITY DINDERS INTERNATIONAL CORPORATION
GR# 136780, August 16, 2001
FACTS: Danilo Alto is a credit card owner of SDIC. He signed a Surety Undertaking with
petitioner to ensure payment of his credit card debts with SDIC. Under the Undertaking,
petitioner bound herself jointly ad severally with Alto to pay SDIC all obligations and
charges in the use of the Diners Club Card and that any change or novation in the
Agreement or any extension of the time granted by SDIC to pay such obligation shall not
release her from the Surety Undertaking. Alto upgraded his card and became Diamond
card holder. However, he incurred debts of P166, 408.31 in credit card advances which
he failed to pay. SDIC sued Alto and petitioner as his surety to collect said amount.
HELD: The upgrading was a novation of the original agreement covering the 1st credit
card issued to Alto, basically since it was committed with the intent of canceling and
replacing the said card. But the novation did not serve to release petitioner from her
surety obligations because in the Surety Undertaking she expressly waived discharged
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in case of change/ novation in the agreement governing the use of the 1st credit card.
The extent of a surety’s liability is determined by the language of the surety ship
contract/ bond itself. Also, the Surety Undertaking expressly provides that petitioner’s
liability is solidary. Although the contract of surety is in essence secondary only to a valid
principal obligation, his liability to the creditor is direct, primary and absolute; he
becomes liable for the debt and duty of another although he possesses no direct or
personal interest over the obligations nor does he receive any benefit there from.
Petitioner had the option to withdraw her suretyship when Alto upgraded his card to one
that permitted unlimited purchases, but instead she approved the upgrading. Hence, her
liability subsists.
CASE NO. 81
SM: obligations; damages
GSIS vs. SPOUSES GONZALO DEANG
GR# 135644, September 17, 2001
FACTS: GSIS and the Deangs had a loan agreement secured by a Real Estate
Mortgage. The Deangs were able to pay said loan and asked that their duplicate copy of
title be released by the GSIS. The latter insisted however that it was not obligated to
return said duplicate copy immediately. As a result, the Deangs were not able to secure
another loan, resulting to damages to their business. Consequently, they sued GSIS for
damages. HELD: Although Article 2180, NCC in inapplicable in the case at bar, GSIS is
still liable for damages. Under Articles 1170 and 2001, NCC, GSIS, due to its negligence
and refusal to return the duplicate copy of title, should pay the Deangs for the damages
they suffered. Since good faith is presumed and bad faith is a matter of fact which
should be proved, GSIS was treated by the SC as a party who defaulted in its obligation
to return the owner’s duplicate copy of title. As an obligor in good faith, GSIS is liable for
all the “natural and probable consequences of the breach of the obligation.” The inability
of the Deangs to secure another loan and the damages they suffered thereby has its
roots in the failure of GSIS to return the owner’s duplicate copy of title. Hence, award of
damage due to the breach of contract is granted.
CASE NO. 84
SM: Obligation and Contracts RA 6552 (realty Installment Buyer Protection Act); Art.
1169, NCC
LEAÑO vs. CA
GR# 129018, November 15, 2001
FACTS: Petitioner and private respondent Fernando executed a contract to sell over a
piece of property. The contract provided that the vendee, herein petitioner, may continue
occupying said lot as long as she complies with all the terms and conditions agreed
upon. The respondent- vendor meanwhile will only execute a deed of sale after the
complete payment of the total purchase price of the property. The parties agreed further
that petitioner will pay in monthly installments for a period of 10 years. However, after
April 01, 1989, petitioner failed to pay said installments. Respondents thereafter filed an
ejectment case against petitioner. HELD: Petitioner’s non payment of the installments
prevented respondent’s obligation to convey the property from arising. In fact, it brought
into effect the provision of the contract on cancellation. Any attempt to cancel the contact
to sell would have to comply with the provisions of RA 6552. RA 6552 recognizes on
conditional sales of all kinds of real estate (industrial, commercial, residential) the right of
the seller to cancel the contract upon non- payment of an installment by the buyer, which
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is simply an event that prevents the obligation of the vendor to convey title from
acquiring binding force. The law also provides for the rights of the buyer in case of
cancellation. Sec. 3(b) provides even that If the contract is cancelled, refund to the buyer
of the case surrender value of the payments is a must. It also provides that the actual
cancellation of the contract shall take place after 30 days from receipt by the buyer of the
notice of cancellation/ demand for rescission of the contract. The decision in the
ejectment case operated as the notice of cancellation required by Sec. 3 (b). As
petitioner was not given the cash surrender value of the payments that she made, there
was still no actual cancellation of the contract. Consequently, petitioner may still
reinstate the contract by updating her account.
CASE NO. 85
SM: Obligations and Contracts; Double Sale; Art. 1544, NCC
TAN vs. CA
GR# 135038, November 16, 2001
FACTS: Hayden Luzon bought the subject property from Lorenzo Atega on sale by
installment, starting form 1957 till 1987. Leoncio Paredes bought a portion of his
property in 1977 and the remaining portion in 1990. However, no registration of their
claims had been made in their favor, much less any title issued in their name. Petitioner
meanwhile bought the lot through Ismael Elloso. Petitioner thereafter registered said
sale with the Register of Deeds in November 1979, soon after title was issued in Atega’s
name, segregating his share in Lot No. 436-A. petitioner filed a notice of adverse claim
which was duly annotated on Atega’s title. HELD: There is evidence showing not only
that respondents knew of the sale of the lot by Elloso to petitioner but also that the latter
was ahead in registering his acquisition of the lot with the Register of Deeds. Both the
prior registration of the deed of sale in petitioner’s favor, as well as the adverse claim,
effectively gave Luzon and Paredes notice of petitioner’s right on the subject land.
Before 2nd buyers like Luzon and Paderes can obtain priority over 1st buyers like Elloso,
petitioner’s predecessor- in – interest, they must show that they have acted in good faith
throughout, having been ignorant of the 1st buyer’s rights from the time of their
acquisition until the title was transferred to them by registration. The requirement is such
that the 2nd buyer must show continuing good faith and innocence or lack of knowledge
of the 1st sale till his contract ripens into full ownership through prior registration as
provided by law. Evidently, both respondents’ claim must yield in petitioner’s favor.
CASE NO. 86
SM: Obligation and Contracts; reciprocal Obligations; Consignation
BACUS vs. CA
GR# 127695, December 03, 2001
FACTS: Petitioners entered into a lease contract with option to buy with respondents.
The private respondents communicated to petitioners’ their intention to buy the property
prior to the expiration of their contract. However, petitioners refused to execute the deed
of sale and demanded respondents to first deliver the money before they would execute
the same. The respondents filed a case for specific performance in the RTC. Before the
RTC rendered its decision, respondents issued a cashier’s check in petitioners’ favor
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purportedly to bolster their claim that they were ready to pay the purchase price.
Asserting that the respondents were in delay when they issued the cashier’s check after
the contract expired, petitioners filed this petition. HELD: Obligations under an option to
buy are reciprocal obligations. In an option to buy, the payment of the purchase price by
the creditor is contingent upon the execution and delivery of a deed of sale by the
debtor. In the case at bar, when the respondents opted to buy the property, their
obligation was to advise petitioners of their decision and their readiness to pay the price.
They were not yet obliged to make actual payment. Only upon petitioners’ actual
execution and delivery of the deed of sale were acquired to pay. Respondents did not
incur in delay when they did not yet deliver payment nor make a consignation before the
expiration of the contract. In reciprocal obligations, neither party incurs in delay if
the other does not comply or is not ready to comply in a proper manner with what
is incumbent upon him. Only from the moment one of the parties fulfills his
obligation, does delay by the other begin. Accordingly, as there was no compliance
yet with what was incumbent upon petitioners under the option to buy, respondents had
not incurred in delay when the cashier’s check was issued even after the contract
expired.
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